-----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, RtyvJsioTu1e/zxs4TxlV69KroqBMdfBx16+4cKsiQC26T7J93WlMHa93Ow9waRH hFnkE/QOFuozps6Cxlsy2Q== 0001169232-07-003644.txt : 20070913 0001169232-07-003644.hdr.sgml : 20070913 20070913074929 ACCESSION NUMBER: 0001169232-07-003644 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070731 FILED AS OF DATE: 20070913 DATE AS OF CHANGE: 20070913 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: 071114454 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 d72696_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 July 31, 2007 |_| 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 510102492 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 490 Wheeler Road, Suite 185 Hauppauge, NY 11788 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (631)234-0140 - -------------------------------------------------------------------------------- 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 August 31, 2007 ------------------- Common stock, $0.01 par value 4,326,929 (This document contains 48 pages) CANAL CAPITAL CORPORATION AND SUBSIDIARIES FORM 10-Q JULY 31, 2007 INDEX The following documents are filed as part of this report: Part I - Financial Information ........................................... 3 Item I. Condensed Financial Statements: Consolidated Balance Sheets - July 31, 2007 and October 31, 2006 ............................................. 4 Consolidated Statements of Operations and Comprehensive (Loss) Income for the Nine Month Periods ended July 31, 2007 and 2006 ............................. 6 Consolidated Statements of Changes in Stockholders' Equity for the One Year and Nine Month Periods ended October 31, 2006 and July 31, 2007 ......................... 10 Consolidated Statements of Cash Flows for the Nine Month Periods ended July 31, 2007 and 2006 .................. 11 Notes to Consolidated Financial Statements .......................... 13 Item II. Management's Discussion and Analysis of Financial Condition ..... 28 Liquidity and Capital Resources ..................................... 38 Other Factors ....................................................... 39 Item III. Quantitative and Qualitative Disclosures About Market Risk ..... 39 Item IV. Controls and Procedures ........................................ 40 Part II Other Information .............................................. 41 Items 1 through 6 ................................................... 42 Signatures and Certifications ....................................... 43 2 PART I FINANCIAL INFORMATION 3 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JULY 31, 2007 AND OCTOBER 31, 2006
JULY 31, OCTOBER 31, 2007 2006 (UNAUDITED) (AUDITED) ----------- ----------- ASSETS: CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 0 $ 38,121 MORTGAGE NOTE RECEIVABLE 1,700,000 1,750,000 NOTES AND ACCOUNTS RECEIVABLE, NET OF AN ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $ZERO AT BOTH JULY 31, 2007 AND OCTOBER 31, 2006, 57,099 117,128 ART INVENTORY, NET OF A VALUATION ALLOWANCE OF $648,400 AND $713,000 AT JULY 31, 2007 AND OCTOBER 31, 2006 310,100 333,000 STOCKYARDS INVENTORY 23,441 11,270 PREPAID EXPENSES 80,460 33,885 ---------- ---------- TOTAL CURRENT ASSETS 2,171,100 2,283,404 ---------- ---------- NON-CURRENT ASSETS: PROPERTY ON OPERATING LEASES, NET OF ACCUMULATED DEPRECIATION OF $400,274 AND $383,624 AT JULY 31, 2007 AND OCTOBER 31, 2006, RESPECTIVELY 1,746,532 1,763,182 ---------- ---------- PROPERTY USED IN STOCKYARD OPERATIONS, NET OF ACCUMULATED DEPRECIATION OF $205,915 AND $191,052 AT JULY 31, 2007 AND OCTOBER 31, 2006, RESPECTIVELY 1,084,798 1,099,661 ---------- ---------- OTHER ASSETS: PROPERTY HELD FOR DEVELOPMENT OR RESALE 102,785 149,260 RESTRICTED CASH - TRANSIT INSURANCE 52,624 49,746 DEPOSITS AND OTHER ASSETS 2,700 113,720 ---------- ---------- 158,109 312,726 ---------- ---------- $5,160,539 $5,458,973 ========== ==========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JULY 31, 2007 AND OCTOBER 31, 2006
JULY 31,2007 OCTOBER 31,2006 (UNAUDITED) (AUDITED) ------------ --------------- LIABILITIES & STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 257,812 $ 282,968 PENSION PLAN PAYABLE 91,785 126,844 SALARIES PAYABLE - OFFICERS 170,375 11,873 ACCRUED PROFESSIONAL FEES 96,603 112,417 COMMERCIAL RENT TAX PAYABLE 0 61,500 INCOME TAXES PAYABLE 10,000 10,000 ------------ ------------ TOTAL CURRENT LIABILITIES 626,575 605,602 ------------ ------------ NON-CURRENT LIABILITIES: LONG-TERM PENSION LIABILITY 331,271 331,271 REAL ESTATE TAXES PAYABLE 158,262 104,437 ------------ ------------ TOTAL NON-CURRENT LIABILITIES 489,533 435,708 ------------ ------------ LONG-TERM DEBT, RELATED PARTY 2,687,000 2,687,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: PREFERRED STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 9,102,655 AND 8,014,137 SHARES ISSUED AND OUTSTANDING AT JULY 31, 2007 AND OCTOBER 31, 2006, RESPECTIVELY AND AGGREGATE LIQUIDATION PREFERENCE OF $10 PER SHARE FOR $ 91,026,550 AND $80,141,370 AT JULY 31, 2007 AND OCTOBER 31, 2006, RESPECTIVELY 91,027 80,141 COMMON STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,313,794 SHARES ISSUED AND 4,326,929 SHARES OUT- STANDING AT JULY 31, 2007 AND OCTOBER 31, 2006, RESPECTIVELY 53,138 53,138 ADDITIONAL PAID-IN CAPITAL 28,301,341 28,224,358 ACCUMULATED DEFICIT (14,461,299) (13,811,198) 986,865 SHARES OF COMMON STOCK HELD IN TREASURY, AT COST (11,003,545) (11,003,545) COMPREHENSIVE INCOME: PENSION VALUATION RESERVE (1,623,231) (1,812,231) ------------ ------------ 1,357,431 1,730,663 ------------ ------------ $ 5,160,539 $ 5,458,973 ============ ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE (LOSS) INCOME FOR THE NINE MONTHS ENDED JULY 31, 2007 AND 2006 2007 2006 (UNAUDITED) (UNAUDITED) ----------- ----------- STOCKYARD OPERATIONS: STOCKYARD REVENUES: YARD HANDLING AND AUCTION $ 2,105,961 $ 2,331,784 FEED AND BEDDING INCOME 146,033 111,435 RENTAL & OTHER INCOME 122,401 139,370 ----------- ----------- 2,374,395 2,582,589 ----------- ----------- STOCKYARD EXPENSES: LABOR AND RELATED COSTS 1,052,785 1,029,272 OTHER OPERATING AND MAINTENANCE 584,272 610,620 FEED AND BEDDING EXPENSE 132,285 97,346 DEPRECIATION AND AMORTIZATION 14,863 15,650 TAXES OTHER THAN INCOME TAXES 131,235 127,266 GENERAL AND ADMINISTRATIVE 278,952 255,849 ----------- ----------- 2,194,392 2,136,003 ----------- ----------- INCOME FROM STOCKYARD OPERATIONS 180,003 446,586 ----------- ----------- REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE 75,000 375,000 OUTSIDE REAL ESTATE RENT 369,495 391,040 EXCHANGE BUILDING RENTAL INCOME 23,152 25,080 ----------- ----------- 467,647 791,120 ----------- ----------- REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 56,711 253,244 LABOR, OPERATING AND MAINTENANCE 59,815 65,833 DEPRECIATION AND AMORTIZATION 16,650 16,650 TAXES OTHER THAN INCOME TAXES 19,800 27,000 GENERAL AND ADMINISTRATIVE 31,800 23,800 ----------- ----------- 184,776 386,527 ----------- ----------- INCOME FROM REAL ESTATE OPERATIONS 282,871 404,593 ----------- ----------- SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 6 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE (LOSS) INCOME FOR THE NINE MONTHS ENDED JULY 31, 2007 AND 2006 Continued ... 