10-K 1 d57999_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2003 |_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 002-96666 CANAL CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 51-0102492 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 717 Fifth Avenue New York, New York 10022 (Address of principal executive offices) (Zip Code) (212) 826-6040 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) or the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes |X| No |_| The aggregate market value of the voting stock held by non-affiliates of the registrant at January 15, 2004, was approximately $106,000. The number of shares of Common Stock, $.01 par value, outstanding at January 15, 2004 was 4,326,929. CANAL CAPITAL CORPORATION AND SUBSIDIARIES 2003 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Page ---- ITEM 1. Business........................................................ 1 ITEM 2 Properties...................................................... 7 ITEM 3. Legal Proceedings............................................... 8 ITEM 4. Submission of Matters to a Vote of Security Holders............. 8 PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters............................................. 9 ITEM 6. Selected Consolidated Financial Data............................ 10 ITEM 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition................... 12 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................... 24 ITEM 8. Financial Statements and Supplementary Data..................... 24 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 24 ITEM 9A. Controls and Procedures......................................... 25 PART III ITEM 10. Directors and Executive Officers of the Registrant............. 26 ITEM 11. Executive Compensation......................................... 27 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................ 30 ITEM 13. Certain Relationships and Related Transactions................. 32 ITEM 14. Principal Accounting Fees and Services ........................ 32 PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................. 33 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1 SIGNATURES................................................................. S-1 CERTIFICATIONS............................................................. S-2 i PART I This Annual Report on Form 10-K includes "forward-looking statements". The words "may," "will," "should," "continue," "future," "potential," "believe," "expect," "anticipate," "project," "plan," "intend," "seek," "estimate" and similar expressions identify forward-looking statements. We caution you that any forward-looking statements made by us are not guarantees of future performance and that a variety of factors, including those discussed below, could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. Please see "Risk Factors" below for detailed information about the uncertainties and other factors that may cause actual results to materially differ from the views stated in such forward-looking statements. All forward-looking statements and risk factors included in this Annual Report on Form 10-K are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement or risk factors. Canal Capital Corporation's fiscal year ends on October 31, of each calendar year. Each reference to a fiscal year in this Annual Report on Form 10K refers to the fiscal year ending October 31, of the calendar year indicated. Unless the context requires otherwise, references to "we", "us", "our", "Canal Capital Corporation" and the "company" refer to Canal Capital Corporation and its subsidiaries. Item 1. Business 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 -- real estate and stockyard operations. Real Estate Operations - Canal's real estate properties located in five Midwest states are primarily associated with its current and former agribusiness related operations. Each property is adjacent to a stockyards operation (two of which are operated by the company) and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, truck stops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from rental income from its Exchange Buildings, lease income from land and structures leased to various commercial and retail enterprises and proceeds from the sale of real estate properties. 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. See "Real Estate Operations". 1 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 and the sale of feed and bedding. See "Stockyard Operations". Real Estate Operations General Canal is involved in the management, development or sale of its agribusiness related real estate properties at its current and former stockyard locations. Real estate operations, which relate primarily to Canal's current and former agribusiness operations, resulted in operating income of $0.2 million, while contributing $1.4 million to Canal's revenues for fiscal 2003. During fiscal 2003, Canal sold approximately 26 acres of land located in two states (Missouri-25 acres and Minnesota-1 acre) for $0.4 million generating operating income of $0.2 million. As of October 31, 2003, there are approximately 71 acres of undeveloped land owned by Canal adjacent to its current and former stockyards. 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 Buildings and undeveloped properties in fiscal 2004. Risk Real estate activities in general may involve various degrees of risk, such as competition for tenants, general market conditions and interest rates. Furthermore, there can be no assurance that Canal will be successful in the development, lease or sale of its agribusiness related real estate properties. Competition Canal competes in the area of agribusiness related real estate development with other regional developers, some of which are substantially larger and have significantly greater financial resources than Canal. To a certain extent, Canal's agribusiness revenues are dependent on the ability of the stockyard operations purchaser and the various meat packers with whom Canal has yardage agreements to successfully compete in their respective businesses. 2 Stockyard Operations General Through an asset repurchase agreement, Canal commenced stockyard operations August 1, 1999 in Sioux City Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota. In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $0, $75,000, and $118,000 for the three years ended October 31, 2003, 2002 and 2001, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux City location in April 2002. Canal has been engaged in extended negotiations to sell this property to a real estate developer whose intention is to convert the property into a retail shopping center. Canal will continue to pursue the sale of this property to this developer as well as exploring any other opportunities to develop or sell this property in fiscal 2004. 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. 3 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 2004. 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 $0.6 million while contributing approximately $3.4 million to Canal's revenues for fiscal 2003. 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. Art Inventory Held for Sale Canal has not purchased inventory in several years nor does it currently have any intention of purchasing additional art inventory in the foreseeable future. It is the Company's intention to liquidate, in an orderly manner, its art inventory. 4 Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned artist of contemporary paintings. As part of this agreement Canal purchased a number of Olitski paintings which it holds for resale with a book value of approximately $500,000 at October 31, 2003. The representation agreement expired December 1, 1994 and Canal now operates independently in the marketing of its contemporary art inventory. Canal will sell its art primarily through two sources, in galleries and at art auctions. In the case of sales in galleries, the Company has consignment arrangements with various art galleries in the United States. In these arrangements Canal consigns its pieces at specific prices to the gallery. In the case of auctions, the Company primarily consigns its art pieces to the two largest auction houses for their spring and fall art auctions. The Company assigns a minimum acceptable price on the pieces consigned. The auction house negotiates a commission on the sale of major pieces. The pieces can be withdrawn at any time before or during the auction. There are no significant differences between the prices obtained in galleries and those obtained at auction. Antiquities and contemporary art represented 27% ($189,122) and 73% ($520,549) and 26% ($230,639) and 74% ($641,749) of total art inventory at October 31, 2003 and 2002, respectively. In fiscal 2003, Canal sold contemporary art totaling $173,000 which sales generated a net gain of approximately $51,000. Additionally, in fiscal 2003 Canal wrote off 11 pieces of antiquity art with a book value of approximately $42,000 due to questions regarding authenticity. Risk Selling art in general involves various degrees of risk. Canal's success in selling its art inventory is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. There can be no assurance that Canal will be able to sell its art inventory at a price greater than or equal to its acquisition costs. Further, there are security risks associated with collections of antiquities and art, including problems of security in their storage, transportation and exhibition. Canal carries insurance to cover such risks. Competition Canal competes in the sale of its art inventory with investment groups and other dealers, most of whom are substantially larger and have greater financial resources and staff than Canal. There may be a number of dealers offering similar pieces of art for sale or auction at the same time as Canal, thereby exerting a downward pressure on prices. 5 Investments Available for Sale Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal's officers and directors also serve as officers and/or directors of this company. Historically, this investment (in which Canal's ownership interest is approximately 1%) was carried at market value. On May 3, 2000 the company Canal has invested in filed for reorganization under Chapter 11 of the Bankruptcy Code and subsequently emerged in December, 2000. This action, in combination with other factors, has resulted in Canal's determination that the steady decline in market value of its investment in this company is permanent. Accordingly, as of October 31, 2003 Canal has written off this investment entirely. This has resulted in Canal's recognizing realized losses on investments in marketable securities of $ 7,405, $13,987 and $47,249 in fiscal 2003, 2002 and 2001, respectively. Employees - At December 31, 2003, Canal had approximately 75 employees. Risk Factors - In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered when evaluating our Company and our business. Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. We also caution you that this Form 10-K includes forward-looking statements that are based on management's beliefs and assumptions and on information currently available to management. Future events and circumstances and our actual results could differ materially from those projected in any forward-looking statements. The risk and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risk and uncertainties actually occur, our future operating results and financial condition could be harmed and the market price of our common stock could decline. Risk Related to Our Business - The Company's risk and uncertainties related to our financial condition and our business include a variety of factors that are beyond our control. Such factors include, without limitation: overall economic conditions; public confidence in the government's ability to safeguard the food supply from infectious diseases; competition for tenants in the agribusiness; the ability of the Company's tenants to compete in their respective businesses; the effect of fluctuations in supply, demand, international monetary conditions and inflation on the Company's art inventories; securities risks associated with collections of antiquities and art; and the effect of fluctuations in interest rates and inflation on the Company's indebtedness. 6 ITEM 2. Properties Canal's real estate properties located in five Midwest states are primarily associated with its current and former agribusiness related operations. Each property is adjacent to a stockyard operation and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, truck stops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. In 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. As landlord, Canal's management responsibilities include leasing, billing, repairs and maintenance and overseeing the day to day operations of its properties. Canal's properties at October 31, 2003 include: Leased Held for Year Total Exchange Stkyds to Third Develop- Location Acquired Site(2) Bldgs. Opertns(1) Parties ment (3) -------- -------- ------- -------- ---------- -------- -------- St. Joseph, MO 1942 59 0 31 0 28 S. St. Paul, MN 1937 25 5 0 10 10 Sioux City, IA 1937 52 0 0 19 33 Omaha, NE 1976 11 0 0 11 0 Sioux Falls, SD 1937 31 1 30 0 0 --- --- --- --- --- Total 178 6 61 40 71 --- --- --- --- --- The following schedule shows the average occupancy rate and average rental rate at each of Canal's three Exchange Buildings: 2003 2002 ------------------------ ------------------------ Occupancy Average(4) Occupancy Average(4) Location Rate Rental Rate Rate Rental Rate -------- --------- ----------- --------- ----------- St. Joseph, MO (5) N/A N/A 75% $ 4.75 S. St. Paul, MN 74% $12.00 74% $12.00 Sioux Falls, SD 90% $ 7.00 90% $ 7.00 NOTES (1) Canal now operates two central public stockyards. (2) For information with respect to mortgages and pledges see Note 7. (3) For information related to property held for development see Note 2(c). (4) Per square foot. (5) In March 2003, Canal sold its Exchange Building in St. Joseph, Missouri. 7 ITEM 3. Legal Proceedings Canal and its subsidiaries are from time to time involved in litigation incidental to their normal business activities, none of which, in the opinion of management, will have a material adverse effect on the consolidated financial condition and operations of the Company. Canal or its subsidiaries are party to the following litigation: Canal Capital Corporation v. Valley Pride Pack, Inc. Canal commenced an action in U.S. District Court in Minnesota on September 23, 1997, as the assignee of United Market Services Company, against Valley Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and referred to herein as "Pine Valley") to recover unpaid livestock fees and charges (estimated to be as much as $1,000,000) due from Pine Valley under a 1936 Agreement between the predecessors of Pine Valley and Canal. On December 20, 2000, the U.S. District Court in Minnesota ruled in Canal's favor granting its motion for summary judgment, thereby establishing Pine Valley's liability to Canal for unpaid livestock fees. Additionally, the court denied all of Pine Valley's assorted defenses and counter claims clearing this matter to go to trial. On February 7, 2001, a Special Verdict was entered in favor of Canal resulting in a total award (including pre- judgment interest and court costs) to Canal of approximately $189,000. On October 15, 2001, Pine Valley filed a voluntary Chapter 11 bankruptcy petition with the court. This action makes the collectability of Canal's award doubtful. For financial statement purposes as of October 31, 2003, Canal has fully reserved the Pine Valley receivable. ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to our stockholders during the fourth quarter of the fiscal year ended October 31, 2003. 8 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters Market Information Canal's stock is traded over-the-counter through the "pink sheets". The high and low price ranges of Canal's common stock for the eight quarters ended October 31, 2003 as reported on the "pink sheets" were: Fiscal 2003 Fiscal 2002 ------------------ ------------------- Quarter Ended High Low High Low ------------- ---- --- ---- --- October 31 ................. $ 1/16 -- $ 1/20 $ 1/16 -- $ 1/20 July 31 .................... 1/16 -- 1/20 1/10 -- 1/16 April 30 ................... 1/14 -- 1/16 1/10 -- 1/16 January 31 ................. 1/11 -- 1/20 1/9 -- 1/16 Dividend Policy and Holders There were no cash dividends paid during fiscal 2003 or 2002. Canal is subject to restrictions on the payment of cash dividends under certain debt agreements. As of January 15, 2004, Canal had approximately 1,500 holders of record of its common stock, par value $.01 per share. 9 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA THE FOLLOWING SELECTED FINANCIAL DATA HAVE BEEN DERIVED FROM OUR CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE BEEN AUDITED BY TODMAN & CO., CPAs, P.C., INDEPENDENT AUDITORS. THE INFORMATION SET FORTH BELOW IS NOT NECESSARILY INDICATIVE OF THE RESULTS OF FUTURE OPERATIONS AND SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS" INCLUDED IN ITEM 7 OF OUR ANNUAL REPORT ON FORM 10-K.
