-----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, JWmaiuqs8wTsC4VSFEI+3MFIznutzj7VMsxMf3IALNfOqnsXq3ba4ZwHfsXSUy/X oNVAHAnv6wKvo9ArN6t/Sw== 0000101821-98-000003.txt : 19980202 0000101821-98-000003.hdr.sgml : 19980202 ACCESSION NUMBER: 0000101821-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980130 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: SEC FILE NUMBER: 002-96666 FILM NUMBER: 98517224 BUSINESS ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128266040 MAIL ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STOCKYARDS CORP DATE OF NAME CHANGE: 19881027 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1997 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, 1998, was approximately $572,000. The number of shares of Common Stock, $.01 par value, outstanding at January 15, 1998 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..... 9 PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters................................. 10 ITEM 6. Selected Financial Data............................. 11 ITEM 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition....... 13 ITEM 8. Financial Statements and Supplementary Data......... 21 ITEM 9. Disagreements on Accounting and Financial Disclosure.......................................... 21 PART III ITEM 10. Directors and Executive Officers of the Registrant.. 22 ITEM 11. Executive Compensation.............................. 23 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................................... 26 ITEM 13. Certain Relationships and Related Transactions...... 28 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 29 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 (five of which operate on land leased from the company) and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, truck stops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. 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". 1 B. Factors That May Affect Future Results This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company s actual results of operations and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be beyond the Company s control. Such factors include, without limitation: overall economic conditions; competition for tenants in the agribusiness; the ability of the Company s tenants to compete in their respective businesses; the effect of fluctuations in supply, demand, international monetary conditions and inflation on the Company s art operations; the effects of forgery and counterfeiting on the Company s art operations; securities risks associated with collections of antiquities and art; and the effect of fluctuations in interest rates and inflation on the Company s indebtedness. These risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this Annual Report on Form 10-K, the words believes, estimates, plans, expects, and anticipates and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. C. Real Estate Operations General Real estate operations, which relate primarily to Canal's former agribusiness operations, resulted in operating income of $1.9 million, while contributing $5.2 million to Canal's revenues for fiscal 1997. 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 a volume based rental agreement with a meat packing company located near the Fargo, North Dakota 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 tenants for this space, it is taking an extended period of time to relet this space. 2 As of October 31, 1997, there are approximately 271 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, 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 has renegotiated this lease as it relates to the Omaha, Nebraska property, and accordingly, Canal s fiscal 1997 revenue from this lease was $924,000. Canal is entitled to receive additional rent if the stockyard's livestock volume or cash flow (as defined) exceeds certain levels. Canal retained the right to receive income from certain volume based rental income leases with two meat packing companies located near the stockyards in Sioux City, Iowa and Fargo, North Dakota. The Sioux City, Iowa lease was terminated and the property sold to the meat packer in fiscal 1996. The Fargo, North Dakota lease is 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 this lease 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 16). Risk Real estate activities in general may involve various degrees of risk, such as competition for tenants, general market conditions and interest rates. Furthermore, there can be no assurance that Canal will be successful in the development, lease or sale of its agribusiness related real estate properties. Competition Canal competes in the area of agribusiness related real estate development with other regional developers, some of which are substantially larger and have significantly greater financial resources than Canal. To a 3 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 General Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned artist of contemporary paintings. As part of this agreement Canal purchased a number of Olitski paintings which it holds for resale with a book value of approximately $1,000,000 at October 31, 1997. 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 63% ($1,775,594) and 37% ($1,035,263) and 64% ($2,311,825) and 36% ($1,277,263) of total art inventory at October 31, 1997 and 1996, respectively. Canal sells its art primarily through two sources, in galleries and at art auctions. In the case of sales in galleries, the Company has consignment arrangements with various art galleries in the United States. In these arrangements Canal consigns its pieces at specific prices to the gallery. In the case of auctions, the Company primarily consigns its art pieces to the two largest auction houses for their spring and fall art auctions. The Company assigns a minimum acceptable price on the pieces consigned. The auction house negotiates a commission on the sale of major pieces. The pieces can be withdrawn at any time before or during the auction. There are no significant differences between the prices obtained in galleries and those obtained at auction. Art operations resulted in an operating loss of approximately $700,000 while contributing approximately $115,000 to Canal's revenues for fiscal 1997. The 1997 loss includes a $350,000 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. Investments Available for Sale Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal s officers and directors also serve as officer and/or directors of this company. This investment (in which Canal s ownership interest is approximately 2%) is carried at market value and the realized gains or losses, if any, are recognized in operating results. Any unrealized gains or losses are reflected in Stockholders Equity. F. Employees At December 31, 1997, 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 (five of which operate on land leased from the company) and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, truck stops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. As landlord, Canal's m a n a gement responsibilities include leasing, billing, repairs and maintenance and overseeing the day to day operations of its properties. Canal's properties at October 31, 1997 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 137 2 37 0 98 West Fargo, ND 1937 81 2 0 17 62 S. St. Paul, MN 1937 119 5 30 21 63 Sioux City, IA 1937 64 2 24 24 14 Omaha, NE 1976 85 2 17 34 32 Sioux Falls, SD 1937 37 0 31 4 2 Total 523 13 139 100 271 The following schedule shows the average occupancy rate and average rental rate at each of Canal's five Exchange Buildings: 1997 1996 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) 46% $12.29 84% $14.48 Sioux City, IA 46% $ 4.14 63% $ 3.59 Omaha, NE 51% $ 4.80 56% $ 4.80 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) None of the leases relating to the above Exchange Buildings represents 10% or more of rental income. 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. 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. 8 Canal filed a Notice of Appeal on October 8, 1996. On September 18, 1997, the Minnesota Court of Appeals affirmed in part and reversed in part the judgement in favor of Pine Valley and Canal paid Pine Valley damages and interest of $388,000 in final settlement of this suit. Canal Capital Corporation v. Valley Pride Pack, Inc. Canal commenced an action in U.S. District Court in Minnesota on October 25, 1996, as the assignee of United Market Services Company, against Valley Pride Pack, Inc. (formerly known as Pine Valley Meats, Inc. and referred to herein as Pine Valley ) for the unpaid livestock fees and charges due under the 1936 Agreement between the predecessors of Pine Valley and Canal. Pine Valley filed a motion to dismiss Canal s complaint on the grounds that the complaint was barred on principles of issue preclusion and the Rooker-Feldman doctrine, or, that the action should be stayed pending the appeal before the Minnesota Court of Appeals in a state court suit involving the same parties. Canal agreed to dismiss the action without prejudice to its right to reinstitute the action following the Minnesota Court of Appeals decision. On September 18, 1997, the Minnesota Court of Appeals affirmed in part and reversed in part a judgement against Canal and Canal paid Pine Valley damages and interest of $388,000 in connection with the state court suit. On September 23, 1997, Canal reinstituted its lawsuit in federal court against Pine Valley for the recovery of livestock fees. Pine Valley has since brought a motion to dismiss this second federal court lawsuit on the same grounds as its motion to dismiss the first federal court lawsuit. There has been no claim asserted by Pine Valley against Canal in this second federal court lawsuit. ITEM 4. Submission of Matters to a Vote of Shareholders None. 9 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stock Matters Canal's stock is traded over-the-counter through the "pink sheets". The high and low price ranges of Canal's common stock for the eight quarters ended October 31, 1997 as reported on the "pink sheets" were: Fiscal 1997 Fiscal 1996 Quarter Ended High Low High Low October 31 ................. $ 1/4 -- $ 5/16 $ 1/4 -- $ 3/16 July 31 .................... 1/4 -- 5/16 5/16 -- 3/16 April 30 ................... 1/4 -- 5/16 1/4 -- 3/16 January 31 ................. 1/4 -- 5/16 1/4 -- 1/16 There were no cash dividends paid during fiscal 1997 or 1996. Canal is subject to restrictions on the payment of cash dividends under certain debt agreements. As of January 20, 1998, Canal had approximately 1,500 holders of record of its common stock, par value $.01 per share. 10 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA THE FOLLOWING DATA HAVE BEEN DERIVED FROM CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE BEEN AUDITED BY TODMAN & CO., CPAs, P.C., INDEPENDENT ACCOUNTANTS. THE INFORMATION SET FORTH BELOW IS NOT NECESSARILY INDICATIVE OF THE RESULTS OF FUTURE OPERATIONS AND SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. (000'S OMITTED, EXCEPT PER SHARE DATA) YEARS ENDED OCTOBER 31, 1997 1996 1995 1994 1993 OPERATING DATA: REVENUES FROM CONTINUING OPERATIONS $5,311 $9,049(2) $4,854(5) $8,460(4) $4,535(3) NET(LOSS)INCOME FROM CONTINUING OPERATIONS ($1,001) $ 842(6) $1,518(9) $1,362(8) ($2,160)(7) EXTRAORDINARY GAIN ON RETIREMENT OF DEBT 0 0 0 0 366 PROVISION FOR INCOME TAXES 0 0 0 0 0 NET(LOSS)INCOME ($1,001) $ 842 ($1,518) $1,362 ($1,794) BASIC (LOSS)INCOME PER SHARE: NET(LOSS)INCOME BEFORE EXTRAORDINARY ITEM ($0.27) $0.16 ($0.40) $0.23 ($0.52) EXTRAORDINARY ITEM 0.00 0.00 0.00 0.00 0.08 NET(LOSS)INCOME ($0.27) $0.16 ($0.40) $0.23 ($0.44) DILUTED (LOSS)INCOME PER SHARE: NET(LOSS)INCOME BEFORE EXTRAORDINARY ITEM ($0.27) $0.13 ($0.40) $0.20 ($0.52) EXTRAORDINARY ITEM 0.00 0.00 0.00 0.00 0.08 NET(LOSS)INCOME ($0.27) $0.13 ($0.40) $0.20 ($0.44) CASH DIVIDENDS PAID $0.00 $0.00 $0.00 $0.00 $0.00 WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,352 4,476 4,327 - DILUTED 5,327 5,327 5,352 5,170 4,933 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued ...) (000'S OMITTED) AT OCTOBER 31, 1997 1996 1995 1994 1993 BALANCE SHEET DATA: CURRENT ASSETS $2,151 $2,015 $1,443 $1,416 $1,321 PROPERTY ON OPERATING LEASES, NET 5,323 7,106 8,385 8,708 9,784 ART INVENTORY NON-CURRENT 2,311 3,089 4,901 5,744 6,074 OTHER ASSETS 3,175 3,279 3,474 4,260 5,184 TOTAL ASSETS $12,960 $15,489 $18,203 $20,128 $22,363 CURRENT LIABILITIES $2,068 $3,426 $2,710 $ 6,122 $15,015 LONG-TERM DEBT 6,050 6,980 11,379 8,062 2,394 STOCKHOLDERS' EQUITY 4,842 5,083 4,114 5,944 4,954 TOTAL LIAB. & STOCKHOLDERS'EQUITY $12,960 $15,489 $18,203 $20,128 $22,363 COMMON SHARES OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327 11(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 increase was due primarily to a $4.4 million increase in sales of real estate which was attributable to the Sioux City, Iowa lease termination and property sale. (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 a $3.8 million gain on the sale of real estate offset by a $1.7 million loss from art operations which included a $1.5 million increase in the art inventory valuation allowance. (7) Includes an $873,000 write-off in connection with a lease termination, a $400,000 provision for litigation settlement and a $300,000 valuation allowance to the art inventory. (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. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - General While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in seven of the last nine years and is involved in litigation with a major tenant in Fargo, North Dakota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1, 6 and 16). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Canal recognized a net loss of $1.0 million for 1997 as compared to the 1996 net income of $0.8 million and the 1995 net loss of $1.5 million. After recognition of preferred stock dividend payments of $182,000 in 1997, $162,000 in 1996 and $193,000 in 1995, the results attributable to common stockholders were a net loss of $1.2 million in 1997, net income of $0.7 in 1996 and a net loss of $1.7 million in 1995. Canal s 1997 net loss of $1.0 million was due primarily to a $3.4 million decrease in income from real estate operations (due to a $2.7 million reduction in real estate sales and a $0.9 million write-down in value of certain property located in Omaha, Nebraska) offset by a $1.0 million reduction in the loss from art operations, a $0.1 million increase in other income and a $0.6 million decrease in interest expense. The 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. 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 1997 decreased by $3.7 million to $5.3 million as compared with 1996 revenues which had increased by $4.2 million to $9.0 million from 1995 revenues of $4.9 million. The 1997 decrease is due primarily to a $2.7 million decrease in sales of real estate. The 1996 increase was due primarily to a $4.4 million increase in real estate sales. 13 Capital Resources and Liquidity While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in seven of the last nine years and is involved in litigation with a major tenant in Fargo, North Dakota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1, 6 and 16). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001, the proceeds of which were used to repay in full the Company s variable rate mortgage notes due May 15, 1998 ($2,605,000), its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes which were due December 31, 1997 ($320,000) plus accrued interest thereon. The purchasers of these notes included certain entities controlled by the Company s Chairman, the Company s Chief Executive Officer and members of their families. The variable rate mortgage notes issued have essentially the same terms and conditions as the variable rate mortgage notes which were repaid. The notes carry interest at the highest of four variable rates, determined on a quarterly basis. These notes, among other things, prohibits Canal from becoming an investment company as defined by the Investment Company Act of 1940; requires Canal to maintain minimum net worth; restricts Canal s ability to pay cash dividends or repurchase stock; requires principal prepayments to be made only out of the proceeds from the sale of certain assets, and requires the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. As a result of the refinancing all of the debt that was repaid on January 8, 1998 was classified as long term debt-related party at October 31, 1997. Cash and cash equivalents of $28,000 at October 31, 1997 increased $17,000 or 165.5% from $11,000 at October 31, 1996. Net cash used by operations in fiscal 1997 was $1.5 million. Substantially all of the 1997 net proceeds from the sale of real estate of $2.5 million and the proceeds from the sale of art of $0.1 million less the cash used in operations was used to reduce outstanding debt and accrued expenses. During 1997 Canal reduced its variable rate mortgage notes by $1.5 million and other long-term debt by $0.1 million for a net 1997 debt reduction of $1.6 million. 14 At October 31, 1997 the Company s current assets exceed current liabilities by $0.1 million as compared to October 31, 1996 when the Company's current liabilities exceeded current assets by $1.4 million, which represented an increase of $0.1 million from 1995. The 1997 increase is due primarily to a decrease in the current portion of long-term debt. The only required principal repayments under Canal's debt agreements for fiscal 1998 will be from the proceeds of the sale of certain assets (if any), and approximately $0.1 million on various fixed mortgages. Canal continues to closely monitor and reduce where possible its overhead expenses and plans to continue to reduce the level of its art inventories to enhance current cash flows. Management believes that its income from operations combined with its cost cutting program and planned reduction of its art inventory will enable it to finance its current business activities. There can, however, be no assurance that Canal will be able to effectuate its planned art inventory reductions or that its income from operations combined with its cost cutting program in itself will be sufficient to fund operating cash requirements. 1997 COMPARED TO 1996 Real Estate Revenues Real estate revenues for 1997 of $5.2 million accounted for 97.8% of the 1997 revenues as compared to revenues of $8.9 million or 97.8% for 1996. 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 (30.6% and 23.4%), Ground lease income (17.8% and 10.6%), volume based rental income (2.1% and 7.4%) and sale of real estate and other income (49.5% and 58.6%) for 1997 and 1996, respectively. The 1997 decrease is due primarily to the $2.7 million decrease in sales of real estate and the $0.9 million write down in value of the Omaha property. The percentage variations in the year to year comparisons are due to the significant decrease in real estate sales for fiscal 1997. Real Estate Expenses Real estate expenses for 1997 of $3.3 million decreased by $0.3 million (8.3%) from $3.6 million in 1996. Real estate expenses are comprised of labor, operating and maintenance (25.2% and 26.7%), depreciation and amortization (10.4% and 10.0%), taxes other than income taxes (7.8% and 15 10.0%), cost of real estate sold (27.1% and 38.3%), provision for litigation settlement (0.0% and 12.0%) and general and administrative and other expenses (29.5% and 3.0%) for 1997 and 1996, respectively. The 1997 decrease in real estate expenses is due primarily to the $0.05 million reduction in cost of real estate sold, a $0.4 million reduction in the provision for litigation settlement offset by the $0.9 million write down in value of the Omaha property. The increase in general and administrative and other expenses reflects the 1997 $0.9 million write down in value of the Omaha property. The percentage variations in year to year comparisons is also due to the decrease in the cost of real estate sold for fiscal 1997. 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 1997 appraisal covered approximately 49% 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 51% 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 1997 Canal recognized a $350,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $2,850,000 as of October 31, 1997 as compared to $2,500,000 and $1,000,000 at October 31, 1996 and 1995, 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. 16 The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. The price at which pieces are consigned is usually in line with appraisals and above the cost of the piece. The amount classified as current represents management's best estimate of the minimum amount of inventory that will be sold in this market. Management believes that the provision discussed above has effectively reduced inventory to its estimated net realizable value. The Company will continually monitor the market for its art inventory and will make adjustments to the carrying value of its art inventory as such adjustments become necessary. The Company's plan to sell inventory at auction is contemplated in the normal course of business. Auction in this context is one of the usual channels used for disposal of its art inventory. The proceeds from these sales are used to reduce the Company's outstanding debt and finance current operations. If these sales are not made the Company has alternate means of raising cash such as sales of real estate, sales of investments available for sale, raising of new capital and further restructuring of debt. Some of these measures were successfully implemented in fiscal 1997. Art Revenues Art revenues for 1997 of $117,000 decreased $78,000 or 40.0% from $195,000 in 1996. Art revenues are comprised of proceeds from the sale of antiquities and contemporary art (97.5% and 100.0%) and commission income on sale of art owned by third parties (2.5% and 0.0%) for 1997 and 1996, respectively. The Company's art inventory was reduced through sales by $0.4 million and $0.3 in fiscal years 1997 and 1996, respectively. Art Expenses Art expenses for 1997 of $0.08 million decreased by $1.1 million (55.9%) from $1.9 million in 1996. Art expenses (excluding valuation allowances) consisted of the cost of art sold (90.7% and 86.9%) and selling, general and administrative expenses (9.3% and 13.1%) for 1997 and 1996, respectively. Included in art expenses is a $0.4 million and a $1.5 million valuation allowance against the Company's art inventory (see Note 10 to the Consolidated Financial Statements) for fiscal years 1997 and 1996, respectively. 17 General and Administrative General and administrative expenses for 1997 of $1.3 million decreased $0.1 million (6.8%) from $1.3 million in 1996. The major components of general and administrative expenses are officers salaries (34.3% and 32.0%), rent (8.9% and 9.1%), legal and professional fees (10.0% and 9.4%), insurance (11.9% and 11.3%) and office salaries (10.0% and 10.1%) for 1997 and 1996, respectively. The percentage increases in officers salaries, legal and professional fees and insurance is a result of the aggregate decrease in total general and administrative expenses. Interest and Other Income Interest and other income of $236,000 for 1997 increased $91,000 (62.2%) from $145,000 in fiscal 1996. The 1997 amounts are comprised primarily of dividend income, interest income and other income. Interest Expense Interest expense for 1997 of $1.0 million decreased by $0.6 million (37.1%) from $1.5 million in 1996. The 1997 decrease is due primarily to the aggregate reduction in the outstanding debt. Interest rates on Canal's variable rate mortgage notes increased to an average of 12.00% in 1997 as compared to an average of 11.94% in 1996 and an average of 11.78% in 1995. At October 31, 1996 Canal had reduced the outstanding face value of these notes from the original $20.0 million to $2.7 million. Other Expense In fiscal 1997 and 1995 Canal incurred other expenses of approximately $200,000 and $286,000, respectively. The 1997 expense was associated with the settlement of a state tax audit while the 1995 expense was due primarily to the write down of Canal s investments. 1996 COMPARED TO 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. 18 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. 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) 19 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, 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. Interest and Other Income Interest and other income of $146,000 for fiscal 1996 decreased $18,000 (11.2%) from $164,000 in fiscal 1995. 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 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. 21 PART III ITEM 10. Directors and Executive Officers of the Registrant The Board of Directors has designated an Executive Committee consisting of Messrs. Edelman and Schultz. The Board of Directors has delegated to the Executive Committee general authority with respect to most matters that would otherwise be considered by the full Board. During fiscal 1997 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. 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 58, has been Chairman of the Board since September 1991 and prior thereto Vice Chairman of the Board and Chairman of the Executive Committee since February, 1985. Mr. Edelman has been a Director, Chairman of the Board, and Chairman of the Executive Committee of Datapoint Corporation ("Datapoint") since March 1985 and has been Datapoint s Chief Executive Officer since February 1993. Mr. Edelman has served as General Partner of Asco Partners, a general partner of Edelman Securities Company L.P. (formerly Arbitrage Securities Company) since June 1984 and is a General Partner and Manager of various investment partnerships and funds. Michael E. Schultz, age 61, has been President and Chief Executive Officer since September 1991 and a Director since 1985; and had been a partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz until December 31, 1994. Gerald N. Agranoff, age 51, has been a Director since 1984. Mr. Agranoff is currently Vice President, General Counsel and Corporate Secretary of Datapoint and has been a Director of Datapoint since 1991. Mr. Agranoff has been a General Partner of Edelman Securities Company L.P. (formerly Arbitrage Securities Company) and Plaza Securities Company for more than five years. Mr. Agranoff is a director of Bull Run Corporation, Atlantic Gulf Communities and The American Energy Group, Ltd.. Mr. Agranoff has also been the General Counsel to Edelman Securities Company L.P. and Plaza Securities Company for more than five years. Reginald Schauder, age 48, has been Vice President, Chief Financial Officer and Treasurer since January 1989 and assumed responsibility as 22 Secretary of the Company in September 1995. Mr. Schauder was corporate controller from July 1985 to 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. 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 1997 exceeded $100,000. SUMMARY COMPENSATION TABLE - Annual Compensation Name and Principal Position Year Salary Michael E. Schultz 1997 $ 165,000 President and Chief 1996 $ 165,000 Executive Officer 1995 $ 162,500 Asher B. Edelman 1997 $ 165,000 Chairman of the Board 1996 $ 165,000 and Executive Committee 1995 $ 162,500 Reginald Schauder 1997 $ 101,200 Vice President, Chief 1996 $ 101,200 Financial Officer 1995 $ 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 $52,000, $68,000 and $87,000 for fiscal years 1997, 1996 and 1995, respectively. Retirement Plans The Canal Capital Corporation Retirement Plan (the "Retirement Plan") provides benefits to eligible employees of the Company and its subsidiaries and affiliates. Directors who are not employees are not eligible to participate in the Retirement Plan. The Retirement Plan is administered by 23 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, 1997. Mr. Schultz has no benefit under the Retirement Plan. For further information on the Retirement Plan see Note 9. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Value Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Name Options at Fiscal Year End At Fiscal Year End Michael E. Schultz 255,500* $ 8,000 Asher B. Edelman 20,000* $ -0- Reginald Schauder 19,600* $ -0- * All options were exercisable at October 31, 1997. 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. 24 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 1997 fiscal year, no options under the 1985 plan were granted and no options previously granted were exercised. At October 31, 1997, options covering an aggregate of 30,500 shares were outstanding under the 1985 Plan and were held by members of the Board of Directors and Executive Committee. The exercise price per share of all outstanding options under the 1985 Plan ranges from $0.13 to $0.25. The expiration dates for outstanding options under the 1985 Plan range from December 2001 to January 2003. Compensation Committee - Interlocks and Insider Participation The Board of Directors (comprised of Asher B. Edelman, Chairman of the Board and Chairman of the Executive Committee, Michael E. Schultz, President and Chief Executive Officer), and Gerald N. Agranoff determines the compensation of the Chief Executive Officer and the Company's other executive officers and administers the Company's 1984 Stock Option Plan and 1985 Stock Option Plan for Directors. In connection with the Company's investment activities, the Executive Committee of the Board of Directors, through Mr. Edelman, has the authority to invest funds of the Company in securities of other companies. Certain funds of the Company have been invested in the securities of other companies in which Mr. Edelman, other directors of the Company or their affiliates are 25 directors or officers, or in which one or more of such persons may also have invested. Since November 1, 1993, such companies included Datapoint Corporation. The Company has filed with the SEC Schedules 13D jointly with Plaza, Mr. Edelman, Edelman Management, Edelman Limited Partnership, certain investment partnerships of which Mr. Edelman is sole or controlling general partner, certain of the companies referred to in the preceding sentence and other persons, indicating that the filing parties constitute groups for purposes of such filings with respect to the acquisition of securities in the companies referred to in the preceding sentence. 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, 1998 were: SECURITIES BENEFICIALLY OWNED No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock Asher B. Edelman 1,769,269 (c) 40.70 Michael E. Schultz 312,135 (c) 6.81 William G. Walters 234,440 (b) 5.42 (a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each individual referred to in the above table has the sole power to direct the voting and disposition of the shares shown. (b) The number reported herein for Mr. Walters includes 117,220 shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co., L.P., of which Mr. Walters is Chief Executive Officer. Mr. Walters has sole power to vote and dispose of the shares described herein. (c) For additional information about beneficial ownership see "Securities Owned by Management" below. 26 SECURITIES OWNED BY MANAGEMENT The following table sets forth certain information as of January 15, 1998, with respect to the beneficial ownership of the Company's Common Stock with respect to all persons who are directors, each of the executives named in the Executive Compensation Table and by all directors and officers as of the most practical date. Unless otherwise indicated, the percentage of stock owned constitutes less than one percent of the outstanding Common Stock and the beneficial ownership for each person consists of sole voting and sole investment power. No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock Gerald Agranoff 25,000 (b) 0.57 Asher B. Edelman 1,769,269 (c)(d) 40.70 Reginald Schauder 19,600 (e) 0.45 Michael E. Schultz 312,135 (f)(g) 6.81 All Directors and Officers as a group (4 persons) 2,126,004 48.53 (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, 355,250 shares of common stock owned by the Edelman 27 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 142,150 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, 39,865 shares of common stock owned by Mr. Edelman's former wife, 22,510 shares of common stock held in three Uniform Gifts to Minors Act accounts for the benefit of Mr. Edelman's children, of which Mr. Edelman's former wife is the custodian 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 19,500 shares subject to options which are presently exercisable. (f) Includes 255,500 shares subject to options which are presently exercisable. (g) The number reported herein for Mr. Schultz excludes 26,620 shares of common stock held by the Canal Capital Corporation Retirement Plan of which Mr. Schultz serves as a trustee 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" 28 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, 1997 the Company filed no reports on Form 8-K. 29 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 30th day of January, 1998. 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 30, 1998 Vice President-Finance Secretary and Treasurer /S/ Reginald Schauder (Principal Financial and Reginald Schauder Accounting Officer) January 30, 1998 /S/ Asher B. Edelman Chairman of the Board Asher B. Edelman and Director January 30, 1998 /S/ Gerald N. Agranoff Gerald N. Agranoff Director January 30, 1998 30 FORM 10-K -- ITEM 14(a)(1) and (2) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following documents are filed as part of this report: (a) 1. Financial Statements -- Independent Accountants Report.......................... F-2 Consolidated Balance Sheets October 31, 1997 and 1996... F-3 Consolidated Statements of Operations and Comprehensive Income for the years ended October 31, 1997, 1996 and 1995............................................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended October 31, 1997, 1996 and 1995............................................. F-7 Consolidated Statements of Cash Flows for the years ended October 31, 1997, 1996 and 1995.......... F-8 Notes to Consolidated Financial Statements.............. F-9 F-1 INDEPENDENT ACCOUNTANTS REPORT To the Stockholders of Canal Capital Corporation: We have audited the accompanying consolidated balance sheets of Canal Capital Corporation (a Delaware corporation) and Subsidiaries as of October 31, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the results of their operations and cash flows for each of the years in the three year period ended October 31, 1997, 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, 6 and 16 to the financial statements, the Company has suffered recurring losses from operations in seven of the last nine years and is involved in various litigations. All of these matters raise substantial doubt about the company s ability to continue as a going concern. Management's plans in regard to these matters are also described in Notes 1, 6 and 16. