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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 OCTOBER 31, 1998
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 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 1,855,728 shares as of December 7, 1998
Common Stock, $1 Par Value--Class B 912,771 shares as of December 7, 1998
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MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
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 8-10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES 11
ITEM 3. DEFAULT UPON SENIOR SECURITIES 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 11
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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)
October 31, 1998 August 1, 1998
(Unaudited) (Note)
---------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,361 $ 5,766
Securities 63 63
Accounts and notes receivable, net 6,550 9,468
Inventories 12,675 11,468
Net investment in capitalized leases 777 786
Prepaid expenses and other current assets 197 242
------ ------
Total current assets 26,623 27,793
------ ------
Property, plant and equipment, net 6,149 6,360
------ ------
Other assets:
Receivables, related entities 954 965
Net investment in capitalized leases 2,001 1,939
Notes receivable 906 998
Real estate held for investment 494 494
Goodwill 579 589
Other 1,310 1,319
------ ------
Total other assets 6,244 6,304
------ ------
$39,016 $40,457
======= =======
See notes to condensed consolidated financial statements
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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)
October 31, 1998 August 1, 1998
(Unaudited) (Note)
---------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks - current portion 271 271
Accounts payable 1,662 2,024
Accrued employee benefits 573 550
Deferred revenues 1,409 1,536
Accrued payroll and payroll taxes 474 561
Income taxes 257 821
Other 440 622
------ ------
Total current liabilities 5,086 6,385
------ ------
Notes payable, banks, net of current portion 5,532 5,594
Minority interest 703 694
Shareholders' equity:
Common stock:
Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding, 1,819,728
and 1,819,728, shares, respectively 1,820 1,820
Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding 948,771
and 948,771 shares, respectively 949 949
Additional paid-in capital 791 791
Retained earnings 24,135 24,224
------- -------
Total shareholders' equity 27,695 27,784
------- -------
$39,016 $40,457
======= =======
NOTE - The condensed consolidated balance sheet at August 1, 1998 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)
Three Months Ended
October 31, November 1,
1998 1997
----------- -----------
Net revenues $ 10,797 $ 14,965
Costs and expenses:
Cost of revenues 7,751 11,082
Research & development 212 59
Selling, general and administrative 2,696 2,906
Other expense (income), net (120) (162)
Interest expense 116 121
------- -------
Total costs and expenses 10,655 14,006
------- -------
Earnings before income taxes
and minority interest 142 959
Provision for income taxes 59 375
Minority shareholder's interest
in earnings of subsidiary 8 16
------- -------
Net earnings $ 75 $ 568
======= =======
Net earnings per common share $ .03 $ .21
------ -------
Weighted average number of
common shares outstanding 2,768,499 2,768,499
---------- ----------
See notes to condensed consolidated financial statements
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MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
October 31, 1998 November 1, 1997
---------------- ----------------
Net cash provided by operating
activities $ 883 $ 249
------ -------
Cash flows from investing activities:
Proceeds from sales of assets 29
Net payments from related parties 11
Capital expenditures (166) (202)
Net payments of long-term receivables 93 3
------- -------
Net cash used in investing activities (62) (170)
------- -------
Cash flows from financing activities:
Principal repayments of notes payable (62) (856)
Dividends paid (164) (164)
------- -------
Net cash used in financing activities (226) (1,020)
------- -------
Net increase(decrease)in cash and cash
equivalents 595 (941)
Cash and cash equivalents at beginning
of period 5,766 5,473
------- -------
Cash and cash equivalents at end of period $6,361 $4,532
======= =======
See notes to condensed consolidated financial statements
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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
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended October 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending July 31, 1999. 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 1, 1998.
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):
October 31, 1998 August 1, 1998
---------------- --------------
Raw materials $ 2,229,000 $ 2,366,000
Work in process 515,000 413,000
Finished goods 9,931,000 8,689,000
----------- -----------
$12,675,000 $11,468,000
=========== ===========
NOTE C - SUBSEQUENT EVENTS
On November 23, 1998, the Company declared a cash dividend of 9.0 cents per
share on its Class A Common Stock payable on December 30, 1998 to shareholders
of record on December 11, 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
1, 1998, including the financial information and management's discussion and
analysis contained or incorporated by reference therein.
FINANCIAL CONDITION AND LIQUIDITY
For the period ending October 31, 1998, the Company's working capital amounted
to approximately $21.5 million with cash and cash equivalents approaching $6.4
million.
