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 AUGUST 1, 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
August 1, 1998 and May 2, 1998
<TABLE>
<S> <C> <C>
UNAUDITED AUDITED
(Dollars in Thousands) August 1, 1998 May 2, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 10,977 2,692
Marketable securities available for sale 8,053 17,808
Trade accounts receivable, less allowance for doubtful receivables
of $442 at August 1, 1998; $433 at May 2, 1998 11,691 10,163
Inventories, at lower of cost (first-in, first-out) or market 14,921 14,258
Deferred income tax assets 1,315 1,315
Other current assets 993 683
Total current assets 47,950 46,919
Net property, plant and equipment 32,871 33,311
Investment in and notes receivable from unconsolidated real estate partnerships 5,495 5,534
Investments in direct financing and leveraged leases 34,116 34,638
Goodwill and other intangibles, net 10,399 10,737
Other assets 4,674 4,450
Total assets 135,505 135,589
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 7,801 8,358
Income taxes payable 1,148 692
Federal and state beer taxes payable 1,725 1,756
Accrued expenses and other 7,665 7,255
Total current liabilities 18,339 18,061
Deferred income tax liabilities 8,958 9,295
Accrued postretirement benefits 15,415 15,415
Other liabilities 412 471
Total liabilities 43,124 43,242
Minority interests in consolidated subsidiaries 2,211 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 86,709 86,143
Unrealized gain on marketable securities, net of income taxes 190 752
Less treasury stock, at cost 3,443 3,475
Total shareholders' equity 90,170 90,120
Total liabilities and shareholders' equity $ 135,505 135,589
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
3
GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF EARNINGS AND RETAINED EARNINGS
Thirteen Weeks Ended August 1, 1998 and August 2, 1997
<TABLE>
(Dollars in Thousands,
Except Per Share Data)
<S> <C> <C>
UNAUDITED
1998 1997
Revenues $ 48,595 53,052
Federal and state beer taxes 9,204 10,107
Net revenues 39,391 42,945
Cost of sales 29,709 32,082
Gross profit 9,682 10,863
Selling, general and administrative expenses 9,088 9,218
Operating Income 594 1,645
Investment income 1,199 834
Other income / (expense), net 166 (31)
Interest of minority partners in earnings of
consolidated subsidiaries (197) (189)
Earnings before income taxes 1,762 2,259
Income taxes 630 842
Net earnings 1,132 1,417
Basic and Diluted earnings per share 0.70 0.88
Retained earnings at beginning of period 86,143 87,720
Less: dividends - $.35 per share in
1998 and $.35 per share in 1997 566 566
Retained earnings at end of period $ 86,709 88,571
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
4
GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirteen Weeks Ended August 1, 1998 and August 2, 1997
<TABLE>
(Dollars in Thousands)
UNAUDITED
<S> <C> <C>
1998 1997
Cash flows from operating activities:
Net earnings $ 1,132 $ 1,417
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amorization 1,590 1,399
Other 205 211
Changes in non-cash assets and liabilities:
Trade accounts receivable (1,461) (1,621)
Inventories (663) (1,603)
Other assets (417) (669)
Account payable (556) 198
Accrued expenses and other 411 (2,041)
Income taxes payable 456 428
Federal and state beer taxes (31) 31
Other liabilities (59) (69)
Net cash provided by (used in) operating activities 607 (2,319)
Cash flows from investing activities:
Purchase of Freedom Foods, net of cash acquired - (11,060)
Capital expenditures (1,006) (2,173)
Sales of marketable securities 9,304 21,456
Purchase of marketable securities (447) (8,324)
Investments in and advances to unconsolidated real
estate investments, net of distributors 40 (11)
Net investment in direct financing and leveraged leases 522 (572)
Withdrawals by minority interest (214) (19)
Net cash provided by (used in) investing activities 8,199 (703)
Cash flows from financing activities:
Principle payments on mortgage payable - (4)
Payment of dividends (567) (566)
Net proceeds from treasury stock transactions 46 35
Net cash used in financing activities (521) (535)
Net increase (decrease) in cash and cash equivalents 8,285 (3,557)
Cash and cash equivalents at beginning of the year 2,692 4,521
Cash and cash equivalents at end of period $ 10,977 $ 964
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
5
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 financial statements presented in the Corporation's
Annual Report to shareholders for the year ended May 2,
1998.
NOTE (B) The weighted average number of Class A and Class B shares
outstanding used in the computation of basic earnings per
share is 1,618,444 for the thirteen week period ended
August 1, 1998 and 1,617,611 for the thirteen week period
ended August 2, 1997. The weighted average and common
equivalent shares of Class A and Class B used in the
computation of diluted earnings per share is 1,619,350 for
the thirteen week period ended August 1, 1998 and
1,621,513 for the thirteen week period ended August 2,
1997.
