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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 APRIL 29, 2000
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 1,859,692 shares as of June 7, 2000.
Common Stock, $1 Par Value--Class B 908,807 shares as of June 7, 2000.
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MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
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 8-11
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 11-12
SIGNATURES 12
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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)
April 29, 2000 July 31,1999
(Unaudited) (Note)
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,653 $ 4,705
Securities 61 63
Accounts and notes receivable, net 8,898 7,846
Inventories (see Note B) 17,674 13,461
Net investment in capitalized leases 699 726
Prepaid expenses and other current assets 152 212
------- -------
Total current assets 31,137 27,013
------- -------
Property, plant and equipment, net 5,645 6,410
------- -------
Other assets:
Receivables, related entities 842 941
Net investment in capitalized leases 1,725 2,350
Notes receivable 262 552
Real estate held for investment 529 494
Goodwill 520 550
Other 2,193 1,641
------- -------
Total other assets 6,071 6,528
------- -------
$42,853 $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)
April 29, 2000 July 31, 1999
(Unaudited) (Note)
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks - current portion 295 295
Accounts payable 5,605 2,589
Accrued employee benefits 223 250
Deferred revenues 1,051 1,338
Accrued payroll and payroll taxes 582 636
Income taxes 180 111
Other 602 832
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Total current liabilities 8,538 6,051
------- -------
Notes payable, banks, net of current portion 5,066 5,280
Minority interest 729 719
Shareholders' equity:
Common stock:
Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding, 1,859,692 1,860 1,858
and 1,857,774, shares, respectively
Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding, 908,807
and 910,725 shares, respectively 909 911
Additional paid-in capital 791 791
Retained earnings 24,960 24,341
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Total shareholders' equity 28,520 27,901
------- -------
$42,853 $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 Nine Months Ended
April 29, May 1, April 29, May 1,
2000 1999 2000 1999
------------------- ----------------------
Net revenues $15,565 $13,552 $44,222 $37,008
Costs and expenses:
Cost of revenues 12,094 9,580 33,142 26,713
Research & development 137 123 433 418
Selling, general and
administrative 3,081 3,172 8,797 8,907
Other expense (income),
net (119) (76) (331) (278)
Interest expense 108 108 313 328
------- ------- ------- -------
Total costs and expenses 15,301 12,907 42,354 36,088
------- ------- ------- -------
Earnings before income
taxes and minority
interest 264 645 1,868 920
Provision for income taxes 106 257 737 374
Minority shareholder's
interest in earnings
of subsidiary (6) (3) 10 11
------- ------- ------- -------
Net earnings $ 164 $ 391 $ 1,121 $ 535
======= ======= ======= =======
Net earnings per common
share $ .06 $ .14 $ .41 $ .19
------- ------- ------- -------
Weighted average number
of common shares
outstanding 2,768,499 2,768,499 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)
Nine Months Ended
April 29, 2000 May 1, 1999
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Net cash provided by (used in) operating
activities $ 394 $ (974)
------- -------
Cash flows from investing activities:
Proceeds from sale of securities 2 0
Purchase of land for investment (35) 0
Proceeds from sales of assets 24 0
Net collections from (advances to)
related parties 99 (52)
Capital expenditures (937) (446)
Purchase of other assets (174) (363)
Net Payments of long-term receivables 290 461
------- -------
Net cash used in investing activities (731) (400)
------- -------
Cash flows from financing activities:
Principal repayments of notes payable (214) (207)
Dividends paid (501) (497)
------- -------
Net cash used in financing activities (715) (704)
------- -------
Net decrease in cash and cash
equivalents (1,052) (2,078)
Cash and cash equivalents at beginning
of period 4,705 5,766
------- -------
Cash and cash equivalents at end of period $ 3,653 $ 3,688
======= =======
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 nine months ended April 29, 2000
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):
April 29, 2000 July 31, 1999
-------------- -------------
Raw materials $ 3,095,000 $ 2,761,000
Work in process 920,000 675,000
Finished goods 13,659,000 10,025,000
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$17,674,000 $13,461,000
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NOTE C - SUBSEQUENT EVENTS
On May 30, 2000, the Company declared a cash dividend of $.09 cents per share on
its Class A Common Stock payable on June 30, 2000 to shareholders of record on
June 16, 2000.
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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 or incorporated by reference therein.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition remained strong for the period ending April
29, 2000. Working capital amounted to approximately $22.6 million and cash and
cash equivalents totaled almost $3.7 million.
