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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 29, 2000
COMMISSION FILE NUMBER: 1-8578
MCRAE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 56-0706710
(State of Incorporation) (I.R.S. Employer Identification No.)
400 NORTH MAIN STREET, MOUNT GILEAD, NORTH CAROLINA 27306
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (910) 439-6147
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock, $1 Par Value American Stock Exchange
Class B Common Stock, $1 Par Value American Stock Exchange
Securities Registered Pursuant to Section 12 (g) of the Act: None
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of shares of the Registrant's $1 par value Class A
and Class B Common Stock held by non-affiliates as of October 23, 2000 was
approximately $5,182,000 and $1,188,000, respectively. On October 23, 2000,
1,859,692 Class A shares and 908,807 Class B shares of the Registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders meeting to be held
on December 14, 2000 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
The Registrant is a Delaware corporation organized in 1983 and is the successor
to a North Carolina corporation organized in 1959. The Company's principal lines
of business are: manufacturing and selling bar code reading and related printing
devices; manufacturing and selling military combat boots, western and work
boots; selling, leasing, and servicing office equipment; and commercial printing
and packaging. Additional financial information about these lines of business
can be found in Note 16 to the financial statements.
BAR CODE OPERATIONS
The bar code unit manufactures and sells bar code reading and printing devices
and other items related to optical data collection, including licensing and
selling computer software through Compsee, Inc. (Compsee), a 94% owned
subsidiary. Compsee markets, sells, and services its products directly through
sales centers located throughout the United States. Compsee also sells its
products in Central and South America, Europe, Australia, the Middle East, and
the Pacific Rim countries through foreign distributors. Compsee's export sales
were 3% of the Registrant's consolidated net revenues for each of the last three
fiscal years.
Compsee designs and manufactures QuickReader and QuickLink bar code readers.
Principal materials used in Compsee's assembly operations consist of various
electrical and electronic components that are readily available from a number of
sources. During fiscal 1996, Compsee introduced APEX II, a new portable bar code
scanner. This product was well received in the market and provided 10%, 11%, and
12% of Compsee sales for fiscal 2000, 1999, and 1998, respectively. A companion
product, the APEX II cradle, which facilitates data transfer and provides
battery-recharging capabilities, was added to the product line in fiscal 1997.
Compsee's wedge product line was upgraded in fiscal 1998 with the introduction
of the Turbowedge line of bar code wedge readers. These products offer several
new features and were well received in the market. During fiscal 2000 Compsee
purchased an enterprise integration software program that enhances and
facilitates mobile bar code applications. This software provides specific
competitive advantages for Compsee's wireless products. For fiscal 2001, Compsee
plans to introduce the APEX III portable data collector. This product will
provide batch and wireless data collection capability.
The markets in which this business unit operates are generally highly
competitive. The Registrant is not aware of any reliable statistics that would
enable the Registrant to determine the relative position of Compsee or its
products within the industry. Competition in the industry is principally based
on product features, customer service, and price. The major competitors in the
industry include PSC, Unitech, and Handheld Products.
Net revenues derived from this unit in fiscal 2000, 1999, and 1998 were 27%,
29%, and 28% of the Registrant's consolidated net revenues, respectively.
QuickReaders, QuickLink, and Turbowedge bar code readers developed and marketed
by Compsee accounted for 11%, 12%, and 11% of Compsee's net revenues for fiscal
2000, 1999, and 1998, respectively, and for 3% of the Registrant's consolidated
net revenues during each of the last three fiscal years. There was no
significant backlog of firm orders for this unit at July 29, 2000.
FOOTWEAR MANUFACTURING
The Registrant's footwear manufacturing operations include the manufacture and
sale of military combat boots. The Registrant has manufactured Direct Molded
Sole
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military combat boots for the United States Government (the Government)
since 1966. On April 30, 1996, the Registrant acquired American West Trading
Company (American West), which manufactures western boots, work boots, military
dress oxfords, and military safety boots.
Whenever the Government determines a need for producing combat boots because of
the number of new recruits entering the services, and the need to replenish its
inventory to replace worn out boots, the Government solicits contracts from U.
S. boot manufacturers. The solicitation process typically includes the
evaluation by the Government of written technical and cost proposals. The
Government awards contracts on negotiated per pair contract prices based on
estimated allowable costs as projected for the subsequent fiscal year plus a
reasonable profit margin. This profit margin is subject to the Government's
determination that the prices are "fair" and "reasonable." All recent Government
contracts for military boots have been awarded to four manufacturers including
the Registrant. The Registrant is currently in the fourth year of the most
recent contract awarded by the Government in April 1997 (the Contract). The
Contract provides for a base year and four one year extensions which may be
exercised by the Government at its sole discretion for the purchase of
additional option quantities of military combat boots. The current option period
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 Company would be successful in any
solicitation of another contract with the Government upon termination of the
current Contract.
No one company dominates the Government military boot industry. Price, quality,
manufacturing efficiency, and delivery are the areas emphasized by the
Registrant to strengthen its competitive position. The Registrant also sells
boots to civilian and other military customers including other countries.
Military boot sales under the Government contract were $7.2 million, $6.9
million, and $9.1 million, for fiscal 2000, 1999, and 1998, respectively. Sales
of military boots to foreign countries were $4.7 million, $76,000, and $1.7
million for the past three fiscal years, respectively. Approximately 75% of
foreign country sales for fiscal 2000 were to Israel.
The Registrant's contracts with the Government are subject to partial or
complete termination under certain specified circumstances including, but not
limited to, the following: for the convenience of the Government, for the lack
of funding, and for the Registrant's actual or anticipated failure to perform
its contractual obligations. If a contract is partially or completely terminated
for its convenience, the Government may negotiate a settlement with the
Registrant to cover costs already incurred. The Registrant has never had a
contract either partially or completely terminated.
Leather and synthetic rubber, which have been and currently are generally
available from several sources, are the principal material components used in
the boot manufacturing process. Pursuant to Government contracts for military
combat boots, all materials used in manufacturing these boots must be and are
produced in the United States and must be certified as conforming to military
specifications.
The Registrant has a technical assistance agreement with Ro-Search, Inc., a
subsidiary of Wellco, Inc., a competitor to which the Registrant pays a fee for
each pair of Direct Molded Sole boots it produces.
American West designs, manufactures, sells, and distributes western and work
boots for men and women who wear boots for work and everyday activities,
including casual wear. American West utilizes seasoned and highly respected
independent sales
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representatives to market and sell its boots nationwide to major retail discount
stores, regional specialty chain stores, and major western boot distributors.
The boots are marketed primarily under the retailer's private label and under
the "American West Trading Company" brand.
In addition to the western and work boot product lines, American West began
producing two styles of military footwear (military dress oxfords and military
safety shoes) in fiscal 1997 and continues to bid on future "welt" construction
military solicitations to supplement the western boot product lines. Sales of
military footwear (excluding Direct Molded Sole boots) amounted to $734,000,
$575,000, and $3.1 million in fiscal 2000, 1999, and 1998, respectively.
During fiscal 2000, American West expanded its western boot product line with
imported children and infant boots from India and ladies cement construction
boots from Mexico. Net revenues from these imported products amounted to
approximately $107,000 for fiscal 2000.
American West consolidated its manufacturing operation in fiscal 1997 by
combining all manufacturing operations at the Waverly facility. The Dresden
location continues to provide storage, warehouse, and shipping functions. The
"upper" parts of boots produced at American West are constructed from leather
and/or synthetic material and the sole and heels consist of either leather,
rubber and/or rubber-plastic blended material. All raw materials necessary for
manufacturing the boots are readily available from several suppliers, both
domestic and abroad.
The western/work boot markets are highly competitive. The Registrant is not
aware of any reliable statistics that would enable it to determine its relevant
position within the industry; however, it believes it has established a solid
position in the market for lower and middle ranged priced boots where
competition is principally based on price and product quality.
American West coordinates its manufacturing and inventory according to the
seasonality of its business, which tends to have higher sales occurring
generally in the fall and winter months. American West contributed $7.9 million,
$6.4 million, and $10.9 million of net revenues for fiscal 2000, 1999, and 1998,
respectively. There were no sales to Wal-Mart for fiscal 2000 and fiscal 1999 as
compared to $3.4 million for fiscal 1998.
The Registrant's backlog of firm orders for military combat boots at July 29,
2000 and July 31, 1999 totaled approximately $8.6 million (all of which is
expected to be filled during the current fiscal year) and $6.5 million,
respectively. The backlog of firm orders for western and work boots at July 29,
2000 and July 31, 1999 totaled approximately $436,000 (all of which is expected
to be filled during the current year) and $376,000, respectively.
Net revenues derived from the military combat boot segment in fiscal 2000, 1999,
and 1998 were 21%, 14%, and 19%, respectively, of the Registrant's consolidated
net revenues.
Net revenues derived from the western and work boot segment in fiscal 2000,
1999, and 1998 were 13%, 12%, and 18%, respectively, of the Registrant's
consolidated net revenues.
OFFICE PRODUCTS AND PRINTING BUSINESS
McRae Office Solutions, Inc. (Office Solutions), formerly McRae Graphics, Inc.,
a wholly owned subsidiary, is a non-exclusive distributor of Toshiba photocopier
and facsimile machines in North Carolina and parts of Virginia and South
Carolina. Office Solutions operates seven district sales offices throughout the
state of North
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Carolina. Office Solutions is also the sole distributor in North Carolina of
RISO digital duplicators. Machines, components, and certain supplies sold by
Office Solutions during fiscal 2000 are generally available only from Toshiba
and RISO.
