-----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, TwW7yZp+rgpt+2ZfMVVCnh6EEozm7SNOb7SnKj2XKIN2UDINsrD0sbbe7eFybEje /OVEJndNJwha4MR6CN4mFA== 0000101821-97-000002.txt : 19970128 0000101821-97-000002.hdr.sgml : 19970128 ACCESSION NUMBER: 0000101821-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970127 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: 002-96666 FILM NUMBER: 97510828 BUSINESS ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128266040 MAIL ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STOCKYARDS CORP DATE OF NAME CHANGE: 19881027 10-K 1 10-K 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, 1996 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 15, 1997, was approximately $593,000. The number of shares of Common Stock, $.01 par value, outstanding at January 15, 1997 was 4,326,929. CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX Description Page PART I ITEM 1. Business............................................ 1 ITEM 2 Properties.......................................... 6 ITEM 3. Legal Proceedings................................... 7 ITEM 4. Submission of Matters to a Vote of Stockholders..... 10 PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters................................. 13 ITEM 6. Selected Financial Data............................. 14 ITEM 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition....... 16 ITEM 8. Financial Statements and Supplementary Data......... 26 ITEM 9. Disagreements on Accounting and Financial Disclosure.......................................... 26 PART III ITEM 10. Directors and Executive Officers of the Registrant.. 27 ITEM 11. Executive Compensation.............................. 28 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................................... 32 ITEM 13. Certain Relationships and Related Transactions...... 34 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 35 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 its art operations. 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 stockyards 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 two meat 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 (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 inventories held for resale of antiquities primarily from ancient Mediterranean cultures and contemporary art primarily of one artist. See "Art Operations". B. Factors That May Affect Future Results This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as 1 amended. The Company s actual results of operations and future financial condition may differ materially from those expressed in any such forward- looking statements as a result of many factors that may be beyond the Company s control. Such factors include, without limitation: overall economic conditions; competition for tenants in the agribusiness; the ability of the Company s tenants to compete in their respective businesses; the effect of fluctuations in supply, demand, international monetary conditions and inflation on the Company s art operations; the effects of forgery and counterfeiting on the Company s art operations; securities risks associated with collections of antiquities and art; and the effect of fluctuations in interest rates and inflation on the Company s indebtedness. C. Real Estate Operations General Real estate operations, which relate primarily to Canal's former agribusiness operations, resulted in operating income of $5.2 million, while contributing $8.9 million to Canal's revenues for fiscal 1996. Canal is involved in the management, development or sale of its agribusiness related real estate properties (as described above) 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. In December 1996, Canal lost its largest tenant (State of Minnesota) in its South St. Paul, Minnesota Exchange Building. This tenant represented 50% (approximately $250,000) of the rental income from this building. While Canal s agents are actively pursuing replacement for this space, it could take an extended period of time to fully relet this space which, in the interim, will effect Canal s cash flow. As of October 31, 1996, there are approximately 321 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. 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, 2 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 is entitled to receive additional rent if the stockyard's livestock volume or cash flow (as defined) exceeds certain levels. The lessee under the Lease is currently experiencing financial difficulties related primarily to a cattle feeding and financing business the lessee entered into after purchasing Canal s stockyard operations. While the payments under the Lease are current, the lessee is in default under the terms of certain other leases it has with the Company for office space at various locations. The cross default provisions of these leases puts the lessee in technical default of the Lease. However, the Company is working with the lessee and expects all arrears due to the Company to be paid in the coming months. The Company has explored the availability of alternative tenants for the stockyard properties covered by the Lease and is confident that should the need arise there are adequate alternatives available to the Company which will protect a substantial portion of the revenue stream from the Lease. Canal retained the right to receive income from certain volume based rental income leases with two meat packing companies located near the stockyards in Sioux City, Iowa and Fargo, North Dakota. The Sioux City, Iowa lease was a fifty year lease expiring in 2017 with John Morrell & Co. ("Morrell"). The lease called 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. On September 30, 1996 Canal and Morrell entered into a Mutual Release and Settlement Agreement, which terminated the Sioux City lease and dismissed the pending lawsuit between the parties (see - Item 3 Legal Proceedings and Note 15). Additionally, on October 1, 1996 Canal sold the Sioux City property (previously under lease) to Morrell. 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. The Fargo, North Dakota lease is the subject of ongoing litigation. For further information about this litigation (see - Item 3 Legal Proceedings and Note 15). 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. 3 Competition Canal competes in the area of agribusiness related real estate development with other regional developers, some of which are substantially larger and have significantly greater financial resources than Canal. To a certain extent, Canal's agribusiness revenues are dependent on the ability of the stockyard operations purchaser and the various meat packers with whom Canal has yardage agreements to successfully compete in their respective businesses. D. Art Operations Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned artist of contemporary paintings. As part of this agreement Canal purchased a number of Olitski paintings which it holds for resale valued at approximately $1,214,000. The representation agreement expired December 1, 1994 and Canal now operates independently in the marketing of its contemporary art inventory. Due to general economic conditions and the softness of the art markets, Canal has not purchased inventory in several years. However, Canal continues its marketing efforts to sell its existing art inventory through various consignment agreements and at public auctions. Antiquities and contemporary art represented 64% ($2,311,825) and 36% ($1,277,263) and 54% ($2,923,332) and 46% ($2,477,263) of total art inventory at October 31, 1996 and 1995, respectively. Canal sells its art primarily through two sources, in galleries and at art auctions. In the case of sales in galleries, the Company has consignment arrangements with various art galleries in the United States. In these arrangements Canal consigns its pieces at specific prices to the gallery. In the case of auctions, the Company primarily consigns its art pieces to the two largest auction houses for their spring and fall art auctions. The Company assigns a minimum acceptable price on the pieces consigned. The auction house negotiates a commission on the sale of major pieces. The pieces can be withdrawn at any time before or during the auction. There are no significant differences between the prices obtained in galleries and those obtained at auction. Art operations resulted in an operating loss of $1.7 million while contributing $0.2 million to Canal's revenues for fiscal 1996. The 1996 loss includes a $1.5 million increase in the art inventory valuation allowance. 4 Risk Dealing in art in general involves various degrees of risk. There can be no assurance that the operations will be profitable. The success of a program of this nature is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. There can be no assurance that Canal will be able to sell its art inventory at a price greater than or equal to its acquisition costs or be able to turn over its art inventory at a desirable rate. In addition, forgery and counterfeiting are risks inherent in the art industry. However, Canal and its associates, through their experience and certain precautionary measures taken in the purchasing process, are confident that this risk has been minimized. Moreover, there are security risks associated with collections of antiquities and art, including problems of security in their storage, transportation and exhibition. Canal has procured insurance to cover such risks. Competition Canal competes in its art operations with investment groups and other dealers, some of whom are substantially larger and have greater financial resources and staff than Canal. There may be a number of institutions and private collectors and dealers who may attempt to acquire the same pieces of art at the same time as Canal, particularly at auction. Similarly, there may be a number of dealers offering similar pieces of art, thereby exerting a downward pressure on prices. E. Securities Portfolio General Canal no longer engages in trading activities but has an investment in a company in which it, together with other entities (some of which are affiliates), comprise a group for regulatory purposes. This investment (in which Canal's ownership interest is less than 4%) is considered long-term in nature and is carried at market value. Canal had 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 had discretionary authority over the securities trading and investment activities of Canal. This agreement was canceled by mutual consent of the parties on October 31, 1996. F. Employees At December 31, 1996, Canal had 7 employees. 5 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, 1996 include: Stockyard Leased Held 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 3 85 West Fargo, ND 1937 66 13 0 17 36 S. St. Paul, MN 1937 210 6 30 55 119 Sioux City, IA 1937 96 2 24 25 45 Omaha, NE 1976 85 2 17 34 32 Sioux Falls, SD 1937 43 0 31 8 4 Total 627 25 139 142 321 The following schedule shows the average occupancy rate and average rental rate at each of Canal's five Exchange Buildings: 1996 1995 Occupancy Average(5) Occupancy Average(5) Location Rate Rental Rate Rate Rental Rate St. Joseph, MO 75% $ 4.75 75% $ 4.75 West Fargo, ND(4) N/A N/A N/A N/A S. St. Paul, MN(6) 84% $14.48 98% $14.25 Sioux City, IA 63% $ 3.59 68% $ 3.40 Omaha, NE 56% $ 4.80 55% $ 4.73 NOTES (1) Leased to the purchaser of Canal's stockyard operations. (2) For information with respect to mortgages and pledges see Note 7. (3) For information related to this see Note 2(c). (4) Canal has closed this building and is offering it for sale. (5) Per square foot. (6) With the exception of the South St. Paul, Minnesota Exchange Building none of the leases relating to the above Exchange Buildings represents 10% or more of rental income. As more fully discussed in Notes 17 and 20, in December 1996, Canal lost its largest tenant (State of Minnesota) in its South St. Paul, Minnesota Exchange Building. 6 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. 7 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 arose 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 alleged 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 alleged that Canal was 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 alleged that, as a result of Canal's failure to provide sufficient animals to meet plaintiff's needs, plaintiff was forced to obtain animals from sources other than the stockyards at an additional cost and was forced to pay additional rent under the lease agreement. Plaintiff sought relief in the form of damages in an unspecified amount and a renegotiation of the rental terms of the lease. On September 30, 1996 Canal and Morrell entered into a Mutual Release and Settlement Agreement which terminated the Sioux City lease and dismissed the lawsuit between the parties. In consideration for the lease termination Canal received $4.2 million from Morrell. Also, as part of the settlement, on October 1, 1996 Canal sold the Sioux City property (previously under lease) to Morrell for $0.3 million. 8 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. 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, 1996. On December 19, 1996, Canal entered into a settlement agreement with the buyer which, among other things, required Canal to issue a promissory note to the buyer in the principal amount of $325,000, payable over five years and releases Canal from any further obligations under the cost sharing agreement and any further remediation obligations. The five year note accrues interest at prime and requires principal and interest payment in each of the first four years (based on a 30 year amortization schedule) commencing December 1, 1997. The balance is payable in full on December 1, 2001. 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 exchange of the four structures covered by the Notice and approximately 16 acres of land to the City if the city will assume full responsibility for the required demolition. In the alternative, 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. 