-----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, FbtUcOiMcVysyEYSaENABJ3IfQJ2GyzI52Vk3TU7kKRm9CjwrUn501yZi7Pw9dzA /7GEpEx3qphC2RBOopStHQ== 0001169232-03-004184.txt : 20030612 0001169232-03-004184.hdr.sgml : 20030612 20030612135353 ACCESSION NUMBER: 0001169232-03-004184 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030430 FILED AS OF DATE: 20030612 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-96666 FILM NUMBER: 03741968 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-Q 1 d56047_10-q.txt QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the quarterly period ended APRIL 30, 2003 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from to Commission File No. 002-96666 Canal Capital Corporation and Subsidiaries (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 No.) 717 Fifth Avenue, New York, NY 10022 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 826-6040 NONE Former name, former address and former fiscal year, if changed since last report. 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 the number of shares outstanding for each of the issuer's classes of common stock, as of the latest practical date: Title of each class Shares outstanding at May 31, 2003 - ------------------------------ Common stock, $0.01 par value 4,326,929 (This document contains 39 pages) CANAL CAPITAL CORPORATION AND SUBSIDIARIES FORM 10-Q APRIL 30, 2003 INDEX The following documents are filed as part of this report: Accountants' Review Report ................................................ 3 Part I - Financial Information ............................................ 4 Item I. Condensed Financial Statements: Consolidated Balance Sheets - April 30, 2003 and October 31, 2002 ......................................... 5 Statements of Consolidated Operations and Comprehensive Income for the Six and Three Month Periods ended April 30, 2003 and 2002 ........................ 7 Statements of Consolidated Changes in Stockholders' Equity for the Six Month and One Year Periods ended April 30, 2003 and October 31, 2002 ............................................. 11 Statements of Consolidated Cash Flows for the Six Month Periods ended April 30, 2003 and 2002 ......................................................... 12 Notes to Consolidated Financial Statements ....................... 13 Item II. Management's Discussion and Analysis of Financial Condition ............................................. 23 Capital Resources and Liquidity .................................. 25 Other Factors .................................................... 30 Item III. Quantitative and Qualitative Disclosures About Market Risk .............................................. 30 Item IV. Controls and Procedures ........................................ 31 Part II - Other Information ............................................... 32 Items 1 through 6 ................................................ 33 Signatures and Certifications .................................... 34 2 ACCOUNTANTS' REVIEW REPORT To the Stockholders of Canal Capital Corporation: We have reviewed the consolidated balance sheet of Canal Capital Corporation and subsidiaries as of April 30, 2003, the related consolidated statements of operations and comprehensive income for the six and three month periods ended April 30, 2003 and the consolidated statements of changes in stockholders' equity and cash flows for the six month period ended April 30, 2003. These consolidated financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements for them to be in conformity with generally accepted accounting principles. The financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations in eight of the last ten years and is obligated to continue making substantial annual contributions to its defined benefit pension plan. 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 Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. New York, N.Y. /s/ Todman & Co., CPA's, P.C. June 11, 2003 ----------------------------- TODMAN & CO., CPA's, P.C. Certified Public Accountants (N.Y.) 3 PART I FINANCIAL INFORMATION 4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 2003 AND OCTOBER 31, 2002
APRIL 30, OCTOBER 31, 2003 2002 (UNAUDITED) (AUDITED) ----------- ---------- ASSETS: CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 8,582 $ 139,057 NOTES AND ACCOUNTS RECEIVABLE, NET OF AN ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $ZERO AT BOTH APRIL 30, 2003 AND OCTOBER 31, 2002 122,376 125,227 ART INVENTORY, NET OF A VALUATION ALLOWANCE OF $1,325,000 AND $1,325,000 AT APRIL 30, 2003 AND OCTOBER 31, 2002 250,000 250,000 STOCKYARDS INVENTORY 15,404 13,017 INVESTMENTS 7,405 7,405 PREPAID EXPENSES 77,711 100,799 ---------- ---------- TOTAL CURRENT ASSETS 481,478 635,505 ---------- ---------- NON-CURRENT ASSETS: PROPERTY ON OPERATING LEASES, NET OF ACCUMULATED DEPRECIATION OF $1,123,462 AND $1,058,219 AT APRIL 30, 2003 AND OCTOBER 31, 2002, RESPECTIVELY 3,463,880 3,336,744 ---------- ---------- PROPERTY USED IN STOCKYARD OPERATIONS, NET OF ACCUMULATED DEPRECIATION OF $119,443 AND $285,223 AT APRIL 30, 2003 AND OCTOBER 31, 2002, RESPECTIVELY 1,081,199 1,176,027 ---------- ---------- ART INVENTORY NON-CURRENT, NET OF A VALUATION ALLOWANCE OF $729,450 AND $858,650 AT APRIL 30, 2003 AND OCTOBER 31, 2002, RESPECTIVELY 558,888 622,388 ---------- ---------- OTHER ASSETS: PROPERTY HELD FOR DEVELOPMENT OR RESALE 454,279 517,939 DEFERRED LEASING AND FINANCING COSTS 16,261 13,366 DEPOSITS AND OTHER 210,902 210,902 ---------- ---------- 681,442 742,207 ---------- ---------- $6,266,887 $6,512,871 ========== ==========
5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS APRIL 30, 2003 AND OCTOBER 31, 2002
APRIL 30, OCTOBER 31, 2003 2002 (UNAUDITED) (AUDITED) ------------ ------------ LIABILITIES & STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: CURRENT PENSION LIABILITY $ 224,492 $ 224,492 REAL ESTATE TAXES PAYABLE 172,580 451,958 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 425,247 574,974 INCOME TAXES PAYABLE 4,268 9,892 ------------ ------------ TOTAL CURRENT LIABILITIES 826,587 1,261,316 ------------ ------------ LONG-TERM DEBT, RELATED PARTY 2,667,000 2,667,000 ------------ ------------ LONG-TERM PENSION LIABILITY 605,247 605,247 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: PREFERRED STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,647,993 AND 5,647,993 SHARES ISSUED AND OUTSTANDING AT APRIL 30, 2003 AND OCTOBER 31, 2002, RESPECTIVELY AND AGGREGATE LIQUIDATION PREFERENCE OF $10 PER SHARE FOR $ 56,479,930 AND $56,479,930 AT APRIL 30, 2003 AND OCTOBER 31, 2002, RESPECTIVELY 56,480 56,480 COMMON STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,313,794 SHARES ISSUED AND 4,326,929 SHARES OUTSTANDING AT APRIL 30, 2003 AND OCTOBER 31, 2002, RESPECTIVELY 53,138 53,138 ADDITIONAL PAID-IN CAPITAL 28,042,499 27,958,498 ACCUMULATED DEFICIT (12,605,120) (12,709,864) 986,865 SHARES OF COMMON STOCK HELD IN TREASURY, AT COST (11,003,545) (11,003,545) COMPREHENSIVE INCOME: PENSION VALUATION RESERVE (2,375,399) (2,375,399) ------------ ------------ 2,168,053 1,979,308 ------------ ------------ $ 6,266,887 $ 6,512,871 ============ ============
