10-Q 1 l10873ae10vq.txt GENESEE CORPORATION Index to Exhibits at page 13 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 30, 2004 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 16 GENESEE CORPORATION AND SUBSIDIARIES Statement Of Net Assets In Liquidation (Liquidation Basis) October 30, 2004 and May 1, 2004 (Dollars in thousands, except per share data) (Unaudited)

See accompanying notes to consolidated financial statements. Page 3 of 16 GENESEE CORPORATION AND SUBSIDIARIES Statement Of Changes In Net Assets In Liquidation (Liquidation Basis) For the Twenty-Six Weeks Ended October 30, 2004 and November 1, 2003 (Dollars in thousands) (Unaudited)

See accompanying notes to consolidated financial statements. Page 4 of 16 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 (the "Plan of Liquidation and Dissolution.") 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 of which it actually received $24.2 million. The Corporation received $11 million of the sale price in the form of notes receivable from High Falls, of which only $8 million in cash was received and 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 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. On May 24, 2004, the Corporation sold the remaining High Falls debt for $1,000,000 (see Note B.) The Corporation has 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. 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 16 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 October 30, 2004. 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 October 30, 2004, substantially all cash balances were in excess of federally insured limits. The Corporation adopted a Contingent Liability Reserve Policy whereby the Corporation will maintain a cash contingency reserve for unexpected expenses of the Corporation. The amount of the reserve may be modified in the future as deemed necessary. The balance of this reserve is $1.6 million, or approximately $1.00 per outstanding share at October 30, 2004; however, it is not classified as restricted or as a liability in the accompanying Statement of Net Assets in Liquidation. Page 6 of 16 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 in December 2000, the Corporation received $11 million in notes receivable from High Falls ($6.5 million in two bridge notes and $4.5 million in a subordinated note.) On July 30, 2002 the Corporation received $5.9 million in satisfaction of the remaining principal balance due on the 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. The Corporation received $500,000 in principal on the subordinated note (the "High Falls Note") in December 2001 leaving a $4 million balance due. On May 25, 2004 the Corporation sold the High Falls Note to a third party for $1,000,000. The High Falls Note had been in default since December 2002. In accordance with liquidation basis accounting the High Falls Note had been previously valued based on the fair market value of publicly-traded debt instruments of similar quality. With the May sale of the High Falls Note, the Corporation's May 1, 2004 Statement of Net Assets in Liquidation, included in the Corporation's Annual Report on Form 10-K, reported the value of the High Falls Note at $1,000,000. In recognition of previously missed interest payments to the Corporation, High Falls has agreed to pay the Corporation $100,000 if, prior to April 30, 2006, certain conditions are satisfied and High Falls' senior creditors consent to the payment. A party to the December 2000 brewery sale claimed that the Corporation had received approximately $120,000 in interest payments from High Falls, which should have been paid to it, as a creditor of High Falls that is senior to the Corporation. High Falls paid this creditor the $120,000 on July 30, 2004 and this claim is resolved. The sale of the High Falls Note, with the exception of the possible receipt of $100,000 mentioned above, completed the financial matters related to the sale of the Corporation's brewing business. Estimated income tax receivable/payable - Based on management's estimate. Amount reflects the impact on cash flow under an orderly liquidation scenario. It includes adjustments for estimates of future expenditures, the utilization of tax credits, and carryforwards and carrybacks. Certain amounts included in the estimated income tax receivable are subject to audit by both state and federal taxing authorities, most notably as it relates to the fiscal years ended May 3, 2003 and May 1, 2004. The Corporation requested, and has settled, accelerated audits from the federal taxing authorities for the tax years ending April 27, 2002, April 28, 2001, and April 29, 2000. State audits have also been resolved through the fiscal year ended April 27, 2002. Page 7 of 16 GENESEE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE (B) Liquidation Basis of Accounting (continued) As tax returns are filed utilizing management's interpretation of applicable rules, the actual tax liability or refund determined after a tax audit can be different from amounts initially claimed when filing tax returns. Based upon all known facts, management has made an estimation of the range of probable outcomes after all tax returns have been filed through the fiscal year end May 1, 2004 and reviewed by the taxing authorities. The estimated income tax receivable of $193,000 recorded on the accompanying Statement of Net Assets in Liquidation is management's estimate of the most probable point within the range. Such estimates are often updated as additional information becomes available. The Corporation may incur additional professional fees as a result of any additional income tax audits. Other assets - Valued based on management estimates. At October 30, 2004 the $359,000 balance is primarily comprised of prepaid insurance, a deposit with the Corporation's third party administrator for its self-insured workers compensation claims, and a note receivable from a former customer of the Genesee Brewing Company, Inc., that the Corporation retained after the sale of its brewing business to High Falls. Accrued compensation, 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 its expected termination. 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 1, 2004 and October 30, 2004 and the expenditures and management adjustments that occurred during the first half of fiscal 2005.

