Exhibit Index at
Page 19
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] 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 0 - 1653
GENESEE CORPORATION
(Exact name of registrant as specified in its charter)
STATE OF NEW YORK 16-0445920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
445 St. Paul Street, Rochester, New York 14605
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (716)546-1030
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
As of the date of this report, the Registrant had the following shares of common
stock outstanding:
Number of Shares
Class Outstanding
Class A Common Stock (voting), 209,885
par value $.50 per share
Class B Common Stock (non-voting), 1,409,024
par value $.50 per share
<PAGE>
2
GENESEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and May 2, 1998
<TABLE>
<S> <C> <C>
UNAUDITED AUDITED
(Dollars in Thousands) October 31, 1998 May 2, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 2,876 2,692
Marketable securities available for sale 8,136 17,808
Trade accounts receivable, less allowance for doubtful receivables
of $515 at October 31, 1998; $433 at May 2, 1998 11,026 10,163
Inventories, at lower of cost (first-in, first-out) or market 16,654 14,258
Deferred income tax assets 1,433 1,315
Other current assets 1,127 683
Total current assets 41,252 46,919
Net property, plant and equipment 36,580 33,311
Investment in and notes receivable from unconsolidated real estate partnerships 5,459 5,534
Investments in direct financing and leveraged leases 34,037 34,638
Goodwill and other intangibles 28,574 10,737
Other assets 5,179 4,450
Total assets 151,081 135,589
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 7,650 8,358
Income taxes payable 504 692
Federal and state beer taxes payable 1,174 1,756
Line of credit and current portion of mortgage payable 10,079 -
Accrued expenses and other 10,894 7,255
Total current liabilities 30,301 18,061
Deferred income tax liabilities 9,294 9,295
Accrued postretirement benefits 15,415 15,415
Mortgage payable 4,744 -
Other liabilities 491 471
Total liabilities 60,245 43,242
Minority interests in consolidated subsidiaries 2,313 2,227
Shareholders' equity:
Common stock Class A 105 105
Common stock Class B 753 753
Additional paid-in capital 5,856 5,842
Retained earnings 84,988 86,143
Unrealized gain on marketable securities, net of income taxes 264 752
Less treasury stock, at cost 3,443 3,475
Total shareholders' equity 88,523 90,120
Total liabilities and shareholders' equity $ 151,081 135,589
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
3
GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF LOSSES AND RETAINED EARNINGS
Thirteen Weeks Ended October 31, 1998 and November 1, 1997
<TABLE>
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C>
UNAUDITED
1998 1997
Revenues $ 45,972 47,827
Federal and state beer taxes 6,784 7,913
Net revenues 39,188 39,914
Cost of sales 29,980 31,007
Gross profit 9,208 8,907
Selling, general and administrative expenses 9,769 10,291
Operating loss (561) (1,384)
Investment income 266 556
Other income / (expense), net (109) (129)
Interest of minority partners in earnings of
consolidated subsidiaries (297) (194)
Loss before income taxes (701) (1,151)
Income tax benefit (115) (382)
Net loss (586) (769)
Basic loss per share (0.36) (0.48)
Diluted loss per share (0.36) (0.47)
Retained earnings at beginning of period 86,709 88,571
Less: dividends - $.70 per share in
1998 and $.70 per share in 1997 1,135 1,133
Retained earnings at end of period $ 84,988 86,669
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
4
GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF EARNINGS AND RETAINED EARNINGS
Twenty six Weeks Ended October 31, 1998 and November 1, 1997
(Dollars in Thousands,
Except Per Share Data)
<TABLE>
<S> <C> <C>
UNAUDITED
1998 1997
Revenues $ 94,560 100,880
Federal and state beer taxes 15,987 18,020
Net revenues 78,573 82,860
Cost of sales 59,690 63,089
Gross profit 18,883 19,771
Selling, general and administrative expenses 18,849 19,510
Operating income 34 261
Investment income 1,465 1,390
Other income / (expense), net 57 (160)
Interest of minority partners in earnings of
consolidated subsidiaries (494) (383)
Earnings before income taxes 1,062 1,108
Income taxes 516 461
Net earnings 546 647
Basic and diluted earnings per share 0.34 0.40
Retained earnings at beginning of period 86,143 87,720
Less: dividends - $1.05 per share in
1998 and $1.05 per share in 1997 1,701 1,698
Retained earnings at end of period $ 84,988 86,669
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
5
GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twenty six Weeks Ended October 31, 1998 and November 1, 1997
(Dollars in Thousands)
<TABLE>
UNAUDITED
<S> <C> <C>
1998 1997
Cash flows from operating activities:
Net earnings $ 546 $ 647
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amorization 3,313 2,539
Other 577 456
Changes in non-cash assets and liabilities:
Trade accounts receivable 53 (1,260)
Inventories (518) (993)
Other assets (511) (226)
Account payable (3,010) (1,271)
Accrued expenses and other 2,526 96
Income taxes payable (188) (171)
Federal and state beer taxes (582) (772)
Other liabilities (1,353) (70)
Net cash provided by (used in) operating activities 853 (1,025)
Cash flows from investing activities:
Acquisitions, net of cash acquired (18,754) (11,060)
Capital expenditures (4,217) (3,529)
Sales of marketable securities 9,800 25,131
Purchase of marketable securities and other investments (912) (10,845)
Investments in and advances to unconsolidated real
estate investments, net of distributors 75 27
Net investment in direct financing and leveraged leases 602 (992)
Withdrawals by minority interest (409) (35)
Net cash used in investing activities (13,815) (1,303)
Cash flows from financing activities:
Line of credit 10,000 -
Mortgage payable 4,800 (9)
Payment of dividends (1,701) (1,698)
Net proceeds from treasury stock transactions 47 38
Net cash provided by (used in) financing activities 13,146 (1,669)
Net increase (decrease) in cash and cash equivalents 184 (3,997)
Cash and cash equivalents at beginning of the year 2,692 4,521
Cash and cash equivalents at end of period $ 2,876 $ 524
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
6
GENESEE CORPORATION
Notes to Consolidated Financial Statements
NOTE (A) The Corporation's consolidated financial statements enclosed
herein are unaudited with the exception of the Consolidated Balance
Sheet at May 2, 1998 and, because of the seasonal nature of the
business and the varying schedule of its special sales efforts, these
results are not necessarily indicative of the results to be expected
for the entire year. In the opinion of management, the interim
financial statements reflect all adjustments, consisting of only
normal recurring items, which are necessary for a fair presentation of
the results for the periods presented. The accompanying financial
statements have been prepared in accordance with GAAP and SEC
guidelines applicable to interim financial information. These
statements should be reviewed in conjunction with the annual report to
shareholders for the year ended May 2, 1998.
NOTE (B) Inventories are summarized as follows:
<TABLE>
<S> <C> <C> <C>
Dollars in thousands
October 31, 1998 May 2, 1998
Finished goods $ 5,629 5,250
Goods in process 1,558 2,301
Raw materials, containers and packaging supplies 9,467 6,406
Total inventories $ 16,654 13,957
</TABLE>
NOTE (C) The Corporation has a mortgage payable in the principle amount of
$4.8 million, collateralized by certain land and buildings. The
mortgage payable bears interest at a fixed rate of 6.49% per annum and
requires payments of principal and interest through 2008. The
maturities of the mortgage payable for each fiscal year through the
year ending May 1, 2004 are, respectively, $82,000, $87,000, $93,000,
$99,000 and $106,000.
In addition, the Corporation has a $15 million line of credit which
bears interest at LIBOR plus .70 for an effective rate of 5.97% as of
December 1, 1998. This line of credit expires in July 1999. At October
31, 1998, $5 million was available for use under this instrument.
NOTE (D) In fiscal 1999, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Comprehensive income is defined as the change in equity of a business
during a period from transactions and other events and circumstances
from non-owner sources. Under SFAS 130, the term "comprehensive
income" is used to describe the total of net earnings plus other
comprehensive income which, for the company, includes unrealized gains
and losses on marketable securities classified as available-for-sale.
<PAGE>
7
GENESEE CORPORATION
Notes to Consolidated Financial Statements (continued)
SFAS 130 does not impact the calculation of net earnings or earnings
per share nor does it impact reported assets, liabilities or total
shareholders' equity. It does impact the presentation of the
components of shareholders' equity within the balance sheet and will
result in the presentation of the components of comprehensive income
within an annual financial statement, which must be displayed with
the same prominence as other financial statements.