2007 2006 (UNAUDITED) (UNAUDITED) ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSE (818,763) (826,389) ----------- ----------- (LOSS) INCOME FROM OPERATIONS (355,889) 24,793 ----------- ----------- OTHER (EXPENSE) INCOME: INTEREST & OTHER INCOME 54,000 54,000 INTEREST EXPENSE (201,818) (202,790) ART SALES AND OPERATIONS 23,343 (2,775) LOSS ON SALE OF INVESTMENT (86,020) 0 ----------- ----------- (210,495) (151,565) ----------- ----------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (566,384) (126,772) PROVISION FOR INCOME TAXES 0 0 ----------- ----------- NET (LOSS) INCOME (566,384) (126,772) OTHER COMPREHENSIVE INCOME: MINIMUM PENSION LIABILITY ADJUSTMENT 189,000 189,000 ----------- ----------- COMPREHENSIVE (LOSS)INCOME $ (377,384) $ 62,228 =========== =========== NET (LOSS) INCOME PER COMMON SHARE BASIC AND DILUTED $ (0.15) $ (0.05) =========== =========== AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 4,326,929 4,326,929 =========== =========== SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 7 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE (LOSS) INCOME FOR THE THREE MONTHS ENDED JULY 31, 2007 AND 2006 2007 2006 (UNAUDITED) (UNAUDITED) ----------- ----------- STOCKYARD OPERATIONS: STOCKYARD REVENUES: YARD HANDLING AND AUCTION $ 452,538 $ 555,803 FEED AND BEDDING INCOME 32,810 30,453 RENTAL & OTHER INCOME 40,395 67,841 ----------- ----------- 525,743 654,097 ----------- ----------- STOCKYARD EXPENSES: LABOR AND RELATED COSTS 309,360 322,141 OTHER OPERATING AND MAINTENANCE 177,697 191,060 FEED AND BEDDING EXPENSE 30,991 24,745 DEPRECIATION AND AMORTIZATION 4,954 5,216 TAXES OTHER THAN INCOME TAXES 41,265 40,233 GENERAL AND ADMINISTRATIVE 63,654 60,162 ----------- ----------- 627,921 643,557 ----------- ----------- (LOSS) INCOME FROM STOCKYARD OPERATIONS (102,178) 10,540 ----------- ----------- REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE 0 0 OUTSIDE REAL ESTATE RENT 123,175 128,812 EXCHANGE BUILDING RENTAL INCOME 7,717 8,377 ----------- ----------- 130,892 137,189 ----------- ----------- REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 0 0 LABOR, OPERATING AND MAINTENANCE 18,973 22,112 DEPRECIATION AND AMORTIZATION 5,550 5,550 TAXES OTHER THAN INCOME TAXES 6,600 9,000 GENERAL AND ADMINISTRATIVE 10,600 8,600 ----------- ----------- 41,723 45,262 ----------- ----------- INCOME FROM REAL ESTATE OPERATIONS 89,169 91,927 ----------- ----------- SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 8 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE (LOSS) INCOME FOR THE THREE MONTHS ENDED JULY 31, 2007 AND 2006 Continued ... 2007 2006 (UNAUDITED) (UNAUDITED) ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSE (269,576) (270,131) ----------- ----------- (LOSS) INCOME FROM OPERATIONS (282,585) (167,664) ----------- ----------- OTHER (EXPENSE) INCOME: INTEREST & OTHER INCOME 18,000 18,000 INTEREST EXPENSE (67,176) (67,175) ART SALES AND OPERATIONS (4,250) (3,887) LOSS ON SALE OF INVESTMENT 0 0 ----------- ----------- (53,426) (53,062) ----------- ----------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (336,011) (220,726) PROVISION FOR INCOME TAXES 0 0 ----------- ----------- NET (LOSS) INCOME (336,011) (220,726) OTHER COMPREHENSIVE INCOME: MINIMUM PENSION LIABILITY ADJUSTMENT 63,000 63,000 ----------- ----------- COMPREHENSIVE (LOSS)INCOME $ (273,011) $ (157,726) =========== =========== NET (LOSS) INCOME PER COMMON SHARE BASIC AND DILUTED $ (0.08) $ (0.06) =========== =========== AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 4,326,929 4,326,929 =========== =========== SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 9 CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED OCTOBER 31, 2006 (AUDITED) AND FOR THE NINE MONTHS ENDED JULY 31, 2007 (UNAUDITED)
COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, OCTOBER 31, 2005 5,313,794 $ 53,138 7,050,836 $ 70,508 NET LOSS 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 963,301 9,633 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 ------------------------- ------------------------- BALANCE, OCTOBER 31, 2006 5,313,794 $ 53,138 8,014,137 $ 80,141 NET LOSS 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 1,088,518 10,886 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 ------------------------- ------------------------- BALANCE, JULY 31, 2007 5,313,794 $ 53,138 9,102,655 $ 91,027 ========================= ========================= ADDITIONAL TREASURY PAID-IN ACCUMULATED COMPREHENSIV STOCK, CAPITAL DEFICIT (LOSS)INCOME AT COST BALANCE, OCTOBER 31, 2005 $28,137,647 ($13,396,580) ($2,048,687) ($11,003,545) NET LOSS 0 (322,424) 0 0 PREFERRED STOCK DIVIDEND 86,711 (92,194) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 236,456 0 ----------- ------------ ----------- ------------ BALANCE, OCTOBER 31, 2006 $28,224,358 ($13,811,198) ($1,812,231) ($11,003,545) NET LOSS 0 (566,384) 0 0 PREFERRED STOCK DIVIDEND 76,983 (83,717) 0 0 MINIMUM PEN. LIAB. ADJ. 0 0 189,000 0 ----------- ------------ ----------- ------------ BALANCE, JULY 31, 2007 $28,301,341 ($14,461,299) ($1,623,231) ($11,003,545) =========== ============ =========== ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 10 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2007 AND 2006 JULY 2007 JULY 2006 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: NET (LOSS) $ (566,384) $ (126,772) ---------- ---------- ADJUSTMENTS TO RECONCILE NET (LOSS) TO NET CASH (USED) IN OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 31,513 32,301 GAIN ON SALES OF REAL ESTATE (18,289) (121,756) GAIN ON ART SALES (NET OF RESERVE) (35,600) (9,400) LOSS ON SALE OF INVESTMENT 86,020 0 MINIMUM PENSION LIABILITY ADJUSTMENT 189,000 189,000 PREFERRED STOCK ISSUED IN LIEU OF OFFICER COMPENSATION 4,150 4,151 DECREASE (INCREASE) IN ASSETS: MORTGAGE NOTE RECEIVABLE - PROCEEDS 50,000 0 NOTES AND ACCOUNTS RECEIVABLE 60,029 49,759 STOCKYARDS INVENTORY (12,171) (415) PREPAID EXPENSES (46,575) (27,877) RESTRICTED CASH - TRANSIT INSURANCE (2,878) (11,816) INCREASE (DECREASE) IN LIABILITIES: ACCOUNTS PAYABLE AND ACCRUED EXPENSES (25,156) (134,387) PENSION PLAN PAYABLE (35,059) (149,040) SALARIES PAYABLE - OFFICERS 158,502 (6,767) ACCRUED PROFESSIONAL FEES (15,814) (62,154) COMMERCIAL RENT TAX PAYABLE (61,500) 0 REAL ESTATE TAXES PAYABLE 53,825 36,341 ---------- ---------- TOTAL ADJUSTMENTS 379,997 (212,060) ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES (186,387) (338,832) ---------- ---------- SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 11 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JULY 31, 2007 AND 2006 Continued ... JULY 2007 JULY 2006 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF REAL ESTATE 75,000 375,000 PROCEEDS FROM SALES OF ART 58,500 28,800 PROCEEDS FROM SALE OF INVESTMENT 25,000 0 COSTS RELATING TO SALES OF REAL ESTATE (10,234) (99,690) CAPITAL EXPENDITURES 0 (6,518) ----------- ----------- NET CASH PROVIDED BY INVESTING ACTIVITIES 148,266 297,592 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (38,121) (41,240) CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 38,121 79,190 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 0 $ 37,950 =========== =========== JULY 31, -------- 2007 2006 ---- ---- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: INTEREST $ 201,818 $ 202,790 =========== =========== INCOME TAXES $ 8,000 $ 0 =========== =========== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: PREFERRED STOCK DIVIDENDS $ 83,717 $ 79,694 =========== =========== SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. 