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. /S/ Todman & Co., CPA s,P.C. New York, N.Y. TODMAN & CO., CPAs, P.C. January 9 , 1998 Certified Public Accountants (N.Y.) F-2 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1997 AND 1996 1997 1996 ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 28,225 $ 10,632 RESTRICTED CASH AND CASH EQUIVALENTS 0 470,000 NOTES AND ACCOUNTS RECEIVABLE, NET 271,891 295,202 ART INVENTORY (NET OF A VALUATION ALLOWANCE OF $ 500,000 AT OCTOBER 31, 1997 AND 1996, RESPECTIVELY) 500,000 500,000 INVESTMENTS 1,151,358 535,558 PREPAID EXPENSES 199,888 203,238 TOTAL CURRENT ASSETS 2,151,362 2,014,630 NON-CURRENT ASSETS: PROPERTY ON OPERATING LEASES, NET OF ACCUMULATED DEPRECIATION OF $ 2,407,533 AND $ 5,753,088 FOR 1997 AND 1996, RESPECTIVELY 5,323,177 7,105,534 ART INVENTORY NON-CURRENT (NET OF VALUATION ALLOWANCE OF $ 2,350,000 AND $2,000,000) AT OCTOBER 31, 1997 AND 1996, RESPECTIVELY 2,310,857 3,089,088 OTHER ASSETS: PROPERTY HELD FOR DEVELOPMENT OR RESALE 2,843,305 2,938,905 DEFERRED LEASING AND FINANCING COSTS 39,655 92,919 DEPOSITS AND OTHER 291,787 248,132 3,174,747 3,279,956 $12,960,143 $15,489,208 ============ =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1997 AND 1996 LIABILITIES & STOCKHOLDERS' EQUITY 1997 1996 CURRENT LIABILITIES: CURRENT PORTION OF LONG-TERM DEBT- RELATED PARTY $ 0 $500,000 CURRENT PORTION OF LONG-TERM DEBT 98,000 64,000 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,871,963 1,984,692 ACCRUED LITIGATION SETTLEMENT 0 850,000 INCOME TAXES PAYABLE 97,995 27,877 TOTAL CURRENT LIABILITIES 2,067,958 3,426,569 LONG-TERM DEBT, LESS CURRENT PORTION 2,375,496 6,130,769 LONG-TERM DEBT, RELATED PARTY 3,675,000 849,000 6,050,496 6,979,769 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: PREFERRED STOCK, $0.01 PAR VALUE: 5,000,000 SHARES AUTHORIZED; 2,997,900 AND 2,703,299 SHARES ISSUED AND OUTSTANDING AND AGGREGATE LIQUIDATION PREFERENCE OF $ 29,979,000 AND $ 27,032,990 AT OCTOBER 31, 1997 AND 1996, RESPECTIVELY 29,979 27,033 COMMON STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,313,794 SHARES ISSUED AT OCTOBER 31, 1997 AND 1996, RESPECTIVELY 53,138 53,138 ADDITIONAL PAID-IN CAPITAL 26,826,293 26,636,939 ACCUMULATED DEFICIT (10,194,335) (9,010,999) 986,865 SHARES OF COMMON STOCK HELD IN TREASURY, AT COST (11,003,545) (11,003,545) COMPREHENSIVE INCOME: PENSION VALUATION RESERVE (1,485,641) (1,619,696) UNREALIZED GAIN ON INVESTMENTS AVAILABLE FOR SALE 615,800 0 4,841,689 5,082,870 $12,960,143 $15,489,208 ============ =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 1997 1996 1995 REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE $2,496,943 $5,170,872 $ 770,012 RENTAL INCOME 1,591,005 2,072,593 2,090,068 GROUND LEASE INCOME 924,000 936,000 972,500 VOLUME BASED RENTAL INCOME 110,414 657,184 729,335 OTHER INCOME 71,109 17,091 31,892 5,193,471 8,853,740 4,593,807 REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 896,698 1,386,029 431,736 LABOR, OPERATING AND MAINTENANCE 833,181 964,918 980,626 DEPRECIATION AND AMORTIZATION 343,741 359,263 364,594 TAXES OTHER THAN INCOME TAXES 256,800 360,000 530,202 PROVISION FOR LITIGATION SETTLEMENT (60,359) 434,918 0 WRITE DOWN OF REAL ESTATE PROPERTY 936,689 0 0 GENERAL AND ADMINISTRATIVE 104,606 107,239 90,888 3,311,356 3,612,367 2,398,046 INCOME FROM REAL ESTATE OPERATIONS 1,882,115 5,241,373 2,195,761 ART OPERATIONS: ART REVENUES: SALES 114,350 195,400 246,550 OTHER REVENUES 2,982 0 13,740 117,332 195,400 260,290 ART EXPENSES: COST OF ART SOLD 432,286 326,399 407,557 VALUATION RESERVE 350,000 1,500,000 500,000 SELLING, GENERAL AND ADMINISTRATIVE 44,541 49,010 79,803 826,827 1,875,409 987,360 LOSS FROM ART OPERATIONS (709,495) (1,680,009) (727,070) SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 Continued ... 1997 1996 1995 GENERAL AND ADMINISTRATIVE EXPENSE (1,256,854) (1,348,179) (1,380,415) (LOSS) INCOME FROM OPERATIONS (84,234) 2,213,185 88,276 OTHER INCOME (EXPENSE): INTEREST AND OTHER INCOME 236,470 145,819 164,209 INTEREST EXPENSE (804,719) (1,494,271) (1,433,828) INTEREST EXPENSE-RELATED PARTY (149,000) (23,000) (51,000) OTHER EXPENSE (200,000) 0 (285,871) (917,249) (1,371,452) (1,606,490) (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (1,001,483) 841,733 (1,518,214) PROVISION FOR INCOME TAXES 0 0 0 NET (LOSS) INCOME ($1,001,483) $ 841,733 ($1,518,214) OTHER COMPREHENSIVE (LOSS) INCOME: MINIMUM PENSION LIABILITY ADJUSTMENT 134,055 116,975 (327,928) UNREALIZED GAIN ON INVESTMENTS AVAILABLE FOR SALE 615,800 0 0 COMPREHENSIVE (LOSS) INCOME ($251,628) $ 958,708 ($1,846,142) (LOSS) INCOME PER COMMON SHARE: - BASIC ($0.27) $ 0.16 ($0.40) - DILUTED ($0.27) $ 0.13 ($0.40) WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,326,929 4,326,929 4,351,680 - DILUTED 5,326,929 5,326,929 5,351,680 SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995 COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, NOVEMBER 1, 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 -------------------- --------------------- BALANCE, OCTOBER 31, 1995 5,313,794 $53,138 2,358,542 $23,585 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 344,757 3,448 -------------------- --------------------- BALANCE, OCTOBER 31, 1996 5,313,794 $53,138 2,703,299 $27,033 NET LOSS 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 294,601 2,946 -------------------- --------------------- BALANCE, OCTOBER 31, 1997 5,313,794 $53,138 2,997,900 $29,979 ==================== ===================== ADDITIONAL TREASURY PAID-IN ACCUMULATED COMPREHENSIVE STOCK, CAPITAL DEFICIT (LOSS)INCOME AT COST BALANCE, NOV. 1, 1994 $26,262,346 ($7,979,331) ($1,408,74 ($11,003,545) NET INCOME 0 (1,518,214) 0 0 PREFERRED STOCK DIVIDEND 205,662 (193,148) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 (327,928) 0 UNREALIZED GAIN ON INVEST. 0 0 0 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 DIVIDEND 168,931 (162,039) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 116,975 0 UNREALIZED GAIN ON INVEST. 0 0 0 0 --------------- -------------- ---------------- BALANCE, OCT. 31, 1996 $26,636,939 ($9,010,999) ($1,619,696) ($11,003,545) NET INCOME 0 (1,001,483) 0 0 PREFERRED STOCK DIVIDEND 189,354 (181,853) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 134,055 0 UNREALIZED GAIN ON INVEST. 0 0 615,800 0 --------------- -------------- ------------ ------------- BALANCE, OCT. 31, 1997 $26,826,293 ($10,194,335) ($ 869,841) ($11,003,545) ============== ============== ================ ============== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) ($1,001,483) $ 841,733 ($1,518,214) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: (CREDIT)PROV. FOR LITIGATION SETTLEMENT (60,359) 434,918 0 DEPRECIATION AND AMOR4TIZATION 419,897 434,532 412,505 GAIN ON SALES OF REAL ESTATE (1,600,245) (3,784,843) (338,276) VALUATION RESERVE - ART INVENTORY 350,000 1,500,000 500,000 CHANGES IN ASSETS AND LIABILITIES: NOTES AND ACCOUNTS RECEIVABLES, NET 23,311 (53,424) 351,045 ART INVENTORY, NET 428,231 311,507 343,537 PREPAID EXPENSES AND OTHER, NET 826,419 (677,535) (254,208) PAYABLES AND ACCRUED EXPENSES, NET (892,611) 203,221 690,964 NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (1,506,840) (789,891) 187,353 CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF REAL ESTATE 2,496,943 5,170,872 770,012 CAPITAL EXPENDITURES (47,237) (128,626) (91,740) NET CASH PROVIDED BY INVESTING ACTIVITIES 2,449,706 5,042,246 678,272 CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM LONG-TERM DEBT-RELATED PARTIES 0 0 1,032,275 REPAYMENT OF SHORT-TERM BORROWINGS (466,000) 0 (787,305) REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (929,273) (3,886,473) (1,029,440) NET CASH USED BY FINANCING ACTIVITIES (1,395,273) (3,886,473) (784,470) DECREASE (INCREASE) IN RESTRICTED CASH AND CASH EQUIVALENTS 470,000 (470,000) 0 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,593 (104,118) 81,155 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,632 114,750 33,595 CASH AND CASH EQUIVALENTS AT END OF YEAR $28,225 $ 10,632 $114,750 ============ ========== ============== NOTE: IN FISCAL 1997, 1996 AND 1995,$ 181,183, $ 162,039 AND $ 193,148, RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE OF 294,611, 344,757 AND 303,348 , RESPECTIVELY, OF SHARES OF PREFERRED STOCK. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Canal Capital Corporation ("Canal"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936. Canal was a wholly-owned subsidiary of Canal-Randolph Corporation until June 1, 1984, when Canal-Randolph Corporation distributed to its stockholders all of the outstanding shares of Canal's common stock, under a plan of complete liquidation. Canal is engaged in 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 seven of the last nine years and is involved in litigation with a major tenant in Fargo, North Dakota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1, 6 and 16). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Canal continues to closely monitor and reduce where possible its overhead expenses and plans to continue to reduce the level of its art inventories to enhance current cash flows. Management believes that its income from operations combined with its cost cutting program and planned reduction of its art inventory will enable it to finance its current business activities. There can, however, be no assurance that Canal will be able to effectuate its planned art inventory reductions or that its income from operations combined with its cost cutting program in itself will be sufficient to fund operating cash requirements. F-9 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Principles of Consolidation -- The consolidated financial statements include the accounts of Canal Capital Corporation ("Canal") and its 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 $208,000 and $150,000 at October 31, 1997 and 1996, respectively, and is included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 1997, 1996 and 1995 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) Investments Available for Sale -- Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal s officers and directors also serve as officers and/or directors of this company. This investment (in which Canal s ownership interest is approximately 2%) is carried at market value and the realized gains or losses, if any, are recognized in operating results. Any unrealized gains or losses are reflected in Stockholders Equity. C) Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment. Property held for Development or Resale -- Property held for development or resale consist of approximately 271 acres located in the midwest of undeveloped land not currently utilized for corporate purposes nor included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value. F-10 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 49% and 66% of the inventory value at October 31, 1997 and 1996, respectively. The remaining 51% and 34% at October 31, 1997 and 1996, 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 63% ($1,775,594) and 37% ($1,035,263) and 64% ($2,311,825) and 36% ($1,277,263) of total art inventory at October 31, 1997 and 1996, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. 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) 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. F-11 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED H) 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 available for sale, if any, are recognized, on a specific identification method, on a trade date basis. I) Income Taxes -- Canal and its subsidiaries file a consolidated Federal income tax return. Deferred income taxes, if any, are provided for temporary differences between financial reporting and taxable basis of assets and liabilities. J) Statements of Cash Flows -- The company considers all short-term investments with a maturity of three months or less to be cash equivalents. Cash equivalents primarily include bank, broker and time deposits with an original maturity of less than three months. These investments are carried at cost, which approximates market value. Canal made federal and state income tax payments of $40,000, $38,000 and $47,000 and interest payments of $954,000, $1,297,000 and $1,485,000 in 1997, 1996 and 1995, respectively. K) Earnings Per Share -- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 Earnings Per Share, which will require companies to present basic earnings per share (EPS) and diluted earnings per share, instead of the primary and fully diluted EPS that is currently required. The new standard requires additional information disclosure, and also makes certain modifications to the currently applicable EPS calculations defined in Accounting Principles Board No. 15. The new standard is required to be adopted by all public companies for reporting periods ending after December 15, 1997, and will require restatement of EPS for all prior periods reported. The Company decided on earlier adoption under the requirement of SFAS No. 128, for the year ended October 31, 1997, 1996 and 1995. L) Comprehensive Income -- Effective for fiscal years beginning after December 15, 1997, Statement of Financial Accounting Standards No. 130 F-12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED requires that comprehensive income and its components, as defined in the statement, be reported in a financial statement. SFAS No. 130 does not require that comprehensive income and its components be reported in an income statement. The Company elected for early adoption of SFAS No. 130 and is presenting its Consolidated Statement of Operations in a single step form at October 31, 1997 and, accordingly, certain reclassifications of prior year amounts have been made to conform to this presentation. M) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. INVESTMENTS AVAILABLE FOR SALE At October 31, the investments available for sale consisted of the following: ($ 000's Omitted) 1997 1996 Aggregate market value..................... $1,151 $ 535 Aggregate carrying value................... $1,151 $ 535 Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal s officers and directors also serve as officers and/or directors of this company. This investment (in which Canal s ownership interest is approximately 2%) is carried at market value and the realized gains or losses, if any, are recognized in operating results. Any unrealized gains or losses are reflected in Stockholders Equity. In fiscal 1997 Canal recognized an unrealized gain on investments of $616,000 which is shown as a separate component of Stockholders Equity. 4. NOTES AND ACCOUNTS RECEIVABLE Included in notes and accounts receivable at October 31, 1997 and 1996 were the current portion of notes receivable in the amount of $25,000 which F-13 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED were generated by real estate and other sales. Notes and accounts receivable is shown net of a provision for doubtful accounts in the amount of $20,000 and $12,000 for fiscal 1997 and 1996, respectively. 5. 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 has renegotiated the lease as it relates to the Omaha, Nebraska property, and accordingly, Canal s fiscal 1997 revenue from this lease was $924,000. Canal could be entitled to receive additional rent if the stockyards livestock value or cash flow (as defined) exceeds certain levels. In addition, Canal retained the right to receive income from certain volume based rental income agreements with various meat packing companies located near the stockyards. The income from the ground lease is included in Canal's operating results as Real Estate operations. Revenues from the volume based rental agreements for the three years ended October 31, 1997 were: ($ 000's Omitted) 1997 1996 1995 Sioux City, Iowa (1) $ 0 $ 537 $ 629 Fargo, North Dakota (2) 110 120 100 $ 110 $ 657 $ 729 (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 were no such revenues in fiscal 1997. (2) Canal is involved in litigation with the operator under this lease.(see Note 15). F-14 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. BORROWINGS At October 31, 1997, substantially all of Canal's real properties, the stock of certain subsidiaries, the investments and a substantial portion of its art inventories are pledged as collateral for the following obligations: October 31, ($ 000's Omitted) 1997 1996 Variable rate mortgage notes due May 15, 1998 ................................ $ 2,655 $ 3,960 Variable Rate Mortgage Notes due September 15, 1998 - related party ......... 700 849 11% mortgage note; original principal amount $1,697; due April 1, 2011; payable in monthly installments (including interest) of $17....... 1,266 1,336 9.5% mortgage note; original principal amount $472; due November 1, 2012; payable in monthly installments (including interest) of $4........ 405 414 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........ 477 485 Other Note - related party....................... 320 500 Other Note ...................................... 325 0 Total ........................................... 6,148 7,544 Less -- current maturities ...................... 98 564 Long-term debt $ 6,050 $ 6,980 F-15 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, 1997, the interest rate was 12.00%. This rate remained unchanged at November 15, 1997 and for the next successive 90-day period. The average interest rate on these notes during 1997 was 12.00%. 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. The balance outstanding at October 31, 1997 of these notes was $2,655,000. 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. The balance outstanding at October 31, 1997 of these notes was $700,000. F-16 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 $150,000 convertible note also due December 31, 1996. Both these notes were subsequently extended to December 31, 1997. The $150,000 note is convertible at the holder s option into one million (1,000,000) shares of the Company's common stock. The notes pay quarterly interest at the prime rate per annum (which was 8.5% at October 31, 1997) 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 balance outstanding at October 31, 1997 of these notes was $320,000. On December 1, 1997 the Company issued a $325,000 promissory note due December 1, 2001 as the result of a settlement agreement with the buyer of a parcel of land located in Portland, Oregon which Canal sold in 1988. The note carries interest at the prime rate (8.5% at October 31, 1997) adjusted semi-annually and requires principal and interest payments in each of the first four years (based on a 30 year amortization schedule) commencing December 1, 1997. The balance is payable in full on December 1, 2001. On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001, the proceeds of which were used to repay in full the Company s variable rate mortgage notes due May 15, 1998 ($2,605,000), its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes which were due December 31, 1997 ($320,000) plus accrued interest thereon. The purchasers of these notes included certain entities controlled by the Company s Chairman, the Company s Chief Executive Officer and members of their families. The variable rate mortgage notes issued have essentially the same terms and conditions as the variable rate mortgage notes which were repaid. These notes carry interest at the highest of four variable rates, determined on a quarterly basis. These notes, among other things, prohibits Canal from becoming an investment company as defined by the Investment Company Act of 1940; requires Canal to maintain minimum net worth; restricts Canal s ability to pay cash dividends or repurchase stock; requires principal prepayments to be made only out of the proceeds from the sale of certain assets, and requires the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. As a result of the refinancing all of the debt that was repaid on January 8, 1998 was classified as long term debt-related party at October 31, 1997. F-17 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The scheduled maturities and sinking fund requirements of long-term debt during the next five years are as follows ($ 000's Omitted): Year Ending Amount 1998 $ 98 1999 100 2000 100 2001 3,800 2002 410 Thereafter 1,640 $ 6,148 7. 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 year ended October 31, 1994 approximately $760,000 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 1,379,952 2011 283,972 $7,047,924 Deferred income tax assets as of October 31, 1997, 1996 and 1995, due primarily to net operating losses, have been reduced to zero by valuation reserves of approximately $1,200,000, $2,700,000 and $2,600,000, respectively due to uncertainties concerning their realization. F-18 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. PENSION PLANS Canal has a defined benefit pension plan covering substantially all of its salaried employees (the "Plan"). The benefits are based on years of service and the employee's compensation earned each year. The Company's funding policy is to contribute the amount that can be deducted for federal income tax purposes. Accordingly, the Company will make a contribution of approximately $162,000 for fiscal 1997 and has made contributions of approximately $164,000 for fiscal 1996 and $160,000 for fiscal 1995. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Assets of the plan were invested in U.S. Government securities, common stocks and antiquities. The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated balance sheets at October 31, 1997 and 1996. Plan Year ($ 000's Omitted) 1997 1996 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,487 and $1,451 in 1997 and 1996, respectively ............. $ 1,490 $ 1,452 Additional benefit due to assumed future compensation levels ......................... 25 21 Projected benefit obligation (1) .............. 1,515 1,473 Plan assets at fair value ..................... 1,105 884 Projected benefit obligation in excess of plan assets .............................. 410 588 Unrecognized net asset ........................ 126 152 Unrecognized net loss ......................... (1,636) (1,792) Valuation reserve to recognize accrued pension costs in the consolidated balance sheets .... 1,486 1,620 Accrued pension cost included among accrued expenses in the consolidated balance sheets.. $ 386 $ 568 (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, 1997, 1996 and 1995 included the following components: Plan Year ($ 000's Omitted) 1997 1996 1995 Service costs - benefits earned during the period ............................ $ 8 $ 8 $ 6 Interest cost on projected benefit obligation ............................ 106 104 114 (Return) loss on assets .............. (250) (95) 34 Net amortization and deferral ........... 193 35 (121) Net period pension cost ................. $ 57 $ 52 $ 33 Assumptions used in computing the 1997, 1996 and 1995 pension cost were: 1997 1996 1995 Discount rate ........................... 7.25% 7.75% 7.25% Rate of increase in compensation level ................................. 5.75% 6.25% 5.75% Expected long-term rate of return on assets ............................. 10.00% 10.00% 10.00% 9. ART OPERATIONS Canal's art dealing operations consist primarily of inventories held for resale of antiquities primarily from ancient Mediterranean cultures and contemporary art primarily of one artist. Canal carries on its art dealing operations through various consignment agreements relating to its antiquities and contemporary art inventories. F-20 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned artist of contemporary paintings. As part of this agreement Canal purchased a number of Olitski paintings which it holds for resale with a book value of approximately $1,000,000 at October 31, 1997. 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 63% ($1,775,594) and 37% ($1,035,263) and 64% ($2,311,825) and 36% ($1,277,263) of total art inventory at October 31, 1997 and 1996, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. 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 1997 appraisal covered approximately 49% 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 51% 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 1997 Canal recognized a $350,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $2,850,000 as of October 31, 1997 as compared to $2,500,000 and $1,000,000 at October 31, 1996 and 1995, 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. Canal will continue to closely monitor the market for its art inventory and will make adjustments to the carrying value of its inventory as such adjustments become necessary. The Company's plan to sell inventory at auction is contemplated in the normal course of business. Auction in this context is one of the usual channels used for disposal of its art inventory. The proceeds from these sales are used to reduce the Company's outstanding debt and finance current operations. If these sales are not made, the Company has alternate means of raising cash such as sales of investments, sale of real estate, raising of new capital and further rescheduling of debt. Some of these measures were successfully implemented in fiscal 1997. Canal's art operations have generated operating losses of approximately $709,000, $1,680,000 and $727,000 on revenues of approximately $117,000, $195,000 and $260,000 for the years ended October 31, 1997, 1996 and 1995, 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 approximately $1,683,000 and $1,268,000 of art inventory on consignment with third party dealers at October 31, 1997 and 1996, respectively. F-22 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ART INVENTORY - The Company classified its art inventory for the two years ended October 31, 1997 and 1996 as follows ($ 000's Omitted): Current Portion Non-Current Portion Total 1997 1996 1997 1996 1997 1996 Antiquities $ 900 $ 900 $ 2,026 $2,212 $ 2,926 $ 3,112 Contemporary 100 100 2,635 2,877 2,735 2,977 Valuation Allowance (500) (500) (2,350) (2,000) ( 2,850) (2,500) Net Value $ 500 $ 500 $ 2,311 $3,089 $ 2,811 $ 3,589 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, 1997, 1996, and 1995 were as follows: ($ 000's Omitted) 1997 1996 1995 Antiquities $ 77 $ 195 $ 246 Contemporary 40 0 14 $ 117 $ 195 $ 260 F-23 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. 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, 1997: Year ended October 31, ($ 000's Omitted) 1998 ........................................ $ 159 1999 ........................................ 26 Minimum payments required ....................... 185 Rental income under subleases ................... 74 Net minimum payments required ................... $ 111 Rent expense under these and other operating leases for the years ended October 31, 1997, 1996 and 1995 were as follows: ($ 000's Omitted) 1997 1996 1995 Minimum rentals ................... $ 159 $ 160 $ 116 Less: sublease rentals ........... (47) (39) (40) $ 112 $ 121 $ 76 F-24 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. STOCK OPTION PLAN Under Canal's 1984 Employee and 1985 Directors Stock Option Plans, $550,000 and 264,000 shares, respectively, of Canal's common stock have been reserved for option grants. The purchase price of shares subject to each option granted, under the Employee and Directors Plans, will not be less than 85% and 100%, respectively, of their fair market value at the date of grant. At October 31, 1997 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, 1997, there were 323,000 exercisable options outstanding under these plans. Transactions under these plans are summarized as follows: Shares Option Price Range Balance outstanding October 31, 1995.... 327,000 $0.125-$8.625 Options granted ........................ 0 - - Options expired ........................ 0 $ - - Balance outstanding October 31, 1996.... 327,000 $0.125-$8.625 Options granted 0 - - Options expired (4,000) $8.625-$8.625 Balance outstanding October 31, 1997.... 323,000 $0.125-$5.375 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, 1997, 1996 and 1995. In October, 1995, the Financial Accounting Standards Board issued Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which becomes effective for transactions entered into in fiscal years 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 adopted the disclosure requirements for this statement effective for the year ending October 31, 1996, while continuing to measure compensation cost using APB 25. Had compensation cost been determined on the basis of SFAS No. 123, the proforma effect on the Company s net income and earnings per share for the years ended October 31, 1997 and 1996 would have been deminimus. 12. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID Basic earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted average number of common share outstanding during the period. Diluted earnings (loss) per share reflect per share amounts that would have resulted if dilutive potential common stock had been reported in the financial statements. For the Year Ended October 31, 1997 Income Shares Per-share (Numerator) (Denominator) Amount Net loss $(1,001,000) Less preferred stock dividends (182,000) Loss available to common stock- holders-basic earnings per share (1,183,000) 4,327,000 $(0.27) Effect of dilutive securities: Options (antidilutive) - - 8.5% convertible note (antidilutive) 13,000 1,000,000 Loss available to common stock- holders-diluted earnings per share $(1,170,000) 5,327,000 $(0.27) F-26 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Year Ended October 31, 1996 Income Shares Per-share (Numerator) (Denominator) Amount Net income $ 842,000 Less preferred stock dividends (162,000) Income available to common stock- holders-basic earnings per share 680,000 4,327,000 $ 0.16 Effect of dilutive securities: Options (antidilutive) - - 7% convertible note (antidilutive) 11,000 1,000,000 Net income available to common stock- holders-diluted earnings per share $ 691,000 5,327,000 $ 0.13 For the Year Ended October 31, 1995 Income Shares Per share (Numerator) (Denominator) Amount Net loss $(1,518,000) Less preferred stock dividends (193,000) Loss available to common stock- holders-basic earnings per share (1,711,000) 4,327,000 $(0.40) Effect of dilutive securities: Options (antidilutive) - - 7% convertible note 11,000 1,000,000 Loss available to common stock- holders-diluted earnings per share $(1,700,000) 5,327,000 $(0.40) F-27 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED During the fiscal years ended October 31, 1997, 1996 and 1995, the Company had 323,000, 327,000 and 327,000 options outstanding, respectively. The options were not included in the computation of diluted earnings (loss) per share because the effect of exercisable price conversion would be antidilutive. There were no dividends declared on common stock during the years ended October 31, 1997, 1996 and 1995. Dividends declared on preferred stock during the years ended October 31, 1997, 1996 and 1995 were approximately $182,000, $162,000 and $193,000. 13. PREFERRED STOCK ISSUANCE On October 15, 1986 Canal exchanged 986,865 shares of its $1.30 Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of its outstanding common stock. Since the exchange, the Company has issued an additional 1,991,035 shares in the form of stock dividends for a total outstanding at October 31, 1997 of 2,977,900. 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-two of the forty-four quarterly payments have been paid in additional stock resulting in the issuance of 1,991,035 shares recorded at their fair value at the time of issuance. Canal is restricted from paying cash dividends by certain of its debt agreements (See Note 6). The last cash dividend paid on Canal's preferred stock was in September 1989. The quarterly dividends payable September 30, 1997 and December 31, 1997 were passed by the Board of Directors. It is the Company s intention to pay its next dividend on the preferred stock on June 30, 1998 at which time a one year dividend will have accumulated. The dividend planned for June 30, 1998 will also be paid in additional stock. F-28 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 thereof. Whenever quarterly dividends payable on the Preferred Stock are in arrears in the aggregate amount at least equal to six full quarterly dividends (which need not be consecutive), the number of directors constituting the Board of Directors of Canal shall be increased by two and the holders of the Preferred Stock shall have, in addition to the rights set forth above, the special right, voting separately as a single class, to elect two directors of Canal to fill such newly created directorships at the next succeeding annual meeting of shareholders (and at each succeeding annual meeting of shareholders thereafter until such cumulative dividends have been paid in full). 14. VALUATION RESERVE The Valuation Reserve represents the excess of additional minimum pension liability required under the provisions of SFAS No. 87 over the unrecognized prior service costs of former stockyard employees. Such excess arose due to the decline in the market value of pension assets available for pension benefits of former employees, which benefits were frozen at the time the stockyard operations were sold in 1989. The excess will be expensed as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists. F-29 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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, ($ 000's Omitted) 1997 1996 1995 Identifiable assets: Art ............................... $ 2,818 $ 3,833 $ 5,408 Real estate ....................... 8,630 10,478 11,630 Corporate ......................... 1,512 1,178 1,165 $ 12,960 $ 15,489 $ 18,203 ($ 000's Omitted) 1997 1996 1995 Capital expenditures: Art ............................... $ 0 $ 0 $ 0 Real estate ....................... 41 125 75 Corporate ......................... 6 4 17 $ 47 $ 129 $ 92 Income from real estate operations includes gains (losses) on sales of real estate of $1.6 million, $3.8 million and $0.3 million in 1997, 1996 and 1995, respectively. Art identifiable assets include approximately $1.0 million and $1.3 million of art inventory in galleries or on consignment abroad as of October 31, 1997 and 1996, respectively. F-30 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-31 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. 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. On September 18, 1997, the Minnesota Court of Appeals affirmed in part and reversed in part the judgement in favor of Pine Valley and Canal paid Pine Valley damages and interest of $388,000 in final settlement of this suit. Canal Capital Corporation v. Valley Pride Pack, Inc. Canal commenced an action in the U.S. District Court in Minnesota on October 25, 1996, as the assignee of United Market Services Company against Valley Pride Pack, Inc. (formerly known as Pine Valley Meats, Inc. and referred to herein as Pine Valley ) for the unpaid livestock fees and charges due under the 1936 Agreement between the predecessors of Pine Valley and Canal. Pine Valley filed a motion to dismiss Canal s complaint on the grounds that the complaint was barred on principles of issue preclusion and the Rooker-Feldman doctrine, or, that the action should be stayed pending the appeal before the Minnesota Court of Appeals in a state court suit involving the same parties. Canal agreed to dismiss the action without prejudice to its right to reinstitute the action following the Minnesota Court of Appeals decision. On September 18, 1997, the Minnesota Court of Appeals affirmed in part and reversed in part a judgement against Canal and Canal paid Pine Valley damages and interest of $388,000 in connection with the state court suit. On September 23, 1997, Canal reinstituted its lawsuit in federal court against Pine Valley for the recovery of livestock fees. Pine Valley has since brought a motion to dismiss this second federal court lawsuit on the same grounds as its motion to dismiss the first federal court lawsuit. There has been no claim asserted by Pine Valley against Canal in this second federal court lawsuit. 17. 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 became 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 F-33 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. 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, 1997: ($ 000's Omitted) Accumulated Location Land Improvements Depreciation Value St. Joseph, MO $ 862 $ 304 $ (178) $ 988 West Fargo, ND 2 292 (216) 78 S. St. Paul, MN 663 2,769 (847) 2,585 Sioux City, IA 446 1,009 (964) 491 Omaha, NE 1,000 0 0 1,000 Sioux Falls, SD 118 98 (77) 142 Corporate Office 0 168 (126) 42 $ 3,091 $ 4,640 $ (2,408) $ 5,323 F-34 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, 1997: (5) ($ 000's Omitted) Volume Year Ending Rental Ground Based October 31, Income (1) Lease(2) Income(3) Total 1998 $ 1,800 $ 924 $ 0 $ 2,724 1999 1,900 924 0 2,824 2000 2,000 0 0 2,000 2001 (4) 2,100 0 0 2,100 2002 2,200 0 0 2,200 $10,000 $ 1,848 $ 0 $ 11,848 (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 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 is taking an extended period of time to relet this space. (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 $100,000 annually for the past five years. (4) The stockyard ground lease has a ten year renewal option (adjusted for CPI increases) which can be exercised November 1, 1999 on essentially the same terms that currently exist. Canal anticipates that the option will be exercised. (5) All real estate leases are accounted for as operating leases. F-35 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 19. