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Index to Exhibits at page 16
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 November 1, 2003
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.)
600 Powers Bldg., 16 W. Main Street, Rochester, New York 14614
- ---------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (585) 454-1250
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
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), par
value $.50 per share 209,885
Class B Common Stock (non-voting), par
value $.50 per share 1,464,201
Page 2 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Statement Of Net Assets In Liquidation (Liquidation Basis)
November 1, 2003 and May 3, 2003
(Dollars in thousands, except per share data)
November 1, 2003 May 3, 2003
---------------- -----------
ASSETS
- ------
Cash and cash equivalents $ 4,592 $ 6,572
Restricted cash 3,200 3,200
Marketable securities available for sale 0 3,010
Note receivable 1,100 2,800
Other assets 228 353
---------- ----------
Total assets $ 9,120 $ 15,935
========== ==========
LIABILITIES AND NET ASSETS
- --------------------------
Accrued compensation $ 279 $ 525
Accrued expenses and other liabilities 687 874
Estimated net income tax payable, net 250 4,664
Accrued self-insured workers compensation 1,224 1,495
---------- ----------
Total liabilities 2,440 7,558
---------- ----------
Net assets in liquidation $ 6,680 $ 8,377
========== ==========
Number of common shares outstanding (Class A - 209,885; Class B - 1,464,201) 1,674,086 1,674,086
Net assets in liquidation per outstanding share $ 3.99 $ 5.00
========== ==========
See accompanying notes to consolidated financial statements.
Page 3 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Statement Of Changes In Net Assets In Liquidation (Liquidation Basis)
For the Thirteen Week and Twenty Six Week Periods Ended November 1, 2003 and
October 26, 2002
(Dollars in thousands)
2003 2002
-------------------------
Net assets in liquidation at May 3, 2003 and April 27, 2002, respectively $ 8,377 $ 29,622
High Falls subordinated note receivable:
Interest income 140 120
Interest income, net 12 194
Changes in estimated liquidation values of assets and liabilities 2 (17)
-------------------------
Net assets in liquidation at August 2, 2003 and July 27, 2002, respectively 8,531 29,919
Liquidating distributions paid to shareholders 0 (13,393)
High Falls subordinated note receivable:
Interest income 70 120
Change in fair value (1,700) (1,200)
Interest (expense) income, net (58) 179
Changes in estimated liquidation values of assets and liabilities (163) (394)
-------------------------
Net assets in liquidation at November 1, 2003 and October 26, 2002, respectively $ 6,680 $ 15,231
=========================
See accompanying notes to consolidated financial statements.
Page 4 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- ------------------------------------------
NOTE (A) Divestiture of the Corporation's Operating Businesses and Other Assets
----------------------------------------------------------------------
In October 2000, Genesee Corporation (the "Corporation") shareholders
approved a plan to divest all of the Corporation's operations and then
liquidate and dissolve the Corporation. Since then, as discussed below,
the Corporation has divested all of its operations and substantially
all of its other assets. The proceeds from these divestitures, net of
amounts paid or reserved to discharge all of the Corporation's
obligations and liabilities, are being distributed to the Corporation's
shareholders in a series of liquidating distributions.
The Corporation sold its brewing business in December 2000 to High
Falls Brewing Company, LLC ("High Falls") for $27.2 million. The
Corporation received $11 million of the sale price in the form of notes
receivable from High Falls, which are more fully described in Note B.
The Corporation sold a significant portion of its equipment lease
portfolio in December 2000 and received $12.8 million in proceeds.
Since then, the Corporation continued to hold and manage a small number
of leases that it retained after this sale. The final lease matured in
November 2003 resulting in the conclusion of the Corporation's
equipment leasing activities.
The Corporation sold its Foods Division in October 2001 to Associated
Brands, Inc. ("ABI") for $24.4 million.
On May 31, 2002, the Corporation sold its ten-percent interest in an
office building located in Rochester, New York and a related note
receivable from the building owner for $2.4 million in cash.
On September 16, 2002, the Corporation sold its 50% interests in a
408-unit apartment complex located in Syracuse, New York and a 150-unit
apartment complex located in Rochester, New York for a combined sales
price of $4.5 million.
With the sale of its interest in the apartment complexes mentioned
above, the Corporation completed the liquidation phase of its plan of
liquidation and dissolution.