9 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 its 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. On May 30 and 31, 1996, damages in favor of the plaintiff in the amount of $400,000 (including $50,000 in punitive damages) were awarded in the County Court of Dakota County, State of Minnesota. Further damages for costs, disbursements and interest in the amount of approximately $40,000 were awarded to plaintiff on September 26, 1996. Canal filed a Notice of Appeal on October 8, 1996. Additionally, on October 14, 1996 Canal posted a supersedeas bond with the court in the agreed upon amount of $470,000 to stay any action on Pine Valley s part to collect on the judgements. Additionally, on October 25, 1996 Canal filed suit against Pine Valley seeking recovery of unpaid livestock fees owing under the walkway agreement. At October 31, 1996 Canal has an accrued litigation settlement in the amount of $450,000 associated with this case which is reflected in the financial statements as a current liability. ITEM 4. Submission of Matters to a Vote of Shareholders None. 10 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 60 President and Chief Attorney, partner in Executive Officer Ehrenkranz, Ehrenkranz since September 1991 & Schultz, law firm, and a Director for until December 31, more than five years. 1994. Executive Vice President, Special Pro- jects, Intelogic Trace, Inc. until December 8, 1994. Asher B. Edelman 57 Chairman of the Controlling General Board since Partner, Plaza September 1991 and Securities Company Prior thereto For more than five Vice Chairman years and of Asco of the Board and Partners (the General Chairman of the Partner of Arbitrage Executive Committee Securities Company), for more than five broker-dealer, for more 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 telecommunications equipment servicing, until December 8, 1994. 11 Reginald Schauder 47 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. 12 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, 1996 as reported on the "pink sheets" were: Fiscal 1996 Fiscal 1995 Quarter Ended High Low High Low October 31 ................. $ 1/4 -- $ 3/16 $ 3/16 -- $ 1/16 July 31 .................... 5/16 -- 3/16 3/16 -- 3/16 April 30 ................... 1/4 -- 3/16 1/4 -- 1/8 January 31 ................. 1/4 -- 1/16 1/2 -- 1/4 There were no cash dividends paid during fiscal 1996 or 1995. Canal is subject to restrictions on the payment of cash dividends under certain debt agreements. As of January 20, 1997, Canal had approximately 1,500 holders of record of its common stock, par value $.01 per share. 13 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) YEARS ENDED OCTOBER 31, 1996 1995 1994 1993 1992 OPERATING DATA: REVENUES FROM CONTINUING OPERATIONS $9,049 $4,854(5) $8,460(4)$4,535(3) $6,968(2) NET INCOME/(LOSS) FROM CONTINUING OPERATIONS $842($1,518)(9)$1,362(8)($2,160)(7)($4,674(6) EXTRAORDINARY GAIN ON RETIREMENT OF DEBT 0 0 0 366 857 PROVISION FOR INCOME TAXES 0 0 0 0 0 NET INCOME/(LOSS) $842($1,518) $1,362 ($1,794) ($3,817) EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: NET INCOME/(LOSS) BEFORE EXTRAORDINARY ITEM $0.16 ($0.40) $0.23 ($0.52) ($1.10) EXTRAORDINARY ITEM 0.00 0.00 0.08 0.08 0.20 NET INCOME/(LOSS) $0.16 ($0.40) $0.23 ($0.44) ($0.90) EARNINGS (LOSS) PER COMMON SHARE ASSUMING FULL DILUTION: NET INCOME/(LOSS) BEFORE EXTRAORDINARY ITEM $0.13 ($0.40) $0.20 ($0.52) ($1.10) EXTRAORDINARY ITEM 0.00 0.00 0.00 0.08 0.20 NET INCOME/(LOSS) $0.13 ($0.40) $0.20 ($0.44) ($0.90) CASH DIVIDENDS PAID $0.00 $0.00 $0.00 $0.00 $0.00 WEIGHTED AVERAGE NUMBER OF SHARES: - PRIMARY 4,327 4,352 4,476 4,327 4,327 - FULLY DILUTED 5,327 5,352 5,170 4,933 4,933 14 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued ...) (IN THOUSANDS) AT OCTOBER 31, 1996 1995 1994 1993 1992 BALANCE SHEET DATA: CURRENT ASSETS $2,015 $1,443 $1,416 $1,321 $3,110 PROPERTY ON OPERATING LEASES, NET 7,106 8,385 8,708 9,784 10,494 ART INVENTORY NON-CURRENT 3,089 4,901 5,744 6,074 7,079 OTHER ASSETS 3,279 3,474 4,260 5,184 6,339 TOTAL ASSETS $15,489 $18,203 $20,128 $22,363 $27,022 CURRENT LIABILITIES $3,426 $2,710 $6,122 $15,015 $17,670 LONG-TERM DEBT 6,980 11,379 8,062 2,394 2,502 STOCKHOLDERS' EQUITY 5,083 4,114 5,944 4,954 6,850 TOTAL LIAB. & STOCKHOLDERS'EQUITY $15,489 $18,203 $20,128 $22,363 $27,022 COMMON SHARES OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327 14(a) ITEM 6. Selected Financial Data (continued..) NOTES: (1) For discussion of material uncertainties and commitments, see Notes 11 and 15 to the Consolidated Financial Statement. (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. (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 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 taken in fiscal 1994. (6) Includes provisions of $400,000 (see Note 6) and $1.6 million for litigation settlements (see Note 15). (7) Includes an $873,000 write-off in connection with a 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 judgment against the Company, a $0.6 million gain on property sales and a $0.3 million gain on the sale of investments offset by a $0.3 million loss on the write down of 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 the Company, a $0.5 million increase in the art inventory valuation reserve, absence of $0.3 million gain on sale of investments, a $0.2 million increase in interest expense partially offset by a $0.6 million gain on real estate sales. (10) Common and common equivalent shares have been calculated to give effect to certain convertible notes issued in March 1994 (see Note 7). (11) Certain prior amounts have been reclassified to conform to the current year s presentation. 15 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 8continue as a going concern. The Company has suffered recurring losses from operations in six of the last eight years, has a working capital deficit at October 31, 1996 of approximately $1.4 million, is involved in various litigations and on December 31, 1996 defaulted on its obligation to repay a $500,000 note. A reserve has been provided in the amount of $450,000 associated with the litigation in Minnesota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1, 7, 16 and 20). The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Canal recognized net income of $0.8 million for 1996 as compared to the 1995 net loss of $1.5 million and the 1994 net income of $1.4 million. After recognition of preferred stock dividend payments of $162,000 in 1996, $193,000 in 1995 and $313,000 in 1994, the results attributable to common stockholders were net income of $0.7 million in 1996, a net loss of $1.7 in 1995 and net income of $1.0 million in 1994. 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. Revenues in 1996 increased by $4.2 million to $9.0 million as compared with 1995 revenues which had decreased by $3.6 million to $4.9 million from 1994 revenues of $8.5 million. The 1996 increase is due primarily to a $4.4 million increase in sales of real estate which is attributable to the Sioux City, Iowa lease termination and property sale to John Morrell & Co. 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. 16 1996 vs. 1995 Canal s 1996 net income of $0.8 million was due primarily to a $3.0 million increase in income from real estate operations (due to increased real estate sales) offset by a $1.7 million loss from art operations, which included a $1.5 million increase in the art inventory valuation allowance. The 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 allowance), a $0.3 million write down of the Company s 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. Real Estate Revenues Real estate revenues for 1996 of $8.9 million accounted for 97.8% of the 1996 revenues as compared to revenues of $4.6 million or 94.6% for 1995. 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 (23.4% and 45.5%), Ground lease income (10.6% and 21.2%), volume based rental income (7.4% and 15.9%) and sale of real estate and other income (58.6% and 17.4%) for 1996 and 1995, respectively. The 1996 increase is due primarily to the $4.4 million increase in sales of real estate. The percentage variations in the year to year comparisons are due to the significant increase in real estate sales for fiscal 1996. Real Estate Expenses Real estate expenses for 1996 of $3.6 million increased by $1.2 million (50.6%) from $2.4 million in 1995. Real estate expenses are comprised of labor, operating and maintenance (26.7% and 40.9%), depreciation and amortization (10.0% and 15.2%), taxes other than income taxes (10.0% and 22.1%), cost of real estate sold (38.3% and 18.0%), provision for litigation settlement (12.0% and 0.0%) and general and administrative expenses (3.0% and 3.8%) for 1996 and 1995, respectively. The 1996 increase in real estate expenses is due primarily to the $0.9 million increase in cost of real estate sales for fiscal 1996. The percentage variations in year to year comparisons is also due to the increase in the cost of real estate sold for fiscal 1996. 17 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 independent appraisers annually. The 1996 appraisal covered approximately 66% 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 34% 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 1996 Canal recognized a $1,500,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $2,500,000 as of October 31, 1996 as compared to $1,000,000 and $500,000 at October 31, 1995 and 1994, 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. 18 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 1996. Because of the available alternatives the Company does not anticipate any extraordinary losses associated with the art inventory in fiscal 1997. Art Revenues Art revenues for 1996 of $195,000 decreased $65,000 or 24.9% from $260,000 in 1995. Art revenues are comprised of proceeds from the sale of antiquities and contemporary art (100.0% and 94.7%) and commission income (primarily from the Salander-O'Reilly agreement) on sale of art owned by third parties (0.0% and 5.3%) for 1996 and 1995, respectively. The Company's art inventory was reduced through sales by $0.3 million and $0.4 in fiscal years 1996 and 1995, respectively. Art Expenses Art expenses for 1996 of $1.9 million increased by $0.9 million (89.9%) from $1.0 million in 1995. Art expenses (excluding valuation allowances) consisted of the cost of art sold (86.9% and 83.6%) and selling, general and administrative expenses (13.1% and 16.4%) for 1996 and 1995, respectively. Included in art expenses is a $1.5 million and a $0.5 million valuation allowance against the Company's art inventory (see Note 10 to the Consolidated Financial Statements) for fiscal years 1996 and 1995, respectively. General and Administrative General and administrative expenses for 1996 of $1.3 million decreased $0.1 million (2.3%) from $1.4 million in 1995. The major components of general and administrative expenses are officers salaries (32.0% and 30.5%), rent (9.1% and 5.7%), legal and professional fees (9.4% and 17.1%), insurance (11.3% and 11.4%) and office salaries (10.1% and 10.4%) for 1996 and 1995, 19 respectively. The percentage increases in officers salaries, insurance and office salaries is a result of the aggregate decrease in total general and administrative expenses as a result of the decrease in legal fees. The percentage decrease in rent expense is due to Canal s New York office space lease providing for four months without rent commencing February 1, 1996. Gain (loss) on Mark-to-Market of Investments Canal recognized a gain of $55,000 in fiscal 1996 as compared to a loss of $286,000 in fiscal 1995 on the mark-to-market of its investments. The 1995 loss included $114,000 to write down the Company s investment in Intelogic Trace, Inc. to zero. Interest and Other Income Interest and other income for 1996 decreased 45.0% to $90,000. 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 remained stable at $1.5 million in 1996. Interest rates on Canal's variable rate mortgage notes increased to an average of 11.94% in 1996 as compared to an average of 11.78% in 1995 and an average of 9.1% in 1994. At October 31, 1996 Canal had reduced the outstanding face value of these notes from the original $20.0 million to $4.0 million. 20 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 investments, 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 investments. These were offset by a $0.3 million write down of the Company's 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 comprised 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. 21 Art Operations Canal has its art inventory appraised by independent appraisers 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. 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. 22 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 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 Investments Canal recognized gains on the sale of 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. Gain (loss) on Mark-to-Market of Investments Canal recognized losses of $286,000 and $344,000 on the mark-to-market of 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. 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 Capital Resources and Liquidity While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in six of the last eight years, has a working capital deficit at October 31, 1996 of approximately $1.4 million, is involved in various litigations and on December 31, 1996 defaulted on its obligation to repay a $500,000 note. A reserve has been provided in the amount of $450,000 associated with the litigation in Minnesota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1, 7, 16 and 20). The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. On May 22, 1985, Canal completed the sale of $20 million face value of Variable Rate Mortgage Notes, due May 15, 1993. 