6 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED APRIL 30, 2003 AND 2002
2003 2002 (UNAUDITED) (UNAUDITED) ----------- ----------- STOCKYARD OPERATIONS: STOCKYARD REVENUES: YARD HANDLING AND AUCTION 1,801,636 1,906,154 FEED AND BEDDING INCOME 111,350 121,449 RENTAL INCOME 1,868 3,624 OTHER INCOME 86,202 110,886 ---------- ---------- 2,001,056 2,142,113 ---------- ---------- STOCKYARD EXPENSES: LABOR AND RELATED COSTS 689,921 798,620 OTHER OPERATING AND MAINTENANCE 377,101 488,564 FEED AND BEDDING EXPENSE 94,676 96,762 DEPRECIATION AND AMORTIZATION 10,531 11,807 TAXES OTHER THAN INCOME TAXES 91,149 127,949 GENERAL AND ADMINISTRATIVE 223,119 240,993 ---------- ---------- 1,486,497 1,764,695 ---------- ---------- INCOME FROM STOCKYARD OPERATIONS 514,559 377,418 ---------- ---------- REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE $ 369,500 $ 189,503 EXCHANGE BUILDING RENTAL INCOME 229,481 249,771 OUTSIDE REAL ESTATE RENT 249,476 271,296 OTHER INCOME 130 0 ---------- ---------- 848,587 710,570 ---------- ---------- REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 243,389 97,836 LABOR, OPERATING AND MAINTENANCE 232,883 231,591 DEPRECIATION AND AMORTIZATION 63,314 66,743 TAXES OTHER THAN INCOME TAXES 74,400 60,600 GENERAL AND ADMINISTRATIVE 24,223 22,985 ---------- ---------- 638,209 479,755 ---------- ---------- INCOME FROM REAL ESTATE OPERATIONS 210,378 230,815 ---------- ----------
7 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED APRIL 30, 2003 AND 2002 Continued ... 2003 2002 (UNAUDITED) (UNAUDITED) ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSE (430,537) (461,998) ----------- ----------- INCOME FROM OPERATIONS 294,400 146,235 ----------- ----------- OTHER (EXPENSE) INCOME: INTEREST & OTHER INCOME 128 323,399 INTEREST EXPENSE (133,350) (133,350) INCOME FROM ART SALES 27,566 11,705 REALIZED GAIN (LOSS) ON INVESTMENTS 0 0 OTHER EXPENSE 0 0 ----------- ----------- (105,656) 201,754 ----------- ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 188,744 347,989 PROVISION FOR INCOME TAXES 0 0 ----------- ----------- NET INCOME 188,744 347,989 OTHER COMPREHENSIVE INCOME: UNREALIZED GAIN (LOSS) ON INVESTMENTS AVAILABLE FOR SALE 0 0 ----------- ----------- COMPREHENSIVE INCOME $ 188,744 $ 347,989 =========== =========== INCOME PER COMMON SHARE - BASIC AND DILUTED $ 0.02 $ 0.04 =========== =========== AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 4,327,000 4,327,000 =========== =========== 8 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED APRIL 30, 2003 AND 2002 2003 2002 (UNAUDITED) (UNAUDITED) ----------- ----------- STOCKYARD OPERATIONS: STOCKYARD REVENUES: YARD HANDLING AND AUCTION 799,725 826,951 FEED AND BEDDING INCOME 48,462 52,527 RENTAL INCOME 844 797 OTHER INCOME 50,294 76,455 -------- --------- 899,325 956,730 -------- --------- STOCKYARD EXPENSES: LABOR AND RELATED COSTS 324,704 391,077 OTHER OPERATING AND MAINTENANCE 184,291 233,064 FEED AND BEDDING EXPENSE 40,817 41,236 DEPRECIATION AND AMORTIZATION 5,265 5,574 TAXES OTHER THAN INCOME TAXES 44,261 63,880 GENERAL AND ADMINISTRATIVE 104,440 107,881 -------- --------- 703,778 842,712 -------- --------- INCOME FROM STOCKYARD OPERATIONS 195,547 114,018 -------- --------- REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE $252,500 $ 189,503 EXCHANGE BUILDING RENTAL INCOME 113,475 124,014 OUTSIDE REAL ESTATE RENT 125,776 143,706 OTHER INCOME 130 (118) -------- --------- 491,881 457,105 -------- --------- REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 187,842 97,836 LABOR, OPERATING AND MAINTENANCE 127,673 122,998 DEPRECIATION AND AMORTIZATION 30,995 31,458 TAXES OTHER THAN INCOME TAXES 37,200 30,300 GENERAL AND ADMINISTRATIVE 11,940 11,246 -------- --------- 395,650 293,838 -------- --------- INCOME FROM REAL ESTATE OPERATIONS 96,231 163,267 -------- --------- 9 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED APRIL 30, 2003 AND 2002 Continued ... 2003 2002 (UNAUDITED) (UNAUDITED) ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSE (216,803) (234,333) ----------- ----------- INCOME FROM OPERATIONS 74,975 42,952 ----------- ----------- OTHER (EXPENSE) INCOME: INTEREST & OTHER INCOME 56 46 INTEREST EXPENSE (66,675) (66,675) INCOME FROM ART SALES (5,157) (4,872) REALIZED GAIN (LOSS) ON INVESTMENTS 0 0 OTHER EXPENSE 0 0 ----------- ----------- (71,776) (71,501) ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 3,199 (28,549) PROVISION FOR INCOME TAXES 0 0 ----------- ----------- NET INCOME (LOSS) 3,199 (28,549) OTHER COMPREHENSIVE INCOME (LOSS): UNREALIZED GAIN (LOSS) ON INVESTMENTS AVAILABLE FOR SALE 0 0 ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ 3,199 $ (28,549) =========== =========== INCOME PER COMMON SHARE - BASIC AND DILUTED $ (0.01) $ (0.02) =========== =========== AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 4,327,000 4,327,000 =========== =========== 10 CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED OCTOBER 31, 2002 (AUDITED) AND FOR THE SIX MONTHS ENDED APRIL 30, 2003 (UNAUDITED)
COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, OCTOBER 31, 2001 5,313,794 $53,138 4,998,446 $49,984 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 649,547 6,496 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 ------------------------ ------------------------- BALANCE, OCTOBER 31, 2002 5,313,794 $53,138 5,647,993 $56,480 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 ------------------------ ------------------------- BALANCE, APRIL 30, 2003 5,313,794 $53,138 5,647,993 $56,480 ======================== ========================= ADDITIONAL TREASURY PAID-IN ACCUMULATED COMPREHENSIVE STOCK, CAPITAL DEFICIT (LOSS) INCOME AT COST BALANCE, OCTOBER 31, 2001 $27,848,561 ($13,019,374) ($2,165,445) ($11,003,545) NET INCOME 0 425,990 0 0 PREFERRED STOCK DIVIDEND 109,937 (116,480) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 (209,954) 0 ----------- ------------ ----------- ------------ BALANCE, OCTOBER 31, 2002 $27,958,498 ($12,709,864) ($2,375,399) ($11,003,545) NET INCOME 0 188,744 0 0 PREFERRED STOCK DIVIDEND 84,001 (84,000) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 ----------- ------------ ----------- ------------ BALANCE, APRIL 30, 2003 $28,042,499 ($12,605,120) ($2,375,399) ($11,003,545) =========== ============ =========== ============