YEARS ENDED OCTOBER 31, ----------------------- STATEMENT OF OPERATIONS DATA 2003 2002 2001 2000 1999 ------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES FROM CONTINUING OPERATIONS $4,760(1) $5,413(2) $5,238(3) $5,768(4) $7,584(5) NET (LOSS) INCOME ($537) $426 ($773) ($922) $1,285 (LOSS) INCOME PER SHARE: BASIC ($0.16) $0.07 ($0.25) ($0.27) $0.24 DILUTED ($0.16) $0.07 ($0.25) ($0.27) $0.24 CASH DIVIDENDS PAID $0.00 $0.00 $0.00 $0.00 $0.00 WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 4,327 - DILUTED 4,327 4,327 4,327 4,327 4,327 OCTOBER 31, ----------- 2003 2002 2001 2000 1999 ------------------------------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: CURRENT ASSETS $ 477 $ 636 $ 602 $1,569 $1,661 PROPERTY ON OPERATING LEASES, NET 2,874 3,337 3,302 3,098 3,088 PROPERTY USED AS STOCKYARDS 1,136 1,176 1,281 1,237 1,248 ART INVENTORY NON-CURRENT 460 622 934 697 735 OTHER ASSETS 1,195 742 859 860 1,202 ------------------------------------------ TOTAL ASSETS $6,142 $6,513 $6,978 $7,461 $7,934 ------------------------------------------ CURRENT LIABILITIES $ 765 $ 585 $1,345 $1,168 $ 910 NON-CURRENT LIABILITIES 1,208 1,282 1,203 1,047 1,055 LONG-TERM DEBT 2,767 2,667 2,667 2,522 2,612 STOCKHOLDERS' EQUITY 1,402 1,979 1,763 2,724 3,357 ------------------------------------------ TOTAL LIAB. & STOCKHOLDERS'EQUITY (6) $6,142 $6,513 $6,978 $7,461 $7,934 ------------------------------------------ COMMON SHARES OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327
10 ITEM 6. Selected Financial Data (continued..) NOTES: (1) The revenue decrease was due primarily to a $0.4 million decrease in sales of real estate coupled with $0.1 million decreases in both stockyard and real estate operating revenues. (2) The revenue increase was due primarily to a $0.4 million increase in sales of real estate which was offset to a certain extent by a $0.2 million decrease in stockyard revenues. (3) The revenue decrease was due primarily to a $0.3 million decrease in sales of real estate. (4) The revenue decrease was due primarily to a $4.1 million decrease in sales of real estate coupled with the elimination of $0.6 million ground lease income, which decreases were offset to a certain extent by a $3.1 million increase in revenues from stockyard operations (represents a full year operation in fiscal 2000 as compared to three months in fiscal 1999). (5) The revenue increase was due primarily to a $3.4 million increase in sales of real estate coupled with the $1 million of revenue from the new stockyard operations. (6) For discussion of material uncertainties and commitments, see Notes 9 and 17 to the Consolidated Financial Statement. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report. FORWARD-LOOKING AND CAUTIONARY STATEMENTS We may from time to time make written or oral forward-looking statements, including those contained in the following section. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. For this purpose, any statements contained in this section that are not statements of historical fact may be deemed to be forward-looking statements. Factors which may effect our results include, but are not limited to, our ability to expand our customer base, our ability to develop additional and leverage our existing distribution channels for our products and solutions, dependance on strategic and channel partners including their ability to distribute our products and meet or renew their financial commitments, our ability to address international markets, the effectiveness of our sales and marketing activities, the acceptance of our products in the market place, the timing and scope of deployments of our products by customers, fluctuations in customer sales cycles, customers' ability to obtain additional funding, the emergence of new competitors in the marketplace, our ability to compete successfully against established competitors with greater resources, the uncertainty of future governmental regulation, our ability to manage growth, and obtain additional funds, general economic conditions and other risks discussed in this report and in our other filings with the Securities and Exchange Commission. All forward- looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors. 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. 12 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 Annual Report. 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 its art inventory appraised by independent appraisers annually. The 2003 appraisal covered approximately 31% of the inventory value. The appraised values estimate the current market value of each piece giving consideration to Canal's practices of engaging in consignment, private and public auction sales. The net realizable value of the remaining 69% of the inventory was estimated by management based in part on the Company's history of losses sustained on art sales in the current and previous years and in part on the results of the independent appraisals done. 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 71 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. (See Note 19). 13 Results of Operations - General The following tables set forth certain items in our statement of operations for the periods indicated: Fiscal Year Ended October 31, ----------------------------- 2003 2002 2001 ---- ---- ---- (In Thousands) Revenues: Real Estate Revenue $ 1,373 $ 1,852 $ 1,444 Stockyard Revenue 3,387 3,561 3,794 ------- ------- ------- Total Revenue 4,760 5,413 5,238 ------- ------- ------- Costs and Expenses: Real Estate Expenses 1,131 1,109 999 Stockyard Expenses 2,802 3,023 3,420 General and Administrative Expenses 1,079 1,135 1,275 ------- ------- ------- Total Costs and Expenses 5,012 5,267 5,694 ------- ------- ------- (Loss) Income from Operations (252) 146 (456) Other Income 25 674 130 Other Expenses (310) (394) (447) ------- ------- ------- Net (Loss) Income $ (537) $ 426 $ (773) ======= ======= ======= While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in eight of the last ten years, is obligated to continue making substantial annual contributions to its defined benefit pension plan. In addition, Canal has joint and several liability on its lease for commercial space in New York City. At October 31, 2003, Canal was current under its obligation, however, the group was approximately $85,000 in arrears on this lease (see Note 9). The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Note 1). 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 $0.5 million for 2003 as compared to the 2002 net income of $0.4 million and the 2001 net loss of $0.8 million. After recognition of preferred stock dividend payments (paid in additional shares of preferred stock for each of fiscal 2003, 2002 and 2001) of $158,000 in 2003, $116,000 in 2002 and $302,000 in 2001, the results attributable to common stockholders were a net loss of $0.7 million in 2003, net income of 14 $0.3 million in 2002 and a net loss of $1.1 million in 2001. Canal's 2003 net loss of $0.7 is due primarily to a $0.5 million decrease in income from real estate operations (consisting of a $0.3 million decrease in gains on sales of real estate; a $0.1 decrease in rental income and a $0.1 million increase in real estate operating expenses); a $0.3 million decrease in other income and a $0.2 million decrease in income from art sales. Canal's 2002 net income of $0.4 million is due primarily to a $0.2 million increase in gains on sales of real estate coupled with a $0.3 million increase in other income (included in Canal's 2002 other income is approximately $350,000 received by Canal as a demutualization compensation payment from an insurance company, from which, Canal had purchased annuity contracts in the early 1980's for certain of its retired stockyard employees). Canal's revenues from continuing operations consist of revenues from its real estate and stockyard operations. Revenues in 2003 decreased by $0.6 million to $4.8 million as compared with 2002 revenues which had increased by $0.2 million to $5.4 million from 2001 revenues of $5.2 million. The fiscal 2003 decrease in revenues is due primarily to a $0.4 million decrease in sales of real estate coupled with $0.1 million decreases in both stockyard and real estate operating revenues. The fiscal 2002 increase in revenues is due primarily to a $0.4 million increase in sales of real estate which was offset to a certain extent by a $0.2 million decrease in stockyard revenues. COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 2003 AND 2002 Stockyard Revenues Stockyard revenues for 2003 of $3.4 million accounted for 71.2% of the 2003 revenues as compared to revenues of $3.6 million or 65.8% for 2002. Stockyard revenues are comprised of yard handling and auction (89.5% and 89.4%), feed and bedding income (5.5% and 5.6%), rental income (0.1% and 0.1%) and other income (4.9% and 4.9%) for 2003 and 2002, respectively. The 2003 decrease is due primarily to softer than anticipated results from the Sioux Falls Stockyards in fiscal 2003. There were no significant percentage variations in the year to year comparisons. Stockyard Expenses Stockyard expenses for 2003 of $2.8 million decreased by $0.2 million (7.3%) from $3.0 million in 2002. Stockyard expenses are comprised of labor and related costs (47.4% and 47.6%), operating and maintenance (27.0% and 27.5%), feed and bedding expense (5.7% and 5.3%), depreciation and amortization (0.7% and 0.8%), taxes other than income taxes (6.2% and 7.2%) and general and administrative expenses (13.0% and 11.6%) for 2003 and 2002, respectively. The 2003 decrease is due primarily to across the board decreases consistent with the revenue reductions in fiscal 2003. There were no significant percentage variations in the year to year comparisons. 15 Real Estate Revenues Real estate revenues for 2003 of $1.4 million accounted for 28.8% of the 2003 revenues as compared to revenues of $1.9 million or 34.2% for 2002. Real estate revenues are comprised of sale of real estate (31.2% and 44.2%), rental income from commercial office space in its Exchange Buildings (31.8% and 26.3%), rentals and other lease income from the rental of vacant land and certain structures (37.0% and 29.5%) and other income (0.0% and 0.0%) for 2003 and 2002, respectively. The 2003 decrease is due primarily to the $0.4 million decrease in sales of real estate. The percentage variations in the year to year comparisons are due primarily to the decrease in real estate sales for fiscal 2003. Real Estate Expenses Real estate expenses for 2003 of $1.1 million were essentially unchanged from $1.1 million in 2002. Real estate expenses are comprised of labor, operating and maintenance (36.0% and 40.4%), depreciation and amortization (12.8% and 12.0%), taxes other than income taxes (22.0% and 10.7%), cost of real estate sold (24.6% and 32.8%),and general and administrative and other expenses (4.6% and 4.1%) for 2003 and 2002, respectively. The percentage variations in year to year comparisons is due primarily to the decrease in the cost of real estate sold in fiscal 2003 coupled with the increase in taxes other than income taxes which reflects a catchup accrual for back real estate taxes relating to the Sioux City, Iowa property. General and Administrative General and administrative expenses for 2003 of $1.1 million were essentially unchanged from $1.1 million in 2002. The major components of general and administrative expenses are officers salaries (43.9% and 40.4%), rent (1.6% and 4.9%), legal and professional fees (0.8% and 2.8%), insurance (10.2% and 14.1%) and office salaries (8.2% and 6.6%) for 2003 and 2002, respectively. The percentage decrease in rent reflects Canal's subletting a significant portion of its New York office space commencing in the fourth quarter of fiscal 2002. The percentage decrease in legal and professional fees is due to a sharp decrease in legal fees which were associated with the fiscal 2001 Pine Valley lawsuit. The percentage decrease in insurance reflects a reduction in insurance coverage during fiscal 2003. The percentage increase in office salaries reflects a severance accrual for an employee terminated in the fourth quarter of fiscal 2003. Interest and Other Income Interest and other income of $25,000 for 2003 decreased $442,000 from $467,000 in fiscal 2002. The 2002 interest and other income included approximately $350,000 received by Canal as a demutalization compensation payment from an insurance company, from which, Canal had purchased annuity 16 contracts in the early 1980's for certain of its retired stockyard employees. Interest and other income is primarily comprised of dividend and interest income. Interest Expense Interest expense for 2003 of $0.3 million increased slightly (5.0%) from $0.3 million in 2002. The 2003 increase is due primarily to a modest increase in the outstanding debt incurred in the final quarter of fiscal 2003 coupled with accrued interest on certain payments which are overdue to Canal's pension plan. Interest rates on Canal's variable rate mortgage notes averaged 10.00% in 2003 and 2002. At October 31, 2003 the outstanding balance of these notes was $2,767,000. (Loss) Income from Art Sales In fiscal 2003, Canal recognized a net loss from art sales of $8,000 as compared to a net gain of $207,000 for fiscal 2002. The 2003 decrease reflects the overall decrease in sales of art during 2003 as compared to 2002. Art revenues are comprised of the proceeds from the sale of antiquities and contemporary art. In fiscal 2003, Canal sold three pieces of contemporary art generating gross proceeds of $173,000 as compared to fiscal 2002 sales of two pieces of antiquity art generating gross proceeds of $540,000. Art expenses are comprised of the cost of inventory sold and selling, general and administrative expenses. In fiscal 2003, Canal incurred cost of inventory sold of $121,000 (net of a valuation allowance of $341,000) as well as selling, general and administrative expenses of $63,000 (which amount included the write off of 11 pieces of antiquity art with a book value of approximately $42,000 net of a valuation allowance of $68,000) as compared to fiscal 2002 cost of inventory sold of $311,000 (net of a valuation allowance of $509,000) and selling, general and administrative expenses of $22,000. 