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 24 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. Cash and cash equivalents of $11,000 at October 31, 1996 decreased $104,000 or 90.7% from $115,000 at October 31, 1995. Net cash used by operations in fiscal 1996 was $0.8 million. Substantially all of the 1996 net proceeds from the sale of real estate of $5.2 million and the proceeds from the sale of art of $0.2 million less the cash used in operations was used to reduce outstanding debt and accrued expenses. During 1996 Canal reduced its variable rate mortgage notes by $3.7 million and other long-term debt by $0.2 million for a net 1996 debt reduction of $3.9 million. At October 31, 1996 the Company's current liabilities exceeded current assets by $1.4 million, an increase of $0.1 million from 1995. The 1996 increase is due primarily to an increase in the current portion of long- term debt. The only required principal repayments under Canal's debt agreements for fiscal 1997 will be from the proceeds of the sale of certain assets (if any), the $0.5 million note due December 31, 1996 (See Notes 7 and 20) 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. The lessee under the Lease is currently experiencing financial difficulties related primarily to a cattle feeding and financing business the lessee entered into after purchasing Canal s stockyard operations. While the payments under the Lease are current, the lessee is in default under the terms of certain other leases it has with the Company for office space at various locations. The cross default provisions of these leases puts the lessee in technical default of the Lease. However, the Company is working with the lessee and expects all arrears due to the Company to be paid in the coming months. The Company has explored the availability of alternative tenants for the stockyard properties covered by the Lease and is confident that should the need arise there are adequate alternatives available to the Company which will protect a substantial portion of the revenue stream from the Lease. Management believes that the 1997 cash flow from operations combined with the proceeds from the sales of real estate and art will be sufficient to support its ongoing operations. 25 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. 26 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 executive officer and the name and principal business of the Company or other organization in which such occupation or employment is carried on, and in regard to other affiliations and business experience during the past five years, has been furnished to the Company by the respective directors. Asher B. Edelman, age 57, 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. Michael E. Schultz, age 60, 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 until December 31, 1994. He was Executive Vice President-Special Projects for Intelogic since November 1992 and a Director since July, 1985 until December 8, 1994. Gerald N. Agranoff, age 50, 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. 27 Reginald Schauder, age 47, has been Vice President, Chief Financial Officer and Treasurer since January 1989 and assumed responsibility as Secretary of the Company in September 1995. Mr. Schauder was corporate controller from July 1985 to January 1989. The Board of Directors has designated an Executive Committee consisting of Messrs. Edelman and Schultz. The Board of Directors has delegated to the Executive Committee general authority with respect to most matters that would otherwise be considered by the full Board. During fiscal 1996 the Board of Directors held one meeting, and the Executive Committee held five 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 other two executive officers of the Company whose salary for fiscal 1996 exceeded $100,000. SUMMARY COMPENSATION TABLE Annual Compensation Name and Principal Position Year Salary Michael E. Schultz 1996 $ 165,000 President and Chief 1995 $ 162,500 Executive Officer 1994 $ 150,000 Asher B. Edelman 1996 $ 165,000 Chairman of the Board 1995 $ 162,500 and Executive Committee 1994 $ 150,000 Reginald Schauder 1996 $ 101,200 Vice President, Chief 1995 $ 92,000 Financial Officer 1994 $ 92,000 Treasurer and Secretary The Company pays certain expenses related to Mr. Edelman's European offices as well as his travel expenses between Europe and the U.S. These expenses totaled $68,000, $87,000 and $86,000 for fiscal years 1996, 1995 and 1994, respectively. 28 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* $ 25,000 Asher B. Edelman 20,000* $ -0- Reginald Schauder 23,600* $ -0- * All options were exercisable at October 31, 1996. Retirement Plans The Canal Capital Corporation Retirement Plan (the "Retirement Plan") provides benefits to eligible employees of the Company and its subsidiaries and affiliates. Directors who are not employees are not eligible to participate in the Retirement Plan. The Retirement Plan is administered by the Company. All Company contributions under the Retirement Plan were deposited with an insurance company and invested in a group annuity contract through May 30, 1985. Thereafter, all Company contributions have been held in trust under a Trust Agreement between the Company and the Executive Committee of the Board of Directors, as trustee. Contributions to the Retirement Plan are determined on an actuarial basis, without individual allocation. In October 1991, each of three executive officers of the Company voluntarily withdrew from participation in the Retirement Plan. As a result of prior service, Messrs. Edelman and Schauder have deferred annual accumulated benefits of approximately $1,300 and $600, respectively, as of October 31, 1996. Mr. Schultz has no benefit under the Retirement Plan. For further information on the Retirement Plan see Note 9. 29 COMPENSATION OF DIRECTORS Fees and Expenses; Other Benefits Directors who are not officers of the Company do not receive cash compensation for service as Directors. Mr. Agranoff was granted $25,000 options of the Company under the 1985 Directors Stock Option Plan, as amended, in lieu of an annual retainer and per meeting fees. The options were granted December 1991. Directors are reimbursed for expenses incurred in attending Board and Committee meetings, including those for travel, food and lodging. Stock Options for Directors The Company maintains an option plan for the benefit of directors of the Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"), which was approved by the stockholders of the Company on March 12, 1986. Pursuant to the 1985 Plan, a maximum of 264,000 shares of common stock, $0.01 par value per share, of the Company have been reserved for issuance to directors and members of the Executive Committee of the Company and its subsidiaries. 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 1996 fiscal year, no options under the 1985 plan were 2granted and no options previously granted were exercised. At October 31, 1996, 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. 30 Compensation Committee Interlocks and Insider Participation The Board of Directors (comprised of Asher B. Edelman, Chairman of the Board and Chairman of the Executive Committee, Michael E. Schultz, President and Chief Executive Officer), and Gerald N. Agranoff determines the compensation of the Chief Executive Officer and the Company's other executive officers and administers the Company's 1984 Stock Option Plan and 1985 Stock Option Plan for Directors. In connection with the Company's investment activities, the Executive Committee of the Board of Directors, through Mr. Edelman, has the authority to invest funds of the Company in securities of other companies. Canal had 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 had discretionary authority over the securities trading and investment activities of Canal. This agreement was canceled by mutual consent of the parties on October 31, 1996. Although Canal no longer engages in securities trading activities, 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 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. 31 ITEM 12. Securities Ownership of Certain Beneficial Owners and Management To the knowledge of the Company, the only beneficial owners of 5% or more of the voting stock of the Company (other than those listed below under "Securities Owned by Management") as of January 15, 1997 were: SECURITIES BENEFICIALLY OWNED No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock Asher B. Edelman 1,685,269 (c) 38.77 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 117,220 shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co., L.P., of which Mr. Walters is Chief Executive Officer 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. The Company did not repay this note on December 31, 1996 and therefore, deems the convertible note outstanding at January 15, 1997 (see Note 20). 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. 32 SECURITIES OWNED BY MANAGEMENT The following table sets forth certain information as of January 15, 1997, 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 1,685,269 (c)(d) 38.77 Reginald Schauder 23,600 (e) Michael E. Schultz 312,135 (f)(g) 6.81 All Directors and Officers as a group (4 persons) 2,046,004 43.99 (a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each director and officer referred to in the above table has the sole power to direct the voting and disposition of the shares shown, except as otherwise set forth in footnotes (c), (d) and (f) below. (b) Includes 25,000 shares subject to options which are presently exercisable. (c) The number reported herein for Mr. Edelman includes 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, 1,017,220 shares owned by A.B. Edelman Limited Partnership ("Edelman Limited Partnership"), of which Mr. Edelman is the sole general partner, 271,250 shares of common stock owned by the Edelman 33 Value Fund Ltd. (the Fund ) of which Mr. Edelman is the investment manager 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 shares 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. Mr. Edelman as the investment manager of the Fund directs the voting and disposition of the Fund s securities. Additionally, 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. (d) The number reported herein for Mr. Edelman excludes 26,620 shares of common stock held by Canal Capital Corporation Retirement Plan of which Mr. Edelman serves as a trustee, 37,865 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. (g) The number reported herein for Mr. Schultz excludes 26,620 shares of common stock held by the Canal Capital Corporation Retirement Plan of which Mr. Schultz serves as a trustee and 590,186 shares of common stock held in three trusts for the benefit of Mr. Edelman's children of which Mr. Schultz serves as the trustee for each of the trusts. ITEM 13. Certain Relationships and Related Transactions See: "Compensation Committee Interlocks and Insider Participation" 34 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, 1996 the Company filed no reports on Form 8-K. 35 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 24th day of January, 1997. 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 24, 1997 Vice President-Finance Secretary and Treasurer /s/ Reginald Schauder (Principal Financial and Reginald Schauder Accounting Officer) January 24, 1997 /s/ Asher B. Edelman Chairman of the Board Asher B. Edelman and Director January 24, 1997 /s/ Gerald N. Agranoff Gerald N. Agranoff Director January 24, 1997 36 FORM 10-K -- ITEM 14(a)(1) and (2) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following documents are filed as part of this report: (a) 1. Financial Statements -- Independent Auditors Report............................. F-2 Consolidated Balance Sheets October 31, 1996 and 1995... F-3 Consolidated Statements of Operations for the years ended October 31, 1996, 1995 and 1994................ F-5 Consolidated Statements of Cash Flows for the years ended October 31, 1996, 1995 and 1994.......... F-7 Consolidated Statements of Changes in Stockholders' Equity for the years ended October 31, 1996, 1995 and 1994............................................. F-8 Notes to Consolidated Financial Statements.............. F-9 F-1 INDEPENDENT AUDITORS REPORT To the Stockholders of Canal Capital Corporation: We have audited the accompanying consolidated balance sheets of Canal Capital Corporation (a Delaware corporation) and Subsidiaries as of October 31, 1996 and 1995 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three year period ended October 31, 1996. 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, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Canal Capital Corporation and Subsidiaries as of October 31, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three year period ended October 31, 1996, 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, 7, 16 and 20 to the financial statements, the Company has suffered recurring losses from operations in six of the last eight years, has a working capital deficiency at October 31, 1996, is involved in various litigations, and on December 31, 1996 defaulted on its obligation to repay a $500,000 note. 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, 7, 16 and 20. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. New York, N.Y. TODMAN & CO., CPAS, P.C. January 2 , 1997 Certified Public Accountants (N.Y.) F-2 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1996 AND 1995 1996 1995 ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 10,632 $114,750 RESTRICTED CASH AND CASH EQUIVALENTS 470,000 0 NOTES AND ACCOUNTS RECEIVABLE, NET 295,202 241,778 ART INVENTORY (NET OF A VALUATION ALLOWANCE OF $ 500,000 AT OCTOBER 31, 1996 AND 1995, RESPECTIVELY) 500,000 500,000 INVESTMENTS 535,558 480,091 PREPAID EXPENSES 203,238 106,600 TOTAL CURRENT ASSETS 2,014,630 1,443,219 NON-CURRENT ASSETS: PROPERTY ON OPERATING LEASES, NET OF ACCUMULATED DEPRECIATION OF $ 5,753,088 AND $ 6,074,482 FOR 1996 AND 1995, RESPECTIVELY 7,105,534 8,384,975 ART INVENTORY NON-CURRENT (NET OF VALUATION ALLOWANCE OF $ 2,000,000 AND $ 500,000) AT OCTOBER 31, 1996 AND 1995, RESPECTIVELY 3,089,088 4,900,595 OTHER ASSETS: PROPERTY HELD FOR DEVELOPMENT OR RESALE 2,938,905 3,000,060 DEFERRED LEASING AND FINANCING COSTS 92,919 147,913 OTHER LONG-TERM NOTES RECEIVABLE 0 83,104 DEPOSITS AND OTHER 248,132 243,546 3,279,956 3,474,623 $15,489,208 $18,203,412 ============ =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1996 AND 1995 1996 1995 LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: CURRENT PORTION OF LONG-TERM DEBT- RELATED PARTY $500,000 $0 CURRENT PORTION OF LONG-TERM DEBT 64,000 51,000 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,984,692 2,218,467 ACCRUED LITIGATION SETTLEMENT 850,000 400,000 INCOME TAXES PAYABLE 27,877 40,881 TOTAL CURRENT LIABILITIES 3,426,569 2,710,348 LONG-TERM DEBT, LESS CURRENT PORTION 6,130,769 9,846,967 LONG-TERM DEBT, RELATED PARTY 849,000 1,532,275 6,979,769 11,379,242 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: PREFERRED STOCK, $0.01 PAR VALUE: 5,000,000 SHARES AUTHORIZED; 2,703,299 AND 2,358,542 SHARES ISSUED AND OUTSTANDING AND AGGREGATE LIQUIDATION PREFERENCE OF $ 27,032,990 AND $ 23,585,420 AT OCTOBER 31, 1996 AND 1995, RESPECTIVELY 27,033 23,585 COMMON STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,313,794 SHARES ISSUED AT OCTOBER 31, 1996 AND 1995, RESPECTIVELY 53,138 53,138 ADDITIONAL PAID-IN CAPITAL 26,636,939 26,468,008 ACCUMULATED DEFICIT (9,010,999) (9,690,693) LESS-VALUATION RESERVE (1,619,696) (1,736,671) LESS-986,865 SHARES OF COMMON STOCK HELD IN TREASURY, AT COST (11,003,545) (11,003,545) 5,082,870 4,113,822 $15,489,208 $18,203,412 ============ ============ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 1996 1995 1994 REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE $5,170,872 $770,012 $2,861,194 RENTAL INCOME 2,072,593 2,090,068 2,125,030 GROUND LEASE INCOME 936,000 972,500 946,772 VOLUME BASED RENTAL INCOME 657,184 729,335 798,489 LITIGATION SETTLEMENT REVERSAL 0 0 1,500,000 OTHER INCOME 17,091 31,892 21,457 8,853,740 4,593,807 8,252,942 REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 1,386,029 431,736 2,292,258 LABOR, OPERATING AND MAINTENANCE 964,918 980,626 918,256 DEPRECIATION AND AMORTIZATION 359,263 364,594 418,227 TAXES OTHER THAN INCOME TAXES 360,000 530,202 517,200 PROVISION FOR LITIGATION SETTLEMENT 434,918 0 0 GENERAL AND ADMINISTRATIVE 107,239 90,888 85,920 3,612,367 2,398,046 4,231,861 INCOME FROM REAL ESTATE OPERATIONS 5,241,373 2,195,761 4,021,081 ART OPERATIONS: ART REVENUES: SALES 195,400 246,550 207,350 OTHER REVENUES 0 13,740 0 195,400 260,290 207,350 ART EXPENSES: COST OF ART SOLD 326,399 407,557 209,461 VALUATION RESERVE 1,500,000 500,000 200,000 SELLING, GENERAL AND ADMINISTRATIVE 49,010 79,803 76,458 1,875,409 987,360 485,919 LOSS FROM ART OPERATIONS (1,680,009) (727,070) (278,569) SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 Continued ... 1996 1995 1994 GENERAL AND ADMINISTRATIVE EXPENSE (1,348,179) (1,380,415) (1,265,793) INCOME FROM OPERATIONS 2,213,185 88,276 2,476,719 OTHER INCOME (EXPENSE): GAIN ON SALE OF INVESTMENTS 0 0 333,278 GAIN (LOSS) ON MARK- TO-MARKET INVESTMENTS 55,467 (285,871) (343,529) INTEREST & OTHER INCOME 90,352 164,209 180,791 INTEREST EXPENSE (1,494,271) (1,433,828) (1,111,928) (23,000) (51,000) (173,000) (1,371,452) (1,606,490) (1,114,388) INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 841,733 (1,518,214) (1,362,331) PROVISION FOR INCOME TAXES 0 0 0 NET INCOME (LOSS) $841,733 $(1,518,214) ($1,362,331) EARNINGS (LOSS) PER COMMON SHARE: - PRIMARY $0.16 $(0.40) $0.23 - FULLY DILUTED $0.13 $(0.40) $0.20 WEIGHTED AVERAGE NUMBER OF SHARES: - PRIMARY 4,326,929 4,351,680 4,475,566 - FULLY DILUTED 5,326,929 5,351,680 5,169,896 SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) $841,733 $(1,518,214) $1,362,331 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: PROVISION FOR LITIGATION SETTLEMENT 434,918 0 (1,500,000) DEPRECIATION AND AMORTIZATION 434,532 412,505 430,248 GAIN ON SALES OF REAL ESTATE (3,784,843) (338,276) (568,936) GAIN FROM SALE INVESTMENTS 0 0 (333,278) VALUATION RESERVE - ART INVENTORY 1,500,000 500,000 200,000 (GAIN)LOSS ON MARK-TO-MARKET INVESTMENTS (55,467) 285,871 343,529 CHANGES IN ASSETS AND LIABILITIES: NOTES AND ACCOUNTS RECEIVABLES, NET (53,424) 351,045 (232,832) ART INVENTORY, NET 311,507 343,537 329,342 PREPAID EXPENSES AND OTHER, NET (622,068) (540,079) (48,725) PAYABLES AND ACCRUED EXPENSES, NET 203,221 690,964 (1,413,823) NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (789,891) 187,353 (1,432,144) CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF REAL ESTATE 5,170,872 770,012 2,861,194 PROCEEDS FROM SALES OF INVESTMENTS 0 0 489,928 CAPITAL EXPENDITURES (128,626) (91,740) (97,440) NET CASH PROVIDED BY INVESTING ACTIVITIES 5,042,246 678,272 3,253,682 CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM LONG-TERM DEBT-RELATED PARTIES 0 1,032,275 500,000 REPAYMENT OF SHORT-TERM BORROWINGS 0 (787,305) (1,729,000) REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (3,886,473) (1,029,440) (582,693) NET CASH USED BY FINANCING ACTIVITIES (3,886,473) (784,470) (1,811,693) (INCREASE) IN RESTRICTED CASH AND CASH EQUIVALENTS (470,000) 0 0 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (104,118) 81,155 9,845 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 114,750 33,595 23,750 CASH AND CASH EQUIVALENTS AT END OF YEAR $10,632 $114,750 $33,595 ============ ============ ============ NOTE: IN FISCAL 1996, 1995 AND 1994,$ 162,039, $ 193,148 AND $ 313,556, RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE OF 344,757, 303,348 AND 271,830 , RESPECTIVELY, OF SHARES OF PREFERRED STOCK. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1996, 1995, AND 1994 COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, NOVEMBER 1, 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 INCOME 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 NET LOSS 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 344,757 3,448 RESERVE 0 0 0 0 BALANCE, OCTOBER 31, 1996 5,313,794 $53,138 2,703,299 $27,033 ADDITIONAL TREASURY PAID-IN ACCUMULATED VALUATION STOCK, CAPITAL DEFICIT RESERVE AT COST BALANCE, NOV 1, 1993 $25,930,799 ($9,028,106) ($1,015,535)($11,003,545) NET INCOME 0 1,362,331 0 0 PREFERRED STOCK DIV. 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 INCOME 0 (1,518,214) 0 0 PREFERRED STOCK DIV. 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) NET INCOME 0 841,733 0 0 PREFERRED STOCK DIV. 168,931 (162,039) 0 0 RESERVE 0 0 116,975 0 BALANCE, OCT 31,1996 $26,636,939 ($9,010,999) ($1,619,696)($11,003,545) SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Canal Capital Corporation ("Canal"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936. Canal was a wholly-owned subsidiary of Canal-Randolph Corporation until June 1, 1984, when Canal-Randolph Corporation distributed to its stockholders all of the outstanding shares of Canal's common stock, under a plan of complete liquidation. Canal is engaged in two distinct businesses - the management of its agribusiness related real estate properties located in the midwest and art operations, consisting mainly of the acquisition of art for resale. While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in six of the last eight years, has a working capital deficit at October 31, 1996 of approximately $1.4 million, is involved in various litigations and on December 31, 1996 defaulted on its obligation to repay a $500,000 note. A reserve has been provided in the amount of $450,000 associated with the litigation in Minnesota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1, 7, 16 and 20). The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 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-9 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Principles of Consolidation -- The consolidated financial statements include the accounts of Canal Capital Corporation ("Canal") and its 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 at October 31, 1996 and 1995, and is included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 1996, 1995 and 1994 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) Marketable Securities -- 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 1996. 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. Investments -- Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. This investment is carried at market value and the unrealized gain or loss is recognized in operating results. This holding does not represent more than a 4% ownership by Canal in the respective entity. 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. F-10 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Property held for Development or Resale -- Property held for development or resale consist of approximately 321 acres located in the midwest of undeveloped land not currently utilized for corporate purposes nor included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value. 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 66% and 78% of the inventory value at October 31, 1996 and 1995, respectively. The remaining 34% and 22% at October 31, 1996 and 1995, 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 64% ($2,311,825) and 36% ($1,277,263) and 54% ($2,923,332) and 46% ($2,477,263) of total art inventory at October 31, 1996 and 1995, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. F-11 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 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 investments, if any, are recognized, on a specific identification method, on a trade date basis and unrealized gains or losses on Canal's investments 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) 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 $38,000, $47,000 and $55,000 and interest payments of $1,297,000, $1,485,000 and $1,285,000 in 1996, 1995 and 1994, respectively. J) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year's presentation. F-12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED K) Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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") with the purchaser covering this land and facilities at five locations. The lease is a ten year lease, renewable at the purchaser s option for an additional ten 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. The lessee under the Lease is currently experiencing financial difficulties related primarily to a cattle feeding and financing business the lessee entered into after purchasing Canal s stockyard operations. While the payments under the Lease are current, the lessee is in default under the terms of certain other leases it has with the Company for office space at various locations. The cross default provisions of these leases puts the lessee in technical default of the Lease. However, the Company is working with the lessee and expects all amounts due to the Company to be paid in the F-13 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED coming months. The Company has explored the availability of alternative tenants for the stockyards covered by the Lease and is confident that should the need arise there are adequate alternatives available to the Company which will protect a substantial portion of the revenue stream from the Lease. Revenues from the volume based rental agreements for the three years ended October 31, 1996 were: (Thousands of Dollars) 1996 1995 1994 Sioux City, Iowa (1) $ 537 $ 629 $ 591 Fargo, North Dakota (2) 120 100 207 $ 657 $ 729 $ 798 (1) On September 20, 1996 Canal entered into a Mutual Release and Settlement Agreement with the Sioux City, Iowa meat packer which terminated the lease. Accordingly, the 1996 revenues are for eleven months only and there will be no such revenues in fiscal 1997. (2) 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). 4. MARKETABLE SECURITIES At October 31, 1996 and 1995, Canal held no marketable securities in its current portfolio. Canal has not traded in marketable securities since fiscal 1991 (see Note 5). 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. This agreement was canceled by mutual consent of the parties on October 31, 1996. F-14 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. INVESTMENTS At October 31, the investments consisted of the following: (Thousands of Dollars) 1996 1995 Aggregate market value..................... $ 535 $ 480 Aggregate carrying value................... $ 535 $ 480 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, 1996, 100% of the market value of Canal's 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. Canal recognized an unrealized gain on investments of $55,000 in fiscal 1996. During fiscal 1995, Canal recognized a loss on write down of 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 investments of $344,000 in fiscal 1994. 6. NOTES AND ACCOUNTS RECEIVABLE Included in notes and accounts receivable at October 31, 1996 and 1995, respectively, were the current portion of notes receivable in the amount of $25,000 and $60,000 from real estate and other sales. Notes and accounts receivable is shown net of a provision for doubtful accounts in the amount of $12,000 and $0 for fiscal 1996 and 1995 respectively. F-15 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. BORROWINGS At October 31, 1996, substantially all of Canal's real properties, the stock of certain subsidiaries, the investments and a substantial portion of its antiquities inventories are pledged as collateral for the following obligations: October 31, (Thousands of Dollars) 1996 1995 Variable rate mortgage notes due May 15, 1998 ................................ $ 3,960 $ 7,635 Variable Rate Mortgage Notes due September 15, 1998 - related party ......... 849 1,032 11% mortgage note; original principal amount $1,697; due April 1, 2011; payable in monthly installments (including interest) of $17....... 1,336 1,356 9.5% mortgage note; original principal amount $472; due November 1, 2012; payable in monthly installments (including interest) of $4........ 414 416 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........ 485 491 Other Note - related party....................... 500 500 Total ........................................... 7,544 11,430 Less -- current maturities ...................... 564 51 Long-term debt $ 6,980 $ 11,379 F-16 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, 1996, the interest rate was 11.75%. This rate remained unchanged at November 15, 1996 and for the next successive 90-day period. The average interest rate on these notes during 1995 was 11.94%. The new agreement, among other things, prohibit 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 fiscal 1996, this agreement was amended to provide for the forgiveness of all additional interest accrued in the event that the Company meets on a timely basis all its obligations under the Note, including the payment of all other principal and accrued interest on or before May 15, 1998. 