The components of the corporation's total comprehensive income were:
<TABLE>
<S> <C> <C> <C>
Dollars in Thousands
Thirteen Weeks Ended Twenty six Weeks Ended
10/31/98 11/01/97 10/31/98 11/01/97
Net earnings/(loss) $ (586) (769) 546 647
Unrealized holding gain/loss,
net of taxes 73 (333) (488) 244
Total comprehensive (loss)/income $ (513) (1,102) 58 891
</TABLE>
<PAGE>
8
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of 13 weeks ended October 31, 1998 to 13 weeks ended November 1, 1997
Consolidated net revenues for the thirteen weeks ended October 31, 1998
were $39.2 million, a decrease of $726,000 over consolidated net revenues
reported for the same period last year. The lower revenues were due to lower
sales volume at the Genesee Brewing Company, which were partially offset by
increased sales by the Corporation's Foods Division.
On a consolidated basis, the Corporation reported an operating loss of
$561,000, which was an $822,000 improvement compared to the same period last
year. The improvement in operating performance was primarily due to reduced
selling, general and administrative expenses at the Genesee Brewing Company.
On a consolidated basis, the Corporation reported a net loss of $586,000,
or $.36 basic and diluted loss per share, in the second quarter this year,
compared to a net loss of $769,000, or $.48 basic and $.47 diluted loss per
share, for the same period last year. The improvement in net loss for the
current year was attributable to a reduction in pre-tax loss in the
Corporation's brewing operations.
Genesee Brewing Company
Genesee Brewing Company's net sales in the second quarter were $25.0
million, a decrease of $3.9 million from last year's second quarter net sales of
$28.9 million. Barrel sales for the second quarter this year were down 15.5%
over last year due to a 12.5% decrease in Genesee Brewing Company's core brands,
a 14.1% decrease in the HighFalls brands and a 25.3% decrease in volume under
the contract with Boston Beer Company.
Within the Genesee core brands, higher-margin returnable glass packages,
draft packages and 24-can packages showed the largest volume declines. These
declines were partially offset by higher unit sales of lower margin,
value-priced 30 and 36 can "Multipaks".
The decline in HighFalls volume, which represents 24% of total volume, was
primarily the result of decreased Honey Brown Lager draft (on premise) sales. It
is management's belief that, Honey Brown has maintained a higher percentage of
draft business than competing craft brands. The slowdown in the craft segment of
the industry is affecting draft sales to a greater extent and HighFalls, with
its higher concentration, is affected to a greater degree. It is anticipated
that Honey Brown Lager draft sales will continue to be adversely affected.
The decline in contract brewing volume for the quarter was due to a
reallocation by Boston Beer Company of a portion of its production requirements
in anticipation of the start of production of a new package configuration by
Genesee Brewing Company. Production of the new package configuration continues
to be delayed by the inability of a Boston Beer Company supplier to deliver
packaging materials. Production of the new package configuration is now
scheduled to commence in December. The decline in volume was also due to a shift
in production of a seasonal product to November versus October in the prior year
and Boston Beer Company moving production of a short run brand and 22oz.
packages to its Cincinnati, Ohio plant.
<PAGE>
9
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Genesee Brewing Company's gross profit decreased $1.1 million to $5.0
million, or 20.1% of net sales, in the second quarter of fiscal 1999, compared
to $6.2 million or 21.4% of net sales, in the second quarter of fiscal 1998. The
negative volume trends for both the Genesee core brands and the HighFalls craft
brands, together with the unfavorable shift in product mix towards Multipak can
packages, contributed to the decline in gross profit in the second quarter this
year. In addition, intense competition has resulted in price stagnation over the
past several years, further depressing Genesee Brewing Company's gross profit
margins.
Selling, general and administrative expenses were down $1.7 million in the
second quarter of fiscal 1999 compared to the same period last year. This
decrease is primarily the result of cost reduction efforts implemented in fiscal
1998.
Genesee Brewing Company's second quarter operating loss of $2.7 million
was $576,000 less than the $3.3 million operating loss in the second quarter of
the prior year. This improvement was primarily due to lower selling, general and
administrative spending in the second quarter of fiscal 1999 as compared to the
same period last year.
