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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 28, 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 December 7, 2000.
Common Stock, $1 Par Value--Class B 908,807 shares as of December 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 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES 12
ITEM 3. DEFAULT UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 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)
October 29, 2000 July 29, 2000
(Unaudited) (Note)
---------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,838 $ 7,223
Securities 61 61
Accounts and notes receivable, net 8,781 6,594
Inventories (See Note B) 14,967 16,294
Net investment in capitalized leases 587 595
Prepaid expenses and other current assets 150 82
------ ------
Total current assets 30,384 30,849
------ ------
Property, plant and equipment, net 5,477 5,601
Other assets:
Receivables, related entities 743 652
Net investment in capitalized leases 1,394 1,533
Notes receivable 242 306
Real estate held for investment 636 645
Goodwill 500 510
Cash surrender value of life insurance 1,830 1,830
Other 746 775
------ ------
Total other assets 6,901 6,251
------ ------
$41,952 $42,701
======= =======
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 28, 2000 July 29, 2000
(Unaudited) (Note)
---------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks - current portion $ 247 $ 247
Accounts payable 4,047 4,676
Accrued employee benefits 348 276
Deferred revenues 909 1,039
Accrued payroll and payroll taxes 599 613
Income taxes 97 478
Contract contingencies 426 426
Estimated loss on discontinuance (see Note C) 475 0
Other 632 574
------ ------
Total current liabilities 7,780 8,329
------ ------
Notes payable, banks net of current portion 4,997 5,057
Minority interest 725 726
Shareholders' equity:
Common stock:
Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding,
1,859,692 shares 1,860 1,860
Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding,
908,807 shares 909 909
Additional paid-in capital 791 791
Retained earnings 24,890 25,029
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Total shareholders' equity 28,450 28,589
------- -------
$41,952 $42,701
======= =======
NOTE - The condensed consolidated balance sheet at July 29, 2000 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 28, October 30,
2000 1999
----------- -----------
Net revenues $ 16,524 $ 14,178
Costs and expenses:
Cost of revenues 12,628 10,070
Research & development 123 161
Selling, general and administrative 3,342 2,980
Other expense (income), net (125) (101)
Interest expense 102 89
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Total costs and expenses 16,070 13,199
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Earnings from continuing operations before
income taxes and minority interest 454 979
Provision for income taxes 189 383
Minority shareholder's interest
in earnings of subsidiary (1) 8
------- -------
Net earnings from continuing operations $ 266 $ 588
Discontinued operations: (See Note C)
Income (loss) from operations of
discontinued business, net of income
tax expense of $34,000 in fiscal 2001
and benefit of $14,000 in fiscal 2000 52 (25)
Estimated loss on disposal of business, net
of income tax benefit of $185,000 in
fiscal 2001 (290) 0
------- -------
Net earnings $ 28 $ 563
======= =======
Net earnings per common share-basic:
Earnings from continuing operations $ .10 $ .21
Discontinued operations (.09) (.01)
------- -------
Net earnings $ .01 $ .20
======= =======
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)
Three Months Ended
October 28, 2000 October 30, 1999
---------------- ----------------
Net cash (used in) provided by operating
activities $(1,001) $1,144
-------- ------
Cash flows from investing activities:
Proceeds from sales of assets 75 17
Net payments from related parties (91) 17
Capital expenditures (206) (380)
Net payments of long-term receivables 65 96
------- ------
Net cash used in investing activities (157) (250)
-------- ------
Cash flows from financing activities:
Principal repayments of notes payable (60) (73)
Dividends paid (167) (167)
-------- ------
Net cash used in financing activities (227) (240)
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Net (decrease) increase in cash and (1,385) 654
cash equivalents
Cash and cash equivalents at beginning
of period 7,223 4,705
------- ------
Cash and cash equivalents at end of period $ 5,838 $5,359
======= ======
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 28,
2000 are not necessarily indicative of the results that may be expected for the
year ending July 28, 2001. 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 29, 2000.