11 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 30, 2003 AND 2002 (UNAUDITED) 2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 188,744 $ 347,989 --------- --------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 80,193 82,902 GAIN ON SALES OF REAL ESTATE (126,111) (91,667) GAIN ON SX CITY STOCKYARDS AUCTION 0 (54,804) CHANGES IN ASSETS AND LIABILITIES: NOTES AND ACCOUNTS RECEIVABLES, NET 2,851 14,743 ART INVENTORY, NET 63,500 66,602 PREPAID EXPENSES AND OTHER, NET (75,256) 152,146 PAYABLES AND ACCRUED EXPENSES, NET (434,729) (642,086) --------- --------- NET CASH (USED) BY OPERATING ACTIVITIES (300,808) (124,175) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF REAL ESTATE 369,500 189,503 CAPITAL EXPENDITURES (199,167) (45,184) --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES 170,333 144,319 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM LONG-TERM DEBT-RELATED PARTIES 0 0 REPAYMENT OF SHORT-TERM BORROWINGS 0 0 REPAYMENT OF LONG-TERM DEBT OBLIGATIONS 0 0 --------- --------- NET CASH (USED) BY FINANCING ACTIVITIES 0 0 --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (130,475) 20,144 CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 139,057 13,680 --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,582 $ 33,824 ========= ========= NOTE: CANAL MADE FEDERAL AND STATE INCOME TAX PAYMENTS OF $16,000 AND $9,000 AND INTEREST PAYMENTS OF $133,000 AND $133,000 IN THE SIX MONTH PERIODS ENDED APRIL 30, 2003 AND 2002, RESPECTIVELY. 12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED APRIL 30, 2003 (UNAUDITED) 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 is engaged in two distinct businesses - the management and further development of its real estate properties and stockyard operations. Canal's real estate properties located in five Midwest states are primarily associated with its current and former agribusiness related operations. As a result of an August 1, 1999 asset purchase agreement, Canal now operates two central public stockyards located in St. Joseph, Missouri and Sioux Falls, South Dakota (collectively the "Stockyards"). 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 obligated to continue making substantial annual contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties. 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 operating expenses and plans to continue its program to develop or sell the property it holds for development or resale as well as 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. 13 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Principles of Consolidation -- The consolidated financial statements include the accounts of Canal Capital Corporation ("Canal") and its wholly-owned subsidiaries ("the Company"). All material intercompany balances and transactions have been eliminated in consolidation. B) Revenue Recognition -- Lease and rental revenues are recognized ratably over the period covered. All real estate leases are accounted for as operating leases. Revenues from real estate sales are recognized generally when title to the property passes. Revenues from stockyard operations which consist primarily of yardage fees (a standard per head charge for each animal sold through the stockyards) and sale of feed and bedding are recognized at the time the service is rendered or the feed and bedding are delivered. Other Income (Expense) Items -- 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. The sale of investments available for sale, if any, are recognized, on a specific identification method, on a trade date basis. C) 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 1%) is carried at market value and the realized gains or losses, if any, are recognized in operating results. Any unrealized gains or losses are reflected in Stockholders Equity. Investments in Joint Ventures -- Investments in which ownership interest range from 20% to 50% or less owned joint ventures are accounted for under the equity method. These joint ventures are not, in the aggregate, material in relation to the financial position or results of operations of Canal. The carrying amount of such investments was $101,000 at both April 30, 2003 and October 31, 2002, and is included in other assets. The operating results of joint ventures accounted for on the equity method were not material to financial statement presentation and were therefore included in other income from real estate operations. D) Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment. 14 Property held for Development or Resale -- Property held for development or resale consist of approximately 101 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. Long-Lived Assets - The Company reviews the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the assets to the estimated future cash flows expected to result from the use of the asset. The measurement of the loss, if any, will be calculated as the amount by which the carrying amount of the asset exceeds the fair value of the asset. E) 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 $16,000 and $9,000 and interest payments of $133,000 and $133,000 in the six month periods ended April 30, 2003 and 2002, respectively. F) Accounting Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount 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. G) Comprehensive Income -- The Company's only adjustments for each classification of the comprehensive income was for minimum pension liability. H) Earnings (Loss) Per Share -- Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common shares by the weighted average of common shares outstanding during the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the effects of convertible securities, stock options and other potentially dilutive financial instruments, only in the period in which such effect is dilutive. There were no dilutive securities in any of the periods presented herein. The shares issuable upon the exercise of stock options are excluded from the calculation of net income (loss) per share as their effect would be antidilutive. 15 I) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year's presentation. J) Recent Accounting Pronouncements -- In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard provides the accounting for the cost of legal obligations associated with the retirement of long-lived assets. