-----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, GpwvZ+asvJaSOc4hswjHBs74HOLioQljwhJHryoeave0plAF/yAo6b7qC1DSr93e o33mGGjrFnjae4rKCgFdsA== 0000101821-96-000003.txt : 19960205 0000101821-96-000003.hdr.sgml : 19960205 ACCESSION NUMBER: 0000101821-96-000003 CONFORMED SUBMISSION TYPE: 10-K CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951031 FILED AS OF DATE: 19960202 SROS: NONE 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: 1934 Act SEC FILE NUMBER: 001-08709 FILM NUMBER: 00000000 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 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, 1995 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 nonaffiliates of the registrant at January 18, 1996, was $644,000. The number of shares of Common Stock, $.01 par value, outstanding at January 18, 1996 was 4,326,929. CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX Description Page PART I ITEM 1. Business............................................ 1 ITEM 2 Properties.......................................... 7 ITEM 3. Legal Proceedings................................... 8 ITEM 4. Submission of Matters to a Vote of Stockholders..... 11 PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters................................. 14 ITEM 6. Selected Financial Data............................. 15 ITEM 7. Management's Discussion and Analysis of the Results of Operations............................... 17 ITEM 8. Financial Statements and Supplementary Data......... 29 ITEM 9. Disagreements on Accounting and Financial Disclosure.......................................... 29 PART III ITEM 10. Directors and Executive Officers of the Registrant.. 30 ITEM 11. Executive Compensation.............................. 31 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................................... 35 ITEM 13. Certain Relationships and Related Transactions...... 37 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 39 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 two distinct businesses -- the management and further development of its agribusiness related real estate properties and art operations consisting mainly of the acquisition of art for resale. In the past, Canal engaged in the trading of and investing in securities. These activities were severely curtailed in fiscal 1991 and not engaged in at all in fiscal years 1992 through 1995; however, the Company continues to hold certain long-term investments which were acquired prior to 1991. Canal's real estate properties located in six midwest states are primarily associated with its former agribusiness related operations. Each property is adjacent to a stockyard operations (which operates on land leased from the company) and consists 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. In connection with the 1989 sale of its stockyards operations, Canal entered into a master lease (the "Lease") with the purchaser covering approximately 139 acres of land and certain facilities used by the stockyards operations. The Lease is a ten year lease renewable at the purchaser's option for an additional ten year period, with escalating annual rentals. In addition, Canal retained the right to receive income from certain volume based rental income leases with t w o m e at packing companies located near the stockyards. See "Agribusiness". Its principal real estate operating revenues are derived from the Lease, income from the volume based rental leases with meat packing companies located near the stockyards, rental income from its five Exchange Buildings 1 (commercial office space), lease income from 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 developing what was excess stockyard property. See "Real Estate Operations". Canal's art dealing operations consist primarily of the purchase for resale of contemporary art and the purchase for resale of antiquities primarily from ancient Mediterranean cultures. See "Art Operations". B. Real Estate Operations General Real estate operations, which relate primarily to Canal's former agribusiness operations, resulted in operating income of $2.2 million, while contributing $4.6 million to Canal's revenues for fiscal 1995. Canal is involved in the management, development or sale of its agribusiness related real estate properties at its former stockyard locations, the lease of certain property underlying the stockyards operations sold by Canal in 1989 and the revenue from various volume based rental agreements with meat packing companies located near the stockyards. As of October 31, 1995, there are approximately 347 acres of undeveloped land owned by Canal adjacent to its former stockyards. Canal is continuing the program, which it started several years ago, to develop or sell this property. In December 1995, the company sold approximately 7 acres of land located in South St. Paul, Minnesota. Agribusiness Under the Lease, Canal has net leased 139 acres of land as well as certain stockyard facilities at five of its former stockyard locations to the group which purchased the stockyard operations. This lease is 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. Canal will be entitled to receive additional rent if the stockyard's livestock volume or cash flow (as defined) exceeds certain levels. 2 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 in Sioux City, Iowa and Fargo, North Dakota. The Sioux City, Iowa lease is a fifty year lease expiring in 2017 with John Morrell & Co. ("Morrell"). The lease calls for Morrell to pay Canal a per head fee for all hogs slaughtered at Morrell s plant that were not purchased at the Sioux City stockyards. The Fargo, North Dakota lease is also a fifty year lease expiring in 2028 with B&H Investment Company ("B&H"). This lease calls for B&H to pay Canal a per head fee for all cattle slaughtered at B&H s plant that were not purchased at the Fargo stockyards. For information on the revenues generated by these leases see Note 3 to the Consolidated Financial Statements. Both the Fargo, North Dakota and the Sioux City, Iowa leases are the subject of ongoing litigation. For further information about this litigation see "Item 3 - Legal Proceedings" and Note 15 to the Consolidated Financial Statements. 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. C. Art Operations Operations 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 Europe and the United States. In these arrangements Canal consigns its pieces at specific prices to the gallery. 3 In the case of auctions, the Company primarily consigns its art pieces to the two largest auction houses for their spring and fall art auction seasons. 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 $0.7 million while contributing $0.3 million to Canal's revenues for fiscal 1995. These operations consist of the purchase and resale of antiquities through various consignment and joint venture agreements in the United States and Europe and the purchase for resale of contemporary art. Salander-O'Reilly In November 1989, Canal entered into a cost and revenue sharing agreement with the Salander-O'Reilly Galleries in New York City, in connection with their exclusive representation of Jules Olitski, a world renowned artist of contemporary paintings. Canal purchased a number of Olitski paintings for resale. This agreement expired December 1, 1994. Canal currently operates independently of Salander-O Reilly Galleries in its marketing efforts. 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 4 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 sufficient 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, hereby exerting a downward pressure on prices. D. Securities Portfolio General C a nal no longer engages in trading activities but does have investments in certain companies in which it, together with other entities, some of which are affiliates, comprise a group for regulatory purposes. These investments (in each of which Canal's ownership interest is less than 4%) are considered long-term in nature and are carried at the lower of adjusted cost or net realizable value, as the Company and the other members of the group can be deemed to have significant influence over operating and financial policies of these companies. It is important to note that it is the group (as defined) that can exercise influence over these companies, not Canal. Accordingly, these situations do not qualify for consolidation as a method of reporting. Adjusted cost includes all mark-to-market adjustments through the date at which significant influence is deemed to exist. These investments will be adjusted to net realizable value if any decline in market value from carrying value is deemed other than temporary. 5 Canal has an agreement with an investment advisor who is affiliated with a director who is also a shareholder and the Chairman of Canal. The investment advisor has discretionary authority over the securities trading and investment activities, if any, of Canal. This agreement may be terminated by either party by 90 days prior written notice to the other. The investment advisor is paid investment advisory fees quarterly based on 25% of net realized gains less any net unrealized losses. At October 31, 1 9 95, Canal had net realized and unrealized investment losses of approximately $2.0 million available to offset against future net realized gains in determining advisory fees payable. E. Employees At December 31, 1995, Canal had 7 employees. 6 ITEM 2. Properties Canal's real estate properties located in six Midwest states are primarily associated with its former agribusiness related operations. Each property is adjacent to a stockyard operation (which operates on land leased from the company) and consists 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, 1995 include: Subject Avail- to the Leased able for Year Total Exchange Master to Third Develop- Location Acquired Site(2) Bldgs. Lease(1) Parties ment (3) St. Joseph, MO 1942 127 2 37 2 86 West Fargo, ND 1937 66 13 0 0 53 S. St. Paul, MN 1937 217 6 30 55 126 (7) Sioux City, IA 1937 127 2 24 55 46 Omaha, NE 1976 85 2 17 34 32 Sioux Falls, SD 1937 43 0 31 8 4 Total 665 25 139 154 347 The following schedule shows the average occupancy rate and average rental rate at each of Canal's five Exchange Buildings: 1995 1994 Occupancy Average(5) Occupancy Average(5) Location Rate Rental Rate Rate Rental Rate St. Joseph, MO 75% $ 4.75 73% $ 4.75 West Fargo, ND(4) N/A N/A N/A N/A S. St. Paul, MN 98% $14.25 96% $13.90 Sioux City, IA 68% $ 3.40 69% $ 3.50 Omaha, NE 55% $ 4.73 62% $ 4.75 NOTES (1) Leased to the purchaser of Canal's stockyard operations. (2) For information with respect to mortgages and pledges see Note 7 to the Consolidated Financial Statements. (3) For information related to this see Note 2(c) to the Consolidated Financial Statements. (4) Canal has closed this building and is offering it for sale. (5) Per square foot. (6) With the exception of S. St. Paul, MN which has one tenant (State of Minnesota) representing 50% of the building's rental income none of the leases relating to the above Exchange Buildings represents 10% or more of rental income. (7) In December 1995, Canal sold seven acres of land at this location. 7 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. In addition, Canal or its subsidiaries are party to the following litigation: Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo This action involves Union Stockyards Company of Fargo ( Union ), a wholly owned subsidiary of Canal. It is an action which involves claims which are similar to some of the claims brought by B&H Investment Co. ( B&H ) against Union several years ago which was dismissed in 1994 following a decision by the Minnesota Court of Appeals in favor of Union. The dispute involves a Lease Agreement relating to certain real estate owned by Union and leased to Federal Beef Processors, Inc. ( Federal Beef ). Federal Beef operates a meat packing plant on the leased premises, and it is a related entity to B&H, which previously operated the packing plant. By the terms of the Lease Agreement, Federal Beef s obligation to pay additional rent is suspended during any period that Union fails to provide adequate yardage service (under the terms of a separate Yardage Agreement between the parties) that materially affects the business of Federal Beef. Federal Beef filed a Complaint on June 2, 1995 in the District Court for Cass County, North Dakota, for damages claimed to be suffered as a result of Union s alleged failure to provide adequate maintenance and cleaning services for the livestock pens used by Federal Beef under the Yardage Agreement. The damages sought by Federal Beef are in an unspecified amount consisting of the additional rent paid by Federal Beef during the time Union allegedly was in breach of the Lease Agreement and the Yardage Agreement. As of June 1995, Federal Beef alleged it was entitled to the return of additional rent in excess of $70,000. In addition, Federal Beef seeks all direct and consequential damages allegedly suffered by Federal Beef because of the claimed breach, including loss of profits from animals allegedly damaged by reason of the condition of the pens. Federal Beef subsequently filed an Amended Complaint in which it has also sought a determination that it is entitled to exercise an option to purchase the leased premises under the terms of the Lease Agreement for a price measured by the unimproved value of the leased premises. 8 Union has filed an Answer and Complaint denying the allegations in the Amended Complaint, seeking a determination that Federal Beef s claims are frivolous, and asking for an award of Union s reasonable attorneys fees and costs in connection with the defense of the action. In July 1995, Union successfully defeated a motion by Federal Beef for an order which would have allowed Federal Beef to deposit into Court all rent payments due from Federal Beef to Union pending the outcome of the litigation. As a result, Federal Beef has continued to make all rent payments due under the Lease Agreement while reserving its alleged claims against Union. Management does not believe that the revenues generated by this lease will be materially affected in resolving this dispute. John Morrell & Co. v. Canal Capital Corporation On October 6, 1993, an action was commenced against Canal by John Morrell & Co. ("plaintiff") in the District Court for Woodbury County, State of Iowa. Plaintiff amended the action on November 30, 1993. The lawsuit arises out of the alleged breach by Canal, as lessor, of a lease agreement relating to certain real estate on which plaintiff operates a meat packing plant in Sioux City, Iowa. Plaintiff alleges in the suit a breach of the lease by Canal as a result of Canal's sale of the Sioux City stockyard operation in 1989 and its failure to renegotiate the rental terms of the lease. Plaintiff alleges that Canal is obligated, as lessor, to provide animals from the Sioux City stockyards to meet plaintiff's needs in operating the packing plant on the leased property. Plaintiff alleges that, as a result of Canal's failure to provide sufficient animals to meet plaintiff's needs, plaintiff has been forced to obtain animals from sources other than the stockyards at an additional cost and has been forced to pay additional rent under the lease agreement. Plaintiff seeks relief in the form of damages in an unspecified amount and a renegotiation of the rental terms of the lease. The parties have agreed to suspend activity in the litigation while the parties explore the possible resolution of the matter. In the meantime, plaintiff has agreed to pay the rent/yardage payments to Canal according to the lease without prejudice to the claims of either plaintiff or Canal. The agreement may be terminated by either party upon 30-days written notice. Management does not believe that the revenues generated by this lease will be materially affected in resolving this dispute. 9 Former Portland Stockyard Property In December 1988, the Company sold a parcel of real estate in Multnomah County, Oregon and, in connection therewith, agreed to share the costs of the correction of adverse environmental conditions on such property with the buyer. Pursuant to the cost sharing agreement, $1.1 million of the sales price was placed in escrow to secure the Company's performance of its cost sharing obligations, which were not limited to that amount. In 1991 the Company received an estimate from the buyer that the correction costs might be in the range of $2 to $5 million. Under the cost sharing agreement, the Company's obligation is to pay 50% of the first $400,000 and 90% of the next $425,000 of costs and 95% of all costs thereafter. The Company had objected to the buyer's definition of costs which require sharing in connection with certain demands of the buyer for release of funds from escrow and had stopped payment of those funds from the escrow. This dispute was the subject of an arbitration which was recently resolved in favor of the buyer. As a result, those funds were released from escrow and the escrow has been substantially depleted. At October 31, 1993, the Company accrued $400,000 representing management's estimate of its additional contingent liability in this matter. This amount is included as a liability in accrued litigation settlement at October 31, 1995. Sioux City, Iowa - Demolition Notice On October 25, 1994, Canal received a Placard Notice (the "Notice") from the City of Sioux City, Iowa (the City ) ordering the demolition of four structures located on Canal's property. The Notice claims that the structures are delapidated, unsafe and must be demolished. While exact costs are not available, Canal estimates demolition costs at $750,000 to $1,000,000. Canal is currently negotiating with the City for the sale of the four structures covered by the Notice and approximately 15 acres of land to the City. If these negotiations are successful the responsibility for any demolition required would be with the City. Additionally, Canal has filed an appeal of this Notice with City Inspection Services Manager and is awaiting a hearing date. If this matter cannot be settled as described above, Canal will pursue alternative means of challenging this Notice. Pine Valley Meats, Inc. v. Canal Capital Corporation On May 5, 1995 an action was commenced against Canal by Pine Valley Meats, Inc. ( Plaintiff ) in the County Court for Dakota County, State of Minnesota. The lawsuit arises out of the alleged breach by Canal of a 10 certain cattle walkway agreement (the walkway agreement ) relating to the passage of cattle over land owned by Canal in South St. Paul, Minnesota. Plaintiff contends that the walkway agreement is a permanent easement thereby requiring Canal to maintain a cattle walkway for their use in perpetuity. Canal s position is that the walkway agreement is in fact a license and can be terminated at Canal s discretion. Canal did close the cattle walkway for several weeks in April 1995. In June 1995, plaintiff sought and won a temporary injunction requiring Canal to continue to maintain the cattle walkway for plaintiff s use until the rights of the parties can be determined at trial. Plaintiff is seeking a permanent injunction determining that the walkway agreement creates an easement as well as unspecified damages for lost profits when the walkway was closed. On January 5, 1996, the Dakota County Court ruled that the walkway agreement constituted a license only and denied the plaintiff s request for a permanent injunction. Trial on the damage issue is scheduled for April 15, 1996. Management does not believe that a damage award in this case is likely or that if damages were awarded that they would be of a material amount. ITEM 4. Submission of Matters to a Vote of Shareholders None. 11 Executive Officers of the Registrant The following table sets forth the names, ages, business backgrounds and areas of responsibility of the executive officers of the Registrant: Positions and Other Current and Prior Offices with Positions During the Name Age the Registrant Past Five Years Michael E. Schultz 59 President and Chief Attorney, partner in Executive Officer Ehrenkranz, Ehrenkranz since September 1991 & Schultz, law firm, and a Director for for more than five more than five years. years. Executive Vice President, Special Pro- jects, Intelogic Trace, Inc. until December 8, 1994. Asher B. Edelman 56 Chairman of the Controlling General Part- Board since ner, Plaza Securities September 1991 and Company for more than prior thereto Vice five years and of Asco Chairman of the Partners (the General Board and Chairman Partner of Arbitrage of the Executive Securities Company), Committee for more broker-dealer, for more than five years. than five years; President of A.B. Edelman Management Company, Inc. (the General Partner of Edelman Value Partners, Inc.) For more than five years. Chairman of the Board of Datapoint Corporation, computer manufacturing and distribution, for more than five years. Chairman of the Board of Intelogic Trace, Inc., computer and telecom- munications equipment servicing, until December 8, 1994. 12 Reginald Schauder 46 Vice President- Controller from Finance, Secretary July 1985 to and Treasurer since January 1989 January 1989. 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. 13 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stock Matters On April 30, 1992 the Securities and Exchange Commission approved an order granting the application of the New York Stock Exchange, Inc. for removal of the Common Stock of Canal from listing and registration on the Exchange under the Securities Exchange Act of 1934. Currently, 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, 1995 as reported on the "pink sheets" were: Fiscal 1995 Fiscal 1994 Quarter Ended High Low High Low October 31 ................. $ 3/16 -- $ 1/16 $ 1 1/2 -- $ 1/2 July 31 .................... 3/16 -- 3/16 1 3/8 -- 3/8 April 30 ................... 1/4 -- 1/8 1 3/8 -- 1/8 January 31 ................. 1/2 -- 1/4 1/16 -- 1/16 There were no cash dividends paid during fiscal 1995 or 1994. Canal is subject to restrictions on the payment of cash dividends under certain debt agreements. As of January 18, 1996, Canal had approximately 1,500 holders of record of its common stock, par value $.01 per share. 14 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. (In Thousands, Except per share data) Year Ended October 31, 1995 1994 1993 1992 1991 Operating Data: Revenues from continuing operations $4,854(5) $8,460(4) $4,535(3) $6,968(2) $11,280(1) Net income (loss) from continuing operations ($1,518)(9)$1,362(8)($2,160)(7)($4,674)(6)($5,296) Extraordinary gain on retirement of debt 0 0 366 857 0 Net income (loss) ($1,518) $1,362 ($1,794) ($3,817) ($5,296) provision for preferred stock dividend (193) (313) (113) (97) 131 Net income (loss) applicable to common shares ($1,711) $1,049 ($1,907) ($3,914) ($5,427) Earnings (loss) per common and common equivalent share (Note 2(I)): (10) Net income (loss) before extraordinary item ($0.40) $0.23 ($0.52) ($1.10) ($1.25) Extraordinary item 0.00 0.00 0.08 0.20 0.00 Net income (loss) $ (0.40) $ 0.23 ($0.44) ($0.90) ($1.25) 15 Item 6. Selected Consolidated Financial Data (cont d) (In Thousands, Except per share data) Year Ended October 31, 1995 1994 1993 1992 1991 Earnings (loss) per common and common equivalent share assuming full dilution (Note 2(I)): (10) Net income (loss) before extraordinary item $(0.37) $ 0.20 ($0.52) ($1.10) ($1.25) Extraordinary item 0.00 0.00 0.08 0.20 0.00 Net income/(loss) $(0.37) $ 0.20 ($0.44) ($0.90) ($1.25) Cash dividends paid $ 0.00 $ 0.00 $0.00 $0.00 $0.00 Notes: (1) The revenue increase is due primarily to Canal s sale of a substantial portion of its antiquities inventory, which was effected in order to strengthen liquidity and reduce the level of outstanding debt. (2) The revenue decrease is due primarily to a reduction in art sales which was offset to a certain extent by increased real estate revenues and the company s cessation of its securities trading and investing which activity had resulted in a $1.2 million loss for fiscal 1991. (3) The revenue decrease is due primarily to a reduction in art sales. (4) The revenue increase is due primarily to an increase of $2.3 million in real estate sales and the reversal of a loss provision established in fiscal 1992 in connection with a judgment against a subsidiary of the company. (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 in 1994 against a subsidiary of the company. 16 Item 6. Selected Consolidated Financial Data (cont d) (6) Includes $400,000 (see Note 6) and a $1.6 million provision for litigation settlement (see Note 15). (7) Includes an $873,000 write-off in connection with lease termination (see Note 11), a $400,000 provision for litigation settlement (see Note 15), and a $300,000 valuation allowance to the art inventory (see Note 10). (8) Includes the reversal of a $1.5 million loss provision established in fiscal 1992 in connection with a judgement against a subsidiary of a company, a $0.6 million gain on property sales and a $0.3 million gain on the sale of long-term investments offset by a $0.3 million loss on the write down of long-term investments and $0.2 million increase in the art inventory valuation reserve. (9) Includes the absence of a judgment reversal of $1.5 million in 1994 against a subsidiary of the company, and a $0.5 million increase in the art inventory valuation reserve, absence of $0.3 million gain on sale of long-term investments, and $0.2 million increase in interest expense partially offset by a $0.6 million gain on real estate sales. (10) Common and common equivalent shares were calculated to give effect to certain common stock equivalents and common stock equivalent share - fully diluted to give effect to certain convertible notes issued in March 1994. (11) For discussion of material uncertainties, see Note 15. 