As previously reported, the beer industry in the United States continues
to be highly competitive. The industry is dominated by Anheuser Busch, Inc.,
Miller Brewing Company and Coors Brewing Company which together account for more
than 80% of domestic production. In comparison, the volume of malt beverages
produced by Genesee Brewing Company represents only about 1% of annual domestic
production. In recent years, per capita consumption of malt beverages in the
United States has declined and total consumption has grown by an average of less
than 1% a year. However, consumption of domestically produced malt beverages has
remained basically flat during this period, with the increase in overall
consumption coming largely from the increasing popularity of imported malt
beverages.
During the past ten years, demand for many established domestic brands has
declined as consumers have turned to new domestic brands, imports and the
diverse range of beer styles offered by the craft beer segment. However, a
slowdown in the craft beer segment of the industry that began in 1997 has
continued through 1998.
As a result of these trends and the excess capacity that exists in the
industry, brewers are attempting to gain market share through reduced pricing,
intensive marketing and promotional programs, new product introductions and
innovative packaging. In addition, the industry has seen increased levels of
price discounting and price promotions and a growth in popularity of value
priced 30 and 36 can Multipaks. Although Anheuser Busch, the largest domestic
brewer, recently implemented price increases on certain brands and packages in
certain markets, there can be no assurance that these increases will remain in
place or that they will provide any meaningful relief in the markets where
Genesee Brewing Company products are sold.
<PAGE>
10
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The competitive position of smaller brewers like Genesee Brewing Company
has also been adversely affected by the consolidation that is occurring within
the distribution tier of the brewing industry. The effects of this consolidation
have been aggravated by the aggressive efforts of the large national brewers to
obtain an increasing share of the distributor's time and attention devoted to
their brands. During the past several years, the large national brewers have
utilized a variety of inducements, incentives and contractual terms to cause
their distributors to make a greater commitment to their brands, largely at the
expense of the brands of smaller brewers, like Genesee, that are also sold by
these distributors. These developments have made it increasingly difficult for
Genesee Brewing Company to effectively promote and sell its brands in its core
markets and to expand sales of its products in new or lower share markets.
The competitive conditions in the brewing industry that are impacting the
performance of Genesee Brewing Company are not expected to materially abate in
the near term.
Foods Division
On August 3, 1998, the Corporation acquired TKI Foods, Inc. and Spectrum
Foods, Inc. for $18.8 million, net of post closing adjustments. The purchase
price was funded in part by a $10 million credit facility from a commercial
bank, with the balance of the purchase price paid from the Corporation's cash
reserves. TKI Foods, is a food company located in Springfield, Illinois, and
Spectrum Foods, an affiliated company was located in Decatur, Illinois.
Net sales for the Foods Division were $13.2 million in the second quarter
of fiscal 1999, compared to $10.3 million for the second quarter last year. The
increase in net sales was primarily attributable to $4.4 million in second
quarter sales of artificial sweeteners and other private label food products of
TKI Foods and Spectrum Foods. The increase in net sales attributable to the TKI
Foods and Spectrum Foods product line was partially offset by the loss of $1.4
million in net sales recorded in the second quarter of the prior year from a one
time government soup contract and a contract to package infant cereal that were
completed in fiscal 1998. The Foods Division is not aggressively seeking to
replace this contract manufacturing business, instead devoting resources to its
core retail private label business and the relocation and integration of TKI
Foods and Spectrum Foods business into the Foods Division.
Gross profit for the Foods Division increased $1.2 million to $3.2 million
in the second quarter of fiscal 1999, compared to $2.0 million for the second
quarter last year. The increase in gross profit was attributable to the
acquisition of TKI Foods and Spectrum Foods.
Selling, general and administrative expenses increased $1.2 million in the
second quarter of fiscal 1999 compared to the same period last year. This
increase is primarily the result of additional costs incurred in connection with
to the acquisition of TKI Foods and Spectrum Foods.
The Foods Division had an operating profit of $1.3 million in the second
quarter of fiscal 1999, which was $15,000 less than the operating profit
reported in the first quarter last year.
<PAGE>
11
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
On October 29, 1998 the Foods Division purchased a 340,000 square foot
production facility in Medina, New York for $2.4 million. The Foods Division
expects to spend approximately $4.6 million on capital improvements to the
Medina facility. The Foods Division borrowed $4.8 million under a mortgage loan
from a commercial bank to fund the acquisition of the Medina facility and a
portion of the improvement costs. The balance of the improvement costs will be
paid from the proceeds of a $1.7 million term loan from the same commercial bank
which will be drawn down as the costs are incurred, with any remaining
improvement costs paid from the Corporation's cash reserves. The Foods Division
expects to relocate and consolidate its operations currently located in leased
facilities in Albion, New York and Springfield, Illinois to the Medina facility
beginning in calendar 1999. The Foods Division is expected to benefit from
synergistic cost savings after all of its operations have been consolidated at
the Medina plant, which is scheduled to be completed during fiscal 2000.
