-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IluPk2VyR4y3+DoxD5IfNv27mUmko5c0psxwHsOSqckBMS5o3Teb7fJv1PEb8noJ LOzaCTzSD3m35y238cVuFg== 0000040934-98-000010.txt : 19981214 0000040934-98-000010.hdr.sgml : 19981214 ACCESSION NUMBER: 0000040934-98-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENESEE CORP CENTRAL INDEX KEY: 0000040934 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 160445920 STATE OF INCORPORATION: NY FISCAL YEAR END: 0503 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01653 FILM NUMBER: 98767947 BUSINESS ADDRESS: STREET 1: 445 ST PAUL ST CITY: ROCHESTER STATE: NY ZIP: 14605 BUSINESS PHONE: 7162639440 MAIL ADDRESS: STREET 1: 445 ST PAUL STREET CITY: ROCHESTER STATE: NY ZIP: 14605 FORMER COMPANY: FORMER CONFORMED NAME: GENESEE BREWING CO INC DATE OF NAME CHANGE: 19880322 10-Q 1 FORM 10-Q FOR PERIOD ENDING 10/31/98 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 2 GENESEE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS October 31, 1998 and May 2, 1998 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.
3 GENESEE CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF LOSSES AND RETAINED EARNINGS Thirteen Weeks Ended October 31, 1998 and November 1, 1997 (Dollars in Thousands, Except Per Share Data) 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
See accompanying notes to consolidated financial statements. 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) 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.
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) UNAUDITED 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.
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: 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
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. 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: 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
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. 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. 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. 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". 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. 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. 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 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, 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 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. 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 19 GENESEE CORPORATION EXHIBIT INDEX Exhibit Number Exhibit Page 10 Amendment No. 1 to Genesee Corporation 20 1986 Incentive Bonus Plan 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 EX-27 2 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 1,000 3-MOS MAY-01-1999 OCT-31-1998 2,876 8,136 11,541 515 16,654 41,252 124,025 87,445 151,081 30,301 0 858 0 0 87,665 151,081 94,560 94,560 59,690 15,987 18,849 0 160 1,062 516 546 0 0 0 546 0.34 0.34
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