12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 2007 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Canal Capital Corporation ("Canal"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936. 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 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. Canal is engaged in two distinct businesses - stockyard operations and real estate. Stockyard Operations - Through an August 1, 1999 asset repurchase agreement, Canal now operates two central public stockyards located in St. Joseph, Missouri and Sioux Falls, South Dakota. Public 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 Company's 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 13 veterinary services 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. 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 upon 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. Virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which account for approximately 50% of its livestock volume annually. Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2007. 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 $23,000 and $11,000 at July 31, 2007 and October 31, 2006, respectively. Stockyard operations resulted in operating income of $180,000 and $447,000 for the nine month periods ended July 31, 2007 and 2006, respectively. Additionally, stockyard operations contributed $2,374,000 and $2,583,000 to Canal's revenues for the nine month periods ended July 31, 2007 and 2006, respectively. 14 Real Estate Operations - Canal's real estate properties are located in Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska and Sioux Falls, South Dakota. The properties consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (rail car 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 lease income from land and structures leased to various commercial and retail enterprises, rental income from its Exchange Building, and proceeds from the sale of real estate properties. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate. Real estate operations resulted in operating income of $283,000 and $405,000 for the nine month periods ended July 31, 2007 and 2006, respectively. Included in the 2007 real estate operating income is a $18,000 gain on the sale of approximately 2 acres of vacant land located in Sioux City, Iowa. Included in the 2006 real estate operating income is a $122,000 gain on the sales of six acres of vacant land located in South Saint Paul, Minnesota and a one acre parcel of land located in Sioux City, Iowa. Additionally, real estate operations contributed $468,000 and $791,000 to Canal's revenues for the nine month periods ended July 31, 2007 and 2006, respectively. As of July 31, 2007, there are approximately 18 acres of undeveloped land owned by Canal adjacent to its stockyard properties. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate. 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) Investments in Joint Ventures -- Investments in which ownership interest range from 20% to 50% or less owned joint ventures are accounted 15 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 $0 and $111,000 at July 31,2007 and October 31, 2006, respectively, and were included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 2007, and 2006 were not material to financial statement presentation and were therefore included in other income from real estate operations. 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 18 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. 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 Held for Sale - 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. 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 net realizable value of Canals remaining art inventory has been estimated by management based in part on the Company's history of art sales in the current and previous years and in 16 part on the results of the independent appraisals done in previous years. 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. F) Income Taxes -- Canal and its subsidiaries file a consolidated Federal income tax return. The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. G) Stockyard Inventory - Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. H) 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. I) 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. 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 $8,000 and $5,000 and interest payments of $202,000 and $203,000 for the nine month period ended July 31, 2007 and 2006, respectively. 17 K) Comprehensive Income (Loss) -- The Company's only adjustments for each classification of the comprehensive income was for minimum pension liability. L) 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. M) Recent Accounting Pronouncements -- In September 2006 the Financial Accounting Standards Board issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No. 158 requires recognition of the funded status of a defined benefit postretirement plan on the balance sheet and recognition of changes in that funded status in the year in which the changes occur through comprehensive income. It also requires the measurement date of the plan's funded status to be the same as the Company's fiscal year-end. SFAS No. 158 is effective at the end of fiscal 2007, except for the change in measurement date, which is effective for fiscal 2008. The Company believes the adoption of SFAS No. 158 will have minimal effect on the financial statements. In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) Topic IN (SAB 108), "Financial Statements - Considering the Effects of Prior Year Misstatement when Quantifying Misstatements in Current Year Financial Statements," which is effective for the year ending October 31, 2007. SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the financial statements are materially misstated. Under this guidance, companies should take into account both the effect of a misstatement on the current year balance sheet as well as the impact upon the current year income statement in assessing the materiality of a current year misstatement. Once a current year misstatement has been quantified, the guidance in 61 SAB Topic IM, "Financial Statements - Materiality," (SAB 99) should be applied to determine whether the misstatement is material. The implementation of SAB 108 did not have any impact on the Company's financial statements. 18 In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes." The Company is required to apply the provisions of this interpretation beginning November 1, 2007. The Company does not believe the adoption of FIN 48 will have a material effect on the financial statements. N) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year presentation. 3. INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements included herein have been prepared by Canal and in the opinion of Management, contain all adjustments necessary to present fairly its financial position as of July 31, 2007 and the results of its operations and its cash flows for the nine month period ended July 31, 2007. 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, 2006 and the notes thereto which are contained in Canal's 2006 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 2007. 