Genesee Ventures
Genesee Ventures, Inc., the Corporation's equipment leasing and real
estate investment subsidiary, reported operating income of $955,000 for the
second quarter of fiscal 1999, compared to $728,000 for the second quarter of
fiscal 1998. The higher operating income was primarily due to an increase in
equipment lease revenue.
Comparison of 26 weeks ended October 31, 1998 to 26 weeks ended November 1, 1997
Consolidated year-to-date net revenues were $78.6 million, a decrease of
$4.3 million from the consolidated net revenues of $82.9 million reported for
the same period last year. The lower revenues were due to lower sales volume at
the Genesee Brewing Company, which were partially offset by increased sales by
the Corporation's Foods Division.
On a consolidated basis, the Corporation reported year-to-date net
earnings of $546,000, or $.34 basic and diluted earnings per share, compared to
net earnings of $647,000, or $.40 basic and diluted earnings per share, for the
same period last year. The decrease in net earnings for the current year was
attributable to reduced contract manufacturing revenues in the Corporation's
Foods Division.
Genesee Brewing Company
Genesee Brewing Company's net sales in the first two quarters of fiscal
1999 were $57.4 million, a decrease of $6.6 million, or 10.3%, from the prior
year's net sales of $64.0 million. Barrel sales for the first two quarters were
down 12.9% over last year due to a 10.9% decrease in Genesee Brewing Company's
core brands, a 7.4% decrease in Genesee Brewing Company's HighFalls brands and a
27.9% decrease in volume under the contract with Boston Beer Company.
Within the Genesee core brands, higher-margin returnable glass packages,
draft packages and 24-can packages showed the largest volume declines. These
declines were partially offset by higher unit sales of lower margin,
value-priced 30 and 36 can "Multipaks".
<PAGE>
12
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The decline in HighFalls volume, which represents 24% of total volume, was
primarily the result of decreased Honey Brown Lager draft (on premise) sales. It
is management's belief that, Honey Brown has maintained a higher percentage of
draft business than competing brands in the craft segment of the industry. The
decrease in Honey Brown draft sales year-to-date has been partially offset by a
1.2% increase in Honey Brown case sales.
The year-to-date decline in contract brewing volume was due to the
reallocation by Boston Beer Company of a portion of its production requirements
in anticipation of the start of production of a new package configuration by
Genesee Brewing Company. Production of the new package configuration continues
to be delayed by the inability of a Boston Beer Company supplier to deliver
packaging materials. Production of the new package configuration is now
scheduled to commence in December. The decline in volume was also due to a shift
in production and sale of a seasonal product to November versus October in the
prior year and Boston Beer Company moving production of a short run brand and
22oz. packages to their Cincinnati, Ohio plant. The contract volume lost as a
result of the delay in producing the new package configuration is not expected
to be made up during the balance of fiscal 1999. Future changes in volume will
depend on consumer demand for Boston Beer Company products and on decisions made
by Boston Beer Company regarding allocation of production among its several
sources of supply.
Genesee Brewing Company's gross profit decreased $1.9 million to $13.4
million, or 23.4% of net sales, year-to-date for fiscal 1999, compared to $15.3
million, or 24.0% of net sales, in the prior year. The negative volume trends
for both the Genesee core brands and the HighFalls craft brands, together with
the unfavorable shift in product mix towards Multipak can packages contributed
to the decline in gross profit for fiscal 1999. In addition, intense competition
has resulted in price stagnation over the past several years, further depressing
Genesee Brewing Company's gross profit margins.
Selling, general and administrative expenses were down $2.5 million in the
first two quarters of fiscal 1999 compared to the same period last year. This
decrease is the result of timing of spending this year versus last and cost
reduction efforts implemented in fiscal 1998.
Genesee Brewing Company's fiscal 1999 operating loss of $2.2 million was
$518,000 less than the $2.7 million operating loss in the prior year. This
improvement was primarily due to the decline in selling, general and
administrative spending in the first two quarters of fiscal 1999 as compared to
the same period last year.