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. Realized Loss on Investments At October 31, 2003, Canal determined that the decline in the market value of its investments available for sale was permanent. Accordingly, as of October 31, 2003, Canal has written off this investment entirely. This has resulted in Canal's recognizing realized losses of approximately $7,000 and $14,000 in fiscal 2003 and 2002, respectively. Further, Canal had recognized a realized loss of approximately $47,000 on this investment in fiscal 2001. Other Expense Other expense of $15,000 for 2003 decreased $98,000 (86.8%)from $113,000 in fiscal 2002. Other expenses are primarily related to the administration of the company's pension plans. 17 COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 2002 AND 2001 Stockyard Revenues Stockyard revenues for 2002 of $3.6 million accounted for 65.8% of the 2002 revenues as compared to revenues of $3.8 million or 72.4% for 2001. Stockyard revenues are comprised of yard handling and auction (89.4% and 88.5%), feed and bedding income (5.6% and 6.6%), rental income (0.1% and 0.1%) and other income (4.9% and 4.8%) for 2002 and 2001, respectively. The 2002 decrease is due primarily to the closing of the Sioux City Stockyards in March 2002. There were no significant percentage variations in the year to year comparisons. Stockyard Expenses Stockyard expenses for 2002 of $3.0 million decreased by $0.4 million (11.6%) from $3.4 million in 2001. Stockyard expenses are comprised of labor and related costs (47.6% and 45.1%), operating and maintenance (27.5% and 26.0%), feed and bedding expense (5.3% and 5.6%), depreciation and amortization (0.8% and 0.8%), taxes other than income taxes (7.2% and 7.2%) and general and administrative expenses (11.6% and 15.3%) for 2002 and 2001, respectively. As discussed above, the 2002 decrease is due primarily to the closing of the Sioux City Stockyards in March 2002. There were no significant percentage variations in the year to year comparisons. Real Estate Revenues Real estate revenues for 2002 of $1.9 million accounted for 34.2% of the 2002 revenues as compared to revenues of $1.4 million or 27.6% for 2001. Real estate revenues are comprised of sale of real estate (44.2% and 29.5%), rental income from commercial office space in its Exchange Buildings (26.3% and 29.8%), rentals and other lease income from the rental of vacant land and certain structures (29.5% and 40.6%) and other income (0.0% and 0.1%) for 2002 and 2001, respectively. The 2002 increase is due primarily to the $0.4 million increase in sales of real estate. The percentage variations in the year to year comparisons are due primarily to the increase in real estate sales for fiscal 2002. Real Estate Expenses Real estate expenses for 2002 of $1.1 million increased by $0.1 million (10.0%) from $1.0 million in 2001. Real estate expenses are comprised of labor, operating and maintenance (40.4% and 42.8%), depreciation and amortization (12.0% and 12.8%), taxes other than income taxes (10.7% and 15.2%), cost of real estate sold (32.8% and 16.6%),and general and administrative and other expenses (4.1% and 12.6%) for 2002 and 2001, respectively. The 2002 increase in real estate expenses is due primarily to 18 the $0.2 million increase in cost of real estate sold in fiscal 2002. The percentage variations in year to year comparisons is also due primarily to the increase in the cost of real estate sold in fiscal 2002. General and Administrative General and administrative expenses for 2002 of $1.1 million decreased $0.2 million (10.9%) from $1.3 million in 2001. The major components of general and administrative expenses are officers salaries (40.4% and 36.0%), rent (4.9% and 7.1%), legal and professional fees (2.8% and 15.0%), insurance (14.1% and 8.6%) and office salaries (6.6% and 8.4%) for 2002 and 2001, respectively. The percentage decrease in rent reflects Canal's subletting a significant portion of its New York office space commencing in the fourth quarter of fiscal 2002. The percentage decrease in legal and professional fees is due to a sharp decrease in legal fees which were associated with the fiscal 2001 Pine Valley lawsuit. The percentage increase in insurance reflects an increase in the cost of worker's compensation coverage for the stockyard employees. The percentage decrease in office salaries reflects staff reductions in the third quarter of fiscal 2001. Interest and Other Income Interest and other income of $467,000 for 2002 increased $336,000 from $131,000 in fiscal 2001. The 2002 interest and other income includes approximately $350,000 received by Canal as a demutalization compensation payment from an insurance company, from which, Canal had purchased annuity contracts in the early 1980's for certain of its retired stockyard employees. The balance of interest and other income is comprised of dividend and interest income. Interest Expense Interest expense for 2002 of $0.3 million increased slightly (3.8%) from $0.3 million in 2001. The 2002 increase is due primarily to a modest increase in the outstanding debt incurred in the final quarter of fiscal 2001. Interest rates on Canal's variable rate mortgage notes averaged 10.00% in 2002 and 2001. At October 31, 2002 the outstanding balance of these notes was $2,667,000. Income (Loss) from Art Sales In fiscal 2002, Canal recognized a net gain from art sales of $207,000 as compared to a net loss of $19,000 for fiscal 2001. The 2002 increase reflects the overall increase in sales of art during 2002 as compared to 2001. Art revenues are comprised of the proceeds from the sale of antiquities and contemporary art. In fiscal 2002, Canal sold two pieces of antiquity art generating gross proceeds of $540,000 as compared to fiscal 19 2001 sales of one piece of contemporary art generating gross proceeds of $24,000. Art expenses are comprised of the cost of inventory sold and selling, general and administrative expenses. In fiscal 2002, Canal incurred cost of inventory sold of $311,000 (net of a valuation allowance of $509,000) as well as selling, general and administrative expenses of $22,000 as compared to fiscal 2001 cost of inventory sold of $13,000 (net of a valuation allowance of $36,000) and selling, general and administrative expenses of $30,000. 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. Realized Loss on Investments At October 31, 2002, Canal determined that the decline in the market value of its investments available for sale was permanent, and accordingly, recognized a realized loss of approximately $14,000 in fiscal 2002. Further, Canal had recognized a realized loss of approximately $47,000 on this investment in fiscal 2001. Other Expense Other expense of $113,000 for 2002 decreased $10,000 (8.1%)from $123,000 in fiscal 2001. Other expenses are primarily related to the administration of the company's pension plans. Related Party Transactions Interest Expense Related Party - At October 31, 2003, 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, 2006. Canal has paid interest expense on these notes of $280,000, $267,000 and $257,000 for the years ended October 31, 2003, 2002 and 2001, respectively. As of October 31, 2003, the balance due under these notes was $2,767,000 all of which is classified as long-term debt related party. Lease Commitments - In February 1999 Canal, together with two other related entities, amended its lease for commercial office space in New York City, which space serves as its headquarters operations. The new lease is for a period of 128 months expiring in October 2009. Canal's portion of the new space is approximately 1,000 square feet and Canal is responsible for 25% of the lease expense. However, each of the three entities that are parties to this lease are jointly and severally responsible for the payments required under the lease. At October 31, 2003 the security deposit related to this lease was approximately $260,000 of which Canal's representative share would be approximately $122,000. In June 2002, Canal sublet for a one year period substantially all of its New York office space at a rate of $7,000 per month. The lease is for a period of one year with a one year renewal option (which was exercised by the 20 tenant). If the tenant continues to sublet this space, then Canal's rent expense for fiscal 2004 will be approximately $18,000. At October 31, 2003, Canal was current under its obligations under this lease. However, the group as a whole was approximately $85,000 in arrears on its rental payments. As discussed above, Canal's share of the office rent is approximately 25%. However, should the remaining two co-tenants default on their obligations, the balance of rental payments due under the lease would be approximately $2.5 million. Contractual Payments due by Period (in 000's) Obligations Total Less than 1 to 3 3 to 5 More than 1 year years years 5 years ----- --------- ------ ------ --------- Long-term debt $ 2,667 $ 0 $2,667 $ 0 $ 0 Operating leases* $ 615 $ 104 $ 312 $ 199 $ 0 * For total rent due under this operating lease see Note 9. 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 in eight of the last ten years and is obligated to continue making substantial annual contributions to its defined benefit pension plan. In addition, Canal has joint and several liability on its lease for commercial space in New York City. At October 31, 2003, Canal was current under its obligation, however, the group was approximately $85,000 in arrears on this lease (see Note 9). The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Note 1). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001. The purchasers of these notes included certain entities controlled by the Company's Chairman, the Company's Chief Executive Officer and members of their families. The notes carried interest at the highest of four variable rates, determined on a quarterly basis. These notes, among other things, prohibit Canal from becoming an investment company as defined by the Investment Company Act of 1940; require Canal to maintain minimum net worth; restrict Canal's ability to pay cash dividends or repurchase stock; require principal prepayments to be made only out of the proceeds from the sale of certain assets, and required the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. 21 On July 29, 1999 the above notes were amended to extend the maturity date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the additional interest due to the holders of the notes shall become current and be treated as principal due under the notes; and to have certain of the holders loan the Company $525,000 in additional financing, the proceeds of which was used to repay in full certain of the holders of the notes. As a result, the notes are now held in total by the Company's Chief Executive Officer and members of his family. On January 10, 2000, the above notes were further amended to have the noteholders loan the Company $1,725,000 in additional financing, the proceeds of which was used to repay in full all of the Company's outstanding non related party long-term debt. On October 8, 2002, the above notes were amended to extend the maturity date to May 15, 2006. As of October 31, 2003, the balance due under these notes was $2,767,000, all of which is classified as long-term debt-related party. Cash and cash equivalents of $14,000 at October 31, 2003 decreased $125,000 or 89.8% from $139,000 at October 31, 2002. Net cash used by operations in fiscal 2003 was $0.4 million. Substantially all of the 2003 net proceeds from the sale of real estate of $0.2 million was used in operations. During fiscal 2003 Canal increased the balance of its current liabilities by a total of $0.2 million. At October 31, 2003 the Company's current liabilities exceed current assets by $0.3 million (which was an increase of $0.2 million) as compared to October 31, 2002 when the Company's current liabilities exceeded current assets by $0.1 million, which represented a decrease of $0.6 million from 2001. The fiscal 2003 change in the Company's liquidity is due primarily to the increases in outstanding accounts payable and accrued expenses. The only required principal repayments under Canal's debt agreements for fiscal 2004 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 that its income from operations combined with its cost cutting program in itself will be sufficient to fund operating cash requirements. 22 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain quarterly financial data for the eight quarters ended October 31, 2003. This quarterly information is unaudited, has been prepared on the same basis as the annual financial statements, and, our opinion, reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the information for periods presented. QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 2003 2003 2003 2003 -------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES $1,458 $1,391 $825 $1,086 ======= ======= ======= ======= NET INCOME (LOSS) $186 $3 ($227) ($499) ======= ======= ======= ======= NET INCOME (LOSS) PER COMMON SHARE: - BASIC $0.03 ($0.01) ($0.06) ($0.13) ======= ======= ======= ======= - DILUTED $0.03 ($0.01) ($0.06) ($0.13) ======= ======= ======= ======= WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 ======= ======= ======= ======= - DILUTED 4,327 4,327 4,327 4,327 ======= ======= ======= ======= QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 2002 2002 2002 2002 -------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES $1,439 $1,434 $1,283 $1,257 ======= ======= ======= ======= NET INCOME (LOSS) $377 ($29) $83 ($5) ======= ======= ======= ======= NET INCOME (LOSS) PER COMMON SHARE: - BASIC $0.07 ($0.02) $0.04 ($0.01) ======= ======= ======= ======= - DILUTED $0.07 ($0.02) $0.04 ($0.01) ======= ======= ======= ======= WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 ======= ======= ======= ======= - DILUTED 4,327 4,327 4,327 4,327 ======= ======= ======= ======= 23 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. The Securities and Exchange Commission's rule related to market risk disclosure requires that we describe and quantify our potential losses from market risk sensitive instruments attributable to reasonably possible market changes. Market risk sensitive instruments include all financial or commodity instruments and other financial instruments (such as investments and debt) that are sensitive to future changes in interest rates, currency exchange rates, commodity prices or other market factors. We are not exposed to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold derivative financial instruments nor do we hold securities for trading or speculative purposes. