<PAGE>
1
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 January 30, 1999
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
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2
GENESEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 30, 1999 and May 2, 1998
<TABLE>
<S> <C> <C>
UNAUDITED AUDITED
(Dollars in Thousands) January 30, 1999 May 2, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 6,358 $ 2,692
Marketable securities available for sale 8,092 17,808
Trade accounts receivable, less allowance for doubtful receivables
of $520 at January 30, 1999; $433 at May 2, 1998 9,690 10,163
Inventories, at lower of cost (first-in, first-out) or market 17,309 14,258
Deferred income tax assets 1,879 1,315
Other current assets 920 683
--------- --------
Total current assets 44,248 46,919
Net property, plant and equipment 36,162 33,311
Investment in and notes receivable from unconsolidated real estate partnerships 5,333 5,534
Investments in direct financing and leveraged leases 29,824 34,638
Goodwill and other intangibles 28,043 10,737
Other assets 3,514 4,450
========= ========
Total assets 147,124 135,589
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 8,167 8,358
Income taxes payable 1,596 692
Federal and state beer taxes payable 700 1,756
Line of credit and current portion of mortgage payable 3,079 -
Accrued expenses and other 10,991 7,255
--------- --------
Total current liabilities 24,533 18,061
Deferred income tax liabilities 9,360 9,295
Accrued postretirement benefits 15,415 15,415
Mortgage payable 4,725 -
Other liabilities 412 471
--------- --------
Total liabilities 54,445 43,242
Minority interests in consolidated subsidiaries 2,425 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 86,739 86,143
Unrealized gain on marketable securities, net of income taxes 244 752
Less treasury stock, at cost 3,443 3,475
--------- --------
Total shareholders' equity 90,254 90,120
--------- --------
Total liabilities and shareholders' equity $ 147,124 $ 135,589
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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3
GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF EARNINGS AND RETAINED EARNINGS
Thirteen Weeks Ended January 30, 1999 and January 31, 1998
(Dollars in Thousands,
Except Per Share Data)
<TABLE>
<S> <C> <C>
UNAUDITED
1999 1998
Revenues $ 41,732 $ 42,560
Federal and state beer taxes 6,303 6,701
----------- -----------
Net revenues 35,429 35,859
Cost of sales 27,144 28,877
----------- -----------
Gross profit 8,285 6,982
Selling, general and administrative expenses 8,843 8,532
----------- -----------
Operating loss (558) (1,550)
Investment income 281 1,335
Other income / (expense), net 3,403 (72)
Interest of minority partners in earnings of
consolidated subsidiaries (216) (199)
----------- -----------
Earnings / (loss) before income taxes 2,910 (486)
Income taxes / (Benefit) 1,159 (139)
----------- -----------
Net earnings / (loss) 1,751 (347)
Basic and Diluted earnings / (loss) per share 1.08 (0.21)
Retained earnings at beginning of period 84,988 86,669
----------- -----------
Retained earnings at end of period $ 86,739 $ 86,322
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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4
GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF EARNINGS AND RETAINED EARNINGS
Thirty Nine Weeks Ended January 30, 1999 and January 31, 1998
(Dollars in Thousands,
Except Per Share Data)
<TABLE>
<S> <C> <C>
UNAUDITED
1999 1998
Revenues $ 136,291 $ 143,440
Federal and state beer taxes 22,290 24,721
----------- -----------
Net revenues 114,001 118,719
Cost of sales 86,833 91,965
----------- -----------
Gross profit 27,168 26,754
Selling, general and administrative expenses 27,692 28,042
----------- -----------
Operating loss (524) (1,288)
Investment income 1,746 2,725
Other income / (expense), net 3,460 (233)
Interest of minority partners in earnings of
consolidated subsidiaries (710) (582)
----------- -----------
Earnings before income taxes 3,972 622
Income taxes 1,675 322
----------- -----------
Net earnings 2,297 300
Basic and Diluted earnings per share 1.42 0.18
Retained earnings at beginning of period 86,143 87,720
Less: Dividends - $1.05 per share in 1999
and $1.05 per share in 1998 1,701 1,698
----------- -----------
Retained earnings at end of period $ 86,739 $ 86,322
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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5