Foods Division
Net sales for the Foods Division were $19.4 million in the first two
quarters of fiscal 1999, compared to $17.4 million for the same time period last
year. The increase in net sales was primarily attributable to $4.4 million in
second quarter sales of artificial sweeteners and other private label food
products of TKI Foods, Inc., and Spectrum Foods, Inc. This increase in net sales
was partially offset by the loss of $2.1 million in net sales recorded in the
first half of the prior year from a government soup contract and a contract to
package infant cereal that were completed in fiscal 1998.
<PAGE>
13
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Gross profit for the Foods Division increased $724,000 to $3.7 million in
the first half of fiscal 1999, compared to $3.0 million for the same period last
year. The increase in gross profit was attributable to the acquisition of TKI
Foods and Spectrum Foods.
Selling, general and administrative expenses increased $1.3 million in the
first half of fiscal 1999 compared to the same period last year. This increase
is primarily the result of additional costs incurred attributable to the
acquisition of TKI Foods and Spectrum Foods.
The Foods Division had an operating profit of $1.0 million in the first
half of fiscal 1999, which was $533,000 less than the operating profit reported
last year. The decrease in operating profit is the result of the loss of
contract revenue from the prior year, and the additional costs associated with
operating two facilities. The Foods Division is expected to benefit from
synergistic cost savings after all of its operations have been relocated to the
newly acquired production facility in Medina, New York, which is scheduled to be
completed during fiscal 2000.
Genesee Ventures
Genesee Ventures, Inc., the Corporation's equipment leasing and real
estate investment subsidiary, reported year-to-date operating income of $1.7
million for fiscal 1999, compared to $1.4 million for the prior year. The higher
operating income was primarily due to an increase in equipment lease revenue.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and marketable securities totaled $11.0 million at
October 31, 1998 and $20.5 million at May 2, 1998. The decline in cash, cash
equivalents, and marketable securities was the result of the sale of marketable
securities to fund a portion of the cost to acquire TKI Foods and Spectrum
Foods.
Accounts receivable balances were $863,000 higher at October 31, 1998 than
May 2, 1998. Inventories at October 31, 1998 were $2.4 million higher than the
balances reported at May 2, 1998. Net property, plant and equipment balances
were $3.3 million higher at October 31, 1998 than May 2, 1998. Goodwill and
other intangibles balances were $17.8 million higher at October 31, 1998 than
May 2, 1998. Goodwill and other intangibles, net property, plant and equipment,
accounts receivable and inventories increased due to the acquisition of TKI
Foods and Spectrum Foods.
Current liabilities were $12.2 million higher at October 31, 1998 compared
to May 2, 1998 due to the $10 million credit facility that was used to fund a
portion of the purchase price of TKI Foods and Spectrum Foods, with the balance
attributable to accrued liabilities acquired with TKI Foods and Spectrum Foods.
<PAGE>
14
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The $4.8 million mortgage payable was established on October 29, 1998 with
a commercial bank in connection with financing the acquisition of and capital
improvements the to Foods Division's new facility in Medina, New York.
The Corporation has a strategy to search for and develop opportunities
which will contribute to the future growth of its non-brewing business. The
Corporation plans to use its capital resources to further expand its Foods
Division to broaden its profit base and contribute to the continued long-term
success of the Corporation.
The Corporation expects that it will fund its future capital needs with a
combination of debt and internally generated funds. With respect to real estate
investments and equipment leasing, it is expected that the debt component will
generally be obtained on a non-recourse basis. The Corporation also continues to
seek acquisition opportunities in the foods industry. Any such acquisition may
involve new debt or the assumption of existing debt.
On December 4, 1998, the engineering firm engaged by Genesee Brewing
Company to inspect its system for storing and handling chemicals used to clean
and sanitize brewing equipment, kegs and refillable bottles (the "System")
delivered a preliminary cost estimate of up to $1.9 million to modify and/or
replace components of the System to achieve compliance with New York State's
chemical bulk storage regulations (the "Regulations"). A detailed inspection
report and cost estimate is expected from the engineering firm by December 31,
1998. The engineering firm has indicated that its preliminary estimate is
conservative. In addition, management believes that it will be able to
substantially reduce the actual cost by making changes to the System and by
seeking variances from certain requirements of the Regulations as they apply to
the System.