NOTE (B) Liquidation Basis of Accounting
-------------------------------
With the sale of its Foods Division, which is described in Note A, the
Corporation adopted the liquidation basis of accounting effective
September 29, 2001. Under the liquidation basis of accounting, assets
are stated at their estimated net realizable values and liabilities are
stated at their estimated settlement amounts, which estimates are
periodically reviewed and adjusted. A Statement of Net Assets and a
Statement of Changes in Net Assets are the two financial statements
presented under the Liquidation Basis of Accounting.
Page 5 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- ------------------------------------------
NOTE (B) Liquidation Basis of Accounting (continued)
-------------------------------------------
The valuation of assets at their net realizable value and
liabilities at their anticipated settlement amounts
necessarily requires many estimates and assumptions. In
addition, there are substantial risks and uncertainties
associated with carrying out the liquidation and dissolution
of the Corporation. The valuations presented in the
accompanying Statement of Net Assets in Liquidation represent
estimates, based on present facts and circumstances, of the
net realizable values of assets and the costs associated with
carrying out the plan of liquidation and dissolution based on
the assumptions set forth below. The actual values and costs
are expected to differ from the amounts shown herein and could
be greater or lesser than the amounts recorded. In particular,
the estimates of the Corporation's costs will vary with the
length of time it operates. In addition, the estimate of net
assets in liquidation per share presented in accordance with
accounting principles generally accepted in the United States
of America (GAAP) in the accompanying Statement of Net Assets
in Liquidation generally does not incorporate a present value
discount to reflect the amount of time that will transpire
before the value of those assets is distributed to
shareholders. Accordingly, it is not possible to predict the
aggregate amount that will ultimately be distributable to
shareholders and no assurance can be given that the amount to
be received in liquidation will equal or exceed the estimate
of net assets in liquidation per share presented in the
accompanying Statement of Net Assets in Liquidation or the
price or prices at which the Corporation's common stock has
traded or is expected to trade in the future.
General assumptions used and asset and liability values under
the Liquidation Basis of Accounting
Following are assumptions utilized by management in assessing
the fair value of assets and the expected settlement values of
liabilities included in the Statement of Net Assets in
Liquidation as of November 1, 2003.
Cash and cash equivalents and restricted cash - Presented at
face value. The Corporation considers all highly liquid
investments with original maturities of three months or less
to be cash equivalents. The Corporation maintains balances in
various operating and money market accounts in excess of
federally insured limits. At November 1, 2003, substantially
all cash balances were in excess of federally insured limits.
The Corporation's Board of Directors (the "Board") has adopted
a Contingent Liability Reserve Policy whereby the Corporation
will maintain a cash contingency reserve equal to $2.5
million, or $1.50 per outstanding share, for unexpected
expenses of the Corporation. The amount of the reserve may be
modified in the future by the Board as deemed necessary. The
balance of this reserve is $2.5 million at November 1, 2003;
however, it is not classified as restricted or as a liability
in the accompanying Statement of Net Assets in Liquidation.
Marketable securities available for sale - Presented at quoted
market prices. The Corporation had maintained a portfolio that
consisted predominantly of high quality corporate bonds which
was managed by an independent third party investment manager.
Valuation of the Corporation's marketable securities was based
upon closing prices of their marketable securities, as
provided by the investment manager. During the second quarter
of fiscal 2004 the Corporation liquidated its portfolio by
selling all of its marketable securities.
