<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended May 2, 1998
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 1-8578
McRae Industries, Inc
(Exact name of registrant as specified in its charter)
Delaware 56-0706710
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 North Main Street
Mt. Gilead, North Carolina 27306
(Address of principal executive offices)
Telephone Number (910)439-6147
(Registrant's telephone number, including area code)
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 periods 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1 Par Value--Class A 1,819,728 shares as of June 12, 1998
Common Stock, $1 Par Value--Class B 948,771 shares as of June 12, 1998
1
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McRae Industries, Inc. and Subsidiaries
INDEX
Page No.
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PART 1. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet 3-4
Condensed Consolidated Statement of Operations 5
Condensed Consolidated Statement of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion And Analysis of Financial
Condition and Results of Operations 8-9
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 10
ITEM 2. Changes in Securities 10
ITEM 3. Default upon Senior Securities 10
ITEM 4. Submission of Matters to a Vote of Securities Holders 10
ITEM 5. Other Information 10
ITEM 6. Exhibits and Reports on Form 8-K 10
Signatures 10
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 2, 1998 August 2, 1997
(Unaudited) (Note)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,535 $ 5,473
Securities 64 64
Accounts and notes receivable, net 8,117 6,710
Inventories 13,401 11,924
Net investment in capitalized leases 839 866
Prepaid expenses and other current assets 362 203
------ ------
Total current assets 27,318 25,240
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Property, plant, and equipment, net 6,780 6,409
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Other assets:
Receivables, related entities 946 2,676
Net investment in capitalized leases 1,438 1,808
Notes receivable 1,154 1,363
Real estate held for investment 494 486
Goodwill 600 629
Other 1,315 1,114
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Total other assets 5,947 8,076
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$40,045 $39,725
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</TABLE>
See notes to condensed consolidated financial statements
3
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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 2, 1998 August 2, 1997
(Unaudited) (Note)
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<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit $ -0- $ 798
Notes payable, banks - current portion 252 314
Accounts payable 2,324 1,802
Accrued employee benefits 617 601
Deferred revenues 1,338 1,517
Accrued payroll and payroll taxes 538 642
Income taxes 551 532
Other 860 622
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Total current liabilities 6,480 6,828
------ ------
Notes payable, banks, net of current portion 5,676 5,854
Minority interest 679 869
Shareholders' equity:
Common stock:
Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding, 1,819,728
and 1,816,332, shares, respectively 1,820 1,817
Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding 948,771
and 952,167 shares, respectively 949 952
Additional paid-in capital 791 791
Retained earnings 23,650 22,614
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Total shareholders' equity 27,210 26,174
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$40,045 $39,725
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</TABLE>
NOTE - The condensed consolidated balance sheet at August 2, 1997 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements
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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 2, May 3, May 2, May 3,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net revenues $ 13,803 $ 12,646 $ 43,883 $ 44,934
Costs and expenses:
Cost of revenues 10,188 9,455 32,557 32,861
Selling and administrative 2,989 2,824 8,834 8,855
Other expense (income), net (116) (277) (427) (422)
Interest expense 131 115 364 367
------- ------- ------- ------
Total costs and expenses 13,192 12,117 41,328 41,661
------- ------- ------- ------
Earnings before income taxes
and minority interest 611 529 2,555 3,273
Provision for income taxes 240 104 998 1,176
Minority shareholder's interest
in earnings of subsidiary 7 (2) 30 62
------ ------ ------ ------
Net earnings $ 364 $ 427 $ 1,527 $ 2,035
======= ======= ======== =======
Net earnings per common share $ .13 $ .15 $ .55 $ .74
------ ------- -------- -------
Weighted average number of
common shares outstanding 2,768,499 2,768,499 2,768,499 2,759,683
---------- ---------- ---------- ---------
</TABLE>
See notes to condensed consolidated financial statements
5
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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
May 2 1998 May 3, 1997
---------------------------
<S> <C> <C>
Net cash provided by (used in) operating
activities $ 356 $ 3,490
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Cash flows from investing activities:
Purchase of minority interest (220) --
Proceeds from sales of assets 132 --
Advances to related parties (126) (257)
Payments from related parties 1,856 34
Capital expenditures (1,459) (294)
Purchase of other assets (219) (142)
Advances of long term receivables (280) (1,087)
Payments of long term receivables 489 443
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Net cash provided by (used in)
investing activities 173 (1,303)
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Cash flows from financing activities:
Principal repayments of notes payable (976) (429)
Proceeds from exercise of stock options -- 58
Dividends paid (491) (482)
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Net cash used in financing activities (1,467) (853)
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Net increase (decrease) in cash and cash
equivalents (938) 1,334
Cash and cash equivalents at beginning
of period 5,473 581
------- -------
Cash and cash equivalents at end of period $ 4,535 $ 1,915
======= =======
</TABLE>
See notes to condensed consolidated financial statements
6
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McRae Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended May 2, 1998 are not
necessarily indicative of the results that may be expected for the year ending
August 1, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto included in the McRae Industries, Inc. Annual
Report on Form 10-K for the year ended August 2, 1997.