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes. At October 31, 2003, the following long-term debt-related party financial instruments are sensitive to changes in interest rates by expected maturity dates: As of Fixed rate Average Fair October 31, ($ US) Interest Rate Value ----------- ---------- ---1---------- ----- 2004 $ 0 N/A 2005 0 N/A 2006 2,767 10% 2007 0 N/A 2008 0 N/A Thereafter 0 N/A ------- Total $ 2,767 N/A (A) ------- ------- (A) Long-term debt related party (See Note 6): it is not practicable to estimate the fair value of the related party debt (See Note 18). ITEM 8. Financial Statements and Supplemental Data The financial statements filed as part of this Annual Report are identified in the Index to Consolidated Financial Statements on page F-1 hereto and are set forth on pages F-2 through F-31 included in Item 15(A) of the report. ITEM 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None. 24 ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Annual Report. Based on such evaluation, such officers have concluded that, as of such date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Canal Capital Corporation (and its consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act. Changes in Internal Control over Financial Reporting. There were no significant changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. 25 PART III ITEM 10. Directors and Executive Officers of the Registrant The company's Board of Directors is comprised of three non-independent directors. As such, the creation of numerous independent committees is not feasible. However, the Board of Directors has designated an Executive Committee consisting of Messrs. Edelman and Schultz. The Board of Directors has delegated to the Executive Committee general authority with respect to most matters that would otherwise be considered by the full Board. During fiscal 2003 the Board of Directors held one meeting, and the Executive Committee held three meetings, all of which were attended by both Mr. Edelman and Mr. Schultz. The following information with respect to the principal occupation or employment of each director and executive officer and the name and principal business of the Company or other organization in which such occupation or employment is carried on, and in regard to other affiliations and business experience during the past five years, has been furnished to the Company by the respective directors. Asher B. Edelman, age 64, has been Chairman of the Board since September 1991 and prior thereto Vice Chairman of the Board and Chairman of the Executive Committee since February, 1985. Mr. Edelman has been a Director, Vice-Chairman of the Board, and Chairman of the Executive Committee of The CattleSale Company formerly known as Dynacore Holdings Corporation, ("CattleSale") since March 1985. In December 2003 Mr. Edelman resigned his position as Vice-Chairman of CattleSale. Michael E. Schultz, age 67, has been President and Chief Executive Officer since September 1991 and a Director since 1985; and had been a partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz until December 31, 1994. Gerald N. Agranoff, age 57, has been a Director since 1984. Mr. Agranoff is currently Vice President, General Counsel and Corporate Secretary of CattleSale and has been a Director of CattleSale since 1991. Mr. Agranoff has been a General Partner of Edelman Securities Company L.P. (formerly Arbitrage Securities Company) and Plaza Securities Company for more than five years. Mr. Agranoff is a director of Bull Run Corporation, Atlantic Gulf Communities and The American Energy Group, Ltd.. Mr. Agranoff has also been the General Counsel to Edelman Securities Company L.P. and Plaza Securities Company for more than five years. Reginald Schauder, age 54, has been Vice President, Chief Financial Officer and Treasurer since January 1989 and assumed responsibility as Secretary of the Company in September 1995. Mr. Schauder was corporate controller from July 1985 to January 1989. 26 There are no family relationships between any of the aforementioned executive officers of the Registrant and such executive officers were elected to serve for a term of one year or until the election and qualification of their respective successors. ITEM 11. Executive Compensation The following table summarizes the compensation of the Company's Chief Executive Officer and the other two executive officers of the Company whose salary for fiscal 2003 exceeded $100,000. SUMMARY COMPENSATION TABLE - Annual Compensation Name and Principal Position Year Salary ------------------ ---- --------- Michael E. Schultz 2003 $ 175,000 President and Chief 2002 $ 175,000 Executive Officer 2001 $ 175,000 Asher B. Edelman 2003 $ 175,000 Chairman of the Board 2002 $ 175,000 and Executive Committee 2001 $ 175,000 Reginald Schauder 2003 $ 115,000 Vice President, Chief 2002 $ 108,700 Financial Officer 2001 $ 108,700 Treasurer and Secretary In order to help ease the stress on the Company's cash flow, Messrs. Edelman and Schultz each agreed to defer $55,000 of their salaries effective June 1, 2001. Additionally, effective November 1, 2002 Mr. Schauder agreed to defer $6,300 of his salary. These amounts are accrued by the Company with payments made from time to time as cash becomes available to the Company. At October 31, 2003, the total liability under these agreements was approximately $60,000. The Company pays certain expenses related to Mr. Edelman's European offices as well as his travel expenses between Europe and the U.S. These expenses totaled $18,000, $41,000 and $24,000 for fiscal years 2003, 2002 and 2001, respectively. Retirement Plans The Canal Capital Corporation Retirement Plan (the "Retirement Plan") provides benefits to eligible employees of the Company and its subsidiaries and affiliates. Directors who are not employees are not eligible to participate in the Retirement Plan. The Retirement Plan is administered by the Company. All Company contributions under the Retirement Plan were deposited with an insurance company and invested in a group annuity contract through May 30, 1985. Thereafter, all Company contributions have been held 27 in trust under a Trust Agreement between the Company and the Executive Committee of the Board of Directors, as trustee. Contributions to the Retirement Plan are determined on an actuarial basis, without individual allocation. In October 1991, each of three executive officers of the Company voluntarily withdrew from participation in the Retirement Plan. As a result of prior service, Messrs. Edelman and Schauder have deferred annual accumulated benefits of approximately $1,300 and $600, respectively, as of October 31, 2003. Mr. Schultz has no benefit under the Retirement Plan. For further information on the Retirement Plan see Note 9. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Value Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Name Options at Fiscal Year End At Fiscal Year End ---- -------------------------- -------------------- Michael E. Schultz 0 $ -0- Asher B. Edelman 0 $ -0- Reginald Schauder 0 $ -0- COMPENSATION OF DIRECTORS Fees and Expenses; Other Benefits Directors who are not officers of the Company do not receive cash compensation for service as Directors. Mr. Agranoff was granted 25,000 options of the Company under the 1985 Directors Stock Option Plan, as amended, in lieu of an annual retainer and per meeting fees. The options were granted December 1991 and expired (unexercised) in December 2001. Directors are reimbursed for expenses incurred in attending Board and Committee meetings, including those for travel, food and lodging. Stock Options for Directors The Company maintains an option plan for the benefit of directors of the Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"), which was approved by the stockholders of the Company on March 12, 1986. Pursuant to the 1985 Plan, a maximum of 264,000 shares of common stock, $0.01 par value per share, of the Company have been reserved for issuance to directors and members of the Executive Committee of the Company and its subsidiaries. 28 Options granted under the 1985 Plan are non-qualified stock options and have an exercise price equal to 100% of fair market value of the shares on the date of grant. The options may be exercised no earlier than one year from the date of grant and no later than ten years after the date of grant. Under the 1985 Plan, options covering 22,000 shares are automatically granted to each new director upon the effective date of his election to office and options covering 5,500 shares are automatically granted to each new member of the Executive Committee upon the effective date of his appointment to office. In addition, the 1985 Plan was amended on December 18, 1991 to provide an automatic grant of options covering 25,000 shares to each current and new director who is not an employee of the Company including Mr. Agranoff (which options expired in December 2001). The 1985 Plan is administered by the Board of Directors of the Company. During the 2003 fiscal year, no options under the 1985 plan were granted and no options previously granted were exercised. At October 31, 2003, there were no options outstanding under the 1985 Plan. Compensation Committee - Interlocks and Insider Participation The Board of Directors (comprised of Asher B. Edelman, Chairman of the Board and Chairman of the Executive Committee, Michael E. Schultz, President and Chief Executive Officer and Gerald N. Agranoff) determines the compensation of the Chief Executive Officer and the Company's other executive officers and administers the Company's 1984 Stock Option Plan and 1985 Stock Option Plan for Directors. In connection with the Company's investment activities, the Executive Committee of the Board of Directors, through Mr. Edelman, has the authority to invest funds of the Company in securities of other companies. Certain funds of the Company have been invested in the securities of other companies in which Mr. Edelman, other directors of the Company or their affiliates are directors or officers, or in which one or more of such persons may also have invested. Since November 1, 1993, such companies included The CattleSale Company (formerly known as Dynacore Holdings Corporation). The Company has filed with the SEC Schedules 13D jointly with Plaza, Mr. Edelman, Edelman Management, Edelman Limited Partnership, certain investment partnerships of which Mr. Edelman is sole or controlling general partner, certain of the companies referred to in the preceding sentence and other persons, indicating that the filing parties constitute groups for purposes of such filings with respect to the acquisition of securities in the companies referred to in the preceding sentence. 29 ITEM 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters To the knowledge of the Company, the only beneficial owners of 5% or more of the voting stock of the Company (other than those listed below under "Securities Owned by Management") as of January 15, 2004 were: SECURITIES BENEFICIALLY OWNED No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock ---- ---------------------- ---------------- Asher B. Edelman 1,909,605 (c) 44.13 Michael E. Schultz 58,835 (c) 1.36 William G. Walters 234,440 (b) 5.42 (a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each individual referred to in the above table has the sole power to direct the voting and disposition of the shares shown. (b) The number reported herein for Mr. Walters includes 117,220 shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co., L.P., of which Mr. Walters is Chief Executive Officer. Mr. Walters has sole power to vote and dispose of the shares described herein. (c) For additional information about beneficial ownership see "Securities Owned by Management" below. SECURITIES OWNED BY MANAGEMENT The following table sets forth certain information as of January 15, 2004, with respect to the beneficial ownership of the Company's Common Stock with respect to all persons who are directors, each of the executives named in the Executive Compensation Table and by all directors and officers as of the most practical date. Unless otherwise indicated, the percentage of stock owned constitutes less than one percent of the outstanding Common Stock and the beneficial ownership for each person consists of sole voting and sole investment power. 30 No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock ---- ---------------------- --------------- Gerald Agranoff 0 0.00 Asher B. Edelman 1,909,605 (b)(c) 44.13 Reginald Schauder 100 (d) 0.01 Michael E. Schultz 58,835 (e)(f) 1.36 --------- All Directors and Officers as a group (4 persons) 1,968,540 45.50 ========= (a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each director and officer referred to in the above table has the sole power to direct the voting and disposition of the shares shown, except as otherwise set forth in footnotes (c), (d) and (f) below. (b) The number reported herein for Mr. Edelman includes 31,300 shares held in Mr. Edelman's retirement plan, 1,017,220 shares owned by A.B. Edelman Limited Partnership ("Edelman Limited Partnership"), of which Mr. Edelman is the sole general partner, 590,186 shares of common stock owned by the Edelman Family Partnership, L.P. ("Edelman Family Partnership"), of which Mr. Edelman is the general partner, 43,830 shares of common stock owned by Edelman Value Partners, L.P. ("Value Partners"), of which Mr. Edelman is the sole stockholder of the general partner, 26,620 shares of common stock held by Canal Capital Corporation Retirement Plan ("Canal Retirement Plan"), of which Mr. Edelman serves as a trustee, 8,400 shares owned by Aile Blanche, Inc., of which Mr. Edelman is the sole stockholder and 3,399 shares owned by Felicitas Partners, L.P. ("Felicitas"), the general partner of which is Citas Partners ("Citas") of which Mr. Edelman is the controlling general partner. Edelman Limited Partnership has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the sole general partner of Edelman Limited Partnership. Edelman Family Partnership has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the general partner. Value Partners has shared power to vote and dispose of the shares owned by it. The power to dispose of such shares is exercisable by A. B. Edelman Management Company, Inc., a corporation controlled by Mr. Edelman as the sole stockholder. Canal Retirement Plan has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as trustee. 