Page 6 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- ------------------------------------------
NOTE (B) Liquidation Basis of Accounting (continued)
-------------------------------------------
Notes receivable - Stated at fair value, which has been discounted from
face value as described below. As partial consideration for the sale of
its brewing business, the Corporation received $11 million in notes
receivable from High Falls. On July 30, 2002 the Corporation received
$5.9 million in satisfaction of the remaining principal balance due on
two bridge notes with original face amounts of $3.5 million and $3
million. This prepayment was in accordance with the terms of the notes,
which required prepayment at such time as the buyer received proceeds
from government backed loans. At November 1, 2003, the amount remaining
due to the Corporation from High Falls is $4 million under a
subordinated note with an original face amount of $4.5 million (the
"High Falls Note"). The $4 million balance is payable as follows: $1
million was due on December 15, 2002 and $3 million is due on December
15, 2003. High Falls did not make the $1 million principal payment due
on December 15, 2002 and is currently in default under the terms of the
High Falls Note. During the second quarter of fiscal 2003 the
Corporation adjusted the value of the $4 million balance due on the
High Falls Note to $2.8 million to reflect management's estimate of the
value of the note, based on the fair market value of publicly traded
debt instruments of similar quality. The Corporation has been in
discussions with High Falls regarding the restructuring of the High
Falls Note in connection with the possible recapitalization of High
Falls Brewing Company. Recently High Falls notified the Corporation
that High Falls' efforts to recapitalize High Falls in a transaction
with a third party have ended unsuccessfully and that High Falls would
not be able to make the December 15, 2003 $ 3 million principal
payment. A proposal from High Falls to refinance the remaining balance
of the High Falls Note is expected before December 31, 2003. As a
result of these developments, the Corporation has reduced the estimated
value of the High Falls Note by another $ 1.7 million to $1.1 million,
based on the fair market value of publicly traded debt instruments of
similar quality.
Other assets - Valued based on management estimates. At November 1,
2003 the $228,000 balance is primarily comprised of prepaid insurance,
accrued interest receivable, and a note receivable from a former
customer of the Genesee Brewing Company, Inc., that the Corporation
retained after the sale of the brewery to High Falls in December 2000.
Page 7 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- ------------------------------------------
NOTE (B) Liquidation Basis of Accounting (continued)
-------------------------------------------
Accrued compensation and accrued expenses and other liabilities - Based
on management's estimate. These are the estimated costs to complete the
Corporation's plan of liquidation and dissolution, and represent the
estimated cash costs of operating the Corporation through April 2004
and for an additional wind-up phase after April 2004. During the second
quarter of fiscal 2004 the estimate of certain costs were adjusted to
reflect management's current expectations.
These costs, which include personnel, facilities, professional fees,
and other related costs, are estimated based on various assumptions
regarding the number of employees, the use of outside professionals
(including attorneys and accountants) and other costs. Due to the
inherent uncertainty in the estimation process, actual results could be
materially different. The table below details these costs by category
as of May 3, 2003 and November 1, 2003 and the expenditures and
management adjustments that occurred during the first half of fiscal
2004.
-------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
Category May 3, 2003 November 1, 2004 November 1, 2004 November 1, 2003
Balance Expenditures Adjustments Balance
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Compensation and related costs $ 525,000 $ (247,000) $ 0 $ 278,000
-------------------------------------------------------------------------------------------------------------------------
Office expenses,
including rent 54,000 (24,000) (2,000) 28,000
-------------------------------------------------------------------------------------------------------------------------
Insurance expense 200,000 (71,000) 21,000 150,000
-------------------------------------------------------------------------------------------------------------------------
Professional fees 205,000 (231,000) 151,000 125,000
-------------------------------------------------------------------------------------------------------------------------
Post April 2004 costs 300,000 0 0 300,000
-------------------------------------------------------------------------------------------------------------------------
Other 115,000 (37,000) 7,000 85,000
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Totals $1,399,000 $ (610,000) $ 177,000 $ 966,000
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
The $151,000 adjustment to the professional fees estimate is primarily
related to an expected increase in legal and accounting costs as the
Corporation appropriately positions itself for its post April 2004
phase to wind up its business.
Page 8 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- ------------------------------------------
NOTE (B) Liquidation Basis of Accounting (continued)
-------------------------------------------
Estimated income tax payable - Based on management's estimate. Amount
reflects the impact on cash flow under an orderly liquidation scenario.
It is comprised of current taxes on current year income, adjusting for
estimates for future expenditures, the utilization of tax credits,
carry forwards and carry backs. Certain amounts included in the
estimated income tax payable are subject to audit by both state and
federal taxing authorities. The Corporation has requested accelerated
audits from both state and federal taxing authorities for the tax years
ending April 27, 2002, April 28, 2001, and April 29, 2000. During July
2003, the Corporation paid $4.7 million to the Internal Revenue Service
on account. The remaining net payable is an estimation of the
accumulation of the payments expected in the future. As tax returns are
filed utilizing estimates and management's reasonable interpretation of
applicable rules, the actual results after a tax audit can be different
from amounts initially filed. Based upon all known facts, management
has made an estimation of the range of probable outcomes after the
audits referred to above have been completed. The tax payable on the
Statement of Net Assets is management's estimate of the most probable
point within the range. Such estimations are often updated as
additional information becomes available.