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for non-trading purposes) for which it is practicable to estimate that value. a) Cash and cash equivalents: The carrying amount approximates fair market value because of the short maturities of such instruments. b) Accrued Litigation: The carrying amount approximates the fair value. c) Long-Term Debt (See Note 13): The fair value of the Company s long- term debt, including the current portion thereof, is estimated based on the quoted market price for the same or similar issues. d) Long-Term Debt Related Party (see Note 13): It is not practicable to estimate the fair value of the related party debt. October 31, 1997 1996 ($ 000's Omitted) Carrying Fair Carrying Fair Amount Value Amount Value Cash, restricted cash and cash equivalents $ 28 $ 28 $ 481 $ 481 Accrued Litigation 0 0 850 850 Current Portion of Long- Term Debt - related party 0 (d) 500 (d) Current Portion of Long- Term Debt 98 98 64 64 Long-Term Debt 2,375 2,375 6,131 6,131 Long-Term Debt - Related Party 3,675 (d) 849 (d) F-36 CANAL CAPITAL CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 20. QUARTERLY INFORMATION (UNAUDITED) FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1997 AND 1996 IS PRESENTED BELOW: (000'S OMITTED, EXCEPT PER SHARE DATA) QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 1997 1997 1997 1997 REVENUES $1,000 $2,640 $ 887 $ 784 ========= ========= ========= ========= NET (LOSS) INCOME ($197) $927 ($98) ($1,633) ========= ========= ========= ========= NET (LOSS) INCOME PER COMMON SHARE: - BASIC ($0.06) $0.20 ($0.03) ($0.39) ========= ========= ========= ========= - DILUTED ($0.06) $0.17 ($0.03) ($0.39) ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 ======== ========= ========= ========= - DILUTED 5,327 5,327 5,327 5,327 ========= ========= ========= ========= (000'S OMITTED, 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 (LOSS) INCOME ($4) ($223) ($599) $1,668 ========= ========= ========= ========= NET (LOSS) INCOME PER COMMON SHARE: - BASIC ($0.01) ($0.06) ($0.15) $0.38 ========= ========= ========= ========= - DILUTED ($0.01) ($0.06) ($0.15) $0.31 ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 ======== ========= ======== ======== - 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). 10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the Registrant's Proxy Statement dated January 31, 1985, relating to the annual meeting of stockholders held March 18, 1985, which exhibit is incorporated herein by reference). 10(b) Form of Incentive Stock Option Agreement (filed as Exhibit 10(b) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). 10(c) Form of Nonstatutory Stock Option Agreement (filed as Exhibit 10(c) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). E-1 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(d) 1985 Directors' Stock Option Plan (1) (See Exhibit A included in the Registrant's Proxy Statement dated January 31, 1986, relating to the annual meeting of stockholders held March 12, 1986, which exhibit is incorporated herein by reference). 10(e) Form of Directors' Stock Option Agreement (filed as Exhibit 10(ab) to the Registrant's Form 10-K filed January 29, 1986 and incorporated herein by reference). 10(f) 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). 10(g) 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(h) 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(i) 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(j) 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). E-2 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(k) 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(l) 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(m) 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(n) 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). 10(o) 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(p) 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). E-3 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(q) 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(r) 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(s) 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(t) $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). 10(u) $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(v) 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). E-4 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(w) 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(x) 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(y) 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 byreference). 10(z) 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). 10(aa) $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(ab) $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). E-5 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(ac) $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(ad) $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(ae) $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(af) General Release dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation (filed as Exhibit 10 (by) to the Registrant s Form 10-K filed January 24, 1997 and incorporated herein by reference). 10(ag) $325,000 Promissory Note dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation (filed as Exhibit 10 (bz) to the Registrant s Form 10-K filed January 24, 1997 and incorporated herein by reference). 10(ah) Mutual Release and Settlement Agreement dated September 30, 1996 by and between John Morrell & Co. and Canal Capital Corporation (filed as Exhibit 10 (ca) to the Registrant s Form 10-K filed January 24, 1997 and incorporated herein by reference). E-6 INVESTOR INFORMATION Annual Meeting Corporate Headquarters The Annual Meeting of Shareholders 7l7 Fifth Avenue of Canal Capital Corporation will New York, NY 10022 be held in our offices at 717 Fifth Avenue, 4th floor, New York, NY, on a date to be announced. Stock Certificates The Board of Directors of Canal Inquiries regarding change of Capital Corporation urges all name or address, or to replace shareholders to vote their shares lost certificates should be made in person or by proxy and thus directly to American Stock participate in the decisions that Transfer and Trust Co., 40 Wall will be made at the annual meeting. Street, New York, NY 10005 or telephone (718) 921-8200 Stock Listing Canal Capital Corporation common stock Auditors is traded on the over-the-counter market through the "pink sheets". Todman & Co., CPAs, P.C. 120 Broadway New York, NY 10271 Investment Analyst Inquiries General Counsel Analyst inquiries are welcome. Proskauer Rose 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-27 2
5 12-MOS OCT-31-1997 OCT-31-1997 28225 1151358 271891 0 500000 2151362 7730710 2407533 12960143 2067958 0 0 29979 53138 4758572 12960143 0 5310803 0 4138183 1256854 0 953719 (1001483) 0 (1001483) 0 0 0 (1001483) (0.27) (0.27)
EX-99 3 INDEX TO EXHIBITS Exhibit No. 10(ai) Stock Pledge and Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, SY Trading Corporation and CCC Lending Corporation. 10(aj) Note Exchange and Loan Agreement dated January 8, 1998 by and between Canal Capital Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust. 10(ak) Collateral Agency Agreement dated January 8, 1998 by and between Canal Capital Corporation, CCC Lending Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust. 10(al) Assignment Agreement dated January 8, 1998 by and between Deltec Asset Management Corporation, Hanseatic Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust. 10(am) Assignment Agreement dated January 8, 1998 by and between Guaranty Reassurance Company, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust. 10(an) Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, Canal Galleries Corporation, Canal Arts Corporation and CCC Lending Corporation. 10(ao) $1,000,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz and Canal Capital Corporation. INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(ap) $242,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz Defined Benefit Trust and Canal Capital Corporation. 10(aq) $229,000 Promissory Note dated January 8, 1998 by and between Lora K. Schultz and Canal Capital Corporation. 10(ar) $186,000 Promissory Note dated January 8, 1998 by and between Roger A. Schultz Pension Plan and Canal Capital Corporation. 10(as) $143,000 Promissory Note dated January 8, 1998 by and between Richard A. Schultz and Canal Capital Corporation. 10(at) $350,000 Promissory Note dated January 8, 1998 by and between Edelman Value Partners, L.P. and Canal Capital Corporation. 10)au) $550,000 Promissory Note dated January 8, 1998 by and between Edelman Value Fund, LTD and Canal Capital Corporation. 10(av) $300,000 Promissory Note dated January 8, 1998 by and between Maria Regina Mayall Edelman and Canal Capital Corporation. 10(aw) $200,000 Promissory Note dated January 8, 1998 by and between SES Trust and Canal Capital Corporation. 10(ax) $500,000 Promissory Note dated January 8, 1998 by and between Roger A. Schultz and Canal Capital Corporation. 22 Subsidiaries of the registrant. STOCK PLEDGE AND SECURITY AGREEMENT STOCK PLEDGE AGREEMENT dated as of January 8, 1998, among CANAL CAPITAL CORPORATION and SY TRADING CORPORATION (together, the "Pledgor"), the parties listed on the signature page hereto under the heading Noteholders (together with their respective successors and assigns, the "Pledgees") and CCC LENDING CORPORATION, as agent for the Pledgee (the "Pledge Agent"). The parties hereto, intending to be legally bound, hereby agree as follows: 0. Pledge of Securities and Grant of Security Interest. To secure the obligations of the Pledgor (the "Obligations") under (i) a certain loan of even date herewith made by Pledgor to the Pledgees in the aggregate principal amount of $395,000 to finance the payment by the Company of the notes previously issued to Cowan & Company Custodian f/b/o William G. Walters Individual Retirement Account and (ii) those certain promissory notes of even date herewith made by Pledgor to the Pledgees in the aggregate principal amount of $3,305,000 in replacement of notes p r eviously issued to Deltec Asset Management Corporation, Guaranty Reassurance Company and certain of the Noteholders (each of the notes in (i) or (ii) individually called, a "Note" or collectively, the "Notes") and (iii) this Agreement, the Pledgor hereby pledges to the Pledgees, and grants to the Pledgees a continuing security interest in, the shares of stock described on Schedule A hereto (the "Pledged Securities"). The Pledgor is herewith delivering the Pledged Securities to the Pledge Agent to be held in accordance with the terms of this Agreement. The Pledgor is also delivering to the Pledge Agent fully executed blank stock powers, which blank stock powers may be utilized by the Pledge Agent on behalf of the Pledgee in the exercise of the Pledgee's rights as herein granted. 0. Representations, Warranties and Covenants of Pledgor. The Pledgor represents and warrants that it is, and covenants and agrees that at all times during the term of this Stock Pledge and Security Agreement it will be, the legal and beneficial owner of the Pledged Securities, free and clear of any lien, security interest, charge or other encumbrance except for the security interest created hereby. 0. Pledge. a. Upon receipt of written notice from the Pledgees and the Pledgor, the Pledge Agent shall deliver the certificate evidencing the Pledged Securities, together with the stock powers held by it to the Pledgor. Further, if within 30 days of receipt of a notice from the Pledgor (with a duplicate copy sent to the Pledgee) that the Notes have been paid in full, the Pledge Agent shall not have received written notification from one or more Pledgee to the contrary, the Pledge Agent shall deliver the certificate evidencing the Pledged Securities together with the stock power held by it, to the Pledgor. a. In the event one or more Pledgees deem that an Event of Default (as hereinafter defined) has occurred under either of the Notes, the Pledgee shall provide written notice of such claimed default to the Pledgor and send a duplicate copy of such notice to the Pledge Agent. In the event that the Pledgor disputes the Pledgee's claimed default, it shall, within 15 days of the Pledgee's notice, send a letter so stating to the Pledgee, with a duplicate copy to the Pledge Agent. In the event of a dispute between the Pledgor and the Pledgee as to whether an Event of Default has occurred, the Pledge Agent will continue to hold the Pledged Securities in accordance herewith and shall take further action only upon a court order or a written consent signed by both the Pledgor and the Pledgee. a. In the event that the Pledgor does not dispute the Pledgee's claimed default within 15 days of the Pledgee's notice, the Pledge Agent shall have the right on behalf of and at the direction of the Pledgee to sell the Pledged Securities. a. The Pledge Agent shall have no duties or obligations other than those specifically set forth in this Agreement. The Pledgor and Pledgees each agrees jointly and severally to indemnify the Pledge Agent and hold it harmless against any and all liabilities and expenses incurred by it hereunder, whether or not such liabilities are a consequence of any action by the Pledgor or Pledgees, except for liabilities incurred by the Pledge Agent resulting from its own willful misconduct or gross negligence. 0. Default Defined; Remedies. a. An Event of Default shall mean (1) the occurrence of an event (and the lapse of all applicable cure periods) which would allow the holder of the Note to declare the Note immediately due and payable and (2) the breach of any representation, warranty or covenant of the Pledgor made herein. a. Unless and until there exists an Event of Default, the Pledgor shall be entitled to exercise all voting and other consensual rights pertaining to the Pledged Securities and shall be entitled to receive and retain any cash dividends thereon and any cash distributions made in respect thereof. a. In the event the Pledge Agent sells the Pledged Securities pursuant to Paragraph 3(c) the Pledge Agent on behalf of the Pledgees shall have all of the rights of a secured party upon the occurrence of a default under the Uniform Commercial Code then in effect in the State of New York; and without limiting the generality of the foregoing, upon the occurrence of a Default, the Pledgees shall have the right at any time or times to direct the Pledge Agent to sell, resell, assign and deliver, all in a commercially reasonable manner, the Pledged Securities or any part thereof, in one or more parcels, at such price or prices as shall be commercially reasonable, at public or private sale, at any exchange or broker's board or elsewhere. a. The proceeds of any such sale or sales, and any proceeds the Pledge Agent receives in respect of any realization upon the Pledged Securities, shall be received and applied: first, to the expenses of the sale of the Pledged Securities or expenses incurred in enforcing the t e rms of this Agreement (including, without limitation, reasonable attorneys fees), second to the payment of the Obligations and, third, any surplus thereafter remaining shall be paid to the Pledgor or to whosoever may be lawfully entitled to receive the same. 0. Right to Substitute and Sell. Pledgor shall have the right from time to time during the term of this Agreement to replace the Pledged Securities with different collateral; provided that such substitute collateral has a value equal or greater than $500,000. In addition, the Pledgor shall have the right from time to time during the term of this Agreement to direct the Pledge Agent to place an order to sell the Pledged Securities at a specified price (if unable to sell at such price, the Pledge Agent shall so notify the Pledgor); provided that the proceeds from such sale shall be applied to the Notes in accordance with and if permitted by the terms thereof. The Net Proceeds realized from the sale of the Pledged Securities in accordance with Section 5 shall be distributed as follows: (a) seventy percent (70%) shall be used to repay the outstanding Notes, and (b) the remaining thirty percent (30%) shall be distributed to the Pledgor or its designee. The Pledgor hereby acknowledges that the Pledge Agent shall have no liability to the Pledgor with respect to the conduct or failure to make any sale in accordance with paragraph 5, other than resulting from Pledge Agent's wilful misconduct or from negligence. 0. Miscellaneous. This Stock Pledge and Security Agreement (a) may only be modified by a written instrument which is executed by both of the parties hereto; (b) shall be governed by the laws of the State of New York applicable to contracts made and to be wholly performed therein; (c) sets forth the entire agreement of the parties with respect to the subject matter hereof; (d) may not be assigned by either party hereto without the prior written consent of the other party, and (e) shall inure to the benefit of, and be binding upon, each of the parties hereto and their respective successors and assigns. All notices and/or other communications relating to this Stock Pledge and Security Agreement shall be in writing and deemed delivered as of the date delivered, if delivered personally, or three (3) days after having been mailed, if mailed by registered or certified mail, postage prepaid, return receipt requested, as follows: if to Pledgees, to: CCC LENDING CORPORATION c/o Michael E. Schultz 2830 Long Meadow Drive West Palm Beach, Florida 33414 with a copy to: EDELMAN VALUE PARTNERS L.P. c/o Irving Garfinkle 717 Fifth Avenue New York, N.Y. 10022 if to Pledgor, to: Canal Capital Corporation 717 Fifth Avenue New York, New York 10022 with a copy to: Gerald N. Agranoff 717 Fifth Avenue New York, New York 10022 if to Pledge Agent, to: MICHAEL E. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 or to such other address as either of such parties shall have designated by like notice to the other party. IN WITNESS WHEREOF, the parties hereto have caused this Stock Pledge Agreement to be executed and delivered on the date first-above written. CANAL CAPITAL CORPORATION By: /S/ Reginald Schauder Vice President SY TRADING CORPORATION By: /S/ Reginald Schauder Vice President NOTEHOLDERS /S/ Michael E. Schultz MICHAEL E. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST By: /S/ Michael E. Schultz Michael E. Schultz, Trustee c/o Michael E. Schultz 2830 Long Meadow Drive West Palm Beach, Florida 33414 /S/ Lora K. Schultz LORA K. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 /S/ Roger A. Schultz ROGER A. SCHULTZ 131 N. Hibiscus Drive Miami Beach, Florida 33129 ROGER A. SCHULTZ PENSION PLAN By: /S/ Roger A. Schultz Roger A. Schultz, Trustee c/o Roger A. Schultz 131 N. Hibiscus Drive Miami Beach, Florida 33129 /S/ Richard A. Schultz RICHARD A. SCHULTZ 136 East 56 Street, Apt. 12H New York, NY 10022 EDELMAN VALUE PARTNERS, L.P. By: A. B. Edelman Management Company, Inc., General Partner By: /S/ Asher B. Edelman Name: Title: 717 Fifth Avenue New York, New York 10022 EDELMAN VALUE FUND, LTD By: /S/ Asher B. Edelman Name: Title: c/o Bayand (Luxembourg) Admin. 1A Rue du St. Esprit L-1475 Luxembourg /S/ Maria Regina Mayall Edelman MARIA REGINA MAYALL EDELMAN Chemin de Pecholettaz 9 1066 Eppallinges, Switzerland SES TRUST By: /S/ Sharon E. Sigesmund Sharon E. Sigesmund Trustee c/o Sharon E. Sigesmund 2859 Queens Courtyard Drive Las Vegas, Nevada 89109 SCHEDULE A 125,000 shares of Common Stock of Datapoint Corporation 236,267 shares of Common Stock of Datapoint Corporation CANAL CAPITAL CORPORATION 717 Fifth Avenue New York, NY 10022 Dated as of January 8, 1998 To each of the Persons named on Schedule I attached hereto (the "Holders") Re: Note Exchange and Loan Agreement Dear Sirs: CANAL CAPITAL CORPORATION (the "Company"), a Delaware corporation, agrees with each of the Holders as follows: 1. Background. (a) The parties acknowledge that certain of the Holders have purchased, for full and fair consideration, the Company's promissory note issued as of May 15, 1993 to Deltec Asset Management Corporation in the original principal amount of $5,800,000 (the "Deltec Note") and the Company's promissory note issued as of May 15, 1993 to Guaranty Reassurance Company in the original principal amount of $3,000,000 (the GRC Note"; together with the Deltec Note, the "Old Notes"). The Holders desire to exchange the Old Notes for new promissory notes of the Company on the terms and conditions set forth herein, including without limitation, the deferral of principal payments due under the Old Notes. Terms that are not capitalized in the sections in which they first appear are as defined in Section 11 below. (b) In addition, the Company has requested that certain of the Holders loan the Company $395,000 ( Refinancing Loan ) on the terms and conditions of the new promissory notes referred to below in order to refinance certain obligations that have become due and payable, and the Holders have agreed to make such loan. (c) The parties further acknowledge that certain of the Holders own the Company s promissory notes issued as of September 15, 1995 in the original principal amount of $1,032,275 (the Original Notes ). Such Holders desire to exchange the Original Notes for new promissory notes of the Company on the terms and conditions set forth herein including, without limitation, the deferral of principal payments due under the Original Notes. 13 2. Amended and Restated Notes. 2.1. Authorization of Amended and Restated Notes. The Company has authorized the issue of $3,700,000 aggregate principal amount of its Amended and Restated Variable Rate Mortgage Notes due May 15, 2001 (the "New Notes", such term to include any notes issued in substitution therefor pursuant to Section 6), to be in the form of Exhibit A attached hereto and to bear interest as provided in such Exhibit A. The New Notes are intended to amend, restate, supersede and replace the Old Notes and the Original Notes. 2.2. Exchange of Notes/Making of Loan. The Company hereby issues and delivers the New Notes to each of the Holders in the principal amounts set forth opposite each such Holder's name on Schedule I hereto. The New Notes amend, restate, supersede and replace in their entirety the Old Notes and the Original Notes. In exchange for the New Notes, the Holders (i) hereby deliver and surrender to the Company the Old Notes and the Original Notes, duly endorsed to the Company and to be canceled immediately thereafter, and (ii) deliver to the Company $395,000 in payment of the Refinancing Loan. 3. Representations and Warranties of the Company. As an inducement for the Holders to enter into this Agreement, the Company represents and warrants that: 3.1. Organization, Standing, etc. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, to issue the New Note and to carry out the terms hereof and thereof. 3.2. Qualification. The Company is duly qualified or licensed as a foreign corporation authorized to do business in each jurisdiction (other than the jurisdiction of its incorporation) where the nature of its activities conducted or of the properties owned or leased by it requires such qualification. 3.3. Authorization. The issuance and delivery by the Company of the New Notes to the Holders has been duly authorized by all necessary corporate action on the part of the Company. 14 3.4. Compliance with Other Instruments. The execution, delivery and performance of this Agreement and the New Notes will not result in any violation of or be in conflict with any term of the charter or by-laws of the Company or any of its Subsidiaries or breach, conflict with any term of, or result in a default under, any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to the Company or any of its Subsidiaries, or result in the creation of (or impose any obligation on the Company or any Subsidiary to create) any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to any such term. 3.5. Title to Properties; Liens. The Company has good and sufficient title to the Collateral, and none of such Collateral is subject to any Lien, except Liens of the character permitted by Section 7.15. The Mortgaged Property constitutes all real property of the Company and its Subsidiaries which is not, as of the date hereof, encumbered by mortgages or deeds of trust in favor of the holders of the Bank Indebtedness, with the exception of the real property of the Company located in St. Paul, Minnesota, known as the "Port Crosby" property. 3.6. Governmental Consent. No consent, approval or authorization of, or declaration or filing with, any governmental authority on the part of the Company is required for the valid execution and delivery by the Company of this Agreement and the valid offer, issue, sale and delivery by the Company of the New Notes as contemplated hereby. 3.7. Solvency. Both immediately before and after giving effect to the issuance and sale of the New Notes as contemplated hereby: (a) the Company does not intend to incur, nor believes that it has incurred or will incur, debts that will be beyond its ability to pay as they mature; (b) the fair saleable value of the assets of the Company as a whole will exceed the amount that will be required to pay the probable liabilities on its debts (whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent) as they mature; and (c) the Company is not incurring obligations or making transfers under any evidence of indebtedness with the intent to hinder, delay, or defraud any entity to which it is or will become indebted. 15 4. Representations and Warranties of the Holders. 4.1. Securities Act. Each Holder represents and warrants to the Company that such Holder understands that the New Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be sold except pursuant to an effective registration statement or pursuant to an available exemption from such registration requirements. Further, such Holder is receiving the New Notes for its own account and not with a view to or for sale in violation of the Securities Act. Information concerning the New Notes, the Company or any other matter relevant to the decision of the Holders to exchange the Old Notes for the New Notes has been made available to the Holders either in reports filed by the Company under the Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise. 4.2. Ownership; Authority; No Liens. The Holders represent and warrant to the Company that the Holders are the sole and undivided beneficial owners of the Old Notes which they are delivering and surrendering to the Company pursuant to Section 2.2, have the authority to deliver and surrender such Old Notes pursuant to the terms hereof, and hold such Old Notes free and clear of any liens, encumbrances or restrictions on transfer. The Holders shall indemnify the Company for any loss or expense which it may suffer or incur as a result of any breach of the Holders' representations in the preceding sentence. 5. Prepayment of Amended and Restated Notes. 5.1. Optional Prepayment Without Premium. So long as the New Notes shall be outstanding, the Company may, at its option, upon notice as provided below, prepay the New Notes in an aggregate principal amount equal to a multiple of $10,000 and greater than $100,000. Not less than five (5) Business Days prior to the date proposed for any prepayment under this Section 5.1, the Company will give written notice of such prepayment to each Holder, specifying such date, the principal amount of each New Note held by such Holder to be prepaid on such date and the amount of interest on such principal amount accrued to such date. Each such notice of a prepayment shall be accompanied by an Officers' Certificate specifying the source or sources of the funds being used for such prepayment. 5.2. Prepayments to be Pro Rata. Notwithstanding anything in this Article 5 to the contrary, the Company shall not at any time prepay 16 any New Note without prepaying all the New Notes on a pro rata basis at such time. 6. Transfer and Substitution of Amended and Restated Notes. 6.1. Replacement Notes. If any Holder claims that a New Note has been lost, destroyed or wrongfully taken, the Company shall issue a replacement New Note. The Company may require that an indemnity bond be posted to protect the Company from any loss that it may suffer if a New Note is replaced, and may charge such Holder for its reasonable expenses, including attorneys' fees, in replacing a New Note. Every replacement New Note will be entitled to the benefits of this Agreement. 6.2. Treasury Notes. In determining whether the Holders of the required principal amount of New Notes have concurred in any direction, waiver or consent, New Notes owned by the Company or any of its Affiliates shall be disregarded. 7. Covenants of the Company. 7.1. Payment of Securities. The Company shall pay the principal of and interest on the New Notes on the dates and in the manner provided in the New Notes. The Company shall pay interest on overdue principal and on overdue installments of interest at the rate set forth in the New Notes. 7.2. Maintenance of Office. The Company agrees not to change its name, identity or corporate structure to such an extent that any financing statement filed in connection with the Security Agreement would become misleading, without giving at least thirty (30) days' prior written notice thereof to the Holders. 7.3. Limitation on Dividends and Other Distributions. The Company will not declare or pay any dividend or make any distribution on its Capital Stock or to the holders of its Capital Stock (other than dividends or distributions payable in its Capital Stock) or purchase, redeem or otherwise acquire or retire for value, or permit any Subsidiary to purchase, redeem or otherwise acquire or retire for value, any such Capital Stock. 7.4. Limitation on Total Indebtedness. The Company may not incur, create, assume or guarantee any additional Indebtedness (other than 17 Indebtedness which is an amendment, renewal, extension or refunding on substantially the same terms of any existing Indebtedness), or enter into a Capitalized Lease Obligation or any other lease not terminable within twelve (12) months, provided, however, that the Company may enter into a new lease of corporate office space on reasonable terms. 7.5. Limitation on Investments. The Company will not, and will not permit any Subsidiary to, make any investment in any other Person ( including, without limitation, by way of stock purchase, capital contribution, loan, advance, guaranty of indebtedness or creation or assumption of any other liability), provided, however, that the Company may purchase Investment Securities. 7.6. Prohibition Against Becoming an Investment Company. The Company will not register as, or conduct its business or take any action which shall cause it to become, or to be deemed to be, an "investment company" as defined under the provisions of the Investment Company Act of 1940. 7.7. Corporate Existence. The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents and the rights (charter and statutory) and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right o r franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not, and will not be, adverse in any material respect to the Holders. 7.8. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (b) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon the property of the Company or any Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate provision has been made; and provided further, that except with respect to property constituting 18 Collateral, compliance with clauses (a) and (b) above shall not be required so long as such nonpayment is, in the judgment of the Board of Directors, desirable in the conduct of the Company's business and such nonpayment is not disadvantageous in any material respect to the Holders. 7.9. Notice of Defaults. In the event that the Company or any of its Subsidiaries receives written notice from any holder of Indebtedness that the full amount of such Indebtedness has been declared due and payable before its maturity because of an acceleration of such indebtedness or the occurrence of any default under such Indebtedness, the Company will promptly give written notice to the Holders of such declaration. 7.10. Maintenance of Properties. The Company will cause all material properties owned by or leased to it or any Subsidiary and used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in normal condition, repair and working order (normal wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterment and improvements thereof, all as in the judgment of the Company may be necessary, so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that the Company may not incur in any year capital expenditures exceeding $100,000, except to the extent that any excess over such amount is made in order to maintain the Company's real property in good working order; and provided, further, that nothing in this Section shall prevent the Company or any Subsidiary from discontinuing the use, operation or maintenance of any of such properties, or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Board of Directors or of the Board of Directors, board of trustees or managing partners of the Subsidiary concerned, or of an officer (or other agent employed by the Company or of any of its Subsidiaries) of the Company or such Subsidiary having managerial responsibility for any such property, desirable in the conduct of the business of the Company or any Subsidiary, and if such discontinuance or disposal is not disadvantageous in any material respect to the Holders. The Company will operate all material properties owned by or leased to it or any Subsidiary in compliance with all applicable federal, state and local laws, ordinances, regulations, administrative or judicial orders, including, without limitation, those pertaining to hazardous or toxic materials and other environmental matters. 19 7.11. Compliance Certificate and Notices of Default. (a) The Company shall deliver to each of the Holders within 90 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signers know of any Default or Event of Default by the Company that occurred during such fiscal year. If they do know of such Default or Event of Default, the certificate shall describe the Default and its status. The first certificate to be delivered by the Company pursuant to this Section 7.11 shall be for the fiscal year ending October 31, 1997. (b) The Company shall deliver to each of the Holders prompt written notice of any Default or Event of Default under this Agreement by the Company, describing the Default and its status. 7.12. Financial and Other Reports. (a) The Company will prepare, for the first three quarters of each fiscal year, quarterly financial statements substantially equivalent to the financial statements required to be included in a report on Form 10- Q under the Exchange Act. The Company will also prepare, on an annual basis, complete audited consolidated financial statements including, but not limited to, a balance sheet, a statement of income and cash flow and all appropriate notes. All such financial statements will be prepared in accordance with generally accepted accounting principles consistently a p p lied, except for changes with which the Company's independent accountants concur, and except that quarterly statements may be subject to year-end adjustments. The Company will cause a copy of such financial statements to be mailed to each of the Holders within 45 days after the close of each of the first three quarters of each fiscal years and within 90 days after the close of each fiscal year. In addition, to the extent that the Company files any other reports, information or documents with the SEC, the Company shall send copies of such reports, information and other documents to the Holders. (b) The Company shall cause, within thirty (30) days after the end of each calendar month, a monthly result of operations statement detailing the financial and operational results of the Company and its Subsidiaries for such month, in a form currently used by the Company, to be mailed to each of the Holders. 7.13. Waiver of Stay, Extension or Usury Laws. The Company 20 covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of and/or interest on the New Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Agreement; and (to the extent it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Holders, but will suffer and permit the execution of every such power as though no such law had been enacted. 