4. MORTGAGE NOTE RECEIVABLE On November 1, 2004 Canal sold its Exchange Building and the associated five acres of land located in South Saint Paul, Minnesota on a contract for deed for $1,750,000. Canal accepted a mortgage note for the full sales price, which note carries interest at a rate of 4.12% per annum, payable in equal monthly installments. During the second fiscal quarter of 2007, Canal received a principal payment of $50,000 on this mortgage note. The remaining balance of the mortgage note of $1,700,000 is due and payable in full on October 31, 2007. 19 5. BORROWINGS The Company's variable rate mortgage notes (originally issued in 1998) are due May 15, 2009 and are held entirely by the Company's Chief Executive Officer and members of his family. These notes carry interest at the rate of ten percent per annum. 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; restricts Canal's ability to pay cash dividends or repurchase stock and require principal prepayments to be made only out of the proceeds from the sale of certain assets. As of July 31, 2007, the balance due under these notes was $2,687,000, all of which is classified as long-term debt-related party. At July 31, 2007, substantially all of Canal's real properties, the stock of certain subsidiaries, the investments and a substantial portion of its art inventories are pledged as collateral for the following obligations: July 31, October 31, ($ 000's Omitted) 2007 2006 - ----------------- ---- ---- Variable rate mortgage notes due May 15, 2009 - related party ..................... $ 2,687 $ 2,687 Less -- current maturities ......................... 0 0 -------- -------- Long-term debt ..................................... $ 2,687 $ 2,687 -------- -------- The following table summarizes the Company's commitments as of July 31, 2007 to make future payments under its debt agreements and other contractual obligations (in 000's): More Less Than 1 - 3 3 - 5 Than Total 1 year Years Years 5 Yrs. ----- ------ ----- ----- ------ Pension Plan Liability (a) $ 423 $ 92 $ 243 $ 88 $ 0 Mortgage Notes Payable (b) 2,687 0 2,687 0 0 ------ ------ ------ ------ ------ $3,110 $ 92 $2,930 $ 88 $ 0 ------ ------ ------ ------ ------ (a) See Note 16. (b) The mortgage notes are due May 15, 2009 and are held entirely by the Company's Chief Executive Officer and members of his family. These notes carry annual interest of 10% and are collateralized by substantially all of Canal's property, the stock of certain subsidiaries and its art inventories. 20 6. RESTRICTED CASH - TRANSIT INSURANCE Transit insurance covers livestock for the period that they are in transit to and physically at the stockyards and under the care of stockyard personnel. This self insurance program is funded by a per head charge on all livestock received at the stockyard. The restricted cash - transit insurance balances of approximately $53,000 and $50,000 at July 31, 2007 and October 31, 2006, respectively, represents the excess of per head fees charged over actual payments made for livestock that was injured or died while at the stockyards. 7. INCOME TAXES At July 31, 2007, the Company has net operating loss carryforwards of approximately $12,700,000 that expire through 2026. For financial statement purposes, a valuation allowance has been provided to offset the net deferred tax assets due to the cumulative net operating losses incurred during recent years. The valuation allowance will be reduced when and if, in the opinion of management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize its deferred tax assets. 8. ART INVENTORY HELD FOR SALE Canal is in the process of selling, in an orderly manner, its remaining art inventory. This will be accomplished primarily through direct sales, consignment arrangements with various independent art dealers and through sale at public art auctions. 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 selling its art inventory. Canal has sold one piece of contemporary art in the first nine months of fiscal 2007 as compared to two pieces of contemporary art sold in the same period of fiscal 2006. Canal's art operations have generated operating income of approximately $23,000 and an operating loss of $3,000 in the nine month periods ended July 31, 2007 and 2006, respectively. Antiquities and contemporary art represented 61% ($189,l22) and 39% ($120,978) and 57% ($189,122) and 43% ($143,878) of total art inventory at July 31, 2007 and October 31, 2006, respectively. All of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. 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 2007 Canal applied $64,600 of the valuation allowance against sales, thereby, decreasing the total valuation allowance to $648,400 as of July 31, 2007 as compared to $713,000 at October 31, 2006. 21 9. PROPERTY ON OPERATING LEASES Property on operating leases consist of approximately 37 acres of land located in Omaha, Nebraska; S. St. Paul, Minnesota; Sioux City, Iowa as well as furniture and equipment used in the Hauppauge, New York office. Land and structures leased to third parties include vacant land, exchange buildings (commercial office space), meat packing facilities, railcar repair shops, lumber yards and various other commercial and retail businesses. A schedule of the Company's property on operating leases at July 31, 2007 is as follows (000's omitted):
Current Year (Retirements Historical Cost Additions --------------- --------- Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 07/31/07 - --------------- ---- --------- ---- --------- ----- -------- New York office Leasehold assets $ 0 $ 8 $ 0 $ 0 $ (8) $ 0 9 acres of land in Omaha, NE 1,150 21 0 0 (12) 1,159 Acquired in 1976 10 acres of land in S. St. Paul, MN 83 485 0 0 (381) 187 Acquired in 1937 18 acres of land in Sioux City, IA 400 0 0 0 0 400 ------- ------- ------- ------- ------- ------- Acquired in 1937 $ 1,633 $ 514 $ 0 $ 0 $ (401) $ 1,746 ======= ======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property on operating leases carried for the nine months ended July 31, 2007 and the year ended October 31, 2006 is as follows (000's omitted): July 31, October 31, 2007 2006 ---- ---- Balance at beginning of year $ 1,763 $ 1,840 Acquisitions and Improvements 0 0 Cost of property sold 0 (53) Depreciation (17) (24) Reclassifications 0 0 ------- ------- Balance at end of the period $ 1,746 $ 1,763 ------- ------- (1) Substantially all of Canal's real property is pledged as collateral for its debt obligations. 22 10. PROPERTY USED IN STOCKYARD OPERATIONS Property used in stockyard operations consist of approximately 60 acres of land located in St. Joseph, Missouri and Sioux Falls, South Dakota. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock. Stockyard facilities include exchange buildings (commercial office space), auction arenas, scale houses, veterinary facilities, barns, livestock pens and loading docks. A schedule of the Company's property used in stockyard operations at July 31, 2007 is as follows (000's omitted):