During fiscal 2000, Office Solutions purchased the rights to a software package
designed to scan, store and provide easy retrieval of various document types.
This product is expected to be part of the product mix in fiscal 2001.
The Registrant also competes in the printing and packaging market through a
wholly owned subsidiary, Rae-Print Packaging, Inc. (Rae-Print). Rae-Print prints
packaging materials principally for the textile industry as well as for
commercial and industrial customers. In addition, this business expanded its
market coverage to include packaging of poster board for the wholesale paper
products market. The principal materials used in Rae-Print's operations are
paperboard and related products, which were readily available from a number of
sources during the year.
The office products and printing industries are generally highly competitive,
with price and service being the dominant factors. The Registrant is not aware
of any reliable statistics that would indicate its relative position within
these industries in the geographical area in which it competes.
In August 2000, the Company's management decided to phase out and discontinue
the operations of the printing business during the 2001 fiscal year.
Net revenues derived from the office products segment during fiscal 2000, 1999,
and 1998 were 34%, 39%, and 30%, respectively, and from the printing segment
were 5%, 6%, and 5%, respectively, of the Registrant's consolidated net
revenues. There was no significant backlog of firm orders for these segments.
OTHER BUSINESSES
The Registrant's Financing and Leasing Division manages the Registrant's
short-term investments and marketable securities. This division is also engaged
in equipment leasing and the financing of receivables for other businesses and
individuals.
OTHER INVESTMENT INTERESTS
The Registrant has an investment in the outstanding Common Stock of American
Mortgage and Investment Company (AMIC). AMIC is located in Charleston, South
Carolina and is engaged in real estate development and sales, primarily lots for
single family dwellings, in the coastal region of South Carolina. D. Gary McRae,
President of the Registrant, is President of AMIC. The Registrant also owns 100%
of the outstanding 20% cumulative convertible preferred stock of AMIC. The
investment in this preferred stock was written down to zero by the Registrant
during fiscal 1990. Write downs in subsequent periods totaling approximately
$273,000 have been made on the Registrant's books to reduce notes and accounts
receivable due from AMIC in order to reflect the Registrant's equity in AMIC.
AMIC has been operating under Chapter X of the United States Bankruptcy Act
since 1974.
EMPLOYMENT
As of July 29, 2000, the Registrant employed approximately 563 persons in all
divisions and subsidiaries. None of the Registrant's employees are represented
by collective bargaining or a labor union. The Registrant considers its
relationship with its employees to be good.
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FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Financial information for the past three fiscal years with respect to the
Registrant's operating segments are incorporated herein by reference to Note 16
to the consolidated financial statements included in this Report.
RESEARCH AND DEVELOPMENT
Research and development costs related to future products amounted to $538,000,
$524,000, and $572,000 for fiscal 2000, 1999, and 1998, respectively.
ITEM 2. PROPERTIES
The following table describes the location, principal use, and approximate size
of the principal facilities of the Registrant and its subsidiaries, all of which
are owned by the Registrant and/or its subsidiaries.
LOCATION PRINCIPAL USE SIZE
-------- ------------- ----
400 North Main Street Corporate headquarters, 71,000 square feet
Mt. Gilead, N.C. manufacturing, and sales
Highway 109 North Footwear manufacturing 57,600 square feet
Mt. Gilead, N.C.
2500 Port Malabar Blvd. Compsee sales office 5,250 square feet
Palm Bay, Florida
Highway 109 North Footwear warehouse 3,500 square feet
Mt. Gilead, N.C.
Highway 109 Printing warehouse 11,200 square feet
Richmond County, N.C.
Highway 24-27 Footwear manufacturing and 35,000 square feet
Troy, N.C. warehousing
Highway 109 North Footwear storage 4,800 square feet
Mt. Gilead, N.C.
111 Main Street Printing operation 11,520 square feet
Mt. Gilead, N.C.
601 E. Railroad Street Footwear manufacturing 71,520 square feet
Waverly, TN
100 Hillcrest Street Footwear storage and warehouse 5,000 square feet
Dresden, TN
In addition to these principal locations, the Registrant and its subsidiaries
lease other offices throughout the United States. The Registrant also owned
approximately 500 acres of undeveloped land on July 29, 2000 that is being held
for investment purposes.
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ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Each of the Registrant's classes of Common Stock are traded on the American
Stock Exchange (ticker symbol MRI-A and MRI-B). As of October 23, 2000, there
were approximately 440 record holders of the Registrant's Class A Common Stock
and approximately 397 record holders of the Class B Common Stock. High and low
stock prices and dividends declared per share for the last two fiscal years
were:
CLASS A COMMON STOCK:
FISCAL 2000 FISCAL 1999
---------------------------- --------------------------
SALES PRICE CASH SALES PRICE CASH
------------- DIVIDENDS ------------ DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
------- ---- --- -------- ---- --- ---------
First $6.13 $4.94 $.09 $7.32 $5.75 $.09
Second 5.63 4.75 .09 8.75 5.75 .09
Third 5.75 4.94 .09 6.07 4.50 .09
Fourth 6.38 4.13 .09 6.00 5.63 .09
CLASS B COMMON STOCK:
FISCAL 2000 FISCAL 1999
-------------- -------------
SALES PRICE SALES PRICE
-------------- -------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
First $5.88 $5.38 $7.00 $7.00
Second 5.38 5.13 8.00 5.75
Third 5.63 5.00 6.00 4.63
Fourth 6.50 4.13 5.75 5.38
The Registrant has no policy with respect to payment of dividends, but expects
to continue paying regular cash dividends on its Class A Common Stock. Dividends
paid
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on Class B Common Stock, if any, must also be paid on Class A Common Stock in an
equal amount. No dividends were paid on Class B Common Stock during the prior
three fiscal years. There can be no assurance as to future dividends on either
class of Common Stock as the payment of any dividends is dependent on future
actions of the Board of Directors, earnings, capital requirements, and financial
condition of the Registrant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data of the Registrant presented
below for each of the five years in the period indicated has been derived from
the Registrant's audited and consolidated financial statements. The Registrant
acquired the stock of American West Trading Company (American West) on April 30,
1996. The results of the Registrant include the results of American West as of
April 30, 1996, the date of its acquisition. The Selected Consolidated Financial
Data should be read in conjunction with the Consolidated Financial Statements
and Notes thereto, "Management's Discussion and Analysis of Financial Conditions
and Results of Operations", and the other financial data included elsewhere
herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED 7-29-00 7-31-99 8-1-98 8-2-97 8-3-96
---------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues $60,212,000 $51,454,000 $60,087,000 $58,480,000 $48,724,000
Net earnings 1,357,000 782,000 2,265,000 2,339,000 2,282,000
Net earnings,
per common share: 0.49 0.28 0.82 0.85 0.84
---------- ---------- ----------- --------- ----------
BALANCE SHEET DATA:
Total assets $42,701,000 $39,951,000 $40,457,000 $39,725,000 $39,561,000
Long-term liabilities 5,057,000 5,280,000 5,594,000 5,854,000 6,285,000
Working capital 22,520,000 20,962,000 21,408,000 18,412,000 16,953,000
Shareholders' equity 28,589,000 27,901,000 27,784,000 26,174,000 24,364,000
Weighted average
number of common
shares outstanding(a) 2,768,499 2,768,499 2,768,499 2,761,825 2,731,334
Cash dividends
declared per common
share(b) $0.36 $0.36 $0.36 $0.36 $0.35
----------- ---------- --------- --------- --------
</TABLE>
(a) Includes both Class A and Class B Common Stock
(b) Dividends were paid only on Class A Common Stock
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS SEGMENTS
The Company has five primary business units: the bar code unit operates under
the name Compsee, Inc. (Compsee); the office products unit operates under the
name McRae Office Solutions, Inc. (Office Solutions); the military boot unit
operates under the name McRae Footwear; the western and work boot unit operates
under the name American West Trading Company (American West); and the commercial
printing unit operates under the name Rae-Print, Inc. (Rae-Print). The Company
also operates other smaller businesses.
A summary of the net revenues; gross profits; selling, general and
administrative expenses; and operating profits of the major business units for
fiscal years 1998 through 2000 is presented in the following chart. Certain
reclassifications have been made to the prior year amounts to conform with the
current year presentation.