Genesee Brewing Company will work to develop a program of modifications,
upgrades and replacements to the System to achieve compliance with the
Regulations (the "Compliance Program"). The deadline for compliance with the
Regulations is December 22, 1999 and Genesee Brewing Company may not be able to
complete the entire Compliance Program by that date in which case it intends to
seek extensions to complete those portions of its Compliance Program that cannot
be completed by the deadline.
It is anticipated that the cost of the Compliance Program will be funded
internally and depreciated over the useful life of the System modifications or
replacements.
YEAR 2000
General
The Corporation is currently assessing and undertaking steps to address
potential problems that could affect the business operations and financial
condition of the Corporation and its subsidiaries as a result of the year 2000
issue. The year 2000 issue is the result of computer hardware and software
systems and other equipment with embedded chips or processors that use only two
digits to represent the year. As
<PAGE>
15
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
the year 2000 approaches, time-sensitive software may recognize a date using
"00" as the year 1900 rather than 2000. These systems may fail to operate or be
unable to process data accurately as a result of this flaw. The year 2000 issue
could arise at any point in the supply chain, manufacturing process,
distribution channels or information systems of the Corporation, its
subsidiaries and third parties with which they do business. The Corporation has
formed a task force made up of senior managers to address year 2000 compliance
issues. These issues include identification of critical and non-critical
systems, determining appropriate remediation measures, assigning responsibility
and scheduling of planned remediation, documentation and certification of task
completion, assessing third party relationships for compliance, cost estimation
and monitoring, and contingency planning for the Corporation and each of its
subsidiaries.
State of Readiness
The Corporation's year 2000 project is proceeding on schedule so far. The
task force has identified critical and non-critical information and other
technology systems at its Genesee Brewing Company subsidiary and is in the
process of identifying these systems in its Foods Division and its equipment
leasing and real estate investment businesses. In November 1998, Genesee Brewing
Company implemented a major hardware and software upgrade to bring its
manufacturing, information and financial consolidation software into year 2000
compliance. The new system has been tested and Genesee Brewing Company is
currently in the process of programming to resolve minor issues relating to the
operation of this new system. This programming is expected to be completed
during the third quarter of fiscal 1999.
The task force is currently in the process of identifying critical third
party relationships and is developing a program to assess year 2000 readiness of
vendors, customers and other material third party relationships for each of its
businesses. The Corporation's timetable for completion of the identification
process and communication program is the end of the third quarter of fiscal
1999.
Year 2000 Costs
The Corporation is committed to making the investments required to ensure
year 2000 readiness of the information and other technology systems of each of
its business units. These investments include hardware and software upgrades and
replacement. The cost to achieve year 2000 readiness for the internal
information and other technology systems of the Corporation and its subsidiaries
is currently estimated to be approximately $1.7 million, with $1.3 million spent
to date.
Year 2000 Risks
Failure by the Corporation or any third party with which the Corporation
has a material business relationship to achieve a year 2000 readiness could
result in the disruption of normal business activities. Such failures could
materially affect the Corporation's results of operations, liquidity and
financial condition. The Corporation is currently unable to estimate the impact
on its results of operations, liquidity and financial condition from the failure
to achieve year 2000 readiness of the Corporation's internal systems or the
failure of venders, customers or third parties to achieve year 2000 readiness.
Risks inherent with the year 2000 problem could occur if there is an
interruption of needed supplies and services,
<PAGE>
16
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
including energy, telecommunications and information exchange suppliers. In a
worse case scenario, this could interrupt or prevent the Corporation's
businesses from producing and selling their products or receiving payment from
customers. Management believes that it can achieve year 2000 readiness with its
internal systems on a timely basis, but at this time is unable to assure year
2000 readiness by third parties in the same time frame.
Year 2000 Contingency Plans
The task force established by the Corporation will evaluate business
disruption scenarios that could result from a failure to achieve year 2000
readiness, identify and implement preemptive strategies, and develop and
coordinate contingency plans. Contingency plans to address reasonably likely
worse case scenarios will be in place by the end of the first quarter of fiscal
2000.
