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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 30, 1999
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, $l Par Value--Class A 1,857,974 shares as of December 7, 1999
Common Stock, $1 Par Value--Class B 910,525 shares as of December 7, 1999
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MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
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PAGE NO.
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PART I. 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 12
</TABLE>
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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 30, 1999 July 31, 1999
(Unaudited) (Note)
---------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,359 $ 4,705
Securities 63 63
Accounts and notes receivable, net 7,868 7,846
Inventories (See Note B) 13,358 13,461
Net investment in capitalized leases 717 726
Prepaid expenses and other current assets 151 212
------- -------
Total current assets 27,516 27,013
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Property, plant and equipment, net 6,374 6,410
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Other assets:
Receivables, related entities 924 941
Net investment in capitalized leases 2,145 2,350
Notes receivable 456 552
Real estate held for investment 494 494
Goodwill 540 550
Other 1,631 1,641
------- -------
Total other assets 6,190 6,528
------- -------
$40,080 $39,951
======= =======
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 30, 1999 July 31, 1999
(Unaudited) (Note)
---------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks - current portion $ 295 $ 295
Accounts payable 2,347 2,589
Accrued employee benefits 300 250
Deferred revenues 1,169 1,338
Accrued payroll and payroll taxes 558 636
Income taxes 459 111
Other 722 832
------ ------
Total current liabilities 5,850 6,051
------ ------
Notes payable, banks, net of current portion 5,207 5,280
Minority interest 727 719
Shareholders' equity:
Common stock:
Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding,
1,857,774 shares 1,858 1,858
Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding,
910,725 shares 911 911
Additional paid-in capital 791 791
Retained earnings 24,736 24,341
------- -------
Total shareholders' equity 28,296 27,901
------- -------
$40,080 $39,951
======= =======
NOTE - The condensed consolidated balance sheet at July 31, 1999 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 30, October 31,
1999 1998
----------- -----------
Net revenues $ 14,784 $ 10,797
Costs and expenses:
Cost of revenues 10,695 7,751
Research & development 161 212
Selling, general and administrative 3,001 2,696
Other expense (income), net (106) (120)
Interest expense 96 116
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Total costs and expenses 13,847 10,655
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Earnings before income taxes
and minority interest 937 142
Provision for income taxes 366 59
Minority shareholder's interest
in earnings of subsidiary 8 8
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Net earnings $ 563 $ 75
======== ========
Net earnings per common share $ .20 $ .03
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Weighted average number of
common shares outstanding 2,768,499 2,768,499
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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)
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<CAPTION>
Three Months Ended
October 30, 1999 October 31, 1998
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Net cash provided by operating
activities $1,144 $ 883
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Cash flows from investing activities:
Proceeds from sales of assets 17
Net payments from related parties 17 11
Capital expenditures (380) (166)
Net payments of long-term receivables 96 93
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Net cash used in investing activities (250) (62)
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Cash flows from financing activities:
Principal repayments of notes payable (73) (62)
Dividends paid (167) (164)
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Net cash used in financing activities (240) (226)
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Net increase in cash and cash equivalents 654 595
Cash and cash equivalents at beginning
of period 4,705 5,766
------ ------
Cash and cash equivalents at end of period $5,359 $6,361
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</TABLE>
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 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending July 29, 2000. 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 July 31, 1999.
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 30, 1999 July 31, 1999
---------------- -------------
Raw materials $ 2,799,000 $ 2,761,000
Work in process 621,000 675,000
Finished goods 9,938,000 10,025,000
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$13,358,000 $13,461,000
=========== ===========
NOTE C - SUBSEQUENT EVENTS
On November 29, 1999, the Company declared a cash dividend of 9.0 cents per
share on its Class A Common Stock payable on December 31, 1999 to shareholders
of record on December 10, 1999.
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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 July 31,
1999, including the financial information and management's discussion and
analysis contained therein.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition at October 30, 1999 continues to be strong.
Working capital increased by approximately $700,000 since July 31, 1999. Cash
and cash equivalents amounted to $5.4 million at October 30, 1999.
Cash generated from operating activities amounted to approximately $1.1 million.
Net income from operations, adjusted for depreciation and amortization,
contributed approximately $1.0 million. Inventories declined by $103,000 as
higher first quarter sales in the printing and western boot units outpaced
inventory purchases. Accounts payable used approximately $250,000 of cash
primarily as a result of the payment of fourth quarter fiscal 1999 inventory
purchases in the first quarter of fiscal 2000. Income taxes provided
approximately $348,000 of cash as first quarter estimated tax payments were made
after quarter end.
Capital expenditures for the first quarter of fiscal 2000 amounted to
approximately $380,000 primarily attributable to upgrades of corporate-wide
computer systems and hardware, production machinery and equipment for the
printing unit, and rental machines for the office products unit.