17 Item 6. Selected Consolidated Financial Data (cont d) (In Thousands) Year Ended October 31, 1995 1994 1993 1992 1991 Balance sheet data: Current assets $ 963 $ 1,416 $ 1,321 $ 3,110 $ 15,732 Property on operating leases, net (1) 8,385 8,708 9,784 10,494 11,665 Art inventory non- current 4,900 5,744 6,074 7,079 0 Other assets 3,955 4,260 5,184 6,339 7,240 Total Assets $18,203 $20,128 $22,363 $27,022 $34,637 Current Liabilities $ 2,710 $ 6,122 $15,015 $17,670 $ 9,763 Long-term debt 11,379 8,062 2,394 2,502 13,948 Stockholders Equity 4,114 5,944 4,954 6,850 10,926 Total Liabilities & Stockholders Equity $18,203 $20,128 $22,363 $27,022 $34,637 Common shares outstanding at year- end 4,327 4,327 4,327 4,327 4,327 Notes: (1) Certain prior amounts have been reclassified to conform to current year s presentation. (2) For discussion of material uncertainties and commitments, see Notes 11 and 15 to the consolidated financial statements. 18 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. First, the Company has suffered significant losses from operations in six of the last seven years. Second, the Company is involved in litigation with major tenants in Sioux City, Iowa and Fargo, North Dakota. Third and last, the Company has a continuing environmental liability associated with a 1988 sale of property located in Portland, Oregon. The financial statements include a reserve of $400,000 associated with the environmental liability, but do not include any adjustments that might result from the resolution of these other uncertainties. Canal recognized a net loss of $1.5 million for 1995 as compared to the 1994 net income of $1.4 million and the 1993 net loss of $1.8 million. After recognition of preferred stock dividend payments of $193,000 in 1995, $313,000 in 1994 and $113,000 in 1993, the results attributable to common stockholders were a net loss of $1.7 million in 1995, net income of $1.0 in 1994 and a net loss of $1.9 million in 1993. Canal's revenues from continuing operations consist of revenues from its real estate 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. During fiscal years 1992 and 1991, the Company sold several large pieces of art to fulfill part of its current cash needs and to reduce the level of its art inventories. These sales were made at amounts below the Company's costs. There were no similar sales in fiscal 1995 nor does management anticipate any significant sales of this nature to occur in fiscal 1996. Revenues in 1995 decreased by $3.6 million to $4.9 million as compared with 1994 revenues which had increased by $3.9 million to $8.5 million from 1993 revenues of $4.5 million. The 1995 decrease is due primarily to a $2.1 million reduction in real estate sales and the 1994 inclusion of the reversal of a $1.5 million loss provision established in fiscal 1992 in connection with a judgment against a subsidiary of the company. The 1994 increase is due primarily to a $2.3 million increase in revenues from the sale of real estate and the inclusion of the reversal of a $1.5 million loss provision as discussed above. 19 1995 vs. 1994 Canal's 1995 net loss of $1.5 million was due primarily to a $0.7 million loss from art operations (which included a $0.5 million increase in the art inventory valuation reserve), a $0.3 million write down of the Company s long-term investment, an increase in interest expense of approximately $0.3 million due to rate increases and a $0.1 million increase in general and administrative expenses associated primarily with increased legal fees. The 1994 results included the reversal of a $1.5 million loss provision established in fiscal 1992 in connection with a judgment against a subsidiary of the Company, a $0.6 million gain on the sale of real estate and a $0.3 million gain on the sale of long-term investments. These were offset by a $0.3 million write down of the Company's long-term investments and a $0.2 million increase in the art inventory valuation reserve. Real Estate Revenues Real estate revenues for 1995 of $4.6 million accounted for 94.6% of the 1995 revenues as compared to revenues of $8.3 million or 97.5% for 1994. 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 (45.5% and 25.7%), Ground lease income (21.2% and 11.5%), volume based rental income (15.9% and 9.7%) and sale of real estate and other income (17.4% and 53.1%) for 1995 and 1994, respectively. The 1995 decrease is due primarily to a $2.1 million decrease in the sale of real estate and the inclusion in the 1994 revenues of the reversal of a $1.5 million loss provision established in fiscal 1992 in connection with a judgment against a subsidiary of the Company. Real Estate Expenses Real estate expenses for 1995 of $2.4 million decreased by $1.8 million (43.3%) from $4.2 million in 1994. Real estate expenses are c o m prised of labor, operating and maintenance (40.9% and 21.7%), depreciation and amortization (15.2% and 9.9%), taxes other than income taxes (22.1% and 12.2%), cost of real estate sold (18.0% and 54.2%) and general and administrative expenses (3.8% and 2.0%) for 1995 and 1994, respectively. The 1995 decrease in real estate expenses is due primarily to the $2.1 million decrease in aggregate real estate sales for fiscal 1995. Additionally, the percentage swings in year to year comparisons is due primarily to the $1.9 million decrease in the cost of real estate sold. 20 Art Operations Management estimates it may take two to 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 s u p p l y, 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 an independent appraiser annually. The 1995 appraisal covered approximately 78% 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 22% of the inventory was estimated by management based in part on operating history and in part on the results of the independent appraisals done. In fiscal 1995 Canal recognized a $500,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $1,000,000 as of October 31, 1995 as compared to $500,000 and $300,000 at October 31, 1994 and 1993, respectively. These estimates were based in part on the Company's history of losses sustained on art sales in the current and previous years. 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 product and will make adjustments to the value of its art inventory as such adjustments become necessary. 21 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 s u ccessfully implemented in fiscal 1995. Because of the available alternatives the Company does not anticipate any extraordinary losses associated with the art inventory in fiscal 1996. Art Revenues Art revenues for 1995 increased $53,000 or 25.5% from $207,000 in 1994. Art revenues are comprised of proceeds from the sale of antiquities and contemporary art (94.7% and 100.0%) and commission income (primarily from the Salander-O'Reilly agreement) on sale of art owned by third parties (5.3% and 0.0%) for 1995 and 1994, respectively. The Company's art inventory was reduced by $0.4 million and $0.3 in fiscal years 1995 and 1994, respectively. Art Expenses Art expenses for 1995 of $1.0 million increased by $0.5 million (103.2%) from $0.5 million in 1994. Art expenses (excluding valuation reserves) consisted of the cost of art sold (83.6% and 73.3%) and selling, general and administrative expenses (16.4% and 26.7%) for 1995 and 1994, respectively. Included in art expenses is a $0.5 million and a $0.2 million valuation allowance against the Company's art inventory (see Note 10 to the Consolidated Financial Statements) for fiscal years 1995 and 1994, respectively. The 1995 increase is due primarily to a $198,000 (94.6%) increase in the cost of art sold. General and Administrative General and administrative expenses for 1995 of $1.4 million increased $0.1 million (9.1%) from $1.3 million in 1994. The major components of general and administrative expenses are officers salaries (30.5% and 31.0%), rent (5.7% and 7.5%), legal and professional fees (17.1% and 11.9%), insurance (11.4% and 16.4%) and office salaries (10.4% and 9.0%) for 1995 and 22 1994, respectively. The percentage decreases in officers salaries, insurance and office salaries is a result of the aggregate increase in total general and administrative expenses as a result of the increases in legal fees. The percentage increase in legal and professional fees reflect increased legal expenses associated with the new lawsuit in Fargo, North Dakota (see Note 15 to the Consolidated Financial Statements). Gain on Sale of Long-term Investments Canal recognized gains on the sale of long-term investments of $333,000 in fiscal 1994. The proceeds from these sales of approximately $500,000 was used to reduce the outstanding balance of short-term borrowings. Write Down of Long-Term Investments Canal recognized losses of $286,000 and $344,000 on the write down of long-term investments in fiscal 1995 and 1994, respectively. The 1995 loss includes $114,000 to write down the Company s investment in Intelogic Trace, Inc. to zero. As per Canal's policy (see Note 2(B)) these losses reflect adjustments to the carrying value of these investments to managements estimate of their net realizable value. Interest and Other Income Interest and other income for 1995 decreased 9.2% to $164,000. These amounts are comprised primarily of dividend and interest income and to a lesser extent the proceeds from the sale of non-essential assets. Interest Expense Interest expense increased $0.2 million (15.6%) to $1.5 million in 1995. The increase reflects increases in the average interest rates charged Canal which was offset to a certain extent by reductions in the average balance of long-term debt outstanding. Interest rates on Canal's variable rate mortgage notes increased to an average of 11.78% in 1995 as compared to an average of 9.1% in 1994 and an average of 8.5% in 1993. At October 31, 1995 Canal had reduced the outstanding face value of these notes from the original $20.0 million to $7.6 million. 23 1994 vs. 1993 Canal's 1994 net income of $1.3 million was due primarily to the reversal of a $1.5 million loss provision established in fiscal 1992 in connection with a judgment against a subsidiary of the Company, a $0.6 million gain on the sale of real estate and a $0.3 million gain on the sale of long-term investments. These were offset by a $0.3 million write-down of the Company's long-term investments and a $0.2 million increase in the art inventory valuation reserve. Real Estate Revenues Real estate revenues for 1994 of $8.3 million accounted for 97.5% of the 1994 revenues as compared to revenues of $4.3 million or 94.2% for 1993. 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 (25.7% and 49.5%), Ground lease income (11.5% and 23.4%), volume based rental income (9.7% and 13.0%) and sale of real estate and other income (53.1% and 14.1%) for 1994 and 1993, respectively. The 1994 increase is due primarily to a $2.3 million increase in the sale of real estate and the reversal of a $1.5 million loss provision established in fiscal 1992 in connection with a judgment against a subsidiary of the Company. Real Estate Expenses Real estate expenses for 1994 of $4.2 million increased by $1.6 million from $2.6 million in 1993 (64.8%). Real estate expenses are c o m prised of labor, operating and maintenance (21.7% and 46.5%), depreciation and amortization (9.9% and 21.6%), taxes other than income taxes (12.2% and 21.1%), cost of real estate sold (54.2% and 8.4%) and general and administrative expenses (2.0% and 2.5%) for 1994 and 1993, respectively. The 1994 increase and the swings in year to year comparisons is due primarily to the $2.1 million increase in the cost of real estate sold. Included in 1993 real estate expenses is a $0.4 million provision for litigation settlement associated with the Company's former Portland Stockyard Property (see Note 15). 24 Art Operations Management estimates it may take two to 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 an independent appraiser annually. The 1994 appraisal covered approximately 80% 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 20% of the inventory was estimated by management based in part on operating history and in part on the results of the independent appraisals done. In fiscal 1994 the Company increased the valuation allowance against its art inventory (see Note 10 to the Consolidated Financial Statements) to reduce the inventory value to its estimated net realizable value to $500,000 from its 1993 level of $300,000. These estimates were based in part on the Company's history of losses sustained on art sales in the current and previous years. 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 on the current portion of the inventory has effectively reduced inventory to its estimated net realizable value. The Company will continually monitor the market for its product and will make adjustments to the value of its art inventory as such adjustments become necessary. 25 Art Revenues Art revenues for 1994 decreased $56,000 (21.4%) from $264,000 in 1993. Art revenues are comprised of proceeds from the sale of antiquities and contemporary art (100.0% and 98.6%) and commission income (primarily from the Salander-O'Reilly agreement) on sale of art owned by third parties (0.0% and 1.4%) for 1994 and 1993, respectively. The Company's art inventory was reduced by $0.3 million and $0.2 in fiscal years 1994 and 1993, respectively. Art Expenses Art expenses for 1994 of $0.5 million decreased by $0.3 million (39.0%) from $0.8 million in 1993. Art expenses (excluding valuation reserves) consisted of the cost of art sold (73.3% and 67.1%), selling, general and administrative expenses (26.7% and 32.7%) and depreciation and amortization expenses (0.0% and 0.2%) for 1994 and 1993, respectively. Included in art expenses is a $0.2 million and a $0.3 million valuation allowance against the current portion of the Company's art inventory (see Note 10) for fiscal years 1994 and 1993, respectively. The 1994 decrease is due primarily to a $123,000 (37.1%) reduction in the cost of art sold associated with the decrease in art sales discussed above and to an $86,000 (52.8%) reduction in the art operations selling, general and administrative expenses as a result of Canal's closing its Daedalus Gallery in London. General and Administrative General and administrative expenses for 1994 of $1.3 million decreased $0.4 million (25.7%) from $1.7 million in 1993. The major components of general and administrative expenses are officers salaries (31.0% and 23.0%), rent (7.5% and 20.4%), legal and professional fees (11.9% and 19.0%), insurance (16.4% and 8.5%) and office salaries (9.0% and 7.0%) for 1994 and 1993, respectively. The percentage increases in officers salaries and office salaries is a result of the aggregate decrease in total general and administrative expenses. The percentage increase in insurance expense relects increased premiums combined with increased deductible copayments on certain of the Company's insurance policies. The percentage decrease in rent is due to the Company's 1993 move to smaller corporate offices in New York City and the percentage decrease in legal and professional fees is due to a reduction in the level of ongoing litigation. 26 Write-off in Connection with Lease Termination The 1993 write-off was associated with the early termination of the Company's New York City office space. The $873,000 write-off consisted of the cost of leasehold improvements (90.4%) and associated deferred leasing expenses (9.6%). There was no similar expense in 1994. Gain on Sale of Long-term Investments Canal recognized gains on the sale of long-term investments of $333,000 and $329,000 in fiscal 1994 and 1993, respectively. The proceeds from these sales (approximately $500,000 in each year) were used to reduce the outstanding balance of short-term borrowings. Write Down of Long-Term Investments During 1994 Canal recognized a loss of $344,000 on the write down of long-term investments. As per Canal's policy (see Note 1(B)) this loss reflects an adjustment of the carrying value of these investments to managements estimate of their net realizable value. There was no similar transaction in fiscal 1993. Interest and Other Income Interest and other income for 1994 decreased $0.2 million (52.1%). Included in the 1993 results were accounting and management fees charged to a third party and proceeds from the sales of excess office furniture and equipment. There were no similar transactions in fiscal 1994. Interest Expense Interest expense decreased $0.2 million (12.0%) to $1.3 million in 1994. The decrease reflects reductions in the average balance of long-term debt outstanding offset to a certain extent by increases in the average interest rates charged Canal. Interest rates on Canal's variable rate mortgage notes increased to an average of 9.1% in 1994 as compared to an average of 8.5% in 1993 and an average of 8.9% in 1992. At October 31, 1994 Canal had reduced the outstanding face value of these notes from the original $20.0 million to $8.0 million. 27 Extraordinary Gain on Retirement of Debt In fiscal 1993 Canal repurchased $1.5 million of its outstanding Variable Rate Mortgage Note at a significant discount resulting in a net extraordinary gain of $365,760. There was no similar transaction in fiscal 1994. Inflation With the sale of its stockyard operations, Canal's operations are less subject to inflation than previously. Its chief area of exposure is now the impact inflation brings to interest rates since most of Canal's debt agreements carry variable interest rates. 28 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. First, the Company has suffered significant losses from operations in six of the last seven years. Second, the Company is involved in litigation with major tenants in Sioux City, Iowa and Fargo, North Dakota. Third and last, the Company has a continuing environmental liability associated with a 1988 sale of property located in Portland, Oregon. The financial statements include a reserve of $400,000 associated with the environmental liability, but does not include any a d justments that might result from the resolution of these other uncertainties. On May 22, 1985, Canal completed the sale of $20 million face value of Variable Rate Mortgage Notes, due May 15, 1993. As discussed more fully below, Canal has extended these notes to may 15, 1998 under essentially the same terms and conditions. The notes carry interest at the highest of four variable rates, determined on a quarterly basis. The new agreement, 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 two, three and four percent per annum for the fiscal years commencing May 15, 1995, 1996 and 1997, respectively. In consideration for the new agreement, Canal agreed to pay a fee to the noteholders of 2% of the principal amount outstanding as of May 15, 1995. On September 20, 1995, the company issued $1,032,000 of variable rate mortgage notes due September 15, 1998, the proceeds of which were used to repay in full the Company s secured credit line and a $650,000 note the Company issued in 1993. The purchasers of these notes included an investment partnership controlled by the company s Chairman and the company s Chief Executive Officer and members of his family. The notes issued have essentially the same terms and conditions as the notes discussed above. 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 two, three and four percent per annum for the fiscal years commencing September 15, 1995, 1996 and 1997, respectively. 29 Net cash provided by operations in fiscal 1995 was $0.2 million. Cash and cash equivalents increased somewhat in 1995. Substantially all of the 1995 cash from operations coupled with the proceeds from new debt, the net proceeds from the sale of real estate of $0.3 million and the proceeds from the sale of art of $0.3 million was used to reduce short term borrowings, accrued expenses and outstanding debt. During 1995 Canal reduced short term borrowings by $0.8 million, its variable rate mortgage notes by $0.3 million and other long-term debt by $0.7 million. Canal incurred new long-term debt in connection with these reductions of $1.0 million. The net 1995 debt reduction was $0.8 million. At October 31, 1995 the Company's current liabilities exceeded current assets by $1.7 million, a decrease of $3.0 million from 1994. The only required principal repayments under Canal's debt agreements for 1996 will be from the proceeds from the sale of certain assets (if any) and approximately $0.1 million on various fixed mortgages. As discussed more fully in Note 3, the Company leases 139 acres of land (at five locations) to a stockyard operator. This lease represents approximately 25% of the Company's annual revenues. To date, the stockyard operator has met all of its obligations under the lease. Management does not anticipate any changes in this situation for the remainder of the lease. Management believes that the 1996 cash flow from operations will be sufficient to support its ongoing operations. 30 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. 31 PART III ITEM 10. Directors and Executive Officers of the Registrant The following information with respect to the principal occupation or employment of each director 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 56, 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; has been General Partner of Plaza Securities Company, an investment partnership, since July 1979; General Partner of Asco Partners, a general partner of Arbitrage Securities Company, a broker/dealer, since July 1984; and General Partner of Arbitrage Securities Company, from January 1977 until June 1984; President of A.B. Edelman Management Company, Inc. (The General Partner of Edelman Value Partners, Inc.) for more than five years. Mr. Edelman is a Director, Chairman of the Board, and Chairman of the Executive Committee of Datapoint Corporation ("Datapoint"). Mr. Edelman was a Director, Chairman of the Board and Chairman of the Executive Committee of Intelogic Trace, Inc. ("Intelogic") until December 8, 1994. Gerald N. Agranoff, age 49, has been a Director since 1984, was General Partner, Asco Partners (the General Partner of Arbitrage Securities Company ("Arbitrage Securities") from July 1984 through December 1991; a General Partner of Arbitrage Securities, a broker/dealer, and of Plaza Securities Company ("Plaza"), an investment partnership for more than five years; Vice President of A.B. Edelman Management Company, Inc. (the General Partner of Edelman Value Partners, Inc.) For more than five years; Trustee, Management Assistance Inc. Liquidating Trust ("Management Assistance Trust") since February, 1986; General Counsel to Plaza and Arbitrage Securities for more than five years; Director of Bull Run Corporation since December 1990; General Counsel of Datapoint Corporation since October, 1994 and a Director since 1991; and was a Director of Intelogic from December, 1991 to December 8, 1994. Michael E. Schultz, age 59, has been President and Chief Executive Officer since September 1991 and a Director since 1985; and has been a partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz for more than five years. Mr. Schultz was Executive Vice President-Special Projects for 32 Intelogic since November 1992 and a Director since July, 1985 until December 8, 1994. T h e 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 1995 the Board of Directors did not hold any meetings, but the Executive Committee held nine meetings, all of which were attended by both Mr. Edelman and Mr. Schultz. ITEM 11. Executive Compensation The following table summarizes the compensation of the Company's Chief Executive Officer and the only other executive officer of the Company whose salary for fiscal 1995 exceeded $100,000. SUMMARY COMPENSATION TABLE Annual Compensation Name and Principal Position Year Salary Michael E. Schultz 1995 $ 162,500 President and Chief Executive Officer 1994 $ 150,000 1993 $ 150,000 Asher B. Edelman 1995 $ 162,500 Chairman of the Board and Executive 1994 $ 150,000 Committee 1993 $ 150,000 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 $87,000, $86,000 and $64,000 for fiscal years 1995, 1994 and 1993, respectively. 33 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Value Value of Unexercised Number of Securities In-the-Money Underlying Unexercised Options at Name Options at Fiscal Year End Fiscal Year End Michael E. Schultz 255,500* $ -0- Asher B. Edelman 20,000* $ -0- * All options were exercisable at October 31, 1995. Retirement Plans The Canal Capital Corporation Retirement Plan (the "Retirement Plan") provides benefits to eligible employees of the Company and its subsidiaries and affiliates. Directors who are not employees are not eligible to participate in the Retirement Plan. The Retirement Plan is administered by the Company. All Company contributions under the Retirement Plan were deposited with an insurance company and invested in a group annuity contract through May 30, 1985. Thereafter, all Company contributions have been held in trust under a Trust Agreement between the Company and the Executive Committee of the Board of Directors, as trustee. Contributions to the Retirement Plan are determined on an actuarial basis, without individual allocation. In October 1991, each of three executive officers of the Company voluntarily withdrew from participation in the Retirement Plan. As a result of prior service, Mr. Edelman has a deferred annual accumulated benefit of approximately $1,300 as of October 31, 1995. Mr. Schultz has no benefit under the Retirement Plan. For further information on the Retirement Plan see Note 9. 34 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. 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. Options granted under the 1985 Plan are nonqualified 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 1995 fiscal year, no options under the 1985 plan were granted and no options previously granted were exercised. However, during fiscal 1995 71,500 options granted in June, 1985 expired. At October 31, 1995, 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. 