-----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, Gg3Xpf/e/KgRaVlsMXR9F+Y6498G3N3AdYVZ07CkvubIyV3KNumLzzF0nlYtt4HW cYwHLT11RKV+RXsEOfntVA== 0000101821-99-000007.txt : 19990127 0000101821-99-000007.hdr.sgml : 19990127 ACCESSION NUMBER: 0000101821-99-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990126 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: 99512604 BUSINESS ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128266040 MAIL ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STOCKYARDS CORP DATE OF NAME CHANGE: 19881027 10-K 1 10-K 1998 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, 1998 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, 1999, was approximately $240,000. The number of shares of Common Stock, $.01 par value, outstanding at January 15, 1999 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..... 8 PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters................................. 9 ITEM 6. Selected Financial Data............................. 10 ITEM 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition....... 12 ITEM 8. Financial Statements and Supplementary Data......... 20 ITEM 9. Disagreements on Accounting and Financial Disclosure.......................................... 20 PART III ITEM 10. Directors and Executive Officers of the Registrant.. 21 ITEM 11. Executive Compensation.............................. 22 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................................... 25 ITEM 13. Certain Relationships and Related Transactions...... 27 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 28 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 September, 1998 Canal sold approximately a 60 acre parcel of land to the City of Omaha, Nebraska. This sale included the Exchange Building, the seventeen acres of land leased to the stockyards operator as well as a number of abandoned former stockyards structures. As part of this transaction, Canal will continue to receive the stockyards rental payment under the lease for as long as the stockyards continue to operate on the subject property. We anticipate that this rental income will continue throughout fiscal 1999. 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 lease with a meat packing company located near the stockyards in Fargo, North Dakota, rental income from its 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". 1 Canal's art dealing operations consist primarily of inventories held for resale of antiquities primarily from ancient Mediterranean cultures and contemporary art primarily of one artist. See "Art Operations". B. Factors That May Affect Future Results This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as 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 $1.8 million, while contributing $4.2 million to Canal's revenues for fiscal 1998. 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 May, 1998 Canal s Exchange Building in Sioux City, Iowa was substantially damaged by a fire. The original building as well as one of the two subsequent additions had to be demolished. The remaining structure (three story - approximately 25,000 square feet) suffered no structural damage, but will require an extensive renovation before it can be occupied. 2 During fiscal 1998, Canal continued to encounter difficulties in increasing the occupancy rate in its St. Paul, Minnesota Exchange Building. Despite our efforts, the occupancy of this building continues to hover at the 50% rate. We will continue to aggressively pursue replacement tenants for this building in fiscal 1999. As of October 31, 1998, there are approximately 237 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. In September, 1998 Canal sold approximately a 60 acre parcel of land to the City of Omaha, Nebraska. This sale included the Exchange Building, the seventeen acres of land leased to the stockyards operator as well as a number of abandoned former stockyards structures. As part of this transaction, Canal will continue to receive the stockyards rental payment under the lease for as long as the stockyards continue to operate on the subject property. We anticipate that this rental income will continue throughout fiscal 1999. 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 17). Risk Real estate activities in general may involve various degrees of risk, such as competition for tenants, general market conditions and interest rates. Furthermore, there can be no assurance that Canal will be successful in the development, lease or sale of its agribusiness related real estate properties. 3 Competition Canal competes in the area of agribusiness related real estate development with other regional developers, some of which are substantially larger and have significantly greater financial resources than Canal. To a certain extent, Canal's agribusiness revenues are dependent on the ability of the stockyard operations purchaser and the various meat packers with whom Canal has yardage agreements to successfully compete in their respective businesses. D. Art Operations 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 $700,000 at October 31, 1998. 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 49% ($713,862) and 51% ($735,263) and 63% ($1,775,594) and 37% ($1,035,263) of total art inventory at October 31, 1998 and 1997, 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 $1,184,000 while contributing approximately $221,000 to Canal's revenues for fiscal 1998. Included in this loss is a $550,000 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, 1998, 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, 1998 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 22 62 Sioux City, IA 1937 64 2 24 24 14 Omaha, NE 1976 11 0 0 11 0 Sioux Falls, SD 1937 36 0 31 4 1 Total 448 11 122 78 237 The following schedule shows the average occupancy rate and average rental rate at each of Canal's five Exchange Buildings: 1998 1997 Occupancy Average(5) Occupancy Average(5) Location Rate Rental Rate Rate Rental Rate St. Joseph, MO 75% $ 4.75 75% $ 4.75 West Fargo, ND(4) N/A N/A N/A N/A S. St. Paul, MN 50% $12.29 50% $12.29 Sioux City, IA(6) N/A $ N/A 46% $ 4.14 Omaha, NE(7) N/A $ N/A 51% $ 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) Building closed in fiscal 1998 due to fire damage. (7) Building sold in September, 1998. 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. 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 include $227,452 in additional rent paid by Federal Beef during the time Union allegedly was in breach of the Lease Agreement and the Yardage Agreement. Federal Beef also 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, and alleged reduction in the number of animals processed at the plant, in an amount calculated by Federal Beef s expert witness to be $1,116,900. 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. 7 In April 1996, Federal Beef served a Second Amended Complaint in which it alleged that Union has also breached an obligation under the Yardage Agreement to provide certain additional yardage services with respect to cattle received at the stockyards for delivery to Federal Beef. Damages in an unspecified amount are sought by Federal Beef against Union for this alleged breach. Canal has also denied this additional claim. The Company is unable at this time to estimate a possible loss or range of loss associated with this suit. However, Management does not believe that any possible loss associated with this suit would be material to the operations of the Company nor does Management believe that the revenues generated under the lease will be materially affected in resolving this dispute. 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 which involved 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. Upon Pine Valley s motion, the Court entered an order dated February 23, 1998 granting summary judgement and dismissing Canal s complaint. Canal has appealed the dismissal to the U.S. Court of Appeals for the Eighth Circuit. Oral arguments were heard on this appeal in mid December. A decision has not yet been rendered by the Court. ITEM 4. Submission of Matters to a Vote of Shareholders None. 8 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, 1998 as reported on the "pink sheets" were: Fiscal 1998 Fiscal 1997 Quarter Ended High Low High Low October 31 ................. $ 1/4 -- $ 3/16 $ 5/16 -- $ 1/4 July 31 .................... 1/4 -- 3/16 5/16 -- 1/4 April 30 ................... 1/4 -- 3/16 5/16 -- 1/4 January 31 ................. 1/4 -- 3/16 5/16 -- 1/4 There were no cash dividends paid during fiscal 1998 or 1997. Canal is subject to restrictions on the payment of cash dividends under certain debt agreements. As of January 20, 1999, Canal had approximately 1,500 holders of record of its common stock, par value $.01 per share. 9 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, 1998 1997 1996 1995 1994 OPERATING DATA: REVENUES FROM CONTINUING OPERATIONS $4,457(2) $5,311(3) $9,049(4) $4,854(5) $8,460 NET (LOSS) INCOME ($1,413) ($1,001) $ 842(6)($1,518)(7) $1,362(8) (LOSS) INCOME PER SHARE: BASIC ($0.37) ($0.27) $ O.16 ($0.40) $0.23 DILUTED ($0.37) ($0.27) $ 0.13 ($0.40) $0.20 CASH DIVIDENDS PAID $0.00 $0.00 $ 0.00 $0.00 $0.00 WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,352 4,476 - DILUTED(9) 4,327 5,327 5,327 5,352 5,170 11 AT OCTOBER 31, 1998 1997 1996 1995 1994 BALANCE SHEET DATA: CURRENT ASSETS $1,197 $2,151 $2,015 $1,443 $1,416 PROPERTY ON OPERATING LEASES, NET 5,861 5,323 7,106 8,385 8,708 ART INVENTORY NON-CURRENT 949 2,311 3,089 4,901 5,744 OTHER ASSETS 1,500 3,175 3,279 3,474 4,260 TOTAL ASSETS $ 9,507 $12,960 $15,489 $18,203 $20,128 CURRENT LIABILITIES $2,186 $2,068 $3,426 $ 2,710 $ 6,122 LONG-TERM DEBT 5,167 6,050 6,980 11,379 8,062 STOCKHOLDERS' EQUITY 2,154 4,842 5,083 4,114 5,944 TOTAL LIAB. & STOCKHOLDERS'EQUITY $ 9,507 $12,960 $15,489 $18,203 $20,128 COMMON SHARES OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327 10 ITEM 6. Selected Financial Data (continued..) NOTES: (1) For discussion of material uncertainties and commitments, see Notes 12 and 17 to the Consolidated Financial Statement. (2) The revenue decrease was due primarily to a $1.1 million decrease in sales of real estate. (3) The revenue decrease was due primarily to a $2.7 million decrease in sales of real estate. (4) The revenue increase was due primarily to a $4.4 million increase in sales of real estate which was attributable to the Sioux City, Iowa lease termination and property sale. (5) The revenue decrease is due primarily to a decrease of $2.1 million in real estate sales and the absence of a $1.5 million judgment reversal taken in fiscal 1994. (6) Includes a $3.8 million gain on the sale of real estate offset by a $1.7 million loss from art operations which included a $1.5 million increase in the art inventory valuation allowance. (7) Includes the absence of a judgment reversal of $1.5 million in 1994 against the Company, a $0.5 million increase in the art inventory valuation reserve, absence of $0.3 million gain on sale of investments, a $0.2 million increase in interest expense partially offset by a $0.6 million gain on real estate sales. (8) 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) Weighted average number of diluted shares have been calculated to give effect to certain convertible notes issued in March 1994. 