GENESEE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty Nine Weeks Ended January 30, 1999 and January 31, 1998
<TABLE>
<S> <C> <C>
UNAUDITED
(Dollars in thousands) 1999 1998
Cash flows from operating activities:
Net earnings $ 2,297 $ 300
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,932 3,762
Other 214 703
Changes in non-cash assets and liabilities:
Trade accounts receivable 1,402 999
Inventories (1,172) (217)
Other assets 334 (946)
Accounts payable (1,848) (1,022)
Accrued expenses and other 1,920 1,078
Income taxes payable 904 (540)
Federal and state beer taxes (1,056) (1,089)
Other liabilities (1,431) (69)
----------- -------------
Net cash provided by operating activities 6,496 2,959
----------- -------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (18,826) (11,060)
Capital expenditures (4,466) (5,153)
Sales of marketable securities 10,319 29,816
Purchases of marketable securities and other investments 82 (14,633)
Investments in and advances to unconsolidated real
real estate investments, net of distributions 200 43
Net investment in direct financing and leveraged leases 4,814 (1,539)
Withdrawals by minority interest (513) (153)
----------- -------------
Net cash used in investing activities (8,390) (2,679)
----------- -------------
Cash flows from financing activities:
Line of credit 3,000 -
Mortgage payable 4,780 (15)
Payment of dividends (2,266) (2,265)
Proceeds from exercise of stock options 46 38
----------- -------------
Net cash provided by / (used in) financing activities 5,560 (2,242)
----------- -------------
Net increase / (decrease) in cash and cash equivalents 3,666 (1,962)
Cash and cash equivalents at beginning of the year 2,692 4,521
=========== =============
Cash and cash equivalents at end of the period $ 6,358 $ 2,559
=========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
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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>
Dollars in thousands
January 30, 1999 May 2, 1998
Finished goods $ 6,594 $ 5,567
Goods in process 1,518 1,664
Raw materials, containers and packaging supplies 9,197 7,027
Total inventories $ 17,309 $ 14,258
</TABLE>
NOTE (C) The Corporation's consolidated balance sheet shows 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% in effect through February 28,
1999. This line of credit expires in July 1999. At
January 30, 1999, $12 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.
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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>
Dollars in Thousands
Thirteen Weeks Ended Thirty Nine Weeks Ended
1/30/99 1/31/98 1/30/99 1/31/98
Net earnings/(loss) $ 1,751 $ (347) $ 2,297 $ 300
Unrealized loss on marketable
securities, net of taxes (20) (478) (508) (234)
Total comprehensive income / (loss) $ 1,731 $ (825) $ 1,789 $ 66
</TABLE>
<PAGE>
8
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of 13 weeks ended January 30, 1999 to 13 weeks ended January 31, 1998
Consolidated net revenues for the thirteen weeks ended January 30,
1999 were $35.4 million, a decrease of $430,000 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 $558,000, which was a $992,000 improvement compared to the same
period last year. The improvement in operating performance was due to
reduced selling, general and administrative expenses at the Genesee
Brewing Company and higher operating income from the Foods Division.
Earnings before income taxes were $2.9 million, which was a $3.4
million improvement compared to the same period last year. The
improvement in earnings before income taxes was due to a $3.4 million
gain realized by Genesee Ventures, Inc. from the sale of its investment
in Lloyd's Food Products, Inc. Lloyd's Food Products is a
Minnesota-based producer of prepared packaged barbecued meat products
that Genesee Ventures, Inc. acquired a minority equity interest in
during the second quarter of fiscal 1998. This $1.5 million investment
was accounted for at cost. The stock of Lloyd's Food Products was sold
to General Mills, Inc. in January 1999, resulting in a pre-tax gain of
$3.4 million to the Corporation.
On a consolidated basis, the Corporation reported net earnings of
$1.8 million, or $1.08 basic and diluted earnings per share, in the
third quarter this year, compared to a net loss of $347,000, or $.21
basic and diluted loss per share, for the same period last year.