35 The Board of Directors gave a small raise to each of the company s executive officers in 1995, which was the first increase in four fiscal years and was intended as a cost of living adjustment. The salary of Mr. Schultz, the CEO of the company, was determined in 1991 when he joined the company. Asher B. Edelman Michael E. Schultz Gerald N. Agranoff 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, Gerald N. Agranoff and Michael E. Schultz, President and Chief Executive Officer) 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 program, the Executive Committee of the Board of Directors, through Mr. Edelman, invests funds of the Company in securities of other companies. Pursuant to an investment management agreement between the Company and Edelman Management (the " I n vestment Management Agreement"), Edelman Management was granted discretionary power with respect to such funds of the Company and, for investment advisory and management services, is entitled to receive an advisory fee quarterly based on 25% of the realized gains less any net unrealized losses in the portfolio. Due to accumulated investment losses, the Company did not incur any advisory fees during the 1995 fiscal year. The Agreement may be terminated by either party by 90 days prior written notice to the other. 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, 1992, such companies included Datapoint and Intelogic. The Company has filed with the SEC Schedules 13D jointly with Plaza, Mr. Edelman, Edelman Management, Edelman Limited 36 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. On December 8, 1994, Intelogic completed a reorganization under the Federal Bankruptcy laws. As a result, there are no longer interlocking directorships between Intelogic and the Company. However, the Company is still subject to certain restrictions under SEC regulations relating to the future sale of these securities. 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 18, 1996 were: SECURITIES BENEFICIALLY OWNED No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock Asher B. Edelman 1,481,019 (c) 34.07 Michael E. Schultz 312,135 (c) 6.81 William G. Walters 1,234,440 (b) 23.17 (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 234,440 shares owned by Whale Securities Co., L.P., of which Mr. Walters is Chief Executive Officer and an option for 1,000,000 shares held in Mr. Walters retirement plan. The shares in Mr. Walters retirement plan are issuable upon conversion of a $150,000 (principal amount) 7% Convertible Note due December 31, 1996. 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. 37 SECURITIES OWNED BY MANAGEMENT The following table sets forth certain information as of January 18, 1996, 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) Asher B. Edelman 1,481,019 (c)(d) 34.07 Reginald Schauder 23,600 (e) Michael E. Schultz 312,135 (f) 6.81 All Directors and Officers as a group (4 persons) 1,841,754 39.60 (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 excludes 26,620 shares of common stock held by Canal Capital Corporation Retirement Plan. Mr. Edelman serves as a trustee of the Canal Capital Corporation Retirement Plan. 38 (d) The number reported herein for Mr. Edelman includes 20,000 shares subject to options granted to Mr. Edelman which are presently exercisable, 8,400 shares owned by Aile Blanche, Inc., of which Mr. Edelman is the sole stockholder, 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, and 1,012,220 shares owned by A.B. Edelman Limited Partnership ("Edelman Limited Partnership"), of which Mr. Edelman is the sole general partner and 31,300 shares held in Mr. Edelman's retirement plan. 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 sales owned by it, which power is exercisable by Mr. Edelman as the controlling general partner of Citas. 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. The number reported herein for Mr. Edelman includes 214,150 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, but excludes 38,865 shares of common stock owned by Mr. Edelman's former wife, 140,110 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 and 590,186 shares of common stock held in three trusts for the benefit of Mr. Edelman's children, as to which Mr. Edelman expressly disclaims beneficial ownership. (e) Includes 23,500 shares subject to options which are presently exercisable. (f) Includes 255,500 shares subject to option which are presently exercisable. The number reported herein excludes 26,620 shares of common stock held by the Canal Capital Corporation Retirement Plan. Mr. Schultz serves as a trustee of the Canal Capital Corporation Retirement Plan. The number reported herein for Mr. Schultz also excludes 590,186 shares of common stock held in three trusts for the benefit of Mr. Edelman's children. Mr. Schultz serves as the trustee for each of the trusts. During the fiscal year ended October 31, 1995, Michael E. Schultz, President and Chief Executive Officer pf the Company, inadvertently omitted to file a Form 5 with respect to 1,194 shares of $1.30 Exchangeable Preferred 39 Stock received by Mr. Schultz in fiscal 1995 and 73,619 shares of $1.30 Exchangeable Preferred Stock received by trusts for the benefit of Mr. Edelman s daughters, of which Mr. Schultz is the trustee. The Form 5 was filed after the omission to file was brought to Mr. Schultz s attention. ITEM 13. Certain Relationships and Related Transactions See: "Compensation Committee Interlocks and Insider Participation" 40 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, 1995 the Company filed no reports on Form 8-K. 41 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 25th day of January, 1995. 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 25, 1996 Vice President-Finance Secretary and Treasurer /s/ Reginald Schauder (Principal Financial and Reginald Schauder Accounting Officer) January 25, 1996 /s/ Asher B. Edelman Chairman of the Board Asher B. Edelman and Director January 25, 1996 /s/ Gerald N. Agranoff Gerald N. Agranoff Director January 25, 1996 42 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 -- Report of Independent Public Accountants................ F-2 Consolidated Balance Sheets October 31, 1995 and 1994... F-3 Consolidated Statements of Operations for the years ended October 31, 1995, 1994 and 1993................ F-5 Consolidated Statements of Cash Flows for the years ended October 31, 1995, 1994 and 1993.......... F-7 Consolidated Statements of Stockholders' Equity for the years ended October 31, 1995, 1994 and 1993...... F-8 Notes to Consolidated Financial Statements.............. F-9 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Canal Capital Corporation: We have audited the accompanying consolidated balance sheet of Canal Capital Corporation (a Delaware corporation) and subsidiaries as of October 31, 1995 and 1994 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended October 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our 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, e v i dence 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, 1995 and 1994, and the results of their operations and cash flows for each of the three years in the period ended October 31, 1995, 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 15 to the financial statements, the Company has suffered recurring losses from operations in six of the last seven years and has a working capital deficit at October 31, 1995, is involved in litigation with a major tenant in Sioux City, Iowa and Fargo, North Dakota and has an indeterminate continuing liability for its share of the costs of environmental remediation associated with the sale of property located in Portland, Oregon. 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 15. The financial statements do not include any adjustments that might result from the outcome of the litigation, the recognition of the Company's share of the costs associated with the correction of the adverse environmental condition or other uncertainties. Furthermore, the financial statements do not include any adjustments that might result from the going concern uncertainty. New York, N.Y. TODMAN & CO., CPAs, P.C. December 27, 1995 Certified Public Accountants (N.Y.) F-2 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1995 AND 1994 1995 1994 ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 2(J) $ 114,750 $ 33,595 Notes and accounts receivable, net (Note 6) 241,778 675,927 Art Inventory (net of a valuation allowance of $500,000 at October 31, 1995 and 1994, respectively) (Notes 2(E) and 10) 500,000 500,000 Prepaid expenses 106,600 111,775 TOTAL CURRENT ASSETS 963,128 1,321,297 NON-CURRENT ASSETS: Property of operating leases, net of accumulated depreciation of $6,074,482 and $5,694,754 for 1995 and 1994, respectively (Note 17) 8,384,975 8,707,662 Art inventory non-current (net of valuation allowance of $500,000 and $0) at October 31, 1995 and 1994, respectively (Notes 2(E) and 10) 4,900,595 5,744,132 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-3 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1995 AND 1994 (cont d) OTHER ASSETS: Property held for development or resale (Note 2(C)) 3,000,000 3,304,000 Long-term investments (Note 5) 480,091 765,962 Deferred leasing and financing costs (Note 2(F) 147,913 23,989 Other long-term notes receivable 83,104 0 Deposits and other 243,546 260,471 3,954,714 4,354,422 $18,203,412 $20,127,513 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1995 AND 1994 1995 1994 LIABILITIES & STOCKHOLDERS EQUITY CURRENT LIABILITIES: Short-term borrowings (Note 7) $ 0 $ 787,305 Accounts payable and accrued expenses 2,618,467 1,918,384 Accrued litigation settlement (Note 15) 0 0 Income taxes payable 40,881 50,000 Current portion of long-term debt (Note 7) 51,000 3,366,000 TOTAL CURRENT LIABILITIES 2,710,348 6,121,689 Long-term debt, less current portion (Note 7) 10,346,967 8,061,407 Long-term debt, related party 1,032,275 0 11,379,242 8,061,407 Commitments and Contingencies (Notes 11 and 15) 0 0 Stockholders Equity: (Notes 12 and 13) Preferred Stock $0.01 par value: 5,000,000 shares authorized; 2,358,542 and 2,055,194 shares issued and outstanding and aggregate liquidation preference of $23,585,420 and $20,551,940 at October 31, 1995 and 1994, respectively 23,585 20,552 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1995 AND 1994 (cont d) 1995 1994 Common Stock, $0.01 par value: 10,000,000 shares authorized; 5,313,794 shares issued at October 31, 1995 and 1994, respectively 53,138 53,138 Additional Paid-in Capital $ 26,468,008 $ 26,262,346 Accumulated Deficit (9,690,693) (7,979,331) Less-Valuation reserve (Notes 9 and 16) (1,736,671) (1,408,743) Less-986,865 shares of common stock held in treasury, at cost (11,003,545) (11,003,545) 4,113,822 5,944,417 $ 18,203,412 $ 20,127,513 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-6 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 1995 1994 1993 Real Estate Operations: Real Estate Revenues: Sale of real estate $ 770,012 $ 2,861,194 $ 543,181 Rental income 2,090,068 2,125,030 2,112,488 Ground lease income 972,500 946,772 1,000,000 Volume based rental income 729,335 798,489 554,507 Litigation settlement reversal Note (15) 0 1,500,000 0 Other income 31,892 21,457 60,639 4,593,807 8,252,942 4,270,815 Real Estate Expenses: Cost of real estate sold 431,736 2,292,258 181,114 Labor, operating and maintenance 980,626 918,256 1,008,232 Depreciation and amortization 364,594 418,227 467,589 Taxes other than income taxes 530,202 517,200 456,552 Provision for litigation settlement 0 0 400,000 General and administrative 90,888 85,920 54,883 2,398,046 4,231,861 2,568,370 Income From Real Estate Operations 2,195,761 4,021,081 1,702,445 Art Operations: Art Revenues: Sales 246,550 207,350 260,222 Other revenues 13,740 0 3,669 260,290 207,350 263,891 The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-7 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (cont d) 1995 1994 1993 Art Expenses: Cost of art sold $ 407,557 $ 209,461 $ 543,181 Valuation reserve 500,000 200,000 300,000 Depreciation and Amortization 0 0 1,420 Selling, general and administrative 79,803 76,458 162,080 987,360 485,919 796,457 Loss from art operations (727,070) (278,569) (532,566) General and Administrative Expense (1,380,415) (1,265,793) (1,703,861) Write-off in connection with lease termination (Note 11) 0 0 (873,000) Income (loss) from operations 88,276 2,476,719 (1,406,982) Other Income (Expense): Gain on sale of long-term investments 0 33,278 329,000 Loss on write down of long- term investments (285,871) (343,529) 0 Interest & other income 164,209 180,791 377,514 Interest expense (1,484,828) (1,284,928) (1,459,358) (1,606,490) (1,114,388) (752,844) The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-8 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (cont d) 1995 1994 1993 Income (loss) before provision for income taxes and extraordinary gain (1,518,214) 1,362,331 (2,159,826) Provision for income taxes (Note 8) 0 0 0 Net income (loss) before extraordinary gain (1,518,214) 1,362,331 (2,159,826) Extraordinary gain on retirement of debt, (net of taxes of $0 in 1993 (Note 7)) 0 0 365,760 Net Income (Loss) (1,518,214) 1,362,331 (1,794,066) Preferred Stock Dividend (193,148) (313,556) (112,532) Net Income (Loss) Applicable to Common Shares ($1,711,362) $1,048,775 ($1,906,598) Earnings (Loss) per Common and Common Equivalent Share (Note 2)(I)): Income (Loss) Before Extraordinary Item ($0.40) $0.20 ($0.52) Extraordinary Item 0.00 0.00 0.08 Net Income (Loss) ($0.40) $0.23 ($0.44) The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-9 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (cont d) 1995 1994 1993 Earnings (Loss) per Common and Common Equivalent Share Assuming Full Dilution (Note 2(I)): Income (Loss) Before Extraordinary Item ($0.37) $0.20 ($0.52) Extraordinary Item 0.00 0.00 0.08 Net Income (Loss) ($0.37) $0.20 ($0.44) The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-10 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 1995 1994 1993 Cash Flows from Operating Activities: Net Income (Loss) ($1,518,214) $ 1,362,331 ($1,794,066) Adjustments to Reconcile Net Income (Loss) to Net Cash Provided (Used) by Operating Activities: Write-off in connection with lease termination 0 0 873,000 Provision for litigation settlement 0 (1,500,000) 400,000 Extraordinary gain on retirement of debt 0 0 (365,760) Depreciation and Amortization 412,505 430,248 649,968 Gain on sales of real estate (338,276) (568,936) (362,067) Gain from sale of long-term investments 0 (333,278) (329,000) Valuation reserve-art inventory 500,000 200,000 300,000 Loss on write down of long-term investments 285,871 343,529 0 Changes in Assets and Liabilities: Notes and accounts receivable, net 351,045 (232,832) 1,125,675 Art inventory, net 343,537 329,342 338,108 Prepaid expenses and other, net (540,079) (48,725) 8,543 Payables and accrued expenses, net 690,964 (1,413,823) (832,934) Net Cash Provided (Used) by Operating Activities 187,353 (1,432,144) 11,467 The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-11 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (cont d) 1995 1994 1993 Cash Flows from Investing Activities: Proceeds from sale of long- term investments $ 0 $ 489,928 $ 500,000 Proceeds from sales of real estate 770,012 2,861,194 543,181 Capital expenditures (91,740) (97,440) (92,379) Net Cash Provided by Investing Activities 678,272 3,253,682 950,802 Cash Flows from Financing Activities: Proceeds from long-term debt 1,032,275 500,000 0 Repayment of short-term borrowings (787,305) (1,729,000) (890,450) Repayment of long-term debt obligations (1,029,440) (582,693) (1,073,658) Net Cash Used by Financing Activities (784,470) (1,811,693) (1,964,108) Net Increase (Decrease) in Cash and Cash Equivalents 81,155 9,845 (1,001,839) Cash and Cash Equivalents at Beginning of Year 33,595 23,750 1,025,589 Cash and Cash Equivalents at End of Year $ 114,750 $ 33,595 $ 23,750 The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-12 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (cont d) Note: In fiscal 1995, 1994 and 1993, $193,148, $313,556 and $112,532, respectively, of preferred stock dividends were paid through the issuance of 303,348, 271,830 and 227,240, respectively, shares of preferred stock. The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-13 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, OCTOBER 31, 1992 5,313,794 $ 53,138 1,556,124 $ 15,561 NET LOSS 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 227,240 2,273 RESERVE 0 0 0 0 BALANCE, OCTOBER 31, 1993 5,313,794 $ 53,138 1,783,364 $ 17,834 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 271,830 2,718 RESERVE 0 0 0 0 BALANCE, OCTOBER 31, 1994 5,313,794 $ 53,138 2,055,194 $ 20,552 NET LOSS 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 303,348 3,033 RESERVE 0 0 0 0 BALANCE, OCTOBER 31, 1995 5,313,794 $ 53,138 2,358,542 $ 23,585 The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-14 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993 (cont d) ADDITIONAL TREASURY PAID-IN ACCUMULATED VALUATION STOCK CAPITAL DEFICIT RESERVE AT COST BALANCE, OCT. 31, 1992 $25,813,954 ($7,121,508) ($907,140)($11,003,545) NET LOSS 0 (1,794,066) 0 0 PRFD STOCK DIVIDEND 116,845 (112,532) 0 0 RESERVE 0 0 (108,395) 0 BALANCE, OCT. 31, 1993 $25,930,799 ($9,028,106) ($1,015,535)($11,003,545) NET INCOME 0 1,362,331 0 0 PRFD STOCK DIVIDEND 331,547 (313,556) 0 0 RESERVE 0 0 (393,208) 0 BALANCE, OCT. 31, 1994 $26,262,346 ($7,979,331)($1,408,743)($11,003,545) NET LOSS 0 (1,518,214) 0 0 PRFD STOCK DIVIDEND 205,662 (193,148) 0 0 RESERVE 0 0 (327,928) 0 BALANCE, OCT. 31, 1995 $26,468,008 ($9,690,693) ($1,736,671)($11,003,545) The Accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-15 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL 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 two distinct businesses - the management of its agribusiness related real estate properties and art operations, consisting mainly of the acquisition of art for resale. In the past, Canal engaged in the trading of and investing in securities. Canal's trading activities were severely curtailed in fiscal 1991 and not engaged in at all in fiscal years 1992 through 1995. 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. First, the Company has suffered significant losses from operations in six of the last seven years and as of October 31, 1995 the company has a working capital deficiency of approximately $1,747,000. Second, the Company is involved in litigation with major tenants in Sioux City, Iowa and Fargo, North Dakota. Third, the Company has a continuing environmental liability associated with a sale of property located in Portland Oregon. The financial statements include a reserve of $400,000 associated with the environmental liability, but does not include any adjustments that might result from the resolution of these other uncertainties. In the past three years, Canal has made significant cuts in expenditures, primarily in salaries and other overhead expenses and plans to continue to reduce the level of its art inventories to enhance current cash flows. Management believes that 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 cost cutting program in itself will be sufficient to fund operating cash requirements. F-16 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 subsidiaries ( the Company ). 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 $150,000 for 1995 and $156,000 at October 31, 1995 and 1994, respectively, and is included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 1995, 1994 and 1993 were not material to financial statement presentation and were therefore included in other income from real estate operations. All significant intercompany balances and transactions have been eliminated in consolidation. B) Long-term Investments -- Due to Canal's desire to further expand its other business lines and to reduce its level of debt outstanding, these activities were severely curtailed during fiscal 1991. There were no such activities in fiscal 1992 through 1995. Canal's program of trading and investing in listed marketable securities, was conducted through a wholly- owned subsidiary and were reflected at market value in its financial statements. Realized and unrealized gains and losses on Canal's current portfolio were recognized in operating results. Realized gains and losses on sales of securities were determined on the first-in, first out method. Canal has investments in certain companies in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. All of these investments are considered long-term in nature and carried at the lower of adjusted cost or net realizable value because Canal and its affiliates have significant influence over operating and financial policies of these entities. It is important to note that it is the group (as defined) that can exercise influence over these companies, not Canal. Accordingly, these situations do not qualify for consolidation as a method of reporting. These investments are adjusted to net realizable value if a decline in market value from carrying value is deemed other than temporary. None of these holdings represents more than a 4% ownership by Canal in the respective entities. F-17 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED C) Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment. Property held for Development or Resale -- Property held for development or resale consist of approximately 347 acres 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. D) Expenditures for maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. When properties are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in current income. E) Art Inventory - 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 78% and 80% of the inventory value at October 31, 1995 and 1994, respectively. The remaining 22% and 20% at October 31, 1995 and 1994, 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 10). Antiquities and contemporary art represented 54% ($2,923,332) and 46% ($2,477,263) and 56% ($3,516,869) and 44% ($2,727,263) of total art inventory at October 31, 1995 and 1994, respectively. F-18 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED F) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new leases and long-term financing are deferred and amortized on the straight-line method over the terms of the related leases or debt agreements, as applicable. G) Revenue Recognition -- 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. 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 the sale of long-term investments, if any, are recognized, on a specific identification method, on a trade date basis and unrealized gains or losses on Canal's marketable securities portfolio are recognized in the period of occurrence. H) Income Taxes -- Canal and its subsidiaries file a consolidated Federal income tax return. Deferred income taxes, if any, are provided for temporary differences between financial reporting and taxable basis of assets and liabilities. I) Net Earnings (Loss) Per Share -- Earnings (loss) per common equivalent share for 1995 were computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The number of common shares was increased by the number of shares issuable on the exercise of options when the market price of the common stock exceeds the exercise price of the options. This increase in the number of common shares was reduced by the number of common shares that are assumed to have been purchased with the proceeds from the exercise price of the options; those purchases were assumed to have been made at the average price of the common stock during that part of the year when the market price of the common stock exceeded the exercise price of the options. Earnings (loss) per common share assuming full dilution for 1995 was determined on the assumption that the convertible notes issued in 1995 were converted on the date of the issue. Net income was adjusted for the interest net of its tax effect. The fully diluted computation also gives recognition for the year end market price of the Company's shares under the treasury stock method. F-19 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the fiscal 1993 common stock equivalents were not included in computing earnings per common share as such inclusion would have been anti- dilutive. Fully diluted earnings per share would also have been anti- dilutive for fiscal 1993. For the years ended October 31, 1995, 1994 and 1993, the weighted average number of shares used in earnings per common share and common equivalent share computation were 4,351,680; 4,475,566; and 4,326,929, respectively. For the years ended October 31, 1995, 1994 and 1993, weighted average number of shares used in the computation of earnings per share assuming full dilution were 4,601,680; 5,169,896; and 4,326,929, respectively. 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 $47,000, $55,000 and $79,000 and interest payments o f $1,485,000, $1,285,000 and $1,459,000 in 1995, 1994 and 1993, respectively. K) Accounting Estimates -- The preparation of financial statements in c o n f ormity 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. L ) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. STOCKYARD OPERATIONS SALE 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 stockyards operations. Canal entered into a master lease (the "Lease") F-20 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED with the purchaser covering this land and facilities at five locations. The lease is a 10-year lease, renewable at the purchaser s option for an additional 10-years, with annual rentals of $750,000 per year for the first year escalating to $1 million per year for the fourth through the tenth years and $1 million adjusted for CPI increases thereafter. Canal could be entitled to receive additional rent if the stockyards livestock value or cash flow (as defined) exceeds certain levels. In addition, Canal retained the right to receive income from certain volume based rental income agreements with various meat packing companies located near the stockyards. The income from the ground lease is included in Canal's operating results as Real Estate operations. Revenues from the volume based rental agreements for the three years ended October 31, 1995 were: (Thousands of Dollars) 1995 1994 1993 Sioux City, Iowa $ 629 $ 591 $ 541 Fargo, North Dakota (1) 100 207 14 $ 729 $ 798 $ 555 (1) Amount reflected for 1994 includes approximately $108,000 of rents due from fiscal 1993 which were collected in fiscal 1994 as a result of litigation (see Note 15 to the Consolidated Financial Statements). 