Due to the numerous significant business dispositions that occurred
during the years which are to be audited, management believes it is
probable that the results of the aforementioned audits may increase or
decrease the amount of estimated income tax payable recorded in the
Statement of Net Assets by up to approximately $400,000. The
Corporation may also incur additional professional fees as a result of
these audits.
Accrued self-insured workers compensation - Based on an independent
actuarial valuation. The Corporation's brewing and foods businesses
were self-insured for workers compensation claims and the Corporation
retained this liability after those businesses were sold. In connection
with this liability, the Corporation is required by the New York
Workers Compensation Board (the "Compensation Board") to maintain the
$3.2 million standby letter of credit, which has been renewed through
August 2004. The issuing bank required the Corporation to collateralize
the letter of credit by maintaining a cash balance of $3.2 million in a
money-market account with the bank.
Contingent liabilities - As with any operating business, the
Corporation may have potential contingent liabilities in addition to
the liabilities recorded in the accompanying consolidated financial
statements. Because no claims for contingent liabilities have been made
or threatened, no amount has been recorded for such liabilities in the
accompanying consolidated financial statements.
Page 9 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- ------------------------------------------
NOTE (C) Financial Statement Presentation
--------------------------------
Liquidation Basis Financial Statements
The Corporation's Statement of Net Assets in Liquidation as of November
1, 2003 and Statement of Changes in Net Assets in Liquidation for the
thirteen week and twenty three week periods ended November 1, 2003 and
October 26, 2002 presented herein are unaudited. The May 3, 2003
Statement of Net Assets has been audited. In the opinion of management,
these financial statements reflect all adjustments which are necessary
for a fair presentation of the results for the interim period
presented.
Net assets in liquidation per outstanding share, which is reported in
the Statement of Net Assets in Liquidation, is calculated by dividing
net assets in liquidation by the number of common shares outstanding as
of the statement date.
The accompanying financial statements have been prepared in accordance
with GAAP and Securities and Exchange Commission (the "SEC") guidelines
applicable to interim financial information. These statements should be
reviewed in conjunction with the Corporation's annual report on Form
10-K for the fiscal year ended May 3, 2003. It is the Corporation's
policy to reclassify certain amounts in the prior year consolidated
financial statements to conform to the current year presentation.
NOTE (D) Class B Common Stock De-listing and Closing of Stock Books
----------------------------------------------------------
As reported in a November 6, 2003 news release and related Current
Report filed on Form 8-K with the SEC on November 7, 2003, the
Corporation announced that it anticipates that its Class B Common Stock
will be de-listed from the Nasdaq National Market and that the
Corporation's stock books for its Class A and Class B Common Stock will
be closed during December 2003. The Corporation also expects to file a
certificate of dissolution with the New York State Department of State
in the future. These actions are part of the next stage of the
Corporation's plan of Liquidation and Dissolution that was adopted by
shareholders in October 2000.
On October 31, 2003 the Corporation received a Nasdaq Staff
Determination indicating that, because the Corporation's stockholders'
equity (net assets in liquidation) is less than $10 million, its Class
B Common Stock will be de-listed from the Nasdaq National Market. The
Nasdaq notice offered the Corporation the opportunity to apply for
listing on the Nasdaq SmallCap Market, which would provide continued
over-the-counter trading in the Class B Common Stock. The cost of
listing on the Nasdaq SmallCap Market for the balance of 2003 could be
approximately $30,000, which includes a one-time non-refundable
entrance fee of $25,000. Given the Corporation's progress in executing
its plan of liquidation, the cost of a short-term listing on the Nasdaq
SmallCap Market makes this an unattractive option.
Therefore, the Corporation has requested a hearing before a Nasdaq
Listing Qualifications Board to review the Nasdaq Staff's
Determination. The Corporation expects that its Class B Common Stock
will continue to trade on the Nasdaq National Market, pending this
hearing, until sometime in December 2003. Unless the Nasdaq National
Market listing is extended, the Class B Common Stock will be de-listed
and there will cease to be an active over-the-counter trading market
for the Corporation's Class B Common Stock. At such time or thereafter,
the Corporation expects to instruct its stock transfer agent and
registrar to close its stock books, after which transfers of both its
Class A and Class B Common Stock will no longer be recognized by the
Corporation.