Genesee Brewing Company
Genesee Brewing Company's net sales in the third quarter were
$23.5 million, a decrease of $3.0 million from last year's third quarter
net sales of $26.5 million. Barrel sales for the third quarter this
year were down 8.8% from the prior year period due to a 12.2% decrease
in Genesee Brewing Company's core brands and a 12.0% decrease in the
HighFalls brands. The declines in core and HighFalls brand volume were
partially offset by a 11.5% increase in volume under the production
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 23% of total
barrel 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 volume than competing
specialty brands and that the slowdown in the specialty segment of the
industry is affecting draft sales to a greater extent than package
sales. Consequently, Honey Brown Lager, with its higher concentration
in draft, was affected to a greater degree.
<PAGE>
9
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
The increase in contract brewing volume for the quarter was due to
the start of production of a new package configuration in December
1998. Production of this new package configuration was originally
scheduled to begin in the first quarter of fiscal 1999, but was delayed
by the inability of a Boston Beer Company supplier to deliver packaging
materials.
Genesee Brewing Company's gross profit decreased $86,000 to $4.9
million in the third quarter of fiscal 1999, compared to $5.0 million in
the third quarter of fiscal 1998. The negative volume trends for both
the Genesee core brands and the HighFalls craft brands, together with
the shift in product mix towards lower margin Multipak can packages,
contributed to the decline in gross profit in the third quarter this
year.
Selling, general and administrative expenses were down $731,000 in
the third 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 third quarter operating loss of $2.0
million was $645,000 less than the $2.6 million operating loss in the
third quarter of the prior year. This improvement was primarily due to
lower selling, general and administrative spending in the third quarter
of fiscal 1999 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 less than 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 increasingly turned to certain
nationally advertised light beer brands, imported malt beverages and
domestic specialty beers like Honey Brown Lager. However, the slowdown
in the domestic specialty beer segment of the industry that began in
1997 continued during 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
and innovative packaging. 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 the large national
brewers implemented price increases during the fourth quarter of
calendar 1998 these increases were generally not as significant as
originally anticipated. Instead of an across-the-board general price
increase, the national brewers took a much more targeted approach,
increasing prices on certain brands
<PAGE>
10
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
and packages based largely on regional competitive considerations.
Although these price increases allowed Genesee Brewing Company to make
modest price increases on certain packages in certain markets, the price
relief did not have a meaningful affect on Genesee Brewing Company's
overall profitability.
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 ensure that an increasing share
of the distributor's time and attention is 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
Net sales for the Foods Division were $11.1 million in the
third quarter of fiscal 1999, compared to $8.4 million for the third
quarter last year. The increase in net sales was primarily
attributable to $4.4 million in third quarter sales of artificial
sweeteners and other private label food products of TKI Foods, Inc.
and Spectrum Foods, Inc., which were acquired by the Corporation
during the second quarter of fiscal 1999. The increase in net sales
attributable to the TKI Foods and Spectrum Foods acquisitions was
partially offset by the loss of $800,000 in net sales recorded in
the third quarter of the prior year from a one-time government soup
contract that was completed in fiscal 1998. The Foods Division did
not aggressively seek 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.
Also partially offsetting the increase in net sales was the
loss of $600,000 of Ice Tea Mix sales in the third quarter of fiscal
1999 as compared to the same period of the prior year. Some of the
Foods Division's retail chain store customers shifted their iced tea
purchases to a Canadian sugar refiner that is seeking to
aggressively expand its share of the United State's private label
iced tea mix market. This Canadian supplier, which controls a large
percentage of the U.S. tariff rate quota for imported products, is
offering extremely low prices to Foods Division iced tea mix
customers to draw their iced tea mix business away from the Foods
Division. Management believes certain actions by the Canadian sugar
refiner violates the United States trade laws. The Corporation is
seeking relief from these trade practices through appropriate
government channels. In addition to sales lost when Foods Division
customers shifted their iced tea mix to the Canadian sugar refiner,
the Foods Division also had to significantly reduce its prices for
iced tea
<PAGE>
11
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
mix to its other iced tea mix customers to retain their business,
which further eroded iced tea mix revenues and profit margins in the
third quarter.