Current Year (Retirements) Historical Cost Additions --------------- --------- Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 07/31/07 - --------------- ---- --------- ---- --------- ----- -------- 30 acres of land in St. Joseph, MO $ 902 $ 200 $ 0 $ 0 $ (151) $ 951 Acquired in 1942 30 acres of land in Sioux Falls, SD 100 89 0 0 (55) 134 ------- ------- ------- ------- ------- ------- Acquired in 1937 $ 1,002 $ 289 $ 0 $ 0 $ (206) $ 1,085 ======= ======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property used in stockyard operations carried for the nine months ended July 31, 2007 and the year ended October 31, 2006 is as follows (000's omitted): July 31, October 31, 2007 2006 ---- ---- Balance at beginning of year $ 1,100 $ 1,121 Acquisitions and Improvements 0 0 Cost of property sold 0 0 Depreciation (15) (21) ------- ------- Balance at end of the period $ 1,085 $ 1,100 ------- ------- (1) Substantially all of Canal's real property is pledged as collateral for its debt obligations. 23 11. PROPERTY HELD FOR DEVELOPMENT OR RESALE Property held for development or resale consist of approximately 18 acres of land 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 at July 31, 2007 is as follows (000's omitted):
Current Year (Retirements) Historical Cost Additions --------------- --------- Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 07/31/07 - --------------- ---- --------- ---- --------- ----- -------- 16 acres of land in St. Joseph, MO $ 39 N/A $ 0 N/A N/A $ 39 Acquired in 1942 2 acres of land in Sioux City, IA 110 N/A $ (46) N/A N/A 64 ------ ------ ------ ------ ------ ------ Acquired in 1937 $ 149 $ 0 $ (46) $ 0 $ 0 $ 103 ====== ====== ====== ====== ====== ======
A schedule of the Company's reconciliation of property held for development or resale carried for the nine months ended July 31, 2007 and the year ended October 31, 2006 is as follows (000's omitted): July 31, October 31, 2007 2006 ---- ---- Balance at beginning of year $ 149 $ 300 Acquisitions and Improvements 0 0 Cost of property sold (46) (151) Reclassification of property 0 0 ------- ------- Balance at end of the period $ 103 $ 149 ------- ------- (1) Substantially all of Canal's real property is pledged as collateral for its debt obligations. 24 12. LEASE COMMITMENTS In June 2004 Canal entered into a lease for approximately 1,000 square feet of office space in Hauppauge, New York at a monthly rental of approximately $1,800. This lease expires May 31, 2010. Canal's future minimum payments for the next five years required under operating leases that have initial or remaining noncancellable terms in excess of one year as of July 31, 2007 are $5,000, $23,000, $24,000 and $14,000 in fiscal 2007, 2008, 2009 and 2010, respectively. There are no commitments extending past five years. Net rent expense under these and other operating leases was $12,000 in each of the nine month periods ended July 31, 2006 and 2005, respectively. 13. IMPAIRMENT LOSS ON LONG-LIVED ASSETS The Company reviews the values of its long-lived assets annually. There was no impairment in the value of Canal's long-lived assets to be recorded as of July 31, 2007 and October 31, 2006. 14. MINIMUM FUTURE RENTALS ON OPERATING LEASES Minimum future rentals consist primarily of rental income from leased land and structures, Exchange Building rents (commercial office space) and other rental activities, all of which are accounted for as operating leases. The estimated minimum future rentals on operating leases are $500,000, $525,000, $550,000, $575,000 and $600,000 for fiscal years 2007, 2008, 2009, 2010 and 2011, respectively. 15. RELATED PARTY TRANSACTIONS Interest Expense Related Party - At July 31, 2007, all of Canal's Long-Term Debt is held by the company's Chief Executive Officer and members of his family. These notes pay interest at a rate of 10% per annum and come due May 15, 2009. Canal has incurred interest expense on these notes of $202,000 and $203,000 and for the nine month periods ended July 31, 2007 and 2006, respectively. At various times during fiscal 2007 and 2006 certain holders of these notes have agreed to defer interest payments due them to help Canal with its cash flow. All deferred interest liability for fiscal 2006 plus accrued interest at a rate of 10% per annum, has been repaid as funds became available. As of July 31, 2007, the balance due under these notes was $2,687,000 all of which is classified as long-term debt related party. 25 16. PENSION VALUATION RESERVE The Pension Valuation Reserve represents the excess of additional minimum pension liability required under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 132(R) 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. 132(R)) recognize the deficiency that exists. The components of net periodic benefit cost are as follows: Nine Months Ended 7/31/07 7/31/06 ---------------------- Service cost 4,300 4,100 Interest cost 75,200 75,500 Expected return on plan assets (80,300) (80,800) Amortization of prior service cost 0 0 Recognized net actuarial loss 201,800 191,800 -------- -------- Net periodic benefit cost 201,000 190,600 ======== ======== For the nine months ended July 31, 2007 amounts have been estimated, actual amounts will be based on the discount rate and assets available at year end. In fiscal 2007 the Company has made a $35,000 contribution into the pension plan. The Company expects to make the balance of its fiscal 2007 required contributions of approximately $92,000 into its pension plan before the end of fiscal 2007. 26 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 and operations of the Company. Canal was not a party to any ongoing litigation at July 31, 2007. The following situation did arise in fiscal 2005: Environmental Protection Agency - Special Notice Letter for Investigation, Portland, Oregon Property In 1989, the Company sold its 48 acre Portland, Oregon stockyard to Oregon Waste Systems, Inc. On September 29, 2003, the United States Environmental Agency (EPA) placed a 4.2 acre portion of that property on the National Priorities List pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), commonly known as the Superfund Act. In a letter from the EPA dated June 27, 2005 the Company, along with approximately 13 other parties, including the current owner and operator of the site, was notified that it might be liable to perform or pay for the remediation of environmental contamination found on and around the site. Since the receipt of the letter, the Company has been in periodic communications with the other parties who received a similar letter with respect to what action, collectively or individually, should be taken in response to the EPA assertion of liability. The Company believes that the remediation of contamination of the site is properly the responsibility of other parties that have occupied and used it for waste recycling purposes since 1961, although under CERCLA the EPA is able to assert joint and several liability against all parties who ever owned or operated the site or generated or transported wastes to it. This investigation is in its preliminary stages and the Company intends to vigorously defend any liability for remediation. At July 31, 2007, the liability for remediation, if any, is not estimatable and therefore no accrual has been recorded in the financial statements. 