<TABLE>
<CAPTION>
FISCAL YEAR PERCENT CHANGE FISCAL YEAR
2000 1999 1998 OVER PRIOR PERIOD 2000 1999 1998
DOLLARS (IN THOUSANDS) 2000 1999 PERCENT OF NET REVENUES
------------------------- ---------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES
Bar Code $16,422 $14,695 $17,084 11.8 (14.0) 27 29 28
Office Products 20,678 19,846 18,051 4.2 9.9 34 39 30
Military Boots 12,395 7,365 11,106 68.3 (33.7) 21 14 19
Western/Work Boots 7,866 6,402 10,926 22.9 (41.4) 13 12 18
Printing 3,071 3,164 2,936 (2.9) 7.8 5 6 5
Eliminations/other (220) (18) (16) NM NM 0 0 0
------------------------ ----- ----- ------------------------
Consolidated $60,212 $51,454 $60,087 17.0 (14.4) 100 100 100
GROSS PROFIT GROSS PROFIT PERCENTAGE
------------------------
Bar Code $ 5,319 $ 5,233 $ 6,254 1.6 (16.3) 32 36 37
Office Products 5,726 6,129 5,934 (6.6) 3.3 28 31 33
Military Boots 2,786 1,663 2,267 67.5 (26.6) 22 23 19
Western/Work Boots 1,106 703 980 57.3 (28.2) 14 11 9
Printing 10 155 325 (93.5) (52.3) 0 5 10
Eliminations/other (74) (80) (92) NM NM 0 0 0
------------------------- ----- ------ ------------------------
Consolidated $14,873 $13,803 $15,668 7.8 (11.9) 25 27 26
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES PERCENTAGE OF NET REVENUES
--------------------------
Bar Code $ 5,525 $ 5,087 $ 5,324 8.6 (4.5) 34 35 31
Office Products 4,688 5,408 4,394 (13.3) 23.1 23 27 24
Military Boots 457 347 606 31.7 (42.7) 4 5 4
Western/Work Boots 1,648 1,407 1,446 17.1 (2.7) 21 22 13
Printing 225 228 239 (1.3) (4.6) 7 7 7
Eliminations/other (23) (9) 41 NM NM 0 0 0
------------------------- ----- ----- ------------------------
Consolidated $12,520 $12,468 $12,050 .4 3.5 21 24 20
OPERATING PROFIT PERCENTAGE OF NET REVENUES
--------------------------
Bar Code $ (206) $ 146 $ 930 (241.1) (84.3) (2) 1 6
Office Products 1,038 721 1,540 44.0 (53.2) 5 4 9
Military Boots 2,329 1,316 1,661 77.0 (20.8) 18 18 15
Western/Work Boots (542) (704) (466) 23.0 (51.1) (7) (11) (4)
Printing (215) (73) 86 (194.5) (184.9) (7) (2) 3
Eliminations/other (51) (71) (133) NM NM 0 0 0
------------------------- ------ ------- ------------------------
Consolidated $ 2,353 $ 1,335 $ 3,618 76.3 (63.1) 4 3 6
</TABLE>
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CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2000 COMPARED TO FISCAL 1999
Consolidated net revenues for fiscal 2000 amounted to $60.2 million, an increase
of 17.0% over the $51.5 million reported for fiscal 1999, primarily attributable
to the military combat boot business, the western and work boot business, and
the bar code business. These business units posted net revenue increases of
68.3%, 22.9%, and 11.8%, respectively, over the net revenues reported for fiscal
1999.
Consolidated gross profit as a percentage of net revenues declined from the 27%
reported for fiscal 1999 to 25% for fiscal 2000 and was primarily the result of
changes in consolidated and business unit product mix, competitive price
pressures in the market, and additional operating costs associated with new bar
code software products and services. The decrease in gross profit percentage was
partially offset by lower western boot unit costs generated by larger production
levels.
Selling, general and administrative (SG&A) expenses decreased as a percentage of
net revenues from 24% for fiscal 1999 to 21% for fiscal 2000. Lower sales
salaries, sales commissions, and advertising and promotional costs were
partially offset by increases in sales travel expenses, group health insurance
costs, professional fees, and bad debt expense.
Consolidated operating profit increased 76.3% from the $1.3 million reported for
fiscal 1999 to the $2.4 million reported for fiscal 2000. The increase in
consolidated operating profit resulted from increased revenues and lower SG&A
expenditures. As a percentage of net revenues, consolidated operating profit was
4%, as compared to 3% reported for fiscal 1999.
BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 2000 COMPARED TO FISCAL 1999
Compsee is a manufacturer and distributor of "hi-tech" bar code reading and
printing devices and other peripheral equipment and supplies related to optical
data collection. Compsee is a global company and continues to seek new markets
throughout the United States and other parts of the world.
Net revenues amounted to $16.4 million for fiscal 2000. This 11.8% increase over
the $14.7 million reported for fiscal 1999 was primarily the result of higher
demand for "wireless" system sales and Compsee manufactured products. Gross
profit as a percentage of net revenue decreased from 36% for fiscal 1999 to 32%
for fiscal 2000. This decline in gross profit was primarily the result of
continued price pressures in the market and to additional costs associated with
the acquisition and development of software used primarily in "wireless"
applications. SG&A expenses increased by approximately $438,000, or 8.6%, over
fiscal 1999 as sales salaries and commissions, travel expenditures, group health
insurance costs, professional fees, and "one-time" costs associated with the
purchased software outpaced lower expenditures for advertising and promotional
materials. The lower gross profit margins coupled with the increase in SG&A
expenditures resulted in an operating loss of approximately $206,000 as compared
to an operating profit of approximately $146,000 in fiscal 1999.
OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 2000 COMPARED TO FISCAL 1999
McRae Office Solutions distributes Toshiba photocopiers, Toshiba facsimile
machines, and RISO digital printing equipment throughout the state of North
Carolina and parts of Virginia and South Carolina. Office Solutions also
provides service and supplies for these products.
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Net revenues amounted to $20.7 million in fiscal 2000, an increase of 4.2% over
the $19.8 million reported for fiscal 1999. This growth in revenue primarily
resulted from the continued strong demand for copier and duplicating equipment
by county-wide educational systems. Gross profit decreased from $6.1 million for
fiscal 1999 to $5.7 million for fiscal 2000 primarily because a greater
percentage of the revenue mix comes from low margin sales to county-wide school
systems. SG&A expenses amounted to $4.7 million, down 13.3% from the $5.4
million for fiscal 1999. This decrease in costs was primarily the result of
reduced sales salaries and commissions associated with the commercial business,
reduced training costs, reduced advertising expenditures, and reduced use taxes,
partially offset by increased expenditures for telephone, group health
insurance, administrative salaries, and professional fees. The $300,000 increase
in operating profit from fiscal 1999 to fiscal 2000 was primarily the result of
higher net revenues and lower SG&A expenses.
FOOTWEAR UNIT RESULTS OF OPERATIONS, FISCAL 2000 COMPARED TO FISCAL 1999
The footwear business unit manufactures and distributes military combat boots,
military dress shoes, military safety boots, western boots, and work boots. The
military footwear is primarily for the U. S. Government and foreign governments
while the western and work boot products are for dress and casual wear for men
and women. In addition, this business unit imports western boots from India and
Mexico primarily for women, infants, and children.
Military combat boot net revenues for fiscal 2000 amounted to approximately
$12.4 million, an increase of 68.3% from the $7.4 million reported for fiscal
1999. This increase in net revenues resulted primarily from higher demand for
military boots by foreign governments. Net revenues associated with military
combat boot sales to the U.S. Government increased by approximately 12.6% from
the level reported for fiscal 1999 as a result of higher boot requirements by
the Government. Gross profit as a percentage of net revenues decreased by 1%
from fiscal 1999 to fiscal 2000 and was primarily attributable to higher
manufacturing labor costs. SG&A expense as a percentage of net revenues for
fiscal 2000 was 4%, down 1% from fiscal 1999. Increased employee benefit costs
were responsible for the increase in SG&A expenditures from $347,000 for fiscal
1999 to $457,000 for fiscal 2000.
The Company is currently in the fourth year of the most recent contract awarded
by the Government in April 1997 (the Contract). 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.
Western and work boot net revenues for fiscal 2000 were up 22.9% over net
revenues for fiscal 1999 primarily attributable to the success of the sales and
marketing strategies implemented during the last half of fiscal 1999. One facet
of that strategy was to develop and deploy a team of experienced, independent
sales representatives to cover areas of the market that had significant growth
potential. Gross profit as a percentage of net revenues for fiscal 2000 was 14%,
a 3% improvement over the 11% for fiscal 1999. This increase in gross profit
percentage was primarily the result of higher production levels providing lower
per unit costs. SG&A expenses for fiscal 2000 amounted to $1.6 million, an
increase of approximately 17.1% over the level reported for fiscal 1999 and was
primarily the result of higher sales commissions and bad debt charges. As a
11
<PAGE> 12
percentage of net revenues, SG&A expenditures decreased from 22% for fiscal 1999
to 21% for fiscal 2000. The operating loss for fiscal 2000 showed a 23.0%
improvement over the operating loss for fiscal 1999 and was primarily
attributable to increased boot sales and improved gross margin levels.
OTHER BUSINESS UNIT RESULTS OF OPERATIONS, FISCAL 2000 TO FISCAL 1999
Net revenues for the printing and packaging business decreased by approximately
$100,000 for fiscal 2000, down 2.9% from fiscal 1999 primarily the result of
competitive pressure in the market. Gross profit for fiscal 2000 was down 93.5%
from fiscal 1999 primarily attributable to labor inefficiencies, equipment
downtime and repair costs, and higher group health insurance expenditures. SG&A
expenses amounted to $225,000, down 1.3% from the SG&A expense level for fiscal
1999 resulting from lower corporate charges and professional fees. The operating
loss increased from $73,000 for fiscal 1999 to $215,000 for fiscal 2000
primarily as a result of lower gross margin.
During the first quarter of fiscal 2001, the Company's management decided to
phase out and discontinue the operations of this business during fiscal year
2001. The impact of this decision is expected to have a negative impact on
earnings for fiscal 2001.
CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 1999 COMPARED TO FISCAL 1998
The Company's consolidated net revenues for fiscal 1999 amounted to $51.5
million, a decrease of 14.4% from the $60.1 million level reported for fiscal
1998. This decrease in net revenues was primarily the result of lower net
revenues in the bar code unit, the military boot unit, and the western and work
boot unit. These units posted net revenue decreases of 14.0%, 33.7%, and 41.4%,
respectively. The office products and printing units partially offset the fiscal
1999 decline in net revenues by posting increased revenues of 9.9% and 7.8%,
respectively.