Gross profit for the Foods Division increased $1.5 million to $2.5
million in the third quarter of fiscal 1999, compared to $1.0 million
for the third 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 $1.3
million in the third 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 $758,000 in the
third quarter of fiscal 1999, which was $293,000 more than the operating
profit reported in the third quarter last year.
Foods Division profitability in the third quarter was adversely
impacted by costs associated with owning the facility in Medina, New
York that the Foods Division acquired in October 1998 and costs arising
from transitioning the TKI Foods business from Springfield, Illinois to
the Medina facility. The Foods Division is executing a plan, which is
scheduled to be completed during fiscal 2000, to consolidate all of its
operations at the Medina facility. This consolidation of all operations
at a single location will allow the Foods Division to close its
Springfield, Illinois and Albion, New York facilities, which is expected
to generate significant cost savings for the Foods Division
Genesee Ventures
Genesee Ventures, Inc., the Corporation's equipment leasing and
real estate investment subsidiary, reported operating income of $820,000
for the third quarter of fiscal 1999, compared to $739,000 for the third
quarter of fiscal 1998. The higher operating income was primarily due
to an increase in equipment lease revenue.
Genesee Ventures, Inc. earnings before taxes increased $3.6
million to $4.0 million as compared to $444,000 for the same period last
year. The increase in earnings was due to a $3.4 million gain on the
sale of Genesee Ventures' investment in Lloyd's Food Products, Inc.
Comparison of 39 weeks ended January 30, 1999 to 39 weeks ended January 31, 1998
Consolidated year-to-date net revenues were $114.0 million, a
decrease of $4.7 million from the consolidated net revenues of $118.7
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.
<PAGE>
12
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Earnings before income taxes were $4.0 million, which was a $3.4
million improvement compared to the same period last year. The
improvement in earnings before income taxes was due to a $3.4 million
gain made on an equity investment made in September 1997. This
investment was accounted for at cost.
On a consolidated basis, the Corporation reported year-to-date
net earnings of $2.3 million, or $1.42 basic and diluted earnings per
share, compared to net earnings of $300,000, or $.18 basic and diluted
earnings per share, for the same period last year.
Genesee Brewing Company
Genesee Brewing Company's net sales in the first three quarters of
fiscal 1999 were $80.9 million, a decrease of $9.6 million, or 10.6%,
from the prior year's net sales of $90.5 million. Barrel sales for the
first three quarters were down 11.8% over last year due to a 11.2%
decrease in Genesee Brewing Company's core brands, a 8.7% decrease in
Genesee Brewing Company's HighFalls brands and a 18.1% 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 23% of total
barrel volume, was primarily the result of decreased Honey Brown Lager
draft (on premise) sales. It is management's belief that Honey Brown
Lager has maintained a higher percentage of draft business than
competing brands in the specialty beer segment of the industry.
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 was originally scheduled to begin in the first
quarter of fiscal 1999 but was delayed until December 1998 by the
inability of a Boston Beer Company supplier to deliver packaging
materials. The decline in volume was also due to 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 contract
brewing 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 $2.0 million to $18.4
million, or 22.7% of net sales, year-to-date for fiscal 1999, compared
to $20.4 million, or 22.5% 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 shift in product mix towards
lower margin Multipak can packages, contributed to the decline in gross
<PAGE>
13
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
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 $3.2
million in the first three 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 $4.2
million was $1.2 million less than the $5.4 million operating loss in
the prior year. This improvement was primarily due to the decline in
selling, general and administrative spending in the first three quarters
of fiscal 1999 as compared to the same period last year.
Foods Division
Net sales for the Foods Division were $30.5 million in the first
three quarters of fiscal 1999, compared to $26.0 million for the same
time period last year. The increase in net sales was primarily
attributable to $8.6 million in year-to-date 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 $2.3 million in net sales recorded in the first three
quarters of the prior year from a government soup contract and a
contract to package infant cereal that were completed in fiscal 1998.
Also partially offsetting the increase in net sales was the loss of $1.7
million of ice tea mix sales in fiscal 1999 as compared to the same
period of the prior year.