4. MARKETABLE SECURITIES At October 31, 1995 and 1994, Canal held no marketable securities in its current portfolio. This reflects Canal's desire to further develop its other business lines and to reduce its level of outstanding debt. Additionally, there were no investing activities for the three year period ended October 31, 1995. F-21 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Commencing January 1, 1986, Canal paid investment advisory fees to a securities broker-dealer which has discretionary authority over the securities trading activities of Canal and which is affiliated with a director who is also a shareholder and chairman of Canal. Investment advisory fees are paid quarterly based on 25% of net realized gains less any net unrealized depreciation in the portfolio, as defined. As a result of the major stock market decline of October 19, 1987, Canal had accumulated realized and unrealized losses available to offset future advisory fees which might have been otherwise payable. Accordingly, at October 31, 1995, Canal had remaining net realized and unrealized losses of approximately $2.0 million which remain available to offset future net realized gains in determining advisory fees payable. 5. LONG-TERM INVESTMENTS At October 31, the long-term investments consisted of the following: (Thousands of Dollars) 1995 1994 Aggregate market value..................... $ 481 $ 969 Aggregate carrying value................... $ 480 $ 766 Canal has investments in the equity securities of a company in which other entities affiliated with Canal also have made investments and which entities together comprise a group for regulatory reporting purposes. It is important to note that it is the group (as defined) that can exercise influence over these companies, not Canal. Accordingly, these situations do not qualify for consolidation as a method of reporting. At October 31, 1995, 100% of the market value of Canal's long-term investments was invested in equity securities of this company in which such parties held 5% or more of the outstanding equity securities of the issuer. Certain of Canal's officers and directors also serve as officers and/or directors of this company. During fiscal 1995, Canal recognized a loss on write down of long-term investments of $286,000. Included in this amount was a $114,000 loss to write down the carrying value of the company s investment in Intelogic Trace, Inc. to zero reflecting managements estimate of its net realizable value. Canal recognized a loss on write down of long-term investments of $344,000 in fiscal 1994. There was no loss recognized in fiscal 1993. F-22 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. NOTES AND ACCOUNTS RECEIVABLE Included in notes and accounts receivable at October 31, 1995 and 1994, respectively, were the current portion of notes receivable in the amount of $60,000 and $176,000 from real estate and other sales. Notes and accounts receivable is shown net of a provision for doubtful accounts in the amount of $0 and $4,000 for fiscal 1995 and 1994 respectively. 7. BORROWINGS At October 31, 1995, substantially all of Canal's real properties, the stock of certain subsidiaries, the long-term investments and a substantial portion of its antiquities inventories are pledged as collateral for the following obligations: October 31, (Thousands of Dollars) 1995 1994 Variable rate mortgage notes due May 15, 1998 ................................ $ 7,635 $ 7,960 Variable Rate Mortgage Notes due September 15, 1998.......................... 1,032 0 11% mortgage note; original principal amount $1,697; due April 1, 2011; payable in monthly installments (including interest) of $17....... 1,356 1,391 9.5% mortgage note; original principal amount $472; due November 1, 2012; payable in monthly installments (including interest) of $4........ 416 425 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........ 491 501 Other ........................................... 500 1,150 Total ........................................... 11,430 11,427 Less -- current maturities ...................... 51 3,366 Long-term debt $11,379 $ 8,061 F-23 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED On May 22, 1985, Canal completed the sale of $20 million face value of Variable Rate Mortgage Notes, due May 15, 1993. As discussed more fully below, Canal has extended these notes to May 15, 1998 under essentially the same terms and conditions. The notes carry interest at the highest of four variable rates, determined on a quarterly basis. At October 31, 1995, the interest rate was 12.25%. This rate remained unchanged at November 15, 1995 and for the next successive 90-day period. The average interest rate on these notes during 1995 was 11.78%. The new agreement, 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 two, three and four percent per annum for the fiscal years commencing May 15, 1995, 1996 and 1997, respectively. In consideration for the new agreement, Canal agreed to pay a fee to the noteholders of 2% of the principal amount outstanding as of May 15, 1995. On September 20, 1995, the Company issued $1,032,000 of variable rate mortgage notes due September 15, 1998 to a group which includes an investment partnership controlled by the Company s Chairman and the Company s Chief Executive Officer and members of his family. The notes issued have essentially the same terms and conditions as the notes discussed above. 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 two, three and four percent per annum for the fiscal years commencing September 15, 1995, 1996 and 1997, respectively. In March 1994 the Company borrowed $500,000 from an individual. The Company executed a $350,000 note due December 31, 1996 and a $150,000 convertible note also due December 31, 1996. The $150,000 note is convertible at the holder s option into one million (1,000,000) shares of the Company's common stock. The notes pay quarterly interest at the rate of 7% per annum and are secured by 125,000 shares of Datapoint Corporation common stock owned by the Company. The proceeds from this loan were used by the Company to meet its obligations under its secured credit line. F-24 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In July, 1993, Canal completed the renegotiation of its secured line of credit with Rabobank Nederland for an additional three year period ending March 31, 1996. Among other things, the revised terms require the Company to maintain a minimum net worth of $5 million, pay interest at the rate of prime plus 1.5% (increasing to 2.0% and 2.5% in the second and third years of the agreement, respectively) on any outstanding borrowings and repay the line of credit through a combination of scheduled repayments and participation by the bank in the proceeds from sale of certain assets by March 31, 1996. On September 20, 1995 this line of credit was repaid in full from the proceeds of the company s issuance of $1,032,000 of Variable Rate Mortgage Notes due September 15, 1998. As part of the Company's 1993 repurchase of $1.5 million of its outstanding variable rate mortgage notes, Canal executed a $650,000 note payable due May 31, 1994. The holder of this note extended the due date of the payment to September 15, 1998. On September 20, 1995 this line of credit was repaid in full from the proceeds of the company s issuance of $1,032,000 of Variable Rate Mortgage Notes due September 15, 1998. The scheduled maturities and sinking fund requirements of long-term debt during the next five years are as follows (thousands of dollars): 1996-$51; 1997-$600; 1998-$8,767; 1999-$100; 2000-$100 8. INCOME TAXES Statement of Financial Accounting Standard No. 109 - Accounting for income taxes, which establishes accounting and reporting standards for the effects of income taxes that result from an enterprise's activities during the current year and preceding years became effective for the Company for its fiscal year ended October 31, 1994. Its implementation had no material effect on the financial statements of the Company. Under FAS 109, the utilization of the net operating loss carryforwards are not presented as extraordinary items. F-25 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company has carryforward losses which are available to offset future federal and state taxable income. For federal income tax reporting purposes, such losses expire as follows: Year Ending Amount 2006 $3,633,545 2008 1,750,455 2010 1,008,964 $6,392,964 Deferred income tax assets as of October 31, 1995, 1994 and 1993, due primarily to net operating losses, have been reduced to zero by valuation reserves of $2,557,186, $1,939,891 and $2,457,814, respectively due to uncertainties concerning their realization. The following is a reconciliation of the federal income tax rate to the actual effective income tax rate as a percentage of pretax income: 1995 1994 1993 Statutory federal income tax rate 34.0% 34.0% 34.0% State and local income tax rate, net of federal tax benefit 5.9 5.9 5.9 Other 0.1 0.1 0.1 40.0 40.0 40.0 Less: Deferred income tax valuation allowance 40.0 40.0 40.0 - % - % - % F-26 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Deferred taxes result from different methods being applied in the recognition of certain revenues and expenses for financial statement and tax reporting purposes called temporary differences. Some of the temporary differences giving rise to deferred taxes and the tax effect of each were as follows: (Thousands of Dollars) 1995 1994 1993 Accelerated depreciation and amortization ................... $ 198 $ 89 $ 84 Real estate activities ........... 0 0 0 Unrealized investment gains and losses, net ................ 285 10 0 Other, net ....................... (483) (99) (84) $ - $ - $ - 9. 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 $160,000 for fiscal 1995 and has made contributions of approximately $150,000 for fiscal 1994 and $328,000 for fiscal 1993. A portion of the 1993 fiscal year contribution consisted of a transfer of marketable securities with a market value of approximately $231,000 at the time of transfer. These publicly traded securities have a ready market and can be freely traded by the Plan subject to the Securities and Exchange Commission Rule 144. 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. F-27 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, 1995 and 1994. Plan Year (Thousands of Dollars) 1995 1994 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,521 and $1,383 in 1995 and 1994, respectively ............. $ 1,526 $ 1,385 Additional benefit due to assumed future compensation levels ......................... 14 11 Projected benefit obligation (1) .............. 1,540 1,396 Plan assets at fair value ..................... 729 814 Projected benefit obligation in excess of plan assets .............................. 811 591 Unrecognized net asset ........................ 177 202 Unrecognized net loss ......................... (1,927) (1,621) Valuation reserve to recognize accrued pension costs in the consolidated balance sheets .... 1,736 1,409 Accrued pension cost included among accrued expenses in the consolidated balance sheets.. $ 797 $ 581 (1) The vast majority of the projected benefit obligation is related to the Company's former stockyard employees. F-28 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Net periodic pension cost for plan years ended October 31, 1995, 1994 and 1993 included the following components: Plan Year (Thousands of Dollars) 1995 1994 1993 Service costs - benefits earned during the period ............................ $ 6 $ 5 $ 14 Interest cost on projected benefit obligation ............................ 114 109 115 (Return) loss on assets .............. 34 374 (297) Net amortization and deferral .......... (121) (465) 207 Net period pension cost ................ $ 33 $ 23 $ 39 Assumptions used in computing the 1995, 1994 and 1993 pension cost were: 1995 1994 1993 Discount rate ........................... 7.25% 8.50% 7.50% Rate of increase in compensation level ................................. 5.75% 7.00% 6.00% Expected long-term rate of return on assets ............................. 10.00% 10.00% 10.00% 10. ART OPERATIONS Canal's art dealing operations consist primarily of the purchase for resale of contemporary art and purchase for resale of antiquities primarily from ancient Mediterranean cultures. Canal s art dealing operations are c a rried on through various consignment agreements relating to its antiquities and contemporary art inventories. F-29 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Salander-O'Reilly - In November 1989, Canal entered into a cost and revenue sharing agreement with the Salander-O'Reilly Galleries in New York City, in connection with their exclusive representation of Jules Olitski, a world renowned artist of contemporary paintings. Canal purchased a number of Olitski paintings for resale. This Agreement expired December 1, 1994. Canal currently operates independently of Salander-O Reilly Galleries in its marketing efforts. In the second quarter of 1993 Canal closed the last of the galleries it had operated, the Daedalus Ancient Art Gallery located in London, England. Canal continues to engage in certain consignment agreements both in the United States and in Europe. Management estimates it may take two to 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 an independent appraiser annually. The 1995 appraisal covered approximately 78% 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 22% of the inventory was estimated by management based in part on operating history and in part on the results of the independent appraisals done. In fiscal 1995 Canal recognized a $500,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $1,000,000 as of October 31, 1995 as compared to $500,000 and $300,000 at October 31, 1994 and 1993, respectively. These estimates were based in part on the Company's history of losses sustained on art sales in the current and previous years. F-30 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 has effectively reduced inventory to its estimated net realizable value. 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 1995. Because of the available alternatives the Company does not anticipate any extraordinary losses associated with the art inventory in fiscal 1996. Canal's art operations have generated operating losses of $0.7 million, $0.3 million and $0.2 million on revenues of $0.3 million, $0.2 million and $0.3 million for the years ended October 31, 1995, 1994 and 1993, respectively. Art sales have resulted primarily through activities in conjunction with sales of antiquities. Canal's management believes that through its consignment and joint venture agreements as well as other potential distribution outlets Canal will continue to deal in antiquities. T h e Company had $1,600,000 and $586,000 of art inventory on consignment with third party dealers at October 31, 1995 and 1994, respectively. Antiquities and contemporary art represented 54% ($2,923,322) and 46% ($2,477,263) and 56% ($3,516,869) and 44% ($2,727,263) of total art inventory at October 31, 1995 and 1994, respectively. F-31 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ART INVENTORY - The Company classified its art inventory as follows: (In 000's) Current Portion Non-Current Portion Total 1995 1994 1995 1994 1995 1994 Antiquities $ 900 $ 900 $ 2,523 $2,867 $ 3,423 $ 3,767 Contemporary 100 100 2,877 2,877 2,977 2,977 Valuation Allowance (500) (500) (500) 0 ( 1,000) (500) Net Value $ 500 $ 500 $ 4,900 $5,744 $ 5,400 $ 6,244 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, 1995, 1994, and 1993 were as follows: (in 000's) 1995 1994 1993 Antiquities $ 246 $ 207 $ 261 Contemporary 14 0 3 $ 260 $ 207 $ 264 F-32 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. LEASE COMMITMENTS Canal currently occupies 4,200 square feet of commercial office space in New York City for its headquarters operation. This space is under a five year lease expiring December 31, 1998. During the third fiscal quarter of 1993 Canal negotiated the early termination of the lease on its then New York City office space. In connection with the termination of this lease, Canal recognized an $873,000 write-off of the leasehold improvements and deferred leasing costs associated with this lease. The following is a schedule of future minimum payments required under operating leases that have initial or remaining noncancellable terms in excess of one year as of October 31, 1995: Year ended October 31, (Thousands of Dollars) 1996 ........................................ $ 154 1997 ........................................ 154 1998 ........................................ 154 1999 ........................................ 26 Minimum payments required ....................... 488 Rental income under subleases ................... 126 Net minimum payments required ................... $ 362 F-33 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Rent expense under these and other operating leases for the years ended October 31, 1995, 1994 and 1993 were as follows: (Thousands of Dollars) 1995 1994 1993 Minimum rentals ................... $ 116 $ 116 $ 706 Less: sublease rentals ........... (40) (33) (366) $ 76 $ 83 $ 340 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, 1995 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, 1995, there were 327,000 exercisable options outstanding under these plans. F-34 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Transactions under these plans are summarized as follows: Shares Option Price Range Balance outstanding October 31, 1993.... 474,100 $0.013-$8.625 Options granted ........................ 0 - - Options expired ........................ (74,500) $0.013-$8,625 Balance outstanding October 31, 1994.... 399,600 $0.013-$8.625 Options granted ........................ 0 - - Options expired ........................ (72,600) $4.890-$6.705 Balance outstanding October 31, 1995.... 327,000 $0.013-$8.625 13. PREFERRED STOCK ISSUANCE On October 15, 1986 Canal exchanged 986,865 shares of its $1.30 Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of its outstanding common stock. Since the exchange, the Company has issued an additional 1,371,677 shares in the form of stock dividends for a total outstanding at October 31, 1995 of 2,358,542. 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, twenty-six of the thirty-six quarterly payments have been paid in additional stock resulting in the issuance of 1,371,677 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 7). The last cash dividend paid on Canal's preferred stock was in September 1989. Additionally, the December 31, 1995 preferred stock dividend will be paid in additional stock. In August 1994, the Board of Directors of the Company agreed to approve a proposal for the exchange of all of its outstanding $1.30 Exchangeable Preferred Stock for shares of its common stock on a basis of 2.5 shares of F-35 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED common stock for each share of preferred stock. Such proposal must be presented to the holders of the preferred stock for approval of the holders of at least 66 2/3% of the outstanding preferred stock. The exchange was to be coupled with a public offering of the company s stock. The public offering was canceled, therefore, the Company has taken no further action in this matter. VOTING RIGHTS - The holders of the Preferred Stock shall not have any voting rights except as set forth in the following paragraphs. 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 or threatened 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). F-36 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS As a result of the sale of the Stockyard Operations and curtailment of the securities trading and investing program, Canal is engaged in two lines of business: Art operations and real estate. The following summary presents segment information relating to these lines of business except for the respective revenues, operating income and t h e reconciliation of operating income with pre-tax income which information is presented on Canal's income statement. October 31, (Thousands of Dollars) 1995 1994 1993 Identifiable assets: Art ............................... $ 5,408 $ 6,286 $ 7,119 Real estate ...................... 11,630 12,677 14,004 Corporate ......................... 1,165 1,165 1,540 $ 18,203 $ 20,128 $ 22,663 (Thousands of Dollars) 1995 1994 1993 Capital expenditures: Art ............................... $ 0 $ 0 $ 0 Real estate ....................... 75 29 90 Corporate ......................... 17 68 3 $ 92 $ 97 $ 93 Income from real estate operations includes gains (losses) on sales of real estate of $0.3 million, $0.6 million and $0.5 million in 1995, 1994 and 1993, respectively. Art identifiable assets include approximately $1.6 million and $0.6 million of art inventory in galleries or on consignment abroad as of October 31, 1995 and 1994, respectively. F-37 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 15. 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. In addition, Canal or its subsidiaries are party to the following litigations: Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo This action involves Union Stockyards Company of Fargo ( Union ), a wholly owned subsidiary of Canal. It is an action which involves claims which are similar to some of the claims brought by B&H Investment Co. ( B&H ) against Union several years ago which was dismissed in 1994 following a decision by the Minnesota Court of Appeals in favor of Union. The dispute involves a Lease Agreement relating to certain real estate owned by Union and leased to Federal Beef Processors, Inc. ( Federal Beef ). Federal Beef operates a meat packing plant on the leased premises, and it is a related entity to B&H, which previously operated the packing plant. By the terms of the Lease Agreement, Federal Beef s obligation to pay additional rent is suspended during any period that Union fails to provide adequate yardage service (under the terms of a separate Yardage Agreement between the parties) that materially affects the business of Federal Beef. Federal Beef filed a Complaint on June 2, 1995 in the District Court for Cass County, North Dakota, for damages claimed to be suffered as a result of Union s alleged failure to provide adequate maintenance and cleaning services for the livestock pens used by Federal Beef under the Yardage Agreement. The damages sought by Federal Beef are in an unspecified amount consisting of the additional rent paid by Federal Beef during the time Union allegedly was in breach of the Lease Agreement and the Yardage Agreement. As of June 1995, Federal Beef alleged it was entitled to the return of additional rent in excess of $70,000. In addition, Federal Beef seeks all direct and consequential damages allegedly suffered by Federal Beef because of the claimed breach, including loss of profits from animals allegedly damaged by reason of the condition of the pens. Federal Beef subsequently filed an Amended Complaint in which it has also sought a determination that it is entitled to exercise an option to purchase the leased premises under the terms of the Lease Agreement for a price measured by the unimproved value of the leased premises. F-38 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Union has filed an Answer and Counterclaim denying the allegations in the Amended Complaint, seeking a determination that Federal Beef s claims are frivolous, and asking for an award of Union s reasonable attorneys fees and costs in connection with the defense of the action. In July 1995, Union successfully defeated a motion by Federal Beef for an order which would have allowed Federal Beef to deposit into Court all rent payments due from Federal Beef to Union pending the outcome of the litigation. As a result, Federal Beef has continued to make all rent payments due under the Lease Agreement while reserving its alleged claims against Union. Management does not believe that the revenues generated by this lease will be materially affected in resolving this dispute. John Morrell & Co. v. Canal Capital Corporation On October 6, 1993, an action was commenced against Canal by John Morrell & Co. ("Plaintiff") in the District Court for Woodbury County, State of Iowa. Plaintiff further amended the action on November 30, 1993. The lawsuit arises out of the alleged breach by Canal, as lessor, of a lease agreement relating to certain real estate on which Plaintiff operates a meat packing plant in Sioux City, Iowa. Plaintiff alleges in the suit a breach of the lease by Canal as a result of Canal's sale of the Sioux City stockyard operation in 1989 and its failure to renegotiate the rental terms of the lease. Plaintiff alleges that Canal is obligated as lessor to provide animals from the Sioux City stockyards to meet plaintiff's needs in operating the packing plant on the leased property. Plaintiff alleges that, as a result of Canal's failure to provide sufficient animals to meet plaintiff's needs, plaintiff has been forced to obtain animals from sources other than the stockyards at an additional cost and has been forced to pay additional rent under the lease agreement. Plaintiff seeks relief in the form of damages in an unspecified amount and a renegotiation of the rental terms of the lease. The parties have agreed to suspend activity in the litigation while the parties explore the possible resolution of the matter. In the meantime, plaintiff has agreed to pay the rent/yardage payments to Canal according to the lease, without prejudice to the claims of either plaintiff or Canal. The agreement may be terminated by either party upon 30-days written notice. F-39 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Management does not believe that the revenues generated by this lease will be materially affected in resolving this dispute. Former Portland Stockyard Property In December 1988 the Company sold a parcel of real estate in Multnomah County, Oregon and in connection therewith, agreed to share the costs of the correction of adverse environmental conditions on such property with the buyer. Pursuant to the cost