Safe Harbor for Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
federal securities laws. These forward-looking statements may include statements
about the operations and prospects for the Corporation and its subsidiary
businesses and statements about industry trends and conditions that may affect
the performance or financial condition of the Corporation and its subsidiary
businesses. These forward-looking statements involve significant risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements. The most important factors that could
cause actual results to differ from the expectations stated in these
forward-looking statements include, among others, the inability of Genesee
Brewing Company and its distributors to develop and execute effective marketing
and sales strategies for Genesee Brewing Company's products; the potential
erosion of sales revenues and profit margins through continued price stagnation,
increased discounting or a higher proportion of sales in lower margin Multipaks;
a continuation of the slowdown in the craft beer category or a potential shift
in consumer preferences away from the craft category, including Honey Brown
Lager; the intensely competitive, slow-growth nature of the beer industry;
demographic trends and social attitudes that can reduce beer sales; the
continued growth in the popularity of import and nationally advertised beers;
increases in the cost of aluminum, paper packaging and other raw materials; the
Corporation's inability to reduce manufacturing and overhead costs of its
brewing and foods businesses to more competitive levels; changes in significant
laws and government regulations affecting sales, advertising and marketing of
malt beverage products; significant increases in federal, state or local beer or
other excise taxes; the potential impact of beer industry consolidation at both
the brewer and distributor levels; a shift in consumer preferences away from
store-brand, private label food products increased competition from branded food
product producers that might adversely affect sales of private label products;
the possibility that the Corporation's Foods Division might experience delays or
difficulties in integrating TKI Foods and Spectrum Foods; the possibility that
the Foods Division might experience delays or difficulties in the relocation of
its operations to Medina, New York; the possibility that the Foods Division
might not achieve all of the expected synergies from the integration and
relocation of all operations into a single facility; interest rate fluctuations
that could reduce demand for or the rate of return on new equipment lease
business; increased competition in the equipment leasing business resulting from
lower interest rate environment; increases in the estimated costs to achieve
year 2000
<PAGE>
17
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
readiness; and the risk that computer systems of the Corporation, its
subsidiaries and their significant suppliers or customers may not be year 2000
compliant.
PART II. OTHER INFORMATION
The Corporation's annual meeting of Class A shareholders was held on
October 22, 1998. At the annual meeting, shareholders elected William A.
Buckingham, Samuel T. Hubbard, Jr. and Robert N. Latella to serve as directors
until the annual meeting of shareholders in 2001. The terms of office of Stephen
B. Ashley, Thomas E. Clement Gary C. Geminn, Richard P. Miller, Jr., Charles S.
Wehle and John L. Wehle, Jr. continued after the annual meeting of shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are attached to this report:
Exhibit 10 - Amendment No. 1 to Genesee Corporation 1986
Incentive Bonus Plan.
(b) Reports on Form 8-K. The Corporation did not file any reports on
Form 8-K during the quarter for which this report is filed.
<PAGE>
18
GENESEE CORPORATION
SIGNATURES
Pursuant to the requirements 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.
GENESEE CORPORATION
Date: 12/11/98 /s /Robert N. Latella
Robert N. Latella
Executive Vice President
and Chief Operating Officer
Date: 12/11/98 /s / Michael C. Atseff
Michael C. Atseff
Vice President and Controller
<PAGE>
19
GENESEE CORPORATION
EXHIBIT INDEX
Exhibit Number Exhibit Page
10 Amendment No. 1 to Genesee Corporation 20
1986 Incentive Bonus Plan
<PAGE>
20
AMENDMENT NO. 1 OF GENESEE CORPORATION
INCENTIVE 1986 BONUS PLAN
On September 15, 1998, the following amendment of the Genesee Corporation
1986 Incentive Bonus Plan (the "Plan") was unanimously adopted by the Management
Continuity Committee of the Board of Directors of Genesee Corporation (the
"Corporation").
1. A new Section 3(D) shall be added to the Plan to read as follows:
Not withstanding any other provision of the Plan, the amount of all
Awards payable pursuant to the Plan to Category A participants (as
hereinafter designated) in fiscal 1999 shall be determined in the sole
discretion of the Committee, with or without regard to the achievement
of goals established for the Performance Measure and/or the amount(s)
of award(s) paid to any other Participant(s).
2. All capitalized terms shall have the definitions set forth in the
Plan.
3. Except as set forth above, the Plan shall remain in full force and
effect in accordance with the terms thereof.
IN WITNESS WHEREOF, the Corporation has caused this Amendment to be
executed by its duly authorized officer as of September 15, 1998.
GENESEE CORPORATION
By: /s/R. N. Latella
Robert N. Latella, Executive Vice President
and Chief Operating Officer
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