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as a part of the book value of the long-lived asset. We are required to adopt SFAS No. 143 effective November 1, 2002. We do not expect the impact of the adoption of SFAS No. 143 to have a material effect on our results of operations or financial position. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121") and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions ("Opinion 30"), for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. For example, SFAS 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairments, establishes criteria for when a long-lived asset is held for sale and prescribes the accounting for long-lived asset that will be disposed of other than by sale. SFAS 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). We are required to adopt SFAS 144 effective November 1, 2002, and plan to adopt its provisions for the quarter ending January 31, 2003. We do not expect the adoption of SFAS 144 for long-lived assets held for use to have a material impact on our consolidated financial statements because the impairment assessment under SFAS 144 is largely unchanged from SFAS 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, we cannot determine the potential effects that adoption of SFAS 144 will have on our consolidated financial statements. 16 In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF issue 94-3, a liability for an exit cost is recognized at the date of an entity's commitment to an exit plan. Under SFAS No. 146, the liabilities associated with an exit or disposal activity will be measured at fair value and recognized when the liability is incurred and meets the definition of a liability in the FASB's conceptual framework. This statement is effective for exit or disposal activities initiated after December 31, 2002. We believe the adoption of SFAS No. 146 will not have a material impact on our financial statements. 3. INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements included herein have been prepared by Canal without audit. In the opinion of Management, the accompanying unaudited financial statements of Canal contain all adjustments necessary to present fairly its financial position as of April 30, 2003 and the results of its operations and its cash flows for the six month period ended April 30, 2003. All of the above referenced adjustments were of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements for the three years ended October 31, 2002 and the notes thereto which are contained in Canal's 2002 Annual Report on Form 10-K. The results of operations for the period presented is not necessarily indicative of the results to be expected for the remainder of fiscal 2003. 4. STOCKYARD OPERATIONS Canal commenced stockyard operations August 1, 1999 in Sioux City, Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota. Stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading and price discovery. The livestock handled by the stockyards include cattle, hogs and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers. 17 In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $75,000, $118,000 and $124,000 for the three years ended October 31, 2002, 2001 and 2000, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux city location in April 2002. The auction generated total sales of $114,000 and operating income of $58,000. On February 27, 2003, the Company entered into a Contract of Sale for the sale of approximately 30 acres of land located in Sioux City, Iowa (formerly used by the Company for stockyards operations) at a purchase price of One Million Three Hundred Thousand ($1,300,000.00) Dollars. The sale is subject to a number of contingencies which must be satisfied before closing. The Company anticipates it will take approximately nine months to close this transaction. Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending on the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market. As discussed above, virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies or independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which accounts for approximately 50% of its livestock volume annually. Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2003. Further, Canal tries to balance its dependence on market agencies and independent commission sales people in various ways, including developing solicitation operations of its own; direct public relations advertising and personal solicitation of producers on behalf of the stockyards; providing additional services at the stockyards to attract sellers and buyers; and providing incentives to market agencies and independent commission sales people for increased business. Canal maintains an inventory of feed and bedding which is comprised primarily of hay, corn and straw. The value of this inventory was $15,000 and $13,000 at April 30, 2003 and October 31, 2002, respectively. 18 Stockyard operations resulted in operating income of $515,000 and $377,000 for the six month periods ended April 30, 2003 and 2002, respectively. Additionally, stockyard operations contributed $2,001,000 and $2,142,000 to Canal's revenues for the six month periods ended April 30, 2003 and 2002, respectively. 5. REAL ESTATE OPERATIONS Canal's real estate properties located in five Midwest states are primarily associated with its current and former agribusiness related operations. Each property is adjacent to a stockyards operation (two of which are operated by the Company) and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, railcar repair shops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from rental income from its Exchange Buildings, lease income from land and structures leased to various commercial and retail enterprises and proceeds from the sale of real estate properties. Real estate operations resulted in operating income of $210,000 and $231,000 for the six month periods ended April 30, 2003 and 2002, respectively. Additionally, real estate operations contributed $849,000 and $711,000 to Canal's revenues for the six month periods ended April 30, 2003 and 2002, respectively. As of April 30, 2003, there are approximately 101 acres of undeveloped land owned by Canal adjacent to its stockyard properties. Canal is continuing the program, which it started several years ago, to develop or sell this property. 6. ART INVENTORY HELD FOR SALE Canal has not purchased inventory in several years nor does it currently have any intention of purchasing additional art inventory in the foreseeable future. It is the Company's intention to liquidate, in an orderly manner, its art inventory. 