sharing agreement, $1.1 million of the sales price was placed in escrow to secure the Company's performance of its cost sharing obligations, which were not limited to that amount. In 1991 the Company received an estimate from the buyer that the correction costs might be in the range of $2 to $5 million. Under the cost sharing agreement, the Company's obligation is to pay 50% of the first $400,000 and 90% of the next $425,000 of costs and 95% of all costs thereafter. The Company had objected to the buyer's definition of costs which require sharing in connection with certain demands of the buyer for release of funds from escrow and had stopped payment of those funds from the escrow. This dispute was the subject of an arbitration, which was recently resolved in favor of the buyer. As a result, those funds were released from escrow, and the escrow has been substantially depleted. At October 31, 1993, the C o mpany accrued $400,000 representing management's estimate of its additional contingent liability in this matter. This amount is included as a liability in accrued litigation settlement at October 31, 1995. Sioux City, Iowa - Demolition Notice On October 25, 1994, Canal received a Placard Notice (the "Notice") from the City of Sioux City, Iowa (the City ) ordering the demolition of four structures located on Canal's property. The Notice claims that the structures are dilapidated, unsafe and must be demolished. While exact costs are not available, Canal estimates demolition costs at $750,000 to $1,000,000. Canal is currently negotiating with the City for the sale of the four structures covered by the Notice and approximately 15 acres of land to the City. If these negotiations are successful the responsibility for any demolition required would be with the City. Additionally, Canal has F-40 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED filed an appeal of the Notice with City Inspection Services Manager and is awaiting a hearing date. If this matter cannot be settled as described above, Canal will pursue alternative means of challenging this Notice. Pine Valley Meats, Inc. v. Canal Capital Corporation On May 5, 1995 an action was commenced against Canal by Pine Valley Meats, Inc. ( Plaintiff ) in the County Court for Dakota County, State of Minnesota. The lawsuit arises out of the alleged breach by Canal of a certain cattle walkway agreement (the walkway agreement ) relating to the passage of cattle over land owned by Canal in South St. Paul, Minnesota. Plaintiff contends that the walkway agreement is a permanent easement thereby requiring Canal to maintain a cattle walkway for their use in perpetuity. Canal s position is that the walkway agreement is in fact a license and can be terminated at Canal s discretion. Canal did close the cattle walkway for several weeks in April 1995. In June 1995, plaintiff sought and won a temporary injunction requiring Canal to continue to maintain the cattle walkway for plaintiff s use until the rights of the parties can be determined at trial. Plaintiff is seeking a permanent injunction determining that the walkway agreement creates an easement and unspecified damages for lost profits when the walkway was closed. On January 5, 1996, the Dakota County Court ruled that the walkway agreement constituted a license only and denied the plaintiff s request for a permanent injunction. Trial on the damage issue is scheduled for April 15, 1996. Management does not believe that a damage award in this case is likely or that if damages were awarded that they would be of a material amount. F-41 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. VALUATION RESERVE The Valuation Reserve represents the excess of the 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 the pension benefits of the former employees, which benefits were frozen at the time the stockyard operations were sold in 1989. The excess will effectively be expensed over time as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists. 17. PROPERTY ON OPERATING LEASES T h e following schedule provides an analysis of the Company's investment in property on operating leases by location as of October 31, 1995: (IN THOUSANDS) Accumulated Location Land Improvements Depreciation Value St. Joseph, MO $ 869 $ 304 $ (156) $ 1,017 West Fargo, ND 3 283 (196) 90 S. St. Paul, MN 675 2,981 (492) 3,164 Sioux City, IA 1,480 3,705 (3,611) 1,574 Omaha, NE 1,437 2,348 (1,469) 2,316 Sioux Falls, SD 118 98 (71) 145 Corporate Office 0 158 (79) 79 $ 4,582 $ 9,877 $ (6,074) $ 8,385 F-42 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The following is a schedule by years of minimum future rentals on operating leases as of October 31, 1995: (5) (IN THOUSANDS) Volume Year Ending Rental Ground Based October 31, Income (1) Lease(2) Income(3) Total 1996 $ 2,200 $ 1,000 $ 0 $ 3,200 1997 2,300 1,000 0 3,300 1998 2,400 1,000 0 3,400 1999 2,500 1,000 0 3,500 2000 (4) 2,600 0 0 2,600 $ 12,000 $ 4,000 $ 0 $ 16,000 (1) Consists of rental income from Exchange Building (commercial office space), lease income from vacant land and structures and other rental income. (2) Ground Lease covers approximately 139 acres leased to the purchaser of Canal's former stockyard operations. (3) Excludes any estimate of volume based income from the Sioux City, IA and the Fargo, ND leases due to the uncertainty of these future revenues. However, Canal s volume based income averaged $600,000 annually for the past five years. (4) The stockyard ground lease has a five year renewal option which can be exercised on essentially the same terms that currently exist. Canal anticipates that this option will be exercised. (5) All real estate leases are accounted for as operating leases. F-43 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 18. Recent Accounting Pronouncements In October 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 119 Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments effective for the Company at December 31, 1994. The Company does not presently have nor has it had any derivative type instruments. The Financial Accounting Standards Board has issued a Statement of Financial Accounting Standards 121 Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of (the Statement ) which, when adopted could have a material impact on the results of operations and financial position of the Company in the year of adoption. The application of this Statement, which will be effective for fiscal years beginning after December 15, 1995, and requires the Company to carry real estate projects no longer under development, at the lower of cost or fair value less cost to sell. If the sum of the expected future net cash flow (undiscounted and without interest charges) is less than the carrying amount of undeveloped projects, an impairment loss would be recognized. The Company, consistent with existing generally accepted accounting principles, currently states the majority of its land and land under development at the lower of cost or net realizable value. The Company has not quantified the effect on the Company. Other pronouncements issued by the Financial Accounting Standards Board with future effective dates are either not applicable or not material to the consolidated financial statements of the Company. The Company applies APB Opinion 25 and related interpretation in account for its stock option plan. Accordingly, no compensation cost has been recognized for years ended October 31, 1995 and 1994. Also, no stock options were issued during fiscal 1995. 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 that begin after December 15, 1995. This statement requires that the fair value based method is applied to stock options awarded during 1995 and thereafter in F-44 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED order to measure the compensation cost at the grant date and recognize it over its vesting period. However, 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, as if the fair value based method of accounting pursuant to SFAS No. 123 had been applied. Since the Company has not issued any stock options during fiscal 1995, no additional disclosure requirement is deemed necessary. The Company intends to adopt the disclosure requirements for this statement effective for fiscal year ending October 31, 1996, while continuing to measure compensation cost using APB 25. F-45 CANAL CAPITAL CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 19. QUARTERLY INFORMATION (UNAUDITED) FINANCIAL INFORMATION FOR THE INTERIM PERIODS OF FISCAL 1995 IS PRESENTED BELOW: QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, (THOUSANDS OF DOLLARS, 1995 1995 1995 1995 EXCEPT PER SHARE DATA) REVENUES $1,143 $ 987 $1,707 $ 1,017 NET INCOME (LOSS) ($62) ($109) ($136) ($1,211) NET INCOME (lOSS) APPLICABLE TO COMMON SHARES ($131) ($151) ($181) ($1,248) NET INCOME (LOSS) PER COMMON EQUIVALENT SHARES ($0.03) ($0.03) ($0.04) ($0.30) NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE-FULLY DILUTED ($0.03) ($0.03) ($0.04) ($0.30) PER SHARE AMOUNTS FOR COMMON AND EQUIVALENT SHARES WAS RECALCULATED FOR THE FISCAL QUARTER ENDED JULY 31, 1994 ($0.38) TO GIVE EFFECT TO CERTAIN COMMON STOCK EQUIVALENTS AND FOR COMMON EQUIVALENT SHARE-FULLY DILUTED ($0.32) TO GIVE EFFECT TO THE ISSUANCE OF CERTAIN CONVERTIBLE NOTES ISSUED IN MARCH 1994. F-46 CANAL CAPITAL CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 19. QUARTERLY INFORMATION, CONTINUED (UNAUDITED) FINANCIAL INFORMATION FOR THE INTERIM PERIODS OF FISCAL 1994 IS PRESENTED BELOW: QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, (THOUSANDS OF DOLLARS, 1994 1994 1994 1994 EXCEPT PER SHARE DATA) REVENUES $1,067 $ 967 $3,898 $ 2,528 NET INCOME (LOSS) $214 ($144) $1,746 ($254) NET INCOME (lOSS) APPLICABLE TO COMMON SHARES $185 ($195) $1,699 ($640) NET INCOME (LOSS) PER COMMON EQUIVALENT SHARES $0.04 ($0.05) $ 0.38 ($0.14) NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE-FULLY DILUTED $0.04 ($0.05) $ 0.32 ($0.14) PER SHARE AMOUNTS FOR COMMON AND EQUIVALENT SHARES WAS RECALCULATED FOR THE FISCAL QUARTER ENDED JULY 31, 1994 ($0.38) TO GIVE EFFECT TO CERTAIN COMMON STOCK EQUIVALENTS AND FOR COMMON EQUIVALENT SHARE-FULLY DILUTED ($0.32) TO GIVE EFFECT TO THE ISSUANCE OF CERTAIN CONVERTIBLE NOTES ISSUED IN MARCH 1994. F-47 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) B y l a ws (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). 4(a) Form of Variable Rate Mortgage Note (filed as Exhibit 4(a) to the Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 15, 1985 (the "Form S-1") and incorporated herein by reference). 4(b) Form of Indenture, dated as of April 1, 1985, between United Stockyards Corporation and Manufacturers Hanover Trust Company, as Trustee (filed as Exhibit 4(b) to the Form S-1 and incorporated herein by reference). 10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the R e gistrant's Proxy Statement dated January 31, 1985, relating to the annual meeting of stockholders held March 1 8 , 1985, which exhibit is incorporated herein by reference). E-1 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 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 110(c) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). 10(d) Canal-Randolph Corporation ("CRC") Agreement of Lease, dated August 30, 1978, between CRC and the Registrant filed as Exhibit 10(a) to the Registrant's Form 10 and incorporated herein by reference). 10(e) Rent Escalation Letters, dated February 1, 1982, June 21, 1982 and April 4, 1983, from Canal-Randolph Associates to the Company (filed as Exhibit 10(b) to the Registrant's Form 10 and incorporated herein by reference). 10(f) Lease Agreement, dated March 1, 1984, between Stockyards Development Corporation and the Company, as a lessor and Triad Corporation, as lessee (filed as Exhibit 10(c) to the Registrant's Form 10 and incorporated herein by reference). 10(g) Supplemental Lease Agreement, dated March 1, 1984, between Stockyards Development Corporation and the Company and Triad Corporation (filed as Exhibit 10(d) to the Registrant's Form 10 and incorporated herein by reference). 10(h) Lease, dated November 30, 1967, by and between Sioux City Stock Yards, a division of the Company ("Sioux City Stock Yards"), and Armour and Company ("Armour") (filed as Exhibit 10(e) to the Registrant's form 10 and incorporated herein by reference). 10(i) Amendment to Lease, dated as of June 4, 1977, by and between the Company and Armour (filed as Exhibit 10(f) to the Registrant's Form 10 and incorporated herein by reference). E-2 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(j) Lease amendment and Easement Grant, dated as of April 1, 1968, by and between Sioux City Stockyards and Armour (filed a s E xhibit 10(g) to the Registrant's Form 10 and incorporated herein by reference). 10(k) Assignment and Acceptance with Consent, dated as of July 31, 1980, between Armour and Iowa Meat Processing Company ("Iowa Meat") (filed as Exhibit 10(h) to the Registrant's Form 10 and incorporated herein by reference). 10(l) Processing Company consent to Assignment and Acceptance, dated as of August 14, 1980, of the Company (filed as Exhibit 10(i) to the Registrant's Form 10 and incorporated herein by reference). 10(m) Agreement, dated April 25, 1964, by and between Sioux City Stock Yards and Floyd Valley Packing Company ("Floyd Valley") (filed as Exhibit 10(j) to the Registrant's Form 1 and incorporated herein by reference). 10(n) Supplemental Agreement, dated November 24, 1964, by and between Sioux City Stock Yards and Floyd Valley (filed as Exhibit 10(k) to the Registrant's Form 10 and incorporated herein by reference). 10(o) Letter, dated August 14, 1989, from the Company to John Morrell & Co. (filed as Exhibit 10(1) to the Registrant's Form 10 and incorporated herein by reference). 10(p) Agreement, dated as of December 31, 1979, by and between the Company and Weinstein International Corp. (filed as Exhibit 10(m) to the Registrant's Form 10 and incorporated herein by reference). E-3 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(q) Indenture of Lease, dated September 14, 1973, by and between Indiana Farm Bureau Cooperative Association, Inc. and Indianapolis Stockyards Corporation (filed as Exhibit 10(n) to the Registrant's Form 10 and incorporated herein by reference). 10(r) Indenture, dated July 31, 1936, by and between Plankinton Packing Company ("Plankinton") and Milwaukee Stock Yards Company ("Milwaukee Stock Yards") (filed as Exhibit 10(o) to t h e Registrant's Form 10 and incorporated herein by reference). 10(s) Indenture, dated July 31, 1936, by and between Plankinton and Milwaukee Stock Yards Company (filed as Exhibit 10(p) to t h e Registrant's Form 10 and incorporated herein by reference). 10(t) Agreement, dated June 11, 1964, by and between P&L Company and the Company (filed as Exhibit 10(g) to the Registrant's Form 10 and incorporated herein by reference). 10(u) Agreement, dated August 28, 1978, by and between Peck Enterprises, Inc. and the Company (filed as Exhibit 10(r) to the Registrant's Form 10 and incorporated by reference). 10(v) Letter, dated July 11, 1980, of Milwaukee Stock Yards (filed a s E xhibit 10(s) to the Registrant's Form 10 and incorporated herein by reference). 10(w) Mortgage and Indenture of Trust, dated as of November 1, 1972, by and between the City of Sioux City, Iowa and the Northwestern National City Bank of Minneapolis, as Trustee (filed as Exhibit 10(t) to the Registrant's Form 10 and incorporated herein by reference). E-4 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(x) Lease Agreement, dated as of November 1, 1972, between the City of Sioux City, Iowa and the Company (filed as Exhibit 10(u) to the Registrant's Form 10 and incorporated herein by reference). 10(y) Revolving Credit and Security Agreement, dated as of October 29, 1985, between the Company, Drovers First American Bank of South St. Paul and Marine Midland Bank, N.A. (filed as Exhibit 10(y) to the Registrant's Form 10 filed January 29, 1986 and incorporated herein by reference). 10(z) Lease Agreement, dated as of March 17, 1985, between the Company and Atlantic Richfield Company (filed as Exhibit 10(z) to the Registrant's Form 10-K filed January 29, 1986 and incorporated herein by reference). 10(aa) 1985 Directors' Stock Option Plan (1) (See Exhibit A included in the Registrant's Proxy Statement dated January 31, 1986, relating to the annual meeting of stockholders held March 12, 1986, which exhibit is incorporated herein by reference). 10(ab) 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(ac) Amendment to Lease, dated as of December 5, 1986, by and between Stockyards Development Corporation and the Company and Stockyards 85 Partnership (filed as Exhibit 10(ac) to the Registrant's Form 10-K filed January 29, 1987, and incorporated herein by reference). 10(ad) Agreement for Investment Advisory and Financial Management Services, dated January 2, 1986, by and between the Company and Arbitrage Securities Company (filed as Exhibit 10(ad) to the Registrant's Form 10-K filed January 29, 1987, and incorporated herein by reference). E-5 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(ae) Lease, dated May 1, 1954, by and between the Sioux Falls Stockyards Company and Messrs. Herman R., Robert Q., Dwight D., and John W. Sutherland (filed as Exhibit 10(ae) to the R e g istrant's Form 10-K filed January 29, 1987, and incorporated herein by reference). 10(af) Lease, dated September 1, 1954 by and between the Sioux Falls Stockyards Company and Messrs. Herman R., Robert Q., Dwight D., and John W. Sutherland (filed as Exhibit 10(af) to the Registrant's Form 10-K filed January 29, 1987, and incorporated herein by reference). 10(ag) Amendment to Lease, dated as of December 17, 1982 by and between the Sioux Falls Stockyards Company and Sutherland Lumber and Material Co. and Sutherland's Home Improvement Co., Inc. (filed as Exhibit 10(ag) to the Registrant's Form 10-K filed January 29, 1987, and incorporated herein by reference). 10(ah) Real Estate Purchase Agreement, dated September 17, 1988 by and between the Company and the American National Bank and Trust Company (filed as Exhibit 10(ah) to the Registrant's Form 8-K filed October 24, 1988 and incorporated herein by reference). 10(ai) A s s ignment of Agreement for Investment Advisory and Financial Management Services dated January 2, 1986, Exhibit number 10(ad) to A.B. Edelman Management Company (filed as Exhibit 10(ai) to the Registrant's Form 10-K filed January 29, 1989 and incorporated herein by reference). 10(aj) Agreement for Antiquities Venture dated October 26, 1988, by and between the Company and Edward H. Merrin Gallery (filed as Exhibit 10(aj) to the Registrant's Form 10-K filed January 29, 1989 and incorporated herein by reference). E-6 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(ak) Purchase Agreement, dated October 31, 1989 by and between USK Acquisition Corporation, Canal Capital Corporation, Omaha Livestock Market, Inc., Sioux Falls Stock Yards Company and Indianapolis Stockyards Corporation (filed as Exhibit 10(ak) to the Registrant's Form 8-K filed November 9, 1989 and incorporated herein by reference). 10(al) Letter Agreement dated October 31, 1989 to USK Acquisition Corporation from Canal Capital Corporation, Omaha Livestock M a r k et, Inc., Sioux Falls Stock Yards Company and Indianapolis Stockyards Corporation (filed as Exhibit 10(al) to the Registrant's Form 8-K filed November 9, 1989 and incorporated herein by reference). 10(am) 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(an) E s crow Agreement dated October 31, 1989 between USK Acquisition Corporation, Canal Capital Corporation, Omaha Livestock Market, Inc., Sioux Falls Stockyards Company, Indianapolis Stockyards Corporation, Norwest Bank South Dakota, N.A. and Lawyers Title Insurance Corporation, as Escrow Agent (filed as Exhibit 10(an) to the Registrant's Form 8-K filed November 9, 1989 and incorporated herein by reference). 10(ao) Sublease Agreement, dated January 3, 1990 by and between Canal Capital Corporation and Gruntal & Co. (filed as Exhibit 10(ao) to the Registrant's Form 10-K filed January 15, 1990 and incorporated herein by reference). E-7 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(ap) Sublease Agreement, dated January 11, 1990 by and between Canal Capital Corporation and Global Leasing Services (filed as Exhibit 10(ap) to the Registrant's Form 10-K filed January 25, 1990 and incorporated herein by reference). 10(aq) Agreement for contemporary art venture (with respect to Jules Olitski), dated November 22, 1989 by and between Canal Capital Corporation and Salander-O'Reilly Contemporary, Inc. (filed as Exhibit 10(aq) to the Registrant's Form 10-K filed January 25, 1990 and incorporated herein by reference). 10(ar) Amendment to the Agreement for Antiquities Venture dated April 11, 1990 by and between Edward H. Merrin Gallery and Canal Capital Corporation (filed as Exhibit 10(ar) to the R e g i strant's Form 10-K filed January 22, 1991 and incorporated herein by reference). 10(as) Amendment to the Revolving Credit Agreement dated May 31, 1 9 90 by and between Cooperative Centrale Raiffersen- Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital Corporation (filed as Exhibit 10(as) to the Registrant's Form 10-K filed January 22, 1991 and incorporated herein by reference). 10(at) Security Agreement dated May 31, 1990 by and between Cooperative Centrale Raiffersen-Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital Corporation (filed as Exhibit 10(at) to the Registrant's Form 10-K filed January 22, 1991 and incorporated herein by reference). 10(au) Release and Agreement dated December 12, 1990 by and between Meritor Savings Bank, Continental American Life Insurance Company and Canal Capital Corporation (filed as Exhibit 10(au) to the Registrant's Form 10-K filed January 22, 1991 and incorporated herein by reference). E-8 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(av) Amendment and Waiver to the Revolving Credit Agreement dated J u l y 31, 1991 by and between Cooperative Centrale Raiffersen-Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital Corporation (filed as Exhibit 10(av) to the R e g i strant's Form 10-K filed January 17, 1992 and incorporated herein by reference). 10(aw) Amendment to the Agreement for Antiquities Venture dated July 1, 1991 by and between The Merrin Group, Inc. and Canal A r t s Corporation (filed as Exhibit 10(aw) to the R e g i strant's Form 10-K filed January 27, 1992 and incorporated herein by reference). 10(ax) Amendment and Restated Credit Agreement dated March 31, 1993 b y and between Cooperative Centrale Raiffersen- Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital Corporation (filed as Exhibit 10(ax) to the Registrant's Form 10-K filed January 28, 1994 and incorporated herein by reference). 10(ay) Amendment to Security Agreement dated March 31, 1993 by and between Cooperative Centrale Raiffersen-Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital Corporation (filed as Exhibit 10 (ay) to the Registrant's Form 10-K filed January 28, 1994 and incorporated herein by reference). 10(az) Amendment to Security Agreement dated March 31, 1993 by and between Cooperative Centrale Raiffersen-Boerenleenbank (Rabobank Nederland) and Canal Arts Corporation (filed as Exhibit 10 (az) to the Registrant's Form 10-K filed January 28, 1994 and incorporated herein by reference). 10(ba) Amendment to Security Agreement dated March 31, 1993 by and between Cooperative Centrale Raiffersen-Boerenleenbank (Rabobank Nederland) and Canal Arts Corporation (filed as Exhibit 10 (ba) to the Registrant's Form 10-K filed January 28, 1994 and incorporated herein by reference). E-9 Exhibit No. 10(bb) Note Exchange Agreement dated May 15, 1993 by and between Hanseatic Corporation, Guaranty Reassurance Company and Canal Capital Corporation (filed as Exhibit 10 (bb) to the R e g i strant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bc) Amended and Restated $3,000,000 Variable Rate Mortgage Note Due May 15, 1996 by and between Guaranty Reassurance Company and Canal Capital Corporation (filed as Exhibit 10 (bc) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bd) Amended and Restated $5,800,000 Variable Rate Mortgage Note Due May 15, 1996 by and between Deltec Asset Management Corporation and Canal Capital Corporation (filed as Exhibit 10 (bd) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(be) Security Agreement dated May 15, 1993 by and between Hanseatic Corporation, Guaranty Reassurance Company, Canal Arts Corporation and Canal Capital Corporation (filed as Exhibit 10 (be) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bf) Collateral Agency Agreement dated May 15, 1993 by and between Hanseatic Corporation, Guaranty Reassurance Company and Canal Capital Corporation (filed as Exhibit 10 (bf) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bg) Assignment of Mortgage - Minnesota dated May 15, 1993 by and between Chemical Bank, Hanseatic Corporation and Guaranty Reassurance Company (filed as Exhibit 10 (bg) to the R e g i strant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bh) First Amendment to Mortgage - Minnesota dated May 15, 1993 by and between Hanseatic Corporation, Guaranty Reassurance Company and Canal Capital Corporation (filed as Exhibit 10 (bh) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). E-10 Exhibit No. 10(bi) Assignment of Mortgage - Iowa dated May 15, 1993 by and between Chemical Bank, Hanseatic Corporation and Guaranty Reassurance Company (filed as Exhibit 10 (bi) to the R e g i strant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bj) First Amendment to Mortgage - Iowa dated May 15, 1993 by and between Hanseatic Corporation, Guaranty Reassurance Company and Canal Capital Corporation (filed as Exhibit 10 (bj) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bk) Assignment of Mortgage - South Dakota dated May 15, 1993 by a n d between Chemical Bank, Hanseatic Corporation and Guaranty Reassurance Company (filed as Exhibit 10 (bk) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bl) First Amendment to Mortgage - South Dakota dated May 15, 1 9 9 3 by and between Hanseatic Corporation, Guaranty Reassurance Company, Sioux Falls Stockyards Company and Canal Capital Corporation (filed as Exhibit 10 (bl) to the R e g i strant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bm) $350,000 Promissory Note dated March 25, 1994 by and between C o wen & Company Custodian F/B/O William G. Walters, Individual Retirement Account and Canal Capital Corporation (filed as Exhibit 10 (bm) to the Registrant's Form 10-K f i l e d January 27, 1995 and incorporated herein by reference). 