Gross profit for the Foods Division increased $2.0 million to $6.2
million in the first three quarters of fiscal 1999, compared to $4.2
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 $2.3
million in the first three quarters 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 $1.8 million in
fiscal 1999, which was $240,000 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 costs associated with
transitioning the TKI Foods business to the Foods Division's newly
acquired facility in Medina, New York.
<PAGE>
14
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Genesee Ventures
Genesee Ventures, Inc., the Corporation's equipment leasing
and real estate investment subsidiary, reported year-to-date operating
income of $2.6 million for fiscal 1999, compared to $2.1 million for the
prior year. The higher operating income was primarily due to an
increase in equipment lease revenue.
Genesee Ventures, Inc. earnings before taxes increased $3.8
million to $5.1 million as compared to $1.3 million for the same
period last year. The increase in earnings was due to a $3.4
million gain on the sale of Genesee Ventures' investment in Lloyd's
Food Products, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, and marketable securities totaled $14.5
million at January 30, 1999 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 $473,000 lower at January 30,
1999 than May 2, 1998. Genesee Brewing Company's receivables were
lower due to seasonality and lower sales volume.
Inventories at January 30, 1999 were $3.1 million higher than the
balances reported at May 2, 1998. Net property, plant and equipment
balances were $2.8 million higher at January 30, 1999 than May 2,
1998. Goodwill and other intangibles balances were $17.3 million
higher at January 30, 1999 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.
Investments in direct financing and leveraged leases were $4.8
million lower than the balances reported at May 2, 1998. This decrease
was due to the maturity of nearly 1/3 of the leasing portfolio and
represents the original investment and realized excess residual income.
Current liabilities were $7.0 million higher at January 30, 1999
compared to May 2, 1998 due to the $3 million credit facility that was
used to fund a portion of the purchase price of TKI Foods and Spectrum
Foods. This credit facility was reduced $7.0 million during the third
quarter of fiscal 1999, with $4.8 million from the reduction in direct
and leveraged leases and the balance from the $3.4 million gain on the
sale of an equity investment. Income taxes payable increased $900,000
due to third quarter earnings. The balance is attributable to accrued
liabilities acquired with TKI Foods and Spectrum Foods.
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 to the Foods Division's new
facility in Medina, New York.
<PAGE>
15
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
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.
Genesee Brewing Company is working on a program of modifications,
upgrades and replacements to its system for storing and handling
chemicals used to clean and sanitize brewing equipment, kegs and
refillable bottles (the "System") to achieve compliance with New York
chemical bulk storage regulations that will take effect in December 1999
(the "Regulations"). The engineering firm engaged by Genesee Brewing
Company to inspect the System and estimate the cost to achieve
compliance with the Regulations has delivered its inspection report and
a preliminary cost estimate of up to $1.9 million to achieve compliance
with the Regulations. Genesee Brewing Company is exploring certain
changes to the System and its operating procedures to substantially
reduce the cost to achieve compliance with the Regulation's. In January
1999, Genesee Brewing Company received regulatory approval of a new
operating procedure that will exempt a portion of the System from the
Regulations. This exemption should eliminate approximately $500,000 of
the estimated cost to achieve compliance with the Regulations.
Genesee Brewing Company may not be able to achieve full compliance
with the Regulations by the December 1999 deadline, in which case it
intends to seek extensions to complete those portions of the System
upgrades and modifications that cannot be completed by the deadline.
It is anticipated that the cost of the System upgrades and
modifications 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
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
<PAGE>
16
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
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, its Foods Division and its equipment leasing and real estate
investment businesses. In November 1998, the Corporation implemented a
major hardware and software upgrade to bring the software and hardware
for its primary manufacturing, information and financial consolidation
system into year 2000 compliance. Each component of the new system is
warranted by the applicable vendor to be year 2000 compliant.
Programming to resolve minor issues relating to the operation of this
new system has been substantially completed and all functional
components of the system are now fully operational.