The $100,000 net adjustment recorded during the first quarter of fiscal 2005 is primarily related to an anticipated increase in workers compensation related legal costs and accounting costs during the Corporation's wind up period. Page 8 of 16 GENESEE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE (B) Liquidation Basis of Accounting (continued) Accrued self-insured workers compensation - Based on management's estimate. 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 a $2.4 million standby letter of credit as financial assurance, which has been renewed through August 2005. The issuing bank required the Corporation to collateralize the letter of credit by maintaining a cash balance of $2.4 million in a money-market account with the bank. As of October 30, 2004 there were 30 open workers compensation claims. The Corporation is investigating potential alternatives to obtain a substitute for the self-insured workers compensation financial assurance amount that would allow it to accelerate the resolution of this liability. The Corporation could incur additional costs to settle this workers compensation liability. 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 October 30, 2004 and Statement of Changes in Net Assets in Liquidation for the twenty-six week period ended October 30, 2004 and November 1, 2003 presented herein are unaudited. The May 1, 2004 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 1, 2004. 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 At the close of business on December 31, 2003 the Corporation's Class B Common Stock was de-listed from the Nasdaq National Market and the Corporation's stock books for its Class A and Class B Common Stock were closed. The Corporation expects to file a certificate of dissolution with the New York State Department of State in the future. Page 9 of 16 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 - OCTOBER 30, 2004 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 June 18, 2004 2,511,000 1.50 ----------- ---- TOTAL $65,290,000 $39.00 =========== ====== 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 is allowed to reduce the financial assurance for its self-insured workers compensation liability described below and 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. The Corporation has estimated the present value of those costs at $257,000 and this amount has been recorded on the accrued expenses and other liabilities line in the accompanying Statement of Net Assets in Liquidation. Page 10 of 16 GENESEE CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) LIQUIDITY AND CAPITAL RESOURCES - OCTOBER 30, 2004 (continued) 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 or more 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 1.6% per annum. The Corporation adopted a Contingent Liability Reserve Policy whereby the Corporation maintains a cash contingency for unexpected expenses of the Corporation. The amount of the reserve may be modified in the future as deemed necessary. The balance of this reserve was $2.5 million, or approximately $1.50 per share, at May 1, 2004; however, after the sale of the High Falls Note on May 25, 2004, it was further reduced to $1.6 million, or approximately $1.00 per share. This reserve remains at $1.6 million at October 30, 2004 and is not classified as restricted or as a liability in the accompanying Statement of Net Assets in Liquidation. Restricted cash represents cash that the Corporation is temporarily unable to access. At October 30, 2004, restricted cash in the amount of $2.4 million is being held in a money-market account with a commercial bank as collateral required 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 standby letter of credit, which is in effect through August 2005. 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 is investigating potential alternatives to obtain a substitute for the self-insured workers compensation financial assurance amount which would allow it to accelerate the resolution of the self-insured workers compensation liability. The Corporation could incur additional costs to settle this workers compensation liability. During the first quarter of fiscal 2005, the Corporation received $1,000,000 in proceeds from the sale of the High Falls Note. See Note B to the accompanying consolidated financial statements. During the second quarter and first quarter of fiscal 2005, the Corporation received $319,000 and 3,000, respectively, in expected income tax refunds from federal and state taxing authorities. As a result, the estimated net income tax receivable line item decreased by $322,000 from its May 1, 2004 balance. The accrued expenses and other liabilities line item decreased during the second quarter of fiscal 2005 as a result of the occurrence of anticipated expenditures. See also Note D to the accompanying consolidated financial statements, which is incorporated herein by reference thereto, which explains the Corporation's Class B Common Stock de-listing and closing of the Corporation's stock books. Page 11 of 16 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 costs, 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, 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, including professional fees, incurred in connection with carrying out the Plan of Liquidation and Dissolution and additional run-out expenses, discharge of contingent liabilities, and the winding up and dissolution of the Corporation. Item 4. Controls and Procedures The management of the Corporation is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. As of October 30, 2004, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, management concluded that the Corporation's disclosure controls and procedures as of October 30, 2004 were effective in ensuring that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported within the time period required by the United States Securities and Exchange Commission's rules and forms. There has been no change in the Corporation's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Corporation's internal control over financial reporting. Page 12 of 16 GENESEE CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The Corporation did not hold an annual meeting of its Class A Shareholders this year. On October 22, 2004, by written consent of the holders of a majority of the Corporation's Class A Common Stock, Stephen B. Ashley was re-elected the sole director of the Corporation. No proxies were solicited. Item 6. Exhibits. See Exhibit Index at Page 13 of this report. 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: 12/3/04 /s/ Steven M. Morse ------------ ---------------------------------- Steven M. Morse President, Treasurer, and Secretary Page 13 of 16 GENESEE CORPORATION AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Exhibit Page No. ------- -------------------------------------------------------- -------- 31.1 Officer Certifications as required by Section 302 of the Sarbanes-Oxley Act of 2002. 14 31.2 Officer Certifications as required by Section 302 of the Sarbanes-Oxley Act of 2002. 15 32 Officers Certifications as required by Section 906 of the Sarbanes-Oxley Act of 2002. 16

GENESEE CORP 10-Q