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 primarily on general economic conditions and the competitiveness of the art market itself. Accordingly, there can be no assurance that Canal will be successful in disposing of its art inventory within the time frame discussed above. Antiquities and contemporary art represented 29% ($230,639) and 71% ($641,749) and 26% ($230,639) and 74% ($578,249) of total art inventory at April 30, 2003 and 2002, respectively. All of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. 19 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. In fiscal 2003 Canal applied against sales $179,000 of the valuation allowance against its art inventory, thereby, decreasing the total valuation allowance to $2,054,450 as of April 30, 2003 as compared to $2,183,650 at October 31, 2002. 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. Canal has its art inventory appraised by independent appraisers annually. The 2002 appraisal covered approximately 22% 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 78% of the inventory was estimated by management based in part on the Company's history of losses sustained on art sales in the current and previous years and in part on the results of the independent appraisals done. Canal's art sales generated income of $28,000 (net of a decrease in the valuation allowance of $179,000) as compared to income of $12,000 (net of a decrease in the valuation allowance of $108,000) for the six month periods ended April 30, 2003 and 2002, respectively. The Company had approximately $175,000 of art inventory (at original cost) on consignment with third party dealers at both April 30, 2003 and October 31, 2002. 7. INVESTMENTS AVAILABLE FOR SALE At April 30, the investments available for sale consisted of the following: ($ 000's Omitted) April 30, October 31, 2003 2002 ---- ---- Aggregate market value..................... $ 7 $ 7 ---- ---- Aggregate carrying value................... $ 7 $ 7 ---- ---- 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 1%) is carried at market value and any unrealized gains or losses are reflected in Stockholders Equity. The realized gains or losses, if any, are recognized in operating results. 20 On May 3, 2000 this company filed for reorganization under Chapter 11 of the Bankruptcy Code and subsequently emerged in December 2000. This action, in combination with other factors, has resulted in Canal's determination that the decline in market value of its investment in this company is permanent, and accordingly, recognized a realized loss on investments in marketable securities of approximately $14,000 in fiscal 2002. Management will continue to monitor this situation closely and take appropriate action if it determines that future fluctuations in the market value of this investment are other than temporary. 8. BORROWINGS At April 30, 2003, substantially all of Canal's real properties, the stock of certain subsidiaries, the investments and a substantial portion of its art inventories are pledged as collateral for the following obligations: April 30, October 31, ($ 000's Omitted) 2003 2002 - ----------------- ---- ---- Variable rate mortgage notes due May 15, 2006 - related party .................. $ 2,667 $ 2,667 ------- -------- On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001. 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. These notes carried 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 required the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. On July 29, 1999 the above Notes were amended to extend the maturity date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the additional interest due to the holders of the notes shall become current and be treated as principal due under the notes; and to have certain of the holders loan the Company $525,000 in additional financing, the proceeds of which was used to repay in full certain of the other holders of the notes. As a result, the notes are now held in total by the Company's Chief Executive Officer and members of his family. On January 10, 2000, the above Notes were further amended to have holders loan the Company $1,725,000 in additional financing, the proceeds of which was used to repay in full all of the Company's outstanding non related party long-term debt. On October 8, 2002, the above notes were amended to extend the maturity date to May 15, 2006. As of January 31, 2003 the balance due under these notes was $2,667,000 all of which is classified as long-term debt-related party. 21 The scheduled maturities and sinking fund requirements of long-term debt during the next five years are $2,667,000 due May 15, 2006. 9. PROPERTY AND EQUIPMENT Included in property and equipment were the cost of buildings of approximately $2.5 million at April 30, 2003 and October 31, 2002. 10. PENSION VALUATION RESERVE The Pension 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 additional minimum pension liability will be expensed as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists. 22 ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE SIX MONTHS ENDED APRIL 30, 2003 The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report. More specifically, the Company's summary of significant accounting policies is on page 14 of this report. Principles of Consolidation -- The consolidated financial statements include the accounts of Canal Capital Corporation ("Canal") and its wholly-owned subsidiaries ("the Company"). All material intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition -- Lease and rental revenues are recognized ratably over the period covered. All real estate leases are accounted for as operating leases. Revenues from real estate sales are recognized generally when title to the property passes. Revenues from stockyard operations which consist primarily of yardage fees (a standard per head charge for each animal sold through the stockyards) and sale of feed and bedding are recognized at the time the service is rendered or the feed and bedding are delivered. Other Income (Expense) Items -- 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. The sale of investments available for sale, if any, are recognized, on a specific identification method, on a trade date basis. 