Cash generated from operating activities for the quarter ending October 31, 1998
amounted to approximately $883,000. Net income from operations, adjusted for
amortization and depreciation, contributed $470,000. Accounts and notes
receivable was a source of $2.9 million of cash as collections on accounts for
the bar code and office products units related to fourth quarter revenues
exceeded the addition of new receivables for the first quarter of fiscal 1999.
Inventories used approximately $1.2 million of cash as inventory levels depleted
from heavy fourth quarter office product unit sales were replenished. The
decrease in accounts payable used almost $362,000 and resulted primarily from
the timing of payments for office products inventory. Payments for corporate
franchise and income taxes amounted to approximately $564,000.
Capital expenditures amounted to approximately $166,000 primarily for new
product molds for the bar code unit and rental equipment for the office products
unit.
The Company used $164,000 of cash to pay quarterly dividends and $62,000 to
reduce the principal amount of long-term debt.
The Company currently has two lines of credit with a bank totaling $2.75
million, all of which was available at October 31, 1998. It is Management's
opinion that future cash flows from operations, currently available cash and
cash equivalents, and unused lines of credit will be sufficient to meet the
Company's future working capital, capital expenditures, and debt repayment
requirements.
FIRST QUARTER FISCAL 1999, COMPARED TO FIRST QUARTER FISCAL 1998
Consolidated net revenues for the first quarter of fiscal 1999 amounted to
approximately $10.8 million, down 28% from the $15.0 million reported for the
first quarter of fiscal 1998 primarily as a result of lower footwear unit
revenues. Military combat boot net revenues continued to be impacted by the U.S.
Government's surplus of this product. Net revenues from military combat boots
declined from the $3.0 million in the first quarter of fiscal 1998 to $1.6
million for the first quarter of fiscal 1999. Net revenues for the western and
work boot product line amounted to $1.3 million, down $1.9 million as compared
to the first quarter of fiscal 1998. This decrease in western and work boot net
revenues is primarily attributable to low market demand for these products.
Gross profit as a percent of net revenues increased from 26% for the first
quarter of fiscal 1998 to 28% for the same period of fiscal 1999 as higher
margin bar code and office equipment products accounted for a greater portion of
the Company's consolidated net revenues for the current quarter. For the
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comparative quarter, gross profit decreased nearly $800,000 which was primarily
attributable to lower consolidated sales volume, competitive price pressures in
the bar code business, and higher per unit production costs in the footwear
business.
Selling, general and administrative (SG&A) expenses decreased approximately
$210,000 for the first quarter of fiscal 1999 as compared to the first quarter
of fiscal 1998. However, as a percent of net revenues, SG&A expenses were 25%
for the first quarter of fiscal 1999, up 5.6% from the 19.4% level reported for
the same period of fiscal 1998. This increase was primarily attributable to
lower sales volume, higher sales salaries and commissions. Lower expenditures
for employee health and life insurance, employee benefits, and telephone costs
provided a partial offset to total SG&A expenses. Research and development
expenditures for the first quarter of fiscal 1999 were $212,000 as compared to
$59,000 for the first quarter of fiscal 1998.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standard (SFAS) No. 128,
"Earnings Per Share", was issued. SFAS No. 128 requires disclosures of "basic"
and "diluted" earnings per share where potential common stock may be issued in
the future. SFAS No. 128 is effective for the Registrant for periods ending
after December 15, 1997. Since the Registrant has no diluted instruments, only
basic earnings per share information is disclosed.
Also in February 1997, SFAS No. 129, "Disclosures of Capital Structure", was
issued. SFAS No. 129 requires information about capital structure to be
disclosed in three separate categories - information about securities,
liquidation preference of preferred stock, and redeemable stock. SFAS No. 129 is
effective for the Registrant's fiscal periods ending after December 15, 1997.
The Registrant is in compliance with this reporting requirement.
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", was issued. SFAS No. 130 requires disclosures of
comprehensive income (which is defined as "the change in equity during a period
excluding changes resulting from investments by stockholders and distributions
to stockholders") and its components. SFAS No. 130 is effective for the
Registrant beginning with the fiscal year ending July 31, 1999, and has been
adopted. Comprehensive income is not different from net income, as there are no
items of other comprehensive income at October 31, 1998, August 1, 1998, and
November 1, 1997.
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. SFAS No. 131 will
be effective for the Registrant for the fiscal year ending July 31, 1999.
Management is evaluating the effect of SFAS No. 131 on the Registrant's future
disclosures.