The practical impact of these expected developments is that
shareholders and others who may wish to purchase or sell the
Corporation's Class A or Class B Common Stock should do so promptly.
Page 10 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This financial review should be read in conjunction with the
accompanying consolidated financial statements and notes. Effective
September 29, 2001 the Corporation adopted the liquidation basis of
accounting which is described in detail in Note B to the accompanying
consolidated financial statements. In the current and prior fiscal
years the Corporation had no operations; therefore, there is no
discussion of operations presented. See also Note D to the accompanying
consolidated financial statements presented in this report that are
incorporated herein by reference thereto.
LIQUIDITY AND CAPITAL RESOURCES - NOVEMBER 1, 2003
------------------------------------------------
Liquidating distributions have been paid to shareholders under the
Corporation's plan of liquidation and dissolution as follows:
AMOUNT AMOUNT
DATE PAID DISTRIBUTED PER SHARE
--------- ----------- ---------
March 1, 2001 $12,557,000 $7.50
November 1, 2001 21,763,000 13.00
May 17, 2002 8,370,000 5.00
August 26, 2002 8,370,000 5.00
October 11, 2002 5,023,000 3.00
March 17, 2003 4,185,000 2.50
April 28, 2003 2,511,000 1.50
--------- ----
TOTAL $62,779,000 $37.50
=========== ======
Page 11 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES - NOVEMBER 1, 2003 (continued)
------------------------------------------------------------
Subject to amounts that the Corporation may hold to discharge
obligations and potential contingent liabilities (see Contingent
Liability Reserve Policy described below), the Corporation expects to
pay additional liquidating distributions as the Corporation: (a)
receives payments on the remaining promissory note described in Note B
to the accompanying consolidated financial statements which accompany
this report; (b) is allowed to reduce the financial assurance for its
self-insured workers compensation liability described below; (c)
reduces the amount of the Contingent Liability Reserve described below.
The length of time that will be required to wind-up the Corporation's
affairs is uncertain and will impact the value of the Corporation's net
assets in liquidation due to the ongoing expense of operating the
Corporation. While Management has targeted that the Corporation's plan
of liquidation and dissolution will be completed by April 2004, there
will be a further phase required to wind up its business, necessitated
by certain assets and liabilities having a longer maturity or term.
While the duration of this additional phase is unknown, there will be
costs associated with it. The Corporation has estimated the present
value of those costs at $300,000 and this amount has been recorded as a
part of the run-out accrual and reflected in the accrued expenses and
other liabilities line in the accompanying Statement of Net Assets in
Liquidation.
As a result of certain assets and liabilities having a maturity or term
beyond April 2004, the Corporation currently expects that the net
realizable value of certain assets will not be distributed to
shareholders and certain of the Corporation's liabilities, including
the workers compensation liability described below, will not be
discharged by that date. All such assets and liabilities will be
retained by the dissolved Corporation or transferred to a
post-dissolution entity to be held for the benefit of the Corporation's
shareholders and will be distributed to shareholders as the net
realizable values of such retained assets become distributable after
discharging any retained liabilities.
Since it is unknown how long it will be before a final liquidating
distribution is paid to shareholders, the present value of the net
assets in liquidation per outstanding share could be less than is
reported in the accompanying Statement of Net Assets in Liquidation and
the ultimate distributions to shareholders may differ materially from
the Corporation's current estimate.
The Corporation's unrestricted and restricted cash and cash equivalents
are invested in commercial bank money market funds to earn a market
rate of return on those funds and give the Corporation the security and
flexibility required as it completes the liquidation and dissolution
process. These funds are currently yielding approximately 1.0% per
annum. The Corporation's Board of Directors (the "Board") has adopted a
Contingent Liability Reserve Policy whereby the Corporation will
maintain a cash contingency reserve equal to $2.5 million, or $1.50 per
outstanding share, for unexpected expenses of the Corporation. The
amount of the reserve may be modified in the future by the Board as
deemed necessary. The balance of this reserve is $2.5 million at
November 1, 2003; however, it is not classified as restricted or as a
liability in the accompanying Statement of Net Assets in Liquidation.