7.14. Reference Bank. In the event that any Reference Bank shall be unwilling or unable to act as such for the purpose of determining LIBOR and Prime Rate on the New Notes, the Company shall promptly appoint another leading domestic bank engaged in transactions in Eurodollar deposits in the international Eurocurrency market to act as such in its place. 7.15. Other Liens. Except for Permitted Encumbrances, the Company will not grant or permit any Liens or other defects in title in or upon the Collateral; provided, however, that the Company may grant or permit such Liens or defects if the monetary value of the Collateral will not be impaired by the existence of the Lien or other defect in title in any material manner and the Company shall have delivered to each of the Holders a copy of an Officers' Certificate to that effect. 7.16. Validity of Liens. The Company shall warrant, preserve and defend the interest and title of the Holders to the Mortgages and the Collateral described in the Security Agreement against the claims of all persons and will continue to perform its obligations pursuant thereto. 7.17. Transactions with Affiliates. Neither the Company nor any Subsidiary shall enter into or participate in any agreements or transactions of any kind with any Affiliates of any of the Company or its Subsidiaries unless such transactions or agreements (i) are in the ordinary course of business, (ii) include only terms or provisions which are fair and equitable to the Company, (iii) require no fees, charges or commissions other than those which are reasonable and disclosed to the Collateral Agents, (iv) are clearly and accurately disclosed in the Company's books 21 and records, and (v) involve terms no less favorable to the Company than would the terms of a similar agreement or transaction with a Person other than an Affiliate. 7.18. Minimum Net Worth. The Company shall not cause or permit the Consolidated Net Worth of itself and its Subsidiaries at the end of any calendar month to be less than 75% of the amount reflected in the Company's most recent balance sheet. 7.19. Negative Pledge. In the event that any property of the Company or any of its Subsidiaries which is currently encumbered by a Lien in favor of the holders of any Bank Indebtedness is released from such Lien, the Company and its Subsidiaries shall not, without the prior written consent of the Holders, thereafter encumber, mortgage, pledge or otherwise grant, suffer or permit any Lien on such property. 8. Default and Remedies. 8.1. Events of Default. An "Event of Default" occurs if: (a) the Company defaults in the payment of interest on any New Note when the same becomes due and payable and the default continues for the later of (i) a period of 30 days and (ii) 10 days after written notice to the Company; (b) the Company defaults in the payment of the principal of any New Note when the same becomes due and payable at maturity, upon redemption or otherwise; (c) the Company fails to observe or perform any of its other covenants contained in the New Notes or this Agreement, and such failure to observe or perform continues uncured for a period of 30 days after the Company's receipt of a written notice from Holders of at least 25% in principal amount of New Notes then outstanding that specifies the Default, demands that it be remedied and states that such notice is a "Notice of Default"; (d) any representation or warranty at any time made by the Company herein or any material representation or warranty which is contained in any certificate, document, written report or financial or other statement shall prove to have been untrue, incorrect or breached in any material respect on or as of the date on which such representation or warranty was made; 22 (e) there shall be a default under any bond, debenture, note or other evidence of indebtedness for money borrowed or under any mortgage, indenture or other instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by the Company or under any guaranty of payment by the Company of indebtedness for money borrowed, whether such indebtedness or guaranty now exists or shall hereafter be created, which default extends beyond any period of grace provided with respect thereto and which default relates to (i) the obligation to pay the principal of or interest on any such indebtedness or guaranty or (ii) an obligation other than the obligation to pay the principal of or interest on any such indebtedness and the effect of such default is the cause, with the giving of notice if required, such indebtedness to become due prior to its stated maturity; provided, however, that no default under this clause (e) shall exist if all such defaults do not relate to such indebtedness or such guaranties with an aggregate principal amount in excess of $100,000; (f) the Company pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding, (ii) consents to the entry of an order for relief against it in an involuntary case or proceeding, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (iv) makes a general assignment for the benefit of its creditors; (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company in an involuntary case or proceeding, (ii) appoints a Custodian of the Company or for all or substantially all of its properties, or (iii) orders the liquidation of the Company, and in each case the order or decree remains unstayed and in effect for 45 days; 23 (h) final judgments for the payment of money which in the aggregate exceed $100,000 shall be rendered against the Company by a court of competent jurisdiction and shall remain undischarged for a period (during which execution shall not be effectively stayed or bonded) of 30 days after such judgment becomes final and nonappealable; or (i) at any time after the date hereof, there shall be transfers, either legally or beneficially, of more than 50% in the aggregate of the issued and outstanding shares of common stock of the Company. The term "Bankruptcy Law" means Title 11 U.S. Code or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law. 8.2. Acceleration. If an Event of Default (other than an Event of Default specified in Section 8.1(f) or (g)) occurs and is continuing, the Holders of at least 25% in principal amount of the New Notes then outstanding may, by notice to the Company, declare all unpaid principal and accrued interest to the date of acceleration on the New Notes then outstanding (if not then due and payable) to be due and payable and upon any such declaration, the same shall become and be immediately due and payable. If an Event of Default specified in Section 8.1(f) or (g) occurs, all unpaid principal and accrued interest on the New Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of any Holder. Upon payment of such principal amount and interest all of the Company's obligations under the New Notes and this Agreement shall terminate. The Holders of a majority in principal amount of the New Notes then outstanding, by notice to the Company, may rescind an acceleration and its consequences if (i) all existing Events of Default, other than the non-payment of the principal of the New Notes which has become due solely by such declaration of acceleration, have been cured or waived within ninety (90) days after the first occurrence of each such Event of Default, (ii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, and (iii) the recision would not conflict with any judgment or decree of a court of competent jurisdiction. 24 8.3. Other Remedies. If any Event of Default occurs and is continuing, any Holder may pursue any available remedy by proceeding at law or in equity to collect the payment of principal or interest on the New Notes or to enforce the performance of any provision of the New Notes or this Agreement. A delay or omission by any Holder in exercising any right or remedy accruing upon Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. 8.4. Waiver of Past Defaults. Subject to Sections 8.5 and 9.1, the Holders of a majority in principal amount of the New Notes then outstanding, by notice to the Company, may waive an existing Default or Event of Default and its consequences, except that waiver of a Default in the payment of principal or interest on any New Note shall require the consent of all the Holders. When a Default or Event of Default is waived, it is cured and ceases. 8.5. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Agreement, the right of any Holder to receive payment of principal and interest on the New Notes on or after the respective due dates expressed in the New Notes, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder; provided, however, that a Holder may not institute such a suit if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver or loss of the Lien on the Collateral. 9. Amendments, Supplements and Waivers. 9.1. General. The Company, when authorized by a resolution of its Board of Directors, and the Holders may amend or supplement this Agreement, the New Notes, the Mortgages or the Security Agreement. Subject to Section 8.5, the Holders of a majority in principal amount of the New Notes then outstanding may waive compliance by the Company with any provision of this Agreement or the New Notes. However, without the consent of each Holder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 8.4, may not: 25 (a) reduce the amount of the New Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the rate or extend the time for payment of interest on any New Note; (c) reduce the principal of or extend the fixed maturity of any New Note or alter the redemption provisions with respect thereto; (d) waive a Default in the payment of the principal of, interest on or redemption payment with respect to any New Note; (e) make any changes to Section 8.4, 8.5 or the third sentence of this Section 9.1; or (f) modify the provisions of Article 10 or Article 11 hereof in a manner adverse to the Holders. After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure by the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver. 9.2. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a New Note or portion of a New Note that evidences the same debt as the consenting Holder's New Note, even if notation of the consent is not made on any New Note. However, any such Holder or subsequent Holder may revoke the consent as to its New Note or portion of a New Note. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. 26 After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clause (a) through (f) of Section 9.1. In that case, the amendment, supplement or waiver shall bind each Holder of a new Note who has consent to it and every subsequent Holder of a New Note or portion of a New Note that evidences the same debt as the consenting Holder's New Note. 10. Security Interest and Mortgage. 10.1. Continuation and Amendment. (a) The Company's obligation to pay the principal amount of and interest and Additional Interest on the New Notes (i) shall continue to be subject to the security interest created by the Security Agreement and the Mortgages and (ii) shall also be subject to the security interest created by the Pledge Agreement, in an amount equal to at least 100% of the aggregate principal amount of the New Notes outstanding at any time. (b) The Security Interest and the Mortgages as now or hereafter in effect shall be held for the equal and ratable benefit and security of the New Notes without preference, priority or distinction of any thereof over any other by any reason, or difference in time, of issuance, sale or otherwise, and for the enforcement and payment of principal and interest on the New Notes in accordance with their terms. (c) The Company and/or one or more of its Subsidiaries has executed and delivered, filed, or recorded and/or will and/or will cause one or more of the Subsidiaries to execute and deliver, file and record, all instruments and documents, and has done or will do or will cause to do all such acts and other things as are necessary to amend the Security Agreement and the Mortgages in order to maintain, perfect and protect the security interests of the Holders in the Collateral and the Mortgaged Properties. 10.2. Release of Collateral. The Collateral Agent (as defined herein) shall from time to time at the request of the Company execute and deliver any instruments necessary or appropriate to release all or a part of the Collateral from the Security Interest, upon compliance by the Company with the following: (a) Receipt by the Collateral Agent of the Company's written notice, at least five Business Days in advance of the 27 requested date for the delivery of the release instruments, r e q uesting the Collateral Agent to execute one or more specifically described release instruments, and certifying (A) that no Event of Default or material Default under this Agreement has occurred and is continuing and (B) that the conditions of this Section 10.2 set forth below, have been fulfilled. (b) No release of Collateral shall be effected unless simultaneously or prior thereto the Company has paid to the Holders, by federal funds wire transfer, 70% of the Net Proceeds from the sale or other disposition of such Collateral. 10.3. Reliance on Opinion of Counsel. The Collateral Agent shall, before taking any action under this Article 10, be entitled to receive an Opinion of Counsel, stating the legal effect of such action, the steps necessary to consummate the same and to perfect the priority of the Collateral Agent (as agent for the Holders) with respect to a Lien and that such action will not be in contravention of the provisions hereof or the New Notes. 10.4. Purchaser May Rely. A purchaser in good faith of the Collateral or any part thereof or interest therein which is purported to be transferred, granted or released by the Collateral Agent as provided in this Article 10 shall not be bound (a) to ascertain, and may rely on the authority of the Collateral Agent to execute, transfer, grant or release, (b) to inquire as to the satisfaction of any conditions precedent to the exercise of such authority, or (c) to see to the application of the purchase price therefor. 10.5. Payment of Expenses. On demand of the Collateral Agent, the Company forthwith shall pay or satisfactorily provide for all reasonable expenditures incurred by the Collateral Agent under this Article 10 and all such sums shall be secured thereby. 10.6. Authority of Collateral Agent. The Company may rely on the directions of CCC Lending Corporation, a Delaware corporation, as collateral agent with respect to the Collateral and the Mortgaged Properties, without incurring liability therefor to the Holders, except to the extent otherwise provided in the Collateral Agency Agreement dated the date hereof. 28 11. Definitions. 11.1. "Affiliate" of any specified person means any other person related by blood, marriage, employed by or employing, or directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. 11.2. "Agreement" shall mean this letter agreement. 11.3. "Artwork" means the collateral under the Security Agreement. 11.4. "Bank Indebtedness" means the principal of and interest on and other amounts due on or in connection with any Indebtedness of the Company, outstanding on the date of this Agreement. Bank Indebtedness shall not include (i) any Indebtedness of the Company which, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to or pari passu with the New Notes or (ii) any Indebtedness of the Company to a Subsidiary. 11.5. "Business Day" means a day, other than a Saturday or a Sunday, on which banks are open for business in New York, New York. 11.6. "Capitalized Lease Obligations" means Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with generally accepted accounting principles; the amount of such Indebtedness shall be the capitalized amount of such obligations determined in accordance with such principles. 11.7. "Capital Stock " means any and all shares, interest, participations or other equivalents (however designated) of corporate stock. 11.8. "Collateral" means Mortgaged Property, the Artwork and the Securities. 11.9. "Collateral Agent" means CCC Lending Corporation, a 29 Delaware corporation. 11.10. "Company " means the party named as such in this Agreement, until a successor replaces it pursuant to the Agreement, and thereafter means the successor. 11.11. "Consolidated Net Worth" means, as of any date, total stockholders' equity which under generally accepted accounting principles would be included on a consolidated balance sheet of the Company and its Subsidiaries, determined in accordance with generally accepted accounting principles consistently applied, as of the end of the last period for which a quarterly financial report is available, less all goodwill, trademarks, trade names, patents, unamortized debt discount and expense and other like intangibles that would be included on such balance sheet. 11.12. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. 11.13. "Indebtedness" means (i) any liability of any person (a) for borrowed money, (b) evidenced by a note, debenture or similar instrument (including a purchase money obligation) given in connection with the acquisition of any property or assets (other than inventory or similar p r o perty acquired in the ordinary course of business), including securities, or (c) for the payment of money relating to a Capitalized Lease Obligation; (ii) any liability of others described in the preceding clause (i) which the person has guaranteed or which is otherwise its legal liability; and (iii) any amendment, renewal, extension or refunding of any liability of the types referred to in clauses (i) and (ii) above. 11.14. "Investment Securities" means (i) U.S. Government Obligations, or (ii) securities, certificates of deposit or commercial paper rated at least "P-1" by Moody's Investors Service, Inc. and at least "A-1" by Standard and Poors Corporation. 11.15. "LIBOR" shall have the meaning provided in Exhibit A annexed hereto. 11.16. "Lien" means any mortgage, liens, pledge, charge or other security interest or encumbrance of any kind or assignment thereof. 11.17. "Mortgages" means any one or all of the mortgages or 30 deeds of trust covering the Mortgaged Property, as assigned to the Holders, substantially in the form annexed hereto as Exhibit C and constituting a part hereof for all purposes, or such other form as may be required by applicable state law or by local custom. 11.18. "Mortgaged Property" means property of the Company described in or from time to time subject to the Mortgages. 11.19. "Net Proceeds" means, cash received by the Company or any of its Subsidiaries with respect to any sale, transfer or disposition of property after (a) reasonable provision for taxes incurred by the Company or any of its Subsidiaries during the fiscal year in which such sale, transfer or disposition occurred as a direct result thereof, (b) payment of reasonable brokerage commissions and reasonable attorneys' fees and expenses incurred as a result of such sale, transfer or disposition, and (c) deduction of appropriate amounts to be provided by the Company and its Subsidiaries as a reserve, in accordance with generally accepted a c counting principles consistently applied, against any liabilities associated with such asset and retained by the Company and its Subsidiaries after such sale, transfer or disposition. 11.20. "Officers' Certificate" means a certificate signed by two officers of the Company having authority to sign such certificates on behalf of the Company. 11.21. "Opinion of Counsel" means a written opinion from legal counsel, who may be an employee of or counsel to the Company, and who is reasonably acceptable to the Holder. 11.22. "Permitted Encumbrances" means (i) liens for taxes, assessments and other governmental charges not delinquent; (2) liens for taxes, assessments and other governmental charges already delinquent which are currently being contested in accordance with the provisions of the Mortgages; (3) mechanics' and materialmen's liens not filed of record and s i m i l ar charges not delinquent, incident to current permissible construction and mechanics' and materialmen's liens incident to such construction which are filed of record but which are being contested in accordance with the provisions of the Mortgages; (4) mechanics', workmen's, repairmen's, materialmen's, warehousemen's and carriers' liens and other similar liens arising in the ordinary course of business for charges which are not delinquent, or which are being contested in accordance with the 31 provisions of the Mortgages; (5) liens in respect of judgments or awards with respect to which the Company shall in good faith currently be prosecuting an appeal or proceedings for review in accordance with the provisions of the Mortgages, and with respect to which the Company shall have secured a stay of execution pending such appeal or proceedings for review; provided, however, that the Company shall have set aside on its books adequate reserves with respect thereto; (6) easements and rights of way, leases, reservations or other rights of others in any property of the Company for streets, roads, bridges, pipes, pipe lines, utilities, railroad, electric transmission and distribution lines, telegraph and telephone lines, flood rights, river control and development rights, sewage and drainage rights, restrictions against pollution and zoning laws; provided, however, that such easements, leases, reservations, rights, restrictions and laws do not in the aggregate materially impair the usefulness of such property for the purposes for which it is held by the Company and do not materially impair the marketability or value of such property as security for the New Notes; (7) leases or other occupancy agreements existing at the date of affecting the Mortgaged Properties and any leases or other occupancy agreements entered into by the Company or its Affiliates which are commercially reasonable and in the ordinary course of business; (8) the burdens of any law or governmental regulation or permit requiring the Company to maintain certain facilities or perform certain acts as a condition of its occupancy of or interference with any public lands or any river or stream or navigable waters; and (9) whether or not included in the foregoing clauses (1) through (8), all restrictions, easements, rights-of-way, exceptions, reservations, conditions, limitations, interests, covenants, agreements and other encumbrances do not in the aggregate materially impair the value of such property as security for the New Notes. 11.23. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. 11.24. Pledge Agreement means the Stock Pledge and Security Agreement dated as of January 8, 1998, among the Company and SY Trading Corporation, as pledgors, and the Holders and CCC Lending Corporation, as secured parties. 32 11.25. "Reference Bank" shall have the meaning provided in Exhibit A annexed hereto. 11.26. "SEC" means the Securities and Exchange Commission. 11.27. "Security Agreement" means the Security Agreement, d a ted as of January 8, 1998, among the Company, Canal Galleries Corporation, and Canal Arts Corporation as debtors, the Holders, as secured parties, and CCC Lending Corporation, as Collateral Agent respecting collateral covered by (i) the Security Agreement dated as of May 15, 1993 among the Company and Canal Arts Corporation, as debtors, and Hanseatic Corporation and Guaranty Reassurance Company as secured parties, as assigned to the Holders and (ii) the Security Agreement dated as of March 31, 1995, between the Company, as debtor, and Cooperative Centrale Raiffeisen - Boerenleenbank B.A., Rabobank Nederland , New York branch, as secured party, as assigned to certain of the Holders. 11.28. "Security Interest" means the Liens on the Collateral created by the Mortgages, the Security Agreement and the Pledge Agreement. 11.29. Securities means the collateral under the Pledge Agreement consisting currently of 361,267 shares of Common Stock of Datapoint Corporation. 11.30. "Subsidiary" means (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by the Company, by the Company and a Subsidiary of the Company or by a Subsidiary of the Company or (ii) any other person (other than a corporation) in which the Company, a Subsidiary of the Company directly or indirectly, at the date of determination thereof, has at least a majority ownership interest. 11.31. "U.S. Government Obligations" means direct non-callable obligations of, or non-callable obligations guaranteed by, the United States of America or any person or agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America for the payment of which guarantee or obligation the full faith and credit of the United States or any person or agency controlled or supervised by or acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States is pledged. 33 12. Miscellaneous. 12.1. Notices. Any notice or communication shall be given in writing and delivered in person or mailed by first-class mail addressed if to the Company, to the addresses set forth on the first page hereof, and if to the Holders, at such addresses as appear on the signature pages to this Agreement. The Company or the Holders by notice to the other may designate additional or different addresses for subsequent notices or communications. Failure to mail a notice or communication to a Holder or any defect in any notice shall not affect the sufficiency of any notice with respect to the other Holders. 12.2. Statements Required in Certificate or Opinion. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Agreement or in the Security Agreement or the Mortgages shall include: (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion or such person, such condition or covenant has been complied with; provided, however, that with respect to matters of fact an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. 12.3. Legal Holidays. A "Legal Holiday" is a Saturday, Sunday or a day on which banking institutions in New York, New York are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 34 12.4. Governing Law. The laws of the State of New York shall govern this Agreement without regard to principles of conflicts of law. 12.5. No Adverse Interpretation of Other Agreements. This Agreement may not be used to interpret another indenture, loan or debt agreement of Company or any of its Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Agreement. 12.6. No Recourse Against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under this Agreement or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting the New Notes waives and releases all such liability. 12.7. Successors. All agreements of the Company in this Agreement and the New Notes shall bind its successor. 12.8. Duplicate Originals. The parties may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent that same agreement. 12.9. Severability. In case any provision of this Agreement or in the New Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 35 SIGNATURES IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed, and its corporate seal to be hereunto affixed and attested, all as of the date first written above. CANAL CAPITAL CORPORATION By: /S/ Reginald Schauder Vice President The foregoing Agreement is hereby accepted by each of the Holders as of the date hereof: /S/ Michael E. Schultz MICHAEL E. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST By: /S/ Michael E. Schultz Michael E. Schultz, Trustee c/o Michael E. Schultz 2830 Long Meadow Drive West Palm Beach, Florida 33414 36 /S/ Lora K. Schultz LORA K. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 /S/ Roger A. Schultz ROGER A. SCHULTZ 131 N. Hibiscus Drive Miami Beach, Florida 33129 ROGER A. SCHULTZ PENSION PLAN By: /S/ Roger A. Schultz Roger A. Schultz, Trustee c/o Roger A. Schultz 131 N. Hibiscus Drive Miami Beach, Florida 33129 /S/ Richard A. Schultz RICHARD A. SCHULTZ th136 East 56 Street, Apt. 12H New York, NY 10022 37 EDELMAN VALUE PARTNERS, L.P. By: A. B. Edelman Management Company, Inc., General Partner By: /S/ Asher B. Edelman Name: Title: 717 Fifth Avenue New York, New York 10022 EDELMAN VALUE FUND, LTD By: /S/ Asher B. Edelman Name: Title: c/o Bayand (Luxembourg) Admin. 1A Rue du St. Esprit L-1475 Luxembourg /S/ Maria Regina Mayall Edelman MARIA REGINA MAYALL EDELMAN Chemin de Pecholettaz 9 1066 Eppallinges, Switzerland SES TRUST By: /S/ Sharon E. Sigesmund Sharon E. Sigesmund Trustee 38 c/o Sharon E. Sigesmund 2859 Queens Courtyard Drive Las Vegas, Nevada 89109 39 EXHIBIT A CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. $__________ CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to , or ___ registered assigns at the address of or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of __________________________________________ Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 13. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 14. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $339,620 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 15. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 16. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 17. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to 2 conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 18. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 19. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 20. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 21. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 22. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 3 23. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 24. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 25. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three 4 United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities o f ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London 5 office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 26. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform 6 Gifts to Minors Act). 27. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 28. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By:_________________________ ____________________________ 7 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee 8 SCHEDULE I Name of Assignee Percentage Michael E. Schultz 27.03% Michael E. Schultz Defined Benefit Trust 6.54% Lora K. Schultz 6.19% Roger A. Schultz 13.51% Roger A. Schultz Pension Plan 5.03% Richard A. Schultz 3.86% Edelman Value Partners, L.P. 9.46% Edelman Value Fund, LTD 14.86% Maria Regina Mayall Edelman 8.11% SES Trust 5.41% COLLATERAL AGENCY AGREEMENT, dated as of January 8, 1998, among (1) the parties listed on the signature pages hereto under the heading "Noteholders" (together with their respective successors and assigns, the "Noteholders", and (2) CCC LENDING CORPORATION, a Delaware corporation 9 (together with its successors and assigns, collectively, the "Collateral Agent"). BACKGROUND The Noteholders are purchasing, for full and fair consideration, the promissory note issued by Canal Capital Corporation, a Delaware corporation (the "Company"), as of May 15, 1993 to Deltec Asset Management Corporation, in the original principal amount of $5,800,000 (the "Deltec Note") and the Company's promissory note issued as of May 15, 1993 to G u aranty Reassurance Company, in the original principal amount of $3,000,000 (the "GRC Note"; together with the Deltec Note, the "Old Notes"). The Old Notes are secured by certain collateral and mortgages which are being assigned to the Noteholders. Pursuant to that certain Note Exchange and Loan Agreement dated as of the date hereof between the Company and the Noteholders (the "Note Exchange Agreement"), the Noteholders are exchanging the Old Notes and making an additional loan to the Company in exchange for new promissory notes of the Company on the terms and conditions set forth therein, including without limitation, the deferral of principal payments due under the Old Notes. In connection with the Note Exchange Agreement, (i) the Company will amend certain Mortgages and a Security Agreement (as such terms are defined in the Note Exchange Agreement; herein, such terms are collectively referred to, together with the Pledge Agreement defined below, as the "Collateral Documents"), to secure the obligations incurred by the Company u n d e r the Note Exchange Agreement and the Collateral Documents (collectively, the "Obligations"), and (ii) the Company will enter into a certain Pledge Agreement ( Pledge Agreement ) to further secure the Obligations. The Noteholders desire to provide for their respective rights and interests in respect of the Collateral (as defined below) and to make certain other commitments and undertakings in connection with the Note Exchange Agreement, the Collateral Documents, the Obligations and the rights of the Noteholders under such agreements. N O W THEREFORE, in consideration of the mutual agreements contained herein, the parties hereto hereby agree as follows: 10 ARTICLE XXIX DEFINITIONS Section 29.1. Definitions of Terms Used in Note Exchange Agreement. All capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Note Exchange Agreement. Section 29.2. Definitions of Certain Terms. As used herein, the following terms shall have the meanings set forth below: "Actionable Default" shall mean any Event of Default under and as defined in the Note Exchange Agreement and/or the Collateral Documents. "Collateral" shall mean all the assets of the Company or its Subsidiaries in which the Collateral Agent has been granted a Lien pursuant to the Collateral Documents. "Insolvency or Liquidation Proceeding" means (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to any of the assets of the Company, or (ii) any liquidation, dissolution, or winding up of the Company. "Notice of Actionable Default" shall mean a notice by or on behalf of the Required Creditors delivered to the Collateral Agent, stating that an Actionable Default has occurred. A Notice of Actionable Default shall be deemed to have been given when the notice referred to in the preceding sentence has actually been received by the Collateral Agent and to have been rescinded when the Collateral Agent has actually received from the Required Creditors a notice withdrawing such notice. A Notice of Actionable Default shall be deemed to be outstanding at all times after such notice has been given until such time, if any, as such notice has been rescinded. "Required Creditors" shall mean, at any time, Noteholders holding, collectively, New Notes representing more than 25% of the outstanding principal balance of the New Notes. Section 29.3. Terms Generally. The definitions in Section 1.2 shall apply equally to both the singular and plural forms and of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. 