27 ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE NINE MONTHS ENDED JULY 31, 2007 You should read the following discussion together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this report and in the documents that we incorporate by reference into this report. This report may contain certain "forward-looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk factors". Company Overview 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 -- stockyard and real estate operations. Stockyard 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"). Public 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 Company's principal stockyard revenues are derived from a per head charge ("yardage charge") imposed on all livestock consigned for sale at the stockyards and the sale of feed and bedding. See "Stockyard Operations". Real Estate Operations - Canal's real estate properties are located in Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska and Sioux Falls, South Dakota. The properties 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, 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 lease income from land and structures leased to various commercial and retail enterprises, rental income from its Exchange Building, and proceeds from the sale of real estate properties. In addition to selling what was excess 28 stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate. See "Real Estate Operations". Stockyard Operations General - Through an August 1, 1999 asset repurchase agreement, Canal now operates two central public stockyards located in St. Joseph, Missouri and Sioux Falls, South Dakota. Public 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 Company's 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. 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 upon 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. 29 Virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which account for approximately 50% of its livestock volume annually. Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2007. 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. Stockyard operations resulted in operating income of approximately $0.2 million while contributing approximately $2.4 million to Canal's revenues for the first nine months of fiscal 2007. Risk - Stockyard activities face a variety of risks and uncertainties related to the safeguarding of the national food supply which are beyond our control. Public confidence in the government's efforts to safeguard the food supply is essential for the success of our stockyard operations. An outbreak of a disease such as bovine spongiform encephalopathy (BSE) better known as Mad Cow Disease could have a devastating impact on stockyard operations. For the company's part we strictly follow all USDA regulations to ensure to the extent we can the safety of the food supply. Furthermore, stockyard activities in general may involve various degrees of risk, such as competition from other regional stockyards and sale barns, general market conditions and to a lesser extent interest rates. Competition - Canal competes in the area of public stockyards with other regional public stockyards and sale barns, some of which are substantially larger and have greater financial resources than Canal. To a certain extent, Canal's stockyard revenues are dependent on the ability of the market agencies and independent commission sales people at each of Canal's stockyard locations to compete within the region. Real Estate Operations General - Canal is involved in the management, development or sale of its real estate properties located in five Midwest states. Real estate operations, resulted in operating income of $0.3 million, while contributing $0.5 million to Canal's revenues for the nine months ended July 31, 2007. In the first nine months of fiscal 2007, Canal sold a two acre parcel of vacant land located in Sioux City, Iowa for $75,000, generating operating income of $18,000. 30 As of July 31, 2007, there are approximately 18 acres of undeveloped land owned by Canal located in five Midwest states. Canal is continuing the program, which it started several years ago, to develop or sell this property. Additionally, Canal will continue to aggressively pursue additional tenants for its Exchange Building and undeveloped properties in fiscal 2007. Risk - Real estate activities in general may involve various degrees of risk, such as the ability to collect receivables, 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 real estate properties. Competition - Canal competes in the area of 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 real estate revenues are dependent on the ability of the stockyard operations and the various meat packers located adjacent to Canal's properties to successfully compete in their respective businesses. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require 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 net sales and expenses during the reporting period. We continually evaluate our estimates, including those related to revenue recognition, bad debts, income taxes, fixed assets, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies impact our most difficult, subjective and complex judgments used in the preparation of our consolidated financial statements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a further discussion of these and other accounting policies, please see Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report. 31 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. Art Inventory Held for Sale -- 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 had varying percentages of its art inventory appraised by independent appraisers in previous years. For fiscal 2007 the net realizable value of Canals remaining art inventory has been estimated by management based in part on the Company's history of art sales in the current and previous years and in part on the results of the independent appraisals done in previous years. 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 18 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. 32 Results of Operations The following tables set forth certain items in our statement of operations for the periods indicated: Nine Months Ended July 31, -------------------------- 2007 2006 ---- ---- (In Thousands) Revenues: Stockyard Revenue $ 2,374 $ 2,583 Real Estate Revenue 468 791 -------- -------- Total Revenue 2,842 3,374 -------- -------- Costs and Expenses: Stockyard Expenses 2,194 2,136 Real Estate Expenses 185 387 General and Administrative Expenses 819 826 -------- -------- Total Costs and Expenses 3,198 3,349 -------- -------- (Loss) Income from Operations (356) 25 Other Income 77 54 Other Expenses (287) (206) -------- -------- Net (Loss) $ (566) $ (127) -------- -------- 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 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 recognized a net loss of approximately $566,000 in the first nine months of fiscal 2007 as compared to a net loss of $127,000 for the same period in fiscal 2006. After recognition of preferred stock dividend payments (paid in additional shares of preferred stock for each of fiscal 2007, and 2006) of $84,000 and $80,000 in 2007 and 2006, respectively. The results attributable to common stockholders were a net loss of $650,000 in 2007 and a net loss of $207,000 in 2006. 