The Company used $167,000 of cash to pay quarterly dividends and $73,000 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 30, 1999. It is Management's
opinion that the 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 2000, COMPARED TO FIRST QUARTER FISCAL 1999
Consolidated net revenues for the first quarter of fiscal 2000 amounted to
approximately $14.8 million, a 37% increase over the $10.8 million reported for
the first quarter of fiscal 1999. This increase was primarily the result of
higher net revenues for each of the Company's major business units. Net revenues
for the military boot business grew from the $1.6 million for the first quarter
of fiscal 1999 to $2.4 million for the first quarter of fiscal 2000 primarily as
a result of higher boot requirements from the U. S. Government and an increased
demand for military boots by foreign governments. Net revenues for the western
and work boot business amounted to $2.4 million for the first quarter of fiscal
2000, an 87% increase over the same period for fiscal 1999 and was attributable
to sales and marketing strategies implemented in fiscal 1999. Office products
business net revenues increased from $3.5 million for fiscal 1999 to $5.1
million for the first quarter of fiscal 2000 as a result of equipment sales to
county-wide educational systems and higher demand for service and supplies
related primarily to this program. Net revenues for the bar code business
increased to $4.2 million for the first quarter of fiscal 2000 from $3.9 million
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for fiscal 1999 as a result of higher unit sales for the current reporting
period.
Consolidated gross profit climbed to $4.1 million, an increase of 35% over the
amount reported for the first quarter of fiscal 1999. This higher level of gross
profit was primarily attributable to increased net revenue levels. As a
percentage of net revenues, gross profit declined by nearly one half of one
percent. This decrease resulted primarily from the lower margin military and
western boot business accounting for a larger percent of the total revenue mix
and from a decline in the gross profit percentage in the office products
business associated with increased sales to lower margined county-wide
educational systems. The military and western boot business posted increased
gross margin levels attributable to higher production levels resulting in lower
per unit costs.
Selling, general and administrative (SG&A) expenses increased by approximately
$300,000 for the first quarter of fiscal 2000 as compared to the first quarter
of fiscal 1999 primarily attributable to higher sales salaries in the bar code
and office products business; increased corporate-wide group health insurance
costs; the timing of certain professional fees and telephone expenses between
the comparative quarters; and additional development costs associated with the
Electronic Response and Information Center web page for the bar code business.
As a percentage of net revenues, however, SG&A expenditures decreased from 25.0%
for the first quarter of fiscal 1999 to 20.3% for the first quarter of fiscal
2000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued and established the accounting and reporting standards
for derivative instruments and hedging activities. SFAS No. 133 will be
effective for the Registrant for the fiscal year beginning July 30, 2000, as
amended by SFAS No. 137. Currently, the Registrant is not involved in any
derivative or hedging activities.
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.
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
infra-structure 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.
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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 are compliant. In addition to purchased software, there are some
program applications that have been developed internally. These programs have
been assessed and those deemed to be critical to the business have been modified
or replaced.
While the Registrant believes that its computer hardware, licensed software, and
internally generated software critical to its business is compliant, there can
be no assurance that every such product is compliant 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
have not been material.
The Registrant has surveyed its mission critical business partners who provide
goods and services. The survey findings indicate that a large majority of the
Registrant's mission critical business partners have developed a plan to
identify and remediate any potential barriers to year 2000 compliance. For those
business partners who did not respond or whose response contained significant
elements of risk, alternative suppliers have been found. The costs associated
with this phase of the plan were expensed as incurred and were not 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 the remainder of calendar 1999 to continue its
evaluation efforts regarding all phases of year 2000 compliance. Pertinent
contingency plans have been and will continue to 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.
Management believes that all products currently manufactured by the Registrant
are year 2000 compliant. Although older bar code products sold by the Registrant
were not year 2000 compliant, the Registrant has delivered instructions to its
customers on the appropriate methods to upgrade these products. Despite this,
there can be no assurance that some customers will not assert claims against the
Registrant because of the year 2000 issue.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Interim 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 U. S. Government (including termination of the U. S.
Government's long-term Contract with the Registrant), the year 2000 problem, 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 30, 1999, 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 or other 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 July 31, 1999.
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 30, 1999.
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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 13, 1999 By: /s/ D. Gary McRae
------------------ ------------------------
D. Gary McRae
President and CEO
(Principal Executive Officer)
DATE: December 13, 1999 By: /s/ Marvin G. Kiser, Sr.
------------------ ------------------------
Marvin G. Kiser, Sr.
(Principal Accounting Officer)
12
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-29-2000
<PERIOD-START> AUG-01-1999
<PERIOD-END> OCT-30-1999
<CASH> 5,359
<SECURITIES> 63
<RECEIVABLES> 8,257
<ALLOWANCES> 389
<INVENTORY> 13,358
<CURRENT-ASSETS> 27,516
<PP&E> 16,708
<DEPRECIATION> 10,334
<TOTAL-ASSETS> 40,080
<CURRENT-LIABILITIES> 5,850
<BONDS> 5,207
0
0
<COMMON> 2,769
<OTHER-SE> 791
<TOTAL-LIABILITY-AND-EQUITY> 40,080
<SALES> 14,784
<TOTAL-REVENUES> 14,784
<CGS> 10,695
<TOTAL-COSTS> 13,953
<OTHER-EXPENSES> (106)
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