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 101 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. Long-Lived Assets -- The Company reviews the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the assets to the estimated future cash flows expected to result from the use of the asset. The measurement of the loss, if any, will be calculated as the amount by which the carrying amount of the asset exceeds the fair value of the asset. 23 Accounting Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. FORWARD-LOOKING AND CAUTIONARY STATEMENTS We may from time to time make written or oral forward-looking statements, including those contained in the following section. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. For this purpose, any statements contained in this section that are not statements of historical fact may be deemed to be forward-looking statements. Factors which may effect our results include, but are not limited to, our ability to expand our customer base, our ability to develop additional and leverage our existing distribution channels for our products and solutions, dependance on strategic and channel partners including their ability to distribute our products and meet or renew their financial commitments, our ability to address international markets, the effectiveness of our sales and marketing activities, the acceptance of our products in the market place, the timing and scope of deployments of our products by customers, fluctuations in customer sales cycles, customers' ability to obtain additional funding, the emergence of new competitors in the marketplace, our ability to compete successfully against established competitors with greater resources, the uncertainty of future governmental regulation, our ability to manage growth, and obtain additional funds, general economic conditions and other risks discussed in this report and in our other filings with the Securities and Exchange Commission. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors. 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 obligated to continue making substantial annual contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties. 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. 24 Canal recognized net income of $189,000 for the six month period ended April 30, 2003 as compared to net income of $348,000 for the same period in fiscal 2002. There were no adjustments necessary to arrive at comprehensive income for the periods presented. After recognition of preferred stock dividend payments of $84,000 and $156,000 for the six month periods ended April 30, 2003 and 2002, respectively, the Company recognized net income applicable to common stockholders of $105,000 ($0.02 per common share) and net income applicable to common stockholders of $192,000 ($0.04 per common share) for the six month periods ended April 30, 2003 and 2002, respectively. Included in the 2003 results is the sale of three parcels of land located in St. Paul, Minnesota and St. Joseph, Missouri which generated operating income of approximately $126,000 and the sale of a piece of contemporary art which generated other income of approximately $33,000. Included in the 2002 results is other income of approximately $323,000 received by Canal as a demutualization compensation payment from an insurance company, from which, Canal had purchased annuity contracts in the early 1980's for certain of its retired stockyards employees. Canal's revenues from continuing operations consist of revenues from its real estate and stockyards operations. Total revenues decreased slightly by $3,000 or 0.1% to $2,850,000 for the six month period ended April 30, 2003, as compared to revenues of $2,853,000 for the same period in fiscal 2002. 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 obligated to continue making substantial annual contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties. 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 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 notes carried 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 required the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. 25 On July 29, 1999 the above notes were amended to extend the maturity date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the additional interest due to the holders of the notes shall become current and be treated as principal due under the notes; and to have certain of the holders loan the Company $525,000 in additional financing, the proceeds of which was used to repay in full certain of the holders of the notes. As a result, the notes are now held in total by the Company's Chief Executive Officer and members of his family. On January 10, 2000, the above notes were further amended to have the noteholders loan the Company $1,725,000 in additional financing, the proceeds of which was used to repay in full all of the Company's outstanding non related party long-term debt. On October 8, 2002, the above notes were amended to extend the maturity date to May 15, 2006. The scheduled maturities and sinking fund requirements of long-term debt during the next five years are $2,667,000 due May 15, 2006. As of April 30, 2003 the balance due under these notes was $2,667,000 all of which is classified as long-term debt-related party. Cash and cash equivalents of $9,000 at April 30, 2003 decreased $130,000 from $139,000 at October 31, 2002. Net cash used by operations in fiscal 2003 was $301,000. At April 30, 2003 and October 31, 2002, the Company's current liabilities exceeded current assets by $0.3 million and $0.6 million, respectively. Substantially all of the funds received by Canal from the sale of real estate and art were used to pay down its accounts payable and accrued expenses. The only required principal repayments under Canal's debt agreements for fiscal 2003 will be from the proceeds, if any, of the sale of certain assets. Canal's cash flow position has been under significant strain for the past several years. Canal continues to closely monitor and reduce where possible its operating expenses and plans to continue its program to develop or sell the property it holds for development or resale as well as 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. 