Certain reclassifications have been made to the prior year's financial
statements to conform with the current year's presentation.
NOTE B - INVENTORIES
An actual valuation of inventory under the LIFO method can be made only at the
end of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to
forces beyond management's control, interim calculations are subject to change
based on the final year-end LIFO inventory valuation.
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
May 2, 1998 August 2, 1997
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<S> <C> <C>
Raw materials $ 2,536 $ 2,314
Work in process 552 771
Finished goods 10,313 8,839
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$13,401 $11,924
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</TABLE>
NOTE C - SUBSEQUENT EVENTS
On May 26, 1998, the Company declared a cash dividend of 9.0 cents per share on
its Class A Common Stock payable on June 26, 1998 to shareholders of record on
June 12, 1998.
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McRae Industries, Inc. and Subsidiaries
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto, and
with the Company's Annual Report on Form 10-K for the fiscal year ended August
2, 1997, including the financial information and management's discussion and
analysis contained or incorporated by reference therein.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition and liquidity continued to remain solid for
the period ending May 2, 1998 as working capital amounted to $20.8 million
resulting in a current ratio of 4.2 to 1. Cash and cash equivalents totaled
approximately $4.5 million.
Cash generated from operating activities for the nine month period ending May 2,
1998 amounted to approximately $356,000. Net income from operations, adjusted
for amortization and depreciation, contributed almost $2.6 million. Accounts and
notes receivable increased by approximately $1.4 million due primarily from
increased third quarter sales as compared to the fourth quarter of fiscal 1997
and the timing of certain receivable collections for the office products unit in
the fourth quarter of fiscal 1997. Due to greater market demand for products
from the office products, bar code, and printing units, the Company increased
related inventories by almost $2.4 million. This inventory buildup was partially
offset by a $900,000 reduction in the footwear unit's inventory primarily as a
result of lower contract quantities for military combat boots and the continuing
soft market for western and work boots. Investment in capitalized leases
declined by approximately $400,000 as outside financing sources participated
more heavily in the funding of office products unit sales.
Accounts payable increased by $521,000 primarily attributable to the timing of
payments associated with the previously noted inventory buildup. Other accruals
contributed approximately $247,000 of cash resulting from the timing of certain
health and general liability insurance payments.
Investing activities produced a positive cash flow of approximately $173,000.
Payments from related parties amounted to almost $1.9 million with approximately
$1.6 million coming from the former president's estate to settle amounts due the
Company attributable to the automobile dealership. The Company made capital
expenditures of $1.5 million for the acquisition of rental machines for the
office products unit, a new corporate telephone system, and various office and
manufacturing equipment. The Company used $220,000 of cash to increase its
ownership in the bar code unit from 92% to 94% and another $219,000 for
investments in land and split dollar life insurance policies.
The Company currently has a $2.75 million line of credit with a bank. An
additional $1.0 million line of credit is being negotiated and is expected to be
available in the near future. It is Management's opinion that the Company's
future working capital and debt repayment requirements will be adequately
covered by the current available cash and cash equivalents, lines of credit, and
cash flows from operations.
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THIRD QUARTER FISCAL 1998 COMPARED TO THIRD QUARTER FISCAL 1997
Consolidated net revenues for the third quarter of fiscal 1998 amounted to
approximately $13.8 million, an increase of 9.5% over the consolidated net
revenues of $12.6 million reported for the same period of fiscal 1997. The bar
code unit and the office products unit posted comparative quarter increases of
$.7 million and $.8 million, respectively, as demand for products and services
associated with these business units remained strong. Net revenues for the
footwear unit amounted to $4.6 million for the current fiscal quarter as
compared to $5.0 million for the same quarter in fiscal 1997. Lower military
boot requirements for the U. S. Government and soft demand for western and work
boots was partially offset by increased shipments of military boots to foreign
customers.