10(bn) $150,000 Convertible Promissory Note dated March 25, 1994 by and between Cowen & Company Custodian F/B/O William G. Walters, Individual Retirement Account and Canal Capital Corporation (filed as Exhibit 10 (bn) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). E-11 Exhibit No. 10(bo) Stock Pledge and Security Agreement dated March 28, 1994 by and between Cowen & Company Custodian F/B/O William G. Walters, Individual Retirement Account, Tenzer, Greenblatt, Fallon & Kaplan and Canal Capital Corporation (filed as Exhibit 10 (bo) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bp) 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 R e g i strant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(bq) First Amendment to Amended and Restated Variable Rate Mortgage Note due May 15, 1998 dated May 15, 1995 by and between Deltec Asset Management Corporation and Canal Capital Corporation. 10(br) First Amendment to Amended and Restated Variable Rate Mortgage Note due May 15, 1998 dated May 15, 1995 by and between Guaranty Reassurance Corporation and Canal Capital Corporation. 10(bs) Note Exchange Agreement dated September 15, 1995 by and between Michael E. Schultz Defined Benefit Trust, Edelman Value Partners, L.P., Lora K. Schultz, SES Trust, Roger A. Schultz Pension Plan and Canal Capital Corporation. 10(bt) $150,000 Promissory Note dated September 15, 1995 by and between Michael E. Schultz Defined Benefit Trust and Canal Capital Corporation. 10(bu) $150,000 Promissory Note dated September 15, 1995 by and between Edelman Value Partners, L.P. and Canal Capital Corporation. 10(bv) $182,275 Promissory Note dated September 15, 1995 by and between Lora K. Schultz and Canal Capital Corporation. E-12 Exhibit No. 10(bw) $300,000 Promissory Note dated September 15, 1995 by and between SES Trust and Canal Capital Corporation. 10(bx) $250,000 Promissory Note dated September 15, 1995 by and between Roger A. Schultz Pension Plan and Canal Capital Corporation. 11 Statement re: computation of per share earnings. This exhibit has not been included because such computation can be clearly determined from the consolidated financial statements included as part of this report on Form 10-K. 22 Subsidiaries of the Registrant. E-13 INVESTOR INFORMATION Annual Meeting Corporate Headquarters The Annual Meeting of Shareholders 7l7 Fifth Avenue of Canal Capital Corporation will New York, NY 10022 be held in our offices at 717 Fifth Avenue, 4th 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 Todman & Co. market through the "pink sheets". 120 Broadway New York, NY 10271 Investment Analyst Inquiries General Counsel Analyst inquires are welcome. Proskauer Rose Goetz & Mendelsohn 1585 Broadway Phone or write: Michael E. Schultz, New York, NY 10036 President at (212) 826-6040 (212) 969-3000 iii EX-10 2 Exhibit 10(bq) CANAL CAPITAL CORPORATION First Amendment to Amended and Restated Variable Rate Mortgage Note Due May 15, 1996 This First Amendment to the Amended and Restated Variable Rate Mortgage Note due May 15, 1996 ( Amendment ), dated as of May 15, 1996, is made and entered into by and between Canal Capital Corporation, a Delaware corporation (the Company ), and Deltec Asset Management Corporation (the Holder ). Whereas, the Company is obligated to the Holder pursuant to its Amended and Restated Variable Rate Mortgage Note Due May 15, 1996 (the Note ) issued pursuant to that certain Note Exchange Agreement dated as of May 15, 1993 (the Agreement ); and Whereas, the Company has requested that the Holder consent to the extension of the maturity of the Notes and to other various changes in the terms of the Notes; Now, therefore, in consideration of the foregoing, the Company and the Holder hereby agree as follows: 1. Amendment to Note. (a). The reference to May 15, 1996" in the title of the Note shall be amended to read May 15, 1998". (b). The reference to May 15, 1996" in the introductory paragraph of the Note shall be amended to read May 15, 1998. (c). The reference to May 15, 1996" in Section 1.(c) shall be amended to read May 15, 1998. (d). The Note shall be amended by adding thereto the following new provision at the end of Section 2: 2.1. (a) For each quarterly period commencing on May 15, 1995 and continuing to and including May 14, 1996, this Note shall bear interest, in addition to the interest provided for in Section 1 (the Additional Interest ) at a rate per annum equal to 2.0% For each quarterly period commencing on May 15, 1996 and continuing to and including May 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each quarterly period commencing on May 15, 1997 and continuing to and including May 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to that rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 1998 or upon the earlier repayment of the Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to that certain Security Agreement dated as of May 15, 1993 entered into in connection with the Agreement. (e) The Note shall be amended by deleting Section 5 thereof in its entirety. 2. Deliveries by the Company. Simultaneously with the execution and delivery of this Amendment, the Company is delivering the following items to the Holder: (a) Resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Amendment and the performance by the Company of its obligations hereunder and thereunder; (b) Copies of the Certificate of Incorporation and By-Laws of the Company as the same may have been amended to the date of this Amendment; (c) The certificate of the president and secretary of the Company, certifying to the Holder that (i) the resolutions described in Section 2(a) above were duly adopted and are true, correct and complete and (ii) the Certificate of Incorporation and By-Laws described in Section 2(b) above are true, correct and complete and (iii) the Company is in compliance with its obligations under the Note, as amended hereby; and (d) An opinion of counsel to the Company, addressed to and in form and substance satisfactory to the Holder, stating that, in the opinion of such counsel (i) the execution and delivery of this Amendment was duly authorized by all necessary corporate actions of the Company, and (ii) the Amendment constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 3. Replacement of Note. Upon surrender by the registered holder thereof to the Company of any Note issued prior to the date hereof, the Company shall execute and deliver to such Holder, in exchange for the Note so surrendered, a new Note of like tenor and representing the principal amount outstanding on such date, as the same is amended by this Amendment. 4. Fees. The Company shall pay a fee to the Holder equal to 2% of the principal amount outstanding on the date hereof, payable pro rata as follows: $25,000 in the aggregate on May 15, 1995, with the remaining balance due in equal amounts on the next three Interest Payment Dates. 5. Expenses. The Company shall pay all out-of-pocket costs and expenses of the Holders incurred in connection with this Amendment, including reasonable attorneys fees. 6. Definitions. All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Note. 7. Effect on Note. Except as expressly modified hereby, the Note remains unmodified in full force and effect. 8. Authority. Each of the Company and the Holder represent and warrant that they have all necessary power and authority to execute and deliver this Amendment. In witness whereof, the parties hereto have executed this Amendment as of the date first written above. Attest CANAL CAPITAL CORPORATION Reginald Schauder By: Michael E. Schultz Name: Reginald Schauder Michael E. Schultz Vice President President The foregoing Amendment is hereby accepted on behalf of the Holder as of the date hereof: DELTEC ASSET MANAGEMENT CORPORATION By: Title: Senior V.P. Exhibit 10(br) CANAL CAPITAL CORPORATION First Amendment to Amended and Restated Variable Rate Mortgage Note Due May 15, 1996 This First Amendment to the Amended and Restated Variable Rate Mortgage Note due May 15, 1996 ( Amendment ), dated as of May 15, 1996, is made and entered into by and between Canal Capital Corporation, a Delaware corporation (the Company ), and Guaranty Reassurance Company (the Holder ). Whereas, the Company is obligated to the Holder pursuant to its Amended and Restated Variable Rate Mortgage Note Due May 15, 1996 (the Note ) issued pursuant to that certain Note Exchange Agreement dated as of May 15, 1993 (the Agreement ); and Whereas, the Company has requested that the Holder consent to the extension of the maturity of the Notes and to other various changes in the terms of the Notes; Now, therefore, in consideration of the foregoing, the Company and the Holder hereby agree as follows: 1. Amendment to Note. (a). The reference to May 15, 1996" in the title of the Note shall be amended to read May 15, 1998". (b). The reference to May 15, 1996" in the introductory paragraph of the Note shall be amended to read May 15, 1998. (c). The reference to May 15, 1996" in Section 1.(c) shall be amended to read May 15, 1998. (d). The Note shall be amended by adding thereto the following new provision at the end of Section 2: 2.1. (a) For each quarterly period commencing on May 15, 1995 and continuing to and including May 14, 1996, this Note shall bear interest, in addition to the interest provided for in Section 1 (the Additional Interest ) at a rate per annum equal to 2.0% For each quarterly period commencing on May 15, 1996 and continuing to and including May 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each quarterly period commencing on May 15, 1997 and continuing to and including May 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to that rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 1998 or upon the earlier repayment of the Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to that certain Security Agreement dated as of May 15, 1993 entered into in connection with the Agreement. (e) The Note shall be amended by deleting Section 5 thereof in its entirety. 2. Deliveries by the Company. Simultaneously with the execution and delivery of this Amendment, the Company is delivering the following items to the Holder: (a) Resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Amendment and the performance by the Company of its obligations hereunder and thereunder; (b) Copies of the Certificate of Incorporation and By-Laws of the Company as the same may have been amended to the date of this Amendment; (c) The certificate of the president and secretary of the Company, certifying to the Holder that (i) the resolutions described in Section 2(a) above were duly adopted and are true, correct and complete and (ii) the Certificate of Incorporation and By-Laws described in Section 2(b) above are true, correct and complete and (iii) the Company is in compliance with its obligations under the Note, as amended hereby; and (d) An opinion of counsel to the Company, addressed to and in form and substance satisfactory to the Holder, stating that, in the opinion of such counsel (i) the execution and delivery of this Amendment was duly authorized by all necessary corporate actions of the Company, and (ii) the Amendment constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 3. Replacement of Note. Upon surrender by the registered holder thereof to the Company of any Note issued prior to the date hereof, the Company shall execute and deliver to such Holder, in exchange for the Note so surrendered, a new Note of like tenor and representing the principal amount outstanding on such date, as the same is amended by this Amendment. 4. Fees. The Company shall pay a fee to the Holder equal to 2% of the principal amount outstanding on the date hereof, payable pro rata as follows: $25,000 in the aggregate on May 15, 1995, with the remaining balance due in equal amounts on the next three Interest Payment Dates. 5. Expenses. The Company shall pay all out-of-pocket costs and expenses of the Holders incurred in connection with this Amendment, including reasonable attorneys fees. 6. Definitions. All capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Note. 7. Effect on Note. Except as expressly modified hereby, the Note remains unmodified in full force and effect. 8. Authority. Each of the Company and the Holder represent and warrant that they have all necessary power and authority to execute and deliver this Amendment. In witness whereof, the parties hereto have executed this Amendment as of the date first written above. Attest CANAL CAPITAL CORPORATION Reginald Schauder By: Michael E. Schultz Name: Reginald Schauder Michael E. Schultz Vice President President The foregoing Amendment is hereby accepted on behalf of the Holder as of the date hereof: GUARANTY REASSURANCE COMPANY By: Mark L. Attanasio Title: By: Crescent Capital Corporation, its Investment Advisor By: Mark L. Attanasio, President Exhibit 10(bs) CANAL CAPITAL CORPORATION 717 Fifth Avenue New York, NY 10022 Dated as of September 15, 1995 To each of the Persons named on Schedule I attached hereto (the "Holders") Re: Note Exchange Agreement Dear Sirs: CANAL CAPITAL CORPORATION (the "Company"), a Delaware corporation, agrees with each of the Holders as follows: 1. Background. The parties acknowledge that the Holders h a ve purchased, for full and fair consideration, the Company's promissory note issued as of March 31, 1993 to Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York branch, in the original principal amount of $3,135,751 (the "Rabobank Note") and the Company's promissory note issued on April 16, 1993 to The DBL Liquidating Trust in the original principal amount of $650,000 (the "DBL Note"; together with the Rabobank Note, the "Old Notes"). The Holders desire to exchange the Old Notes for new promissory notes of the Company on the terms and conditions set forth herein, including without limitation, the deferral of principal payments due under the Old Notes. Terms that are not capitalized in the sections in which they first appear are as defined in Section 11 below. 2. Amended and Restated Notes. 2.1. Authorization of Amended and Restated Notes. The Company has authorized the issue of $1,032,275 aggregate principal amount of its Amended and Restated Variable Rate Mortgage Notes due September 15, 1998 (the "New Notes", such term to include any notes issued in substitution therefor pursuant to Section 6), to be in the form of Exhibit A attached hereto and to bear interest as provided in such Exhibit A. The New Notes are intended to amend, restate, supersede and replace the Old Notes. 2.2. Exchange of Old Notes. The Company hereby issues and delivers the New Notes to each of the Holders in the principal amounts set forth opposite each such Holder's name on Schedule I hereto. The New Notes amend, restate, supersede and replace in their entirety the Old Notes. In exchange for the New Notes, the Holders hereby deliver and surrender to the Company the Old Notes, duly endorsed to the Company and to be cancelled immediately thereafter. 3. Representations and Warranties of the Company. As an inducement for the Holders to enter into this Agreement, the Company represents and warrants that: 3.1. O r g a nization, Standing, etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, to issue the New Note and to carry out the terms hereof and thereof. 3.2. Qualification. The Company is duly qualified or licensed as a foreign corporation authorized to do business in each jurisdiction (other than the jurisdiction of its incorporation) where the nature of its activities conducted or of the properties owned or leased by it requires such qualification. 3.3. Authorization. The issuance and delivery by the Company of the New Notes to the Holders has been duly authorized by all necessary corporate action on the part of the Company. 3.4. Compliance with Other Instruments. The execution, delivery and performance of this Agreement and the New Notes will not result in any violation of or be in conflict with any term of the charter or by-laws of the Company or any of its Subsidiaries or breach, conflict with any term of, or result in a default under, any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Company or any of its Subsidiaries, or result in the creation of (or impose any obligation on the Company or any Subsidiary to create) any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to any such term. 3.5. Title to Properties; Liens. The Company has good and sufficient title to the Collateral, and none of such Collateral is subject to any Lien, except Liens of the character permitted by Section 7.15. The Mortgaged Property constitutes all real property of the Company and its Subsidiaries which is not, as of the date hereof, encumbered by mortgages or deeds of trust in favor of the holders of the Bank Indebtedness, with the exception of the real property of the Company located in St. Paul, Minnesota, known as the "Port Crosby" property. 3.6. G o v e r nmental Consent. No consent, approval or authorization of, or declaration or filing with, any governmental authority on the part of the Company is required for the valid execution and delivery by the Company of this Agreement and the valid offer, issue, sale and delivery by the Company of the New Notes as contemplated hereby. 3.7. Solvency. Both immediately before and after giving effect to the issuance and sale of the New Notes as contemplated hereby: (a) the Company does not intend to incur, nor believes that it has incurred or will incur, debts that will be beyond its ability to pay as they mature; (b) the fair saleable value of the assets of the Company as a whole will exceed the amount that will be required to pay the probable liabilities on its debts (whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent) as they mature; and (c) the Company is not incurring obligations or making transfers under any evidence of indebtedness with the intent to hinder, delay, or defraud any entity to which it is or will become indebted. 4. Representations and Warranties of the Holders. 4.1. Securities Act. Each Holder represents and warrants to the Company that such Holder understands that the New Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be sold except pursuant to an effective registration statement or pursuant to an available exemption from such registration requirements. Further, such Holder is receiving the New Notes for its own account and not with a view to or for sale in violation of the Securities Act. Information concerning the New Notes, the Company or any other matter relevant to the decision of the Holders to exchange the Old Notes for the New Notes has been made available to the Holders either in reports filed by the Company under the Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise. 4.2. Ownership; Authority; No Liens. The Holders represent and warrant to the Company that the Holders are the sole and undivided beneficial owners of the Old Notes which they are delivering and surrendering to the Company pursuant to Section 2.2, have the authority to deliver and surrender such Old Notes pursuant to the terms hereof, and hold such Old Notes free and clear of any liens, encumbrances or restrictions on transfer. The Holders shall indemnify the Company for any loss or expense which it may suffer or incur as a result of any breach of the Holders' representations in the preceding sentence. 5. Prepayment of Amended and Restated Notes. 5.1. Optional Prepayment Without Premium. So long as the New Notes shall be outstanding, the Company may, at its option, upon notice as provided below, prepay the New Notes in an aggregate principal amount equal to a multiple of $10,000 and greater than $100,000. Not less than five (5) Business Days prior to the date proposed for any prepayment under this Section 5.1, the Company will give written notice of such prepayment to each Holder, specifying such date, the principal amount of each New Note held by such Holder to be prepaid on such date and the amount of interest on such principal amount accrued to such date. Each such notice of a prepayment shall be accompanied by an Officers' Certificate specifying the source or sources of the funds being used for such prepayment. 5.2. Prepayments to be Pro Rata. Notwithstanding anything in this Article 5 to the contrary, the Company shall not at any time prepay any New Note without prepaying all the New Notes on a pro rata basis at such time. 6. Transfer and Substitution of Amended and Restated Notes. 6.1. Replacement Notes. If any Holder claims that a New Note has been lost, destroyed or wrongfully taken, the Company shall issue a replacement New Note. The Company may require that an indemnity bond be posted to protect the Company from any loss that it may suffer if a New Note is replaced, and may charge such Holder for its reasonable expenses, including attorneys' fees, in replacing a New Note. Every replacement New Note will be entitled to the benefits of this Agreement. 6.2. Treasury Notes. In determining whether the Holders of the required principal amount of New Notes have concurred in any direction, waiver or consent, New Notes owned by the Company or any of its Affiliates shall be disregarded. 7. Covenants of the Company. 7.1. Payment of Securities. The Company shall pay the principal of and interest on the New Notes on the dates and in the manner provided in the New Notes. The Company shall pay interest on overdue principal and on overdue installments of interest at the rate set forth in the New Notes. 7.2. Maintenance of Office. The Company agrees not to change its name, identity or corporate structure to such an extent that any financing statement filed in connection with the Security Agreement would become misleading, without giving you at least thirty (30) days' prior written notice thereof to the Holders. 7.3. Limitation on Dividends and Other Distributions. The Company will not declare or pay any dividend or make any distribution on its Capital Stock or to the holders of its Capital Stock (other than dividends or distributions payable in its Capital Stock) or purchase, redeem or otherwise acquire or retire for value, or permit any Subsidiary to purchase, redeem or otherwise acquire or retire for value, any such Capital Stock. 7.4. Limitation on Total Indebtedness. The Company may not incur, create, assume or guarantee any additional Indebtedness (other than Indebtedness which is an amendment, renewal, extension or refunding on substantially the same terms of any existing Indebtedness), or enter into a Capitalized Lease Obligation or any other lease not terminable within twelve (12) months, provided, however, that the Company may enter into a new lease of corporate office space on reasonable terms. 7.5. Limitation on Investments. The Company will not, and will not permit any Subsidiary to, make any investment in any other Person (including, without limitation, by way of stock purchase, capital contribution, loan, advance, guaranty of indebtedness or creation or assumption of any other liability), provided, however, that the Company may purchase Investment Securities. 7.6. Prohibition Against Becoming an Investment Company. The Company will not register as, or conduct its business or take any action which shall cause it to become, or to be deemed to be, an "investment company" as defined under the provisions of the Investment Company Act of 1940. 7.7. Corporate Existence. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents and the rights (charter and statutory) and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not, and will not be, adverse in any material respect to the Holders. 7.8. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (b) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made; and provided further, that except with respect to property constituting Collateral, compliance with clauses (a) and (b) above shall not be required so long as such nonpayment is, in the judgment of the Board of Directors, desirable in the conduct of the Company's business and such nonpayment is not disadvantageous in any material respect to the Holders. 7.9. Notice of Defaults. In the event that the Company or any of its Subsidiaries receives written notice from any holder of Indebtedness that the full amount of such Indebtedness has been declared due and payable before its maturity because of an acceleration of such indebtedness or the occurrence of any default under such Indebtedness, the Company will promptly give written notice to the Holders of such declaration. 7.10. Maintenance of Properties. The Company will cause all material properties owned by or leased to it or any Subsidiary and used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in normal condition, repair and working order (normal wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterment and improvements thereof, all as in the judgment of the Company may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that the Company may not incur in any year capital expenditures exceeding $100,000, except to the extent that any excess over such amount is made in order to maintain the Company's real property in good working order; and provided, further, that nothing in this Section shall prevent the Company or any Subsidiary from discontinuing the use, operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors or of the Board of Directors, board of trustees or managing partners of the Subsidiary concerned, or of an officer (or other agent employed by the Company or of any of its Subsidiaries) of the Company or such Subsidiary having managerial responsibility for any such property, desirable in the conduct of the business of the Company or any Subsidiary, and if such discontinuance or disposal is not disadvantageous in any material respect to the Holders. The Company will operate all material properties owned by or leased to it or any Subsidiary in compliance with all applicable federal, state and local laws, ordinances, regulations, administrative or judicial orders, including, without limitation, those pertaining to hazardous or toxic materials and other environmental matters. 