11 ARTICLE XXX ACTS OF REQUIRED CREDITORS; AMOUNT OF OBLIGATIONS Section 30.1. Acts of Required Creditors. Any request, demand, authorization, direction, notice, consent, waiver or other action permitted or required by this Agreement to be given or taken by the Required Creditors may be and, at the request of the Collateral Agent, shall be, embodied in and evidenced by one or more written instruments satisfactory in form to the Collateral Agent and signed by or on behalf of such persons and, except as otherwise expressly provided in any such instrument, any such action shall become effective when such instrument or instruments shall have been delivered to the Collateral Agent. The instrument or instruments evidencing any action (and the action embodied therein and evidenced thereby) are sometimes referred to herein as an "Act" of the persons signing such instrument or instruments. Section 30.2. Determination of Amounts of Outstanding Principal Balance. Whenever the Collateral Agent is required to determine the outstanding principal balance of the Notes or the existence of any Actionable Default for any purposes of this Agreement, it shall be entitled to make such determination on the basis of one or more certificates of the Noteholders; provided, however, that if notwithstanding the request of the Collateral Agent, the Noteholders shall fail or refuse promptly to certify as to the outstanding principal balance of the New Notes or the existence of an Actionable Default, the Collateral Agent shall be entitled to determine such existence or amount by such method as the Collateral Agent may, in its sole discretion, determine, including by reliance upon a certificate of the Company. The Collateral Agent may rely conclusively, and shall be fully protected in so relying, on any determination made by it in accordance with the provisions of the preceding sentence (or as otherwise directed by a court of competent jurisdiction) and shall have no liability to the Company, any Noteholder or any other person as a result of such determination. Upon any request of the Collateral Agent, the Company will, and by countersigning this Agreement the Company agrees to, furnish a certificate to the Collateral Agent as to the outstanding principal balance of the New Notes or as to the existence of any Actionable Default. ARTICLE XXXI DUTIES OF COLLATERAL AGENT Section 31.1. Notices to Authorized Representative and Noteholders. The Collateral Agent shall promptly furnish to each Noteholder: (i) a copy of each of Notice of Actionable Default received by the Collateral Agent; 12 (ii) a copy of each certificate received by the Collateral Agent rescinding a Notice of Actionable Default; (iii) written notice, and a reasonably detailed description, of any additional Collateral in which the Collateral Agent has been granted a Lien; (iv) written notice of their receipt, and the amount, of any proceeds received by the Collateral Agent upon the disposition of any Collateral; (v) written notice of the aggregate amount distributed to the Noteholders in connection with any distribution hereunder; and (vi) written notice of any release by the Collateral Agent of any Collateral, together with any consents received by the Collateral Agent from Noteholders to permit such release. Section 31.2. A c t i ons Under Collateral Documents. The Collateral Agent shall not be obligated to take any action under this Agreement or any of the Collateral Documents except for the performance of such duties as are specifically set forth herein or therein. Subject to the provisions of Article V, the Collateral Agent shall take any action under or with respect to the Collateral Documents or this Agreement which is requested by the Required Creditors and which is not inconsistent with or contrary to the provisions of this Agreement or the Collateral Documents. The Collateral Agent may amend or waive any provision of any Collateral Document without the approval of the Required Creditors so long as such amendment or waiver does not adversely affect in any material respect the interests of any Noteholder. At any time when a Notice of Actionable Default shall have been given and shall be outstanding, the Collateral Agent shall, subject in all cases to the provisions of Article V, exercise or refrain from exercising all such rights, powers and remedies as shall be available to it under the Collateral Documents or any of them in accordance with any written instructions received from the Required Creditors. Absent written instruction from the Required Creditors at a time when a Notice of Actionable Default shall be outstanding, the Collateral Agent may take, but shall have no obligation to take, any and all such actions under the Collateral Documents or any of them or otherwise as it shall deem to be in the best interest of the Noteholders; provided, however, that in the absence of written instructions (which may relate to the exercise of specific remedies or to the exercise of remedies in general) from the Required Creditors the Collateral Agent shall not exercise remedies available to it under any Collateral Documents with respect to the Collateral or any part thereof. 13 ARTICLE XXXII PROCEEDS RECEIVED UNDER COLLATERAL DOCUMENTS Section 32.1. Collateral Account. (a) The Collateral Agent shall establish and maintain an account (the "Collateral Account") into which it shall (except as otherwise explicitly provided in any Collateral Document) deposit all amounts received by it in its capacity as Collateral Agent in respect of the Collateral. All amounts deposited in such account shall be held by the Collateral Agent subject to the terms hereof and of the Collateral Documents. The Company shall have no rights with respect to, and the Collateral Agent shall have exclusive dominion and control over, the Collateral Account. All moneys received by the Collateral Agent with respect to all or any part of the Collateral either (i) prior to the occurrence of an Actionable Default, (ii) prior to the Collateral Agent's receipt of a Notice of Actionable Default or (iii) after withdrawal of all pending Notices of Actionable Default shall be delivered to the Company or any other person entitled thereto in accordance with the Collateral Documents, at such person's instruction. (b) N o t w ithstanding the provisions of Section 4.2, the Collateral Agent shall have the right at any time and from time to time (prior to making any distributions described in Section 4.2) to apply any amounts in the Collateral Account to the payment of the reasonable out-of- pocket costs and expenses (including reasonable attorneys fees and disbursements) incurred by the Collateral Agent in administering and carrying out its obligations under this Agreement or any of the Collateral Documents, in exercising or attempting to exercise any right or remedy hereunder or thereunder or in taking possession of, protecting, preserving or disposing of any item of Collateral, and all amounts against or for which the Collateral Agent is to be indemnified or reimbursed hereunder (excluding any such costs, expenses or amounts which have theretofore been reimbursed) until all of such costs, expenses and amounts have been paid in full; provided, however, that any such application shall be allocated pro rata among the Noteholders. The Collateral Agent shall reimburse any Noteholder prior to applying any amounts in the Collateral Account pursuant to Section 4.2 for any and all amounts expended with respect to pay indemnity provided in accordance with Section 5.3(e) to such Noteholder, by application of funds in the account established hereunder in the same manners provided in the provision the preceding sentence. Section 32.2. Distribution of Amounts Deposited in Collateral Accounts. (a) All amounts deposited in the Collateral Account shall be distributed in the following order of priority: First, to the Noteholders pro rata in accordance with the aggregate principal amounts of the Notes outstanding at such time held 14 by such holders, until the Obligations shall have been paid in full; Second, the balance, if any, to the Company or such other person or persons as shall be entitled thereto pursuant to the Collateral Documents. (b) Notwithstanding any provision of this Agreement or the Collateral Documents, any sums and amounts received by any Noteholder pursuant to this Section shall be applied as provided in the Notes, the Note Exchange Agreement and the Collateral Documents. Section 32.3. Time of Payment. All distributions under Section 4.2 of amounts deposited in the Collateral Account shall be made promptly after the deposit of such amounts into the Collateral Account. Section 32.4. Investment of Amounts in Account. Pending the disbursement thereof pursuant to the terms of this Agreement, all amounts in the account shall (to the extent the Collateral Agent deem practical) be invested by the Collateral Agent in (a) marketable direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing not later than the earlier of the anticipated distribution date of such amounts and the date 180 days from the date of acquisition thereof; (b) investments in commercial paper maturing not later than the earlier of the anticipated distribution date of such amounts and the date 180 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from Standard & Poor's Corporation or from Moody's Investors Service, Inc.; or (c) investments in certificates of deposit, banker's acceptances and time deposits maturing not later than the earlier of the anticipated distribution date of such amounts and the date 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any office of any commercial b a nk which has a combined capital and surplus of not less than $500,000,000. ARTICLE XXXIII CONCERNING THE COLLATERAL AGENT Section 33.1. Appointment of Collateral Agent. Each of the Noteholders appoints the Collateral Agent to act as Collateral Agent pursuant to the terms of the Collateral Documents and this Agreement, and the Collateral Agent agrees to act as Collateral Agent for the Noteholders pursuant to the terms of the Collateral Documents and this Agreement. Section 33.2. Limitations of Responsibilities of Collateral Agent. The Collateral Agent shall not be responsible in any manner whatsoever for the correctness of any recitals, statements, representations 15 or warranties contained herein or in any Collateral Document, except for those made by it herein. The Collateral Agent makes no representation as to the value or condition of the Collateral or any part thereof, as to the title of the Company to the Collateral, as to the security afforded by this Agreement or any Collateral Document or, except as set forth in Article VI, as to the validity, execution, enforceability, legality, or sufficiency of this Agreement or any Collateral Documents, and the Collateral Agent shall incur no liability or responsibility in respect of any such matters. The Collateral Agent shall not be responsible for insuring the Collateral for the payment of taxes, charges, assessments or liens upon the Collateral or otherwise as to the maintenance of the Collateral, except as provided in the immediately following sentence when the Collateral Agent has possession of the Collateral. The Collateral Agent shall have no duty to the Company or to the holders of the Secured Obligations as to any Collateral in its possession or control or in the possession or control of any agent or nominee of the Collateral Agent or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto, except the duty to accord such of the Collateral as may be in its possession substantially the same care as it accords its own assets and the duty to account for monies received by it. The Collateral Agent shall not be required to ascertain or inquire as to the performance by the Company of any of the covenants or agreements contained herein or in any of the Collateral Documents. Neither the Collateral Agent nor any officer, agent or representative thereof shall be personally liable for any action taken or omitted to be taken by any such person in connection with this Agreement or any Collateral Document except for such person's own gross negligence or wilful misconduct. Neither the Collateral Agent nor any officer, agent or representative thereof shall be personally liable for any action taken by any such person in accordance with any notice given by the Required Creditors or the Noteholders, as the case may be, hereunder even if, at the time such action is taken by any such person, the Required Creditors or Noteholders, as the case may be, which gave the notice to take such action are no longer the Required Creditors or all the Noteholders, as applicable, and if the Collateral Agent has not received written notice of such fact. The Collateral Agent may execute any of the powers granted under this Agreement or any of the Collateral Documents and perform any duty hereunder or thereunder either directly or by or through agents or attorneys-in-fact, and shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it without gross negligence or wilful misconduct. Section 33.3. Reliance on Collateral Agent; Indemnity Against Liabilities; etc. (a) Whenever in the performance of its duties under this Agreement the Collateral Agent shall deem it necessary or desirable that a matter be proved or established with respect to the Company or other person in connection with the taking, suffering or omitting of any action hereunder by the Collateral Agent, such matter may be conclusively deemed to be proved or established by a certificate executed by an officer of such person, and the Collateral Agent shall have no liability with respect to any action taken, suffered or omitted in reliance thereon. (b) The Collateral Agent may consult with counsel and shall be fully protected in taking any action hereunder in accordance with any 16 advice of such counsel. The Collateral Agent shall have the right but not t h e obligation at any time to seek instructions concerning the administration of this Agreement, the duties created hereunder or the Collateral from any court of competent Jurisdiction. (c) The Collateral Agent shall be fully protected in relying upon any resolution, statement, certificate, instrument, opinion, report, notice, request, consent, order or other paper or document which it believes to be genuine and to have been signed or presented by the proper party or parties. In the absence of its gross negligence or wilful misconduct, the Collateral Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificate or opinions furnished to the Collateral Agent in connection with this Agreement. (d) The Collateral Agent shall not be deemed to have actual, constructive, direct or indirect notice or knowledge of the occurrence of any Actionable Default unless and until the Collateral Agent shall have received a Notice of Actionable Default. The Collateral Agent shall have no obligation whatsoever either prior to or after receiving such a notice to inquire whether an Actionable Default has, in fact, occurred and shall be entitled to rely conclusively, and shall be fully protected in so relying, on any certificate so furnished to them. (e) If the Collateral Agent has been requested to take any specific action pursuant to any provision of this Agreement, the Collateral Agent shall not be under any obligation to exercise any of the rights or powers vested in it by this Agreement in the manner so requested unless it shall have been provided indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred by it in connection with such request or direction. Section 33.4. Resignation and Removal of the Collateral Agent. The Collateral Agent may at any time, by giving 30 days' prior written notice to the Company, and each Noteholder, resign and be discharged from the responsibilities hereby created, such resignation to become effective upon the earlier of (i) 30 days after the date of such notice or (ii) the appointment of a successor by the Required Creditors and the acceptance of such appointment be such successor. If no successor shall be appointed and approved within 30 days after the date of any such resignation, the Collateral Agent (notwithstanding the termination of all their other duties and obligations hereunder by reason of such resignation) may apply to any court of competent jurisdiction to appoint a successor to act until a successor shall have been appointed by the Required Creditors as above provided or may, on behalf of the Noteholders, appoint one or more successor Collateral Agent. The Collateral Agent may be removed at any time by the affirmative vote of the Required Creditors and, upon the appointment of a successor by the Required Creditors and the acceptance of such appointment by such successor, the Collateral Agent shall be discharged from the responsibilities hereby created. Section 33.5. Expenses and Indemnification by the Company. By countersigning this Agreement, the Company agrees (i) to reimburse the 17 Collateral Agent, on demand, for any expenses incurred by the Collateral Agent, including counsel fees and compensation of agents, arising out of, in any way connected with, or as a result of, the execution or delivery of this Agreement or any Collateral Document or any agreement or instrument contemplated thereby or the performance by the parties thereto of their respective obligations hereunder or in connection with the enforcement or protection of the rights of the Collateral Agent or the Noteholders under the Collateral Documents and (ii) to indemnify and hold harmless the Collateral Agent and its affiliates, and each of their partners, trustees, officers, employees and agents, on demand, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Collateral Agent in its capacity as the Collateral Agent in any way relating to or arising out of this Agreement or any Collateral Document or any action taken or omitted by it under this Agreement or any Collateral Document; provided that the Company shall not be liable to the Collateral Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of the Collateral Agent or any of its officers, employees or agents. Section 33.6. Expenses and Indemnification by Credit Agreement Creditors and Noteholders. Each Noteholder agrees (i) to reimburse the Collateral Agent, on demand, in the amount of its pro rata share (based on the amount of the Obligations held by it), for any expenses referred to in Section 5.5 which shall not have been reimbursed by the Company or paid from the proceeds of Collateral as provided herein and (ii) to indemnify and hold harmless the Collateral Agent and its affiliates, and each of their partners, trustees, officers, employees and agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements referred to in Section 5.5, to the extent the same shall not have been reimbursed by the Company or paid from the proceeds of Collateral as provided herein; provided that no Noteholder shall be liable to the Collateral Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of the Collateral Agent or any of officers, employees or agents. ARTICLE XXXIV REPRESENTATIONS AND WARRANTIES The Collateral Agent, each of the Noteholders and the Company represents and warrants to the other parties hereto that (a) the execution, delivery and performance of this Agreement (i) has been duly authorized by all requisite corporate, partnership or trust action on its part, as the case may be, and (ii) will not contravene any provision of its governing documents or any order of any court or other governmental authority having applicability to it, and (b) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligation. 18 ARTICLE XXXV INTERCREDITOR ARRANGEMENTS Section 35.1. Security Interests. The Collateral Agent and each of the Noteholders hereby agree that the Liens granted to the Collateral Agent under the Collateral Documents shall be treated, as between the Noteholders as having equal priority and shall at all times be shared by the Noteholders as provided herein. Section 35.2. Release of Collateral. The Noteholders and the Collateral Agent agree as follows: (a) Release Following Sale of Collateral. The Collateral Agent shall release all Collateral from the Liens created by the Collateral Documents, so long as such release is in connection with the sale of such Collateral and at least seventy percent (70%) of the Net Proceeds from such sale are used to pay the Obligations. (b) Release at Direction of all Noteholders. Except under the circumstances specified in the foregoing paragraph (a), the Collateral Agent shall release Collateral from the Liens created by the Collateral Documents only at the direction of all the Noteholders. Section 35.3. Purchase of Collateral. Any Noteholder (or the Collateral Agent on behalf of all the Noteholders with the consent and direction of each of the Noteholders) may purchase Collateral at any public sale of such Collateral pursuant to any of the Collateral Documents and may make payment on account thereof by using any claim then due and payable to such Noteholder (or all the Noteholders, in the case of a purchase by the Collateral Agent) from the person which granted a security interest in such Collateral as a credit against the purchase price. Section 35.4. Sharing of Payments. If any Noteholder shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise) on account of any Obligation in excess of its ratable share (determined by application of the provisions of this Agreement, and the Note Exchange Agreement) of payments on account of Obligations, such Noteholder shall, within 90 days after receipt of written notice from one or more of the Noteholders and of adequate supporting documentation and information, purchase from the other Noteholders such participations in their Obligations as shall be necessary to cause such purchasing Noteholder to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Noteholder, such purchase from each Noteholder shall be rescinded and each such Noteholder shall promptly repay to the purchasing Noteholder the purchase price to the extent of such recovery together with an amount equal to such Noteholder's ratable share (according to the proportion of (i) the amount of such Noteholder's required repayment to (ii) the total amount so recovered from the purchasing Noteholder) of any interest or other amount paid or payable by 19 the purchasing Noteholder in respect of the total amount so recovered. The Company agrees that any Noteholder so purchasing a participation from another Noteholder pursuant to this Section 7.5 may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such participation as fully as if such Noteholder were the direct creditor of the Company in the amount of such participation. Section 35.5. Setoffs. If any Noteholder exercises any right of setoff or similar right with respect to any assets (whether or not such assets shall constitute Collateral) of the Company for payment of any Obligations, the amounts so setoff shall constitute Collateral for purposes of this Agreement and such Noteholder shall promptly cause such amounts to be delivered to or put in the custody, possession or control of the Collateral Agent for disposition or distribution in accordance with the provisions of Sections 4.1 and 4.2. Until such time as the provisions of the immediately preceding sentence have been complied with, such Noteholder shall be deemed to hold such Collateral in trust for the parties hereto entitled thereto hereunder. Section 35.6. Further Assurances, etc. Each party hereto shall execute and deliver such other documents and instruments, in form and substance reasonably satisfactory to the other parties hereto, and shall take such other action, in each case as any other party hereto may reasonably have requested (at the cost and expense of the Company which, by countersigning this Agreement, agrees to pay such costs and expenses), to effectuate and carry out the provisions of this Agreement, including by recording or filing in such places as the requesting party may deem desirable this Agreement or such other documents or instruments. ARTICLE XXXVI APPROVAL BY THE COMPANY By countersigning this Agreement, the Company, although not a party hereto, acknowledges and consents to, and agrees to perform and be bound by, the provisions hereof. ARTICLE XXXVII MISCELLANEOUS Section 37.1. N o Individual Action. No holder of any Obligations may require the Collateral Agent to take or refrain from taking any action hereunder or under any of the Collateral Documents or with respect to any of the Collateral except as and to the extent expressly set forth in this Agreement. Section 37.2. Successors and Assigns. This Agreement shall be binding on and inure to the benefit of the Collateral Agent and each of the 20 Noteholders and their respective successors and assigns. Except as specifically set forth above, this Agreement is not intended to confer any benefit on, or create any obligation of a party hereto to, any third party, including, without limitation, the Company. Section 37.3. N o tices. Notices and other communications provided for herein or in any Collateral Document shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telex, graphic scanning or other telegraphic communications equipment of the sending party, to each party at its address specified in the Note Exchange Agreement. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telex, graphic scanning or other telegraphic communications equipment of the sender, or on the date five business days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 9.3 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.3. Section 37.4. Termination. This Agreement shall terminate automatically upon the indefeasible payment in full of the Obligations; provided, however, that Sections 5.5 and 5.6 of this Agreement shall survive, and remain operative and in full force and effect, regardless of the termination of this Agreement. Section 37.5. A p p licable Law. This agreement shall be construed in accordance with and governed by the laws of the State of New York. Section 37.6. Waiver of Rights. Neither any failure nor any delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, and a single or partial exercise thereof shall not preclude any other or further exercise or the exercise of any other right, power or privilege. Section 37.7. Severability. In case one or more of the provisions contained in this invalid, illegal or unenforceable in validity, legality and enforceability provisions contained herein shall not in case any one or Agreement should be any respect, the of the remaining any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provision. Section 37.8. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. Section 37.9. Section Headings. The Article and Section headings used herein are for convenience of reference only and are not to 21 affect the construction of or be taken into consideration in interpreting this Agreement. Section 37.10. Complete Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior representations, negotiations, writings, memoranda and agreements. To the extent any provision of this Agreement conflicts with the Note Exchange Agreement or any other Note Purchase Document, the provisions of this Agreement shall be controlling. Nothing in this Agreement, expressed or implied, is intended to confer upon any person, other than the parties hereto and their permitted successors and assigns pursuant to Section 9.2 hereof, any rights or remedies under or by reason of this Agreement, IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written. CCC LENDING CORPORATION By /S/ Michael E. Schultz Michael E. Schultz, President CANAL CAPITAL CORPORATION By: /S/ Michael E. Schultz Michael E. Schultz, President 22 NOTEHOLDERS /S/ Michael E. Schultz MICHAEL E. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST By: /S/ Michael E. Schultz Michael E. Schultz, Trustee c/o Michael E. Schultz 2830 Long Meadow Drive West Palm Beach, Florida 33414 /S/ Lora K. Schultz LORA K. SCHULTZ 2830 Long Meadow Drive West Palm Beach, Florida 33414 /S/ Roger A. Schultz ROGER A. SCHULTZ 131 N. Hibiscus Drive Miami Beach, Florida 33129 23 ROGER A. SCHULTZ PENSION PLAN By: /S/ Roger A. Schultz Roger A. Schultz, Trustee c/o Roger A. Schultz 131 N. Hibiscus Drive Miami Beach, Florida 33129 /S/ Richard A. Schultz RICHARD A. SCHULTZ th 136 East 56 Street, Apt. 12H New York, NY 10022 EDELMAN VALUE PARTNERS, L.P. By: A. B. Edelman Management Company, Inc., General Partner By: /S/ Asher B. Edelman Name: Title: 717 Fifth Avenue New York, New York 10022 24 EDELMAN VALUE FUND, LTD By: /S/ Asher B. Edelman Name: Title: c/o Bayand (Luxembourg) Admin. 1A Rue du St. Esprit L-1475 Luxembourg /S/ Maria Regina Mayall Edelman MARIA REGINA MAYALL EDELMAN Chemin de Pecholettaz 9 1066 Eppallinges, Switzerland SES TRUST By: /S/ Sharon E. Sigesmund Sharon E. Sigesmund Trustee c/o Sharon E. Sigesmund 2859 Queens Courtyard Drive Las Vegas, Nevada 89109 25 AGREEMENT THIS AGREEMENT dated as of January 8, 1998 by and between DELTEC A S SET MANAGEMENT CORPORATION ( Deltec ) and HANSEATIC CORPORATION ( Hanseatic ; and collectively, Assignors ), and each of the persons and entities set forth on Schedule I hereto (the Assignees ). W I T N E S S E T H: WHEREAS, Deltec is the holder of a promissory note issued by Canal Capital Corporation, a Delaware corporation (the Borrower ), as of May 15, 1993 in the original principal amount of $5,800,000 (the Note ), pursuant to and in accordance with the Note Exchange Agreement dated as of May 15, 1993 among Assignors, the Borrower and Guaranty Reassurance Company (the Note Agreement ); and WHEREAS, the Borrower's obligations under the Note are secured by c e rtain Collateral pursuant to the Security Agreement and certain Mortgages, all as defined in the Note Agreement; and WHEREAS, Assignors wish to assign to the Assignees all of Assignors rights, title and interest in and to the Note, the Collateral and the Mortgages, and under the Note Agreement and the Security Agreement, for the consideration set forth herein. 26 NOW, THEREFORE, the parties hereby agree as follows: a. Assignment and Assumption. Assignors hereby assign, sell, transfer and convey to the Assignees all of Assignors rights, title and interest in and to the Note, the Collateral and the Mortgages, and under the Note Agreement and the Security Agreement. Each Assignee shall hold a proportional interest in the Note, the Collateral and the Mortgages and under the Security Agreement based on the percentage set forth opposite its or his name on Schedule I hereto. Assignors are delivering the original Note to the Assignees simultaneously herewith. The Assignees hereby agree to assume any and all of Assignors obligations under the Note Agreement and the Security Agreement that may arise after the date hereof. b. Other Documentation. Simultaneously herewith, Assignors are executing and delivering to the collateral agent of the Assignees, CCC L e nding Corporation, for recording and filing with all applicable authorities, assignments of the Mortgages listed on Schedule II hereto and Forms UCC-3 with respect to the Collateral (the Security Documents ). c. Further Assurances. At any time, and from time to time after the date hereof, Assignors shall, without further consideration, execute and deliver such additional agreements, instruments, documents or certificates, and shall take such other action as shall reasonably be requested by the Assignees in order better to transfer and convey to the Assignees all of Assignors rights, title and interest in and to the Collateral and the Mortgages. In the event that the Borrower makes any payments to Assignors after the date hereof in respect of the Note, Assignors shall promptly forward such payments to CCC Lending Corporation, the collateral agent of the Assignees, at c/o Michael E. Schultz, 2830 Long Meadow Drive, West Palm Beach, Florida 33414. d. Consideration. In consideration for Assignors undertakings herein, including, without limitation, its making the assignments set forth in this Agreement and executing and delivering the Security Documents, the Assignees are paying to Deltec, by wire transfer to Deltec's account, the sum of (a) $1,717,456.00, constituting the full principal amount remaining under the Note, plus (b) $30,900.51, constituting interest accrued as of the date hereof, plus (c) $28,930.10 constituting certain fees that are accrued but unpaid with respect to the Note. e. Representations and Warranties. i. Each of the Assignors and the Assignees hereby represents and warrants to the other that (i) it has all requisite power and authority to enter into and to perform this Agreement; (ii) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding agreement, enforceable against it in accordance with its terms; (iii) such party's execution, delivery and performance of this Agreement will not violate the applicable organizational documents of 27 such party; and (iv) such party's execution, delivery and performance of this Agreement will not breach of, or constitute a default under, any other agreement or instrument to which any Assignor or any Assignee, as the case may be, is a party or by which its assets are bound. ii. In addition, Assignors hereby jointly and severally represent and warrant to the Assignees that (i) Assignors have not assigned, sold, transferred, pledged, hypothecated or otherwise encumbered Assignors rights under the Note or in and to the Collateral and the Mortgages, (ii) Assignors have not agreed to do any of the foregoing with any person or entity other than the Assignees and (iii) upon consummation of the transactions contemplated hereby, the Assignees will own all of Assignors' rights, title and interest in and to the Note, free and clear of any and all liens, claims, charges, rights or other encumbrances. iii. The representations and warranties set forth in this Section 5 shall survive the consummation of the transactions contemplated hereby. f. Governing Law. This Agreement shall be construed and enforced in accordance with laws of the State of New York, without consideration of principles governing conflicts of law. g. Entire Agreement. This Agreement, including the Security Documents, contains a complete statement of all the arrangements between the parties with respect to the subject matter thereof and supersedes any previous arrangement or understanding between them relating to the subject- matter hereof. IN WITNESS WHEREOF, the Assignors and the Assignees have executed and delivered this Agreement as of the date first above written. Assignors: DELTEC ASSET MANAGEMENT CORPORATION By: /S/ John Cento Name: John Cento Title: Senior Vice President HANSEATIC CORPORATION 28 By: /S/ Paul Biddelman Treasurer Assignees: /S/ Michael E. Schultz Michael E. Schultz MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST By: /S/ Michael E. Schultz Michael E. Schultz Trustee /S/ Lora K. Schultz Lora K. Schultz 29 ROGER A. SCHULTZ PENSION PLAN By: /S/ Roger A. Schultz Roger A. Schultz Trustee /S/ Richard A. Schultz Richard A. Schultz EDELMAN VALUE PARTNERS, L.P. By: A. B. Edelman Management Company, Inc., General Partner By: /S/ Asher B. Edelman Name: Title: EDELMAN VALUE FUND, LTD. By: /S/ Asher B. Edelman Name: Title: /S/ Maria Regina Mayall Edelman Maria Regina Mayall Edelman 30 SES TRUST By: /S/ Sharon E. Sigesmund Sharon E. Sigesmund Trustee (THIS PAGE HAS BEEN LEFT BLANK) 31 SCHEDULE I Name of Assignee Percentage Michael E. Schultz 27.03% Michael E. Schultz Defined Benefit Trust 6.54% Lora K. Schultz 6.19% Roger A. Schultz 13.51% Roger A. Schultz Pension Plan 5.03% Richard A. Schultz 3.86% Edelman Value Partners, L.P. 9.46% Edelman Value Fund, LTD 14.86% Maria Regina Mayall Edelman 8.11% SES Trust 5.41% 32 SCHEDULE II Assignment of Mortgage - Minnesota (Schedule II-A attached) Assignment of Mortgage - Iowa (Schedule II-B attached) Assignment of Mortgage - South Dakota (Schedule II-C attached) Schedule II-A 33 ASSIGNMENT OF MORTGAGE - MINNESOTA As of January 8, 1998, for valuable consideration, Hanseatic Corporation, having an address at 450 Park Avenue, Suite 2302, New York, New York 10022 ( Hanseatic ), and Guaranty Reassurance Company, having an address at 7800 Belfort Parkway, Suite 200, Jacksonville, Florida 32256, collectively, as Collateral Agent pursuant to that certain Collateral Agency Agreement dated as of May 15, 1993 (hereafter collectively Assignor ), as successor in interest to Chemical Bank (formerly known as Manufacturers Hanover Trust Company) by that First Amendment to Mortgage dated May 15, 1993, does hereby sell, assign and transfer to CCC Lending Corporation, a Delaware corporation, all of its right, title and interest in that certain Mortgage, Assignment, Security Agreement and Financing Statement dated as of May 15, 1985, made by United Stockyards Corporation (which by name change became Canal Capital Corporation), a Delaware corporation, as grantor ( Grantor ) and the Assignor, in its capacity as Trustee pursuant to that certain Indenture dated as of May 15, 1985, as amended by a First Supplemental Indenture dated as of April 20, 1988, by and between Grantor and Chemical Bank, said Mortgage being filed for record in the Office of the Register of Deeds in and for the County of Dakota, State of Minnesota on the 31st day of May, 1985, as Document Number 688807. This assignment is made without recourse or warranty. The legal description of the property encumbered by the Mortgage is attached to the Mortgage, portions of which have been released from time to time. Hanseatic Corporation Guaranty Reassurance Company Collateral Agent Collateral Agent By: Trust Company of the West Its Investment Advisor By: Paul Biddelman By: Melissa V. Weiler Its:President Its:Managing Director Schedule II-A (cont d) STATE OF ) ) SS. COUNTY OF ) 34 The foregoing instrument was duly acknowledged before me, a notary public, by , the of Hanseatic Corporation, a New York corporation, on behalf of the Corporation. Notary Public STATE OF ) ) SS. COUNTY OF ) The foregoing instrument was duly acknowledged before me, a notary public, by , the of the