31 Aile Blanche, Inc. has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as President. Felicitas has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the controlling general partner of Citas. Additionally, the number reported herein for Mr. Edelman includes 188,650 shares of common stock held in three Uniform Gifts to Minors Act accounts for the benefit of Mr. Edelman's children of which Mr. Edelman is the custodian. (c) The number reported herein for Mr. Edelman excludes 242,000 shares of common stock owned by Mr. Edelman's mother and 11,100 shares of common stock held in a trust for Mr. Edelman's son, as to which Mr. Edelman expressly disclaims beneficial ownership. (d) Represents 100 shares owned directly. (e) Represents 58,835 shares owned directly. (f) The number reported herein for Mr. Schultz excludes 26,620 shares of common stock held by the Canal Capital Corporation Retirement Plan of which Mr. Schultz serves as a trustee, as to which Mr. Schultz expressly disclaims beneficial ownership. ITEM 13. Certain Relationships and Related Transactions See: Item 11 "Compensation Committee Interlocks and Insider Participation" ITEM 14. Principal Accounting Fees and Services The following fees were billed to us by Todman & Co., CPAs, PC during fiscal 2003 and 2002: 2003 2002 ---- ---- Audit fees $ 55,000 $ 54,000 Tax fees 0 0 All other fees 3,000 2,400 -------- -------- $ 58,000 $ 56,400 ======== ======== Audit-related fees include statutory audits and Sarbanes-Oxley related consultation and assistance. Tax fees and all other fees primarily consist of tax and advisory services. The Board of Directors of Canal has determined that Todman & Co., CPAs, PC provision of non-audit services is compatible with maintaining the independence of Todman & Co., CPAs PC. 32 PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements and Notes See accompanying index to consolidated financial statements. 2. Schedules and Supplementary Note None 3. Exhibits See accompanying index to exhibits. (b) 1. Reports on Form 8-K None 33 FORM 10-K - ITEM 15(a)(3) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS (a) 3. Exhibits - The following exhibits required by Item 601 of Regulations S-K are filed as part of this report. For convenience of reference, the exhibits are listed according to the numbers appearing in Table I to Item 601 of Regulation S-K. Each exhibit which is incorporated by reference and the document in which such exhibit was originally filed are indicated in parentheses immediately following the description of such exhibit. Exhibit No. ----------- 3(a) Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Registrant's Registration Statement on Form 10 filed with the Securities and Exchange Commission on May 3, 1984 (the "Form 10") and incorporated herein by reference). 3(b) Bylaws (filed as Exhibit 3(b) to the Registrant's Registration Statement on Form 10 and incorporated herein by reference). 3(c) Certificate of Amendment of the Restated Certificate of Incorporation dated September 22, 1988 (filed as Exhibit 3(c) to the Registrant's Form 10-K filed January 29, 1989 and incorporated herein by reference). 10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the Registrant's Proxy Statement dated January 31, 1985, relating to the annual meeting of stockholders held March 18, 1985, which exhibit is incorporated herein by reference). 10(b) Form of Incentive Stock Option Agreement (filed as Exhibit 10(b) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). 10(c) Form of Nonstatutory Stock Option Agreement (filed as Exhibit 10(c) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). 10(d) 1985 Directors' Stock Option Plan (1) (See Exhibit A included in the Registrant's Proxy Statement dated January 31, 1986, relating to the annual meeting of stockholders held March 12, 1986, which exhibit is incorporated herein by reference). 10(e) Form of Directors' Stock Option Agreement (filed as Exhibit 10(ab) to the Registrant's Form 10-K filed January 29, 1986 and incorporated herein by reference). 34 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. ----------- 10(f) Agreement of Lease dated January 14, 1994 by and between The Equitable Life Assurance Society of the United States, Intelogic Trace Incorporated, Datapoint Corporation and Canal Capital Corporation (filed as Exhibit 10 (bp) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(g) Stock Pledge and Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, SY Trading Corporation and CCC Lending Corporation (filed as Exhibit 10 (ai) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(h) Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, Canal Galleries Corporation, Canal Arts Corporation and CCC Lending Corporation (filed as Exhibit 10 (an) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(i) $1,000,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz and Canal Capital Corporation (filed as Exhibit 10 (ao) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(j) $242,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz Defined Benefit Trust and Canal Capital Corporation (filed as Exhibit 10 (ap) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(k) $229,000 Promissory Note dated January 8, 1998 by and between Lora K. Schultz and Canal Capital Corporation (filed as Exhibit 10 (aq) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(l) $186,000 Promissory Note dated January 8, 1998 by and between Roger A. Schultz Pension Plan and Canal Capital Corporation (filed as Exhibit 10 (ar) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(m) $143,000 Promissory Note dated January 8, 1998 by and between Richard A. Schultz and Canal Capital Corporation (filed as Exhibit 10 (as) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference). 35 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. ----------- 22 Subsidiaries of the registrant. 31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 36 INVESTOR INFORMATION Annual Meeting Corporate Headquarters The Annual Meeting of Shareholders 7l7 Fifth Avenue 15th floor of Canal Capital Corporation will New York, NY 10022 be held in our offices at 717 Fifth Avenue, 15th floor, New York, NY, on a date to be announced. Stock Certificates The Board of Directors of Canal Inquiries regarding change of Capital Corporation urges all name or address, or to replace shareholders to vote their shares lost certificates should be made in person or by proxy and thus directly to American Stock participate in the decisions that Transfer and Trust Co., 59 Maiden will be made at the annual meeting. Lane, New York, NY 10007 or telephone (718) 921-8200 Stock Listing Auditors Canal Capital Corporation common stock Todman & Co., CPAs, P.C. is traded on the over-the-counter 120 Broadway market through the "pink sheets". New York, NY 10271 Investment Analyst Inquiries General Counsel Analyst inquiries are welcome. Proskauer Rose LLP 1585 Broadway Phone or write: Michael E. Schultz, New York, NY 10036 President at (212) 826-6040 (212) 969-3000 37 FORM 10-K -- ITEM 15(a)(1) and (2) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following documents are filed as part of this report: (a) 1. Financial Statements -- Report of Independent Auditors .................................... F-2 Consolidated Balance Sheets as of October 31, 2003 and 2002 ...................................................... F-3 Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended October 31, 2003, 2002 and 2001 ................................................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended October 31, 2003, 2002 and 2001 ....................................................... F-7 Consolidated Statements of Cash Flows for the years ended October 31, 2003, 2002 and 2001 .................... F-8 Notes to Consolidated Financial Statements ........................ F-9 F-1 INDEPENDENT AUDITORS REPORT To the Stockholders of Canal Capital Corporation: We have audited the accompanying consolidated balance sheets of Canal Capital Corporation (a Delaware corporation) and Subsidiaries (the "Company") as of October 31, 2003 and 2002, and the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders' equity, and cash flows for each of the three years in the period ended October 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Canal Capital Corporation and Subsidiaries as of October 31, 2003 and 2002, and the results of their operations and its cash flows for each of the three years in the period ended October 31, 2003, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 and 9 to the financial statements, the Company has suffered recurring losses from operations in eight of the last ten years, is obligated to continue making substantial annual contributions to its defined benefit pension plan and has joint and several liability on its lease for commercial space. All of these matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. /S/ Todman & Co., CPAs,P.C. --------------------------- New York, New York TODMAN & CO., CPAs, P.C. January 21, 2004 Certified Public Accountants (N.Y.) F-2 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2003 AND 2002
2003 2002 ---- ---- ASSETS ASSETS: CASH AND CASH EQUIVALENTS $ 14,191 $ 139,057 NOTES AND ACCOUNTS RECEIVABLE, NET OF AN ALLOWANCE FOR DOUBTFUL ACCOUNTS OF ZERO AT BOTH OCTOBER 31, 2003 AND 2002 131,836 125,227 ART INVENTORY, NET OF A VALUATION ALLOWANCE OF $ 1,157,400 AND $1,325,000 AT OCTOBER 31, 2003 AND 2002, RESPECTIVELY 250,000 250,000 STOCKYARDS INVENTORY 11,412 13,017 INVESTMENTS 0 7,405 PREPAID EXPENSES 69,168 100,799 ---------- ---------- TOTAL CURRENT ASSETS 476,607 635,505 ---------- ---------- NON-CURRENT ASSETS: PROPERTY ON OPERATING LEASES, NET OF ACCUMULATED DEPRECIATION OF $ 1,199,723 AND $ 1,058,219 AT OCTOBER 31, 2003 AND 2002, RESPECTIVELY 2,874,457 3,336,744 ---------- ---------- PROPERTY USED IN STOCKYARD OPERATIONS, NET OF ACCUMULATED DEPRECIATION OF $ 130,041 AND $ 285,223 AT OCTOBER 31, 2003 AND 2002, RESPECTIVELY 1,136,056 1,176,027 ---------- ---------- ART INVENTORY NON-CURRENT, NET OF A VALUATION ALLOWANCE OF $ 617,350 AND $ 858,650 AT OCTOBER 31, 2003 AND 2002, RESPECTIVELY 459,671 622,388 ---------- ---------- OTHER ASSETS: PROPERTY HELD FOR DEVELOPMENT OR RESALE 899,679 517,939 RESTRICTED CASH - TRANSIT INSURANCE 58,729 0 DEFERRED LEASING AND FINANCING COSTS 16,006 13,366 DEPOSITS AND OTHER 221,031 210,902 ---------- ---------- 1,195,445 742,207 ---------- ---------- $6,142,236 $6,512,871 ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2003 AND 2002
2003 2002 ---- ---- LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES ..... $ 755,110 $ 574,974 INCOME TAXES PAYABLE ............................ 10,000 9,892 ------------ ------------ TOTAL CURRENT LIABILITIES ..................... 765,110 584,866 ------------ ------------ NON-CURRENT LIABILITIES: LONG-TERM PENSION LIABILITY ..................... 907,573 829,739 REAL ESTATE TAXES PAYABLE ....................... 300,000 451,958 ------------ ------------ TOTAL NON-CURRENT LIABILITIES ................. 1,207,573 1,281,697 ------------ ------------ LONG-TERM DEBT, RELATED PARTY .......................... 2,767,000 2,667,000 ------------ ------------ STOCKHOLDERS' EQUITY: PREFERRED STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,443,979 AND 5,647,993 SHARES ISSUED AND OUTSTANDING AT OCTOBER 31, 2003 AND 2002, RESPECTIVELY AND AGGREGATE LIQUIDATION PREFERENCE OF $10.00 PER SHARE FOR $ 54,439,790 AND $ 56,479,930 AT OCTOBER 31, 2003 AND 2002, RESPECTIVELY ...... 54,440 56,480 COMMON STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,313,794 SHARES ISSUED & 4,326,929 SHARES OUTSTANDING AT OCTOBER 31, 2003 AND 2002, RESPECTIVELY ...... 53,138 53,138 ADDITIONAL PAID-IN CAPITAL ........................... 28,018,997 27,958,498 ACCUMULATED DEFICIT .................................. (13,404,934) (12,709,864) 986,865 SHARES OF COMMON STOCK HELD IN TREASURY, AT COST ..................... (11,003,545) (11,003,545) COMPREHENSIVE INCOME: PENSION VALUATION RESERVE ......................... (2,315,543) (2,375,399) ------------ ------------ 1,402,553 1,979,308 ------------ ------------ $ 6,142,236 $ 6,512,871 ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
2003 2002 2001 ---- ---- ---- REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE $ 428,436 $ 818,671 $ 426,240 EXCHANGE BUILDING RENT 436,573 486,678 430,175 OUTSIDE REAL ESTATE RENT 508,211 546,151 586,219 OTHER INCOME 130 0 1,000 ----------- ----------- ----------- 1,373,350 1,851,500 1,443,634 ----------- ----------- ----------- REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 278,145 363,374 166,108 LABOR, OPERATING AND MAINTENANCE 406,650 447,790 427,566 DEPRECIATION AND AMORTIZATION 144,988 132,676 127,859 TAXES OTHER THAN INCOME TAXES 248,800 119,200 151,700 GENERAL AND ADMINISTRATIVE 52,253 45,903 126,123 ----------- ----------- ----------- 1,130,836 1,108,943 999,356 ----------- ----------- ----------- INCOME FROM REAL ESTATE OPERATIONS 242,514 742,557 444,278 ----------- ----------- ----------- STOCKYARD OPERATIONS: STOCKYARD REVENUES: YARD HANDLING AND AUCTION 3,031,552 3,181,874 3,358,554 FEED AND BEDDING INCOME 186,130 198,128 249,154 RENTAL INCOME 3,399 5,298 4,521 OTHER INCOME 165,876 176,000 182,248 ----------- ----------- ----------- 3,386,957 3,561,300 3,794,477 ----------- ----------- ----------- STOCKYARD EXPENSES: LABOR AND RELATED COSTS 1,328,755 1,437,778 1,542,324 OTHER OPERATING AND MAINTENANCE 755,836 832,552 889,037 FEED AND BEDDING EXPENSE 158,939 162,865 192,513 DEPRECIATION AND AMORTIZATION 19,363 24,352 26,891 TAXES OTHER THAN INCOME TAXES 172,990 216,031 246,760 GENERAL AND ADMINISTRATIVE 366,358 349,391 523,133 ----------- ----------- ----------- 2,802,241 3,022,969 3,420,658 ----------- ----------- ----------- INCOME FROM STOCKYARD OPERATIONS 584,716 538,331 373,819 ----------- ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSE (1,079,670) (1,134,994) (1,274,529) ----------- ----------- ----------- (LOSS) INCOME FROM OPERATIONS (252,440) 145,894 (456,432) ----------- ----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 Continued ...