2003 COMPARED TO 2002 Stockyard Revenues Stockyard revenues for the six months ended April 30, 2003 of $2,001,000 accounted for 70.2% of the fiscal 2003 revenues as compared to stockyard revenues of $2,142,000 or 75.1% for the same period in fiscal 2002. Stockyard revenues are comprised of yard handling and auction (90.0% and 26 89.0%), feed and bedding income (5.6% and 5.7%), rental income (0.1% and 0.1%) and other income (4.3% and 5.2%) for the six month periods ended April 30, 2003 and 2002, respectively. There were no significant percentage variations in the year to year comparisons. Stockyard revenues for the three months ended April 30, 2003 of $899,000 accounted for 64.6% of the fiscal 2003 revenues as compared to stockyard revenues of $957,000 or 67.7% for the same period in fiscal 2002. Stockyard revenues are comprised of yard handling and auction (88.9% and 86.4%), feed and bedding income (5.4% and 5.5%), rental income (0.1% and 0.1%) and other income (5.6% and 8.0%) for the three month periods ended April 30, 2003 and 2002, respectively. There were no significant percentage variations in the year to year comparisons. Stockyard Expenses Stockyard expenses for the six months ended April 30, 2003 of $1,486,000 decreased by $279,000 (15.8%) from stockyard expenses of $1,765,000 for the same period in fiscal 2002. Stockyard expenses are comprised of labor and related costs (46.4% and 45.3%), other operating and maintenance (25.4% and 27.7%), feed and bedding expense (6.4% and 5.5%), depreciation and amortization (0.7% and 0.5%), taxes other than income taxes (6.1% and 6.3%) and general and administrative expense (15.0% and 13.7%) for the six month periods ended April 30, 2003 and 2002, respectively. There were no significant percentage variations in the year to year comparisons. Stockyard expenses for the three months ended April 30, 2003 of $704,000 decreased by $139,000 (16.5%) from stockyard expenses of $843,000 for the same period in fiscal 2002. Stockyard expenses are comprised of labor and related costs (46.1% and 46.4%), other operating and maintenance (26.2% and 27.7%), feed and bedding expense (5.8% and 4.9%), depreciation and amortization (0.8% and 0.6%), taxes other than income taxes (6.3% and 7.6%) and general and administrative expense (14.8% and 12.8%) for the three month periods ended April 30, 2003 and 2002, respectively. There were no significant percentage variations in the year to year comparisons. In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $75,000, $118,000, and $124,000 for the three years ended October 31, 2002, 2001 and 2000, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux City location in April 2002. The auction generated total sales of $114,000 and operating income of $58,000. On February 27, 2003, the Company entered into a Contract of Sale for the sale of approximately 30 acres of land located in Sioux City, Iowa (formerly used by the Company for stockyards operations) at a purchase price of One Million Three Hundred Thousand ($1,300,000.00) Dollars. The sale is subject to a number of contingencies which must be satisfied before closing. The Company anticipates it will take approximately nine months to close this transaction. 27 Real Estate Revenues Real estate revenues for the six months ended April 30, 2003 of $849,000 accounted for 29.8% of the fiscal 2003 revenues as compared to real estate revenues of $711,000 or 24.9% for the same period in fiscal 2002. Real estate revenues are comprised of sale of real estate (43.5% and 26.7%), rental income from commercial office space in its Exchange Buildings (27.0% and 35.2%), rentals and other lease income from the rental of vacant land and certain structures (29.4% and 38.1%) and other income (0.1% and 0.0%) for the six months ended April 30, 2003 and 2002, respectively. The percentage variations in the year to year comparisons are due primarily to increased sales of real estate for fiscal 2003. Real estate revenues for the three months ended April 30, 2003 of $492,000 accounted for 35.4% of the fiscal 2003 revenues as compared to real estate revenues of $457,000 or 32.3% for the same period in fiscal 2002. Real estate revenues are comprised of sale of real estate (51.3% and 41.5%), rental income from commercial office space in its Exchange Buildings (23.1% and 27.1%), rentals and other lease income from the rental of vacant land and certain structures (25.6% and 31.4%) and other income (0.0% and 0.0%) for the three months ended April 30, 2003 and 2002, respectively. The percentage variations in the year to year comparisons are due primarily to increased sales of real estate for fiscal 2003. Real Estate Expenses Real estate expenses for the six months ended April 30, 2003 of $638,000 increased by $158,000 (33.0%) from real estate expenses of $480,000 for the same period in fiscal 2002. Real estate expenses are comprised of the cost of real estate sold (38.1% and 20.4%), labor, operating and maintenance (36.5% and 48.3%), depreciation and amortization (9.9% and 13.9%), taxes other than income taxes (11.7% and 12.6%) and general and administrative and other expenses (3.8% and 4.8%) for the six months ended April 30, 2003 and 2002, respectively. The percentage variations in the year to year comparisons are due primarily to the increased cost of real estate sold for fiscal 2003. Real estate expenses for the three months ended April 30, 2003 of $396,000 increased by $102,000 (34.6%) from real estate expenses of $294,000 for the same period in fiscal 2002. Real estate expenses are comprised of the cost of real estate sold (47.5% and 33.3%), labor, operating and maintenance (32.3% and 41.9%), depreciation and amortization (7.8% and 10.7%), taxes other than income taxes (9.4% and 10.3%) and general and administrative and other expenses (3.0% and 3.8%) for the three months ended April 30, 2003 and 2002, respectively. The percentage variations in the year to year comparisons are due primarily to the increased cost of real estate sold for fiscal 2003. 28 General and Administrative General and administrative expenses for the six months ended April 30, 2003 of $431,000 decreased by $31,000 (6.8%) from expenses of $462,000 for the same period in fiscal 2002. The major components of general and administrative expenses are officers salaries (54.0% and 49.6%), rent (2.3% and 9.8%), legal and professional fees (1.0% and 0.8%), insurance (10.9% and 14.7%) and office salaries (8.9% and 8.1%) for the six month periods ended April 30, 2003 and 2002, respectively. The percentage variations in the year to year comparisons are due primarily to the sharp decreases in rent expense (resulting from Canal's subletting substantially all of its New York office space)and insurance premiums for fiscal 2003. General and administrative expenses for the three months ended April 30, 2003 of $217,000 decreased by $17,000 (7.5%) from expenses of $234,000 for the same period in fiscal 2002. The major components of general and administrative expenses are officers salaries (53.4% and 48.9%), rent (2.9% and 9.8%), legal and professional fees (1.0% and 0.8%), insurance (10.8% and 14.5%) and