Trust Company of the West, as investment advisor of Guaranty Reassurance Corporation, a Florida corporation, on behalf of the Corporation. Notary Public Schedule II-B 35 ASSIGNMENT OF MORTGAGE - IOWA As of January 8, 1998, for valuable consideration, Hanseatic Corporation, having an address at 450 Park Avenue, Suite 2302, New York, New York 10022 ( Hanseatic ), and Guaranty Reassurance Company, having an address at 7800 Belfort Parkway, Suite 200, Jacksonville, Florida 32256, collectively, as Collateral Agent pursuant to that certain Collateral Agency Agreement dated as of May 15, 1993 (hereafter collectively Assignor ), as successor in interest to Chemical Bank (formerly known as Manufacturers Hanover Trust Company) by that First Amendment to Mortgage dated May 15, 1993, does hereby sell, assign and transfer to CCC Lending Corporation, a Delaware corporation, all of its right, title and interest in that certain Mortgage, Assignment, Security Agreement and Financing Statement dated as of May 15, 1985, made by United Stockyards Corporation (which by name change became Canal Capital Corporation), a Delaware corporation, as grantor ( Grantor ) and the Assignor, in its capacity as Trustee pursuant to that certain Indenture dated as of May 15, 1985, as amended by a First Supplemental Indenture dated as of April 20, 1988, by and between Grantor and Chemical Bank, said Mortgage being filed for record on the 31st day of May, 1985, on Roll 157, Image 1841 in the Office of the County Recorder for Woodbury County, Iowa, as amended by that certain First Amendment to Mortgage - Iowa dated as of May 15, 1993 and filed for record December 28, 1995 on Roll 340, Image 832 in the Office of the County Recorder for Woodbury County, Iowa. This assignment is made without recourse or warranty. The legal description of the property encumbered by the Mortgage is attached to the Mortgage, portions of which have been released from time to time. Hanseatic Corporation Guaranty Reassurance Company Collateral Agent Collateral Agent By: Trust Company of the West Its Investment Advisor By: Paul Biddelman By: Melissa V. Weiler Its:President Its:Managing Director Schedule II-B (cont d) STATE OF ) ) SS. 36 COUNTY OF ) The foregoing instrument was duly acknowledged before me, a notary public, by , the of Hanseatic Corporation, a New York corporation, on behalf of the Corporation. Notary Public STATE OF ) ) SS. COUNTY OF ) The foregoing instrument was duly acknowledged before me, a notary public, by , the of the Trust Company of the West, as investment advisor of Guaranty Reassurance Corporation, a Florida corporation, on behalf of the Corporation. Notary Public 37 Schedule II-C ASSIGNMENT OF MORTGAGE - SOUTH DAKOTA As of January 8, 1998, for valuable consideration, Hanseatic Corporation, having an address at 450 Park Avenue, Suite 2302, New York, New York 10022 ( Hanseatic ), and Guaranty Reassurance Company, having an address at 7800 Belfort Parkway, Suite 200, Jacksonville, Florida 32256, collectively, as Collateral Agent pursuant to that certain Collateral Agency Agreement dated as of May 15, 1993 (hereafter collectively Assignor ), as successor in interest to Chemical Bank (formerly known as Manufacturers Hanover Trust Company) by that First Amendment to Mortgage dated May 15, 1993, does hereby sell, assign and transfer to CCC Lending Corporation, a Delaware corporation, all of its right, title and interest in that certain Mortgage, Assignment, Security Agreement and Financing Statement dated as of May 15, 1985, made by United Stockyards Corporation (which by name change became Canal Capital Corporation), a Delaware corporation, and Sioux Falls Stockyards Company, a South Dakota corporation, together as grantor ( Grantor ) and the Assignor, in its capacity as Trustee pursuant to that certain Indenture dated as of May 15, 1985, by and between Grantor and Chemical Bank, said Mortgage recorded on May 29, 1985 at 11:10 o clock a.m. in Book 760 of Mortgages on Pages 838- 898 in the Office of the Minnehaha County, South Dakota Register of Deeds. This assignment is made without recourse or warranty. The legal description of the property encumbered by the Mortgage is attached herein as Exhibit A, portions of which have been released from time to time. Hanseatic Corporation Guaranty Reassurance Company Collateral Agent Collateral Agent By: Trust Company of the West Its Investment Advisor By: Paul Biddelman By: Melissa V. Weiler Its:President Its:Managing Director CORPORATE SEAL CORPORATE SEAL Schedule II-C (cont d) 38 STATE OF ) ) SS. COUNTY OF ) On this day of , in the year , before me personally appeared , known to me to be the of the corporation that is described in and that executed the within instruments and acknowledged to me that such corporation executed the same. Notary Public - My commission expires STATE OF ) ) SS. COUNTY OF ) On this day of , in the year , before me personally appeared , known to me to be the of the corporation that is described in and that executed the within instruments and acknowledged to me that such corporation executed the same. Notary Public - My commission expires 39 AGREEMENT THIS AGREEMENT dated as of January 8, 1998 by and between GUARANTY REASSURANCE COMPANY ( Assignor ) and each of the persons and entities set forth on Schedule I hereto (the Assignees ). W I T N E S S E T H: WHEREAS, Assignor is the holder of a promissory note issued by Canal Capital Corporation, a Delaware corporation (the Borrower ), as of May 15, 1993 in the original principal amount of $3,000,000 (the Note ), pursuant to and in accordance with the Note Exchange Agreement dated as of May 15, 1993 among Assignor, the Borrower and Hanseatic Corporation (the Note Agreement ); and WHEREAS, the Borrower's obligations under the Note are secured by certain Collateral pursuant to the Security Agreement and certain Mortgages, all as defined in the Note Agreement; and 40 WHEREAS, Assignors wish to assign to the Assignees all of Assignors rights, title and interest in and to the Note, the Collateral and the Mortgages, and under the Note Agreement and the Security Agreement, for the consideration set forth herein. NOW, THEREFORE, the parties hereby agree as follows: h. Assignment and Assumption. Assignor hereby assigns, sells, transfers and conveys to the Assignees all of Assignor s rights, title and interest in and to the Note, the Collateral and the Mortgages, and under the Note Agreement and the Security Agreement. Each Assignee shall hold a proportional interest in the Note, the Collateral and the Mortgages and under the Security Agreement based on the percentage set forth opposite its or his name on Schedule I hereto. Assignor is delivering the original Note to the Assignees simultaneously herewith. The Assignees hereby agree to assume any and all of Assignor s obligations under the Note Agreement and the Security Agreement that may arise after the date hereof. i. Other Documentation. Simultaneously herewith, Assignor is executing and delivering to the collateral agent of the Assignees, CCC Lending Corporation, for recording and filing with all applicable authorities, assignments of the Mortgages listed on Schedule II hereto and Forms UCC-3 with respect to the Collateral (the Security Documents ). j. Further Assurances. At any time, and from time to time after the date hereof, Assignor shall, without further consideration, execute and deliver such additional agreements, instruments, documents or certificates, and shall take such other action as shall reasonably be requested by the Assignees in order better to transfer and convey to the Assignees all of Assignor s rights, title and interest in and to the Collateral and the Mortgages. In the event that the Borrower makes any payments to Assignor after the date hereof in respect of the Note, Assignor shall promptly forward such payments to CCC Lending Corporation, the collateral agent of the Assignees, at c/o Michael E. Schultz, 2830 Long Meadow Drive, West Palm Beach, Florida 33414. k. Consideration. In consideration for Assignor s undertakings herein, including, without limitation, its making the assignments set forth in this Agreement and executing and delivering the Security Documents, the Assignees are paying to Assignor, by wire transfer to Assignor s account, the sum of (a) $887,544.00, constituting the full principal amount remaining under the Note, plus (b) $15,989.49, constituting interest accrued as of the date hereof, plus (c) $14,969.90 constituting certain fees that are accrued but unpaid with respect to the Note. l. Representations and Warranties. i. Each of the Assignor and the Assignees hereby 41 represents and warrants to the other that (i) it has all requisite power and authority to enter into and to perform this Agreement; (ii) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding agreement, enforceable against it in accordance with its terms; (iii) such party's execution, delivery and performance of this Agreement will not violate the applicable organizational documents of such party; and (iv) such party's execution, delivery and performance of this Agreement will not breach of, or constitute a default under, any other agreement or instrument to which the Assignor or any Assignee, as the case may be, is a party or by which its assets are bound. ii. In addition, Assignor hereby represents and warrants to the Assignees that (i) Assignor has not assigned, sold, transferred, pledged, hypothecated or otherwise encumbered Assignor's rights under the Note or in and to the Collateral and the Mortgages, (ii) Assignor has not agreed to do any of the foregoing with any person or entity other than the Assignees and (iii) upon consummation of the transactions contemplated hereby, the Assignees will own all of Assignor s rights, title and interest in and to the Note, free and clear of any and all liens, claims, charges, rights or other encumbrances. iii. The representations and warranties set forth in this Section 5 shall survive the consummation of the transactions contemplated hereby. m. Governing Law. This Agreement shall be construed and enforced in accordance with laws of the State of New York, without consideration of principles governing conflicts of law. n. Entire Agreement. This Agreement, including the Security Documents, contains a complete statement of all the arrangements between the parties with respect to the subject matter thereof and supersedes any previous arrangement or understanding between them relating to the subject- matter hereof. IN WITNESS WHEREOF, the Assignors and the Assignees have executed and delivered this Agreement as of the date first above written. Assignors: GUARANTY REASSURANCE COMPANY By: /S/ Melissa V. Weiler Name: Melissa V. Weiler Title: Managing Director 42 Assignees: /S/ Michael E. Schultz Michael E. Schultz MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST By: /S/ Michael E. Schultz Michael E. Schultz Trustee /S/ Lora K. Schultz Lora K. Schultz 43 ROGER A. SCHULTZ PENSION PLAN By: /S/ Roger A. Schultz Roger A. Schultz Trustee /S/ Richard A. Schultz Richard A. Schultz EDELMAN VALUE PARTNERS, L.P. By: A. B. Edelman Management Company, Inc., General Partner By: /S/ Asher B. Edelman Name: Title: EDELMAN VALUE FUND, LTD. By: /S/ Asher B. Edelman Name: Title: /S/ Maria Megina Mayall Edelman Maria Regina Mayall Edelman 44 SES TRUST By: /S/ Sharon E. Sigesmund Sharon E. Sigesmund Trustee SCHEDULE I Name of Assignee Percentage Michael E. Schultz 27.03% Michael E. Schultz Defined Benefit Trust 6.54% Lora K. Schultz 6.19% Roger A. Schultz 13.51% Roger A. Schultz Pension Plan 5.03% Richard A. Schultz 3.86% Edelman Value Partners, L.P. 9.46% Edelman Value Fund, LTD 14.86% Maria Regina Mayall Edelman 8.11% SES Trust 5.41% 45 46 SCHEDULE II Assignment of Mortgage - Minnesota (Schedule II-A attached) Assignment of Mortgage - Iowa (Schedule II-B attached) Assignment of Mortgage - South Dakota (Schedule II-C attached) Schedule II-A 47 ASSIGNMENT OF MORTGAGE - MINNESOTA As of January 8, 1998, for valuable consideration, Hanseatic Corporation, having an address at 450 Park Avenue, Suite 2302, New York, New York 10022 ( Hanseatic ), and Guaranty Reassurance Company, having an address at 7800 Belfort Parkway, Suite 200, Jacksonville, Florida 32256, collectively, as Collateral Agent pursuant to that certain Collateral Agency Agreement dated as of May 15, 1993 (hereafter collectively Assignor ), as successor in interest to Chemical Bank (formerly known as Manufacturers Hanover Trust Company) by that First Amendment to Mortgage dated May 15, 1993, does hereby sell, assign and transfer to CCC Lending Corporation, a Delaware corporation, all of its right, title and interest in that certain Mortgage, Assignment, Security Agreement and Financing Statement dated as of May 15, 1985, made by United Stockyards Corporation (which by name change became Canal Capital Corporation), a Delaware corporation, as grantor ( Grantor ) and the Assignor, in its capacity as Trustee pursuant to that certain Indenture dated as of May 15, 1985, as amended by a First Supplemental Indenture dated as of April 20, 1988, by and between Grantor and Chemical Bank, said Mortgage being filed for record in the Office of the Register of Deeds in and for the County of Dakota, State of Minnesota on the 31st day of May, 1985, as Document Number 688807. This assignment is made without recourse or warranty. The legal description of the property encumbered by the Mortgage is attached to the Mortgage, portions of which have been released from time to time. Hanseatic Corporation Guaranty Reassurance Company Collateral Agent Collateral Agent By: Trust Company of the West Its Investment Advisor By: Paul Biddelman By: Melissa V. Weiler Its:President Its:Managing Director Schedule II-A (cont d) STATE OF ) ) SS. COUNTY OF ) 48 The foregoing instrument was duly acknowledged before me, a notary public, by , the of Hanseatic Corporation, a New York corporation, on behalf of the Corporation. Notary Public STATE OF ) ) SS. COUNTY OF ) The foregoing instrument was duly acknowledged before me, a notary public, by , the of the Trust Company of the West, as investment advisor of Guaranty Reassurance Corporation, a Florida corporation, on behalf of the Corporation. Notary Public Schedule II-B 49 ASSIGNMENT OF MORTGAGE - IOWA As of January 8, 1998, for valuable consideration, Hanseatic Corporation, having an address at 450 Park Avenue, Suite 2302, New York, New York 10022 ( Hanseatic ), and Guaranty Reassurance Company, having an address at 7800 Belfort Parkway, Suite 200, Jacksonville, Florida 32256, collectively, as Collateral Agent pursuant to that certain Collateral Agency Agreement dated as of May 15, 1993 (hereafter collectively Assignor ), as successor in interest to Chemical Bank (formerly known as Manufacturers Hanover Trust Company) by that First Amendment to Mortgage dated May 15, 1993, does hereby sell, assign and transfer to CCC Lending Corporation, a Delaware corporation, all of its right, title and interest in that certain Mortgage, Assignment, Security Agreement and Financing Statement dated as of May 15, 1985, made by United Stockyards Corporation (which by name change became Canal Capital Corporation), a Delaware corporation, as grantor ( Grantor ) and the Assignor, in its capacity as Trustee pursuant to that certain Indenture dated as of May 15, 1985, as amended by a First Supplemental Indenture dated as of April 20, 1988, by and between Grantor and Chemical Bank, said Mortgage being filed for record on the 31st day of May, 1985, on Roll 157, Image 1841 in the Office of the County Recorder for Woodbury County, Iowa, as amended by that certain First Amendment to Mortgage - Iowa dated as of May 15, 1993 and filed for record December 28, 1995 on Roll 340, Image 832 in the Office of the County Recorder for Woodbury County, Iowa. This assignment is made without recourse or warranty. The legal description of the property encumbered by the Mortgage is attached to the Mortgage, portions of which have been released from time to time. Hanseatic Corporation Guaranty Reassurance Company Collateral Agent Collateral Agent By: Trust Company of the West Its Investment Advisor By: Paul Biddelman By: Melissa V. Weiler Its:President Its:Managing Director Schedule II-B (cont d) STATE OF ) ) SS. 50 COUNTY OF ) The foregoing instrument was duly acknowledged before me, a notary public, by , the of Hanseatic Corporation, a New York corporation, on behalf of the Corporation. Notary Public STATE OF ) ) SS. COUNTY OF ) The foregoing instrument was duly acknowledged before me, a notary public, by , the of the Trust Company of the West, as investment advisor of Guaranty Reassurance Corporation, a Florida corporation, on behalf of the Corporation. Notary Public 51 Schedule II-C ASSIGNMENT OF MORTGAGE - SOUTH DAKOTA As of January 8, 1998, for valuable consideration, Hanseatic Corporation, having an address at 450 Park Avenue, Suite 2302, New York, New York 10022 ( Hanseatic ), and Guaranty Reassurance Company, having an address at 7800 Belfort Parkway, Suite 200, Jacksonville, Florida 32256, collectively, as Collateral Agent pursuant to that certain Collateral Agency Agreement dated as of May 15, 1993 (hereafter collectively Assignor ), as successor in interest to Chemical Bank (formerly known as Manufacturers Hanover Trust Company) by that First Amendment to Mortgage dated May 15, 1993, does hereby sell, assign and transfer to CCC Lending Corporation, a Delaware corporation, all of its right, title and interest in that certain Mortgage, Assignment, Security Agreement and Financing Statement dated as of May 15, 1985, made by United Stockyards Corporation (which by name change became Canal Capital Corporation), a Delaware corporation, and Sioux Falls Stockyards Company, a South Dakota corporation, together as grantor ( Grantor ) and the Assignor, in its capacity as Trustee pursuant to that certain Indenture dated as of May 15, 1985, by and between Grantor and Chemical Bank, said Mortgage recorded on May 29, 1985 at 11:10 o clock a.m. in Book 760 of Mortgages on Pages 838- 898 in the Office of the Minnehaha County, South Dakota Register of Deeds. This assignment is made without recourse or warranty. The legal description of the property encumbered by the Mortgage is attached herein as Exhibit A, portions of which have been released from time to time. Hanseatic Corporation Guaranty Reassurance Company Collateral Agent Collateral Agent By: Trust Company of the West Its Investment Advisor By: Paul Biddelman By: Melissa V. Weiler Its:President Its:Managing Director CORPORATE SEAL CORPORATE SEAL Schedule II-C (cont d) 52 STATE OF ) ) SS. COUNTY OF ) On this day of , in the year , before me personally appeared , known to me to be the of the corporation that is described in and that executed the within instruments and acknowledged to me that such corporation executed the same. Notary Public - My commission expires STATE OF ) ) SS. COUNTY OF ) On this day of , in the year , before me personally appeared , known to me to be the of the corporation that is described in and that executed the within instruments and acknowledged to me that such corporation executed the same. Notary Public - My commission expires 53 SECURITY AGREEMENT SECURITY AGREEMENT, dated as of January 8, 1998, by and among CANAL CAPITAL CORPORATION, formerly known as United Stockyards Corporation ("Canal Capital"), CANAL GALLERIES CORPORATION ( Canal Galleries ) and CANAL ARTS CORPORATION ("Canal Arts"; together with Canal Capital and Canal Galleries, collectively, "Debtor"), a Delaware corporation having an address at 717 Fifth Avenue, New York, New York 10022, and the parties listed on Schedule I hereto ( Noteholders ) and CCC LENDING CORPORATION ( "Collateral Agent"), as collateral agent pursuant to that certain Collateral Agency Agreement of even date herewith. RECITALS 38. Canal Capital is a party to that certain Indenture (the "Indenture") dated as of May 15, 1985, between United Stockyards Corporation (the predecessor-in-interest to Canal Capital) and Manufacturers Hanover Trust Company, as Trustee ("Trustee"), pursuant to which Debtor issued its Variable Rate Mortgage Notes (the "MHTC Notes"). 39. The indebtedness evidenced by the MHTC Notes (the "Indebtedness") is secured by certain mortgages of Canal Capital's real property, each dated as of May 15, 1985, from Canal Capital to Trustee (the "MHTC Mortgages"). 54 40. In connection with a modification of the Indebtedness described in that certain Note Exchange Agreement dated as of May 15, 1993 (the "1993 Note Exchange Agreement"), the MHTC Notes were amended, restated and replaced by Amended and Restated Notes (the "1993 Notes") from Canal Capital to Hanseatic Corporation ( Hanseatic ) and Guaranty Reassurance Company ( Guaranty ). 41. Canal Capital has issued and outstanding certain other promissory notes, dated as of September 15, 1995, (the Other Notes ) due to certain of the Noteholders, secured by certain other Mortgages on Canal Capital s real property (the Other Mortgages ) and certain other collateral. 42. In connection with a further modification of the Indebtedness described in that certain Note Exchange and Loan Agreement of even date herewith (the Note Exchange Agreement ), the 1993 Notes and the Other Notes have been amended, restated and replaced by, and a further loan has been made to Canal Capital to refinance certain existing indebtedness pursuant to, certain Amended and Restated Notes (the Notes ) from Canal Capital to the Noteholders (as defined in the Note Exchange Agreement). 43. The Notes are secured by (i) the MHTC Mortgages, which had been assigned by Trustee to Hanseatic and Guaranty, (ii) by certain additional mortgages from Canal Capital to Hanseatic and Guaranty encumbering property of Canal Capital not encumbered by the MHTC Mortgages, all of which have been assigned by Hanseatic and Guaranty to Collateral Agent and (iii) by the Other Mortgages (all of the foregoing collectively the "Mortgages"). 44. In connection with the issuance of the Notes, Canal Capital has pledged certain shares of stock pursuant to a Stock Pledge and Security Agreement dated the date hereof ( Pledge Agreement ). 45. Canal Arts and Canal Galleries are wholly-owned subsidiaries of Canal Capital, and are directly benefited by the modification of the Indebtedness described above. 46. In connection with the 1993 Notes, Debtor agreed to grant to Hanseatic and Guaranty a security interest in all of the property described in Part I of Schedule A annexed hereto, together with any substitutions therefor and proceeds therefrom (the "1993 Collateral") pursuant to a Security Agreement dated as of May 15, 1993 which security interest has been assigned to Collateral Agent in connection with the Note Exchange Agreement. 47. In connection with the Other Notes, Debtor has agreed to grant certain of the Noteholders a security interest in all of the property described in Part II of Schedule A, together with any substitutions therefor and proceeds therefrom (together with the 1993 Collateral, the Collateral ). 55 AGREEMENT NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Collateral Agent and Debtor agree as follows: 47.1. As collateral security for the payment, performance and discharge of the Obligations (as herein after defined), Debtor hereby pledges, grants, assigns, transfers, and sets over to Collateral Agent and grants to Collateral Agent a first priority lien on and security interest in, all of Debtor's rights, title and interest in and to the Collateral, whether heretofore or hereafter acquired. Debtor further grants to Collateral Agent full power and authority, in the name of Debtor or otherwise, to take any action which Collateral Agent may deem necessary or advisable in connection with effectuating and perfecting the assignment herein and lien and security interest created hereby, Debtor hereby irrevocably constituting and appointing Collateral Agent, the true and lawful attorney-in-fact of Debtor for such purposes, which appointment is coupled with an interest. This appointment is unconditional and irrevocable and continuing and these rights, powers and privileges shall be exclusive in Collateral Agent, its successors and assigns, so long as any of the Obligations remain unpaid or unperformed. 47.2. This Agreement constitutes a security agreement under the New York Uniform Commercial Code (the "Code") with respect to the Collateral for the purposes of Article 9 of the Code. This Agreement and any photostatic copies hereof may, at the option of Collateral Agent, be filed in the Department of State of the State of New York, the Office of the City Register, New York County, and in such other filing offices as Collateral Agent shall desire to give notice of the lien and security interest created hereby, Debtor hereby irrevocably constituting and appointing Collateral Agent the true and lawful attorney-in-fact of Debtor for such purposes, which appointment is coupled with an interest and is unconditional and irrevocable. Debtor hereby further authorizes Collateral Agent to file financing and continuation statements with respect to the Collateral without the signature of Debtor and, upon request of Collateral Agent, Debtor shall promptly execute and file at Debtor's expense financing and continuation statements, in form satisfactory to Collateral Agent to further evidence and secure Collateral Agent's lien on and security interest in the Collateral. 47.3. This Agreement is made for the purpose of securing the following (collectively, the "Obligations"): (a) The payment by Canal Capital of the principal sum, interest and indebtedness evidenced by the Notes and any renewal, extension, refinancing, substitution or reissuance thereof, and all other sums, with interest thereon, becoming due and payable to or for the benefit of Collateral Agent under the provisions of this Agreement, the Mortgages, the Pledge Agreement or any other documents executed in connection with or securing the Notes (collectively, the "Loan Documents"). 56 (b) The performance and discharge of each and every obligation, covenant and agreement of Debtor contained in this Agreement, the Notes, the Mortgages, the Pledge Agreement or any other Loan Documents. 47.4. Debtor represents and warrants to Collateral Agent as follows: (a) The execution, delivery or performance of this Agreement by Debtor will not require the consent or approval of, or the registration, declaration or filing with, any person or entity, which have not been obtained or completed, or violate or result in a breach of, or constitute a default under, any applicable law or regulation or any other agreement to which Debtor is bound. This Agreement has been duly executed by Debtor and constitutes a valid, legal and binding obligation of Debtor enforceable against the Debtor in accordance with its terms. (b) Canal Arts is the sole owner of record, legal and beneficial title to the Collateral, free and clear of all liens, claims, options, charges, pledges and encumbrances, other than the liens and security interest created pursuant to this Agreement. (c) Debtor shall immediately notify Collateral Agent of any actual or contemplated change in the principal place of business of Debtor, of the establishment of any additional place of business of Debtor or of any change of name of Debtor, and shall promptly, upon demand of Collateral Agent, execute and file, at Debtor's expense all financing statements and other documents and instruments requested by Collateral Agent so that any such change in or other establishment of place of business or change of name of Debtor shall not adversely affect the lien on or security interest in the Collateral. 47.5. Debtor hereby covenants with Collateral Agent as follows: (a) Debtor will not, nor will it, consent, agree or commit itself to, sell, assign, transfer, convey, pledge, delegate, grant any option with respect to, grant a security interest in, or otherwise dispose of or encumber in any other manner, or permit, agree or commit itself to permit, any such sale, assignment, transfer, conveyance, pledge, grant, delegation, disposition or encumbrance of, all or any portion of the Collateral or any beneficial or other interest therein. In the event of the sale, exchange or other disposition of the Collateral, or any portion thereof or any interest therein, in violation of this Agreement (and no such sale, exchange or other disposition is hereby authorized or consented to), the lien and security interest of Collateral Agent shall nevertheless continue in said Collateral (including, without limitation, all proceeds therefrom). Notwithstanding said sale, exchange or other disposition; all of said proceeds shall remain Collateral hereunder and shall be transferred and paid over to Collateral Agent immediately following said sale, exchange, or other disposition and shall be applied in accordance with the provisions of Section 9 hereof; and the receipt by Collateral Agent of all or any part of said proceeds shall not be deemed or construed to be an 57 authorization or consent of Collateral Agent to such sale, exchange or other disposition of said Collateral or a waiver of any breach resulting therefrom of this Agreement. (b) Debtor will furnish promptly to Collateral Agent such information as shall reasonably be requested by Collateral Agent in connection with the Collateral of the performance by Debtor of the Obligations, or required for effectuating the rights and benefits of Collateral Agent herein. (c) From and after the date hereof, Debtor agrees to maintain the Collateral in at least as good condition as it is on the date hereof. Debtor will not move all or any portion of the Collateral from its present locations, which locations are indicated on Schedule A annexed hereto. At all times during the terms of this Security Agreement, Debtor will comply with the terms of conditions of all applicable insurance policies maintained hereunder; and Debtor will not taken any action, or suffer or permit any action to be taken by any person or persons (other than Collateral Agent and its officers and agents), which is in violation of any provision thereof, including, without limitation, any provision relating to the maintenance, storage or use of the Collateral, the protection of same, the condition or use of the premises where same is located, or any other provision which would affect the amount of recovery hereunder in the event of any loss or damage to the Collateral. (d) From and after the date hereof, Maker agrees to maintain Fine Art All Risk insurance on the Collateral, with a deductible not in excess of $5,000, at all times at least equal to the outstanding principal amount of the Notes plus accrued but unpaid interest. Such insurance shall be written only by insurance companies licensed to do business in New York having an A.M. Best's rating of "A" or better. Debtor agrees to provide Collateral Agent with a valid Certificate of Insurance in form and substance reasonably satisfactory to Collateral Agent naming Collateral Agent or its assignee as loss payee under the insurance policy, which policy shall not be cancelable by the insurance company without at least 30 days' prior written notice to Collateral Agent and providing that Collateral Agent shall be notified by the insurance company of the payment or non-payment of the premiums in respect of the insurance policy. Debtor agrees not to cancel any such insurance policy without at least 60 days' prior written notice to Collateral Agent and obtaining a substitute insurance policy that satisfies the terms provided herein. In the event of an Event of Default, Debtor agrees to maintain insurance in accordance with the provisions herein, regardless of whether Debtor or Collateral Agent is in possession of the Collateral. 47.6. The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Agreement: (a) Any default beyond applicable grace or cure periods, if any, shall occur under the Notes, the Mortgages, the Pledge Agreement or any other Loan Document; or 58 (b) Debtor shall fail to perform any Obligation or fail to observe any of the provisions contained in this Agreement or breach any covenant or agreement made or given by Debtor herein; or (c) Any representation or warranty made by or on behalf of Debtor herein or otherwise in writing shall prove to have been false or incorrect in any material respect; or (d) Debtor shall file a voluntary petition seeking an order for relief under Title 11 of the United States Code, or Debtor shall be adjudicated a debtor, bankrupt or insolvent, or shall file any petition or answer seeking, consenting to or acquiescing in any order for relief, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future general bankruptcy act or any other present or future applicable federal, state or other statute or law (foreign or domestic), or shall file an answer admitting or failing to deny the material allegations in a petition against it for any such relief, or shall admit in writing its inability to pay its debts as they mature, or shall make an assignment for the benefit of creditors or shall seek or consent or acquiesce in the appointment of any trustee, receiver, examiner, sequestrator, custodian or liquidator or similar official of Debtor or of all or any portion of the Collateral; or if, within sixty (60) days after the commencement of any proceeding against Debtor, whether by the filing of a petition or otherwise, seeking any order for relief, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal bankruptcy act or any other present or future applicable federal, state or other statute or law (foreign or domestic), such proceeding shall not have been dismissed, or if, within sixty (60) days after the appointment of any trustee, receiver or liquidator of Debtor or of all or any part of the Collateral, without the consent or acquiescence of Debtor, such appointment shall not have been vacated or otherwise discharged, or if any execution or attachment shall be issued against Debtor or all or any portion of the Collateral. 