2003 2002 2001 ---- ---- ---- OTHER (EXPENSES) INCOME: INTEREST AND OTHER INCOME 25,207 467,341 130,737 INTEREST EXPENSE-RELATED PARTY (279,814) (266,700) (257,022) (LOSS) INCOME FROM ART SALES (7,987) 206,669 (19,351) REALIZED LOSS ON INVESTMENTS (7,405) (13,987) (47,249) OTHER EXPENSE (14,902) (113,227) (123,230) ----------- ----------- ----------- (284,901) 280,096 (316,115) ----------- ----------- ----------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (537,341) 425,990 (772,547) PROVISION FOR INCOME TAXES 0 0 0 ----------- ----------- ----------- NET (LOSS) INCOME (537,341) 425,990 (772,547) OTHER COMPREHENSIVE (LOSS) INCOME: MINIMUM PENSION LIABILITY ADJUSTMENT 59,856 (209,954) (195,824) ----------- ----------- ----------- COMPREHENSIVE (LOSS) INCOME $ (477,485) $ 216,036 $ (968,371) =========== =========== =========== NET (LOSS) INCOME PER COMMON SHARE: - BASIC $ (0.16) $ 0.07 $ (0.25) - DILUTED $ (0.16) $ 0.07 $ (0.25) WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,326,929 4,326,929 4,326,929 - DILUTED 4,326,929 4,326,929 4,326,929
SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 2003, 2002, AND 2001 COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, NOVEMBER 1, 2000 5,313,794 $ 53,138 4,407,614 $ 44,076 NET (LOSS) 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 590,832 5,908 MINIMUM PEN. LIAB. ADJ 0 0 0 0 ----------------------- ------------------------ BALANCE, OCTOBER 31, 2001 5,313,794 $ 53,138 4,998,446 $ 49,984 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 649,547 6,496 MINIMUM PEN. LIAB. ADJ 0 0 0 0 ----------------------- ------------------------ BALANCE, OCTOBER 31, 2002 5,313,794 $ 53,138 5,647,993 $ 56,480 NET (LOSS) 0 0 0 0 PREFERRED STOCK REPURCHASE 0 0 (992,255) (9,922) PREFERRED STOCK DIVIDEND 0 0 788,241 7,882 MINIMUM PEN. LIAB. ADJ 0 0 0 0 ----------------------- ------------------------ BALANCE, OCTOBER 31, 2003 5,313,794 $ 53,138 5,443,979 $ 54,440 ======================= ========================
ADDITIONAL TREASURY PAID-IN ACCUMULATED COMPREHENSIVE STOCK, CAPITAL DEFICIT (LOSS)INCOME AT COST BALANCE, NOVEMBER 1, 2000 $ 27,545,053 ($11,945,307) ($ 1,969,621) ($11,003,545) NET (LOSS) 0 (772,547) 0 0 PREFERRED STOCK DIVIDEND 303,508 (301,520) 0 0 MINIMUM PEN. LIAB. ADJ 0 0 (195,824) 0 ------------ ------------ ------------ ------------ BALANCE, OCTOBER 31, 2001 $ 27,848,561 ($13,019,374) ($ 2,165,445) ($11,003,545) NET INCOME 0 425,990 0 0 PREFERRED STOCK DIVIDEND 109,937 (116,480) 0 0 MINIMUM PEN. LIAB. ADJ 0 0 (209,954) 0 ------------ ------------ ------------ ------------ BALANCE, OCTOBER 31, 2002 $ 27,958,498 ($12,709,864) ($ 2,375,399) ($11,003,545) NET (LOSS) 0 (537,341) 0 0 PREFERRED STOCK REPURCHASE (89,303) 0 0 0 PREFERRED STOCK DIVIDEND 149,802 (157,729) 0 0 MINIMUM PEN. LIAB. ADJ 0 0 59,856 0 ------------ ------------ ------------ ------------ BALANCE, OCTOBER 31, 2003 $ 28,018,997 ($13,404,934) ($ 2,315,543) ($11,003,545) ============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENT F-7 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001 2003 2002 2001 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: NET (LOSS) INCOME $(537,341) $ 425,990 $(772,547) --------- --------- --------- ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO NET CASH (USED) BY OPERATING ACTIVITIES: DEPRECIATION AND AMORTIZATION 167,052 170,352 183,576 GAIN ON SALES OF REAL ESTATE (150,291) (455,297) (260,132) VALUATION RESERVE - ART INVENTORY (408,900) (508,500) (35,800) REALIZED LOSS ON INVESTMENTS 7,405 13,987 47,249 REALIZED LOSS ON ART WRITE OFF 41,517 0 0 GAIN ON SIOUX CITY STOCKYARD AUCTION 0 (54,804) 0 CHANGES IN ASSETS AND LIABILITIES: NOTES AND ACCOUNTS RECEIVABLES, NET (6,609) 2,544 608,617 ART INVENTORY, NET 162,717 311,351 (22,882) PREPAID EXPENSES AND OTHER, NET 275,714 215,612 (254,745) PAYABLES AND ACCRUED EXPENSES, NET 106,120 (681,523) 332,983 --------- --------- --------- NET CASH (USED) BY OPERATING ACTIVITIES (342,616) (560,288) (173,681) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF REAL ESTATE 428,436 818,671 426,240 PROCEEDS FROM SIOUX CITY STOCKYARD AUCTION 0 114,307 0 CAPITAL EXPENDITURES (211,460) (247,313) (471,148) --------- --------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 216,976 685,665 (44,908) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM LONG-TERM DEBT-RELATED PARTIES 100,000 0 145,000 PREFERRED STOCK REPURCHASE (99,226) 0 0 --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 774 0 145,000 --------- --------- --------- NET (DECREASE ) INCREASE IN CASH AND CASH EQUIVALENTS (124,866) 125,377 (73,589) CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 139,057 13,680 87,269 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14,191 $ 139,057 $ 13,680 ========= ========= ========= NOTE: IN FISCAL 2003, 2002 AND 2001,$ 157,730, $ 116,480 AND $ 301,520, RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE OF 740,241, 649,547 AND 590,832, RESPECTIVELY, OF SHARES OF PREFERRED STOCK. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. 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. Canal was a wholly-owned subsidiary of Canal-Randolph Corporation until June 1, 1984, when Canal-Randolph Corporation distributed to its stockholders all of the outstanding shares of Canal's common stock, under a plan of complete liquidation. Canal is engaged in two distinct businesses - real estate and stockyard operations. Real Estate Operations - Canal's real estate properties located in five Midwest states are primarily associated with its current and former agribusiness related operations. Each property is adjacent to a stockyards operation (two of which are operated by the company) and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, truck stops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from rental income from its Exchange Buildings, lease income from land and structures leased to various commercial and retail enterprises and proceeds from the sale of real estate properties. 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. 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 F-9 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 2004. 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. While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in eight of the last ten years, is obligated to continue making substantial annual contributions to its defined benefit pension plan. In addition, Canal has joint and several liability on its lease for commercial space in New York City. At October 3, 2003, Canal was current under its obligation, however, the group was approximately $85,000 in arrears on this lease (see Note 9). 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. F-10 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) Principles of Consolidation -- The consolidated financial statements include the accounts of Canal Capital Corporation ("Canal") and its wholly- owned subsidiaries ("the Company"). All material intercompany balances and transactions have been eliminated in consolidation. B) Investments Available for Sale -- Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal's officers and directors also serve as officers and/or directors of this company. This investment (in which Canal's ownership interest is approximately 1%) is carried at market value and the realized gains or losses, if any, are recognized in operating results. Any unrealized gains or losses are reflected in Stockholders Equity (see Note 3). Investments in Joint Ventures -- Investments in which ownership interest range from 20% to 50% or less owned joint ventures are accounted for under the equity method. These joint ventures are not, in the aggregate, material in relation to the financial position or results of operations of Canal. The carrying amount of such investments was $111,000 and $101,000 at October 31, 2003 and 2002, and is included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 2003, 2002 and 2001 were not material to financial statement presentation and were therefore included in other income from real estate operations. C) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new leases and long-term financing are deferred and amortized over the terms of the related leases or debt agreements, as applicable. D) Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment. Property held for Development or Resale -- Property held for development or resale consist of approximately 71 acres located in the midwest of undeveloped land not currently utilized for corporate purposes nor included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value. F-11 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. (See Note 19). E) 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. F) 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. Net realizable value is determined in part by independent appraisal. Independent appraisals covered approximately 31% and 22% of the inventory value at October 31, 2003 and 2002, respectively. The remaining 69% and 78% at October 31, 2003 and 2002, respectively was estimated by management based in part on the independent appraisals done. However, because of the nature of art inventory, such determination is very subjective and, therefore, the estimated values could differ significantly from the amount ultimately realized. The cost of art is generally specified on the purchase invoice. When individual art is purchased as part of a group or collection of art, cost is allocated to individual pieces by management using the information available to it. A significant portion of the art inventory remains in inventory longer than a year. Consequently, for financial statement purposes, Canal has classified a portion of its inventory as non-current assets (see Note 7). Antiquities and contemporary art represented 27% ($189,122) and 73% ($520,549) and 26% ($230,639) and 74% ($641,749) of total art inventory at October 31, 2003 and 2002, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. G) 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. F-12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED H) Stockyard Inventory - Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. I) 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. J) 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. K) 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 $17,000, $13,000 and $25,000 and interest payments of $280,000, $267,000 and $257,000 in 2003, 2002 and 2001, respectively. L) Comprehensive Income -- The Company's only adjustments for each classification of the comprehensive income was for minimum pension liability. M) 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 F-13 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. N) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year presentation. O) Recent Accounting Pronouncements -- In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF issue 94-3, a liability for an exit cost is recognized at the date of an entity's commitment to an exit plan. Under SFAS No. 146, the liabilities associated with an exit or disposal activity will be measured at fair value and recognized when the liability is incurred and meets the definition of a liability in the FASB's conceptual framework. This statement is effective for exit or disposal activities initiated after December 31, 2002. We believe the adoption of SFAS No. 146 will not have a material impact on our financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for all financial instruments created or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 will not have a material impact on our consolidated financial statements. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, and interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46 requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise that has a controlling financial interest through ownership of a majority of the voting interest in the entity. We will adopt FIN 46 as of January 31, 2004. The adoption of FIN 46 will not have a material impact on our consolidated financial statements. F-14 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. INVESTMENTS AVAILABLE FOR SALE At October 31, the investments available for sale consisted of the following: ($ 000's Omitted) 2003 2002 ---- ---- Aggregate market value..................... $ 0 $ 7 --- --- Aggregate carrying value................... $ 0 $ 7 --- --- Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal's officers and directors also serve as officers and/or directors of this company. Historically, this investment (in which Canal's ownership interest is approximately 1%) was carried at market value and any unrealized gains or losses are reflected in Stockholders Equity. The realized gains or losses, if any, are recognized in operating results. On May 3, 2000 this company filed for reorganization under Chapter 11 of the Bankruptcy Code and subsequently emerged in December 2000. This action, in combination with other factors, has resulted in Canal's determination that the decline in market value of its investment in this company is permanent. Accordingly, as of October 31, 2003 Canal has written off this investment entirely. This has resulted in Canal's recognizing a realized loss on investments in marketable securities of approximately $7,000, $14,000 and $47,000 in fiscal 2003, 2002 and 2001, respectively. 4. STOCKYARD OPERATIONS Through an asset repurchase agreement, Canal commenced stockyard operations August 1, 1999 in Sioux City, Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota. Stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading and price discovery. The livestock handled by the stockyards include cattle, hogs and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers. F-15 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $-0-, $75,000 and $118,000 for the three years ended October 31, 2003, 2002 and 2001, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux city location in April 2002. The auction generated total sales of $114,000 and operating income of $58,000. Canal has been engaged in extended negotiations to sell this property to a real estate developer whose intention is to convert the property into a retail shopping center. Canal will continue to pursue the sale of this property to this developer as well as exploring any opportunities to develop or sell this property in fiscal 2004. Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending on the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market. As discussed above, virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies or independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which accounts for approximately 50% of its livestock volume annually. Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2004. 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 $11,000 and $13,000 at October 31, 2003 and 2002, respectively. F-16 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. BORROWINGS At October 31, 2003, substantially all of Canal's real properties, the stock of certain subsidiaries, the investments and a substantial portion of its art inventories are pledged as collateral for the following obligations: October 31, ------------------- ($ 000's Omitted) 2003 2002 ----------------- ---- ---- Variable rate mortgage notes due May 15, 2006 - related party (see Note 16) ......... $ 2,767 $ 2,667 Other Note ........................................... 0 0 ------- ------- Total ................................................ 2,767 2,667 Less -- current maturities ........................... 