NOTE (C) Inventories are summarized as follows:
<TABLE>
<S> <C> <C> <C>
Dollars in thousands
August 1, 1998 May 2, 1998
Finished goods $ 4,858 $ 5,567
Goods in process 1,919 1,664
Raw materials, containers and packaging supplies 8,144 7,027
Total inventories $ 14,921 $ 14,258
</TABLE>
NOTE (D) On August 3, 1998, the Corporation acquired all of the
capital stock of TKI Foods, Inc., a food company located
in Springfield, Illinois, and certain assets of Spectrum
Foods, Inc., an affiliated company located in Decatur,
Illinois for $19.9 million. For the year ended December
31, 1997, TKI Foods and the lines of business acquired
from Spectrum Foods recorded approximately$21 million in
sales from the manufacture and sale of artificial
sweeteners and other private label food products. TKI
Foods sells to many of the same supermarket chains already
buying private label soup, side dish, drink mix and
bouillon products from the Corporation's Foods Division.
The Corporation intends to relocate TKI Foods'
manufacturing and sales operations to its Foods Division
facility in western, New York. The acquisition was
financed through the combination of $10.0 million from a
commercial bank credit facility and $9.9 million of
internally generated funds. The acquisition will be
accounted for using the purchase method, whereby the
purchase price will be allocated to the underlying assets
and liabilities based upon their estimated fair values.
<PAGE>
6
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of 13 weeks ended August 1, 1998 to 13 weeks ended August 2, 1997
Consolidated net revenues for the thirteen weeks ended August
1, 1998 were $39.4 million, as compared to $42.9 million for the
same period last year. The lower revenues were the result of lower
sales volume at the Genesee Brewing Company and lower contract
manufacturing revenue for the Foods Division.
Consolidated operating income was down $1.1 million, primarily
due to lower sales volume at Genesee Brewing Company and Ontario
Foods.
Earnings before income taxes were $1.8 million, down $497,000
from the prior year. The decrease was reduced by an increase of
$415,000 of realized capital gains. Realized capital gains of
$883,000 were recorded in the first quarter of fiscal 1999 when the
corporation sold marketable securities in order to finance the
acquisitions of TKI Foods, Inc. and Spectrum Foods, Inc. Realized
capital gains of $468,000 were recorded in the first quarter of
fiscal 1998 when the corporation sold marketable securities in order
to finance the acquisition of Freedom Foods.
On a consolidated basis, the Corporation reported consolidated
net earnings of $1.1 million, or $.70 basic and diluted earnings per
share, in the first quarter this year, compared to net earnings of
$1.4 million, or $.88 basic and diluted earnings per share, for the
same period last year.
Genesee Brewing Company
Genesee Brewing Company's net sales in the first quarter were
$32.4 million, a decrease of $2.8 million from last year's first
quarter net sales. Barrel sales for the first quarter this year
were down 10.7% over last year due primarily to an 9.6% decrease in
Genesee Brewing Company's Core brands and lower volume under the
brewing contract with Boston Beer Company. The Highfalls brands,
which represent 25% of total volume, declined slightly in the first
quarter, despite a slight increase in volume for JW Dundee's Honey
Brown Lager.
Contract brewing volume was down 24,000 barrels (or 31%) over
the first quarter last year. The decline in volume was partially
due to the planned reallocation of production during the first
quarter of a portion of Boston Beer Company's requirements in
anticipation of the start of production of a new package
configuration by Genesee Brewing Company. Production of the new
package configuration was then delayed by the inability of a Boston
Beer Company supplier to deliver packaging materials. The decline
in volume was also due to a shift in production and sale of a
seasonal product to August versus July in the prior year and Boston
Beer Company moving a short run brand and 22oz. packages to their
Cincinnati, Ohio plant. Volume under this contract has reached the
maximum level required by Boston Beer Company to meet consumer
demand in the markets where Boston Beer Company products produced by
Genesee Brewing Company are sold.
<PAGE>
7
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Genesee Brewing Company's gross profit decreased $802,000 to
$8.4 million, or 25.9% of net sales, in the first quarter of fiscal
1999, compared to $9.2 million, or 26.2% of net sales, in the first
quarter of fiscal 1998. The decrease in gross profit margins was
primarily the result of the continued shift in sales mix towards
lower-margin multipak can packages.
Genesee Brewing Company's selling, general and administrative
expenses were down $745,000 in the first quarter of fiscal 1999
compared to the same period last year. This decrease is primarily
the result of planned decreases in spending as a result of cost
reduction efforts implemented in fiscal 1998.