Consolidated gross profit for fiscal 1999 decreased 11.9% from $15.7 million
reported for fiscal 1998 primarily as a result of lower consolidated net
revenues. As a percent of net revenues, gross profit increased to 27% from 26%
for fiscal 1998. This increase was primarily attributable to the higher margin
bar code and office products accounting for 68% of 1999 net revenues as compared
to 58% in fiscal 1998.
Selling, general and administrative (SG&A) expenses increased by approximately
$418,000 primarily attributable to higher expenditures for sales salaries and
commissions, equipment rental, sales training, group health insurance,
professional services, depreciation expense, and use tax audit adjustments.
These higher costs were partially offset by cost reductions for telephone
expense, employee benefit charges, and bad debt write-offs.
Consolidated operating profit declined from $3.6 million for fiscal 1998 to $1.3
million for fiscal 1999. This significant decrease in consolidated operating
profit is attributable to lower revenues, reduced gross profit margins in the
bar code and office products units, and higher operating costs in the office
products unit. Total operating profit as a percentage of sales declined to 3%,
down from 6% reported for fiscal 1998.
BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 1999 COMPARED TO FISCAL 1998
Net revenues for fiscal 1999 were $14.7 million, down $2.4 million from the
level reported for fiscal 1998. This decrease in net revenues was primarily the
result of lower "system" sales and the delay in introducing new products to the
market. Gross profit margins continued to be influenced by competitive price
pressures in the market and declined as a percentage of net revenues from 37%
for fiscal 1998 to 36% for fiscal 1999. SG&A expenses decreased 4.5% from the
$5.3 million level for fiscal 1998 primarily attributable to cost reductions in
sales commissions, telephone expenses, travel related expenditures, employee
benefit costs, bad debt write-offs, and research
12
<PAGE> 13
and development. These cost savings were partially offset by higher sales
salaries, corporate charges, and professional services. Lower net revenues
coupled with declining profit margins and higher operating costs resulted in an
84% decrease in operating profit for fiscal 1999.
OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 1999 COMPARED TO FISCAL 1998
Net revenues for fiscal 1999 reached $19.8 million, up $1.8 million or 9.9%
compared to the results for fiscal 1998. The increase was primarily attributable
to increased equipment sales to large county-wide educational systems. Gross
profit as a percentage of net revenue declined to 31%, down from the 33%
reported for fiscal 1998, and resulted from a greater proportion of lower margin
sales to county-wide educational systems. SG&A expenses increased almost 23% for
fiscal 1999 as compared to fiscal 1998. Increased expenditures for sales
salaries and commissions, travel expenses, training, utilities, professional
services, depreciation, corporate charges, and sales and use tax audit
adjustments were partially offset by lower cost for employee benefits and bad
debt write-offs. Lower gross profit margins and higher operating expenditures
caused operating profits to decrease from the $1.5 million level for fiscal 1998
to approximately $721,000 for the current reporting period.
FOOTWEAR UNIT RESULTS OF OPERATIONS, FISCAL 1999 COMPARED TO FISCAL 1998
Military boot net revenues for fiscal 1999 decreased approximately 34% from the
fiscal 1998 level as a result of lower military boot sales to the U. S.
Government and foreign governments. Gross profit declined from $2.3 million for
fiscal 1998 to $1.7 million for fiscal 1999 as a result of lower net revenues.
Gross profit as a percentage of net revenues increased to 23% for fiscal 1999 as
compared to 19% for fiscal 1998. The increase was primarily attributable to
lower manufacturing overhead expenditures. SG&A expenses as a percentage of net
revenues also declined 43% for fiscal 1999 as compared to fiscal 1998 primarily
as a result of lower corporate overhead charges. Military boot operating profit
for fiscal 1999 amounted to $1.3 million, down $345,000 or 21% from the amount
recorded for fiscal 1998. The impact of lower net revenues was partially offset
by lower manufacturing and support costs.
Western and work boot net revenues decreased from $10.9 million for fiscal 1998
to $6.4 million for fiscal 1999 as the market for these products continue to be
soft and to the loss of Wal-Mart business. Gross profit declined by 28% for the
comparative periods primarily attributable to reduced net revenues. Lower
manufacturing costs resulted in gross profit as a percentage of net revenues to
increase from 9% in fiscal 1998 to 11% for the current reporting period. SG&A
expenses amounted to approximately $1.4 million for both fiscal 1999 and fiscal
1998. As a percentage of net revenues, SG&A expenses increased from 13% to 22%
for fiscal 1998 and fiscal 1999, respectively. This increase resulted from the
same level of SG&A expenditures supporting a 41% decrease in net revenues in
fiscal 1999 as compared to fiscal 1998. The operating loss increased by 51% as a
result of lower net revenues.
OTHER BUSINESS UNIT RESULTS OF OPERATIONS, FISCAL 1999 COMPARED TO FISCAL 1998
Net revenues for the printing unit increased to $3.2 million for fiscal 1999 as
compared to $2.9 million for fiscal 1998 primarily attributable to strong demand
for printed material and packaging services. Gross profit declined by
approximately 52% for the current fiscal year as compared to fiscal 1998 and
resulted from labor inefficiencies associated with the unit's packaging services
program. SG&A expenditures were basically unchanged for the comparative periods.
The fiscal 1999 operating loss resulted from the decline in gross profit
associated with the labor inefficiencies.
13
<PAGE> 14
FINANCIAL CONDITION
The Company's financial condition remained strong at July 29, 2000 as cash and
cash equivalents amounted to approximately $7.2 million and working capital
reached the $22.5 million level. The current ratio was 3.7 to 1.
Cash provided by operating activities amounted to approximately $4.7 million.
Earnings from operations, adjusted for depreciation and amortization, provided a
positive cash flow of approximately $2.9 million. Trade accounts and notes
receivable provided almost $1.1 million of cash as the timing of collection of
open accounts for all business units outpaced sales. Higher inventory levels
used approximately $2.8 million of cash primarily attributable to building
product levels for the growing demand for military and western footwear, to the
initial manufacturing requirements necessary for the introduction of a new bar
code product, and to the negative impact of competitive pressure in placing
office equipment in county-wide school systems. The increased capability of
utilizing third party financing for the office products business produced a
positive cash flow as the net investment in capitalized leases and the deferred
revenue accounts decreased by approximately $649,000. The positive cash flow
contributed by the increase in accounts payable was primarily attributable to
the timing of payments for inventory after year-end, to an increase in the
amounts set aside to cover leather and shipping cost adjustments and VEST
quantity deficiencies under the Contract with the Government, and to amounts
reserved for future lease buyouts. The increase in income taxes resulted from
the timing of larger fourth quarter tax payments being made after year-end.
Investing activities used approximately $1.2 million of cash. Capital
expenditures amounted to approximately $1.4 million primarily for office
equipment, computer equipment, production machinery for the footwear and
printing businesses, and rental machines for county-wide educational programs.
The purchase of various software programs for strategic product development used
approximately $600,000 of cash. Rental equipment associated with several
county-wide educational programs that were placed with third party finance
companies provided a positive cash flow of approximately $632,000. Net
collections on various notes and related party receivables also provided cash
amounting to nearly $610,000.
Quarterly dividend payments and principal payments on long-term debt used
approximately $669,000 and $271,000 of cash, respectively.
The Registrant's primary sources of liquidity at July 29, 2000 consisted of
cash, cash equivalents, and short-term investments totaling approximately $7.3
million and $2.75 million of availability at year-end in two lines of credit. It
is management's opinion that the cash on hand, cash generated from operations,
and the current credit facilities will be sufficient to meet the Registrant's
capital requirements for fiscal 2001.
ENVIRONMENTAL MATTERS AND INFLATION
The Registrant is subject to various laws and regulations concerning
environmental matters and employee safety and health. The Registrant has been
able to comply with such laws and regulations with no material adverse effect on
its business. In the opinion of management, the Registrant is not in violation
of any environmental laws or regulations that would have a material adverse
effect on the financial condition of the Registrant.
The Registrant does not believe inflation has had a material impact on sales or
operating results for the periods covered in this discussion.
14
<PAGE> 15
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", was issued in February 1998. SFAS No. 132 revises employers'
disclosures requirements regarding pensions and other postretirement benefit
plans and has been adopted by the Registrant. The Registrant is in compliance
with this reporting requirement.
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. Currently, the Registrant is not
involved in any derivative or hedging activities.
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.
ITEM 7A. 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 July 29, 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 purposes. Borrowings under the Company's
credit facilities described above bear interest at rates based upon the "Prime
Rate" or the "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).
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
PAGE
----
1. INDEPENDENT AUDITOR'S REPORT 17
2. MCRAE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS:
Consolidated Balance Sheets as of July 29, 2000 and July 31, 1999 18-19
Consolidated Statements of Operations for the Years Ended July 29,
2000, July 31, 1999, and August 1, 1998 20
Consolidated Statements of Shareholders' Equity for the Years Ended
July 29, 2000, July 31, 1999, and August 1, 1998 21
Consolidated Statements of Cash Flows for the Years Ended July 29,
2000, July 31, 1999, and August 1, 1998 22
Notes to Consolidated Financial Statements 23-34
3. FINANCIAL STATEMENT SCHEDULE:
Schedule II 35
Schedules other than those listed above have been omitted because they
are not applicable or the required information is shown in the
financial statements or the notes thereto.