11 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 eight of the last ten 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, 5 and 17). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Canal recognized a net loss of $1.4 million for 1998 as compared to the 1997 net loss of $1.0 million and the 1996 net income of $0.8 million. After recognition of preferred stock dividend payments of $200,000 in 1998, $182,000 in 1997 and $162,000 in 1996, the results attributable to common stockholders were a net loss of $1.6 million in 1998, a net loss of $1.2 in 1997 and net income of $0.7 million in 1996. Canal s 1998 net loss of $1.4 million is due primarily to a $1.2 million loss on its art operations and a $0.3 million reduction in its gain on sales of real estate (due to a $1.1 million decrease in real estate sales) in the current year. These were offset to a certain extent by moderate decreases in both interest and general and administrative expenses. 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. 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 1998 decreased by $0.8 million to $4.5 million as compared with 1997 revenues which had decreased by $3.7 million to $5.3 million from 1996 revenues of $9.0 million. The 1998 decrease is due primarily to a $1.1 million decrease in sales of real estate offset to a certain extent by a gain on insurance proceeds of $0.4 million related to a fire in Sioux City, Iowa. The 1997 decrease was due primarily to a $2.7 million decrease in sales of real estate. 12 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 eight of the last ten 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, 5 and 17). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001, the proceeds of which were used to repay in full the Company s variable rate mortgage notes due May 15, 1998 ($2,605,000), its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes which were due December 31, 1997 ($320,000) plus accrued interest thereon. The purchasers of these notes included certain entities controlled by the Company s Chairman, the Company s Chief Executive Officer and members of their families. The variable rate mortgage notes issued have essentially the same terms and conditions as the variable rate mortgage notes which were repaid. The notes carry interest at the highest of four variable rates, determined on a quarterly basis. These notes, among other things, prohibit Canal from becoming an investment company as defined by the Investment Company Act of 1940; require Canal to maintain minimum net worth; restrict Canal s ability to pay cash dividends or repurchase stock; require principal prepayments to be made only out of the proceeds from the sale of certain assets, and require the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. At October 31, 1998 the Company was in technical default of this mortgage note agreement as it relates to minimum net worth. The Company requested and has received a waiver of this default from the note holders. As of October 31, 1998 the balance due under these notes was $2,846,000 all of which is classified as long-term debt-related party. Cash and cash equivalents of $34,000 at October 31, 1998 increased $6,000 or 18.8% from $28,000 at October 31, 1997. Net cash used by operations in fiscal 1998 was $0.5 million. Substantially all of the 1998 net proceeds from the sale of real estate of $1.4 million and the proceeds from the sale of art of $0.2 million less the cash used in operations was used to reduce outstanding debt and accrued expenses. During 1998 Canal reduced its variable rate mortgage notes by $0.8 million and other long-term debt by $0.1 million for a net 1998 debt reduction of $0.9 million. 13 At October 31, 1998 the Company s current liabilities exceed current assets by $1.0 million as compared to October 31, 1997 when the Company's current assets exceeded current liabilities by $0.1 million, which represented an increase of $1.5 million from 1996. The 1998 decrease in current assets is due primarily to a decrease in the market value of Canal s investments available for sale of $0.9 million. The only required principal repayments under Canal's debt agreements for fiscal 1999 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. 1998 COMPARED TO 1997 Real Estate Revenues Real estate revenues for 1998 of $4.2 million accounted for 95.1% of the 1998 revenues as compared to revenues of $5.2 million or 97.8% for 1997. Real estate revenues are comprised of rental income from Exchange Building (commercial office space) rentals and other lease income from the rental of vacant land and certain structures (32.5% and 30.6%), Ground lease income (21.8% and 17.8%), volume based rental income (3.0% and 2.1%) and sale of real estate and other income (42.7% and 49.5%) for 1998 and 1997, respectively. The 1998 decrease is due primarily to the $1.1 million decrease in sales of real estate. The percentage variations in the year to year comparisons are due to the significant decrease in real estate sales for fiscal 1998. Real Estate Expenses Real estate expenses for 1998 of $2.5 million decreased by $0.9 million (25.8%) from $3.3 million in 1997. Real estate expenses are comprised of labor, operating and maintenance (36.2% and 25.2%), depreciation and amortization (8.8% and 10.4%), taxes other than income taxes (9.9% and 7.8%), cost of real estate sold (41.5% and 27.1%),and general and administrative and other expenses (3.6% and 29.5%) for 1998 and 1997, respectively. The 1998 decrease in real estate expenses is due primarily to the $0.9 million write down in value of the Omaha property. The decrease in 14 general and administrative and other expenses also reflects the elimination of the 1997 $0.9 million write down in value of the Omaha property. The percentage variations in year to year comparisons is due to the decrease in the real estate expenses for fiscal 1998. Art Operations Management estimates it may take approximately five years to dispose of its current art inventory. The Company's ability to dispose of its art inventory is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. Additionally, the art market itself is a very competitive market. Accordingly, there can be no assurance that Canal will be successful in disposing of its art inventory within the time frame discussed above. Canal has its art inventory appraised by independent appraisers annually. The 1998 appraisal covered approximately 50% of the inventory value. The appraised values estimate the current market value of each piece giving consideration to Canal's practices of engaging in consignment, private and public auction sales. The net realizable value of the remaining 50% of the inventory was estimated by management based in part on operating history and in part on the results of the independent appraisals done. In fiscal 1998 Canal recognized a $550,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $3,400,000 as of October 31, 1998 as compared to $2,850,000 and $2,500,000 at October 31, 1997 and 1996, respectively. These estimates were based in part on the Company's history of losses sustained on art sales in the current and previous years. The valuation allowance represents management's best estimate of the loss that will be incurred by the Company in the normal course of business. The estimate is predicated on past history and the information that was available at the time that the financial statements were prepared. The provision contemplates the loss that could result if the level of sale anticipated was achieved. The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. The price at which pieces are consigned is usually in line with appraisals and above the cost of the piece. The amount classified as current represents management's best estimate of the minimum amount of inventory that will be sold in this market. Management believes that the provision discussed above has effectively reduced inventory to its estimated net 15 realizable value. The Company will continually monitor the market for its art inventory and will make adjustments to the carrying value of its art inventory as such adjustments become necessary. The Company's plan to sell inventory at auction is contemplated in the normal course of business. Auction in this context is one of the usual channels used for disposal of its art inventory. The proceeds from these sales are used to reduce the Company's outstanding debt and finance current operations. If these sales are not made the Company has alternate means of raising cash such as sales of real estate, sales of investments available for sale, raising of new capital and further restructuring of debt. Some of these measures were successfully implemented in fiscal 1998. Art Revenues Art revenues for 1998 of $221,000 increased $104,000 or 88.2% from $117,000 in 1997. Art revenues are comprised of proceeds from the sale of antiquities and contemporary art (100.0% and 97.5%) and commission income on sale of art owned by third parties (0.0% and 2.5%) for 1998 and 1997, respectively. The Company's art inventory was reduced through sales by $0.8 million and $0.4 in fiscal years 1998 and 1997, respectively. Art Expenses Art expenses for 1998 of $1.4 million increased by $0.6 million (69.9%) from $0.8 million in 1997. Art expenses (excluding valuation allowances) consisted of the cost of art sold (95.3% and 90.7%) and selling, general and administrative expenses (4.7% and 9.3%) for 1998 and 1997, respectively. Included in art expenses is a $0.6 million and a $0.4 million valuation allowance against the Company's art inventory (see Note 8 to the Consolidated Financial Statements) for fiscal years 1998 and 1997, respectively. General and Administrative General and administrative expenses for 1998 of $1.2 million decreased $0.1 million (3.1%) from $1.3 million in 1997. The major components of general and administrative expenses are officers salaries (35.4% and 34.3%), rent (7.8% and 8.9%), legal and professional fees (9.9% and 10.0%), insurance (12.9% and 11.9%) and office salaries (9.2% and 10.0%) for 1998 and 1997, respectively. The percentage increases in officers salaries, legal and professional fees and insurance is a result of the aggregate decrease in total general and administrative expenses. 