Due to the decline in barrel volume and revenues, first quarter
operating income for Genesee Brewing Company declined to $474,000,
compared to operating income of $531,000 in the first quarter 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 so far in calendar 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 announced its intention to increase prices on certain brands
and packages in certain markets, there can be no assurance that these
increases will remain in place if they are implemented or that they will
provide any meaningful relief in the markets where Genesee Brewing
Company products are sold.
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 National Beer Wholesalers
Association estimates that the number of beer wholesalers in the United
<PAGE>
8
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
States declined by 14% between 1992 and 1997. 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 implemented 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
abate in the near term.
Foods Division
Net sales for the Foods Division were $6.2 million in the first
quarter of fiscal 1999, compared to $7.1 million for the first
quarter last year, traditionally the slowest period for the Foods
Division. The decline in sales was attributable to lower contract
manufacturing revenues in the first quarter. The prior year
benefited from a 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
the recently acquired TKI Foods, Inc. and Spectrum Foods, Inc.
business into the Foods Division.
Lower then expected sales of iced tea mix and side dishes also
contributed to the decline in Foods Division sales in the first
quarter of fiscal 1999. Foods Division iced tea mix and side dish
sales were adversely affected by heavy promotions for branded ice
tea and side dish products. Despite lower iced tea mix and side
dish sales, retail private label net sales increased $324,000 in the
first quarter to $6.1 million, due in part to a $236,000 increase
in bouillon sales. The Freedom Foods line of bouillon cubes and
powder were acquired during the first quarter of fiscal 1998 so the
prior year period included two fewer weeks of bouillon business.
The Foods Division had an operating loss of $265,000, compared
to an operating profit of $253,000 in the first quarter last year, a
decrease of $518,000.
Genesee Ventures
Genesee Ventures, Inc., the Corporation's equipment leasing and
real estate investment subsidiary, reported operating income of
$787,000 for the first quarter of fiscal 1999, compared to
<PAGE>
9
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
$673,000 for the first quarter of fiscal 1998. 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 $19.0
million at August 1, 1998 and $20.5 million at May 2, 1998. The
decline in cash, cash equivalents, and marketable securities was the
result of an increase in accounts receivable. The Genesee Brewing
Company's accounts receivable is traditionally larger at the end of
the first quarter due to higher summer sales as compared to fiscal
year end sales levels. Marketable securities decreased $9.8 million
in the first quarter, which was partially offset by an $8.3 million
increase in cash and cash equivalents to position the cash balances
for the purchase of all the capital stock of TKI Foods, Inc. and
certain assets of Spectrum Foods, Inc.
Inventories at August 1, 1998 were approximately $663,000
higher than the balances reported at May 2, 1998 partially due to an
inventory build to support sales of a seasonal product for Boston
Beer. Foods Division inventory also increased in the first quarter
to support fall bouillon sales.
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 significant
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 to fund future capital needs internally
as it has in the past. With respect to real estate and equipment
leasing, such investments may also include a debt component,
generally 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.
The Corporation is addressing Year 2000 compliance to ensure the
availability and integrity of its financial, operating and information
systems. The Corporation is making investments in its information
systems and applications to ensure they are Year 2000 compliant through
either replacement of existing systems with new Year 2000 compatible
systems or modifications of its current systems.
The Corporation does not expect that the cost of replacing and
modifying its information systems to achieve Year 2000 compliance will
be material to its financial condition or results of operations. The
Corporation is also working with its suppliers and customers to ensure
their compliance with Year 2000 issues in an effort to avoid any
business interruptions. At this time the Corporation does not expect
that its business or operations will be materially affected if
significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance.
<PAGE>
10
GENESEE CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are being filed with this report.
(b) The Corporation did not file any reports on Form 8-K
during the quarter for which this report is filed.
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.
Date: 9/11/98 / s / Robert N. Latella
Robert N. Latella
Executive Vice President and Chief Operating Officer
Date: 9/11/98 / s / Michael C. Atseff
Michael C. Atseff
Vice President and Controller
<TABLE> <S> <C>
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<FISCAL-YEAR-END> MAY-1-1999
<PERIOD-END> AUG-1-1998
<CASH> 10,977
<SECURITIES> 8,053
<RECEIVABLES> 12,133
<ALLOWANCES> 442
<INVENTORY> 14,921
<CURRENT-ASSETS> 47,950
<PP&E> 118,915
<DEPRECIATION> 86,044
<TOTAL-ASSETS> 135,505
<CURRENT-LIABILITIES> 18,339
<BONDS> 0
<COMMON> 858
0
0
<OTHER-SE> 89,312
<TOTAL-LIABILITY-AND-EQUITY> 135,505
<SALES> 48,595
<TOTAL-REVENUES> 48,595
<CGS> 29,709
<TOTAL-COSTS> 9,204
<OTHER-EXPENSES> 9,088
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