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, prohibit 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 F-17 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Company's common stock (see Note 20). 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 then secured credit line. The scheduled maturities and sinking fund requirements of long-term debt during the next five years are as follows (thousands of dollars): 1997-$564; 1998-$4,873; 1999-$64; 2000-$64 2001-$64 Thereafter-$1,915 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. For the years ended October 31, 1996 and 1994 approximately $250,000 and $760,000, respectively, of net operating loss carryforwards have been utilized to eliminate the Company s taxable income. In addition, 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 1,969,952 $7,353,952 Deferred income tax assets as of October 31, 1996, 1995 and 1994, due primarily to net operating losses, have been reduced to zero by valuation reserves of approximately $2,700,000, $2,600,000 and $1,900,000, respectively due to uncertainties concerning their realization. F-18 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 $164,000 for fiscal 1996 and has made contributions of approximately $160,000 for fiscal 1995 and $150,000 for fiscal 1994. 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. The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated balance sheets at October 31, 1996 and 1995. Plan Year (Thousands of Dollars) 1996 1995 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,451 and $1,521 in 1996 and 1995, respectively ............. $ 1,452 $ 1,526 Additional benefit due to assumed future compensation levels ......................... 21 14 Projected benefit obligation (1) .............. 1,473 1,540 Plan assets at fair value ..................... 884 729 Projected benefit obligation in excess of plan assets .............................. 588 811 Unrecognized net asset ........................ 152 177 Unrecognized net loss ......................... (1,792) (1,927) Valuation reserve to recognize accrued pension costs in the consolidated balance sheets .... 1,620 1,736 Accrued pension cost included among accrued expenses in the consolidated balance sheets.. $ 568 $ 797 (1) The vast majority of the projected benefit obligation is related to the Company's former stockyard employees. F-19 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Net periodic pension cost for plan years ended October 31, 1996, 1995 and 1994 included the following components: Plan Year (Thousands of Dollars) 1996 1995 1994 Service costs - benefits earned during the period ............................ $ 8 $ 6 $ 5 Interest cost on projected benefit obligation ............................ 104 114 109 (Return) loss on assets .............. (95) 34 374 Net amortization and deferral ........... 35 (121) (465) Net period pension cost ................. $ 52 $ 33 $ 23 Assumptions used in computing the 1996, 1995 and 1994 pension cost were: 1996 1995 1994 Discount rate ........................... 7.75% 7.25% 8.50% Rate of increase in compensation level ................................. 6.25% 5.75% 7.00% Expected long-term rate of return on assets ............................. 10.00% 10.00% 10.00% 10. ART OPERATIONS Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned F-20 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED artist of contemporary paintings. As part of this agreement Canal purchased a number of Olitski paintings which it holds for resale. The representation agreement expired December 1, 1994 and Canal now operates independently in the marketing of its contemporary art inventory. Due to general economic conditions and the softness of the art markets, Canal has not purchased inventory in several years. However, Canal continues its marketing efforts to sell its existing art inventory through various consignment agreements and at public auctions. Antiquities and contemporary art represented 64% ($2,311,825) and 36% ($1,277,263) and 54% ($2,923,332) and 46% ($2,477,263) of total art inventory at October 31, 1996 and 1995, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. Canal's art dealing operations consist primarily of inventories held for resale of antiquities primarily from ancient Mediterranean cultures and contemporary art primarily of one artist. Canal s art dealing operations are carried on through various consignment agreements relating to its antiquities and contemporary art inventories. 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 1996 appraisal covered approximately 66% 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 34% 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 1996 Canal recognized a $1,500,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $2,500,000 as of October 31, 1996 as compared to $1,000,000 and $500,000 at October 31, 1995 and 1994, 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-21 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 1996. Because of the available alternatives the Company does not anticipate any extraordinary losses associated with the art inventory in fiscal 1997. Canal's art operations have generated operating losses of $1.7 million, $0.7 million and $0.3 million on revenues of $0.2 million, $0.3 million and $0.2 million for the years ended October 31, 1996, 1995 and 1994, respectively. Art sales have resulted primarily through activities in conjunction with sales of antiquities. Canal's management believes that through its consignment agreements as well as other potential distribution outlets Canal will continue to deal in antiquities and contemporary art. The Company had $1,268,000 and $1,600,000 of art inventory on consignment with third party dealers at October 31, 1996 and 1995, respectively. F-22 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 1996 1995 1996 1995 1996 1995 Antiquities $ 900 $ 900 $ 2,212 $2,523 $ 3,112 $ 3,423 Contemporary 100 100 2,877 2,877 2,977 2,977 Valuation Allowance (500) (500) (2,000) (500) ( 2,500) (1,000) Net Value $ 500 $ 500 $ 3,089 $4,900 $ 3,589 $ 5,400 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, 1996, 1995, and 1994 were as follows: (in 000's) 1996 1995 1994 Antiquities $ 195 $ 246 $ 207 Contemporary 0 14 0 $ 195 $ 260 $ 207 F-23 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. 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, 1996: Year ended October 31, (Thousands of Dollars) 1997 ........................................ 159 1998 ........................................ 159 1999 ........................................ 26 Minimum payments required ....................... 344 Rental income under subleases ................... 84 Net minimum payments required ................... $ 260 Rent expense under these and other operating leases for the years ended October 31, 1996, 1995 and 1994 were as follows: (Thousands of Dollars) 1996 1995 1994 Minimum rentals ................... $ 160 $ 116 $ 116 Less: sublease rentals ........... (39) (40) (33) $ 121 $ 76 $ 83 F-24 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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, 1996 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, 1996, there were 327,000 exercisable options outstanding under these plans. Transactions under these plans are summarized as follows: Shares Option Price Range 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 Options granted 0 - - Options expired 0 - - Balance outstanding October 31, 1996.... 327,000 $0.013-$8.625 The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the years ended October 31, 1996, 1995 and 1994. In October, 1995, the Financial Accounting Standards Board issued Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which becomes effective for transactions entered into in fiscal years beginning after December 15, 1995. This statement permits an entity to apply the fair value based method to stock options awarded during 1995 and thereafter in order to measure the compensation cost at the grant date and recognize it over its vesting period. This statement also allows an entity to continue to measure compensation costs for these plans pursuant to APB Opinion 25. F-25 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Entities electing to remain with the accounting treatment under APB Opinion 25 must make proforma disclosures of net income and earnings per share to include the effects of all awards granted in fiscal years beginning after December 31, 1994, as if the fair value based method of accounting pursuant to SFAS No. 123 has been applied. The Company intends to adopt the disclosure requirements for this statement effective for the year ending October 31, 1996, if material, while continuing to measure compensation cost using APB 25. Had compensation cost been determined on the basis of SFAS No. 123, the proforma effect on the Company s net income and earnings per share for the year ended October 31, 1996 would have been deminimus. 13. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID Primary earnings (loss) are computed by deducting preferred dividends from net income (loss) in order to determine net income (loss) attributable to common stockholders. This amount is then divided by the weighted average number of common shares outstanding and common stock equivalents arising from stock options. The weighted average number of common shares outstanding for primary earnings per share is 4,326,926, 4,351,680 and 4,475,566 shares for each of the years ended October 31, 1996, 1995 and 1994, respectively. Fully diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the year after giving effect for common stock equivalents arising from stock options and convertible debt assumed converted to common stock. The weighted average number of common shares for full dilution is 5,326,929, 5,351,680 and 5,169,896 shares for each of the years ended October 31, 1996, 1995 and 1994, respectively. There were no dividends declared on common stock during the years ended October 31, 1996, 1995 and 1994. Dividends declared on preferred stock during the years ended October 31, 1996, 1995 and 1994 were $162,039, $193,148 and $303,556. F-26 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. PREFERRED STOCK ISSUANCE On October 15, 1986 Canal exchanged 986,865 shares of its $1.30 Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of its outstanding common stock. Since the exchange, the Company has issued an additional 1,716,434 shares in the form of stock dividends for a total outstanding at October 31, 1996 of 2,703,299. 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, thirty of the forty quarterly payments have been paid in additional stock resulting in the issuance of 1,716,434 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, 1996 preferred stock dividend will be paid in additional stock. 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 F-27 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED constituting the Board of Directors of Canal shall be increased by two and the holders of the Preferred Stock shall have, in addition to the rights set forth above, the special right, voting separately as a single class, to elect two directors of Canal to fill such newly created directorships at the next succeeding annual meeting of shareholders (and at each succeeding annual meeting of shareholders thereafter until such cumulative dividends have been paid in full). 15. 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 the reconciliation of operating income with pre-tax income which information is presented on Canal's income statement. October 31, (Thousands of Dollars) 1996 1995 1994 Identifiable assets: Art ............................... $ 3,833 $ 5,408 $ 6,286 Real estate ....................... 10,478 11,630 12,677 Corporate ......................... 1,178 1,165 1,165 $ 15,489 $ 18,203 $ 20,128 (Thousands of Dollars) 1996 1995 1994 Capital expenditures: Art ............................... $ 0 $ 0 $ 0 Real estate ....................... 125 75 29 Corporate ......................... 4 17 68 $ 129 $ 92 $ 97 Income from real estate operations includes gains (losses) on sales of real estate of $3.8 million, $0.3 million and $0.6 million in 1996, 1995 and 1994, respectively. Art identifiable assets include approximately $1.3 million and $1.6 million of art inventory in galleries or on consignment abroad as of October 31, 1996 and 1995, respectively. F-28 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. 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-29 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 arose 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 alleged 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 alleged that Canal was 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 alleged that, as a result of Canal's failure to provide sufficient animals to meet plaintiff's needs, plaintiff was forced to obtain animals from sources other than the stockyards at an additional cost and was forced to pay additional rent under the lease agreement. Plaintiff sought relief in the form of damages in an unspecified amount and a renegotiation of the rental terms of the lease. On September 30, 1996 Canal and Morrell entered into a Mutual Release and Settlement Agreement which terminated the Sioux City lease and dismissed the lawsuit between the parties. In consideration for the lease termination Canal received $4.2 million from Morrell. Also, as part of the settlement, on October 1, 1996 Canal sold the Sioux City property (previously under lease) to Morrell for $0.3 million. F-30 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. 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, 1996. On December 19, 1996, Canal entered into a settlement agreement with the buyer which, among other things, required Canal to issue a promissory note to the buyer in the principal amount of $325,000, payable over five years and releases Canal from any further obligations under the cost sharing agreement and any further remediation obligations. The five year note accrues interest at prime and requires principal and interest payment in each of the first four years (based on a 30 year amortization schedule) commencing December 1, 1997. The balance is payable in full on December 1, 2001. 