33 Canal's revenues from continuing operations consist of revenues from its stockyard and real estate operations. Revenues in 2007 decreased by $532,000 to $2,842,000 as compared with 2006 revenues of $3,374,000. The fiscal 2007 decrease in revenues is due primarily to a $208,000 decrease in stockyard revenues due to the loss of two commission firms at our Sioux Falls, South Dakota location combined with a $300,000 decrease in sales of real estate. COMPARISON OF FISCAL PERIODS ENDED JULY 31, 2007 AND 2006 Stockyard Revenues Stockyard revenues for the nine months ended July 31, 2007 of $2,374,000 accounted for 83.5% of the fiscal 2007 revenues as compared to stockyard revenues of $2,583,000 or 76.6% for the same period in fiscal 2006. The 2007 increase in the stockyard revenues as a percent of total revenues, is due primarily to the decrease in sales of real estate for the first nine months of 2007. Stockyard revenues are comprised of yard handling and auction (88.7% and 90.3%), feed and bedding income (6.2% and 4.3%) and rental and other income (5.1% and 3.9%) for the nine month periods ended July 31, 2007 and 2006, respectively. There were no significant percentage variations in the year to year comparisons. Stockyard Revenues Stockyard revenues for the three months ended July 31, 2007 of $576,000 accounted for 80.1% of the fiscal 2007 revenues as compared to stockyard revenues of $654,000 or 82.7% for the same period in fiscal 2006. The 2007 decrease in the stockyard revenues as a percent of total revenues, is due primarily to the decrease in stockyard revenues as described above. Stockyard revenues are comprised of yard handling and auction (86.1% and 85.0%), feed and bedding income (6.2% and 4.7%) and rental and other income (7.7% and 10.3%) for the three month periods ended July 31, 2007 and 2006, respectively. There were no significant percentage variations in the year to year comparisons. Stockyard Expenses Stockyard expenses for the nine months ended July 31, 2007 of $2,194,000 increased by $58,000 (2.7%) from stockyard expenses of $2,136,000 for the same period in fiscal 2006. Stockyard expenses are comprised of labor and related costs (48.0% and 50.1%), other operating and maintenance (26.6% and 29.7%), feed and bedding expense (6.0% and 3.9%), depreciation and amortization (0.7% and 0.8%), taxes other than income taxes (6.0% and 6.2%) and general and administrative expense (12.7% and 9.3%) for the nine month periods ended July 31, 2007 and 2006, respectively. There were no significant percentage variations in the year to year comparisons. 34 Stockyard Expenses Stockyard expenses for the three months ended July 31, 2007 of $628,000 decreased by $16,000 (2.4%) from stockyard expenses of $644,000 for the same period in fiscal 2006. Stockyard expenses are comprised of labor and related costs (49.3% and 50.1%), other operating and maintenance (28.3% and 29.7%), feed and bedding expense (4.9% and 3.9%), depreciation and amortization (0.8% and 0.8%), taxes other than income taxes (6.6% and 6.2%) and general and administrative expense (10.1% and 9.3%) for the three month periods ended July 31, 2007 and 2006, respectively. There were no significant percentage variations in the year to year comparisons. Real Estate Revenues Real estate revenues for the nine months ended July 31, 2007 of $468,000 accounted for 16.5% of the fiscal 2007 revenues as compared to real estate revenues of $791,000 or 23.4% for the same period in fiscal 2006. The fiscal 2007 decrease in real estate revenues as a percentage of total revenues is due primarily to the sharp increase in sales of real estate for the first nine months of 2006. Real estate revenues are comprised of sale of real estate (16.0% and 47.4%), rentals and other lease income from the rental of vacant land and certain structures (79.0% and 49.4%) and rental income from commercial office space in its Exchange Buildings (5.0% and 3.2%) for the nine months ended July 31, 2007 and 2006, respectively. The increase in rentals and other lease income from the rental of vacant land and certain structures as a percentage of total revenues is due primarily to the decrease in sales of real estate. Real Estate Revenues Real estate revenues for the three months ended July 31, 2007 of $131,000 accounted for 19.9% of the fiscal 2007 revenues as compared to real estate revenues of $137,000 or 17.3% for the same period in fiscal 2006. The fiscal 2007 increase in real estate revenues as a percentage of total revenues is due primarily to the decrease in stockyard revenues for the third fiscal quarter of 2006. Real estate revenues are comprised of sale of real estate (0.0% and 0.0%), rentals and other lease income from the rental of vacant land and certain structures (94.1% and 93.9%) and rental income from commercial office space in its Exchange Buildings (5.9% and 6.1%) for the three months ended July 31, 2007 and 2006, respectively. There were no significant percentage variations in the year to year comparisons. 35 Real Estate Expenses Real estate expenses for the nine months ended July 31, 2007 of $185,000 decreased by $202,000 (52.2%) from real estate expenses of $387,000 for the same period in fiscal 2006. The sharp decrease in real estate expenses is due to the 2007 decrease in real estate sales. Real estate expenses are comprised of the cost of real estate sold (30.7% and 65.5%), labor, operating and maintenance (32.4% and 17.0%), depreciation and amortization (9.0% and 4.3%), taxes other than income taxes (10.7% and 7.0%) and general and administrative expenses (17.2% and 6.2%) for the nine months ended July 31, 2007 and 2006, respectively. The percentage variations in the year to year comparisons are due primarily to the significant decrease in the cost of real estate sold in fiscal 2007. Real Estate Expenses Real estate expenses for the three months ended July 31, 2007 of $42,000 decreased by $3,000 (7.8%) from real estate expenses of $45,000 for the same period in fiscal 2006. The decrease in real estate expenses is consistent with the 2007 decrease in real estate revenues. Real estate expenses are comprised of the cost of real estate sold (0.0% and 0.0%), labor, operating and maintenance (45.5% and 48.9%), depreciation and amortization (13.3% and 12.3%), taxes other than income taxes (15.8% and 19.9%) and general and administrative expenses (25.4% and 19.0%) for the three months ended July 31, 2007 and 2006, respectively. There were no significant percentage variations in the year to year comparisons. General and Administrative General and administrative expenses for the nine months ended July 31, 2007 of $819,000 decreased by $7,000 (0.9%) from expenses of $826,000 for the same period in fiscal 2006. The major components of general and administrative expenses are officers salaries (43.9% and 42.7%), pension expense (23.1% and 22.9%), insurance expense (4.6% and 6.2%), office salaries (8.6% and 8.6%), travel expense (2.7% and 3.2%), rent (1.7% and 1.6%) and professional fees (4.8% and 4.8%) for the nine month periods ended July 31, 2007 and 2006, respectively. There are no significant percentage variations in the year to year comparisons. General and Administrative General and administrative expenses for the three months ended July 31, 2007 of $270,000 were unchanged as compared to the same period in fiscal 2006. The major components of general and administrative expenses 36 are officers salaries (45.5% and 44.6%), pension expense (23.4% and 23.3%), insurance expense (4.7% and 6.3%), office salaries (8.7% and 8.3%), travel expense (3.9% and 3.3%), rent (1.9% and 1.6%) and professional fees (4.9% and 4.9%) for the three month periods ended July 31, 2007 and 2006, respectively. There are no significant percentage variations in the year to year comparisons. Interest and Other Income Interest and other income for the nine months ended July 31, 2007 of $54,000 was unchanged for the same period in fiscal 2006. Interest and other income is comprised primarily of interest income on the $1,700,000 note receivable associated