7.11. Compliance Certificate and Notices of Default. (a) The Company shall deliver to each of the Holders within 90 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signers know of any Default or Event of Default by the Company that occurred during such fiscal year. If they do know of such Default or Event of Default, the certificate shall describe the Default and its status. The first certificate to be delivered by the Company pursuant to this Section 7.11 shall be for the fiscal year ending October 31, 1995. (b) The Company shall deliver to each of the Holders prompt written notice of any Default or Event of Default under this Agreement by the Company, describing the Default and its status. 7.12. Financial and Other Reports. (a) The Company will prepare, for the first three quarters of e a c h fiscal year, quarterly financial statements substantially equivalent to the financial statements required to be included in a report on Form 10-Q under the Exchange Act. The Company will also prepare, on an annual basis, complete audited consolidated financial statements including, but not limited to, a balance sheet, a statement of income and cash flow and all appropriate notes. All such financial statements will be prepared in accordance with generally accepted accounting principles consistently applied, except for changes with which the Company's independent accountants concur, and except that quarterly statements may be subject to year-end adjustments. The Company will cause a copy of such financial statements to be mailed to each of the Holders within 45 days after the close of each of the first three quarters of each fiscal years and within 90 days after the close of each fiscal year. In addition, to the extent that the Company files any other reports, information or documents with the SEC, the Company shall send copies of such reports, information and other documents to the Holders. (b) The Company shall cause, within thirty (30) days after the end of each calendar month, a monthly result of operations statement detailing the financial and operational results of the Company and its Subsidiaries for such month, in a form currently used by the Company, to be mailed to each of the Holders. 7.13. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of and/or interest on the New Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Agreement; and (to the extent it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law had been enacted. 7.14. Reference Bank. In the event that any Reference Bank shall be unwilling or unable to act as such for the purpose of determining LIBOR and Prime Rate on the New Notes, the Company shall promptly appoint another leading domestic bank engaged in transactions in Eurodollar deposits in the international Eurocurrency market to act as such in its place. 7.15. Other Liens. Except for Permitted Encumbrances, the Company will not grant or permit any Liens or other defects in title in or upon the Collateral; provided, however, that the Company may grant or permit such Liens or defects if the monetary value of the Collateral will not be impaired by the existence of the Lien or other defect in title in any material manner and the Company shall have delivered to each of the Holders a copy of an Officers' Certificate to that effect. 7.16. Validity of Liens. The Company shall warrant, preserve and defend the interest and title of the Holders to the Mortgages and the Collateral described in the Security Agreement against the claims of all persons and will continue to perform its obligations pursuant thereto. 7.17. Transactions with Affiliates. Neither the Company nor any Subsidiary shall enter into or participate in any agreements or transactions of any kind with any Affiliates of any of the Company or its Subsidiaries unless such transactions or agreements (i) are in the ordinary course of business, (ii) include only terms or provisions which are fair and equitable to the Company, (iii) require no fees, charges or commissions other than those which are reasonable and disclosed to the Collateral Agents, (iv) are clearly and accurately disclosed in the Company's books and records, and (v) involve terms no less favorable to the Company than would the terms of a similar agreement or transaction with a Person other than an Affiliate. 7.18. No Increase in Compensation. The Company shall not, directly or indirectly, increase the compensation in whatever form (including, without limitation, by way of salary, benefits, or other remuneration pursuant to any employment, service or severance agreement) paid to Mr. Asher Edelman or Mr. Michael Schultz, by an amount greater than five per centum (5%) per annum, except compensation by way of common stock (either by dividend or upon new issuance) or stock options exercisable at the then current market value. 7.19. Minimum Net Worth. The Company shall not cause or permit the Consolidated Net Worth of itself and its Subsidiaries at the end of any calendar month to be less than 75% of the amount reflected in the Company's most recent balance sheet. 7.20. Negative Pledge. In the event that any property of the Company or any of its Subsidiaries which is currently encumbered by a Lien in favor of the holders of any Bank Indebtedness is released from such Lien, the Company and its Subsidiaries shall not, without the prior written consent of the Holders, thereafter encumber, mortgage, pledge or otherwise grant, suffer or permit any Lien on such property. 8. Default and Remedies. 8.1. Events of Default. An "Event of Default" occurs if: (a) the Company defaults in the payment of interest on any New Note when the same becomes due and payable and the default continues for the later of (i) a period of 30 days and (ii) 10 days after written notice to the Company; (b) the Company defaults in the payment of the principal of any New Note when the same becomes due and payable at maturity, upon redemption or otherwise; (c) the Company fails to observe or perform any of its other covenants contained in the New Notes or this Agreement, and such failure to observe or perform continues uncured for a period of 30 days after the Company's receipt of a written notice from Holders of at least 25% in principal amount of New Notes then outstanding that specifies the Default, demands that it be remedied and states that such notice is a "Notice of Default"; (d) any representation or warranty at any time made by the Company herein or any material representation or warranty which is contained in any certificate, document, written report or financial or other statement shall prove to have been untrue, incorrect or breached i n any material respect on or as of the date on which such representation or warranty was made; (e) there shall be a default under any bond, debenture, note or other evidence of indebtedness for money borrowed or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or under any guaranty of payment by the Company of indebtedness for money borrowed, whether such indebtedness or guaranty now exists or shall hereafter be created, which default extends beyond any period of grace provided with respect thereto and which default relates to (i) the obligation to pay the principal of or interest on any such indebtedness or guaranty or (ii) an obligation other than the obligation to pay the principal of or interest on any such indebtedness and the effect of such default is the cause, with the giving of notice if required, such indebtedness to become due prior to its stated maturity; provided, however, that no default under this clause (e) shall exist if all such defaults do not relate to such indebtedness or such guaranties with an aggregate principal amount in excess of $100,000; (f) the Company pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding, (ii) consents to the entry of an order for relief against it in an involuntary case or proceeding, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (iv) makes a general assignment for the benefit of its creditors; (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company in an involuntary case or proceeding, (ii) appoints a Custodian of the Company or for all or substantially all of its properties, or (iii) orders the liquidation of the Company, and in each case the order or decree remains unstayed and in effect for 45 days; (h) final judgments for the payment of money which in the aggregate exceed $100,000 shall be rendered against the Company by a court of competent jurisdiction and shall remain undischarged for a period (during which execution shall not be effectively stayed or bonded) of 30 days after such judgment becomes final and nonappealable; or (i) at any time after the date hereof, there shall be transfers, either legally or beneficially, of more than 50% in the aggregate of the issued and outstanding shares of common stock of the Company. The term "Bankruptcy Law" means Title 11 U.S. Code or any similar Federal or state law for the relief of debtors. The term " C u s todian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. 8.2. Acceleration. If an Event of Default (other than an Event of Default specified in Section 8.1(f) or (g)) occurs and is continuing, the Holders of at least 25% in principal amount of the New Notes then outstanding may, by notice to the Company, declare all unpaid principal and accrued interest to the date of acceleration on the New Notes then outstanding (if not then due and payable) to be due and payable and upon any such declaration, the same shall become and be immediately due and payable. If an Event of Default specified in Section 8.1(f) or (g) occurs, all unpaid principal and accrued interest on the New Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of any Holder. Upon payment of such principal amount and interest all of the Company's obligations under the New Notes and this Agreement shall terminate. The Holders of a majority in principal amount of the New Notes then outstanding, by notice to the Company, may rescind an acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal of the New Notes which has become due solely by such declaration of acceleration, have been cured or waived, (ii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, and (iii) the recision would not conflict with any judgment or decree of a court of competent jurisdiction. 8.3. Other Remedies. If any Event of Default occurs and is continuing, any Holder may pursue any available remedy by proceeding at law or in equity to collect the payment of principal or interest on the New Notes or to enforce the performance of any provision of the New Notes or this Agreement. A delay or omission by any Holder in exercising any right or remedy accruing upon Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. 8.4. Waiver of Past Defaults. Subject to Sections 8.5 and 9.1, the Holders of a majority in principal amount of the New Notes then outstanding, by notice to the Company, may waive an existing Default or Event of Default and its consequences, except that waiver of a Default in the payment of principal or interest on any New Note shall require the consent of all the Holders. When a Default or Event of Default is waived, it is cured and ceases. 8.5. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Agreement, the right of any Holder to receive payment of principal and interest on the New Notes on or after the respective due dates expressed in the New Notes, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder; provided, however, that a Holder may not institute such a suit if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the Lien on the Collateral. 9. Amendments, Supplements and Waivers. 9.1. General. The Company, when authorized by a resolution of its Board of Directors, and the Holders may amend or supplement this Agreement, the New Notes, the Mortgages or the Security Agreement. Subject to Section 8.5, the Holders of a majority in principal amount of the New Notes then outstanding may waive compliance by the Company with any provision of this Agreement or the New Notes. However, without the consent of each Holder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 8.4, may not: (a) reduce the amount of the New Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the rate or extend the time for payment of interest on any New Note; (c) reduce the principal of or extend the fixed maturity of any New Note or alter the redemption provisions with respect thereto; (d) waive a Default in the payment of the principal of, interest on or redemption payment with respect to any New Note; (e) make any changes to Section 8.4, 8.5 or the third sentence of this Section 9.1; or (f) modify the provisions of Article 10 or Article 11 hereof in a manner adverse to the Holders. After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure by the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver. 9.2. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a New Note or portion of a New Note that evidences the same debt as the consenting Holder's New Note, even if notation of the consent is not made on any New Note. However, any such Holder or subsequent Holder may revoke the consent as to its New Note or portion of a New Note. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then n o t withstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clause (a) through (f) of Section 9.1. In that case, the amendment, supplement or waiver shall bind each Holder of a new Note who has consent to it and every subsequent Holder of a New Note or portion of a New Note that evidences the same debt as the consenting Holder's New Note. 10. Security Interest and Mortgage. 10.1. Continuation and Amendment. (a) The Company's obligation to pay the principal amount of and interest on the New Notes shall continue to be subject to the security interest created by the Security Agreement and the Mortgages in an amount equal to at least 100% of the aggregate principal amount of the New Notes outstanding at any time. (b) The Security Interest and the Mortgages as now or hereafter in effect shall be held for the equal and ratable benefit and security of the New Notes without preference, priority or distinction of any thereof over any other by any reason, or difference in time, of issuance, sale or otherwise, and for the enforcement and payment of principal and interest on the New Notes in accordance with their terms. (c) The Company and/or one or more of its Subsidiaries has executed and delivered, filed, or recorded and/or will and/or will cause one or more of the Subsidiaries to execute and deliver, file and record, all instruments and documents, and has done or will do or will cause to do all such acts and other things as are necessary to amend the Security Agreement and the Mortgages in order to maintain, perfect and protect the security interests of the Holders in the Collateral and the Mortgaged Properties. 10.2. Release of Collateral. The Collateral Agent (as defined herein) shall from time to time at the request of the Company execute and deliver any instruments necessary or appropriate to release all or a part of the Collateral from the Security Interest, upon compliance by the Company with the following: (a) Receipt by the Collateral Agent of the Company's written notice, at least five Business Days in advance of the requested date for the delivery of the release instruments, requesting the Collateral Agent to execute one or more specifically described release instruments, and certifying (A) that no Event of Default or material Default under this Agreement has occurred and is continuing and (B) that the conditions of this Section 10.2 set forth below, have been fulfilled. (b) No release of Collateral shall be effected unless simultaneously or prior thereto the Company has paid to the Holders, by federal funds wire transfer, 80% of the Net P r o ceeds from the sale or other disposition of such Collateral. 10.3. Reliance on Opinion of Counsel. The Collateral shall, before taking any action under this Article 10, be entitled to receive an Opinion of Counsel, stating the legal effect of such action, the steps necessary to consummate the same and to perfect the priority of the Collateral Agent (as agent for the Holders) with respect to a Lien and that such action will not be in contravention of the provisions hereof or the New Notes. 10.4. Purchaser May Rely. A purchaser in good faith of the Collateral or any part thereof or interest therein which is purported to be transferred, granted or released by the Collateral Agent as provided in this Article 10 shall not be bound (a) to ascertain, and may rely on the authority of the Collateral Agent to execute, transfer, grant or release, (b) to inquire as to the satisfaction of any conditions precedent to the exercise of such authority, or (c) to see to the application of the purchase price therefor. 10.5. Payment of Expenses. On demand of the Collateral Agent, the Company forthwith shall pay or satisfactorily provide for all reasonable expenditures incurred by the Collateral Agent under this Article 10 and all such sums shall be secured thereby. 10.6. Authority of Collateral Agent. The Company may rely on the directions of CCC Lending Corporation, a Delaware corporation, as collateral agent with respect to the Collateral and the Mortgaged Properties, without incurring liability therefor to the Holders, except to the extent otherwise provided in the Collateral Agency Agreement dated the date hereof. 11. Definitions. 11.1. "Affiliate" of any specified person means any other person related by blood, marriage, employed by or employing, or directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 11.2. "Agreement" shall mean this letter agreement. 11.3. "Artwork" means the collateral under the Security Agreement. 11.4. "Bank Indebtedness" means the principal of and interest on and other amounts due on or in connection with any Indebtedness of the Company, outstanding on the date of this Agreement. Bank Indebtedness shall not include (i) any Indebtedness of the Company which, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to or pari passu with the New Notes or (ii) any Indebtedness of the Company to a Subsidiary. 11.5. "Business Day" means a day, other than a Saturday or a Sunday, on which banks are open for business in New York, New York. 11.6. "Capitalized Lease Obligations" means Indebtedness represented by obligations under a lease that is required to be c a pitalized for financial reporting purposes in accordance with g e n e r ally accepted accounting principles; the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with such principles. 11.7. "Capital Stock " means any and all shares, interest, participations or other equivalents (however designated) of corporate stock. 11.8. "Collateral" means Mortgaged Property and Artwork. 11.9. "Collateral Agent" means CCC Lending Corporation, a Delaware corporation. 11.10. "Company " means the party named as such in this Agreement, until a successor replaces it pursuant to the Agreement, and thereafter means the successor. 11.11. "Consolidated Net Worth" means, as of any date, total stockholders' equity which under generally accepted accounting principles would be included on a consolidated balance sheet of the Company and its Subsidiaries, determined in accordance with generally accepted accounting principles consistently applied, as of the end of the last period for which a quarterly financial report is available, less all goodwill, trademarks, trade names, patents, unamortized debt discount and expense and other like intangibles that would be included on such balance sheet. 11.12. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. 11.13. "Indebtedness" means (i) any liability of any person (a) for borrowed money, (b) evidenced by a note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any property or assets (other than inventory or similar property acquired in the ordinary course of business), including securities, or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) any liability of others described in the preceding clause (i) which the person has guaranteed or which is otherwise its legal liability; and (iii) any amendment, renewal, extension or refunding of any liability of the types referred to in clauses (i) and (ii) above. 11.14. "Investment Securities" means (i) U.S. Government Obligations, or (ii) securities, certificates of deposit or commercial paper rated at least "P-1" by Moody's Investors Service, Inc. and at least "A-1" by Standard and Poors Corporation. 11.15. "LIBOR" shall have the meaning provided in Exhibit A annexed hereto. 11.16. "Lien" means any mortgage, liens, pledge, charge or other security interest or encumbrance of any kind or assignment thereof. 11.17. "Mortgages" means the mortgage that was granted by the Company to The DBL Liquidating Trust on April 16, 1993, as assigned to the Holder, and the mortgages that were granted by the Company to Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York branch, as of March 31, 1993, as assigned to the Holder, each as amended pursuant to Section 10.1 hereof, or such other form as may be required by applicable state law or by local custom. 11.18. "Mortgaged Property" means property of the Company described in or from time to time subject to the Mortgages. 11.19. "Net Proceeds" means, cash received by the Company or any of its Subsidiaries with respect to any sale, transfer or disposition of property after (a) reasonable provision for taxes incurred by the Company or any of its Subsidiaries during the fiscal year in which such sale, transfer or disposition occurred as a direct result thereof, (b) payment of reasonable brokerage commissions and reasonable attorneys' fees and expenses incurred as a result of such sale, transfer or disposition, and (c) deduction of appropriate amounts to be provided by the Company and its Subsidiaries as a reserve, in accordance with generally accepted accounting principles consistently applied, against any liabilities associated with such asset and retained by the Company and its Subsidiaries after such sale, transfer or disposition. 11.20. "Officers' Certificate" means a certificate signed b y two officers of the Company having authority to sign such certificates on behalf of the Company. 11.21. "Opinion of Counsel" means a written opinion from legal counsel, who may be an employee of or counsel to the Company, and who is reasonably acceptable to the Holder. 11.22. "Permitted Encumbrances" means (i) liens for taxes, assessments and other governmental charges not delinquent; (2) liens for taxes, assessments and other governmental charges already delinquent which are currently being contested in accordance with the provisions of the Mortgages; (3) mechanics' and materialmen's liens not filed of r e cord and similar charges not delinquent, incident to current permissible construction and mechanics' and materialmen's liens incident to such construction which are filed of record but which are being contested in accordance with the provisions of the Mortgages; (4) mechanics', workmen's, repairmen's, materialmen's, warehousemen's and carriers' liens and other similar liens arising in the ordinary course of business for charges which are not delinquent, or which are being contested in accordance with the provisions of the Mortgages; (5) liens in respect of judgments or awards with respect to which the Company shall in good faith currently be prosecuting an appeal or proceedings for review in accordance with the provisions of the Mortgages, and with respect to which the Company shall have secured a stay of execution pending such appeal or proceedings for review; provided, however, that the Company shall have set aside on its books adequate reserves with respect thereto; (6) easements and rights of way, leases, reservations or other rights of others in any property of the Company for streets, roads, bridges, pipes, pipe lines, utilities, railroad, electric transmission and distribution lines, telegraph and telephone lines, flood rights, river control and development rights, sewage and drainage rights, restrictions against pollution and zoning laws; provided, however, that such easements, leases, reservations, rights, restrictions and laws do not in the aggregate materially impair the usefulness of such property for the purposes for which it is held by the Company and do not materially impair the marketability or value of such property as security for the New Notes; (7) leases or other occupancy agreements existing at the date of affecting the Mortgaged Properties and any leases or other occupancy agreements entered into by the Company or its Affiliates which are commercially reasonable and in the ordinary course of business; (8) the burdens of any law or governmental regulation or permit requiring the Company to maintain certain facilities or perform certain acts as a condition of its occupancy of or interference with any public lands or any river or stream or navigable waters; and (9) whether or not included in the foregoing clauses (1) through (8), all r e s trictions, easements, rights-of-way, exceptions, reservations, conditions, limitations, interests, covenants, agreements and other encumbrances do not in the aggregate materially impair the value of such property as security for the New Notes. 11.23. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. 11.24. "Reference Bank" shall have the meaning provided in Exhibit A annexed hereto. 11.25. "SEC" means the Securities and Exchange Commission. 11.26. "Security Agreement" means the Security Agreement as of March 31, 1995 the Company, as debtor, and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York branch, as secured party, as assigned to the Holder. 11.27. " S e c urity Interest" means the Liens on the Collateral created by the Mortgages and by the Security Agreement. 