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 exchange of F-31 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED the four structures covered by the Notice and approximately 16 acres of land to the City if the City will assume full responsibility for the required demolition. In the alternative, Canal has 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 its 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. On May 30 and 31, 1996, damages in favor of the plaintiff in the amount of $400,000 (including $50,000 in punitive damages) were awarded in the County Court of Dakota County, State of Minnesota. Further damages for costs, disbursements and interest in the amount of approximately $40,000 were awarded to plaintiff on August 16, 1996. F-32 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Canal filed a Notice of Appeal on October 8, 1996. Additionally, on October 14, 1996 Canal posted a supersedeas bond with the court in the agreed upon amount of $470,000 to stay any action on Pine Valley s part to collect on the judgements. Finally, on October 25, 1996 Canal filed suit against Pine Valley seeking recovery of unpaid livestock fees owing under the walkway agreement. At October 31, 1996 Canal has an accrued litigation settlement in the amount of $450,000 associated with this case which is reflected as a current liability. 17. VALUATION RESERVE The Valuation Reserve represents the excess of additional minimum pension liability required under the provisions of SFAS No. 87 over the unrecognized prior service costs of former stockyard employees. Such excess arose due to the decline in the market value of pension assets available for pension benefits of former employees, which benefits were frozen at the time the stockyard operations were sold in 1989. The excess will be expensed as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists. 18. PROPERTY ON OPERATING LEASES The following schedule provides an analysis of the Company's investment in property on operating leases by location as of October 31, 1996: (IN THOUSANDS) Accumulated Location Land Improvements Depreciation Value St. Joseph, MO $ 869 $ 304 $ (167) $ 1,006 West Fargo, ND 3 292 (206) 89 S. St. Paul, MN 675 3,061 (667) 3,069 Sioux City, IA 451 3,005 (2,953) 503 Omaha, NE 1,437 2,384 (1,590) 2,231 Sioux Falls, SD 118 98 (74) 142 Corporate Office 0 161 (102) 59 $ 3,553 $ 9,305 $ (5,759) $ 7,099 F-33 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, 1996: (5) (IN THOUSANDS) Volume Year Ending Rental Ground Based October 31, Income (1) Lease(2) Income(3) Total 1997 $ 1,700 $ 924 $ 0 $ 2,624 1998 1,800 924 0 2,724 1999 1,900 924 0 2,824 2000 (4) 2,000 0 0 2,000 2001 2,100 0 0 2,100 $ 9,500 $ 2,772 $ 0 $ 12,272 (1) Consists of rental income from Exchange Building (commercial office space), lease income from vacant land and structures and other rental income. In December 1996, Canal lost its largest tenant (State of Minne sota) in its South St. Paul, Minnesota Exchange Building. This tenant represented 50% (approximately $250,000) of the rental income from this building. While Canal s agents are actively pursuing replacement for this space, it could take an extended period of time to fully relet this space which, in the interim, will effect Canal s cash flow. (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 Fargo, ND lease due to the uncertainty of these future revenues. However, Canal s volume based income from this lease has averaged $100,000 annually for the past five years. (4) The stockyard ground lease has a ten year renewal option (adjusted for CPI increases) which can be exercised November 1, 1999 on essentially the same terms that currently exist. Canal anticipates that the option will be exercised. (5) All real estate leases are accounted for as operating leases. F-34 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 19. Recent Accounting Pronouncements 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 financial statements. 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. 20. Subsequent Events On December 31, 1996 the Company defaulted on its obligation to repay a $500,000 note. Canal is currently negotiating with the noteholder to extend the term of the note, under substantially the same terms, for a period of one year. While management believes that an agreement to extend this note will be executed by the noteholder, there is no assurance that this will occur. Absent such an agreement, the noteholder could hold the Company in default and demand immediate payment of the outstanding balance. In which case, the Company may not have the available cash to meet this obligation (see Note 7). In December 1996, the Company lost its largest tenant (State of Minnesota) in South St. Paul, Minnesota Exchange Building. This tenant represented 50% (approximately $250,000) of the rental income from the building. While the Company s agents are actively pursuing replacement tenants for this space, it could take an extended period of time to fully relet this space which, in the interim, will effect the Company s cash flow. F-35 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 21. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for non-trading purposes) for which it is practicable to estimate that value. a) Cash and cash equivalents: The carrying amount approximates fair market value because of the short maturities of such instruments. b) Accrued Litigation: The carrying amount approximates the fair value. c) Long-Term Debt (See Note 13): The fair value of the Company s long- term debt, including the current portion thereof, is estimated based on the quoted market price for the same or similar issues. d) Long-Term Debt Related Party (see Note 13): It is not practicable to estimate the fair value of the related party debt. October 31, 1996 1995 (Thousands of dollars) Carrying Fair Carrying Fair Amount Value Amount Value Cash, restricted cash and cash equivalents $ 481 $ 481 $ 115 $ 115 Accrued Litigation 850 850 400 400 Current Portion of Long- Term Debt - related party 500 (d) - - Current Portion of Long- Term Debt 64 64 51 51 Long-Term Debt 6,131 6,131 9,847 9,847 Long-Term Debt - Related Party 849 (d) 1,532 (d) F-36 CANAL CAPITAL CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 22. QUARTERLY INFORMATION (UNAUDITED) FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1996 AND 1995 IS PRESENTED BELOW: (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT.31, 1996 1996 1996 1996 REVENUES $1,557 $940 $1,051 $5,501 NET INCOME (LOSS) ($4) ($223) ($599) $1,668 NET INCOME (LOSS) PER COMMON SHARE: - PRIMARY ($0.01) ($0.06) ($0.15) $0.38 - FULLY DILUTED ($0.01) ($0.06) ($0.15) $0.31 WEIGHTED AVERAGE NUMBER OF SHARES: - PRIMARY 4,327 4,327 4,327 4,327 - FULLY DILUTED 5,327 5,327 5,327 5,327 (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 1995 1995 1995 1995 REVENUES $1,143 $987 $1,707 $1,017 NET INCOME (LOSS) ($62) ($109) ($136) ($1,211) NET INCOME (LOSS) PER COMMON SHARE - PRIMARY ($0.03) ($0.03) ($0.04) ($0.30) - FULLY DILUTED ($0.03) ($0.03) ($0.04) ($0.30) WEIGHTED AVERAGE NUMBER OF SHARES: - PRIMARY 4,327 4,327 4,327 4,327 - FULLY DILUTED 5,327 5,327 5,327 5,327 F-37 FORM 10-K - ITEM 14(a)(3) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS (a) 3. Exhibits - The following exhibits required by Item 601 of Regulations S-K are filed as part of this report. For convenience of reference, the exhibits are listed according to the numbers appearing in Table I to Item 601 of Regulation S-K. Each exhibit which is incorporated by reference and the document in which such exhibit was originally filed are indicated in parentheses immediately following the description of such exhibit. Exhibit No. 3(a) Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Registrant's Registration Statement on Form 10 filed with the Securities and Exchange Commission on May 3, 1984 (the "Form 10") and incorporated herein by reference). 3(b) Bylaws (filed as Exhibit 3(b) to the Registrant's Registration Statement on Form 10 and incorporated herein by reference). 3(c) Certificate of Amendment of the Restated Certificate of Incorporation dated September 22, 1988 (filed as Exhibit 3(c) to the Registrant's Form 10-K filed January 29, 1989 and incorporated herein by reference). 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 Registrant's Proxy Statement dated January 31, 1985, relating to the annual meeting of stockholders held March 18, 1985, which exhibit is incorporated herein by reference). 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 10(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 as Exhibit 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 the 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 the 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 as Exhibit 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 Registrant'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) Assignment 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 Market, 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) Escrow 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 Registrant's Form 10-K filed January 22, 1991 and incorporated herein by reference). 10(as) Amendment to the Revolving Credit Agreement dated May 31, 1990 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 July 31, 1991 by and between Cooperative Centrale Raiffersen-Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital Corporation (filed as Exhibit 10(av) to the Registrant'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 Arts Corporation (filed as Exhibit 10(aw) to the Registrant's Form 10-K filed January 27, 1992 and incorporated herein by reference). 10(ax) Amendment and Restated Credit Agreement dated March 31, 1993 by 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 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED 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 Registrant'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 Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). E-10 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 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). 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 Registrant'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 and 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, 1993 by and between Hanseatic Corporation, Guaranty Reassurance Company, Sioux Falls Stockyards Company and Canal Capital Corporation (filed as Exhibit 10 (bl) to the Registrant'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 Cowen & 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 filed January 27, 1995 and incorporated herein by reference). E-11 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 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). 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 Registrant'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 (filed as Exhibit 10 (bq) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). 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 (filed as Exhibit 10 (br) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). 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 (filed as Exhibit 10 (bs) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). E-12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(bt) $150,000 Promissory Note dated September 15, 1995 by and between Michael E. Schultz Defined Benefit Trust and Canal Capital Corporation (filed as Exhibit 10 (bt) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). 10(bu) $150,000 Promissory Note dated September 15, 1995 by and between Edelman Value Partners, L.P. and Canal Capital Corporation (filed as Exhibit 10 (bu) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). 10(bv) $182,275 Promissory Note dated September 15, 1995 by and between Lora K. Schultz and Canal Capital Corporation (filed as Exhibit 10 (bv) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). 10(bw) $300,000 Promissory Note dated September 15, 1995 by and between SES Trust and Canal Capital Corporation (filed as Exhibit 10 (bw) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). 10(bx) $250,000 Promissory Note dated September 15, 1995 by and between Roger A. Schultz Pension Plan and Canal Capital Corporation (filed as Exhibit 10 (bx) to the Registrant s Form 10-K filed January 25, 1996 and incorporated herein by reference). 10(by) General Release dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation. 10(bz) $325,000 Promissory Note dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation. E-13 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED 10(ca) Mutual Release and Settlement Agreement dated September 30, 1996 by and between John Morrell & Co. 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. 21 Subsidiaries of the Registrant. E-14 CANAL CAPITAL CORPORATION 717 FIFTH AVENUE NEW YORK, NY 10022 SUBSIDIARIES IDENTIFICATION # SY Trading Corp. 13-3244066 Omaha Livestock Market, Inc. 47-0582031 Union Stockyards Co. of Fargo 45-0205040 Sioux Falls Stockyards Company 46-0189565 Wheeling Industrial Corporation 36-2545924 Canal Galleries Corporation 13-3492920 Canal Arts Corporation 13-3492921 DIVISIONS Canal Capital Corporation (parent) 51-0102492 St. Joseph Stockyards St. Paul Union Stockyards Sioux City Stockyards Note: All subsidiaries are 100% owned 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 Auditors Canal Capital Corporation common stock Todman & Co., CPAs, P.C. is traded on the over-the-counter 120 Broadway market through the "pink sheets". New York, NY 10271 Investment Analyst Inquiries General Counsel Analyst inquiries are welcome. Proskauer Rose Goetz & Mendelsohn, LLP 1585 Broadway Phone or write: Michael E. Schultz, New York, NY 10036 President at (212) 826-6040 (212) 969-3000 iii EX-10 2 INDEX TO EXHIBITS Exhibit No. 10(by) General Release dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation. 10(bz) $325,000 Promissory Note dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation. 