Page 12 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES - NOVEMBER 1, 2003 (continued)
--------------------------------------------------------------
Restricted cash represents cash that the Corporation is temporarily
unable to access. Restricted cash in the amount of $3.2 million is
being held in a money-market account with a commercial bank as
collateral for a standby letter of credit issued by the bank to provide
statutorily required financial assurance for the Corporation's
self-insured workers compensation liability. The Corporation is
required by the New York Workers Compensation Board (the "Compensation
Board") to maintain the $3.2 million standby letter of credit, which
has been renewed through August 2004. The issuing bank required the
Corporation to collateralize the letter of credit by maintaining a cash
balance of $3.2 million in a money-market account with the bank.
Despite a $1.2 million actuarially based valuation of the Corporation's
workers compensation liability, and the Corporation's expectation that
the valuation of its workers compensation liability will decline over
time as claims are paid, the Compensation Board will not review the
$3.2 million financial security requirement until at least December
2003 and it is not currently known whether the Compensation Board will
adjust the financial security requirement to an amount more consistent
with the actuarial valuation of workers compensation liability. It is
management's current expectation that the Compensation Board will
require the Corporation to maintain some amount of financial assurance
for the actuarially determined duration of the self-insured workers
compensation liability, which is currently estimated to be twenty to
twenty-five years, and any such amount will not be available for
distribution to shareholders until the Corporation is relieved of its
financial assurance obligation.
The Corporation's marketable securities consisted of a bond portfolio
managed by an investment management firm. This portfolio was liquidated
during the second quarter of fiscal 2004 with the proceeds invested in
commercial bank money market funds.
During the first half of fiscal 2004, the Corporation received $242,000
in interest from High Falls on the High Falls Note that is described in
Note B to the accompanying consolidated financial statements. The
remaining High Falls Note bears interest at the rate of 12% per annum;
however, interest is currently accruing at the default rate of 14% per
annum as a result of the default by High Falls on the December 15, 2002
$1 million principal payment. However, the Corporation has only
received interest at 12% for its June 15, 2003 and September 15, 2003
quarterly interest payments. The $4 million balance is payable as
follows: $1 million was due on December 15, 2002 and $3 million is due
on December 15, 2003. As mentioned above, High Falls did not make the
$1 million principal payment due on December 15, 2002. As a result of
this default, the Corporation has been in discussions with High Falls
regarding the restructuring of the High Falls Note in connection with
the possible recapitalization of High Falls Brewing Company. Recently
High Falls notified the Corporation that High Falls' efforts to
recapitalize High Falls in a transaction with a third party have ended
unsuccessfully and that High Falls would not be able to make the
December 15, 2003 $3 million principal payment. A proposal from High
Falls to refinance the remaining balance of the High Falls Note is
expected before December 31, 2003. Under the current arrangement with
High Falls, the December 15, 2003 principal payment can be extended by
High Falls to December 15, 2005 if High Falls does not achieve 2.5
million barrels of contract brewing volume as measured from December
15, 2000 through December 15, 2003. High Falls, which is required to
certify its contract volume annually, has certified to the Corporation
that as of December 31, 2002, it has achieved 2,153,946 barrels of
contract brewing volume since December 15, 2000.
Page 13 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES - NOVEMBER 1, 2003 (continued)
------------------------------------------------------------
The High Falls Note is subordinate to High Falls' senior bank debt and
mezzanine financing. Under the terms of the senior debt agreements, in
the event of a default by High Falls, the senior lenders could declare
a standstill, which would prevent the Corporation from receiving
principal and interest payments and enforcing its rights against
collateral pledged by High Falls to secure the High Falls Note. If the
senior lenders were to declare a standstill, payments to the
Corporation and the Corporation's rights against collateral pledged to
secure the note could be suspended indefinitely. The terms of the High
Falls seller financing are detailed in exhibits to the Corporation's
report on Form 8-K filed on January 2, 2001.
During the second quarter of fiscal 2003, the Corporation adjusted the
value of the $4 million balance due on the High Falls Note to $2.8
million to reflect management's estimate of the value of the note,
based on the fair market value of publicly traded debt instruments of
similar quality. As a result of the developments described above, the
Corporation has reduced the estimated value of the High Falls Note by
another $ 1.7 million to $ 1.1 million, based on the fair market value
of publicly traded debt instruments of similar quality. This adjustment
had no effect on the estimated income tax payable amount presented in
the Statement of Net Assets in Liquidation.