The task force has identified critical third party relationships
for each of its businesses. The Corporation's co-venturer in Cheyenne
Leasing Company has provided assurances that its internal systems for
administering the equipment leasing business are year 2000 ready. The
Corporation has determined that there are no other third parties whose
failure to achieve year 2000 readiness would materially impact its
equipment leasing business. The Corporation has determined that its
real estate investments are not dependent on any third parties whose
failure to achieve year 2000 readiness would materially impact those
investments.
During the second quarter of fiscal 1999, Genesee Brewing Company
contacted all customers, mission critical vendors and other material
third parties to assess the extent of their year 2000 readiness. To
date, 63 of 75 critical vendors of Genesee Brewing Company have
responded that they are in the process of addressing the year 2000 issue
or are already in compliance. To date, no critical vendors have
responded that they will not be year 2000 ready. Genesee Brewing
Company has implemented a program to follow up with critical vendors who
have not yet responded and to monitor the progress of critical vendors
who responded that they are addressing the year 2000 issue but are not
yet in compliance. To date, Genesee Brewing Company's Monroe County
Branch distribution business and 154 independent distributors,
representing in the aggregate approximately 60% of barrel volume for
Genesee Brewing Company, are year 2000 ready or are addressing the year
2000 issue. Genesee Brewing Company has implemented a program to follow
up with significant distributors who have not yet responded or who
responded that they are addressing the year 2000 issue but are not yet
in compliance.
<PAGE>
17
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Boston Beer Company, whose contract brewing business represents
15% of Genesee Brewing Company's barrel volume, reported in its most
recent Form 10-Q filed with the Securities Exchange Commission on
November 4, 1998 that it believes that its internal computer systems
will be year 2000 compliant by March 31, 1999. Boston Beer Company also
reported that it has contacted vendors that it believes present a
possible critical risk to its business; that 28 of 37 critical vendors
have reported that they are year 2000 compliant or are addressing the
year 2000 problem; that it will pursue vendors who have not yet
responded; that it will monitor progress of vendors who are addressing
the year 2000 problem; and that it will develop contingency plans for
all services and supplies.
During March 1999, the Corporation's Foods Division is contacting
all of its customers, critical vendors, and material third parties to
assess the extent of their year 2000 readiness. The Foods Division will
collect and evaluate the responses to these questionnaires and then
implement a program to follow up with critical vendors and significant
customers as needed.
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 $1.4 million spent to date.
Year 2000 Risks
The Corporation expects that it will 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.
The failure to achieve year 2000 readiness by any third party with which
the Corporation or any of its subsidiaries has a material business
relationship could result in the disruption of normal business
activities. Risks inherent with the year 2000 problem could occur if
there is an interruption of needed supplies and services, 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. 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 or financial condition from the failure
to achieve year 2000 readiness by the Corporation's critical venders,
customers or other third parties.
Year 2000 Contingency Plans
The Corporation intends to develop contingency plans to address
the failure of any critical vendors or a significant number of customers
to achieve year 2000 readiness. These contingency plans will be
designed to prevent or mitigate the impact on the Corporation's business
from the failure by such third parties to achieve year 2000 readiness.
These contingency plans may include establishing alternative sources of
supply; stockpiling of certain critical supplies; and implementing
stand-by manual order entry,
<PAGE>
18
GENESEE CORPORATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
delivery and billing systems. The Corporation's timetable calls for
the task force to identify specific third-party relationships that
may require a contingency plan by the end of fiscal 1999. The
timetable calls for developing an appropriate contingency plan for
each such situation by the end of the first quarter of fiscal 2000.
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; uncertainties due to the intensely
competitive, stagnant 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, difficulties or unanticipated
expenses in integrating TKI Foods and Spectrum Foods; the possibility
that the Foods Division might experience delays, difficulties or
unanticipated expenses in the relocation of its operations to Medina,
New York; the possibility that the Foods Division might not achieve 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 readiness; and the risk that
computer systems of the Corporation, its subsidiaries and their
significant suppliers or customers may not be year 2000 compliant.
<PAGE>
19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. No exhibits are being filed with this report:
(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>
20
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: 3/12/99 /s /Robert N. Latella
Robert N. Latella
Executive Vice President and ChiefOperating Officer
Date: 3/12/99
/s / Michael C. Atseff
Michael C. Atseff
Vice President and Controller
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