10(ca) Mutual Release and Settlement Agreement dated September 30, 1996 by and between John Morrell & Co. and Canal Capital Corporation. GENERAL RELEASE KNOW ALL PERSONS BY THESE PRESENTS: 1. That Waste Management Disposal Services of Oregon, Inc. ( Releasor ), for the sole consideration of Three Hundred Twenty Five Thousand Dollars ($325,000), the receipt by promissory note and sufficiency of which is hereby acknowledged, for its subsidiary, affiliated and parent corporations, and their successors, assigns, officers directors, employees, agents, servants, and insurers, hereby release and forever discharge Canal Capital Corporation, ( Releasee ), its subsidiary, affiliated and parent corporations, and its successors, assigns, heirs, personal representatives, executors, administrators, attorneys, officers, directors, employees, agents, servants, and insurers, from all claims, demands, actions, or causes of action on account of any and all known and unknown, foreseen and unforeseen, damages, expenses, costs, losses, liabilities, claims, damages to property, death, bodily injuries, personal injuries, psychological injuries, business losses, and the consequences thereof, which Releasor may now or hereafter have, resulting from or arising out of, or which may or will result from or arise out of, directly or indirectly, the obligations of Releasee under that Option Agreement and Agreement of Purchase and Sale dated December 31, 1987, and the Environmental Cost Sharing Agreement dated December 29, 1988, respectively, by and between Releasor and Releasee (the Agreements ). 2. Releasor understands that it may have sustained or developed, or may sustain or develop in the future, damages of all kinds which may now be unknown, unforeseen, unrecognized or not contemplated by Releasor, but which may or will develop, arise or occur in the future. Releasor also understands that those damages of all kinds which are presently known to it may worsen or become greater in the future. By this General Release, Releasor expressly intend to release and forever discharge Canal Capital Corporation of and from any and all liability and responsibility for any and all such unknown, unforeseen and subsequently arising damages which may otherwise have been covered by the Agreements. 3. Releasor warrants and fully understands that no promise or inducement has been offered to it except as set forth in (I) the Promissory Note between the parties hereto in the principal amount of $325,000.00 and (ii) this General Release and the Promissory Note, that it has signed this General Release without relying upon any statement or representation of Releasee, its attorneys or its representatives, and that the terms of this General Release are contractual and not mere recitals. 4. Releasor also warrants and represents that no person, firm or corporation has received any assignment, subrogation, or other right of substitution to the claims or demands asserted or which could have been asserted with regard to the above-mentioned Agreements. 5. Releasor understands and agrees that the acceptance of the above-mentioned sum is in full accord and satisfaction of disputed claims and that payment of the said sum is not to be construed in any way as an admission of liability on the part of Canal Capital Corporation. 6. Releasor warrants that Robert P. Damico has been legally authorized to execute this General Release on behalf of the Releasor, and it hereby assumes the risk of any mistake of fact and law as to any damages, losses or injuries, whether disclosed or undisclosed, sustained as a result of the above-mentioned Agreements and all matters related and incident thereto. 7. The parties understand that they are entitled to consult professionals of their choice, including engineers and lawyers, regarding the terms of this General Release and the claims and damages included herein. 8. Releasor has carefully read the above and foregoing General Release, and knows and understands its contents, and it has caused the Release to be signed by its duly authorized representative. It fully understands and agrees that the signing of this General Release shall be forever binding, that this is a full and final release of all its claims of every nature and kind whatsoever against the persons and parties released in connection with the above-described Agreements, and that no rescission, modification or release from the terms of this General Release will be made for any mistakes. 9. This General Release is conditioned upon the full and complete performance by the Releasee of all its obligations under that certain Promissory Note issued by Releasee to Releasor in the principal amount of $325,000.00 and dated December 19, 1996. Any failure by Releasee to perform each and every obligation under the Promissory Note shall result in this General Release being deemed null and void and Releasor shall be allowed to seek any and all remedies available to it pursuant to the Agreements. IN WITNESS WHEREOF, Releasor has caused this General Release to be executed by its duly authorized agent this 19th day of December 1996. CAUTION: READ BEFORE SIGNING /s/ Robert P. Damico Robert P. Damico, President Waste Management Disposal Services of Oregon, Inc. PROMISSORY NOTE $325,000 Denver, Colorado December 19, 1996 F O R VALUE RECEIVED, Canal Capital Corporation, a Delaware corporation, it successors and assigns ( Maker ) hereby promises to pay to the order of Waste Management Disposal Services of Oregon, Inc., a Delaware corporation, its successors and assigns ( Payee ), the principal sum of Three Hundred Twenty Five Thousand Dollars ($325,000). The principal balance outstanding from time to time shall accrue interest from the date hereof until paid in full at the prime rate as set forth in the Wall Street Journal on the first business day of June and December of each year, such principal shall be paid in full on December 1, 2001. Interest shall be adjusted each and every June 1 and December 1, until principal has been paid in full based upon the adjustments in the prime rate as set forth above. Principal and interest payments shall be made on December 1, 1997, 1998, 1999 and 2000 using a 30 year amortization schedule for purposes of determining the amount of payment to be made each December 1 of the term of this Promissory Note. Any amounts due on this Note which are not paid within fifteen (15) days when due hereunder shall bear additional interest from the date such payment was due until paid in full at a rate ( Default Rate ) equal to eighteen percent (18%) per annum, borne from time to time on the unpaid principal hereunder, which additional interest shall be payable forthwith upon demand therefor. Interest on this Note shall be calculated on the basis of 365-day year from the actual number of days elapsed in any portion of a month for which interest may be due. This Note is executed to evidence the obligations of Maker under an Environmental Cost Sharing Agreement dated December 29, 1988, by and between Canal Capital Corporation and Oregon Waste Management Disposal Systems of Oregon, Inc. Provided that no Default then exists under this Note, privilege is reserved by Maker to prepay the indebtedness evidenced hereby, in full or in part, without penalty or premium. All payments (including any prepayments hereof) received on account of the indebtedness evidenced by this Note shall be applied first, to amount other than principal and interest due hereunder second, to accrued and unpaid interest on the outstanding principal balance hereof and third, to the outstanding principal balance hereof. All payments made on account of the indebtedness evidenced by this Note shall be made in currency and coin of the United States of America which shall be legal tender for public and private debts at the time of payment. Said payments are to be made at such place as the legal holder hereof may from time to time in writing appoint or, in the absence of such appointment, at the office of Payee at 3900 South Wadsworth Boulevard, Suite 800, Lakewood, Colorado 80235. It is agreed that the occurrence of any of the following events under this note shall be considered a default ( Default ): (a) Default in the payment of principal or interest on this Note within fifteen (15) days following the date due hereunder, (b) in the event that: (i) Maker or any successor or assign shall file a voluntary p e t i tion in bankruptcy or for arrangement, reorganization or other relief under a chapter of the Federal Bankruptcy Code or any similar law, state or federal, now or hereafter in effect, (ii) Maker or any successor or assign shall file an answer or other pleading in any proceeding admitting insolvency, bankruptcy or inability to pay their debts as they mature, (iii) Within thirty (30) days after the filing against Make or any successor or assign of any involuntary proceeding under the Federal Bankruptcy Code or similar law, state or federal, now or hereafter in effect unless such proceedings shall have been dismissed within thirty (30) days of the filing, (iv) all or a substantial part of the assets of Maker or any s u c cessor or assign are sold, attached, seized, subjected to a writ or distress warrant, or are levied upon, unless such attachment, seizure, writ, warrant or levy is vacated within thirty (30) days, (v) An order of discharge entered in respect of the Maker by any bankruptcy court, (vi) M a ker or any successor or assign shall make an assignment for the benefit of creditors or shall admit in writing or its his or her inability to pay its or his or her debts generally as they become due or shall consent to the appointment to a custodian receiver or trustee or liquidator of all or the major part of its or his or her property, or the premises; or (vii) any order appointing a custodian receiver, trustee or liquidator of Maker or any successor or assign or all or a major part of such party s property is not vacated within thirty (30) days following the entry hereof. (c) any attempt by Maker or any successor to assign to offset any amounts due to Payee hereunder: then, at any time thereafter, at the election of the holder or holders hereof and without notice to Maker, the principal sum remaining unpaid hereon, together with accrued interest thereon, shall become at once due and payable at the place of payment as aforesaid, and Payee may proceed to exercise any rights and remedies against Maker or with respect to this Note which Payee may have hereunder, at law, in equity or otherwise. The remedies of Payee, as provided herein, may be pursued singularly, successively or together at the sole discretion of Payee, and may be exercised as often as occasion therefore shall arise. Failure of Payee, for any period of time or on more than one occasion to exercise this option to accelerate the maturiy of this Note shall not constitute a waiver of the right to exercise the same at any time thereafter or in the event of any subsequent Default. No act or omission or commission of Payee, including specifically any failure to exercise any right, remedy or recourse, shal be deemed to be a waiver or release of the same; any such waiver or release is to be effected only through a written documents executed by Payee and then only to the extent specifically recited therein. A waiver or release with reference to any one event shall not be construed as a waiver or release of any subsequent event or as a bar to any subsequent exercise of Payee s rights or remedies hereunder. Except as otherwise specifically required herein, notice of the exercise of any right or remedy granted to Payee by this Note is not required to be given. In the event that : (i) this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceedings, or (ii) if any attorney is retained to represent Payee in any bankruptcy, reorganization, receivership, or other proceedings affecting creditors rights and involving a claim under this Note; Maker shall forthwith upon demand therefore pay to Payee all reasonable attorney s fees, costs and expenses incurred in connection therewith, in addition to all other amounts due hereunder and such costs and expenses shall be deemed to be principal outstanding hereunder. From and after the occurrence of a Default, Payee is expressly authorized to apply payments under this Note as Payee may elect against any or all amounts, or portions thereof, then due and payable hereunder, the outstanding principal balance due under this Note, the unpaid and accrued interest due under this Note, or any combination of the foregoing. Maker, and any and all others who are now or may become liable for all or part of the obligations of Maker under this Note (all of the foregoing being referred to collectively herein as Obligors ) agree to be jointly and severally bound hereby and jointly and severally: (i) waive presentment and demand for payment, notices of non-payment and of dishonor, protest or dishonor, and notice of protest; (ii) waive all notices in connection with the delivery and acceptance hereof; (iii) waive any and all lack of diligence and delays in the enforcement of the payment hereof; (iv) agree that the liability of each of the Obligors shall be unconditional and without regard to the liability of any other person or entity for the payment hereof, and shall not in any manner be affected by an indulgence or forbearance granted or consented to by Payee to any of them with respect hereto; (v) consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Payee with respect to the payment or other provisions hereof, and to the release of any security at any time given for the payment hereof, or any part thereof, with or without substitution, and to the release of any person or entity liable for the payment hereof; and (vi) consent to the addition of any and all other Makers, endorsers, guarantors, and other Obligors for the payment thereof, and to the acceptance of any and all other security for the payment hereof, and agree that the addition of any such Obligors or security shall not affect the liability of any of the Obligors for the payment hereof. Time is of the essence hereof. Maker agrees that this instrument and the rights and obligations of all parties hereunder shall be governed by and construed under the substantive laws of the State of Oregon. The parties hereto intend and believe that each provision