16 Interest and Other Income Interest and other income of $148,000 for 1998 decreased $89,000 (37.5%) from $236,000 in fiscal 1997. Interest and other income amounts are comprised primarily of dividend income, interest income and other income. Interest Expense Interest expense for 1998 of $0.8 million decreased by $0.2 million (16.4%) from $1.0 million in 1997. The 1998 decrease is due primarily to the aggregate reduction in the outstanding debt. Interest rates on Canal's variable rate mortgage notes averaged 12.00% in 1998 as compared to an average of 12.00% in 1997 and an average of 11.94% in 1996. At October 31, 1998 the outstanding balance of these notes was $2,846,000. Other Expense Other expense of $139,000 for 1998 decreased $61,000 (30.3%) from $200,000 in fiscal 1997. 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 17 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 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. 18 The valuation allowance represents management's best estimate of the loss that will be incurred by the Company in the normal course of business. The estimate is predicated on past history and the information that was available at the time that the financial statements were prepared. The provision contemplates the loss that could result if the level of sale anticipated was achieved. The 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. 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. 19 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. 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. 20 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 1998 the Board of Directors held one meeting, and the Executive Committee held three meetings, all of which were attended by both Mr. Edelman and Mr. Schultz. 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 59, 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 62, 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 52, 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 49, has been Vice President, Chief Financial Officer and Treasurer since January 1989 and assumed responsibility as Secretary of the Company in September 1995. Mr. Schauder was corporate controller from July 1985 to January 1989. 21 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 1998 exceeded $100,000. SUMMARY COMPENSATION TABLE - Annual Compensation Name and Principal Position Year Salary Michael E. Schultz 1998 $ 165,000 President and Chief 1997 $ 165,000 Executive Officer 1996 $ 165,000 Asher B. Edelman 1998 $ 165,000 Chairman of the Board 1997 $ 165,000 and Executive Committee 1996 $ 165,000 Reginald Schauder 1998 $ 101,200 Vice President, Chief 1997 $ 101,200 Financial Officer 1996 $ 101,200 Treasurer and Secretary The Company pays certain expenses related to Mr. Edelman's European offices as well as his travel expenses between Europe and the U.S. These expenses totaled $42,000, $52,000 and $68,000 for fiscal years 1998, 1997 and 1996, respectively. Retirement Plans The Canal Capital Corporation Retirement Plan (the "Retirement Plan") provides benefits to eligible employees of the Company and its subsidiaries and affiliates. Directors who are not employees are not eligible to participate in the Retirement Plan. The Retirement Plan is administered by the Company. All Company contributions under the Retirement Plan were deposited with an insurance company and invested in a group annuity contract through May 30, 1985. Thereafter, all Company contributions have been held in trust under a Trust Agreement between the Company and the Executive Committee of the Board of Directors, as trustee. Contributions to the Retirement Plan are determined on an actuarial basis, without individual allocation. 22 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, 1998. 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* $ 17,500 Asher B. Edelman 20,000* $ -0- Reginald Schauder 19,600* $ -0- * All options were exercisable at October 31, 1998. COMPENSATION OF DIRECTORS Fees and Expenses; Other Benefits Directors who are not officers of the Company do not receive cash compensation for service as Directors. Mr. Agranoff was granted 25,000 options of the Company under the 1985 Directors Stock Option Plan, as amended, in lieu of an annual retainer and per meeting fees. The options were granted December 1991. Directors are reimbursed for expenses incurred in attending Board and Committee meetings, including those for travel, food and lodging. Stock Options for Directors The Company maintains an option plan for the benefit of directors of the Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"), which was approved by the stockholders of the Company on March 12, 1986. Pursuant to the 1985 Plan, a maximum of 264,000 shares of common stock, $0.01 par value per share, of the Company have been reserved for issuance to directors and members of the Executive Committee of the Company and its subsidiaries. 23 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 1998 fiscal year, no options under the 1985 plan were granted and no options previously granted were exercised. At October 31, 1998, options covering an aggregate of 30,500 shares were outstanding under the 1985 Plan and were held by members of the Board of Directors and Executive Committee. The exercise price per share of all outstanding options under the 1985 Plan ranges from $0.13 to $0.25. The expiration dates for outstanding options under the 1985 Plan range from December 2001 to January 2003. Compensation Committee - Interlocks and Insider Participation The Board of Directors (comprised of Asher B. Edelman, Chairman of the Board and Chairman of the Executive Committee, Michael E. Schultz, President and Chief Executive Officer and Gerald N. Agranoff) determines the compensation of the Chief Executive Officer and the Company's other executive officers and administers the Company's 1984 Stock Option Plan and 1985 Stock Option Plan for Directors. In connection with the Company's investment activities, the Executive Committee of the Board of Directors, through Mr. Edelman, has the authority to invest funds of the Company in securities of other companies. Certain funds of the Company have been invested in the securities of other companies in which Mr. Edelman, other directors of the Company or their affiliates are directors or officers, or in which one or more of such persons may also have invested. Since November 1, 1993, such companies included Datapoint Corporation. The Company has filed with the SEC Schedules 13D jointly with Plaza, Mr. Edelman, Edelman Management, Edelman Limited Partnership, certain investment partnerships of which Mr. Edelman is sole or controlling general partner, certain of the companies referred to in the preceding sentence and other persons, indicating that the filing parties constitute groups for purposes of such filings with respect to the acquisition of securities in the companies referred to in the preceding sentence. 24 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, 1999 were: SECURITIES BENEFICIALLY OWNED No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock Asher B. Edelman 2,446,075 (c) 56.27 Michael E. Schultz 314,335 (c) 6.86 William G. Walters 234,440 (b) 5.42 (a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each individual referred to in the above table has the sole power to direct the voting and disposition of the shares shown. (b) The number reported herein for Mr. Walters includes 117,220 shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co., L.P., of which Mr. Walters is Chief Executive Officer. Mr. Walters has sole power to vote and dispose of the shares described herein. (c) For additional information about beneficial ownership see "Securities Owned by Management" below. 25 SECURITIES OWNED BY MANAGEMENT The following table sets forth certain information as of January 15, 1999, with respect to the beneficial ownership of the Company's Common Stock with respect to all persons who are directors, each of the executives named in the Executive Compensation Table and by all directors and officers as of the most practical date. Unless otherwise indicated, the percentage of stock owned constitutes less than one percent of the outstanding Common Stock and the beneficial ownership for each person consists of sole voting and sole investment power. No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock Gerald Agranoff 25,000 (b) 0.57 Asher B. Edelman 2,446,075 (c)(d) 56.27 Reginald Schauder 19,600 (e) 0.45 Michael E. Schultz 314,335 (f)(g) 6.86 All Directors and Officers as a group (4 persons) 2,805,010 60.04 (a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each director and officer referred to in the above table has the sole power to direct the voting and disposition of the shares shown, except as otherwise set forth in footnotes (c), (d) and (f) below. (b) Includes 25,000 shares subject to options which are presently exercisable. (c) The number reported herein for Mr. Edelman includes 31,300 shares held in Mr. Edelman's retirement plan, 20,000 shares subject to options granted to Mr. Edelman which are presently exercisable, 1,017,220 shares owned by A.B. Edelman Limited Partnership ("Edelman Limited Partnership"), of which Mr. Edelman is the sole general partner, 590,186 shares of common stock owned by the Edelman Family Partnership, L.P. ( Edelman Family Partnership ), of which Mr. Edelman is the general partner, 385,250 shares of common stock owned by the Edelman Value Fund Ltd. (the Fund ) of which Mr. Edelman is the investment manager, 30,000 shares of common stock owned by Edelman Value Partners, L.P. ( Value Partners ), of which Mr. Edelman is the sole stockholder of the general partner, 26,620 shares of common stock held by Canal Capital Corporation Retirement Plan ( Canal Retirement Plan ), of which 26 Mr. Edelman serves as a trustee, 8,400 shares owned by Aile Blanche, Inc., of which Mr. Edelman is the sole stockholder and 3,399 shares owned by Felicitas Partners, L.P. ("Felicitas"), the general partner of which is Citas Partners ("Citas") of which Mr. Edelman is the controlling general partner. Edelman Limited Partnership has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the sole general partner of Edelman Limited Partnership. Edelman Family Partnership has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the general partner. Mr. Edelman as the investment manager of the Fund directs the voting and disposition of the Fund s securities. Value Partners has shared power to vote and dispose of the shares owned by it. The power to dispose of such shares is exercisable by A. B. Edelman Management Company, Inc., a corporation controlled by Mr. Edelman as the sole stockholder. Canal Retirement Plan has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as trustee. Aile Blanche, Inc. has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as President. Felicitas has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the controlling general partner of Citas. Additionally, the number reported herein for Mr. Edelman includes 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 39,865 shares of common stock owned by Mr. Edelman's former wife and 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, as to which Mr. Edelman expressly disclaims beneficial ownership. (e) Includes 100 shares owned directly and 19,500 shares subject to options which are presently exercisable. (f) Includes 58,835 shares owned directly and 255,500 shares subject to options which are presently exercisable. (g) The number reported herein for Mr. Schultz excludes 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 and 26,620 shares of common stock held by the Canal Capital Corporation Retirement Plan of which Mr. Schultz serves as a trustee, as to which Mr. Schultz expresses disclaims beneficial ownership. ITEM 13. Certain Relationships and Related Transactions See: "Compensation Committee Interlocks and Insider Participation" 27 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, 1998 the Company filed no reports on Form 8-K. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 25th day of January, 1999. CANAL CAPITAL CORPORATION By: /S/ Michael E. Schultz Michael E. Schultz President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date President and Chief /S/ Michael E. Schultz Executive Officer and Director Michael E. Schultz (Principal Executive Officer) January 25, 1999 Vice President-Finance Secretary and Treasurer /S/ Reginald Schauder (Principal Financial and Reginald Schauder Accounting Officer) January 25, 1999 /S/ Asher B. Edelman Chairman of the Board Asher B. Edelman and Director January 25, 1999 /S/ Gerald N. Agranoff Gerald N. Agranoff Director January 25, 1999 29 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, 1998 and 1997... F-3 Consolidated Statements of Operations and Comprehensive Income for the years ended October 31, 1998, 1997 and 1996............................................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended October 31, 1998, 1997 and 1996............................................. F-7 Consolidated Statements of Cash Flows for the years ended October 31, 1998, 1997 and 1996.......... 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, 1998 and 1997 and the related consolidated statements of operations & comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three year period ended October 31, 1998. 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, 1998 and 1997, and the results of their operations and cash flows for each of the years in the three year period ended October 31, 1998, 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, 5 and 17 to the financial statements, the Company has suffered recurring losses from operations in eight of the last ten years and is involved in various litigations. All of these matters raise substantial doubt about the company s ability to continue as a going concern. Management's plans in regard to these matters are also described in Notes 1, 5 and 17. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. /S/ Todman & Co., CPA s,P.C. New York, N.Y. TODMAN & CO., CPAs, P.C. December 23 , 1998 Certified Public Accountants (N.Y.) F-2 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1998 AND 1997 1998 1997 ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 33,538 $ 28,225 RESTRICTED CASH AND CASH EQUIVALENTS 0 0 NOTES AND ACCOUNTS RECEIVABLE, NET 211,070 271,891 ART INVENTORY (NET OF A VALUATION ALLOWANCE OF $ 1,500,000 AND $500,000 AT OCTOBER 31, 1998 AND 1997, RESPECTIVELY) 500,000 500,000 INVESTMENTS 278,175 1,151,358 PREPAID EXPENSES 173,938 199,888 TOTAL CURRENT ASSETS 1,196,721 2,151,362 NON-CURRENT ASSETS: PROPERTY ON OPERATING LEASES, NET OF ACCUMULATED DEPRECIATION OF $ 1,671,222 AND $ 2,407,533 FOR 1998 AND 1997, RESPECTIVELY 5,861,064 5,323,177 ART INVENTORY NON-CURRENT (NET OF VALUATION ALLOWANCE OF $ 1,900,000 AND $2,350,000) AT OCTOBER 31, 1998 AND 1997, RESPECTIVELY 949,125 2,310,857 OTHER ASSETS: PROPERTY HELD FOR DEVELOPMENT OR RESALE 1,318,095 2,843,305 DEFERRED LEASING AND FINANCING COSTS 12,866 39,655 DEPOSITS AND OTHER 169,578 291,787 1,500,539 3,174,747 $ 9,507,449 $12,960,143 ============ =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1998 AND 1997 LIABILITIES & STOCKHOLDERS' EQUITY 1998 1997 CURRENT LIABILITIES: CURRENT PORTION OF LONG-TERM DEBT- RELATED PARTY $ 0 $ 0 CURRENT PORTION OF LONG-TERM DEBT 110,000 98,000 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2,061,210 1,871,963 ACCRUED LITIGATION SETTLEMENT 0 0 INCOME TAXES PAYABLE 14,314 97,995 TOTAL CURRENT LIABILITIES 2,185,524 2,067,958 LONG-TERM DEBT, LESS CURRENT PORTION 2,321,433 2,375,496 LONG-TERM DEBT, RELATED PARTY 2,846,000 3,675,000 5,167,433 6,050,496 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: PREFERRED STOCK, $0.01 PAR VALUE: 5,000,000 SHARES AUTHORIZED; 3,411,681 AND 2,997,900 SHARES ISSUED AND OUTSTANDING AND AGGREGATE LIQUIDATION PREFERENCE OF $10.00 PER SHARE FOR $ 34,116,810 AND $ 29,979,000 AT OCTOBER 31, 1998 AND 1997, RESPECTIVELY 34,117 29,979 COMMON STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,313,794 SHARES ISSUED; 4,326,929 SHARES OUTSTANDING AT OCTOBER 31, 1998 AND 1997, RESPECTIVELY 53,138 53,138 ADDITIONAL PAID-IN CAPITAL 7,033,046 26,826,293 ACCUMULATED DEFICIT (11,808,043) (10,194,335) 986,865 SHARES OF COMMON STOCK HELD IN TREASURY, AT COST (11,003,545) (11,003,545) COMPREHENSIVE INCOME: PENSION VALUATION RESERVE (1,896,838) (1,485,641) UNREALIZED GAIN ON INVESTMENTS AVAILABLE FOR SALE (257,383) 615,800 2,154,492 4,841,689 $ 9,507,449 $12,960,143 ============ =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 1998 1997 1996 REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE $1,434,439 $2,496,943 $5,170,872 RENTAL INCOME 1,376,714 1,591,005 2,072,593 GROUND LEASE INCOME 924,000 924,000 936,000 VOLUME BASED RENTAL INCOME 125,617 110,414 657,184 OTHER INCOME 375,000 71,109 17,091 4,235,770 5,193,471 8,853,740 REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 1,019,509 896,698 1,386,029 LABOR, OPERATING AND MAINTENANCE 891,809 833,181 964,918 DEPRECIATION AND AMORTIZATION 216,572 343,741 359,263 TAXES OTHER THAN INCOME TAXES 240,415 256,800 360,000 PROVISION FOR LITIGATION SETTLEMENT 0 (60,359) 434,918 WRITE DOWN OF REAL ESTATE PROPERTY 0 936,689 0 GENERAL AND ADMINISTRATIVE 89,352 104,606 107,239 2,457,657 3,311,356 3,612,367 INCOME FROM REAL ESTATE OPERATIONS 1,778,113 1,882,115 5,241,373 ART OPERATIONS: ART REVENUES: SALES 220,800 114,350 195,400 OTHER REVENUES 0 2,982 0 220,800 117,332 195,400 ART EXPENSES: COST OF ART SOLD 814,936 432,286 326,399 VALUATION RESERVE 550,000 350,000 1,500,000 SELLING, GENERAL AND ADMINISTRATIVE 39,920 44,541 49,010 1,404,856 826,827 1,875,409 LOSS FROM ART OPERATIONS (1,184,056) (709,495) (1,680,009) SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 Continued ... 1998 1997 1996 GENERAL AND ADMINISTRATIVE EXPENSE(1,218,239) (1,256,854) (1,348,179) (LOSS) INCOME FROM OPERATIONS (624,182) (84,234) 2,213,185 OTHER INCOME (EXPENSE): INTEREST AND OTHER INCOME 147,744 236,470 145,819 INTEREST EXPENSE (333,424) (804,719) (1,494,271) INTEREST EXPENSE- RELATED PARTY (464,300) (149,000) (23,000) OTHER EXPENSE (139,308) (200,000) 0 (789,288) (917,249) (1,371,452) (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (1,413,470) (1,001,483) 841,733 PROVISION FOR INCOME TAXES 0 0 0 NET (LOSS) INCOME ($1,413,470) $(1,001,483) $ 841,733 OTHER COMPREHENSIVE (LOSS) INCOME: MINIMUM PENSION LIABILITY ADJUSTMENT (411,197) 134,055 116,975 UNREALIZED GAIN ON INVESTMENTS AVAILABLE FOR SALE (873,183) 615,800 0 COMPREHENSIVE (LOSS) INCOME ($2,697,850) ($251,628) $ 958,708 (LOSS) INCOME PER COMMON SHARE: - BASIC ($0.37) ($0.27) $ 0.16 - DILUTED ($0.37) ($0.27) $ 0.13 WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,326,929 4,326,929 4,326,929 - DILUTED 4,326,929 5,326,929 5,326,929 SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1998, 1997, AND 1996 COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, NOV 1, 1995 5,313,794 $53,138 2,358,542 $23,585 NET INCOME 0 0 0 0 PFD STOCK DIVIDEND 0 0 344,757 3,448 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 ----------------- --------------------- BALANCE, OCT 31, 1996 5,313,794 $53,138 2,703,299 $27,033 NET INCOME 0 0 0 0 PFD STOCK DIVIDEND 0 0 294,601 2,946 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 UNREALIZED GAIN ON INVEST. 0 0 0 0 ------------------- --------------------- BALANCE, OCT 31, 1997 5,313,794 $53,138 2,997,900 $29,979 NET LOSS 0 0 0 0 PFD STOCK DIVIDEND 0 0 413,781 4,138 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 UNREALIZED LOSS ON INVEST. 0 0 0 0 -------------------- --------------------- BALANCE, OCT 31, 1998 5,313,794 $53,138 3,411,681 $34,117 =================== ===================== ADDITIONAL TREASURY PAID-IN ACCUMULATED COMPREHENSIVE STOCK, CAPITAL DEFICIT (LOSS)INCOME AT COST BAL, NOV 1, 1995 $26,468,008($9,690,693)($1,736,671)($11,003,545) NET INCOME 0 841,733 0 0 PFD 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 --------- -------------- ------------ ------------ BAL, OCT 31, 1996 $26,636,939($9,010,999)($1,619,696)($11,003,545) NET INCOME 0 (1,001,483) 0 0 PFD 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 ------------ ----------- ------------ --------- BAL, OCT 31, 1997 $26,826,293($10,194,335)($ 869,841)($11,003,545) NET INCOME 0 (1,413,470) 0 0 PFD STOCK DIVIDEND 206,753 (200,238) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 (411,197) 0 UNREALIZED LOSS ON INVEST. 