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 28, 2000 July 29, 2000
---------------- -------------
Raw materials $ 3,015,000 $ 3,033,000
Work in process 838,000 979,000
Finished goods 11,114,000 12,282,000
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$14,967,000 $16,294,000
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NOTE C - DISCONTINUED OPERATIONS OF BUSINESS SEGMENT
In August 2000, the Company's management decided to phase out and discontinue
the operations of the printing and packaging business. This business is expected
to complete the fulfillment of current orders and finish normal operations by
January 31, 2001. The collection of accounts receivable and the sale of
remaining inventory and fixed assets is expected to be completed by July 28,
2001. The assets and liabilities of the printing business as of October 28, 2000
and July 29, 2000 are as follows:
October 28, 2000 July 29, 2000
---------------- -------------
ASSETS
Cash $ 9,000 $ 13,000
Accounts Receivable, net 515,000 341,000
Inventories, net 605,000 998,000
Prepaid expenses 3,000 1,000
Fixed assets, net 161,000 170,000
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Total Assets 1,293,000 1,523,000
LIABILITIES
Accounts payable 42,000 57,000
Reserve for discontinuance 475,000 0
Accrued liabilities 1,000 4,000
Accrued income tax (2,000) (2,000)
Inter-company debt 1,535,000 1,985,000
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Total Liabilities 2,051,000 2,044,000
Net assets of
discontinued operations $ (758,000) $ (521,000)
For the quarter ending October 28, 2000, the printing business reported net
earnings of $52,000, net of $34,000 of tax expense. A reserve for estimated loss
on discontinuance of this business amounted to $290,000, net of $185,000 of tax
benefit. Net earnings per share as a result of the discontinued operations were
reduced by $.09 per share for the first quarter of fiscal 2001 and by $.01 per
share for the same period of fiscal 2000. The results of the printing and
packaging business operations have been reported separately as discontinued
operations in the Condensed Consolidated Statement of Operations.
Prior year financial statements for fiscal 2000 have been restated to present
the operations of the printing and packaging business as a discontinued
operation.
NOTE D - SUBSEQUENT EVENTS
On November 29, 2000, the Company declared a cash dividend of $.09 cents per
share on its Class A Common Stock payable on December 29, 2000 to shareholders
of record on December 8, 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 29,
2000, including the financial information and management's discussion and
analysis contained therein.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition remained strong as of October 28, 2000 as cash
and cash equivalents and working capital amounted to $5.8 million and $22.6
million, respectively. The current ratio was a solid 3.9 to 1 at the end of the
quarter.
Cash used in operating activities amounted to approximately $1.0 million. Net
income from operations, adjusted for depreciation and amortization, contributed
approximately $360,000. The increase in accounts and notes receivable used
approximately $2.2 million of cash primarily as a result of the timing of
collection of larger quarter-end sales for the footwear business and the office
products business. The decline in inventories provided a positive cash flow of
approximately $1.3 million as the build up of products from the previous quarter
were used in the current reporting period. The office products business,
footwear business, and printing business accounted for approximately $635,000,
$360,000, and $394,000, respectively of the decrease in inventories. Reductions
in accounts payable used approximately $629,000 of cash. The office products
business used approximately $1.0 million to pay for inventory that was purchased
during the previous quarter. This use of cash was partially offset by the timing
of payments for approximately $400,000 of inventory purchases for the footwear
business that were made after quarter-end. Income taxes decreased by
approximately $381,000 primarily because of lower taxable income. The estimated
loss on the discontinuance of the printing business amounted to $475,000.
Capital expenditures for the current period amounted to approximately $206,000
and consisted primarily of rental equipment used in countywide education
programs. Advances to related parties used $91,000 of cash to pay for land
development costs. Proceeds from the sale of various printing equipment and
investment property provided approximately $75,000 of cash.
The Company used $167,000 of cash to pay quarterly dividends and $60,000 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 28, 2000. 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 2001, COMPARED TO FIRST QUARTER FISCAL 2000
Consolidated net revenues for the first quarter of fiscal 2001 amounted to $16.5
million, an increase of 16.5% over the $14.2 million reported for the first
quarter of fiscal 2000. This increase in net revenues was primarily attributable
to the military boot business that reported net revenues of $4.9 million for the
first quarter of fiscal 2001 as compared to $2.4 million for the same period of
fiscal 2000 as a result of higher military boot requirements by the U. S.
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Government and greater demand for military boots by foreign governments. The
office products and western boot businesses experienced increased net revenues
for the comparative first quarters of fiscal 2001 and 2000 of 8.4% and 5.9%,
respectively, as demand for office equipment by countywide school and government
agencies and western boots remained strong. The bar code business was down
15.0%, from $4.2 million for the first quarter of fiscal 2000 to $3.6 million
for the same period of fiscal 2001 primarily the result of lower system sales
and competitive pressures in the market.