office salaries (8.8% and 8.0%) for the three month periods ended April 30, 2003 and 2002, respectively. The percentage variations in the year to year comparisons are due primarily to the sharp decreases in rent expense (resulting from Canal's subletting substantially all of its New York office space)and insurance premiums for fiscal 2003. Interest Expense Interest expense for the six months ended April 30, 2003 of $133,000 was unchanged from the same period in fiscal 2002. The principal balances outstanding as well as the interest rates (10%) on Canal's variable rate mortgage notes have remained unchanged for the past 12 months. At April 30, 2003 the outstanding balance of these notes was $2,667,000. Interest and Other Income Interest and other income for the six months ended April 30, 2003 of $0 decreased $323,000 (100.0%) from interest and other income of $323,000 for the same period in fiscal 2002. Included in the 2002 results is other income of approximately $323,000 received by Canal as a demutalization compensation payment from an insurance company that Canal had purchased annuity contracts from in the early 1980's for certain of its retired stockyard employees. Income (Loss) from Art Sales Other income from art sales for the six months ended April 30, 2003 of $28,000 increased by $16,000 from other income of $12,000 for the same period in fiscal 2002. Art revenues are comprised of the proceeds from the sale of antiquities and contemporary art. Canal recognized gross sales of $103,000 and $90,000 for the six month periods ended April 30, 2003 and 2002, respectively. Art expenses are comprised of the cost of inventory sold and selling, general and administrative expenses. Canal incurred cost of 29 inventory sold of $64,000 and $67,000 (net of a valuation allowance of $179,000 and $108,000) as well as selling, general and administrative expenses of $11,000 and $12,000 for the six month periods ended April 30, 2003 and 2002, respectively. It is the Company's policy to use the adjusted carrying value for sales, thereby reducing the valuation reserve proportionately as the inventory is sold. Other Factors Some of the statements in this Form 10-Q, as well as statements by the Company in periodic press releases, oral statements made by the Company's officials to analysts and stockholders in the course of presentations about the Company and conference calls following earning releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involved known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. ITEM III. Quantitative and Qualitative Disclosures About Market Risk The Securities and Exchange Commission's rule related to market risk disclosure requires that we describe and quantify our potential losses from market risk sensitive instruments attributable to reasonably possible market changes. Market risk sensitive instruments include all financial or commodity instruments and other financial instruments (such as investments and debt) that are sensitive to future changes in interest rates, currency exchange rates, commodity prices or other market factors. We are not exposed to market risks from changes in foreign currency, exchange rates or commodity prices. As of April 30, 2003, we do not hold derivative financial instruments nor do we hold securities for trading or speculative purposes. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes. At April 30, 2002, the following long-term debt-related party financial instruments are sensitive to changes in interest rates by expected maturity dates: As of Fixed rate Average Fair April 30, ($ US) Interest Rate Value ----------- ---------- ------------- ----- 2003 $ 0 N/A 2004 0 N/A 2005 0 N/A 2006 2,667 10% 2007 0 N/A Thereafter 0 N/A ------- Total $ 2,667 N/A (A) ------- ------- (A) Long-term debt related party (See Note 8): it is not practicable to estimate the fair value of the related party debt. 30 Item IV. Controls and Procedures Our management, which includes our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13(a)-14(c) promulgated under the Securities Exchange Act of 1934) as of April 30, 2003 ("the Evaluation Date") within 45 days prior to the filing date of this report. Based upon that evaluation our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for timely gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934, as amended. There have been no significant changes made in our internal controls or other factors that could significantly effect our internal controls subsequent to the Evaluation Date. 31 PART II OTHER INFORMATION 32 Item 1: Legal Proceedings: See Item 3 of Canal's October 31, 2002 Form 10-K. Item 2 and 3: Not applicable. Item 4: Submission of Matters to a Vote of Security Holders: None. Item 5: Other Information: None. Item 6: Exhibits and Reports on Form 8-K: (A) Not applicable. 33 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Canal Capital Corporation Registrant /s/ Michael E. Schultz ------------------------- Michael E. Schultz Chief Executive Officer & President /s/ Reginald Schauder ------------------------- Reginald Schauder Vice President-Finance & Chief Financial Officer Date: June 12, 2003 34 CERTIFICATIONS I, Michael E. Schultz, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Canal Capital Corporation and subsidiaries; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light if the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4) The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 35 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 12, 2003 /s/ Michael E. Schultz ----------------------- Chief Executive Officer 36 CERTIFICATIONS I, Reginald Schauder, certify that: 1) I have reviewed this quarterly report on Form 10-Q of Canal Capital Corporation and subsidiaries; 2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light if the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4) The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and 37 b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: June 12, 2003 /s/ Reginald Schauder ----------------------- Chief Financial Officer 38 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Canal Capital Corporation and Subsidiaries, a Delaware corporation (the "Company"), does hereby certify that: The Quarterly Report of Form 10-Q for the six months ended April 30, 2002 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: June 12, 2003 /s/ Michael E. Schultz ----------------------- Chief Executive Officer Date: June 12, 2003 /s/ Reginald Schauder ----------------------- Chief Financial Officer 39 -----END PRIVACY-ENHANCED MESSAGE-----