0 0 (873,183) 0 ----------- ----------- ---------- ---------- BAL, OCT 31, 1998 $27,033,046($11,808,043)($2, 154,221)($11,003,545) ============= =========== =========== ============= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996 1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) ($1,413,470) ($1,001,483) $841,733 ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: (CREDIT)PROV. FOR LITIGATION SETTLEMENT 0 (60,359) 434,918 DEPRECIATION AND AMORTIZATION 265,659 419,897 434,532 GAIN ON SALES OF REAL ESTATE (414,930) (1,600,245) (3,784,843) VALUATION RESERVE - ART INVENTORY 550,000 350,000 1,500,000 CHANGES IN ASSETS AND LIABILITIES: NOTES AND ACCOUNTS RECEIVABLES, NET 60,821 23,311 (53,424) ART INVENTORY, NET 811,732 428,231 311,507 PREPAID EXPENSES AND OTHER, NET (503,286) 826,419 (677,535) PAYABLES AND ACCRUED EXPENSES, NET 105,566 (892,611) 203,221 NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (537,908) (1,506,840) (789,891) CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF REAL ESTATE 1,434,439 2,496,943 5,170,872 CAPITAL EXPENDITURES (60,155) (47,237) (128,626) NET CASH PROVIDED BY INVESTING ACTIVITIES 1,374,284 2,449,706 5,042,246 CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM LONG-TERM DEBT-RELATED PARTIES 3,740,000 0 0 REPAYMENT OF SHORT-TERM BORROWINGS 0 (466,000) 0 REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (4,571,063) (929,273) (3,886,473) NET CASH USED BY FINANCING ACTIVITIES (831,063) (1,395,273) (3,886,473) DECREASE (INCREASE) IN RESTRICTED CASH AND CASH EQUIVALENTS 0 470,000 (470,000) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,313 17,593 (104,118) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,225 10,632 114,750 CASH AND CASH EQUIVALENTS AT END OF YEAR $33,538 $ 28,225 $ 10,632 ========== ========== ========== NOTE: IN FISCAL 1998, 1997 AND 1996,$ 200,238, $ 181,853 AND $ 162,039, RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE OF 413,781, 294,601 AND 344,757 , 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 eight of the last ten 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 17). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Canal continues to closely monitor and reduce where possible its overhead expenses and plans to continue to reduce the level of its art inventories to enhance current cash flows. Management believes that its income from operations combined with its cost cutting program and planned reduction of its art inventory will enable it to finance its current business activities. There can, however, be no assurance that Canal will be able to effectuate its planned art inventory reductions or that its income from operations combined with its cost cutting program in itself will be sufficient to fund operating cash requirements. F-9 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Principles of Consolidation -- The consolidated financial statements include the accounts of Canal Capital Corporation ("Canal") and its 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 $101,000 and $208,000 at October 31, 1998 and 1997, respectively, and is included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 1998, 1997 and 1996 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 237 acres located in the midwest of undeveloped land not currently utilized for corporate purposes nor included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value. F-10 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Impairment of Long-Lived Assets The Company adopted Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of ( SFAS No. 121") as of November 1, 1996. SFAS No. 121 prescribes that an impairment loss is recognized in the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. An impairment loss is recognized whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. (See Note 20). 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 50% and 49% of the inventory value at October 31, 1998 and 1997, respectively. The remaining 50% and 51% at October 31, 1998 and 1997, respectively was estimated by management based in part on the independent appraisals done. However, because of the nature of art inventory, such determination is very subjective and, therefore, the estimated values could differ significantly from the amount ultimately realized. The cost of art is generally specified on the purchase invoice. When individual art is purchased as part of a group or collection of art, cost is allocated to individual pieces by management using the information available to it. A significant portion of the art inventory remains in inventory longer than a year. Consequently, for financial statement purposes, Canal has classified a portion of its inventory as non-current assets (see Note 8). Antiquities and contemporary art represented 49% ($713,862) and 51% ($735,263) and 63% ($1,775,594) and 37% ($1,035,263) of total art inventory at October 31, 1998 and 1997, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. F-11 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED F) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new leases and long-term financing are deferred and amortized over the terms of the related leases or debt agreements, as applicable. G) Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. H) Revenue Recognition -- 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 $30,000, $40,000 and $38,000 and interest payments of $798,000, $954,000 and $1,297,000 in 1998, 1997 and 1996, respectively. K) Earnings Per Share -- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 Earnings Per Share, which requires companies to present basic earnings per share (EPS) and diluted earnings per share, instead of the primary and F-12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED fully diluted EPS that is currently required. The new standard requires additional information disclosure, and also makes certain modifications to the currently applicable EPS calculations defined in Accounting Principles Board No. 15. The new standard was required to be adopted by all public companies for reporting periods ending after December 15, 1997, and requires restatement of EPS for all prior periods reported. The Company adopted SFAS No. 128, for the years ended October 31, 1997 and 1996, respectively. L) Comprehensive Income -- Effective for fiscal years beginning after December 15, 1997, Statement of Financial Accounting Standards No. 130 requires that comprehensive income and its components, as defined in the statement, be reported in a financial statement. The Company elected early adoption of SFAS No. 130 as of October 31, 1997. The only adjustments for each classification of the comprehensive income was for minimum pension liability and unrealized (loss) gain on investments available for sale. M) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. INVESTMENTS AVAILABLE FOR SALE At October 31, the investments available for sale consisted of the following: ($ 000's Omitted) 1998 1997 Aggregate market value..................... $ 278 $1,151 Aggregate carrying value................... $ 278 $1,151 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. Canal recognized an unrealized (loss) and an unrealized gain on investments of ($873,000) and $616,000 for the years ended October 31, 1998 and 1997, respectively, which are shown as a separate component of Stockholders Equity. F-13 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. 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 $924,000. In September, 1998 Canal sold approximately a 60 acre parcel of land to the City of Omaha, Nebraska. This sale included the Exchange Building, the seventeen acres of land leased to the stockyard operator as well as a number of abandoned former stockyards structures. As part of this transaction, Canal continues to receive the stockyards rental payment under the lease for as long as the stockyards continue to operate on the subject property. The Company anticipates that this rental income will continue throughout fiscal 1999. Canal could be entitled to receive additional rent if the stockyards livestock value or cash flow (as defined) exceeds certain levels. In addition, Canal retained the right to receive income from certain volume based rental income agreements with various meat packing companies located near the stockyards. The income from the ground lease is included in Canal's operating results as Real Estate operations. Revenues from the volume based rental agreements for the three years ended October 31, 1998 were: ($ 000's Omitted) 1998 1997 1996 Sioux City, Iowa (1) $ 0 $ 0 $ 537 Fargo, North Dakota (2) 126 110 120 $ 126 $ 110 $ 657 (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 or 1998. (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 5. BORROWINGS At October 31, 1998, 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) 1998 1997 Variable rate mortgage notes due May 15, 2001 - related party ................ $ 2,846 $ 0 Variable rate mortgage notes due May 15, 1998 ................................ 0 2,655 Variable Rate Mortgage Notes due September 15, 1998 - related party ......... 0 700 11% mortgage note; original principal amount $1,697; due April 1, 2011; payable in monthly installments (including interest) of $17....... 1,210 1,266 9.5% mortgage note; original principal amount $472; due November 1, 2012; payable in monthly installments (including interest) of $4........ 393 405 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........ 466 477 Other Note - related party....................... 0 320 Other Note ...................................... 362 325 Total ........................................... 5,277 6,148 Less -- current maturities ...................... 110 98 Long-term debt $ 5,167 $ 6,050 F-15 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001, the proceeds of which were used to repay in full the Company s variable rate mortgage notes due May 15, 1998 ($2,605,000), its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes which were due December 31, 1997 ($320,000) plus accrued interest thereon. The purchasers of these notes included certain entities controlled by the Company s Chairman, the Company s Chief 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. At October 31, 1998 the Company was in technical default of this mortgage note agreement as it relates to minimum net worth. The Company requested and has received a waiver of this default from the note holders. As of October 31, 1998 the balance due under these notes was $2,846,000 all of which is classified as long-term debt-related party. 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 extended these notes to May 15, 1998 under essentially the same terms and conditions. In fiscal 1996, this agreement was further 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. As discussed above, these notes were repaid on January 8, 1998. 