10-Q 1 l03009ae10vq.txt GENESEE CORPORATION Index to Exhibits at page 14 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 2, 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 17 GENESEE CORPORATION AND SUBSIDIARIES Statement Of Net Assets In Liquidation (Liquidation Basis) August 2, 2003 and May 3, 2003 (Dollars in thousands, except per share data)

See accompanying notes to consolidated financial statements. Page 3 of 17 GENESEE CORPORATION AND SUBSIDIARIES Statement Of Changes In Net Assets In Liquidation (Liquidation Basis) For the Thirteen Weeks Ended August 2, 2003 and July 27, 2002 (Dollars in thousands)

See accompanying notes to consolidated financial statements. Page 4 of 17 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. The Corporation continues to hold a small number of the leases, which it retained after this sale. 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 17 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 August 2, 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 August 2, 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 August 2, 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 maintains a portfolio that consists predominantly of high quality corporate bonds which is managed by an independent third party investment manager. Valuation of the Corporation's marketable securities is based upon closing prices of their marketable securities, as provided by the investment manager, at August 2, 2003. Page 6 of 17 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 August 2, 2003, the amount remaining due to the Corporation from High Falls is $4 million under a subordinated note receivable with an original face amount of $4.5 million. 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 remaining High Falls note. The Corporation is currently in discussions with High Falls regarding the restructuring of this remaining note in connection with the possible recapitalization of High Falls Brewing Company. During the second quarter of fiscal 2002 the Corporation adjusted the value of the balance of the remaining High Falls note on the Statement of Net Assets in Liquidation to $2.8 million to reflect management's estimate of the value of the note, which is based on the fair market value of publicly traded debt instruments of similar quality. At August 2, 2003, the note remains valued at $2.8 million. Other assets - Valued based on management estimates. At August 2, 2003 the $317,000 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. 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 represents the estimated cash costs of operating the Corporation through April 2004 and for an additional wind-up phase after April 2004. 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. Given that there is 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 August 2, 2003 and the expenditures during the first quarter of fiscal 2004.

Page 7 of 17 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, carryforwards and carrybacks. 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. NOTE (C) Financial Statement Presentation Liquidation Basis Financial Statements The Corporation's Statement of Net Assets in Liquidation as of August 2, 2003 and Statement of Changes in Net Assets in Liquidation for the thirteen weeks ended August 2, 2003 and July 27, 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. Page 8 of 17 GENESEE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE (C) Financial Statement Presentation (continued) The accompanying financial statements have been prepared in accordance with GAAP and Securities and Exchange Commission 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. 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. LIQUIDITY AND CAPITAL RESOURCES - AUGUST 2, 2003 Liquidating distributions have been paid to shareholders under the Corporation's plan of liquidation and dissolution as follows:

Page 9 of 17 GENESEE CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY AND CAPITAL RESOURCES - AUGUST 2, 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 payment 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 August 2, 2003; however, it is not classified as restricted or as a liability in the accompanying Statement of Net Assets in Liquidation. Page 10 of 17 GENESEE CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY AND CAPITAL RESOURCES - AUGUST 2, 2003 (continued) Restricted cash represents cash which 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 $1.5 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 consist of a bond portfolio managed by an investment management firm. This portfolio had a fair market value of $2,284,000 at August 2, 2003. The investments in this portfolio include $293,000 in U.S. government agency bonds with the balance of $1,991,000 invested in corporate bonds. The portfolio at August 2, 2003 has a Moody's dollar weighted average rating of A1. The portfolio currently has a weighted average duration of approximately 1.09 years. The current weighted average yield to maturity is approximately 1.78%. The $726,000 decrease in this financial statement line item from May 3, 2003 to August 2, 2003 is a result of certain investments being sold with the proceeds remaining in cash and reflected in the cash and cash equivalents line item. In August 2003, the portfolio was liquidated and the cash proceeds were invested in money market funds. During the first quarter of fiscal 2004, the Corporation received $121,000 in interest from High Falls on the $4 million note receivable which is described in Note B to the accompanying consolidated financial statements. The remaining $4 million note receivable from High Falls 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. Interest is payable quarterly. 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 is currently in discussions with High Falls regarding the restructuring of the note in connection with the possible recapitalization of High Falls Brewing Company. 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 11 of 17 GENESEE CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY AND CAPITAL RESOURCES - AUGUST 2, 2003 (continued) The $4 million 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 $4 million 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 High Falls note on its Statement of Net Assets in Liquidation to $2.8 million to reflect management's estimate of the value of the note, which is based on the fair market value of publicly traded debt instruments of similar quality. At August 2, 2003, the fair value of this note receivable remains at $2.8 million. This adjustment had no effect on the estimated income tax payable amount presented in the Statement of Net Assets in Liquidation. Accrued compensation and accrued expenses and other liabilities line items decreased during the first quarter 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. Page 12 of 17 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, that 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 Brewing Company LLC ("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 to 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; and 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 expenses, the amount of income earned during the liquidation period on the Corporation's bond portfolio and investment in money market funds, risks that the market value of the Corporation's bond portfolio could decline, risks associated with investments in bonds and money market funds in the current low interest rate environment, discharge of contingent liabilities, and the actual timing of 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 13 of 17 GENESEE CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: See Exhibit Index at Page 14 of this report. (b) Reports on Form 8-K. The Corporation filed a report on Form 8-K on June 20, 2003 to report information under Item 5 (Other Events). 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: 9/10/03 /s/ Stephen B. Ashley ----------- ----------------------------------------- Stephen B. Ashley President Date: 9/10/03 /s/ Steven M. Morse ----------- ----------------------------------------- Steven M. Morse Vice President and Chief Financial Officer Page 14 of 17 GENESEE CORPORATION AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Exhibit Page No. -------------------------------------------------------------------------------- 31 Officer Certifications as required by Section 302 of the Sarbanes-Oxley Act of 2002 15 32 Officer Certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002 17

GENESEE CORP 10-Q