16
<PAGE> 17
GLEIBERMAN SPEARS SHEPHERD & MENAKER, P. A.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders of
McRae Industries, Inc.
Mount Gilead, North Carolina
We have audited the accompanying consolidated balance sheets of McRae
Industries, Inc. and subsidiaries as of July 29, 2000, and July 31, 1999, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended July 29, 2000, and
the financial statement schedule listed under Item 8. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of McRae Industries,
Inc. and subsidiaries as of July 29, 2000, and July 31, 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended July 29, 2000, in conformity with generally accepted accounting
principles. Further, in our opinion, the financial statement schedule referred
to above presents fairly, in all material respects, the information stated
therein, when considered in relation to the financial statements taken as a
whole.
/s/ Gleiberman Spears Shepherd & Menaker, P.A.
October 20, 2000
Bank of America Plaza, Suite 2500
Charlotte, North Carolina 28280
Telephone 704-377-0220 Telefax 704-377-7612
Certified Public Accountants
17
<PAGE> 18
CONSOLIDATED BALANCE SHEETS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
JULY 29, JULY 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,223,000 $ 4,705,000
Marketable securities (Note 2) 61,000 63,000
Accounts receivable, less allowances for
doubtful accounts of $328,000 and
$373,000, respectively (Note 6) 6,430,000 7,566,000
Notes receivable, current portion
Employees 50,000 64,000
Other 114,000 216,000
Inventories (Notes 3 and 6) 16,294,000 13,461,000
Net investment in capitalized leases,
current portion (Note 4) 595,000 726,000
Prepaid expenses and other current assets 82,000 212,000
----------- -----------
Total current assets 30,849,000 27,013,000
Property, plant and equipment, net (Notes 5 and 6) 5,601,000 6,410,000
Other assets:
Notes and accounts receivable, related
entities (Notes 11 and 12) 652,000 941,000
Net investment in capitalized leases,
net of current portion (Note 4) 1,533,000 2,350,000
Notes receivable, net of current portion
Employees 33,000 102,000
Other 273,000 450,000
Real estate held for investment 645,000 494,000
Goodwill 510,000 550,000
Cash surrender value life insurance (Note 13) 1,830,000 1,472,000
Other 775,000 169,000
----------- -----------
Total other assets 6,251,000 6,528,000
----------- -----------
Total assets $42,701,000 $39,951,000
----------- -----------
</TABLE>
See notes to consolidated financial statements
18
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
JULY 29, JULY 31,
2000 1999
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable, banks (Note 6) $ 247,000 295,000
Accounts payable 4,676,000 2,589,000
Accrued employee benefits (Note 7) 276,000 250,000
Deferred revenues 1,039,000 1,338,000
Accrued payroll and payroll taxes 613,000 636,000
Income taxes (Note 8) 478,000 111,000
Contract contingencies 426,000
Other (Note 8) 574,000 832,000
----------- -----------
Total current liabilities 8,329,000 6,051,000
Notes payable, banks, net of current portion (Note 6) 5,057,000 5,280,000
Minority interest (Note 9) 726,000 719,000
Commitments and contingencies (Note 9)
Shareholders' equity: (Note 10)
Common stock:
Class A, $1 par value; authorized
5,000,000 shares; issued and outstanding,
1,859,692 and 1,857,774 shares, respectively 1,860,000 1,858,000
Class B, $1 par value; authorized
2,500,000 shares; issued and outstanding,
908,807 and 910,725 shares, respectively 909,000 911,000
Additional paid-in capital 791,000 791,000
Retained earnings 25,029,000 24,341,000
----------- -----------
Total shareholders' equity 28,589,000 27,901,000
----------- -----------
Total liabilities and shareholders' equity $42,701,000 $39,951,000
----------- -----------
</TABLE>
See notes to consolidated financial statements
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 29, JULY 31, AUGUST 1,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues $ 60,212,000 $ 51,454,000 $ 60,087,000
Cost of revenues 45,339,000 37,651,000 44,419,000
------------ ------------ ------------
Gross profit 14,873,000 13,803,000 15,668,000
Selling, general and
administrative expenses 12,520,000 12,468,000 12,050,000
------------ ------------ ------------
Earnings from operations 2,353,000 1,335,000 3,618,000
Other income, net 327,000 343,000 759,000
Interest expense (Note 6) (430,000) (420,000) (513,000)
------------ ------------ ------------
Earnings before income
taxes and minority interest 2,250,000 1,258,000 3,864,000
Provision for income taxes (Note 8) 886,000 452,000 1,554,000
Minority shareholder's interest
in earnings of subsidiary (Note 9) (7,000) (24,000) (45,000)
------------ ------------ ------------
Net earnings $ 1,357,000 $ 782,000 $ 2,265,000
------------ ------------ ------------
Net earnings per common share $ 0.49 $ 0.28 $ 0.82
Weighted average number of
common shares outstanding 2,768,499 2,768,499 2,768,499
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMMON STOCK, $1 PAR VALUE
CLASS A CLASS B ADDITIONAL RETAINED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL EARNINGS
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 2, 1997 1,816,332 $1,817,000 952,167 $952,000 $791,000 $22,614,000
Conversion of Class B to 3,396 3,000 (3,396) (3,000)
Class A stock
Cash dividend ($.36 per
Class A common stock) (655,000)
Net earnings 2,265,000
---------------------------------------------------------------------
BALANCE, AUGUST 1, 1998 1,819,728 1,820,000 948,771 949,000 791,000 24,224,000
Conversion of Class B to
Class A stock 38,046 38,000 (38,046) (38,000)
Cash dividend ($.36 per
Class A common stock) (665,000)
Net earnings 782,000
---------------------------------------------------------------------
BALANCE, JULY 31, 1999 1,857,774 1,858,000 910,725 911,000 791,000 24,341,000
Conversion of Class B to
Class A stock 1,918 2,000 (1,918) (2,000)
Cash dividend ($.36 per
Class A common stock (669,000)
Net earnings 1,357,000
---------------------------------------------------------------------
BALANCE, JULY 29, 2000 1,859,692 $1,860,000 908,807 $909,000 $791,000 $25,029,000
=====================================================================
</TABLE>
See notes to consolidated financial statements
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JULY 29, JULY 31, AUGUST 1,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,357,000 $ 782,000 $ 2,265,000
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 1,525,000 1,566,000 1,529,000
Equity in net (income) loss of investee 40,000 29,000 (101,000)
Minority shareholder's interest in earnings
of subsidiary 7,000 24,000 45,000
Loss (Gain) on sale of assets 59,000 (7,000) (75,000)
Contract contingencies 426,000
Changes in operating assets and liabilities:
Accounts receivable 1,136,000 1,542,000 (2,802,000)
Inventories (2,833,000) (1,993,000) 456,000
Net investment in capitalized leases 948,000 (351,000) (51,000)
Prepaid expenses and other current assets 130,000 30,000 (39,000)
Accounts payable 2,087,000 565,000 222,000
Accrued employee benefits 26,000 (300,000) (51,000)
Deferred revenues (299,000) (198,000) 19,000
Accrued payroll and payroll taxes (23,000) 75,000 (81,000)
Income taxes 367,000 (710,000) 289,000
Other (258,000) 210,000
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,695,000 1,264,000 1,625,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 632,000 226,000 295,000
Proceeds from sale of short term investments 2,000 1,000
Purchase of land (151,000)
Purchase of other assets (963,000) (322,000) (213,000)
Purchase of minority interest (220,000)
Capital expenditures (1,367,000) (1,795,000) (1,660,000)
Advances to related parties (108,000) (66,000) (182,000)
Collections from related parties 357,000 61,000 1,994,000
Advances on notes receivable (5,000) (961,000)
Collections on notes receivable 361,000 531,000 1,370,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,237,000) (1,370,000) 424,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on lines of credit (798,000)
Principal repayments of long-term debt (271,000) (290,000) (303,000)
Dividends paid (669,000) (665,000) (655,000)
----------- ----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (940,000) (955,000) (1,756,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 2,518,000 (1,061,000) 293,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,705,000 5,766,000 5,473,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,223,000 $ 4,705,000 $ 5,766,000
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
For the Years Ended July 29, 2000, July 31, 1999, and August 1, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Minority interest represents the minority shareholder's
proportionate share of the equity of a majority-owned subsidiary. The investment
in an investee is accounted for on the equity method. Significant inter-company
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES
The timely preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual results
could differ from those estimates. Significant estimates expected to change in
the near term include the allowance for contract contingencies.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid debt instruments such as certificates
of deposit and commercial paper purchased with an original maturity date of
three months or less.
MARKETABLE SECURITIES
Investments in marketable equity and debt securities have been classified as
available for sale and as a result are stated at fair value based on quoted
market prices. Unrealized holding gains and losses, if applicable, are included
as a separate component of shareholders' equity until realized.
INVENTORIES
Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method for military boots and photocopier inventories and using
the first-in, first-out (FIFO) method for all other inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes.
23
<PAGE> 24
REVENUE RECOGNITION
Service maintenance agreements are sold for certain products. Revenues related
to these agreements are deferred and recognized over the term of the related
agreements.
The Company sells equipment under sales-type equipment leasing and third party
leasing companies. Sales of the equipment under cost per copy lease agreements
are recognized when third party or sales-type lease agreements are signed and
the equipment is installed. Revenue from copy usage in excess of the lease
minimum is recognized when billed quarterly or monthly based on the actual
usage. Maintenance and supply expenses related to these cost per copy lease
agreements are recognized as incurred.