Operating activities for the nine-month period ending April 29, 2000 provided
approximately $394,000 of cash. Net income from operations, adjusted for
depreciation and amortization, contributed $2.3 million. Accounts and notes
receivable used $1.1 million of cash. This increase in trade receivables was
primarily the result of the timing of collection of office equipment sales to
county-wide school systems and bar code system sales. These timing differences
amounted to approximately $603,000 and $321,000, respectively. Higher inventory
levels used approximately $4.2 million of cash primarily attributable to a $3.2
million increase in inventory for the office products business to cover fourth
quarter demand for county-wide school system equipment sales. Strong demand for
bar code products and military combat boots increased inventory levels for these
businesses by $467,000 and $358,000, respectively. Accounts payable provided
$3.0 million of cash as payments for military boot leather, bar code equipment,
and office product equipment inventory purchases were made after the
quarter-end. The bar code business used approximately $375,000 of cash to
purchase an enterprise integration software program that enhances and
facilitates mobile bar code applications.
Capital expenditures amounted to approximately $937,000 for the nine months
ended April 29, 2000. Corporate-wide expenditures for computer hardware and
software upgrades for "Year 2000" compliance amounted to approximately $137,000.
Production machinery for the printing unit, rental equipment for the office
products unit, and warehouse renovations at the corporate facility to implement
inventory control and equipment set up efficiencies for the office products unit
used approximately $115,000, $267,000, and $178,000 of cash, respectively.
Various equipment rental programs for the office products unit were placed with
outside financing sources and resulted in approximately $559,000 of positive
cash flow. Collections of long-term notes receivable provided an additional
$290,000 of cash. Premiums for officer split dollar life insurance policies used
approximately $174,000 of cash for the nine-month reporting period.
Financing activities used approximately $715,000 of cash to pay quarterly
dividends of $501,000 and to reduce the principal amount of long-term debt by
$214,000.
The Company currently has two lines of credit with a bank totaling $2.75
million, all of which was available at April 29, 2000. 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.
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THIRD QUARTER FISCAL 2000 COMPARED TO THIRD QUARTER FISCAL 1999
Consolidated net revenues for the third quarter of fiscal 2000 amounted to
approximately $15.6 million, an increase of 14.9% from the consolidated net
revenues of $13.6 million reported for the third quarter of fiscal 1999. Net
revenues for the military boot business were $3.4 million for the current
quarter as compared to $2.0 million for the third quarter of fiscal 1999. This
growth in net revenues is primarily attributable to higher boot requirements
from the U.S. Government and increased sales of military boots to foreign
governments. The bar code business reported an approximate $717,000 increase in
net revenues for the comparative third quarters of fiscal 2000 and fiscal 1999
as demand for scanning and related products remained high. Net revenues for the
office products business amounted to approximately $5.0 million for the third
quarter of fiscal 2000, down $601,000 from the amount reported for the same
quarter of fiscal 1999 as a result of fewer county-wide school system sales. Net
revenues for the western and work boot business increased by $348,000 as a
result of the impact of sales and marketing strategies implemented during fiscal
1999.
Consolidated gross profit as a percentage of net revenues for the third quarter
of fiscal 2000 was 22.3%, down from 29.3% reported for the third quarter of
fiscal 1999. This decrease in gross profit percentage resulted primarily from
the lower margin military and western and work boot business accounting for a
larger percent of the total revenue mix, a decline in the gross profit
percentage in the office products business associated with greater sales to
lower margined accounts, and additional programming salaries and related costs
associated with the enterprise integration software product for the bar code
business.
Selling, general, and administrative (SG&A) expenses amounted to approximately
$3.1 million, a decrease of 2.9% from the same period of fiscal 1999. This
reduction in SG&A expenditures resulted primarily from decreased sales salaries
and commissions for the office products business and to corporate-wide
reductions in employee benefit costs. This decrease was partially offset by
increased sales salaries and commissions for the bar code and western and work
boot businesses. As a percentage of net revenues, SG&A expenditures decreased
from 23.4% for the third quarter of fiscal 1999 to 19.8% for the third quarter
of fiscal 2000.