47.7. Upon the occurrence of an Event of Default, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been remedied or waived by Collateral Agent by written notice given in accordance with the provisions hereof, then all of the Obligations shall become immediately due and payable without notice, presentment or demand, each of which is hereby waived by Debtor, and Collateral Agent shall be entitled to any and all rights, recourse and remedies available to it at law, in equity or by statute, or pursuant to this Agreement and any other Loan Document, including, without limitation, all rights and remedies available to a secured party under the Code. In furtherance, and not in limitation of the foregoing, Collateral Agent shall have the following rights and remedies upon the occurrence of an Event of Default: (a) Collateral Agent may, without being required to give any notice, demand or advertisement, except to the extent specifically set forth herein, take possession of and sell all or any portion of the Collateral at public or private sale in New York City or elsewhere, as Collateral Agent shall determine, for cash, upon credit or for future 59 delivery and at such price or prices as Collateral Agent may deem satisfactory, and, subject to compliance with applicable law, Collateral Agent may be the purchaser of any or all of the Collateral sold. Upon any such sale, Collateral Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold and Debtor, to the extent permitted by applicable law, hereby specifically waives all rights of redemption, stay or appraisal which it may have with respect to the Collateral under any rule of law or statute now existing or hereafter adopted. At any such sale Collateral Agent may, in its discretion, restrict the prospective bidders or purchasers to persons who will represent and warrant that they are acquiring the Collateral, or any portion thereof, for their own account, for investment only and not with a view toward the resale or distribution thereof and who will make such further representations and warranties as Collateral Agent may, in its discretion, deem necessary or desirable to assure Collateral Agent that such prospective bidders or purchasers are, with respect to the applicable Federal and state securities laws, regulations and rules, suitable bidders or purchasers of such Collateral, which restrictions as to prospective bidders or purchasers the parties agree are commercially reasonable. If notice of sale of all or any portion of the Collateral hereunder is required by law, the parties agree that written notice mailed to Debtor ten (10) business days prior to the date of public sale of the Collateral or ten (10) business days prior to the date after which a private sale or any other disposition of the Collateral is intended to be made shall constitute reasonable notice (all other notices, demands or advertisements of any kind being hereby expressly waived), but notice given in any other reasonable manner or at any other reasonable time shall be sufficient. Collateral Agent shall not be obligated to make any sale or other disposition pursuant to any notice thereof, and without notice or publication, adjourn any public or private sale or other disposition or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale or other disposition, and such sale or other disposition may be made at any time or place to which the same may be so adjourned. In case of any sale or other disposition of all or any part of the Collateral on credit or for further delivery, the Collateral so sold or disposed of may be retained by Collateral Agent until the selling price is paid by the purchaser thereof, but Collateral Agent shall not incur any liability in case of the failure of such purchaser to pay for the Collateral so sold or disposed of, and, in case of any such failure, such Collateral may again be sold or disposed of upon like notice and pursuant to the provisions hereof. Collateral Agent shall have no duty as to the collection or protection of the Collateral or any income thereon or as to the preservation of any rights pertaining thereto. (b) Collateral Agent, instead of exercising the power of sale herein conferred upon it may, at its option, proceed by a suit or suits at law or in equity to foreclose the security interest and sell all or any portion of the Collateral under a judgment or decree of a court or courts of competent jurisdiction, or may bring an action on any Obligation and obtain and enforce a judgment thereon, with or without first or simultaneously foreclosing, judicially or non-judicially, on the Collateral. (c) Collateral Agent, as attorney-in-fact, may, in the name and stead of Debtor, make and execute all conveyances, agreement and transfers of the Collateral sold pursuant to this Section 9 which Collateral Agent 60 shall deem advisable, and Debtor hereby ratifies and confirms all such acts taken by Debtor as such attorney-in-fact. Notwithstanding the foregoing, Debtor shall, if so requested by Collateral Agent, ratify and confirm any sale or sales by executing and delivering to Collateral Agent, or to any purchaser or purchasers of the Collateral sold, all such instruments as may, in the reasonable judgment of Collateral Agent, be advisable for such purpose. (d) Debtor shall be liable for all costs and expenses (including, without limitation, reasonable attorneys' fees, disbursements and legal expenses) incurred by Collateral Agent in enforcing any of the rights or remedies of Collateral Agent provided for in this Agreement, at law, in equity or by statute, and the amount thereof shall be deemed part of the Obligations and payment thereof shall be secured by the Collateral. If the proceeds of the sale or other disposition of the Collateral are insufficient to cover the costs and expenses (including, without limitation, reasonable attorneys' fees, disbursements and legal expenses) of such sale or other disposition and to pay in full the amount of the Obligations, Debtor shall remain liable for any such deficiency. (e) The proceeds of any sale or other disposition of all or any portion of the Collateral under this Agreement shall be applied by Collateral Agent in the following order of priority: First, to the payment of all costs and expenses (including, without limitation, reasonable attorneys' fees, disbursements and legal expenses) of such sale or other disposition; Second, to the payment of the amounts (other than principal and interest) due and payable under the Notes, the Mortgages and the other Obligations; Third, to the payment of interest due on the Notes; Fourth, to the payment of the principal of the Notes; Fifth, subject to the provisions of Section 9-504(c) of the Code, to the payment of any indebtedness, lien or encumbrance affecting such Collateral which is subordinate to the lien created hereby; and Finally, the balance, if any, to Debtor or as a court of competent jurisdiction may direct. 47.8. Debtor waives demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon and all other notices of any description. 61 47.9. Debtor, at its expense, will execute and deliver all such instruments, agreements and other document, and take all such actions, as Collateral Agent, from time to time, may reasonably request in order to obtain the full benefits of this Agreement and the rights and powers herein created. Debtor hereby constitutes and appoints Collateral Agent its true and lawful attorney-in-fact, coupled with an interest, and in the name, place and stead of Debtor, to execute and file any instrument, agreement or other document required to be executed or filed by Debtor pursuant to this Agreement (including, without limitation, any instrument assigning, transferring or conveying all or any portion of the Collateral). This appointment is unconditional and irrevocable and continuing and these rights, power and privileges shall be exclusive in Collateral Agent, its successors and assigns, so long as any of the Obligations remain unsatisfied or any part of the indebtedness secured hereby shall remain unpaid. 47.10. No delay or omission by Collateral Agent in insisting upon the strict observance or performance of any provision of this Agreement, or in exercising any right or remedy, shall be construed as a waiver or relinquishment of such provision, nor shall it impair such right or remedy. 47.11. This Agreement is given as security in addition to the security of the other documents executed in connection herewith. All rights and remedies herein conferred may be exercised whether or not any proceedings of any nature are pending under any of such other documents. Collateral Agent shall not be required to resort first to the security of this Agreement or any of such other documents before resorting to the security of the other such documents and Debtor may exercise the security hereof or thereof concurrently or independently and in any order or preference. The rights and remedies set forth herein are cumulative and in addition to, and not in lieu of, any other rights and remedies to which Collateral Agent may be entitled, whether under any such other document, at law or in equity. 47.12. This Agreement shall terminate upon payment in full and performance and discharge of all of the Obligations, Collateral Agent at Debtor's expense, will execute and deliver such instruments as Debtor may reasonably request to evidence such termination. 47.13. Except as otherwise specifically provided herein, all notices, election, approvals, requests, demands and other communications permitted or required to be made or given hereunder (collectively, "notices") shall be in writing, signed by the party giving such notice and shall be sufficiently given only when (x) sent by registered or certified mail, postage prepaid, return receipt requested, to the party for which such notice is intended at the address set forth below or at such other or additional address as may be designated by notice given in conformity with the terms of this Section 13, (y) delivered by hand, or tendered for delivery by hand, at such address, or (z) sent to such address by way of a recognized commercial overnight delivery service, and notices shall be effectively given only if received at such address by, or tendered for receipt to, a person who is or who reasonably appears to be authorized to receive written communications on behalf of the party to which the notice 62 is directed. The present notice addresses of the parties are as follows: (i) for Collateral Agent: CCC Lending Corporation c/o Michael E. Schultz, 2830 Long Meadow Drive, West Palm Beach, Florida 33414 and (ii) for Debtor: 717 Fifth Avenue, New York, New York, 10022, Attention: Gerald Agranoff. 47.14. This Agreement shall be governed by and construed in accordance with, the laws of the State of New York governing contracts made and performed in the State of New York, without regard to principles of conflicts of law. 47.15. This Agreement shall be binding upon Debtor, its successors and assigns, and shall inure to the benefit of Collateral Agent, their respective successors and assigns (including each subsequent holder of the Notes, whether or not an express assignment to such holder of rights under this Agreement shall have been made). 63 IN WITNESS WHEREOF, Debtor has caused this Agreement to be duly executed as of the 8th day of January, 1998. CANAL ARTS CORPORATION, CANAL CAPITAL CORPORATION, Debtor Debtor By: /S/ Reginald Schauder By: /S/ Reginald Schauder Vice President - Finance Vice President - Finance CANAL GALLERIES CORPORATION, CCC LENDING CORPORATION, Debtor as Collateral Agent By: /S/ Reginald Schauder By: /S/ Michael E. Schultz Vice President - Finance President 64 STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) On this ___ day of January, 1998, before me personally appeared Reginald Schauder to me known, who being by me duly sworn, did depose and say that he is the Vice President of each of Canal Capital Corporation, Canal Galleries Corporation and Canal Arts Corporation, the corporations described in and which executed the foregoing instrument, and he acknowledged that he executed the same by order of the board of directors of such corporation. Notary Public My commission expires on STATE OF _____________ ) ) SS.: COUNTY OF ___________ ) On this ___ day of January, 1998, before me personally appeared Michael E. Schultz, to me known, who being by me duly sworn, did depose and say that he is President of CCC Lending Corporation, the corporation described in and which executed the above instrument; and that he signed his name thereto by order of the board of directors of said corporation. Notary Public My commission expires on 65 SECURITY AGREEMENT SECURITY AGREEMENT, dated as of January 8, 1998, by and among CANAL CAPITAL CORPORATION, formerly known as United Stockyards Corporation ("Canal Capital"), CANAL GALLERIES CORPORATION ( Canal Galleries ) and CANAL ARTS CORPORATION ("Canal Arts"; together with Canal Capital and Canal Galleries, collectively, "Debtor"), a Delaware corporation having an address at 717 Fifth Avenue, New York, New York 10022, and the parties listed on Schedule I hereto ( Noteholders ) and CCC LENDING CORPORATION ( "Collateral Agent"), as collateral agent pursuant to that certain Collateral Agency Agreement of even date herewith. RECITALS 48. Canal Capital is a party to that certain Indenture (the "Indenture") dated as of May 15, 1985, between United Stockyards Corporation (the predecessor-in-interest to Canal Capital) and Manufacturers Hanover Trust Company, as Trustee ("Trustee"), pursuant to which Debtor issued its Variable Rate Mortgage Notes (the "MHTC Notes"). 49. The indebtedness evidenced by the MHTC Notes (the "Indebtedness") is secured by certain mortgages of Canal Capital's real property, each dated as of May 15, 1985, from Canal Capital to Trustee (the "MHTC Mortgages"). 50. In connection with a modification of the Indebtedness described in that certain Note Exchange Agreement dated as of May 15, 1993 (the "1993 Note Exchange Agreement"), the MHTC Notes were amended, restated and replaced by Amended and Restated Notes (the "1993 Notes") from Canal Capital to Hanseatic Corporation ( Hanseatic ) and Guaranty Reassurance Company ( Guaranty ). 51. Canal Capital has issued and outstanding certain other promissory notes, dated as of September 15, 1995, (the Other Notes ) due to certain of the Noteholders, secured by certain other Mortgages on Canal Capital s real property (the Other Mortgages ) and certain other collateral. 66 52. In connection with a further modification of the Indebtedness described in that certain Note Exchange and Loan Agreement of even date herewith (the Note Exchange Agreement ), the 1993 Notes and the Other Notes have been amended, restated and replaced by, and a further loan has been made to Canal Capital to refinance certain existing indebtedness pursuant to, certain Amended and Restated Notes (the Notes ) from Canal Capital to the Noteholders (as defined in the Note Exchange Agreement). 53. The Notes are secured by (i) the MHTC Mortgages, which had been assigned by Trustee to Hanseatic and Guaranty, (ii) by certain additional mortgages from Canal Capital to Hanseatic and Guaranty encumbering property of Canal Capital not encumbered by the MHTC Mortgages, all of which have been assigned by Hanseatic and Guaranty to Collateral Agent and (iii) by the Other Mortgages (all of the foregoing collectively the "Mortgages"). 54. In connection with the issuance of the Notes, Canal Capital has pledged certain shares of stock pursuant to a Stock Pledge and Security Agreement dated the date hereof ( Pledge Agreement ). 55. Canal Arts and Canal Galleries are wholly-owned subsidiaries of Canal Capital, and are directly benefited by the modification of the Indebtedness described above. 56. In connection with the 1993 Notes, Debtor agreed to grant to Hanseatic and Guaranty a security interest in all of the property described in Part I of Schedule A annexed hereto, together with any substitutions therefor and proceeds therefrom (the "1993 Collateral") pursuant to a Security Agreement dated as of May 15, 1993 which security interest has been assigned to Collateral Agent in connection with the Note Exchange Agreement. 57. In connection with the Other Notes, Debtor has agreed to grant certain of the Noteholders a security interest in all of the property described in Part II of Schedule A, together with any substitutions therefor and proceeds therefrom (together with the 1993 Collateral, the Collateral ). AGREEMENT NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Collateral Agent and Debtor agree as follows: 57.1. As collateral security for the payment, performance and discharge of the Obligations (as herein after defined), Debtor hereby pledges, grants, assigns, transfers, and sets over to Collateral Agent and grants to Collateral Agent a first priority lien on and security interest 67 in, all of Debtor's rights, title and interest in and to the Collateral, whether heretofore or hereafter acquired. Debtor further grants to Collateral Agent full power and authority, in the name of Debtor or otherwise, to take any action which Collateral Agent may deem necessary or advisable in connection with effectuating and perfecting the assignment herein and lien and security interest created hereby, Debtor hereby irrevocably constituting and appointing Collateral Agent, the true and lawful attorney-in-fact of Debtor for such purposes, which appointment is coupled with an interest. This appointment is unconditional and irrevocable and continuing and these rights, powers and privileges shall be exclusive in Collateral Agent, its successors and assigns, so long as any of the Obligations remain unpaid or unperformed. 57.2. This Agreement constitutes a security agreement under the New York Uniform Commercial Code (the "Code") with respect to the Collateral for the purposes of Article 9 of the Code. This Agreement and any photostatic copies hereof may, at the option of Collateral Agent, be filed in the Department of State of the State of New York, the Office of the City Register, New York County, and in such other filing offices as Collateral Agent shall desire to give notice of the lien and security interest created hereby, Debtor hereby irrevocably constituting and appointing Collateral Agent the true and lawful attorney-in-fact of Debtor for such purposes, which appointment is coupled with an interest and is unconditional and irrevocable. Debtor hereby further authorizes Collateral Agent to file financing and continuation statements with respect to the Collateral without the signature of Debtor and, upon request of Collateral Agent, Debtor shall promptly execute and file at Debtor's expense financing and continuation statements, in form satisfactory to Collateral Agent to further evidence and secure Collateral Agent's lien on and security interest in the Collateral. 57.3. This Agreement is made for the purpose of securing the following (collectively, the "Obligations"): (a) The payment by Canal Capital of the principal sum, interest and indebtedness evidenced by the Notes and any renewal, extension, refinancing, substitution or reissuance thereof, and all other sums, with interest thereon, becoming due and payable to or for the benefit of Collateral Agent under the provisions of this Agreement, the Mortgages, the Pledge Agreement or any other documents executed in connection with or securing the Notes (collectively, the "Loan Documents"). (b) The performance and discharge of each and every obligation, covenant and agreement of Debtor contained in this Agreement, the Notes, the Mortgages, the Pledge Agreement or any other Loan Documents. 57.4. Debtor represents and warrants to Collateral Agent as follows: (a) The execution, delivery or performance of this Agreement by Debtor will not require the consent or approval of, or the registration, declaration or filing with, any person or entity, which have not been 68 obtained or completed, or violate or result in a breach of, or constitute a default under, any applicable law or regulation or any other agreement to which Debtor is bound. This Agreement has been duly executed by Debtor and constitutes a valid, legal and binding obligation of Debtor enforceable against the Debtor in accordance with its terms. (b) Canal Arts is the sole owner of record, legal and beneficial title to the Collateral, free and clear of all liens, claims, options, charges, pledges and encumbrances, other than the liens and security interest created pursuant to this Agreement. (c) Debtor shall immediately notify Collateral Agent of any actual or contemplated change in the principal place of business of Debtor, of the establishment of any additional place of business of Debtor or of any change of name of Debtor, and shall promptly, upon demand of Collateral Agent, execute and file, at Debtor's expense all financing statements and other documents and instruments requested by Collateral Agent so that any such change in or other establishment of place of business or change of name of Debtor shall not adversely affect the lien on or security interest in the Collateral. 57.5. Debtor hereby covenants with Collateral Agent as follows: (a) Debtor will not, nor will it, consent, agree or commit itself to, sell, assign, transfer, convey, pledge, delegate, grant any option with respect to, grant a security interest in, or otherwise dispose of or encumber in any other manner, or permit, agree or commit itself to permit, any such sale, assignment, transfer, conveyance, pledge, grant, delegation, disposition or encumbrance of, all or any portion of the Collateral or any beneficial or other interest therein. In the event of the sale, exchange or other disposition of the Collateral, or any portion thereof or any interest therein, in violation of this Agreement (and no such sale, exchange or other disposition is hereby authorized or consented to), the lien and security interest of Collateral Agent shall nevertheless continue in said Collateral (including, without limitation, all proceeds therefrom). Notwithstanding said sale, exchange or other disposition; all of said proceeds shall remain Collateral hereunder and shall be transferred and paid over to Collateral Agent immediately following said sale, exchange, or other disposition and shall be applied in accordance with the provisions of Section 9 hereof; and the receipt by Collateral Agent of all or any part of said proceeds shall not be deemed or construed to be an authorization or consent of Collateral Agent to such sale, exchange or other disposition of said Collateral or a waiver of any breach resulting therefrom of this Agreement. (b) Debtor will furnish promptly to Collateral Agent such information as shall reasonably be requested by Collateral Agent in connection with the Collateral of the performance by Debtor of the Obligations, or required for effectuating the rights and benefits of Collateral Agent herein. 69 (c) From and after the date hereof, Debtor agrees to maintain the Collateral in at least as good condition as it is on the date hereof. Debtor will not move all or any portion of the Collateral from its present locations, which locations are indicated on Schedule A annexed hereto. At all times during the terms of this Security Agreement, Debtor will comply with the terms of conditions of all applicable insurance policies maintained hereunder; and Debtor will not taken any action, or suffer or permit any action to be taken by any person or persons (other than Collateral Agent and its officers and agents), which is in violation of any provision thereof, including, without limitation, any provision relating to the maintenance, storage or use of the Collateral, the protection of same, the condition or use of the premises where same is located, or any other provision which would affect the amount of recovery hereunder in the event of any loss or damage to the Collateral. (d) From and after the date hereof, Maker agrees to maintain Fine Art All Risk insurance on the Collateral, with a deductible not in excess of $5,000, at all times at least equal to the outstanding principal amount of the Notes plus accrued but unpaid interest. Such insurance shall be written only by insurance companies licensed to do business in New York having an A.M. Best's rating of "A" or better. Debtor agrees to provide Collateral Agent with a valid Certificate of Insurance in form and substance reasonably satisfactory to Collateral Agent naming Collateral Agent or its assignee as loss payee under the insurance policy, which policy shall not be cancelable by the insurance company without at least 30 days' prior written notice to Collateral Agent and providing that Collateral Agent shall be notified by the insurance company of the payment or non-payment of the premiums in respect of the insurance policy. Debtor agrees not to cancel any such insurance policy without at least 60 days' prior written notice to Collateral Agent and obtaining a substitute insurance policy that satisfies the terms provided herein. In the event of an Event of Default, Debtor agrees to maintain insurance in accordance with the provisions herein, regardless of whether Debtor or Collateral Agent is in possession of the Collateral. 57.6. The occurrence of any one or more of the following events shall constitute an "Event of Default" under this Agreement: (a) Any default beyond applicable grace or cure periods, if any, shall occur under the Notes, the Mortgages, the Pledge Agreement or any other Loan Document; or (b) Debtor shall fail to perform any Obligation or fail to observe any of the provisions contained in this Agreement or breach any covenant or agreement made or given by Debtor herein; or (c) Any representation or warranty made by or on behalf of Debtor herein or otherwise in writing shall prove to have been false or incorrect in any material respect; or (d) Debtor shall file a voluntary petition seeking an order for relief under Title 11 of the United States Code, or Debtor shall be 70 adjudicated a debtor, bankrupt or insolvent, or shall file any petition or answer seeking, consenting to or acquiescing in any order for relief, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future general bankruptcy act or any other present or future applicable federal, state or other statute or law (foreign or domestic), or shall file an answer admitting or failing to deny the material allegations in a petition against it for any such relief, or shall admit in writing its inability to pay its debts as they mature, or shall make an assignment for the benefit of creditors or shall seek or consent or acquiesce in the appointment of any trustee, receiver, examiner, sequestrator, custodian or liquidator or similar official of Debtor or of all or any portion of the Collateral; or if, within sixty (60) days after the commencement of any proceeding against Debtor, whether by the filing of a petition or otherwise, seeking any order for relief, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal bankruptcy act or any other present or future applicable federal, state or other statute or law (foreign or domestic), such proceeding shall not have been dismissed, or if, within sixty (60) days after the appointment of any trustee, receiver or liquidator of Debtor or of all or any part of the Collateral, without the consent or acquiescence of Debtor, such appointment shall not have been vacated or otherwise discharged, or if any execution or attachment shall be issued against Debtor or all or any portion of the Collateral. 57.7. Upon the occurrence of an Event of Default, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been remedied or waived by Collateral Agent by written notice given in accordance with the provisions hereof, then all of the Obligations shall become immediately due and payable without notice, presentment or demand, each of which is hereby waived by Debtor, and Collateral Agent shall be entitled to any and all rights, recourse and remedies available to it at law, in equity or by statute, or pursuant to this Agreement and any other Loan Document, including, without limitation, all rights and remedies available to a secured party under the Code. In furtherance, and not in limitation of the foregoing, Collateral Agent shall have the following rights and remedies upon the occurrence of an Event of Default: (a) Collateral Agent may, without being required to give any notice, demand or advertisement, except to the extent specifically set forth herein, take possession of and sell all or any portion of the Collateral at public or private sale in New York City or elsewhere, as Collateral Agent shall determine, for cash, upon credit or for future delivery and at such price or prices as Collateral Agent may deem satisfactory, and, subject to compliance with applicable law, Collateral Agent may be the purchaser of any or all of the Collateral sold. Upon any such sale, Collateral Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold and Debtor, to the extent permitted by applicable law, hereby specifically waives all rights of redemption, stay or appraisal which it may have with respect to the Collateral under any rule of law or statute now existing or hereafter adopted. At any such sale Collateral Agent may, in its discretion, restrict the prospective bidders or purchasers to persons who will represent and warrant that they are acquiring the Collateral, or any portion thereof, for their own account, for investment only and not with a 71 view toward the resale or distribution thereof and who will make such further representations and warranties as Collateral Agent may, in its discretion, deem necessary or desirable to assure Collateral Agent that such prospective bidders or purchasers are, with respect to the applicable Federal and state securities laws, regulations and rules, suitable bidders or purchasers of such Collateral, which restrictions as to prospective bidders or purchasers the parties agree are commercially reasonable. If notice of sale of all or any portion of the Collateral hereunder is required by law, the parties agree that written notice mailed to Debtor ten (10) business days prior to the date of public sale of the Collateral or ten (10) business days prior to the date after which a private sale or any other disposition of the Collateral is intended to be made shall constitute reasonable notice (all other notices, demands or advertisements of any kind being hereby expressly waived), but notice given in any other reasonable manner or at any other reasonable time shall be sufficient. Collateral Agent shall not be obligated to make any sale or other disposition pursuant to any notice thereof, and without notice or publication, adjourn any public or private sale or other disposition or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale or other disposition, and such sale or other disposition may be made at any time or place to which the same may be so adjourned. In case of any sale or other disposition of all or any part of the Collateral on credit or for further delivery, the Collateral so sold or disposed of may be retained by Collateral Agent until the selling price is paid by the purchaser thereof, but Collateral Agent shall not incur any liability in case of the failure of such purchaser to pay for the Collateral so sold or disposed of, and, in case of any such failure, such Collateral may again be sold or disposed of upon like notice and pursuant to the provisions hereof. Collateral Agent shall have no duty as to the collection or protection of the Collateral or any income thereon or as to the preservation of any rights pertaining thereto. (b) Collateral Agent, instead of exercising the power of sale herein conferred upon it may, at its option, proceed by a suit or suits at law or in equity to foreclose the security interest and sell all or any portion of the Collateral under a judgment or decree of a court or courts of competent jurisdiction, or may bring an action on any Obligation and obtain and enforce a judgment thereon, with or without first or simultaneously foreclosing, judicially or non-judicially, on the Collateral. (c) Collateral Agent, as attorney-in-fact, may, in the name and stead of Debtor, make and execute all conveyances, agreement and transfers of the Collateral sold pursuant to this Section 9 which Collateral Agent shall deem advisable, and Debtor hereby ratifies and confirms all such acts taken by Debtor as such attorney-in-fact. Notwithstanding the foregoing, Debtor shall, if so requested by Collateral Agent, ratify and confirm any sale or sales by executing and delivering to Collateral Agent, or to any purchaser or purchasers of the Collateral sold, all such instruments as may, in the reasonable judgment of Collateral Agent, be advisable for such purpose. (d) Debtor shall be liable for all costs and expenses (including, without limitation, reasonable attorneys' fees, disbursements and legal expenses) incurred by Collateral Agent in enforcing any of the 72 rights or remedies of Collateral Agent provided for in this Agreement, at law, in equity or by statute, and the amount thereof shall be deemed part of the Obligations and payment thereof shall be secured by the Collateral. If the proceeds of the sale or other disposition of the Collateral are insufficient to cover the costs and expenses (including, without limitation, reasonable attorneys' fees, disbursements and legal expenses) of such sale or other disposition and to pay in full the amount of the Obligations, Debtor shall remain liable for any such deficiency. (e) The proceeds of any sale or other disposition of all or any portion of the Collateral under this Agreement shall be applied by Collateral Agent in the following order of priority: First, to the payment of all costs and expenses (including, without limitation, reasonable attorneys' fees, disbursements and legal expenses) of such sale or other disposition; Second, to the payment of the amounts (other than principal and interest) due and payable under the Notes, the Mortgages and the other Obligations; Third, to the payment of interest due on the Notes; Fourth, to the payment of the principal of the Notes; Fifth, subject to the provisions of Section 9-504(c) of the Code, to the payment of any indebtedness, lien or encumbrance affecting such Collateral which is subordinate to the lien created hereby; and Finally, the balance, if any, to Debtor or as a court of competent jurisdiction may direct. 57.8. Debtor waives demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon and all other notices of any description. 57.9. Debtor, at its expense, will execute and deliver all such instruments, agreements and other document, and take all such actions, as Collateral Agent, from time to time, may reasonably request in order to obtain the full benefits of this Agreement and the rights and powers herein created. Debtor hereby constitutes and appoints Collateral Agent its true and lawful attorney-in-fact, coupled with an interest, and in the name, place and stead of Debtor, to execute and file any instrument, agreement or other document required to be executed or filed by Debtor pursuant to this Agreement (including, without limitation, any instrument assigning, transferring or conveying all or any portion of the Collateral). This appointment is unconditional and irrevocable and continuing and these 73 rights, power and privileges shall be exclusive in Collateral Agent, its successors and assigns, so long as any of the Obligations remain unsatisfied or any part of the indebtedness secured hereby shall remain unpaid. 57.10. No delay or omission by Collateral Agent in insisting upon the strict observance or performance of any provision of this Agreement, or in exercising any right or remedy, shall be construed as a waiver or relinquishment of such provision, nor shall it impair such right or remedy. 57.11. This Agreement is given as security in addition to the security of the other documents executed in connection herewith. All rights and remedies herein conferred may be exercised whether or not any proceedings of any nature are pending under any of such other documents. Collateral Agent shall not be required to resort first to the security of this Agreement or any of such other documents before resorting to the security of the other such documents and Debtor may exercise the security hereof or thereof concurrently or independently and in any order or preference. The rights and remedies set forth herein are cumulative and in addition to, and not in lieu of, any other rights and remedies to which Collateral Agent may be entitled, whether under any such other document, at law or in equity. 57.12. This Agreement shall terminate upon payment in full and performance and discharge of all of the Obligations, Collateral Agent at Debtor's expense, will execute and deliver such instruments as Debtor may reasonably request to evidence such termination. 57.13. Except as otherwise specifically provided herein, all notices, election, approvals, requests, demands and other communications permitted or required to be made or given hereunder (collectively, "notices") shall be in writing, signed by the party giving such notice and shall be sufficiently given only when (x) sent by registered or certified mail, postage prepaid, return receipt requested, to the party for which such notice is intended at the address set forth below or at such other or additional address as may be designated by notice given in conformity with the terms of this Section 13, (y) delivered by hand, or tendered for delivery by hand, at such address, or (z) sent to such address by way of a recognized commercial overnight delivery service, and notices shall be effectively given only if received at such address by, or tendered for receipt to, a person who is or who reasonably appears to be authorized to receive written communications on behalf of the party to which the notice is directed. The present notice addresses of the parties are as follows: (i) for Collateral Agent: CCC Lending Corporation c/o Michael E. Schultz, 2830 Long Meadow Drive, West Palm Beach, Florida 33414 and (ii) for Debtor: 717 Fifth Avenue, New York, New York, 10022, Attention: Gerald Agranoff. 57.14. This Agreement shall be governed by and construed in accordance with, the laws of the State of New York governing contracts made and performed in the State of New York, without regard to principles of conflicts of law. 74 57.15. This Agreement shall be binding upon Debtor, its successors and assigns, and shall inure to the benefit of Collateral Agent, their respective successors and assigns (including each subsequent holder of the Notes, whether or not an express assignment to such holder of rights under this Agreement shall have been made). 