in this Note comports with all applicable law. However, if any provision in this Note is found by a court of law to be in violation of any applicable law, and if such court should declare such provision of this Note to be unlawful, void or unenforceable as written, then it is the intent of all the parties hereto that such provision shall be given full force and effect to the fullest possible extent that it is legal, valid and enforceable, and that the remainder of this Note shall be construed as if such unlawful, void or unenforceable provision were to be contained therein, and that the rights, obligations and interests of the Maker and the holder hereof under the remainder of this Note shall continue in full force and effect. Upon any endorsement, assignment or other transfer of this Note by Payee or by operation of law including, without limitation, the endorsement to a third party upon sale of this Note, the term Payee , as used herein, shall mean such endorsee, assignee, or other transferee or successor to Payee then becoming the holder of this Note. This Note shall inure to the benefit of Payee and its successors and assigns. The terms Maker and Obligors , as used herein, shall include the respective successors, assigns, legal and personal representatives, executors, administrators, devises, legatees and heirs of Maker and any other Obligors. Any notice, demand or other communication with any party may desire or may be required to give to any other party shall be in writing, and shall be deemed given if and when personally delivered, or on the second business day after being deposited in the United States registered or certified mail, postage prepaid, addressed to a party of its address set forth below, or to such other address as the party to receive such notice may have designed to all other parties by notice in accordance herewith: a) If to the Payee address to: Waste Management Disposal Service of Oregon, Inc. 3900 South Wadsworth Boulevard, Suite 800 Lakewood, Colorado 80235 Attn: Robert P. Damico, President With a copy to: Waste Management, Inc. Mountain Group 3900 South Wadsworth Boulevard, Suite 800 Lakewood, Colorado 80235 Attn: W. A. Jeffry, Group General Counsel b) If the Maker, addressed to: Canal Capital Corporation 717 Fifth Avenue New York, New York 10022 Attn: Michael E. Schultz, President With a copy to: IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the day and year first above written. CANAL CAPITAL CORPORATION /s/ Michael E. Schultz Michael E. Schultz, President MUTUAL RELEASE AND SETTLEMENT AGREEMENT This Mutual Release and Settlement Agreement is made and executed on this 30th day of September, 1996, by and between John Morrell & Co. and Canal Capital Corporation. WHEREAS, John Morrell & Co. is the tenant and Canal Capital Corporation is the landlord in regard to certain lease agreements covering various parcels of real estate in Sioux City, Iowa, which leases are a continuing obligation of both parties and which are under dispute; and, WHEREAS, John Morrell & Co. is the former tenant and/or occupant and Canal Capital Corporation is the owner of certain other parcels of land in Sioux City, Iowa about which leases have, or may have, expired and the tenant may be subject to potential claims of encroachment, holdover status or other claims concerning the real estate formerly leased and/or formerly or currently occupied by John Morrell & Co. in Sioux City, Iowa; and, WHEREAS, John Morrell & Co. and Canal Capital Corporation are parties in two lawsuits now pending in Sioux City, Iowa before the Iowa District Court of Woodbury County, and which are designed Equity No. 108003C and Law No. 107592C; and, WHEREAS, John Morrell & Co. and Canal Capital Corporation desire to enter into an agreement to amend the existing leases to change the termination dates to the date of this Agreement, to settle all claims and dismiss the two lawsuits pending in Sioux City, Iowa, and to resolve and settle all matters, claims, demands and causes of action of every nature between them concerning any matter in Sioux City, Iowa up to the date of this Agreement, and as a result obtain complete peace between these two parties for all matters in Sioux City, Iowa up to and including the date of this Agreement. NOW, THEREFORE, in consideration of the mutual promises, release and other agreements set forth below together with the consideration described below, John Morrell & Co. and Canal Capital Corporation enter i n t o t his Mutual Release and Settlement Agreement (hereinafter Agreement ), as follows: 1. Payment. John Morrell & Co. shall pay to Canal Capital Corporation consideration of the sum of four million two hundred thousand dollars ($4,200,000.00), with said payment being made and delivered in Sioux City, Iowa at the time this Agreement is executed and receipt of which is acknowledged by execution and delivery of this Agreement by Canal Capital Corporation. 2. Termination of Leases. John Morrell & Co. and Canal Capital Corporation will execute and deliver to John Morrell & Co. for recording in the records of the Auditor and Recorder for Woodbury County, Iowa, an amendment to each lease which remains in force pertaining to property occupied by John Morrell & Co. and owned by Canal Capital Corporation in Sioux City, Iowa with the effect of the Amendment to Leases being to change the termination date of each such lease to the date of this Agreement. A copy of the Amendment to Leases to provide for this termination of leases, and which shall satisfy the terms of this paragraph, is attached to this Agreement as Exhibit l. 3. Dismissal of Lawsuits. John Morrell & Co. and Canal Capital Corporation shall jointly file stipulations of dismissal, with prejudice, and with each party bearing its own costs, with regard to all of the claims and counter-claims in each of the two lawsuits currently pending in Sioux City, Iowa before the Iowa District Court for Woodbury County, Iowa and identified as Equity No. 108003C and Law No. 107592C. Copies of the two Stipulations for Dismissal With Prejudice which shall satisfy the terms of this paragraph, are attached to this Agreement as Exhibit 2. 4. Acknowledgement about Buildings and Fixtures. Canal Capital C o r poration shall execute and deliver to John Morrell & Co. an Acknowledgement statement concerning the ownership of buildings and fixtures on real estate in Sioux City, Iowa which is owned by Canal Capital Corporation and is or has been leased and/or occupied by John Morrell & Co. The copy of the Acknowledgement statement which shall satisfy the terms of this paragraph, is attached to this Agreement as Exhibit 3. 5. Pending Real Estate Transaction. John Morrell & Co. and Canal Capital Corporation expressly agree that notwithstanding any of this Agreement, these parties expressly affirm the pending purchase agreement of real estate being acquired by John Morrell & Co. from Canal Capital Corporation in Sioux City, Iowa, and state that they shall complete and close said real estate transaction in accord with the terms of the Offer to Buy Real Estate and Acceptance pertaining to said transaction. A copy of the Offer to Buy Real Estate and Acceptance referred to in this paragraph is attached to the Agreement as Exhibit 4. 6. Rent Payment. John Morrell & Co. shall continue to pay rental amounts to Canal Capital Corporation pursuant to the terms of the Ruling for Woodbury County on December 27, 1993 in the lawsuit identified as Law No. 107592C, up to and including the date that this Agreement is executed and delivered by the parties. 7. Mutual Releases. John Morrell & Co. and Canal Capital Corporation, by and through their duly authorized and acting officers who have executed this Agreement, hereby acknowledge receipt of the payment, agreements, covenants and other consideration described in this Agreement, and in consideration of such payment and other consideration, John Morrell & Co. hereby releases, acquits and forever discharges Canal Capital Corporation and all subsidiary, affiliated and related companies, their owners, o f f icers, directors, employees, agents, representatives, attorneys, successors, or assigns; and also, Canal Capital Corporation hereby releases, acquits and forever discharges John Morrell & Co. and all subsidiary, affiliated and related companies, their owners, officer, directors, employees, agents, representatives, attorneys, successors or assigns, from any and all liability whatsoever, including all claims, demands and causes of action of every nature affecting them or any of them, jointly or severally, which they, or any of them, may have or ever claim to have by reason of: (a) The Lease dated November 30, 1967 between Sioux City Stockyards Company, as Lessor, and Armour & Co., as Lessee, as amended by instruments dated April 1, 1968, June 4, 1977, and may 7, 1987, which lease subsequently became the obligation of John Morrell & Co., and any and all claims arising from it concerning the lease, or the real estate which is the subject of the lease or the condition and use of real estate. (b) T h e Lease dated January 1, 1980 between Sioux City Stockyards, as Lessor, and John Morrell & Co., as Lessee, which lease expired but about which property John Morrell & Co. continued as a hold- over tenant for a time, and any and all claims arising from it concerning the lease, or the real estate which is the subject of the lease or the condition and use of that real estate. (c) The Lease dated May 15, 1981 between Sioux City Stockyards, as Lessor, and Iowa Meat Processing Company, as Lessee, as amended by an instrument dated May 7, 1987, which lease subsequently became the obligation of John Morrell & Co., and any and all claims arising from it concerning the lease, or the real estate which is the subject of the lease, or the condition and use of that real estate. (d) The Lease dated June 9, 1983 between Sioux City Stockyards, as Lessor, and Iowa Meat Processing Company, as Lessee, which lease subsequently became the obligation of John Morrell & Co., as amended by an instrument dated May 7, 1987, and which lease may have expired but about which property John Morrell & Co. continued to hold-over tenant, and any and all claims arising from it concerning the lease, or the real estate which is the subject of the lease or the condition and use of that real estate. (e) The Lease dated June 12, 1986 between Sioux City Stockyards, as Lessor, and John Morrell & Co., as Lessee, as amended by an instrument dated May 7, 1987, and any and all claims arising from it concerning the lease, or the real estate which is the subject of the lease, or the condition and use of that real estate. (f) An area of real estate adjacent to the real estate which is the subject of the lease dated June 12, 1986, described in sub-paragraph (e) above, which has been used or is occupied by John Morrell & Co. and which John Morrell & Co. may have encroached from time to time without he benefit of a lease, and any and all claims arising from the condition and use of that real estate. (g) Any and all claims made, or which could have been made, in a lawsuit captioned John Morrell & Co., plaintiff v. Canal Capital Corporation, formerly United Stockyards Corporation, defendant; Law No. 107592C filed in the Iowa District Court for Woodbury County, Iowa. (h) Any and all claims made, or which could have been made, in a lawsuit captioned Canal Capital Corporation, plaintiff v. John Morrell & Co., defendant; Equity No. 108003C filed in the Iowa District Court for Woodbury County, Iowa. (i) Any and all claims, demands or causes of action of every kind or nature which existed, or may exist, or may be claimed to exist, between John Morrell & Co. and Canal Capital Corporation as a result of any of their business dealings of any kind or nature in Sioux City, Iowa; the leasing of or use of any land in Sioux City, Iowa; or any other matter arising from activities of John Morrell & Co. and Canal Capital Corporation in and around Sioux City, Iowa up to and including the date that this Agreement is executed by the parties. As further consideration of said payment and other consideration, we, each of us, jointly and severally, hereby agree: (1) That this release covers all injuries and damages, whether known or not and which may hereafter appear or develop arising from the matters referred to. (2) That the above sum, promises, covenants, agreements and other consideration, is all that we or either of us will receive from our claims and no promise for any other or further consideration has been made by anyone. (3) That this release is executed as a compromise settlement of a disputed claim, liability for which is expressly denied by the party and/or parties released, and the payment of the above sum and other consideration does not constitute an admission of liability on the part of any person or entity. (4) That we are executing this release solely in reliance upon our own knowledge, belief and judgment and not upon any representations made by any party released or others in its behalf. (5) John Morrell & Co. and Canal Capital Corporation agree that this Agreement is made in Sioux City, Iowa, and that it is governed by the laws of the State of Iowa. (6) John Morrell & Co. and Canal Capital Corporation agree to cooperate with regard to all steps necessary to complete and give full force to, the terms of this Mutual Release and Settlement Agreement. That we have each read the foregoing release, and understand its terms and freely and voluntarily sign the same. Words and phrases herein shall be construed as in the singular or plural number, and as masculine, feminine or neuter gender, according to the context. Dated at Sioux City, Iowa on the 30th day of September, 1996. CAUTION: THIS IS A RELEASE---READ BEFORE SIGNING! JOHN MORRELL & CO. CANAL CAPITAL CORPORATION By: /s/ John O. Nielsen By: /s/ Reginald Schauder John O. Nielsen Reginald Schauder Chairman and CEO Vice President and Secretary EX-27 3
5 12-MOS OCT-31-1996 OCT-31-1996 480632 535558 295202 0 500000 2014630 12858622 5753088 15489208 3426569 0 0 27033 53138 5002699 15489208 0 9049140 0 5487776 1348179 0 1517271 841733 0 841733 0 0 0 841733 0.16 0.13
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