0 0 ------- ------- Long-term debt ....................................... $ 2,767 $ 2,667 ------- ------- On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001. The purchasers of these notes included certain entities controlled by the Company's Chairman, the Company's Chief Executive Officer and members of their families. These notes carried interest at the highest of four variable rates, determined on a quarterly basis. These notes, among other things, prohibits Canal from becoming an investment company as defined by the Investment Company Act of 1940; requires Canal to maintain minimum net worth; restricts Canal's ability to pay cash dividends or repurchase stock; requires principal prepayments to be made only out of the proceeds from the sale of certain assets, and required the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. On July 29, 1999 the above Notes were amended to extend the maturity date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the additional interest due to the holders of the notes shall become current and be treated as principal due under the notes; and to have certain of the holders loan the Company $525,000 in additional financing, the proceeds of which was used to repay in full certain of the other holders of the notes. As a result, the notes are now held in total by the Company's Chief Executive Officer and members of his family. On January 10, 2000, the above Notes were further amended to have holders loan the Company $1,725,000 in additional financing, the proceeds of which was used to repay in full all of the Company's outstanding non related party long-term debt. On October 8, 2002, the above notes were amended to extend the maturity date to May 15, 2006. As of October 31, 2003 the balance due under these notes was $2,767,000 all of which is classified as long-term debt-related party. The scheduled maturities and sinking fund requirements of long-term debt during the next five years are $2,767,000 due May 15, 2006. F-17 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. INCOME TAXES Significant components of the Company's deferred asset/(liability) as of October 31, 2003, 2002 and 2001 include differences in depreciation methods, deferred rent, inventory valuation allowance and net operating loss carryforward ($ 000's Omitted): 2003 2002 2001 ---- ---- ---- Total Gross Deferred Tax assets $ 3,893 $ 3,503 $ 3,422 Less - Valuation Allowance (3,893) (3,503) (3,422) ------- ------- ------- Net Deferred Tax Assets $ 0 $ 0 $ 0 ------- ------- ------- Total Gross Deferred Tax Liability $ 0 $ 0 $ 0 ------- ------- ------- Net Deferred Tax Asset (Liability) $ 0 $ 0 $ 0 ------- ------- ------- Actual income tax (benefit) expense differs from the "expected" tax expense computed by applying the U.S. federal corporate tax rate of 35% to income(loss) before income taxes as follows (& 000's Omitted): 2003 2002 2001 ---- ---- ---- Computed Expected Tax (Benefit)Expense $ (188) $ 149 $ (270) Change in Valuation Allowance 390 81 236 Inventory Valuation Differences (144) (178) (13) Other (58) (52) 47 ------ ------ ------ $ 0 $ 0 $ 0 ------ ------ ------ At October 31, 2003, the Company has net operating loss carryforwards of approximately $11,123,000 that expire through 2017 and a net capital loss carryforward of approximately $1,446,000 that expires October 31, 2007. For financial statement purposes, a valuation allowance has been provided to offset the net deferred tax assets due to the cumulative operating losses and capital losses incurred during recent years. Such allowance increased by approximately $352,000, $81,000 and $236,000 during the years ended October 31, 2003, 2002 and 2001, respectively. 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. F-18 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. PENSION PLANS Canal has a defined benefit pension plan covering substantially all of its salaried employees (the "Plan"). The benefits are based on years of service and the employee's compensation earned each year. The Company's funding policy is to contribute the amount that can be deducted for federal income tax purposes. Accordingly, the Company has made contributions of approximately $0 for fiscal 2003, $149,000 for fiscal 2002 and $129,000 for fiscal 2001. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Assets of the plan were invested in U.S. Government securities, common stocks and antiquities. Assumptions used in computing the 2003, 2002 and 2001 pension cost were: 2003 2002 2001 ---- ---- ---- Discount rate ................................ 6.25% 7.00% 7.00% Rate of increase in compensation level ....... 5.50% 5.50% 5.50% Expected long-term rate of return on assets .. 9.00% 9.00% 9.00% Net periodic pension cost for plan years ended October 31, 2003, 2002 and 2001 included the following components: Plan Year --------- ($ 000's Omitted) 2003 2002 2001 ----------------- ---- ---- ---- Service costs - benefits earned during the period ................................ $ 12 $ 12 $ 10 Interest cost on projected benefit obligation ................................ 114 120 111 Net (Return) loss on assets ................. 137 94 46 Net amortization and deferral ............... (54) (54) (54) ------ ------ ------ Net period pension cost ..................... $ 209 $ 172 $ 113 ------ ------ ------ F-19 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated balance sheets at October 31, 2003 and 2002. Plan Year --------- ($ 000's Omitted) 2003 2002 ----------------- ---- ---- Change in benefit obligation Benefit obligation at beginning of year $ 1,770 $ 1,597 Service cost 12 12 Interest cost 114 120 Plan participants' contributions 0 0 Amendments 0 0 Actuarial gain 49 181 Benefits paid (127) (140) ------- ------- Benefit obligation at end of year $ 1,818 $ 1,770 ------- ------- Change in plan assets Fair value of plan assets at beginning of year $ 904 $ 848 Actual return on plan assets 91 (20) Employer contribution 72 265 Plan participants' contributions 0 0 Plan expenses (68) (49) Benefits paid (127) (140) ------- ------- Fair value of plan assets at end of year $ 872 $ 904 ------- ------- (1) The vast majority of the projected benefit obligation is related to the Company's former stockyard employees. 8. ART INVENTORY HELD FOR SALE Due to general economic conditions and the softness of the art markets, Canal has not purchased inventory in several years nor does it currently have any intention of purchasing additional art inventory in the foreseeable future. It is the Company's intention to liquidate, in an orderly manner, its art inventory. Management estimates it may take approximately five years to dispose of its current art inventory. The Company's ability to dispose of its art inventory is dependent primarily on general economic conditions and the competitiveness of the art market itself. Accordingly, there can be no assurance that Canal will be successful in disposing of its art inventory within the time frame discussed above. F-20 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Antiquities and contemporary art represented 27% ($189,122) and 73% ($520,549) and 26% ($230,639) and 74% ($641,749) of total art inventory at October 31, 2003 and 2002, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. The Company classified its art inventory for the two years ended October 31, 2003 and 2002 as follows ($ 000's Omitted): Current Portion Non-Current Portion Total ------------------ ------------------- ------------------ 2003 2002 2003 2002 2003 2002 ---- ---- ---- ---- ---- ---- Antiquities $ 407 $ 575 $ 89 $ 31 $ 496 $ 1,606 Contemporary 1,000 1,000 988 1,450 1,988 2,450 Valuation Allowance (1,157) (1,325) (617) (859) (1,774) (2,184) ------- ------- ------- ------- ------- ------- Net Value $ 250 $ 250 $ 460 $ 622 $ 710 $ 872 ------- ------- ------- ------- ------- ------- The Company's valuation allowance for the three years ended October 31, 2003, 2002 and 2001 is as follows: Balance at Balance Beginning at End of of Period Deductions Period --------- ---------- --------- Year ended October 31, 2003 Deducted from art inventories: Reserve for valuation allowance $2,184 $ (410) $1,774 Year ended October 31, 2002 Deducted from art inventories: Reserve for valuation allowance $2,692 $ (508) $2,184 Year ended October 31, 2001 Deducted from art inventories: Reserve for valuation allowance $2,728 $ (36) $2,692 The amount recorded as the current portion of art inventory represents management's estimate of the inventory expected to be sold during the next twelve months. The Company recorded a valuation allowance against the current portion of its inventory to reduce it to its estimated net realizable value based on the history of losses sustained on inventory items sold in the current and previous years. In fiscal 2003 Canal applied against sales $408,900 of the valuation allowance against its art inventory, thereby, decreasing the total valuation allowance to $1,774,750 as of October 31, 2003 as compared to $2,183,650 and $2,692,150 at October 31, 2002 and 2001, respectively. F-21 F-21 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. Canal has its art inventory appraised by independent appraisers annually. The 2003 appraisal covered approximately 31% of the inventory value. The appraised values estimate the current market value of each piece giving consideration to Canal's practices of engaging in consignment, private and public auction sales. The net realizable value of the remaining 69% of the inventory was estimated by management based in part on the Company's history of losses sustained on art sales in the current and previous years and in part on the results of the independent appraisals done. Canal's art operations have generated an operating loss of approximately $8,000, operating income of $207,000 and an operating loss of $19,000 on revenues of approximately $173,000, $540,000 and $24,000 for the years ended October 31, 2003, 2002 and 2001, respectively. In fiscal 2003 Canal wrote off 11 pieces of antiquity art with a book value of approximately $42,000 due to questions regarding authenticity. The Company had approximately $250,000 and $175,000 of art inventory (at original cost) on consignment with third party dealers at October 31, 2003 and 2002, respectively. 9. LEASE COMMITMENTS In February 1999 Canal, together with two other related entities, amended its lease for commercial office space in New York City, which space serves as its headquarters operations. The new lease is for a period of 128 months expiring in October 2009. Canal's portion of the new space is approximately 1,000 square feet and Canal is responsible for 25% of the lease expense. Each of the three entities that are parties to this lease are jointly and severally responsible for the payments required under the lease. At October 31, 2003, the security deposit relating to this lease was approximately $260,000 of which Canal's representative share is approximately $122,000. At October 31, 2003, Canal was current under its obligations under this lease. However, the group as a whole was approximately $85,000 in arrears on its rental payments. As discussed above, Canal's share of the rent is approximately 25%. However, should the remaining two co-tenants default, the balance of rental payments due under the lease would be approximately $2.5 million. F-22 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The following is a schedule of Canal's portion of future minimum payments required under operating leases that have initial or remaining noncancellable terms in excess of one year as of October 31, 2003: YEAR ENDED CANAL'S TOTAL LEASE OCTOBER 31 OBLIGATION OBLIGATION ---------- ---------- ----------- 2004 $104,000 $ 416,000 2005 104,000 416,000 2006 104,000 416,000 2007 104,000 416,000 2008 104,000 416,000 Thereafter 95,000 380,000 -------- ---------- $615,000 $2,460,000 ======== ========== Rent expense under these and other operating leases for the years ended October 31, 2003, 2002 and 2001 were as follows: ($ 000's Omitted) 2003 2002 2001 ----------------- ---- ---- ---- Minimum rentals ....................... $ 107 $ 97 $ 90 Less: sublease rentals .............. (89) (42) 0 ----- ----- ----- $ 18 $ 55 $ 90 ----- ----- ----- In June 2002, Canal sublet for a one year period substantially all of its New York office space at a rate of $7,000 per month. The lease is for a period of one year with a one year renewal option (which was exercised by the tenant). If the tenant continues to sublet this space, then Canal's rent expense for fiscal 2004 will be approximately $18,000. 10. 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 October 31, 2003, 2002 and 2001. 11. STOCK OPTION PLAN Under Canal's 1984 Employee and 1985 Directors Stock Option Plans, $550,000 and 264,000 shares, respectively, of Canal's common stock have been reserved for option grants. The purchase price of shares subject to each F-23 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED option granted, under the Employee and Directors Plans, will not be less than 85% and 100%, respectively, of their fair market value at the date of grant. At October 31, 2002 the purchase price of shares subject to each option granted equaled 100% of the fair market value on the date of grant. Options granted under both plans are exercisable for 10 years from the date of grant, but no option will be exercisable earlier than one year from the date of grant. Under the Employee Plan, stock appreciation rights may be granted in connection with stock options, either at the time of grant of the options or at any time thereafter. No stock appreciation rights have been granted under this plan. At October 31, 2003, there were no exercisable options outstanding under these plans. Transactions under these plans are summarized as follows: Shares Option Price Range ------ ------------------ Balance outstanding October 31, 2001.... 30,500 $0.125-$0.250 Options granted ........................ 0 - - Options expired ........................ (25,000) $0.125-$0.250 -------- ------------- Balance outstanding October 31, 2002.... 5,500 $0.125-$0.125 Options granted 0 - - Options expired (5,500) $0.125-$0.125 -------- ------------- Balance outstanding October 31, 2003.... 0 N/A - N/A -------- ------------- The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the years ended October 31, 2003, 2002 and 2001. In October, 1995, the Financial Accounting Standards Board issued Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which becomes effective for transactions entered into in fiscal years beginning after December 15, 1995. This statement permits an entity to apply the fair value based method to stock options awarded during 1995 and thereafter in order to measure the compensation cost at the grant date and recognize it over its vesting period. This statement also allows an entity to continue to measure compensation costs for these plans pursuant to APB Opinion 25. Entities electing to remain with the accounting treatment under APB Opinion 25 must make proforma disclosures of net income and earnings per share to include the effects of all awards granted in fiscal years beginning after December 31, 1994, as if the fair value based method of accounting pursuant to SFAS No. 123 has been applied. F-24 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company adopted the disclosure requirements for this statement effective for the year ending October 31, 1996, while continuing to measure compensation cost using APB 25. Had compensation cost been determined on the basis of SFAS No. 123, the proforma effect on the Company's net income and earnings per share for the years ended October 31, 2003, 2002 and 2001 would have been deminimus. 12. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID During each of the fiscal years ended October 31, 2003, 2002 and 2001, the Company had 0, 5,500 and 30,500 options outstanding. The options were not included in the computation of diluted earnings (loss) per share because the effect of exercisable price conversion would be antidilutive. There were no dividends declared on common stock during the years ended October 31, 2003, 2002 and 2001. Dividends declared on preferred stock during the years ended October 31, 2003, 2002 and 2001 were approximately $158,000, $116,000 and $302,000. Basic earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted average number of common share outstanding during the period. Diluted earnings (loss) per share reflect per share amounts that would have resulted if dilutive potential common stock had been reported in the financial statements. Basic and diluted earnings (losses) available to common stockholders at October 31, 2003, 2002 and 2001 were: For the Year Ended October 31, 2003 -------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- --------- Net (loss) $ (537,000) Less preferred stock dividends (158,000) ---------- (Loss) available to common stock- holders-basic earnings per share (695,000) 4,327,000 $ (0.16) ======== Effect of dilutive securities: Options (antidilutive) N/A N/A ---------- ---------- (Loss) available to common stock- holders-diluted earnings per share $ (695,000) 4,327,000 $ (0.16) ========== ========== ======== F-25 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Year Ended October 31, 2002 -------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- --------- Net income 426,000 Less preferred stock dividends (116,000) ---------- Income available to common stock- holders-basic earnings per share 310,000 4,327,000 $ 0.07 ======== Effect of dilutive securities: Options (antidilutive) N/A N/A ---------- ---------- Income available to common stock- holders-diluted earnings per share $ 310,000 4,327,000 $ 0.07 ========== ========== ======== For the Year Ended October 31, 2001 -------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- --------- Net (loss) $ (773,000) Less preferred stock dividends (302,000) ----------- (Loss) available to common stock- holders-basic earnings per share (1,075,000) 4,327,000 $ (0.25) ======== Effect of dilutive securities: Options (antidilutive) N/A N/A ----------- ----------- (Loss) available to common stock- holders-diluted earnings per share $(1,075,000) 4,327,000 $ (0.25) =========== =========== ======== F-26 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. PREFERRED STOCK ISSUANCE On October 15, 1986 Canal exchanged 986,865 shares of its $1.30 Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of its outstanding common stock. Since the exchange, the Company has issued an additional 5,449,369 shares in the form of stock dividends and in October 2003 the Company, repurchased for retirement, 992,225 shares (from an affiliate) at $0.10 per share resulting in a total outstanding at October 31, 2003 of 5,443,979. All of the Preferred Stock has a par value of $0.01 per share and a liquidation preference of $10 per share. The Preferred Stock is subject to optional redemption, in exchange for Canal's 13% Subordinated Notes, by Canal, in whole or in part at any time on or after September 30, 1988 at the redemption price of $10 per share. Dividends on the Preferred Stock accrue at an annual rate of $1.30 per share and are cumulative. Dividends are payable quarterly in cash or in Preferred Stock at Canal's option. Payment commenced December 31, 1986. To date, fifty-six of the sixty-eight quarterly payments have been paid in additional stock resulting in the issuance of 5,449,369 shares recorded at their fair value at the time of issuance. Canal is restricted from paying cash dividends by certain of its debt agreements (See Note 5). The last cash dividend paid on Canal's preferred stock was in September 1989. The quarterly dividends payable September 30, 2003 and December 31, 2003 were passed by the Board of Directors. It is the Company's intention to pay its next dividend on the preferred stock on June 30, 2004 at which time a one year dividend will have accumulated. The dividend planned for June 30, 2004 will also be paid in additional stock. Whenever quarterly dividends payable on the Preferred Stock are in arrears in the aggregate amount at least equal to six full quarterly dividends (which need not be consecutive), the number of directors constituting the Board of Directors of Canal shall be increased by two and the holders of the Preferred Stock shall have, in addition to the rights set forth above, the special right, voting separately as a single class, to elect two directors of Canal to fill such newly created directorships at the next succeeding annual meeting of shareholders (and at each succeeding annual meeting of shareholders thereafter until such cumulative dividends have been paid in full). VOTING RIGHTS - The holders of the Preferred Stock shall not have any voting rights except that the following actions must be approved by holders of 66 2/3% of the shares of Preferred Stock, voting as a class: (I) any amendment to the Certificate of Incorporation of Canal which would materially alter the relative rights and preferences of the Preferred Stock so as to adversely affect the holders thereof; and (ii) issuance of securities of any class of Canal's capital stock ranking prior (as to dividends or upon liquidation, dissolution or winding up) to the Preferred Stock. The holders of the Preferred Stock shall be entitled to specific enforcement of the foregoing covenants and to injunctive relief against any violation thereof. F-27 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. PENSION VALUATION RESERVE The Pension Valuation Reserve represents the excess of additional minimum pension liability required under the provisions of SFAS No. 87 over the unrecognized prior service costs of former stockyard employees. Such excess arose due to the decline in the market value of pension assets available for pension benefits of former employees, which benefits were frozen at the time the stockyard operations were sold in 1989. The additional minimum pension liability will be expensed as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists. 15. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS Canal is engaged in two distinct businesses - the management and further development of its agribusiness related real estate operations and stockyard operations. The following summary presents segment information relating to these lines of business except for the respective revenues, operating income and the reconciliation of operating income with pre-tax income which information is presented on Canal's income statement. October 31, --------------------------------- ($ 000's Omitted) 2003 2002 2001 ----------------- ---- ---- ---- Identifiable assets: Real estate ..................... $ 3,871 $ 4,007 $ 4,092 Stockyard operations ............ 1,440 1,448 1,497 Corporate .................... 931 1,058 1,389 ------- ------- ------- $ 6,142 $ 6,513 $ 6,978 ------- ------- ------- ($ 000's Omitted) 2003 2002 2001 ----------------- ---- ---- ---- Capital expenditures: Real estate ..................... $ 171 $ 214 $ 393 Stockyard operations ............ 32 29 70 Corporate .................... 8 4 8 ------- ------- ------- $ 211 $ 247 $ 471 ------- ------- ------- Income from real estate operations includes gains (losses) on sales of real estate of $0.2 million, $0.4 million and $0.4 million in 2003, 2002 and 2001, respectively. Included in corporate identifiable assets is approximately $0.2 million and $0.2 million of art inventory in galleries or on consignment abroad as of October 31, 2003 and 2002, respectively. F-28 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. Related Party Transactions Interest Expense Related Party - At October 31, 2003, 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, 2006. Canal has paid interest expense on these notes of $280,000, $267,000 and $257,000 for the years ended October 31, 2003, 2002 and 2001, respectively. As of October 31, 2003, the balance due under these notes was $2,767,000 all of which is classified as long-term debt related party. Lease Commitments - In February 1999 Canal, together with two other related entities, amended its lease for commercial office space in New York City, which space serves as its headquarters operations. The new lease is for a period of 128 months expiring in October 2009. Canal's portion of the new space is approximately 1,000 square feet and Canal is responsible for 25% of the lease expense. However, each of the three entities that are parties to this lease are jointly and severally responsible for the payments required under the lease. At October 31, 2003 the security deposit related to this lease was approximately $260,000 of which Canal's representative share is approximately $122,000. In June 2002, Canal sublet for a one year period substantially all of its New York office space at a rate of $7,000 per month. The lease is for a period of one year with a one year renewal option (which was exercised by the tenant). If the tenant continues to sublet this space, then Canal's rent expense for fiscal 2004 will be approximately $18,000. At October 31, 2003, Canal was current under its obligations under this lease. However, the group as a whole was approximately $85,000 in arrears on its rental payments. As discussed above, Canal's share of the rent is approximately 25%. However, should the remaining two co-tenants default, the balance of rental payments due under the lease would be approximately $2.5 million. 17. LITIGATION Canal and its subsidiaries are from time to time involved in litigation incidental to their normal business activities, none of which, in the opinion of management, will have a material adverse effect on the consolidated financial condition of the Company. Canal or its subsidiaries are party to the following litigations: Canal Capital Corporation v. Valley Pride Pack, Inc. Canal commenced an action in U.S. District Court in Minnesota on September 23, 1997, as the assignee of United Market Services Company, against Valley Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and referred to herein as "Pine Valley") to recover unpaid livestock fees and charges (estimated to be as much as $1,000,000) due from Pine Valley under a 1936 Agreement between the predecessors of Pine Valley and Canal. F-29 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED On December 20, 2000, the U.S. District Court in Minnesota ruled in Canal's favor granting its motion for summary judgment, thereby establishing Pine Valley's liability to Canal for unpaid livestock fees. Additionally, the court denied all of Pine Valley's assorted defenses and counter claims clearing this matter to go to trial. On February 7, 2001, a Special Verdict was entered in favor of Canal resulting in a total award (including pre- judgment interest and court costs) to Canal of approximately $189,000. On October 15, 2001, Pine Valley filed a voluntary Chapter 11 bankruptcy petition with the court. This action makes the collectability of Canal's award doubtful. For financial statements purposes as of October 31, 2003, Canal has fully reserved the Pine Valley receivable. 18. Restricted Cash - Transit Insurance Due to significant proposed increases in the premiums for transit insurance, management decided to initiate a plan of self insurance commencing November 1, 2002. Transit insurance covers livestock for the period that they are 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 October 31, 2003 balance in restricted cash- transit insurance of approximately $59,000 represents the excess of per head fees charged over actual payments made for livestock that was injured or died while at the stockyards. 19. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for non- trading purposes) for which it is practicable to estimate that value. October 31, 2003 2002 ------------------- ------------------- ($ 000's Omitted) Carrying Fair Carrying Fair Amount Value Amount Value ------ ------ ------ ------ Cash and cash equivalents $ 14 $ 14 $ 139 $ 139 ------ ------ ------ ------ Long-Term Debt - Related Party 2,767 (b) 2,667 (b) ------ ------ ------ ------ a) Cash and cash equivalents: The carrying amount approximates fair market value because of the short maturities of such instruments. b) Long-Term Debt Related Party (see Note 5): It is not practicable to estimate the fair value of the related party debt. F-30 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 20. Property on Operating Leases Property on operating leases consist of approximately 40 acres of land located in New York, New York; Omaha, Nebraska; S. St. Paul, Minnesota and Sioux City, Iowa. Land and structures leased to third parties include vacant land, exchange buildings (commercial office space), meat packing facilities, railcar repair shops, truck stops, lumber yards and various other commercial and retail businesses. A schedule of the Company's property on operating leases at October 31, 2003 is as follows (000's omitted):
Capitalized Cost Subsequent to Initial Cost Acquisition Date ------------ ---------------- Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/02 ----------------- ---- --------- ---- --------- ------ -------- New York office Various leasehold improvements $ 0 $ 153 $ 0 $ 31 $ (156) $ 28 11 acres of land in Omaha, NE Acquired in 1976 1,200 0 0 21 (4) 1,217 10 acres of land in S. St. Paul, MN Acquired in 1937 125 1,220 0 907 (1,039) 1,213 19 acres of land in Sioux City, IA 416 0 0 0 0 416 ------- ------- ------- ------- ------- ------- Acquired in 1937 $ 1,741 $ 1,373 $ 0 $ 959 $(1,199) $ 2,874 ======= ======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property on operating leases carried for the three years ended October 31, 2003, 2002 and 2001 is as follows (000's omitted): 2003 2002 2001 ---- ---- ---- Balance at beginning of year $ 3,337 $ 3,302 $ 3,098 Acquisitions 0 0 0 Improvements 179 218 427 Cost of property sold (142) (183) (223) Reclassification to property held for development or resale (500) 0 0 ------- ------- ------- Balance at end of year $ 2,874 $ 3,337 $ 3,302 ------- ------- ------- (1) Substantially all of Canal's real property is pledged as collateral for its debt obligations (see Note 5). F-31 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 21. Property used in Stockyard Operations Property used in stockyard operations consist of approximately 61 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 on operating leases at October 31, 2003 is as follows (000's omitted):
Capitalized Cost Subsequent to Initial Cost Acquisition Date ------------ ---------------- Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/03 ----------------- ---- --------- ---- --------- ------ -------- 31 acres of land in St. Joseph, MO Acquired in 1942 $ 862 $ 375 $ 40 $ (175) $ (104) $ 998 30 acres of land in Sioux Falls, SD Acquired in 1937 100 51 0 13 (26) 138 ------- ------- ------- ------- ------- ------- $ 962 $ 426 $ 40 $ (162) $ (130) $ 1,136 ======= ======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property used in stockyard operations carried for the three years ended October 31, 2003, 2002 and 2001 is as follows (000's omitted): 2003 2002 2001 ---- ---- ---- Balance at beginning of year $ 1,176 $ 1,281 $ 1,237 Acquisitions 40 0 0 Improvements 32 29 44 Cost of property sold (112) (134) 0 ------- ------- ------- Balance at end of year $ 1,136 $ 1,176 $ 1,281 ------- ------- ------- (1) Substantially all of Canal's real property is pledged as collateral for its debt obligations (see Note 5). F-32 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 22. Property Held for Development or Resale Property held for development or resale consist of approximately 113 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 October 31, 2003 is as follows (000's omitted): Capitalized Cost Subsequent to Initial Cost Acquisition Date ------------ ---------------- Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/03 ----------------- ---- --------- ---- --------- ------ -------- 28 acres of land in St. Joseph, MO Acquired in 1942 $ 75 N/A N/A N/A N/A $ 75 10 acres of land in S. St. Paul, MN Acquired in 1937 144 N/A N/A N/A N/A 144 33 acres of land in Sioux City, IA Acquired in 1937 681 N/A N/A N/A N/A 681 ------ ------ ------ ------ ------ ------ $ 900 $ 0 $ 0 $ 0 $ 0 $ 900 ====== ====== ====== ====== ====== ====== A schedule of the Company's reconciliation of property held for development or resale carried for the three years ended October 31, 2003, 2002 and 2001 is as follows (000's omitted): 2003 2002 2001 ---- ---- ---- Balance at beginning of year $ 518 $ 620 $ 648 Acquisitions 0 0 0 Improvements 0 0 0 Cost of property sold (118) (102) (28) Reclassification from property on operating leases 500 0 0 ----- ----- ----- Balance at end of year $ 900 $ 518 $ 620 ----- ----- ----- (1) Substantially all of Canal's real property is pledged as collateral for its debt obligations (see Note 5). F-33 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 23. Minimum Future Rentals on Operating Leases The following is a schedule by years of minimum future rentals on operating leases as of October 31, 2003: ($ 000's Omitted) ----------------- Year Ending Rental October 31, Income (1) ----------- ---------- 2004 $ 1,000 2005 1,050 2006 1,100 2007 1,150 2008 1,200 ------- $ 5,500 ======= (1) Consists of rental income from Exchange Building (commercial office space), lease income from land and structures and other rental income. All real estate leases are accounted for as operating leases. F-34 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 27th day of January, 2004. 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 --------- ----- ---- /S/ Michael E. Schultz President and Chief ---------------------- Executive Officer and Director Michael E. Schultz (Principal Executive Officer) January 27, 2004 /S/ Reginald Schauder Vice President-Finance ---------------------- Secretary and Treasurer Reginald Schauder (Principal Financial and Accounting Officer) January 27, 2004 /S/ Asher B. Edelman Chairman of the Board ---------------------- and Director January 27, 2004 Asher B. Edelman /S/ Gerald N. Agranoff Director January 27, 2004 ---------------------- Gerald N. Agranoff S-1