Certain orders under the current contract awarded in April 1997 require the
Company to store boots after they are manufactured and sold to the Government.
Revenue on these orders is recognized at the time of the sale and the acceptance
of title by the Government.
All other sales of the Company are recognized as revenues when goods are shipped
by the Company.
GOODWILL
Goodwill represents the excess of the purchase prices over the fair value of the
net assets acquired in business combinations in prior years and is being
amortized by the straight-line method over periods ranging up to 20 years. On a
periodic basis, the Company estimates the future undiscounted cash flow of the
businesses to which goodwill relates to assess that the carrying value of such
goodwill has not been impaired.
INCOME TAXES
A deferred tax asset or liability is recorded for all temporary differences
between financial and tax-reporting using enacted tax rates. Deferred tax
expense (benefit) results from the change during the year of the deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of common
stock outstanding during the year.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", was issued in
February 1998. SFAS No. 132 revises employers' disclosure requirements regarding
pensions and other postretirement benefit plans and has been adopted by the
Company. The Company is in compliance with this reporting requirement.
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 Company for the fiscal year beginning August 1, 2000, as
amended by SFAS No. 137 and SFAS No. 138. Currently, the Company is not involved
in any derivative or hedging activities.
24
<PAGE> 25
RESEARCH AND DEVELOPMENT
Research and development costs related to future products are expensed in the
year incurred. Research and development expense for fiscal 2000, 1999, and 1998
were $538,000, $524,000, and $572,000, respectively.
ADVERTISING
The Company expenses advertising costs when incurred. Advertising expense
amounted to $157,000, $210,000, and $278,000 for fiscal 2000, 1999, and 1998,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements and notes thereto to conform with the current year presentation.
2. MARKETABLE SECURITIES
The following is a summary of the estimated fair market value of available for
sale securities:
2000 1999
------- -------
Municipal Bonds $55,000 $55,000
Common Stocks 6,000 8,000
------- -------
$61,000 $63,000
Expected maturities may differ from contractual maturities of the municipal
bonds because the issuers of the securities may have the right to prepay
obligations without prepayment penalties. There were no significant unrealized
gains and losses at July 29, 2000 or July 31, 1999.
3. INVENTORIES
Current costs exceed the LIFO value of inventories by approximately $715,000 and
$744,000 at July 29, 2000 and July 31, 1999, respectively. Year-end inventories
valued under the LIFO method were $8,788,000 and $6,419,000 at July 29, 2000 and
July 31, 1999, respectively. A reduction in the LIFO reserve due to changes in
FIFO prices in fiscal 2000 and a reduction in inventory quantities in fiscal
1999 resulted in increased net earnings of $18,000 and $27,000 in fiscal 2000
and 1999, respectively. The components of inventory at each year-end are as
follows:
2000 1999
----------- ------------
Raw materials $ 3,033,000 $ 2,761,000
Work-in-process 979,000 675,000
Finished goods 12,282,000 10,025,000
---------- -----------
$16,294,000 $13,461,000
25
<PAGE> 26
4. LEASES
The Company leases photocopier products under sales-type leases. The Company's
net investment in these leases is as follows:
2000 1999
------------ ------------
Minimum lease payments receivable $ 2,415,000 $ 3,630,000
Estimated unguaranteed residual values 135,000 186,000
Unearned income (309,000) (552,000)
Allowance for doubtful accounts (113,000) (188,000)
------------ ------------
Net investment 2,128,000 3,076,000
Less: Current portion 595,000 726,000
------------ ------------
$ 1,533,000 $ 2,350,000
------------ ------------
The scheduled maturities for the above minimum lease payments receivable at July
29, 2000 are as follows:
FISCAL YEARS ENDING
2001 $ 860,000
2002 701,000
2003 538,000
2004 234,000
2005 and thereafter 82,000
-----------
Total minimum lease payments receivable $ 2,415,000
-----------
5. PROPERTY, PLANT AND EQUIPMENT
2000 1999
------------ ------------
Land and improvements $ 732,000 $ 740,000
Buildings 4,268,000 4,181,000
Machinery and equipment 8,086,000 8,638,000
Furniture and fixtures 2,684,000 2,809,000
------------ -----------
15,770,000 16,368,000
Less: Accumulated depreciation 10,169,000 9,958,000
------------ -----------
$ 5,601,000 $ 6,410,000
------------ -----------
Depreciation expense for fiscal 2000, 1999, and 1998 was $1,484,000, $1,526,000,
and $1,489,000, respectively.
26
<PAGE> 27
6. NOTES PAYABLE AND LINES OF CREDIT
NOTES PAYABLE:
JULY 29, 2000 JULY 31, 1999
------------- -------------
Note payable, bank, due in monthly
installments of $56,477 including
interest at the prime rate less 0.5%
through July, 2011. All of the inventory,
accounts receivable and property, plant
and equipment, which originally cost $8,991,000,
of the Company's American West subsidiary
are pledged as collateral. $5,035,000 $5,289,000
Note payable, State of Tennessee, due
March, 2013. Note is payable in 60 monthly
installments of $1,930 including interest at
1.5%, then 60 monthly installments of $2,073
including interest at 2.5% and then 120 monthly
installments of $2,175 including interest at 3.5%.
Land, buildings and building improvements, which
originally cost $847,000, of the Company's
American West subsidiary, are pledged as collateral. 269,000 286,000
----------- ----------
5,304,000 5,575,000
Less: Current portion 247,000 295,000
----------- ----------
$ 5,057,000 $5,280,000
=========== ==========
ANNUAL MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:
FISCAL YEARS ENDING:
2001 $ 247,000
2002 268,000
2003 292,000
2004 317,000
2005 347,000
thereafter 3,833,000
----------
$5,304,000
==========
LINES OF CREDIT:
American West has an unsecured $1,000,000 revolving line of credit with a bank,
which is guaranteed by the parent company. The Company had no outstanding
borrowings under the line of credit as of July 29, 2000 and July 31, 1999. The
line of credit expires in June 2001 and provides for interest on outstanding
balances to be payable monthly at the prime rate less 0.5%.
The Company has an additional $1,750,000 line of credit with a bank. This line
is restricted to 100% of the outstanding accounts receivable due from the U. S.
Government. There were no outstanding borrowings under this line of credit as of
July 29, 2000 and July 31, 1999. The line of credit expires in June 2001 and
provides for interest on outstanding balances to be payable monthly at the prime
rate.
Cash paid for interest during fiscal years 2000, 1999, and 1998 was
approximately $430,000, $420,000, and $513,000, respectively.
27
<PAGE> 28
7. EMPLOYEE BENEFIT PLANS
The Company's employee benefit program consists of an employee stock ownership
plan, a 401-K retirement plan, a cash bonus program, incentive awards and other
specified employee benefits as approved by the Board of Directors. At its sole
discretion, the Board of Directors determines the amount and the timing of
payment for benefits under these plans.
The employee stock ownership plan (ESOP) covers substantially all employees. Its
principal investments include shares of Class A and B Common Stock of the
Company and collective funds consisting of short-term cash, fixed-income and
equity investments.
The Company has a 401-K retirement plan, which covers substantially all
employees. Employees can contribute up to 15% of their salary. At its sole
discretion, the Board of Directors determines the amount and timing of any
Company matching contribution. The Company's contribution was $191,000 and
$229,000 for the years ended July 29, 2000 and July 31, 1999, respectively.
Employee benefit program expense amounted to $261,000, $247,000, and $491,000 in
2000, 1999, and 1998, respectively. To the extent the amount of these benefits
are not disbursed, the Board may, at its sole discretion, reduce any remaining
accruals.
8. INCOME TAXES
Significant components of the provision for income taxes are as follows:
2000 1999 1998
----------- ----------- -----------
CURRENT EXPENSE (BENEFIT)
Federal $ 836,000 $ 80,000 $ 1,327,000
State 287,000 138,000 302,000
---------- ---------- ------------
1,123,000 218,000 1,629,000
---------- ---------- ------------
DEFERRED EXPENSE (BENEFIT)
Federal (201,000) 199,000 (64,000)
State (36,000) 35,000 (11,000)
----------- ----------- -----------
(237,000) 234,000 (75,000)
----------- ----------- -----------
$ 886,000 $ 452,000 $ 1,554,000
----------- ----------- ------------
The components of the provision for deferred income taxes are as follows:
2000 1999 1998
----------- ----------- ------------
Depreciation $ (115,000) $ (31,000) $ (64,000)
Leasing activities (111,000) 130,000 18,000
Accrued employee benefits (85,000) 118,000 (10,000)
Allowances for doubtful accounts 50,000 64,000 (71,000)
Inventory 24,000 (47,000) 42,000
Other - - 10,000
----------- ----------- -------------
Deferred income taxes, expense
(benefit) $ (237,000) $ 234,000 $ (75,000)
----------- ----------- ------------
28
<PAGE> 29
Deferred tax liabilities and assets at each year-end are as follows:
DEFERRED TAX LIABILITIES:
2000 1999
--------- ---------
Depreciation $ 91,000 $ 206,000
Leasing activities 603,000 714,000
--------- ---------
Total deferred tax liabilities 694,000 920,000
--------- ---------
DEFERRED TAX ASSETS:
Accrued employee benefits 104,000 20,000
Allowances for doubtful accounts 191,000 241,000
Inventory 137,000 160,000
--------- ---------
Total deferred tax assets 432,000 421,000
--------- ---------
Net deferred tax liabilities $ 262,000 $ 499,000
--------- ---------
The reconciliation of income tax computed at the U. S. federal statutory tax
rate to actual income tax expense are (in thousands):
2000 1999 1998
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Tax at U. S. statutory rate $ 764 34.0% $ 428 34.0% $1,314 34.0%
State income taxes, net of
federal tax benefit 142 6.3 49 6.3 244 6.3
Other - net (20) (0.9) (25) (4.4) (4) (.1)
------------ -------------- -------------
$ 886 39.4% $ 452 35.9% $1,554 40.2%
------------- -------------- -------------
Total income tax payments during fiscal years 2000, 1999, and 1998 were
approximately $671,000, $1,244,000, and $1,343,000, respectively.
9. COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
The Company leases certain sales offices and equipment under non-cancelable
operating leases. Rental expenses on all operating leases were $487,000,
$423,000, and $432,000 for fiscal 2000, 1999, and 1998. The future minimum
annual rental payments under non-cancelable operating leases are as follows:
Fiscal Years Ending
2001 $291,000
2002 286,000
2003 113,000
2004 4,000
2005 -0-
--------
$694,000
29
<PAGE> 30
MINORITY INTEREST
The Company has entered into a restrictive stock agreement with the minority
shareholder of its majority owned subsidiary. Under the terms of the agreement,
the Company has the right of first refusal to purchase at any time any shares
representing the minority interest in the subsidiary at a defined book value of
said shares. The minority shareholder has the right to sell twenty percent of
his shares per year to the Company, at the defined book value of such shares,
provided the minority shareholder remains employed by the subsidiary.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments,
receivables, and capitalized leases. The Company maintains substantially all of
its cash and certificates of deposits with various financial institutions in
amounts that are in excess of the federally insured limits. Management performs
periodic evaluations of the relative credit standing of those financial
institutions.
Concentrations of credit risk with respect to receivables and capitalized leases
are limited due to the large number of entities comprising the Company's
customer base and their dispersion across many different industries. The Company
does not require collateral on trade accounts receivable. As of July 29, 2000,
seven customers accounted for 26% of accounts receivable and five customers
accounted for 35% of the net investment in capitalized leases.
As of July 31, 1999, eleven customers accounted for 48% of the accounts
receivable and three customers accounted for 26% of the net investment in
capitalized leases.
OTHER
Under the terms of sale to the U.S. Government, the negotiated contract prices
of combat boots are subject to renegotiation if certain conditions are present.
Management is of the opinion that renegotiation, if any, will have no material
adverse effect on the Company's consolidated financial position or results of
operations.
The Company has committed to provide maintenance and supplies (excluding paper)
on $13 million of office products equipment under certain lease agreements.
Under these lease agreements, customers are charged on a cost per copy basis and
have agreed to a minimum copy usage per quarter over the term of the lease. The
terms of the lease agreements range from three to six years. The minimum copy
usage over the lease term should cover the cost of the equipment, supplies, and
service. The average cost per copy rate in these lease agreements is $0.02.
Although the Company has committed to provide maintenance and supplies
(excluding paper), the Company's ability to recognize additional revenue on
these lease agreements is contingent upon the customers' actual copy usage
exceeding the minimum copy usage in the lease agreement. As a result of this
contingency, the Company has reserved approximately $426,000 in fiscal 2000 to
offset any increase in the operating costs of these programs. For fiscal 1999
and 1998, the Company recognized revenue in excess of the related maintenance
and supplies expenses for these lease agreements as the actual copy usage had
significantly exceeded the minimum copy usage for the lease agreements.
30
<PAGE> 31
10. SHAREHOLDERS' EQUITY
COMMON STOCK
Each share of Class A Common Stock is entitled to one-tenth vote and each share
of Class B Common Stock is entitled to one full vote at meetings of
shareholders, except that Class A shareholders are entitled to elect 25% and
Class B shareholders are entitled to elect 75% of the directors. Each share of
Class B Common Stock can be converted to Class A Common Stock on a share for
share basis. All dividends paid on Class B Common Stock must also be paid on
Class A Common Stock in an equal amount.
During fiscal 1999, The Company adopted the McRae Industries, Inc. 1998
Incentive Equity Plan (the "Plan"). The Plan has reserved 100,000 shares of the
Company's Class A Common Stock for issuance to certain key employees of the
Company. At July 29, 2000, there were 100,000 shares available for future grants
under the Plan.
11. RELATED PARTY TRANSACTIONS
Notes and accounts receivable from related entities that are included in the
balance sheet are as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Investments in and advances to investee (see Note 12) $ 652,000 $ 729,000
McRae Chevrolet-Buick, Inc., guaranteed by the estate of the
former President of the Company, with interest
at federal funds rate plus 2%. - 15,000
Notes receivable from the estate of the former President of the
Company, unsecured, with interest at federal funds
rate plus 2%. - 197,000
----------- ----------
$ 652,000 $ 941,000
</TABLE>
31
<PAGE> 32
12. INVESTMENT IN INVESTEE
The Company has an investment in a real estate development company, American
Mortgage & Investment Company. The investee has been operating under Chapter X
of the United States Bankruptcy Act since 1974, and the court has imposed
certain restrictions under a Plan of Reorganization. The President of the
Company is also the President of the investee. The Company adjusts its
investment in and advances to the investee by the equity method. Summarized
financial data of the investee is as follows:
2000 1999 1998
----------- ---------- -----------
BALANCE SHEET
Assets $1,543,000 $1,579,000 $1,572,000
Liabilities 1,728,000 1,724,000 1,688,000
Shareholders' deficiency (185,000) (145,000) (116,000)
RESULTS OF OPERATIONS
Revenues $ 165,000 $ 297,000 $ 469,000
Net income (loss) (40,000) (29,000) 101,000
The following table summarizes the activity of the Company's investment in
investee:
2000 1999 1998
----------- ------------ ------------
Beginning investment $ 729,000 $ 693,000 $ 822,000
Equity in income (loss) (40,000) (29,000) 101,000
Additional investments (repayments) (37,000) 65,000 (230,000)
----------- ------------- ------------
Ending investment $ 652,000 $ 729,000 $ 693,000
----------- ------------- ------------
13. FINANCIAL INSTRUMENTS
All financial instruments are held or issued for other than trading purposes.
Management used the following methods and assumptions to estimate the fair value
of financial instruments:
CASH AND CASH EQUIVALENTS: Because of the close proximity to maturity, the
carrying value of cash and cash equivalents approximates fair value.
MARKETABLE SECURITIES: The fair values of marketable debt and equity securities
are based on quoted market prices.
NOTES RECEIVABLE: For notes receivable, fair value is estimated by discounting
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
CASH SURRENDER VALUE LIFE INSURANCE: Represents officer's life insurance
policies recorded at their cash surrender value, which approximates fair value.
LONG AND SHORT-TERM DEBT: The carrying amounts of the borrowings under
short-term revolving credit agreements approximate its fair value. The fair
value of long- term debt was estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
32
<PAGE> 33
CARRYING FAIR
ASSETS AMOUNT VALUE
---------- ----------
Cash and cash equivalents $7,223,000 $7,223,000
Short-term investments 61,000 61,000
Notes receivable, related entities 652,000 652,000
Notes receivable, current and long-term 470,000 470,000
Cash surrender value life insurance 1,830,000 1,830,000
LIABILITIES
Long and short-term debt 5,304,000 5,304,000
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth unaudited quarterly financial information for the
years ended July 29, 2000 and July 31, 1999:
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
JULY 29, 2000
Net revenues $14,784,000 $13,873,000 $15,565,000 $15,990,000
Gross profit 4,131,000 3,544,000 3,517,000 3,681,000
Net earnings 563,000 394,000 164,000 236,000
Net earnings per common share .20 .15 .06 .09
JULY 31, 1999
Net revenues $10,797,000 $12,659,000 $13,552,000 $14,446,000
Gross profit 3,073,000 3,300,000 4,022,000 3,408,000
Net earnings 75,000 69,000 391,000 247,000
Net earnings per common share .03 .02 .14 .09
Reclassifications affecting cost of sales for certain employee benefit costs
have been made to the prior quarters and prior year amounts to conform with the
current year presentation.
15. SUBSEQUENT EVENTS
In August 2000, the Company decided to discontinue the operations of a
subsidiary, Rae-Print Packaging, Inc. This subsidiary had a loss of
approximately $211,000 in fiscal 2000. The Company anticipates that the loss
from discontinuance of these operations in fiscal 2001 will approximate
$500,000.
33
<PAGE> 34
16. OPERATING SEGMENT INFORMATION
The Company's principal operations have been classified into four business
segments: bar code operations; office products; printing and packaging; and
footwear manufacturing. The bar code segment manufactures and sells bar code
reading and related printing devices and other products related to optical data
collection to customers throughout the United States. The office products
segment sells, provides maintenance and leases Toshiba photocopiers, Toshiba
facsimile machines, and RISO digital duplicators, principally to customers in
North Carolina and parts of Virginia and South Carolina. Machines, components,
and certain supplies sold by the office products segment are generally available
only from Toshiba and RISO. The printing and packaging segment provides print
materials and packaging services for commercial and industrial customers. The
footwear segment manufactures combat boots, military dress oxfords, and military
safety boots for the U.S. Government and foreign governments, and western and
work boots for customers throughout the United States. Total consolidated
revenues related to sales to the U.S. Government were 14% in 2000, 14% in 1999,
and 20% in 1998. There were no significant inter-segment sales or transfers
during 2000, 1999, and 1998. Operating profits by business segment exclude
allocated corporate interest income, income taxes, minority interest, and equity
in net loss of investee. Corporate assets consist principally of cash,
short-term investments, certain receivables, and real estate held for
investment.