FIRST NINE MONTHS FISCAL 2000 COMPARED TO FIRST NINE MONTHS FISCAL 1999
Consolidated net revenues for the first nine months of fiscal 2000 amounted to
$44.2 million, an increase of 19.5% over the consolidated net revenues for the
same period of fiscal 1999. The military boot business net revenues amounted to
$8.6 million for the current reporting period, an increase of $3.5 million over
the amount reported for the first nine months of fiscal 1999. This increase in
net revenues was the result of increased U.S. Government requirements for
military combat boots and increased sales of military boots to foreign
governments. The net revenues for the western and work boot business were up
31.9% for the current reporting period as compared to the same prior year period
primarily attributable to the continued success of the sales and marketing
strategies implemented during the last half of fiscal 1999. The office products
business net revenues reached $15.1 million for the first nine months of fiscal
2000, up 5.2% from the $14.3 million reported for the first nine months of
fiscal 1999. This growth in net revenues is primarily the result of continued
strong demand for copier and duplicating equipment by county-wide school
systems. The bar code business was up 12.9% for the first nine months of fiscal
2000 as compared to the same period of fiscal 1999 as demand for scanning and
related equipment continued to be strong.
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Consolidated gross profit for the first nine months of fiscal 2000 and fiscal
1999 amounted to $11.1 million and $10.2 million, respectively, with the
increase primarily resulting from the increase in net revenues. As a percentage
of net revenues, gross profit declined from 27.8% for the first nine months of
fiscal 1999 to 25.1% for the first nine months of fiscal 2000 as the lower
margin military combat boot business and western and work boot business
accounted for a greater portion of the Company's consolidated net revenues.
Increased production levels for the western and work boot business resulted in a
gross profit percentage improvement of 7.0% for the comparative nine-month
periods as per unit production costs were lowered. The gross profit percentage
for the office products business decreased from 33.9% for the first nine months
of fiscal 1999 to 27.8% for the same period of fiscal 2000 as lower margin sales
made up a greater portion of this business unit's total net revenues.
Selling, general, and administrative expenses as a percentage of consolidated
net revenues for the first nine months of fiscal 2000 and fiscal 1999 were 19.9%
and 24.1%, respectively. For the comparative nine-month periods, total SG&A
expenditures decreased from $8.9 million in fiscal 1999 to $8.8 million in
fiscal 2000. Reductions in sales salaries, commissions, and advertising were
partially offset by higher sales and marketing expenses, professional fees, and
group health insurance costs.
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
In prior reporting periods, The Company disclosed the nature of its approach and
the progress of its plans to become compliant with Year 2000 issues. As a result
of the planning and the implementation of compliance efforts, the Company has
experienced no significant disruptions with internal mission critical computer
hardware or software systems. The Company is not aware of any material problems
resulting from Year 2000 issues with its products, internal systems, or the
products and services of mission critical suppliers.
The Company's expenditures for Year 2000 remediation were not material and were
either expensed in the period incurred or capitalized in accordance with
generally accepted accounting principals.
The Company will continue to monitor its mission critical computer applications
and the operations of its mission critical suppliers during the year 2000 to
ensure that any potential Year 2000 issues are resolved without any material
disruption to the Company's operations.
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 of 1934, as amended. 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,
acceptance of new footwear products in the market place, risks unique to selling
goods to the Government (including termination of the Contract, failure to
exercise the next option period under the Contract or reducing purchases), and
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the effect of general economic conditions, that could cause actual results to
differ materially from those in such forward-looking statements.
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 April 29, 2000, there was no
outstanding indebtedness under the lines of credit and $5.1 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 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
current 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
While the Registrant and its subsidiaries are engaged in litigation from time to
time in the ordinary course of business incidental to their respective
operations, management does not believe that any such litigation is likely to
have a material adverse effect on the Registrant's consolidated financial
position or operations.
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
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Registrant's Form S-14, Registration
No. 2-85908).
3.2 Amendment to the Certificate of Incorporation (Incorporated by
reference to Exhibit 3 to the Registrant's Form 10-K for the year
ended August 1, 1987).
3.3 Amendment to the Bylaws of the Registrant effective September 10,
1993 (Incorporated by reference to Exhibit 3.3 to the Registrant's
Form 10-K for the fiscal year ended July 31, 1993).
3.4 Restated Bylaws of the Registrant (Incorporated by reference to
Exhibit 3.4 to the Registrant's Form 10-K for the fiscal year ended
July 31, 1993).
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27 Financial Data Schedule (Filed in electronic format only.
Pursuant to Rule 402 of Regulation S-T, this schedule shall not be
deemed filed for purpose 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 April 29, 2000.
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 13, 2000 By: /s/ D. Gary McRae
--------------- ------------------------------
D. Gary McRae
President and CEO
(Principal Executive Officer)
Date: June 13, 2000 By: /s/ Marvin G. Kiser, Sr.
--------------- ------------------------------
Marvin G. Kiser, Sr.
(Principal Accounting Officer)
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