75 IN WITNESS WHEREOF, Debtor has caused this Agreement to be duly executed as of the 8th day of January, 1998. CANAL ARTS CORPORATION, CANAL CAPITAL CORPORATION, Debtor Debtor By: /S/ Reginald Schauder By: /S/ Reginald Schauder Vice President - Finance Vice President - Finance CANAL GALLERIES CORPORATION, CCC LENDING CORPORATION, Debtor as Collateral Agent By: /S/ Reginald Schauder By: /S/ Michael E. Schultz Vice President - Finance President 76 STATE OF NEW YORK ) ) SS.: COUNTY OF NEW YORK ) On this ___ day of January, 1998, before me personally appeared Reginald Schauder to me known, who being by me duly sworn, did depose and say that he is the Vice President of each of Canal Capital Corporation, Canal Galleries Corporation and Canal Arts Corporation, the corporations described in and which executed the foregoing instrument, and he acknowledged that he executed the same by order of the board of directors of such corporation. Notary Public My commission expires on STATE OF _____________ ) ) SS.: COUNTY OF ___________ ) On this ___ day of January, 1998, before me personally appeared Michael E. Schultz, to me known, who being by me duly sworn, did depose and say that he is President of CCC Lending Corporation, the corporation described in and which executed the above instrument; and that he signed his name thereto by order of the board of directors of said corporation. Notary Public My commission expires on 77 Schedule A Part I Property: St. Paul, Minnesota - Represents approximately a 60% interest in the property which totals 75 acres. Includes 30 acres leased to the stockyard 78 operator and a two story (48,000 sq. ft.) Exchange Building. Sioux Falls, South Dakota - The property totals 37 acres. Includes 31 acres leased to the stockyard operator and an additional 4 acres leased on a long-term basis to a rail car repair company and a commercial bank. The remaining two acres are available for sale or development. Sioux City, Iowa - The property totals 64 acres. Includes 24 acres leased to the stockyard operator. An additional 24 acres are leased to third parties including a lumber yard, feed and grain supplier, railcar repair company and various other commercial businesses. The balance of 14 acres is available for sale or development. Art: Contemporary art - includes 64 paintings by three artists primarily Jules Olitski. Investments: 236,000 shares of Common Stock of Datapoint Corporation. Schedule A (cont d) 79 Part II Property: St. Paul, Minnesota - Represents approximately a 40% interest in the property which totals 75 acres. Includes various third party leases including a lumber yard, service station and truck wash and a fast food restaurant. Omaha, Nebraska - The property totals 85 acres. Canal has entered into an agreement to sell approximately 55 acres to the city of Omaha in mid 1998. The remaining 30 acres are leased on a long-term basis to a railcar repair company. St. Joseph, Missouri - The property totals 137 acres. The stockyard operator leases 37 acres and the Exchange Building. The remaining 100 acres are available for sale or development. Fargo, North Dakota - The property totals 81 acres. A meat packing facility leases 17 acres on a long-term basis. The balance of 64 acres including a two story Exchange Building are available for sale or development. Art: Antiquities - Includes 53 pieces of antiquity from ancient Mediterranean cultures. Investments: 125,000 shares of Common Stock of Datapoint Corporation. CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 1 $1,000,000 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to MICHAEL E. SCHULTZ, or his registered assigns at his address of 2830 Long Meadow Drive, West Palm Beach, Florida 33414, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of One Million Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in 80 each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 58. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 59. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $91,799.29 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 60. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of 81 which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 61. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 62. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 63. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 64. Persons Deemed Owners. 82 The registered Holder of a Note may be treated as the owner of it for all purposes. 65. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 66. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 67. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 68. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 69. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, 83 in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 70. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the 84 United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly 85 Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 71. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 72. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 86 73. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By: /S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 87 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 2 $242,000 88 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to MICHAEL E. SCHULTZ DEFINED BENEFIT TRUST, or its registered assigns at the address of c/o Michael E. Schultz, 2830 Long Meadow Drive, West Palm Beach, Florida 33414, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Two Hundred Forty-two Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 74. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 75. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $22,211.15 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 76. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange 89 Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 77. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 78. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 90 79. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 80. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 81. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 82. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 83. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 84. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least 91 $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 85. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 86. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: 92 Three Month Discount Rate (%) x 365 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the 93 Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 87. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 88. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal 94 Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 89. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By: /S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 95 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 3 $229,000 96 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to LORA K. SCHULTZ, or her registered assigns at the address of 2830 Long Meadow Drive, West Palm Beach, Florida 33414, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Two Hundred Twenty-nine Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 90. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 91. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $21,022.48 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 92. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is registered at 97 the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 93. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 94. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 95. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in 98 denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 96. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 97. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 98. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 99. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 100. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of 99 the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 101. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 102. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 100 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 101 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 103. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 104. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 102 105. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By: /S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 103 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 5 $186,000 104 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to ROGER A. SCHULTZ PENSION PLAN, or its registered assigns at the address of c/o Roger A. Schultz, 131 N. Hibiscus Drive, Miami Beach, Florida 33139 or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of One Hundred Eighty-six Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 106. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 107. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $17,082.89 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 108. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is 105 registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 109. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 110. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 111. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in 106 denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 112. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 113. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 114. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 115. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 116. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of 107 the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 117. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 118. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 108 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 109 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 119. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 120. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 110 121. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By:/S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 111 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 6 $143,000 112 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay RICHARD A. SCHULTZ, or his registered assigns at the address of 136 East 56 Street, Apt. 12H, New York, New York 10022, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of One Hundred Forty-three Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 122. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 123. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $13,109.33 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 124. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is 113 registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 125. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 126. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 127. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in 114 denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 128. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 129. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 130. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 131. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 132. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of 115 the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 133. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 134. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 116 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 117 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 135. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 136. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 118 137. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By:/S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 119 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 7 $350,000 120 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to EDELMAN VALUE PARTNERS, L.P., or its registered assigns at the address of c/o A.B. Edelman Management Company, Inc., 717 Fifth Avenue, New York, New York 10022, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Three Hundred Fifty Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 138. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 139. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $32,128.05 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 140. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note 121 Exchange Agreement, be paid to the person in whose name this Note is registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 141. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 142. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 143. Denominations, Transfer, Exchange. 122 The Notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 144. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 145. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 146. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 147. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 148. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the 123 Notes to be due and payable immediately in accordance with Section 7.2 of the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 149. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 150. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 124 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 125 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 151. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 152. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 126 153. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By: /S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 127 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 8 $550,000 128 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to EDELMAN VALUE FUND, LTD, or its registered assigns at the address of c/o Bayand (Luxembourg) Admin., 1A Rue du St. Espirit, L-1475 Luxembourg, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Five Hundred Fifty Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 154. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 155. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $50,467.53 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 156. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is 129 registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 157. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 158. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 159. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in 130 denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 160. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 161. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 162. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 163. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 164. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of 131 the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 165. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 166. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 132 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 133 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 167. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 168. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 134 169. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By: /S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 135 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 9 $300,000 136 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to MARIA REGINA MAYALL EDELMAN, or her registered assigns at the address of Chemin de Pecholettaz 9, 1066 Eppallinges, Switzerland, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Three Hundred Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 170. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 171. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $27,543.18 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 172. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is 137 registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 173. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 174. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 175. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in 138 denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 176. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 177. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 178. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 179. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 180. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of 139 the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 181. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 182. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 140 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 141 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 183. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 184. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 142 185. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By: /S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 143 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 10 $200,000 144 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to SES TRUST, or its registered assigns at the address of c/o Sharon E. Sigesmund, 2859 Queens Courtyard Drive, Las Vegas, Nevada 89109, or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Two Hundred Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 186. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 187. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $18,373.44 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 188. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is 145 registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 189. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 190. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 191. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in 146 denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 192. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 193. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 194. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 195. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 196. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of 147 the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 197. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 198. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 148 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 149 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 199. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 200. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 150 201. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By:/S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 151 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION Amended and Restated Variable Rate Mortgage Note Due May 15, 2001. No. 4 $500,000 152 CANAL CAPITAL CORPORATION, a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company") for value received, hereby promises to pay to ROGER A. SCHULTZ, or his registered assigns at the address of 131 N. Hibiscus Drive, Miami Beach, Florida 33139 or at such other address as may be designated by the registered holder hereof to the Company, the principal sum of Five Hundred Thousand Dollars on May 15, 2001 and to pay interest thereon monthly on the 15th day of each month (each an "Interest Payment Date"), in each year, commencing on January 15, 1998, at the applicable rate per annum determined as a provided below, until the principal hereof is paid or made available for payment. 202. For each Quarterly Period, this Note shall bear interest at a variable rate per annum, equal to the greatest of (i) the Three Month Treasury Rate with respect to such quarterly period plus 600 basis points, (ii) LIBOR with respect to such Quarterly Period plus 475 basis points, (iii) 120% of the Ten Year Treasury Rate with respect to such Quarterly Period plus 150 basis points, or (iv) Prime Rate with respect to such quarterly period plus 350 basis points. If the Agent Bank cannot determine LIBOR or Prime Rate, as the case may be, for at least five Business Days during the Rate Determination Period for any Quarterly Period then this Note will bear interest following such Quarterly Period at a rate per annum equal to the greatest of the remaining variable rates with respect to such Quarterly Period. Prior to the beginning of each Quarterly Period, the Company must compute the interest rate for such Quarterly Period. The Company must mail notice of the rate to each holder of a Note for each Quarterly Period. Interest will be computed on the basis of a 360-day year of twelve 30 -day months. 203. (a) For each Quarterly Period, this Note shall bear interest, in addition to the interest provided in Section 1 (the "Additional Interest"), at a rate per annum equal to 4.0%. The rate per annum of Additional Interest for any Quarterly Period shall be limited to the rate which, when added to the interest rate established pursuant to Section 1, does not exceed a rate of 15% per annum. (b) Additional Interest shall accrue quarterly and be added to the principal amount of this Note for the purpose of calculating the amount of Additional Interest to be accrued. The aggregate accrued amount of Additional Interest shall be payable on May 15, 2001 or upon the earlier retirement of this Note. The obligation to pay Additional Interest shall be entitled to the benefits of the security interest granted pursuant to the Security Agreement and the Pledge Agreement. (c) Additional Interest of $45,882.66 which had accrued with respect to the Old Notes but had remained unpaid by the Company as of the date of this Note shall also be considered Additional Interest hereunder and shall continue to be due and payable to the holder hereof as provided above. 204. The interest payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Note Exchange Agreement, be paid to the person in whose name this Note is 153 registered at the close of business on the regular record date, which shall be the first day of each month (whether or not a Business Day) next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for, and any interest payable on such defaulted interest (to the extent lawful), will forthwith cease to be payable to the Holder on such regular record date and shall be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such defaulted interest to be fixed by the Company, notice of which shall be given to Holders not less than 15 days prior to such special record date. Payment of the principal of and interest on this Note will be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, by check mailed to the address of the holder of this Note, as specified in the first paragraph hereof. 205. Note Exchange Agreement; Limitations. This Note is one of a duly authorized issue of Notes of the Company (which term includes any successor corporation under the Note Exchange Agreement hereinafter referred to) designated as its Variable Rate Mortgage Notes due May 15, 2001 (the "Notes"), in the aggregate principal amount of $3,700,000 issued pursuant to that certain Note Exchange and Loan Agreement, dated as of January 8, 1998 (the "Note Exchange Agreement"), among the Company and the Holders. This is one of the New Notes described in the Note Exchange Agreement. The terms of this Note include those stated in the Note Exchange Agreement. Reference is hereby made to the Note Exchange Agreement and all amendments and supplements thereto for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company and the Holder and of the terms upon which the Notes are, and are to be, delivered. 206. Security. This Note is secured by (i) a security interest in the Artwork, (ii) the Mortgages and (iii) a security interest in the Securities, in an amount equal to at least 100% of the aggregate principal amount of this Note outstanding at any time and accrued Additional Interest. The Note Exchange Agreement imposes certain limits on the payment of dividends and other distributions on the Company's capital stock, the ability of the Company to incur additional indebtedness and the amount and type of permitted investments by the Company. It also obligates the Company to conduct its business so as to avoid becoming an investment company within the meaning of the Investment Company Act of 1940. Once a year the Company must report to the Holder with respect to its compliance with such limitations. 207. Denominations, Transfer, Exchange. The Notes are issuable only in registered form without coupons in 154 denominations of $1,000 and any integral multiple thereof. The Holder may transfer or exchange Notes in accordance with the Note Exchange Agreement. The Company may require the Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay taxes and fees required by law or permitted by the Note Exchange Agreement. 208. Persons Deemed Owners. The registered Holder of a Note may be treated as the owner of it for all purposes. 209. Discharge Prior to Redemption or Maturity. The Note Exchange Agreement will be discharged and canceled except for certain Sections thereof, subject to the terms of the Note Exchange Agreement, upon the payment of the Notes, or, following the date on which the Company has given notice to the Holder of the repayment of the Notes upon the irrevocable deposit with the Holder of funds or U.S. Government Obligations sufficient for such payment. 210. Amendment and Waiver. The Note Exchange Agreement contains provisions permitting the Holders to waive compliance by the Company with certain provisions of the Note Exchange Agreement and certain past defaults under the Note Exchange Agreement and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all Future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 211. Successor Corporation. When a successor corporation assumes all the obligations of its predecessor under the New Notes and the Note Exchange Agreement, the predecessor corporation will be released from those obligations. 212. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Notes; default in payment of principal on them; failure by the Company for 30 days after notice to it to comply with any of its other agreements in the Note Exchange Agreement or the Notes; acceleration or default under other Indebtedness of the Company aggregating at least $100,000; the existence of certain unsatisfied judgments aggregating at least $100,000; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Holder may declare all the Notes to be due and payable immediately in accordance with Section 7.2 of 155 the Note Exchange Agreement. The Holders may not enforce the Note Exchange Agreement or the Notes except as provided in the Note Exchange Agreement. 213. No Recourse against Others. A director, officer, employee or shareholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Note Exchange Agreement or for any claim based on, in respect of or by reason of, such obligations or their creation. The Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the New Notes. 214. Definitions. All terms used in this Note which are defined in the Note Exchange Agreement shall have the meanings assigned to them in the Note Exchange Agreement. "Three Month Discount Rate" means, with respect to any Quarterly Period, the arithmetic average of the weekly average per annum secondary market discount rates for three-month United States Treasury obligations for the three calendar weeks constituting the Rate Determination Period with respect to such Quarterly Period (x) as published by the Federal Reserve Board (i) in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly per annum secondary market discount rates presently are set forth in such Statistical Release under the caption "U.S. Government Securities -- Treasury Bills -- Secondary Market -- 3 Month," or (ii) if said Statistical Release H.15 (519) is not then published, in any release comparable to Statistical Release H.15(519), or (y) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency. However, if the Three Month Discount Rate cannot be determined as provided above, then the Three Month Discount Rate shall mean the arithmetic average of the average per annum secondary market discount rates, based on the asked prices, for each business day during the Rate Determination Period of all of the issues of non-interest bearing United States Treasury obligations with a maturity of not less than 80 nor more than 100 days from such business day (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "Three Month Treasury Rate" means, with respect to any Quarterly Period, the result of the following calculation regarding the Three Month Discount Rate for such Quarterly Period, rounded to the nearest basis point: Three Month Discount Rate (%) x 365 156 360 - (91 x.01 x Three Month Discount Rate (%)) "Ten Year Treasury Rate" means, with respect to any date, the arithmetic average (rounded to the nearest basis point) of the weekly average per annum yield to maturity values adjusted to constant maturities of ten years for the three calendar weeks constituting the Rate Determination Period for the Quarterly Period in which such date occurs as read from the yield curves of the most actively traded marketable United States Treasury fixed interest rate securities (x) constructed daily by the United States Treasury Department (i) as published by the Federal Reserve Board in its Statistical Release H.15 (519), "Selected Interest Rates," which weekly average yield to maturity values presently are set forth in such statistical release under the caption "U.S. Government Securities -- Treasury Constant Maturities -- 10 Year", or (ii) if said Statistical Release H.15(519) is not then published, as published by the Federal Reserve Board in any release comparable to its Statistical Release H.15 (519), or (iii) if the Federal Reserve Board shall not then be publishing a comparable release, as published in any official publication or release of any other United States Government department or agency, or (y) if the United States Treasury Department shall not then be constructing such yield curves, as constructed by the Federal Reserve Board or any other United States Government department or agency and published as set forth in (x) above. However, if the Ten Year Treasury Rate cannot be determined as provided above, then the Ten Year Treasury Rate shall mean the arithmetic average (rounded to the nearest basis point) of the per annum yields to maturity for each business day during the Rate Determination Period of all of the issues of actively traded marketable United States Treasury fixed interest rate securities with a maturity of not less then 117 months nor more than 123 months from such business day (excluding all such securities which can be surrendered at the option of the holder at face value in payment of any federal estate tax, which provide tax benefits to the holder or which were issued at a substantial discount) (1) as published in The Wall Street Journal, or (2) if The Wall Street Journal shall cease such publication, based on average asked prices (or yields) as quoted by each of three United States Government securities dealers of recognized national standing selected by the Company. "LIBOR" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of LIBOR for each business day in the Rate Determination Period for such Quarterly Period, as determined by Bankers Trust Company or its successor as the agent bank (the "Agent Bank") of the Company in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal London office of each of Bankers Trust Company, Citibank, N.A. and Chemical Bank (the "Reference Banks", which term shall include any successor Reference Bank or Reference Banks appointed by the Company as provided in the Note Exchange Agreement) to provide the Agent Bank with its offered quotation for three-month United States dollar deposits to leading banks in the London interbank market at approximately 11:00 A.M. (London time). LIBOR, for each such business day, shall be the arithmetic average (rounded to the nearest basis point) of such offered quotations of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such offered quotations, LIBOR for that day shall be determined in accordance with the two preceding 157 sentences on the basis of the offered quotations of those Reference Banks providing such quotations. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent Bank with such an offered quotation, the Agent Bank shall not determine LIBOR for that day. "Prime Rate" means, with respect to any Quarterly Period, the arithmetic average (rounded to the nearest basis point) of Prime Rate for each business day in the Rate Determination Period for such Quarterly Period, as determined by the Agent Bank in accordance with the following provisions. On each business day during the Rate Determination Period with respect to such Quarterly Period, the Agent Bank will request the principal New York office of each of the Reference Banks to provide the Agent Bank with the rate announced by such Reference Bank as its prime commercial lending rate per annum at approximately 11 A.M. (New York time). Prime Rate, for each such business day, shall be arithmetic average (rounded to the nearest basis point) of such rates of the Reference Banks for such business day as determined by the Agent Bank. If on any business day during a Rate Determination Period at least two but fewer than all the Reference Banks provide the Agent Bank with such rates, Prime Rate for that day shall be determined in accordance with the two preceding sentences on the basis of the rates of those Reference Banks providing such rates. If on any business day during a Rate Determination Period fewer than two of the Reference Banks provide the Agent bank with such rates, the Agent Bank shall not determine Prime Rate for that day. "Quarterly Period" means the period from each November 15 through the next February 14, from each February 15 through the next May 14, from each May 15 through the next August 14, or from each August 15 through the next November 14, as the case may be. "Rate Determination Period" means, with respect to any Quarterly Period, the three calendar weeks ending on the last Friday that is more than 15 days prior to the first day of such Quarterly Period. 215. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or any assignee, such as: TEN COM (= tenant in common), TEN ENT (= tenants by the entire entities), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 216. Copies of Note Exchange Agreement. The Company will furnish to any Noteholder of record upon written request without charge a copy of the Note Exchange Agreement. Requests may be made to: Canal Capital Corporation, 717 Fifth Avenue, New York, New York 10022, Attention: Treasurer. 158 217. Amendment and Restatement. The New Notes, including this Note, amend, supersede and replace the Old Notes, and are delivered in substitution for, but not in payment of, the Old Notes. IN WITNESS WHEREOF, CANAL CAPITAL CORPORATION has caused this instrument to be executed in its corporate name by the signature of its Vice President. Dated: As of January 8, 1998 CANAL CAPITAL CORPORATION Attest: By: /S/ Reginald Schauder Vice President /S/ Dante C. Ortiz 159 ASSIGNMENT FORM If you the holder want to assign this Variable Rate Mortgage Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Variable Rate Mortgage Note to: (Print or Type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint ________________________, agent to transfer this Variable Rate Mortgage Note on the books of the Company. The agent may substitute another to act for him. Dated: _____________________________ Signed: _____________________________ _____________________________ (Sign exactly as name appears on the other side of this Note) Signature Guarantee CANAL CAPITAL CORPORATION 717 FIFTH AVENUE NEW YORK, NY 10022 160 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 161 162 -----END PRIVACY-ENHANCED MESSAGE-----