<TABLE>
<CAPTION>
WESTERN/
MILITARY WORK OFFICE CORPORATE
(IN THOUSANDS) BOOTS BOOTS BAR CODE PRODUCTS PRINTING & OTHER CONSOLIDATED
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JULY 29, 2000
Net Revenues $12,395 $ 7,866 $ 16,422 $20,678 $ 3,071 $ (220) $60,212
Earnings(loss)from
operations 2,329 (542) (206) 1,038 (215) (51) 2,353
Identifiable assets 2,381 5,791 11,159 15,462 1,523 6,385 42,701
Capital expenditures 122 0 256 633 141 215 1,367
Depreciation expense
and amortization 108 213 168 751 29 256 1,525
------- -------- -------- ------- ------- ------- -------
FOR THE YEAR ENDED JULY 31, 1999
Net Revenues $ 7,365 $ 6,402 $ 14,695 $19,846 $ 3,164 $ (18) $51,454
Earnings(loss)from
operations 1,316 (704) 146 721 (73) (71) 1,335
Identifiable assets 2,130 5,828 9,169 15,157 1,955 5,712 39,951
Capital expenditures 24 64 206 1,400 5 96 1,795
Depreciation expense
and amortization 119 318 181 653 25 270 1,566
------- -------- -------- ------- ------- ------- -------
FOR THE YEAR ENDED AUGUST 1, 1998
Net Revenues $11,106 $ 10,926 $ 17,084 $18,051 $ 2,936 $ (16) $60,087
Earnings(loss)from
operations 1,661 (466) 930 1,540 86 (133) 3,618
Identifiable assets 1,564 5,413 11,406 13,071 1,738 7,265 40,457
Capital expenditures 99 33 131 1,008 66 323 1,660
Depreciation expense
and amortization 131 304 181 519 41 353 1,529
------- -------- -------- ------- ------- ------- -------
</TABLE>
34
<PAGE> 35
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
ADDITIONS
(1) (2)
DESCRIPTION BALANCE AT CHARGED TO CHARGED DEDUCTION BALANCE
BEGINNING COSTS AND TO OTHER DESCRIBE AT END OF
OF PERIOD EXPENSES ACCOUNTS PERIOD
DESCRIBE
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED JULY 29, 2000
Deducted from Assets Accounts:
Allowance for Doubtful Accounts $ 561,000 $ (235,000) $ 114,000 (1) $ 440,000
Employee Benefit Accrual 250,000 262,000 (236,000) (2) 276,000
Health Insurance Accrual 212,000 - 38,000 (2) 250,000
Allowance for contract contingencies - 426,000 - 426,000
YEAR ENDED JULY 31, 1999
Deducted from Assets Accounts:
Allowance for Doubtful Accounts $ 718,000 $ (233,000) $ 76,000 (1) $ 561,000
Employee Benefit Accrual 550,000 4,000 (304,000) (2) 250,000
Health Insurance Accrual 192,000 - 20,000 (2) 212,000
YEAR ENDED AUGUST 1, 1998
Deducted from Assets Accounts:
Allowance for Doubtful Accounts $ 722,000 $ (343,000) $ 339,000 (1) $ 718,000
Employee Benefit Accrual 601,000 286,000 (337,000) (2) 550,000
Health Insurance Accrual 192,000 - - 192,000
</TABLE>
(1) Uncollectible accounts written off
(2) Payments and/or expenses charged to operations
35
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
PART III
Items 10 through 13 are incorporated herein by reference to the sections
captioned Principal Stockholders and Holdings of Management; Election of
Directors; Director Compensation; Executive Officers; Compensation Committee
Interlocks and Insider Participation; Certain Relationships and Related
Transactions; Executive Compensation; Stock Performance Graph; Compensation
Committee Report; and Section 16 (a) Beneficial Ownership Reporting Compliance
in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be
held December 14, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) INDEPENDENT AUDITOR'S REPORT
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS:
Consolidated Balance Sheets as of July 29, 2000 and July 31,
1999.
Consolidated Statements of Operations for the Years Ended July
29, 2000, July 31, 1999, and August 1, 1998.
Consolidated Statements of Shareholders' Equity for the Years
Ended July 29, 2000, July 31, 1999, and August 1, 1998.
Consolidated Statements of Cash Flows for the Years Ended July
29, 2000, July 31, 1999, and August 1, 1998.
Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULE:
Schedule II
(3) EXHIBITS:
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit 3.1
to the Registrant's Form S-14, Registration N. 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).
36
<PAGE> 37
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 of the Registrant (Filed herein). Pages 41 and 42.
10.1 1985 McRae Industries, Inc. Non-Qualified Stock Option Plan
(Incorporated by reference to Exhibit 10 to the Registrant's Form 10-K
for the fiscal year ended August 3, 1985).*
10.2 Technical Assistance Agreement dated September 13, 1984 between the
Registrant and Ro-Search, Incorporated (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year ended
July 28, 1984).
10.3 Stock Purchase Agreement and Guaranty Agreement as of April 7, 1996
among Walter A. Dupuis, Kenneth O. Moore, William Glover, and McRae
Industries, Inc., was filed as Exhibit 2 to the Registrant's current
report on Form 8- K filed May 11, 1996 and is incorporated herein by
reference.
10.4 Promissory Note, Security Agreement and Guaranty Agreement dated July
25, 1996 among American West Trading Company, as borrower, The Fidelity
Bank, as lender, and the Registrant, as Guarantor (Incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-K for the fiscal
year ended August 3, 1996).
10.5 Deed of Trust between American West Trading Company and The Fidelity
Bank, dated July 25, 1996 (Incorporated by reference to Exhibit 10.6 to
the Registrant's Form 10-K for the fiscal year ended August 3, 1996).
10.6 Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-K for the fiscal year ended August 3, 1996).
10.7 Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated April 15, 1997 (Incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K for the fiscal year ended
August 2, 1997).
10.8 McRae Industries, Inc. Incentive Equity Plan (Incorporated by reference
to Exhibit 4 to the Registrant's Form S-8 dated January 6, 1999).*
21 Subsidiaries of the Registrant (Filed herein). Page 43.
23 Consent of Independent Auditors (Filed herein). Page 44.
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).
----------------
*DENOTES A MANAGEMENT CONTRACT OR COMPENSATORY PLAN OR ARRANGEMENT.
(b) REPORTS ON FORM 8-K:
The Company filed no reports on Form 8-K for the fiscal year ended July
29, 2000.
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: October 27, 2000 By: /s/ D. Gary McRae
------------------
D. Gary McRae
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE DATE
--------- ----
/s/D. Gary McRae October 27, 2000
------------------------
D. Gary McRae
President, Treasurer, and Director
(Principal Executive Officer)
/s/George M. Bruton October 27, 2000
------------------------
George M. Bruton
Director
/s/Hilton J. Cochran October 27, 2000
------------------------
Hilton J. Cochran
Director
/s/Brady W. Dickson October 27, 2000
------------------------
Brady W. Dickson
Director
/s/Victor A. Karam October 27, 2000
------------------------
Victor A. Karam
President - McRae Footwear and Director
/s/James W. McRae October 27, 2000
------------------------
James W. McRae
Vice President, Secretary, and Director
/s/Harold W. Smith October 27, 2000
------------------------
Harold W. Smith
Vice President - McRae Office Solutions and Director
/s/Marvin G, Kiser, Sr. October 27, 2000
------------------------
Marvin G. Kiser, Sr.
Controller
(Principal Financial and Accounting Officer)
38
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EXHIBIT INDEX
3.1 Certificates of Incorporation (Incorporation by reference to Exhibit
3.1 to the Registrant's Form S-14, Registration N. 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 fiscal
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 (Filed herein). Pages 41 and 42.
10.1 1985 McRae Industries, Inc. Non-Qualified Stock Option Plan
(Incorporated by the reference to Exhibit 10 to the Registrant's Form
10-K for the fiscal year ended August 3, 1985).
10.2 Technical Assistance Agreement dated September 13, 1984 between the
Registrant and Ro-Search, Incorporated (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year July 28,
1984).
10.3 Stock Purchase Agreement and Guaranty Agreement as of April 17, 1996
among Walter A. Dupuis, Kenneth O, Moore, William Glover, and McRae
Industries, Inc., was filed as Exhibit 2 to the Registrant's current
report on Form 8-K filed May 11, 1996 and is incorporated herein by
reference.
10.4 Promissory Note, Security Agreement and Guaranty Agreement dated July
25, 1996 among American West Trading Company, as borrower, The Fidelity
Bank, as lender and the Registrant, as Guarantor (Incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-K for the fiscal
year ended August 3, 1996).
10.5 Deed of Trust between American West Trading Company and The Fidelity
Bank, dated July 25, 1996 (Incorporated by reference to Exhibit 10.6 to
the Registrant's Form 10-K for the fiscal year ended August 3, 1996).
10.6 Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-K for the fiscal year ended August 3, 1996).
10.7 Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated April 15, 1997 (Incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K for the fiscal year ended
August 2, 1997).
10.8 McRae Industries, Inc. Incentive Equity Plan (Incorporate by reference
to Exhibit 4 to the Registrant's Form S-8 dated January 6, 1999).
39
<PAGE> 40
21 Subsidiaries of the Registrant (Filed herein). Page 43.
23 Consent of Independent Auditors (Filed herein). Page 44.
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).
40