Other than the $177,000 in adjustments to the estimated costs to
complete the Corporation's plan of liquidation and dissolution, which
are primarily related to professional fees and are included in Note B
to the accompanying consolidated financial statements, the accrued
compensation and accrued expenses and other liabilities line items
decreased during the first half of fiscal 2004 as a result of expected
expenditures occurring.
During the first quarter of fiscal 2004, the Corporation paid $4.7
million to the Internal Revenue Service on account. As a result, the
estimated net income tax payable financial statement line item
decreased accordingly.
See also Note D to the accompanying consolidated financial statements,
which is incorporated herein by reference thereto, which explains the
Corporation's impending Class B Common Stock de-listing and closing of
the Corporation's stock books.
Page 14 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Forward-Looking Statements
--------------------------
This report contains forward-looking statements within the meaning of
the federal securities laws. These forward-looking statements include
estimates of the net assets of the Corporation in liquidation,
statements about the amount and timing of the payment of additional
liquidating distributions and statements about the Corporation's
operating costs through final dissolution, including the additional
wind-up phase beyond April 2004, which will vary with the length of
time it operates. The cautionary statements regarding estimates of net
assets in liquidation set forth in Note B to the accompanying
consolidated financial statements that accompany this report are
incorporated herein by reference. The forward-looking statements in
this report are subject to a number of other significant risks and
uncertainties, and there can be no assurance that the expectations
reflected in those statements will be realized or achieved. Such risks
and uncertainties include, without limitation, the amount and timing of
payments to the Corporation by High Falls under the remaining
promissory note described in Note B to the accompanying consolidated
financial statements which accompany this report; the possible
extension of payment or renegotiation of terms as a result of the
default by High Falls under that note; possible contingent liabilities
and post-closing indemnification and other obligations arising from the
sale of the Corporation's operating businesses and other assets; the
risk that federal, state or local taxing authorities will audit the tax
returns filed by the Corporation that report the sale of its brewing,
foods and equipment leasing businesses and other assets resulting in
additional taxes being assessed against the Corporation; the risk that
income, sales, use and other tax returns filed by the Corporation prior
to the divestiture of its brewing, foods and equipment leasing
businesses might be audited by federal, state or local taxing
authorities resulting in additional taxes being assessed against the
Corporation; the risk that the Corporation may not be able to realize
its current estimate of the net value of its assets; the risk that the
Corporation may have underestimated the settlement expense of its
obligations and liabilities, including without limitation, its
estimates of self-insured workers compensation liability, accrued
compensation, and tax liabilities; risks associated with the
liquidation and dissolution of the Corporation, including without
limitation, settlement of the Corporation's liabilities and
obligations, costs incurred in connection with carrying out the plan of
liquidation and dissolution and additional run-out expense, discharge
of contingent liabilities, the actual timing of the de-listing of the
Corporation's Class B Common Stock, the closing of the stock books of
both the Class A and Class B Common Stock, and the winding up and
dissolution of the Corporation.
Item 4. Controls and Procedures
In accordance with Securities Exchange Act of 1934 rules, the
Corporation's management, under the supervision of the President and
Chief Financial Officer, conducted an evaluation of the effectiveness
of the design and operation of the Corporation's disclosure controls
and procedures as of the end of the period covered by this quarterly
report. Based on that evaluation, the Corporation concluded that the
design and operation of its disclosure controls and procedures were
effective. There has been no change in the Corporation's internal
control over financial reporting that occurred during the period
covered by this quarterly report, that has materially affected, or is
reasonably likely to affect, the Corporation's internal control over
financial reporting.
Page 15 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
---------
See Exhibit Index at Page 16 of this report.
(b) Reports on Form 8-K. The Corporation did not file any
reports on Form 8-K during the second quarter of
fiscal 2004.
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: 11/21/03 /s/ Stephen B. Ashley
--------------- ----------------------------------------------
Stephen B. Ashley
President
Date: 11/21/03 /s/ Steven M. Morse
--------------- ----------------------------------------------
Steven M. Morse
Vice President and Chief Financial Officer
Page 16 of 20
GENESEE CORPORATION
AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Exhibit Page No.
- -----------------------------------------------------------------------------------------------------------------------------
10 Amendment to Employment Agreement with S.M. Morse 17
31 Officer Certifications as required by Section 302 of the Sarbanes-Oxley Act of 2002. 18
32 Officer Certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002. 20