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 had essentially the same terms and conditions as the notes discussed above. As discussed above, these notes were repaid On January 8, 1998. In March 1994 the Company borrowed $500,000 from an individual. The Company executed a $350,000 note due December 31, 1996 and a $150,000 convertible note also due December 31, 1996. Both these notes were subsequently extended to December 31, 1998. The $150,000 note was convertible at the holder s option into one million (1,000,000) shares of the F-16 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Company's common stock. The notes paid quarterly interest at the prime rate per annum (which was 8.5% at October 31, 1997) and were 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. As discussed above, these notes were repaid in full in fiscal 1998. On December 1, 1997 the Company issued a $325,000 promissory note due December 1, 2001 as the result of a settlement agreement with the buyer of a parcel of land located in Portland, Oregon which Canal sold in 1988. The note carries interest at the prime rate (8.5% at October 31, 1998) adjusted semi-annually and requires principal and interest payments in each of the first four years (based on a 30 year amortization schedule) commencing December 1, 1997. The balance is payable in full on December 1, 2001. The balance outstanding on this note at October 31, 1998 was $322,000. The scheduled maturities and sinking fund requirements of long-term debt during the next five years are as follows ($ 000's Omitted): Year Ending Amount 1999 $ 110 2000 133 2001 3,833 2002 446 2003 120 Thereafter 635 $ 5,277 6. 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, 1997 approximately $760,000 of net operating loss carryforwards have been utilized to eliminate the Company s taxable income. F-17 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 2012 1,267,839 2018 1,063,000 $9,378,763 Deferred income tax assets as of October 31, 1998, 1997 and 1996, due primarily to net operating losses, have been reduced to zero by valuation reserves of approximately $1,300,000, $1,200,000 and $2,700,000, respectively due to uncertainties concerning their realization. 7. PENSION PLANS Canal has a defined benefit pension plan covering substantially all of its salaried employees (the "Plan"). The benefits are based on years of service and the employee's compensation earned each year. The Company's funding policy is to contribute the amount that can be deducted for federal income tax purposes. Accordingly, the Company will make a contribution of approximately $150,000 for fiscal 1998 and has made contributions of approximately $162,000 for fiscal 1997 and $164,000 for fiscal 1996. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Assets of the plan were invested in U.S. Government securities, common stocks and antiquities. Assumptions used in computing the 1998, 1997 and 1996 pension cost were: 1998 1997 1996 Discount rate ...................... 7.00% 7.25% 7.75% Rate of increase in compensation level ........................... 5.50% 5.75% 6.25% Expected long-term rate of return on assets ....................... 10.00% 10.00% 10.00% F-18 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated balance sheets at October 31, 1998 and 1997. Plan Year ($ 000's Omitted) 1998 1997 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,449 and $1,487 in 1998 and 1997, respectively ............. $ 1,449 $ 1,490 Additional benefit due to assumed future compensation levels ......................... 26 25 Projected benefit obligation (1) .............. 1,475 1,515 Plan assets at fair value ..................... 707 1,105 Projected benefit obligation in excess of plan assets ............................. 768 410 Unrecognized net obligation ................... 101 126 Unrecognized net loss ......................... (2,024) (1,636) Valuation reserve to recognize accrued pension costs in the consolidated balance sheets .... 1,897 1,486 Accrued pension cost included among accrued expenses in the consolidated balance sheets.. $ 742 $ 386 (1) The vast majority of the projected benefit obligation is related to the Company's former stockyard employees. Net periodic pension cost for plan years ended October 31, 1998, 1997 and 1996 included the following components: Plan Year ($ 000's Omitted) 1998 1997 1996 Service costs - benefits earned during the period ..................... $ 9 $ 8 $ 8 Interest cost on projected benefit obligation ..................... 101 106 104 (Return) loss on assets ............ 359 (250) (95) Net amortization and deferral .... (408) 193 35 Net period pension cost .......... $ (61) $ 57 $ 52 F-19 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. ART OPERATIONS Canal's art dealing operations consist primarily of inventories held for resale of antiquities primarily from ancient Mediterranean cultures and contemporary art primarily of one artist. Canal carries on its art dealing operations through various consignment agreements relating to its antiquities and contemporary art inventories. Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned 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 $700,000 at October 31, 1998. 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 49% ($713,862) and 51% ($735,263) and 63% ($1,775,594) and 37% ($1,035,263) of total art inventory at October 31, 1998 and 1997, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. Management estimates it may take approximately five years to dispose of its current art inventory. The Company's ability to dispose of its art inventory is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. Additionally, the art market itself is very competitive. Accordingly, there can be no assurance that Canal will be successful in disposing of its art inventory within the time frame discussed above. Canal has its art inventory appraised by an independent appraiser annually. The 1998 appraisal covered approximately 50% of the inventory value. The appraised values estimate the current market value of each piece giving consideration to Canal's practices of engaging in consignment, private and public auction sales. The net realizable value of the remaining 50% of F-20 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 1998 Canal recognized a $550,000 valuation allowance against its art inventory, thereby increasing the total valuation allowance to $3,400,000 as of October 31, 1998 as compared to $2,850,000 and $2,500,000 at October 31, 1997 and 1996, respectively. These estimates were based in part on the Company's history of losses sustained on art sales in the current and previous years. 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 1998. Canal's art operations have generated operating losses of approximately $1,184,000, $709,000 and $1,680,000 on revenues of approximately $221,000, $117,000 and $195,000 for the years ended October 31, 1998, 1997 and 1996, respectively. Art sales have resulted primarily through activities in conjunction with sales of antiquities. Canal's management believes that through its consignment agreements as well as other potential distribution outlets Canal will continue the orderly reduction of its antiquities and contemporary art. The Company had approximately $2,140,000 and $1,683,000 of art inventory on consignment with third party dealers at October 31, 1998 and 1997, respectively. F-21 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED ART INVENTORY - The Company classified its art inventory for the two years ended October 31, 1998 and 1997 as follows ($ 000's Omitted): Current Portion Non-Current Portion Total 1998 1997 1998 1997 1998 1997 Antiquities $1,000 $ 900 $ 1,114 $2,026 $ 2,114 $ 2,926 Contemporary 1,000 100 1,735 2,635 2,735 2,735 Valuation Allowance (1,500) (500) (1,900) (2,350) ( 3,400) (2,850) Net Value $ 500 $ 500 $ 949 $2,311 $ 1,449 $ 2,811 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, 1998, 1997, and 1996 were as follows: ($ 000's Omitted) 1998 1997 1996 Antiquities $ 221 $ 77 $ 195 Contemporary 0 40 0 $ 221 $ 117 $ 195 9. NOTES AND ACCOUNTS RECEIVABLE Included in notes and accounts receivable at October 31, 1998 and 1997 were the current portion of notes receivable in the amount of $15,000 and $25,000, respectively, which were generated by real estate and other sales. Notes and accounts receivable is shown net of a provision for doubtful accounts in the amount of $0 and $20,000 for fiscal 1998 and 1997, respectively. F-22 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. LEASE COMMITMENTS Canal currently occupies 4,200 square feet of commercial office space in New York City for its headquarters operation. This space is under a five year lease expiring December 31, 1998. Canal is exploring its options for future space and will remain at its current location on a month-to- month basis for the time being. The following is a schedule of future minimum payments required under operating leases that have initial or remaining noncancellable terms in excess of one year as of October 31, 1998: Year ended October 31, ($ 000's Omitted) 1999 Minimum payments required .................. $ 26 Rental income under subleases ................... (10) Net minimum payments required ................... $ 16 Rent expense under these and other operating leases for the years ended October 31, 1998, 1997 and 1996 were as follows: ($ 000's Omitted) 1998 1997 1996 Minimum rentals ................... $ 26 $ 159 $ 160 Less: sublease rentals ........... (10) (47) (39) $ 16 $ 112 $ 121 11. IMPAIRMENT LOSS ON LONG-LIVED ASSETS The Company adopted Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of ( SFAS No. 121") as of November 1, 1996. The Company recognized an impairment loss of $0.9 million in fiscal 1997 on the write-down of its Omaha, Nebraska property. This was the result of the Company entering into two agreements to sell a substantial portion of its holdings in Omaha, Nebraska for approximately $1.0 million in November 1997. As a result, the anticipated undiscounted future cash flow of this group of assets exceeded their carrying values as of October 31, 1997 requiring an impairment loss in long-lived assets to be recognized in fiscal 1997. There was no similar loss to be recognized in fiscal 1998. F-23 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 12. STOCK OPTION PLAN Under Canal's 1984 Employee and 1985 Directors Stock Option Plans, $550,000 and 264,000 shares, respectively, of Canal's common stock have been reserved for option grants. The purchase price of shares subject to each option granted, under the Employee and Directors Plans, will not be less than 85% and 100%, respectively, of their fair market value at the date of grant. At October 31, 1998 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, 1998, 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, 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 Options granted 0 - - Options expired 0 $ - - Balance outstanding October 31, 1998.... 