with the fiscal 2005 sale of the company's South St. Paul, Minnesota Exchange Building. This property was sold on a contract for deed payable in October 2007. Interest Expense Interest expense for the nine months ended July 31, 2007 of $202,000 was unchanged for the same period in fiscal 2006. The principal balances outstanding at July 31, 2007 and October 31, 2006 was $2,687,000. The interest rate (10%) on Canal's variable rate mortgage notes has remained unchanged for the past 12 months. There are no significant percentage variations in the year to year comparisons. (Expense) Income from Art Sales Other income from art sales for the nine months ended July 31, 2007 of $23,000 increased by $26,000 from an expense from arts sales of $3,000 for the same period in fiscal 2006. Canal sold one piece of contemporary art in the first nine months of fiscal 2007 as compared to two pieces of contemporary art sold in the same period in fiscal 2006. Art revenues are comprised of the proceeds from the sale of antiquities and contemporary art. Canal recognized gross sales of $59,000 and $29,000 for the nine month periods ended July 31, 2007 and 2006, respectively. Art expenses are comprised of the cost of inventory sold and selling, general and administrative expenses. Canal incurred cost of inventory sold of $23,000 and $20,000 (net of a valuation allowance of $65,000 and $55,000) as well as selling, general and administrative expenses of $12,000 and $13,000 for the nine month periods ended July 31, 2007 and 2006, 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. 37 Liquidity and Capital Resources 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 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. The Company's variable rate mortgage notes (originally issued in 1998 and amended several times since then) are due May 15, 2009 and are held entirely by the Company's Chief Executive Officer and members of his family. These notes carry interest at the rate of ten percent per annum. 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; restricts Canal's ability to pay cash dividends or repurchase stock and require principal prepayments to be made only out of the proceeds from the sale of certain assets. As of July 31, 2007, the balance due under these notes was $2,687,000, all of which is classified as long-term debt-related party. Cash and cash equivalents of $0 at July 31, 2007 decreased $38,000 or 100.0% from $38,000 at October 31, 2006. Net cash used by operations in fiscal 2007 was $186,000. Substantially all of the 2007 net proceeds from the sales of real estate of $75,000 was used in operations. During fiscal 2007 Canal increased the balance of its liabilities by a total of $75,000. At July 31, 2007 the Company's current assets exceed current liabilities by $1.1 million which was a decrease of $0.5 million as compared to October 31, 2006 when the Company's current assets exceeded current liabilities by $1.6 million. The only required principal repayments under Canal's debt agreements for fiscal 2007 will be from the proceeds (if any) of the sale of certain assets. As discussed above, 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 38 that its income from operations combined with its cost cutting program in itself will be sufficient to fund operating cash requirements. 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 July 31, 2007, 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 July 31, 2007, 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 July 31, ($ US) Interest Rate Value ---------- ---------- ------------- ----- 2007 $ 0 N/A 2008 0 N/A 2009 2,687 10% 2010 0 N/A 2011 0 N/A Thereafter 0 N/A ------- Total $ 2,687 N/A (A) ------- ------- (A) Long-term debt related party: it is not practicable to estimate the fair value of the related party debt. 39 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, 2007 ("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. 40 PART II OTHER INFORMATION 41 Item 1: Legal Proceedings: Also see Item 3 of Canal's October 31, 2006 Form 10-K. 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 was not a party to any ongoing litigation at July 31, 2007. The following situation did arise in fiscal 2005: Environmental Protection Agency - Special Notice Letter for Investigation, Portland, Oregon Property In 1989, the Company sold its 48 acre Portland, Oregon stockyard to Oregon Waste Systems, Inc. On September 29, 2003, the United States Environmental Agency (EPA) placed a 4.2 acre portion of that property on the National Priorities List pursuant to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), commonly known as the Superfund Act. In a letter from the EPA dated June 27, 2005 the Company, along with approximately 13 other parties, including the current owner and operator of the site, was notified that it might be liable to perform or pay for the remediation of environmental contamination found on and around the site. Since the receipt of the letter, the Company has been in periodic communications with the other parties who received a similar letter with respect to what action, collectively or individually, should be taken in response to the EPA assertion of liability. The Company believes that the remediation of contamination of the site is properly the responsibility of other parties that have occupied and used it for waste recycling purposes since 1961, although under CERCLA the EPA is able to assert joint and several liability against all parties who ever owned or operated the site or generated or transported wastes to it. This investigation is in its preliminary stages and the Company intends to vigorously defend any liability for remediation. At July 31, 2007, the liability for remediation, if any, is not estimatable and therefore no accrual has been recorded in the financial statements. 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. (B) None 42 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 13th day of September, 2007. 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 - ---------------------- (Principal Executive Officer) September 13, 2007 Michael E. Schultz Vice President-Finance Secretary and Treasurer /S/ Reginald Schauder (Principal Financial and Reginald Schauder Accounting Officer) September 13, 2007 /S/ Asher B. Edelman Chairman of the Board - ---------------------- and Director September 13, 2007 Asher B. Edelman 43 EX-31.1 2 d72696_ex31-1.txt SECTION 302 CERTIFICATION OF CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent financial quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: September 13, 2007 /S/ Michael E. Schultz - ---------------------- Chief Executive Officer EX-31.2 3 d72696_ex31-2.txt SECTION 302 CERTIFICATION OF CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; and b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent financial quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: September 13, 2007 /S/ Reginald Schauder - --------------------- Chief Financial Officer EX-32 4 d72696_ex32.txt SECTION 906 CERTIFICATION OF CEO AND CFO 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 three months ended July 31, 2007 (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: September 13, 2007 /S/ Michael E. Schultz ----------------------- Chief Executive Officer Date: September 13, 2007 /S/ Reginald Schauder ----------------------- Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----