11.28. "Subsidiary" means (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by the Company, by the Company and a Subsidiary of the Company or by a Subsidiary of the Company or (ii) any other person (other than a corporation) in which the Company, a Subsidiary of the Company directly or indirectly, at the date of determination thereof, has at least a majority ownership interest. 11.29. "U.S. Government Obligations" means direct non- callable obligations of, or non-callable obligations guaranteed by, the United States of America or any person or agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America for the payment of which guarantee or obligation the full faith and credit of the United States or any person or agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States is pledged. 12. Miscellaneous. 12.1. Notices. Any notice or communication shall be given in writing and delivered in person or mailed by first-class mail addressed if to the Company, to the addresses set forth on the first page hereof, and if to the Holders, at such addresses as appear on the signature pages to this Agreement. The Company or the Holders by notice to the other may designate additional or different addresses for subsequent notices or communications. Failure to mail a notice or communication to a Holder or any defect in any notice shall not affect the sufficiency of any notice with respect to the other Holders. 12.2. Statements Required in Certificate or Opinion. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Agreement or in the Security Agreement or the Mortgages shall include: (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion or such person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. 12.3. Legal Holidays. A "Legal Holiday" is a Saturday, Sunday or a day on which banking institutions in New York, New York are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 12.4. Governing Law. The laws of the State of New York shall govern this Agreement without regard to principles of conflicts of law. 12.5. No Adverse Interpretation of Other Agreements. This Agreement may not be used to interpret another indenture, loan or debt agreement of Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Agreement. 12.6. No Recourse Against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under this Agreement or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting the New Notes waives and releases all such liability. 12.7. Successors. All agreements of the Company in this Agreement and the New Notes shall bind its successor. 12.8. Duplicate Originals. The parties may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent that same agreement. 12.9. Severability. In case any provision of this A g r e ement or in the New Notes shall be invalid, illegal or u n enforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SIGNATURES IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed, and its corporate seal to be hereunto affixed and attested, all as of the date first written above. CANAL CAPITAL CORPORATION By:_______________________________ The foregoing Agreement is hereby accepted by each of the Holders as of the date hereof: MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST By: Michael E. Schultz Trustee c/o Michael E. Schultz 2830 Long Meadow Drive West Palm Beach, Florida 33414 EDELMAN VALUE PARTNERS L.P. By: A. B. Edelman Management Company, Inc., General Partner By: Name: Title: 717 Fifth Avenue New York, New York 10022 LORA K. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 SES TRUST By: Sharon E. Sigesmund Trustee 2859 Queens Courtyard Drive Las Vegas, Nevada 89109 ROGER A. SCHULTZ PENSION PLAN By: Roger A. Schultz Trustee EXHIBIT A CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due September 15, 1998. No. $__________ CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to , or its registered assigns at its address of or at such other address as may be designated by the registered holder hereof to t h e C o m p a n y , t h e p r i n c i p al sum of __________________________________________ Dollars on September 15, 1998 and to pay interest thereon quarterly on December 15, March 15, June 15 and September 15 (each an "Interest Payment Date"), in each year, commencing on December 15, 1995, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 1. For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 15, 1998, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 - day months. 2. (a) For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 14, 1996, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest") at a rate per annum equal to 2.0%. For each Quarterly Period commencing on September 15, 1996 and continuing to and including September 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each Quarterly Period commencing on September 15, 1997 and continuing to and including September 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on September 15, 1998 or upon the earlier retirement of this Note. 3. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the December 15, March 15, June 15, or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 4. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due September 15, 1998 (the "Notes"), in the aggregate principal amount of $1,032,275 issued pursuant to that certain Note Exchange Agreement, dated as of September 15, 1995 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 5. Security. This Note is secured by a security interest in the Artwork and by the Mortgages, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's c a pital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 6. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 7. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 8. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and cancelled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 9. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 10. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 11. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its o t her agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied j u dgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 12. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 13. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury o b ligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non- interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each September 15 through the next December 14, from each December 15 through the next March 14, from each March 15 through the next June 14, or from each June 15 through the next September 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 14. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 15. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 16. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of September 15, 1995 CANAL CAPITAL CORPORATION Attest: By:_________________________ ____________________________ ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signatured guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee SCHEDULE I Name of Holder Principal Amount Michael E. Schultz Defined Benefit Trust $150,000 Edelman Value Partners L.P. $150,000 SES Trust $300,000 Lora K. Schultz $182,275 Roger A. Schultz Pension Plan $250,000 9 Exhibit 10(bt) CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due September 15, 1998. No. 1 $150,000.00 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to the MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST, or its registered assigns at its address of c/o Michael E. Schultz, 2830 Long Meadow Drive, West Palm Beach, Florida 33414 or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of One Hundred Fifty Thousand Dollars on September 15, 1998 and to pay interest thereon quarterly on December 15, March 15, June 15 and September 15 (each an "Interest Payment Date"), in each year, commencing on December 15, 1995, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 17. For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 15, 1998, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 - day months. 18. (a) For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 14, 1996, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest") at a rate per annum equal to 2.0%. For each Quarterly Period commencing on September 15, 1996 and continuing to and including September 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each Quarterly Period commencing on September 15, 1997 and continuing to and including September 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. 10 (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on September 15, 1998 or upon the earlier retirement of this Note. 19. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the December 15, March 15, June 15, or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 20. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due September 15, 1998 (the "Notes"), in the aggregate principal amount of $1,032,275 issued pursuant to that certain Note Exchange Agreement, dated as of September 15, 1995 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 21. Security. This Note is secured by a security interest in the Artwork and by the Mortgages, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's c a pital stock, the ability of the Company to incur additional 11 indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 22. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 23. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 24. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and cancelled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 25. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 26. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 27. Defaults and Remedies. An Event of Default is: default for 30 days in payment of 12 interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its o t her agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied j u dgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 28. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 29. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury o b ligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non- interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by 13 each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the 14 agent bank (the "Agent Bank") of the Company in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each September 15 through the next December 14, from each December 15 through the next March 14, from each March 15 through the next June 14, or from each June 15 through the next September 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly 15 Period. 30. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 31. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 32. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of September 15, 1995 CANAL CAPITAL CORPORATION By:/S/ MICHAEL E. SCHULTZ 16 Exhibit 10(bu) CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due September 15, 1998. No. 2 $150,000.00 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to EDELMAN VALUE PARTNERS, L.P., or its registered assigns at its address of c\o A.B. Edelman Management Company, Inc., 717 Fifth Avenue, New York, New York 10022, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of One Hundred Fifty Thousand Dollars on September 15, 1998 and to pay interest thereon quarterly on December 15, March 15, June 15 and September 15 (each an "Interest Payment Date"), in each year, commencing on December 15, 1995, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 33. For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 15, 1998, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 - day months. 34. (a) For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 14, 1996, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest") at a rate per annum equal to 2.0%. For each Quarterly Period commencing on September 15, 1996 and continuing to and including September 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each Quarterly Period commencing on September 15, 1997 and continuing to and including September 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on September 15, 1998 or upon the earlier retirement of this Note. 35. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the December 15, March 15, June 15, or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 36. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due September 15, 1998 (the "Notes"), in the aggregate principal amount of $1,032,275 issued pursuant to that certain Note Exchange Agreement, dated as of September 15, 1995 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 37. Security. 18 This Note is secured by a security interest in the Artwork and by the Mortgages, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's c a pital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 38. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 39. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 40. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and cancelled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 41. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 42. Successor Corporation. When a successor corporation assumes all the obligations of 19 its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 43. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its o t her agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied j u dgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 44. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 45. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury o b ligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary 20 market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non- interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers 21 of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each September 15 through the next December 14, from each December 15 through the next 22 March 14, from each March 15 through the next June 14, or from each June 15 through the next September 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 46. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 47. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 48. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of September 15, 1995 CANAL CAPITAL CORPORATION By:/S/ MICHAEL E. SCHULTZ 23 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signatured guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee Exhibit 10(bv) CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due September 15, 1998. No. 4 $182,275.00 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to LORA K. SCHULTZ, or her registered assigns at her address of 2830 Long Meadow Drive, West Palm Beach, Florida 33414, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of One Hundred Eighty Two Thousand Two Hundred Seventy Five Dollars on September 15, 1998 and to pay interest thereon quarterly on December 15, March 15, June 15 and September 15 (each an "Interest Payment Date"), in each year, commencing on December 15, 1995, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 49. For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 15, 1998, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 - day months. 50. (a) For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 14, 1996, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest") at a rate per annum equal to 2.0%. For each Quarterly Period commencing on September 15, 1996 and continuing to and including September 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each Quarterly Period commencing on September 15, 1997 and continuing to and including September 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of 25 calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on September 15, 1998 or upon the earlier retirement of this Note. 51. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the December 15, March 15, June 15, or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 52. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due September 15, 1998 (the "Notes"), in the aggregate principal amount of $1,032,275 issued pursuant to that certain Note Exchange Agreement, dated as of September 15, 1995 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 53. Security. This Note is secured by a security interest in the Artwork and by the Mortgages, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's c a pital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to 26 avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 54. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 55. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 56. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and cancelled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 57. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 58. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 59. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its 27 o t her agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied j u dgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 60. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 61. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury o b ligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non- interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. 28 "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent 29 Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each September 15 through the next December 14, from each December 15 through the next March 14, from each March 15 through the next June 14, or from each June 15 through the next September 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 30 62. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 63. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 64. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of September 15, 1995 CANAL CAPITAL CORPORATION By: /S/ MICHAEL E. SCHULTZ Exhibit 10(bw) 31 CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due September 15, 1998. No. 3 $300,000.00 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to SES TRUST, or its registered assigns at its address of 2859 Queens Courtyard Drive, Las Vegas, Nevada 89109, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Three Hundred Thousand Dollars on September 15, 1998 and to pay interest thereon quarterly on December 15, March 15, June 15 and September 15 (each an "Interest Payment Date"), in each year, commencing on December 15, 1995, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 65. For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 15, 1998, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 - day months. 66. (a) For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 14, 1996, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest") at a rate per annum equal to 2.0%. For each Quarterly Period commencing on September 15, 1996 and continuing to and including September 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each Quarterly Period commencing on September 15, 1997 and continuing to and including September 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on September 15, 1998 or upon the earlier retirement of this Note. 67. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the December 15, March 15, June 15, or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 68. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due September 15, 1998 (the "Notes"), in the aggregate principal amount of $1,032,275 issued pursuant to that certain Note Exchange Agreement, dated as of September 15, 1995 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and 33 immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 69. Security. This Note is secured by a security interest in the Artwork and by the Mortgages, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's c a pital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 70. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 71. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 72. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and cancelled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 73. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver 34 by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 74. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 75. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its o t her agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied j u dgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 76. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 77. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury o b ligations for the three calendar weeks constituting the Rate 35 Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non- interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United 36 States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate 37 for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each September 15 through the next December 14, from each December 15 through the next March 14, from each March 15 through the next June 14, or from each June 15 through the next September 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 78. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 79. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 80. Amendment and Restatement. 38 The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of September 15, 1995 CANAL CAPITAL CORPORATION By:/S/ MICHAEL E. SCHULTZ 39 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signatured guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee Exhibit 10(bx) CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due September 15, 1998. No. 5 $250,000.00 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to the ROGER A. SCHULTZ PENSION PLAN, or its registered assigns at its address of c/o Roger A. Schultz, 131 N. Hibiscus Drive, Miami Beach, Florida 33139, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Two Hundred Fifty Thousand Dollars on September 15, 1998 and to pay interest thereon quarterly on December 15, March 15, June 15 and September 15 (each an "Interest Payment Date"), in each year, commencing on December 15, 1995, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 81. For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 15, 1998, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 - day months. 82. (a) For each Quarterly Period commencing on September 15, 1995 and continuing to and including September 14, 1996, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest") at a rate per annum equal to 2.0%. For each Quarterly Period commencing on September 15, 1996 and continuing to and including September 14, 1997, this Note shall bear Additional Interest at a rate per annum equal to 3.0%. For each Quarterly Period commencing on September 15, 1997 and continuing to and including September 14, 1998, this Note shall bear Additional Interest at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any quarterly period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1.(c) herein, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on 41 September 15, 1998 or upon the earlier retirement of this Note. 83. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the December 15, March 15, June 15, or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 84. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due September 15, 1998 (the "Notes"), in the aggregate principal amount of $1,032,275 issued pursuant to that certain Note Exchange Agreement, dated as of September 15, 1995 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 85. Security. This Note is secured by a security interest in the Artwork and by the Mortgages, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's c a pital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to 42 the Holder with respect to its compliance with such limitations. 86. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 87. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 88. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and cancelled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 89. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 90. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 91. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its o t her agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company 43 aggregating at least $100,000; the existence of certain unsatisfied j u dgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 92. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 93. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury o b ligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non- interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any 44 Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust 45 Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the f o l l owing provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each September 15 through the next December 14, from each December 15 through the next March 14, from each March 15 through the next June 14, or from each June 15 through the next September 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 46 94. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 95. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 96. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of September 15, 1995 CANAL CAPITAL CORPORATION By:/S/ MICHAEL E. SCHULTZ 47 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signatured guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee 48 EX-21 3 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 Stockyards Development Corporation 75-1564988 Wheeling Industrial Corporation 36-2545924 Canal Galleries Corporation 13-3492920 Canal Arts Corporation 13-3492921 DIVISIONS Canal Capital Corporation (parent) 51-0102492 Fort Worth Stockyards St. Joseph Stockyards St. Paul Union Stockyards Sioux City Stockyards Note: All subsidiaries are 100% owned EX-27 4
5 12-MOS OCT-31-1995 OCT-31-1995 114,750 0 241,778 0 500,000 963,128 14,459,457 (6,074,482) 18,203,412 2,710,348 0 0 23,585 53,138 4,037,099 18,203,412 0 4,854,097 0 4,765,821 285,871 0 1,320,619 (1,518,214) 0 (1,518,214) 0 0 0 (1,711,362) (0.40) (0.37)
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