YEAR 2000 ISSUES
Many computers and software programs were designed to accommodate only two-digit
date fields to represent a given year (e.g. "98" represents 1998). It is
possible that such systems will not be able to accurately process data
containing information related to the calendar year 2000 or later. The "year
2000 issue" has the potential to affect the Registrant through the failure to
process business transactions both at the Registrant and between the Registrant
and its business partners. In addition, claims to cover costs associated with
the issue may be asserted against insurance contracts in which the Registrant
participates.
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In April 1998, the Registrant designated "a year 2000 team" consisting of the
chief executive officer, the principal financial and accounting officer and the
manager of information systems. A Year 2000 (Y2K) Plan was developed,
communicated to the board of directors and senior management, and implemented.
The Y2K plan is designed to (i) assess compliance of internally used computer
hardware and software programs; (ii) determine compliance issues with
infrastructure systems such as telephone systems, production line equipment,
shipping systems, and facility heating and air conditioning equipment; (iii)
conduct Y2K compliance surveys with mission critical business partners to
include major customers and suppliers of goods and services; (iv) implement
appropriate testing procedures to measure actual compliance; and (v) develop and
institute contingency plans to mitigate any unforeseen Y2K issues.
The Registrant has reviewed virtually all of its internally used computer
hardware and software for year 2000 compliance. Non-compliant hardware has
either been replaced, scheduled for replacement, or placed in non-mission
critical functions. The critical computerized business systems utilized by the
Registrant are primarily based on software products licensed from third parties
that specialize in software development. These software vendors indicate that
their products will be made compliant on a timely basis. In addition to
purchased software, there are some program applications that have been developed
internally. These programs are being assessed and those deemed to be critical to
the business will be modified or replaced.
While the Registrant believes that its computer hardware, licensed software, and
internally generated software critical to its business will be compliant on a
timely basis, there can be no assurance that every such product will be
compliant on a timely basis and there can be no assurance that there will be no
material disruption to the Registrant's business if such products are not
compliant. The Registrant believes that the actual expenses involved in making
the internal processing system year 2000 compliant will not be material when
completed.
The Registrant is in the process of surveying its mission critical business
partners who provide goods and services. As a result, a thorough assessment of
any significant barriers to year 2000 compliance has not been completed. Final
assessment and development of any related contingency plans to prevent a
material disruption in the Registrant's business is scheduled for completion by
December 31, 1998. The costs associated with this phase of the plan are being
expensed as incurred and are not expected to be material. Because the Registrant
relies on the business activities of its many business partners to be year 2000
compliant, there can be no assurance that there will not be a material
disruption to the Registrant's business or an increase in the cost of doing
business.
The Registrant expects to utilize calendar 1999 to continue its evaluation
efforts regarding all phases of year 2000 compliance. Pertinent contingency
plans will be developed based on substantive determination that year 2000
non-compliance situations exist which could be disruptive and costly to the
Registrant's business activities in the year 2000 and beyond.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report includes certain
forward-looking statements as such term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act. These forward-looking
statements involve certain risks and uncertainties, including but not limited to
acquisitions, additional financing requirements, development of new products and
services, the effect of competitive products and pricing, risks unique to
selling goods to the Government (including termination of the Contract), and the
effect of general economic conditions, that could cause actual results to differ
materially from those in such forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes due to its
aggregate $2.75 million lines of credit and a term loan through its wholly owned
subsidiary, American West Trading Company. As of October 31, 1998, there was no
outstanding indebtedness under the lines of credit and $5.5 million was
outstanding on the term loan. The Company does not buy or sell derivative
financial instruments for trading purposes. Borrowings under the Company's
credit facilities described above bear interest at rates based upon the "Prime
Rate" offered by the applicable lender less a margin of one-half percent. The
Company has not entered into any swap agreements or engaged in any other hedging
activities with respect to this variable rate indebtedness. An increase of
1% in the interest rate under the Company's credit facilities would increase
annual interest expense by approximately $60,000 (assuming the Company's
aggregate borrowings under the credit facilities averaged $6.0 million during a
fiscal year).
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 1, 1998.
ITEMS 2, 3, 4, AND 5.
These items are not applicable 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 October 31, 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: December 10, 1998 By: /s/ D. Gary McRae
------------------ ------------------------
D. Gary McRae
President and CEO
(Principal Executive Officer)
DATE: December 10, 1998 By: /s/ Marvin G. Kiser, Sr.
------------------ ------------------------
Marvin G. Kiser, Sr.
(Principal Accounting Officer)
11
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<PERIOD-START> AUG-02-1998
<PERIOD-END> OCT-31-1998
<CASH> 6,361
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