Consolidated gross profit for the first quarter of fiscal 2001 amounted to $3.9
million, a decrease of 4.9% from the $4.1 million reported for the first quarter
of fiscal 2000. Gross profit as a percentage of net revenues fell from 29.0% for
the first quarter of fiscal 2000 to 23.6% for the first quarter of fiscal 2001.
Gross profit for the footwear business climbed from $1.0 million for first
quarter of fiscal 2000 to $1.8 million for the current reporting period
primarily the result of increased sales of military and western boots and lower
per unit costs associated with higher western boot production levels. The gross
profit for the bar code unit fell 33% for the first quarter of fiscal 2001, down
$519,000 from the $1.6 million reported for the first quarter of fiscal 2000.
This decrease in gross profit resulted primarily from lower product sales and
costs attributable to the software application product and related services. The
office products business also experienced a decline in gross profit for the
comparative first quarters amounting to approximately $400,000 and was primarily
attributable to increased sales to lower margin countywide school systems and
higher service costs.
Selling, general and administrative (SG&A) expenses for the first quarter of
fiscal 2001 were up 12.1% from the $3.0 million reported for the first quarter
of fiscal 2000. This increase in SG&A expenses was primarily attributable to
higher sales salaries and commissions for the western boot and office products
businesses, increased office space rentals for the bar code and office products
businesses, higher travel and entertainment expenses, larger administrative
salaries for western boot and office products businesses, and the timing of
sales and use tax payments between quarters. These increased expenditures were
partially offset by the timing of payment for group health insurance claims,
employee benefit costs, and professional services. As a percentage of net
revenues, SG&A expenditures decreased from 21.0 % for the first quarter of
fiscal 2000 to 20.2% for the first quarter of fiscal 2001.
The Company's military footwear business is currently in the fourth year of the
most recent contract (the Contract) awarded by the United States government (the
Government) in April 1997. The Contract provides for a base year and four
one-year extensions that may be exercised by the Government at its sole
discretion for the purchase of additional option quantities of military combat
boots. The current option will expire in April 2001. The Government is now
evaluating a new military combat boot construction that is not compatible with
the Company's current manufacturing process. As a result, the Government could
decide to cancel the remaining Contract options and to require future military
combat boot purchases to meet the new boot construction specification. While the
Company is taking the appropriate actions to accommodate any military combat
boot specification changes, there can be no assurances that the Government will
exercise the subsequent renewal options under the Contract or that the Company
would be successful in any solicitation of another contract with the Government
upon termination of the current Contract.
In August 2000, the Company's management decided to phase out the operation of
the printing and packaging business. Net revenues for the first quarter of
fiscal 2001 were $749,000 as compared to $606,000 for the same period of fiscal
2000. Net earnings from operations for the first quarter of fiscal 2001 amounted
to $52,000 and included a gain on sale of assets of $65,000. For the same period
of fiscal 2000, the printing and packaging business reported a net operating
loss of $25,000. For the first quarter of fiscal 2001, an estimated loss on
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discontinuance of this business amounted to $290,000, net of the tax benefit.
This estimated loss consists of the expected earnings from the phase out period
of operations less the difference in the carrying value and estimated fair value
of the business assets and the expected payments to settle all liabilities.
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 and SFAS No. 138. The Registrant is in compliance with
this reporting requirement.
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, including but not limited to
statements about the Company's ability to meet future working capital, capital
expenditure and debt repayment requirements, estimates concerning the
discontinued business and legal proceedings. These forward-looking statements
involve certain risks and uncertainties, including but not limited to the effect
of acquisitions, the ability to meet additional financing requirements, the
successful development and marketing 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), and 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 October 28, 2000, there was no
outstanding indebtedness under the lines of credit and $5.0 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" or "prime rate" less a margin of one-half percent offered by
the applicable lender. The Company has not entered into any swap agreements or
engaged in any other hedging activities with respect to this variable rate
indebtedness. A 10% increase in the interest rates under the Company's credit
facilities would increase annual interest expense by approximately $45,000
(assuming the Company's aggregate borrowings under the credit facilities
averaged $5.0 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.
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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).
3.5 Amendment to Bylaws (Incorporated by reference to Exhibit 3.5
to the Registrant's Form 10-K for the fiscal year ended July
29, 2000).
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 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 28, 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: December 11, 2000 By: /s/D. Gary McRae
------------------ -------------------------
D. Gary McRae
President and CEO
(Principal Executive Officer)
DATE: December 11, 2000 By: /s/ Marvin G. Kiser, Sr.
------------------ ------------------------
Marvin G. Kiser, Sr.
(Principal Accounting Officer)
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