Consolidated gross profit increased from the $3.2 million reported for the third
quarter of fiscal 1997 to $3.6 million for the third quarter of fiscal 1998. As
a percentage of sales, consolidated gross profit for the current quarter was
26.2% as compared to the 25.2% reported for the previous year's third quarter.
Gross profit margins were favorably affected by greater sales of higher margin
bar code and office products which were partially offset by competitive price
pressures experienced by the bar code unit and higher per unit production costs
associated with lower footwear unit production levels.
Selling, general and administrative (SG&A) expenses increased to $3.0 million
for the current fiscal quarter as compared to $2.8 million for the third quarter
of fiscal 1997 and declined as a percentage of sales from 22.3% to 21.7%. Higher
expenditures for selling and administrative salaries, employee benefits,
professional fees, and bad debt write-offs were primarily responsible for the
increase in SG&A costs.
FIRST NINE MONTHS FISCAL 1998 COMPARED TO FIRST NINE MONTHS FISCAL 1997
Consolidated net revenues for the first nine months of fiscal 1998 were $1.1
million less than the consolidated net revenues reported for the same period of
fiscal 1997. The office products and printing businesses continued to
experienced strong demand for duplicating equipment and printed material as net
revenues for the 1998 fiscal period increased by approximately $1.9 million over
the comparable period last year. Net revenues for the footwear unit amounted to
$17.8 million for the first nine months of fiscal 1998, down approximately $2.5
million for the same nine month period of fiscal 1997. This decline in business
is the result of decreased contract quantities for military boots and the
continued softness for western and work boots. Discontinued and abbreviated
operations of several of the smaller business units contributed $300,000 less
revenue for the 1998 fiscal period as compared to the same period of fiscal
1997.
Consolidated gross profit decreased from the $12.1 million level reported for
the first nine months of fiscal 1997 to $11.3 million for the same period of
fiscal 1998. Gross profit as a percentage of net revenues for the 1998 fiscal
period was 25.8% as compared to 26.9% reported for the 1997 fiscal period. Lower
overall sales volume, competitive price pressures in the bar code unit, and
higher unit costs associated with reduced footwear production levels were
primarily responsible for the decline in gross profit.
Selling, general and administrative (SG&A) expenses were virtually unchanged for
the comparable nine months periods. As a percentage of sales, SG&A expenses were
20.1% for the nine months of fiscal 1998 as compared to 19.7% for the same
period of fiscal 1997. Reduced expenditures for administrative salaries,
royalties, and group health insurance were offset by slightly higher costs for
professional services and bad debt write-offs, primarily associated with the
finance and leasing business.
9
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 of the Company's Annual Report to Shareholders on
Form 10-K for the fiscal year ended August 2, 1997.
Items 2, 3, 4, and 5.
These items are inapplicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule. (Filed in electronic format only.
Pursuant to Rule 402 of Regulations S-T, this schedule shall
not be deemed filed for purposes of Section 11 of the
Securities Act of 1933 or Section 18 of the Securities
Exchange Act of 1934.)
(b) No reports on Form 8-K were filed during the quarter ended May 2, 1998.
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.
McRae Industries, Inc.
(Registrant)
Date: June 12, 1998 By: /s/ D. Gary McRae
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D. Gary McRae
President and CEO
(Principal Executive Officer)
Date: June 12, 1998 By: /s/ Marvin G. Kiser, Sr.
------------- ------------------------
Marvin G. Kiser, Sr.
(Principal Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-01-1998
<PERIOD-START> AUG-03-1997
<PERIOD-END> MAY-02-1998
<CASH> 4,535
<SECURITIES> 64
<RECEIVABLES> 8,826
<ALLOWANCES> 709
<INVENTORY> 13,401
<CURRENT-ASSETS> 27,318
<PP&E> 15,922
<DEPRECIATION> 9,142
<TOTAL-ASSETS> 40,045
<CURRENT-LIABILITIES> 6,480
<BONDS> 5,676
0
0
<COMMON> 2,769
<OTHER-SE> 791
<TOTAL-LIABILITY-AND-EQUITY> 40,045
<SALES> 43,883
<TOTAL-REVENUES> 43,883
<CGS> 32,557
<TOTAL-COSTS> 41,755
<OTHER-EXPENSES> (427)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 364
<INCOME-PRETAX> 2,555
<INCOME-TAX> 998
<INCOME-CONTINUING> 1,527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,527
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