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, 1998, 1997 and 1996. In October, 1995, the Financial Accounting Standards Board issued Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which becomes effective for transactions entered into in fiscal years beginning after December 15, 1995. This statement permits an entity to apply the fair value based method to stock options awarded during 1995 and thereafter in order to measure the compensation cost at the grant date and recognize it over its vesting period. This statement also allows an entity to continue to measure compensation costs for these plans pursuant to APB Opinion 25. Entities electing to remain with the accounting treatment under APB Opinion 25 must make proforma disclosures of net income and earnings per share to include the effects of all awards granted in fiscal years beginning after December 31, 1994, as if the fair value based method of accounting pursuant to SFAS No. 123 has been applied. F-24 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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, 1998 and 1997 would have been deminimus. 13. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID During the fiscal years ended October 31, 1998, 1997 and 1996, the Company had 323,000, 323,000 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, 1998, 1997 and 1996. Dividends declared on preferred stock during the years ended October 31, 1998, 1997 and 1996 were approximately $200,000, $182,000 and $162,000. Basic earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted average number of common share outstanding during the period. Diluted earnings (loss) per share reflect per share amounts that would have resulted if dilutive potential common stock had been reported in the financial statements. For the Year Ended October 31, 1998 Income Shares Per-share (Numerator) (Denominator) Amount Net loss $(1,413,000) Less preferred stock dividends (200,000) Loss available to common stock- holders-basic earnings per share(1,613,000) 4,327,000 $(0.37) Effect of dilutive securities: Options (antidilutive) N/A N/A N/A Loss available to common stock- holders-diluted earnings per share $(1,613,000) 4,327,000 $(0.37) F-25 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Year Ended October 31, 1997 Income Shares Per-share (Numerator) (Denominator) Amount Net loss (1,001,000) Less pfd stock dividends(182,000) Loss available to common stock- holders-basic earnings per share (1,183,000) 4,327,000 $ (0.27) Effect of dilutive securities: Options (antidilutive) - - 7% convertible note (antidilutive) 13,000 1,000,000 Net loss available to common stock- holders-diluted earnings per share $(1,170,000) 5,327,000 $ (0.27) For the Year Ended October 31, 1996 Income Shares Per-share (Numerator) (Denominator) Amount Net income $ (842,000) Less pfd 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 11,000 1,000,000 Income available to common stock- holders-diluted earnings per share $ 691,000 5,327,000 $ 0.13 F-26 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. PREFERRED STOCK ISSUANCE On October 15, 1986 Canal exchanged 986,865 shares of its $1.30 Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of its outstanding common stock. Since the exchange, the Company has issued an additional 2,426,930 shares in the form of stock dividends for a total outstanding at October 31, 1998 of 3,411,681. 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-six of the forty-eight quarterly payments have been paid in additional stock resulting in the issuance of 2,426,930 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, 1998 and December 31, 1998 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, 1999 at which time a one year dividend will have accumulated. The dividend planned for June 30, 1999 will also be paid in additional stock. VOTING RIGHTS - The holders of the Preferred Stock shall not have any voting rights except that the following actions must be approved by holders of 66 2/3% of the shares of Preferred Stock, voting as a class: (I) any amendment to the Certificate of Incorporation of Canal which would materially alter the relative rights and preferences of the Preferred Stock so as to adversely affect the holders thereof; and (ii) issuance of securities of any class of Canal's capital stock ranking prior (as to dividends or upon liquidation, dissolution or winding up) to the Preferred Stock. The holders of the Preferred Stock shall be entitled to specific enforcement of the foregoing covenants and to injunctive relief against any violation thereof. Whenever quarterly dividends payable on the Preferred Stock are in arrears in the aggregate amount at least equal to six full quarterly dividends (which need not be consecutive), the number of directors constituting the Board of Directors of Canal shall be increased by two and the holders of the Preferred Stock shall have, in addition to the rights set forth above, the special right, voting separately as a single class, to elect two directors of Canal to fill such newly created directorships at the next succeeding annual meeting of shareholders (and at each succeeding annual meeting of shareholders thereafter until such cumulative dividends have been paid in full). F-27 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 15. VALUATION RESERVE The Valuation Reserve represents the excess of additional minimum pension liability required under the provisions of SFAS No. 87 over the unrecognized prior service costs of former stockyard employees. Such excess arose due to the decline in the market value of pension assets available for pension benefits of former employees, which benefits were frozen at the time the stockyard operations were sold in 1989. The excess will be expensed as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists. 16. 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) 1998 1997 1996 Identifiable assets: Art ........................... $ 1,463 $ 2,818 $ 3,833 Real estate ................... 7,490 8,630 10,478 Corporate ... ................. 554 1,512 1,178 $ 9,507 $ 12,960 $ 15,489 ($ 000's Omitted) 1998 1997 1996 Capital expenditures: Art ........................... $ 0 $ 0 $ 0 Real estate .................... 46 41 125 Corporate ...................... 14 6 4 $ 60 $ 47 $ 129 Income from real estate operations includes gains (losses) on sales of real estate of $0.3 million, $1.6 million and $3.8 million in 1998, 1997 and 1996, respectively. Art identifiable assets include approximately $1.3 million and $1.0 million of art inventory in galleries or on consignment abroad as of October 31, 1998 and 1997, respectively. F-28 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 17. LITIGATION Canal and its subsidiaries are from time to time involved in litigation incidental to their normal business activities, none of which, in the opinion of management, will have a material adverse effect on the consolidated financial condition of the Company. Canal or its subsidiaries are party to the following litigations: 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. The damages sought by Federal Beef include $227,452 in additional rent paid by Federal Beef during the time Union allegedly was in breach of the Lease Agreement and the Yardage Agreement. Federal Beef also 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, and alleged reduction in the number of animals processed at the plant, in an amount calculated by Federal Beef s expert witness to be $1,116,900. 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 F-29 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. In April 1996, Federal Beef served a Second Amended Complaint in which is alleged that Union has also breached an obligation under the Yardage Agreement to provide certain additional yardage services with respect to cattle received at the stockyards for delivery to Federal Beef. Damages in an unspecified amount are sought by Federal Beef against Union for this alleged breach. Canal has also denied this additional claim. The Company is unable at this time to estimate a possible loss or range of loss associated with this suit. However, Management does not believe that any possible loss associated with this suit would be material to the operations of the Company nor does Management believe that the revenues generated under the lease will be materially affected in resolving this dispute. 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 which involved 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 $388,000 in connection with the state court suit. On September 23, 1997, Canal reinstituted its lawsuit in federal court against Pine Valley for the recovery of livestock fees. Pine Valley has since brought a motion to dismiss this second federal court lawsuit on the same grounds as its motion to dismiss the first federal court lawsuit. There has been no claim asserted by Pine Valley against Canal in this second federal court lawsuit. Upon Pine Valley s motion, the Court entered an order dated February 23, 1998 granting summary judgement and dismissing Canal s complaint. Canal has appealed the dismissal to the U.S. Court of Appeals for the Eighth Circuit. Oral arguments were head on this appeal in mid December. A decision has not yet been rendered by the Court. F-30 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 18. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS No. 121") as of November 1, 1996. Pronouncements issued by the Financial Accounting Standards Board with future effective dates are either not applicable or not material to the consolidated financial statements of the Company. 19. PROPERTY ON OPERATING LEASES The following schedule provides an analysis of the Company's investment in property on operating leases by location as of October 31, 1998: ($ 000's Omitted) Accumulated Location Land Improvements Depreciation Value St. Joseph, MO $ 862 $ 304 $ (188) $ 978 West Fargo, ND 2 292 (227) 67 S. St. Paul, MN 663 2,815 (1,028) 2,450 Sioux City, IA 997 0 0 997 Omaha, NE 1,200 0 0 1,200 Sioux Falls, SD 117 98 (80) 135 Corporate Office 0 182 (148) 34 $ 3,841 $ 3,691 $ (1,671) $ 5,861 F-31 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, 1998: (5) ($ 000's Omitted) Volume Year Ending Rental Ground Based October 31, Income (1) Lease(2) Income(3) Total 1999 $ 1,000 $ 924 $ 0 $ 1,924 2000(4) 1,100 0 0 1,100 2001 1,200 0 0 1,200 2002 1,300 0 0 1,300 2003 1,400 0 0 1,400 $ 6,000 $ 924 $ 0 $ 6,924 (1) Consists of rental income from Exchange Building (commercial office space), lease income from land and structures and other rental income. (2) Ground Lease covers approximately 122 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 in excess of $100,000 annually for the past five years. (4) The stockyard ground lease has a ten year renewal option (adjusted for CPI increases) which can be exercised November 1, 1999 on essentially the same terms that currently exist. Canal anticipates that the option will be exercised or the properties sold to the operators. Should this not be the case, it is management s intention that the stockyards will continue to operate after the expiration of the ground lease. (5) All real estate leases are accounted for as operating leases. F-32 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 20. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for non-trading purposes) for which it is practicable to estimate that value. October 31, 1998 1997 ($ 000's Omitted) Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $ 34 $ 34 $ 28 $ 28 Current Portion of Long- Term Debt - related party 0 (d) 0 (d) Current Portion of Long- Term Debt 110 110 98 98 Long-Term Debt 2,321 2,321 2,375 2,375 Long-Term Debt - Related Party 2,846 (d) 3,675 (d) a) Cash and cash equivalents: The carrying amount approximates fair market value because of the short maturities of such instruments. b) Accrued Litigation: The carrying amount approximates the fair value. c) Long-Term Debt (See Note 5): The fair value of the Company s long- term debt, including the current portion thereof, is estimated based on the quoted market price for the same or similar issues. d) Long-Term Debt Related Party (see Note 5): It is not practicable to estimate the fair value of the related party debt. F-33 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (21) Property Held for Development or Resale Property held for development or resale consist of approximately 237 acres located in the midwest of undeveloped land not currently utilized for corporate purposes and not included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value. A schedule of the Company s property held for development or resale is as follows: Date Number Carrying Location Acquired Of Acres Cost Encumbrances St. Joseph, MO 1942 98 $ 248,000 (1) West Fargo, ND 1937 62 5,000 (1) South St. Paul, MN 1937 62 737,845 (1) Sioux City, IA 1937 14 325,000 (1) Omaha, NE 1976 0 0 (1) Sioux Falls, SD 1937 1 2,250 (1) 237 $1,318,095 (1) Substantially all of Canal s real property is pledged as collateral for its debt obligations (see Note 5). 22. Year 2000 Compliance The financial impact to the Company has not been and is not anticipated to be material to its financial position or results of operations in any given year. F-34 CANAL CAPITAL CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 23. QUARTERLY INFORMATION (UNAUDITED) FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1998 AND 1997 IS PRESENTED BELOW: (000'S OMITTED, EXCEPT PER SHARE DATA) QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 1998 1998 1998 1998 REVENUES $803 $911 $1,268 $1,475 ========= ========= ========= ========= NET (LOSS) INCOME ($326) ($103) $296 ($1,282) ======== ========= ========= ========= NET (LOSS) INCOME PER COMMON SHARE: - BASIC ($0.09) ($0.03) $0.06 ($0.31) ========= ========= ========= ========= - DILUTED ($0.09) ($0.03) $0.06 ($0.31) ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES: - - BASIC 4,327 4,327 4,327 4,327 ========= ========= ========= ========= - - DILUTED 4,327 4,327 4,327 4,327 ========= ========= ========= ========= (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 ====== ========= ========= ========= F-35 FORM 10-K - ITEM 14(a)(3) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS (a) 3. Exhibits - The following exhibits required by Item 601 of Regulations S-K are filed as part of this report. For convenience of reference, the exhibits are listed according to the numbers appearing in Table I to Item 601 of Regulation S-K. Each exhibit which is incorporated by reference and the document in which such exhibit was originally filed are indicated in parentheses immediately following the description of such exhibit. Exhibit No. 3(a) Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Registrant's Registration Statement on Form 10 filed with the Securities and Exchange Commission on May 3, 1984 (the "Form 10") and incorporated herein by reference). 3(b) Bylaws (filed as Exhibit 3(b) to the Registrant's Registration Statement on Form 10 and incorporated herein by reference). 3(c) Certificate of Amendment of the Restated Certificate of Incorporation dated September 22, 1988 (filed as Exhibit 3(c) to the Registrant's Form 10-K filed January 29, 1989 and incorporated herein by reference). 10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the Registrant's Proxy Statement dated January 31, 1985, relating to the annual meeting of stockholders held March 18, 1985, which exhibit is incorporated herein by reference). 10(b) Form of Incentive Stock Option Agreement (filed as Exhibit 10(b) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). 10(c) Form of Nonstatutory Stock Option Agreement (filed as Exhibit 10(c) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). 10(d) 1985 Directors' Stock Option Plan (1) (See Exhibit A included in the Registrant's Proxy Statement dated January 31, 1986, relating to the annual meeting of stockholders held March 12, 1986, which exhibit is incorporated herein by reference). E-1 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(e) Form of Directors' Stock Option Agreement (filed as Exhibit 10(ab) to the Registrant's Form 10-K filed January 29, 1986 and incorporated herein by reference). 10(f) Master Ground Lease, dated October 27, 1989 by and between USK Acquisition Corporation, Canal Capital Corporation, Omaha Livestock Market, Inc. and Sioux Falls Stock Yards Company (filed as Exhibit 10(am) to the Registrant's Form 8- K filed November 9, 1989 and incorporated herein by reference). 10(g) Agreement of Lease dated January 14, 1994 by and between The Equitable Life Assurance Society of the United States, Intelogic Trace Incorporated, Datapoint Corporation and Canal Capital Corporation (filed as Exhibit 10 (bp) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(h) General Release dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation (filed as Exhibit 10 (by) to the Registrant s Form 10-K filed January 24, 1997 and incorporated herein by reference). 10(i) $325,000 Promissory Note dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation (filed as Exhibit 10 (bz) to the Registrant s Form 10-K filed January 24, 1997 and incorporated herein by reference). 10(j) Stock Pledge and Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, SY Trading Corporation and CCC Lending Corporation (filed as Exhibit 10 (ai) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(k) Note Exchange and Loan Agreement dated January 8, 1998 by and between Canal Capital Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust (filed as Exhibit 10 (aj) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). E-2 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(l) Collateral Agency Agreement dated January 8, 1998 by and between Canal Capital Corporation, CCC Lending Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust (filed as Exhibit 10 (ak) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(m) Assignment Agreement dated January 8, 1998 by and between Deltec Asset Management Corporation, Hanseatic Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust (filed as Exhibit 10 (al) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(n) Assignment Agreement dated January 8, 1998 by and 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 (filed as Exhibit 10 (am) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(o) Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, Canal Galleries Corporation, Canal Arts Corporation and CCC Lending Corporation (filed as Exhibit 10 (an) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(p) $1,000,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz and Canal Capital Corporation (filed as Exhibit 10 (ao) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(q) $242,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz Defined Benefit Trust and Canal Capital Corporation (filed as Exhibit 10 (ap) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). E-3 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(r) $229,000 Promissory Note dated January 8, 1998 by and between Lora K. Schultz and Canal Capital Corporation (filed as Exhibit 10 (aq) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(s) $186,000 Promissory Note dated January 8, 1998 by and between Roger A. Schultz Pension Plan and Canal Capital Corporation(filed as Exhibit 10 (ar) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(t) $143,000 Promissory Note dated January 8, 1998 by and between Richard A. Schultz and Canal Capital Corporation (filed as Exhibit 10 (as) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(u) $350,000 Promissory Note dated January 8, 1998 by and between Edelman Value Partners, L.P. and Canal Capital Corporation (filed as Exhibit 10 (at) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(v) $550,000 Promissory Note dated January 8, 1998 by and between Edelman Value Fund, LTD and Canal Capital Corporation (filed as Exhibit 10 (au) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(w) $300,000 Promissory Note dated January 8, 1998 by and between Maria Regina Mayall Edelman and Canal Capital Corporation (filed as Exhibit 10 (av) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(x) $200,000 Promissory Note dated January 8, 1998 by and between SES Trust and Canal Capital Corporation (filed as Exhibit 10 (aw) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(y) $500,000 Promissory Note dated January 8, 1998 by and between Roger A. Schultz and Canal Capital Corporation (filed as Exhibit 10 (ax) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 22 Subsidiaries of the registrant. E-4 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 LLP 1585 Broadway Phone or write: Michael E. Schultz, New York, NY 10036 President at (212) 826-6040 (212) 969-3000 ii EX-27 2
5 12-MOS OCT-31-1998 OCT-31-1998 33,538 278,175 211,070 0 500,000 1,196,721 7,532,286 1,671,222 9,507,449 2,185,524 0 0 34,117 53,138 2,067,237 9,507,449 0 4,456,570 0 3,862,513 1,218,239 0 937,032 (1,413,470) 0 (1,413,470) 0 (1,284,380) 0 (2,697,850) (0.37) (0.37)
EX-99 3 INDEX TO EXHIBITS Exhibit No. 22 Subsidiaries of the Registrant. CANAL CAPITAL CORPORATION 717 FIFTH AVENUE NEW YORK, NY 10022 SUBSIDIARIES IDENTIFICATION # SY Trading Corp. 13-3244066 Omaha Livestock Market, Inc. 47-0582031 Union Stockyards Co. of Fargo 45-0205040 Sioux Falls Stockyards Company 46-0189565 Wheeling Industrial Corporation 36-2545924 Canal Galleries Corporation 13-3492920 Canal Arts Corporation 13-3492921 DIVISIONS Canal Capital Corporation (parent) 51-0102492 St. Joseph Stockyards St. Paul Union Stockyards Sioux City Stockyards Note: All subsidiaries are 100% owned -----END PRIVACY-ENHANCED MESSAGE-----