McRae Industries, Inc.
Filed 10/26/01
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
(BOX WITH AN X) EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
(EMPTY BALLOT BOX) EXCHANGE ACT OF 1934
For the fiscal year ended July 28, 2001
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 (BOX WITH AN X) No
(EMPTY BALLOT BOX)
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. (BOX WITH AN 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 22, 2001 was approximately $4,947,000 and $1,220,000, respectively. On October 22, 2001,
1,861,817 Class A shares and 906,682 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 20, 2001 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 Registrant'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; and selling, leasing, and servicing office
equipment. The Registrant's commercial printing and packaging business was discontinued during fiscal 2001. Additional
financial information about these lines of business can be found in Note 17 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 99% owned
subsidiary. Compsee markets, sells, and services its products directly through sales centers located throughout the United
States. Compsee also sells its products worldwide; however, net revenues from foreign sales are negligible when compared to
the Registrant's consolidated net revenues.
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. Compsee's portable bar code scanner equipment includes the APEX II which was introduced in fiscal 1996 and the APEX
III which was introduced in fiscal 2001. These products were well received in the market and provided 13%, 10% and 11% of
Compsee sales for fiscal 2001, 2000, 1999, 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. During the last half of fiscal 2001, Compsee introduced the APEX III
portable data collector. This product provides batch and wireless data collection capability. The APEX IV portable data
collection unit is expected to be introduced to the market in fiscal 2002. This unit is a more rugged, pistol grip version
of the APEX III product. 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 2001, 2000, and 1999 were 22%, 29%, and 31% of the Registrant's consolidated
net revenues, respectively. QuickReader, QuickLink, and Turbowedge bar code readers developed and marketed by Compsee
accounted for 11%, 11%, and 12% of Compsee's net revenues for fiscal 2001, 2000, and 1999, 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 28, 2001.
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Footwear Manufacturing
The Registrant's footwear manufacturing operations include the manufacture and sale of military combat boots. The Registrant
has manufactured Direct Molded Sole 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 fifth 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 and final option period will expire in April 2002. The Government continues
to evaluate a new military combat boot construction that is not compatible with the Registrant's current manufacturing
process that could require future military combat boot purchases to meet the new boot construction specification. While the
Registrant is positioned to accommodate any military combat boot specification changes, there can be no assurances that the
Registrant would be successful in any solicitation of another contract with the Government upon termination of the current
Contract.
In September 2001, the Government notified the Registrant to increase its production levels of military combat boots as a
result of the deployment of troops in the war on terrorism. The increased production levels represent an approximate 60%
increase over the quantities normally purchased by the Government under the Contract.
No one company dominates the Government military boot industry. The Registrant's major competitors in the military boot
market include Wellco, Inc., Belleville Shoe Manufacturing Company, and Altama Delta Corporation. 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 $11.7 million, $7.2 million, and $6.9 million, for fiscal 2001, 2000, and 1999,
respectively. Sales of military boots to foreign countries were $4.6 million, $4.7 million, and $76,000 for the past three
fiscal years, respectively. Approximately 89% of foreign country sales for fiscal 2001 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.
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Leather and synthetic rubber, currently available from one source, 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 whom
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
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.
On June 29, 2001, American West acquired the Dingo brand name and certain inventory from Lucchese, Inc., a wholly owned
subsidiary of Arena Brands, Inc. The Dingo footwear line provides a "lifestyle" product to supplement American West's
western boot products. Also, in early October 2001, American West purchased the Dan Post brand name and certain inventory
from Lucchese, Inc. The Dan Post brand is a high quality, traditional western product and is well recognized by both
retailers and consumers. This addition to the product mix allows the Registrant to compete in the hand crafted boot market
segment.
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 $520,000, $734,000, and $575,000 in fiscal 2001, 2000, and 1999, respectively.
During fiscal 2000, American West expanded its western boot product line with imported children boots from India and
China. In addition, American West imports ladies cement construction western boots from Mexico. Net revenues from these
imported products amounted to approximately $632,000 and $107,000 for fiscal 2001 and fiscal 2000, respectively.
American West consolidated its manufacturing operation in fiscal 1997 by combining all manufacturing operations at the
Waverly, Tennessee facility. The Dresden, Tennessee 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 and 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 all price ranges.
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 $9.4 million, $7.9 million, and
$6.4 million of net revenues for fiscal 2001, 2000, and 1999, respectively.
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The Registrant's backlog of firm orders for military combat boots at July 28, 2001 and July 29, 2000 totaled approximately
$3 million (all of which is expected to be filled during the current fiscal year) and $8.6 million, respectively. The
backlog of firm orders for western and work boots at July 28, 2001 and July 29, 2000 totaled approximately $1,358,000 (all
of which is expected to be filled during the current year) and $436,000, respectively.
Net revenues derived from the military combat boot segment in fiscal 2001, 2000, and 1999 were 29%, 21%, and 15%,
respectively, of the Registrant's consolidated net revenues.
Net revenues derived from the western and work boot segment in fiscal 2001, 2000, and 1999 were 16%, 14%, and 13%,
respectively, of the Registrant's consolidated net revenues.
Office Products
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 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 2001 are generally available only from Toshiba and RISO.
McRae Office Solutions purchased the rights to a software package designed to scan, store, and provide easy retrieval of
various document types in fiscal 2000. During fiscal 2001 the software was reformatted to conform with current
technology. This product is expected to be part of the product mix in fiscal 2002.
The office products business is 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 this industry in the
geographical area in which it competes.
Net revenues derived from the office products segment during fiscal 2001, 2000, and 1999 were 33%, 36%, and 41%,
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.
Foreign Sales
It is not practicable for the Registrant to calculate the amounts of revenues derived from domestic and foreign
customers. The only business that experiences significant foreign sales is the military boot business. Sales of military
boots to foreign countries were $4.6 million (27.4% of total military boot sales), $4.7 million (37.9%) and $76,000 (1.0%)
for the past three fiscal years, respectively. Approximately 89% of foreign military boot sales for fiscal 2001 were to
Israel.
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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.
Environmental Matters
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.
Employment
As of July 28, 2001, the Registrant employed approximately 506 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.
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 17 to the consolidated financial statements included in this Report.
Research and Development
Research and development costs related to future products amounted to $496,000, $538,000, and $524,000 for fiscal 2001,
2000, and 1999, respectively.
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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,
Mt. Gilead, N.C manufacturing, and sales 71,000 square feet
Highway 109 North
Mt. Gilead, N.C Footwear manufacturing 57,600 square feet
2500 Port Malabar Blvd.
Palm Bay, Florida Compsee bar code sales office 5,250 square feet
Highway 109 North
Mt. Gilead, N.C Footwear warehouse 3,500 square feet
Highway 109
Richmond County, N.C Footwear storage 11,200 square feet
Highway 24-27 Footwear manufacturing and
Troy, N.C warehousing 35,000 square feet
Highway 109 North
Mt. Gilead, N.C Footwear storage 4,800 square feet
601 E. Railroad Street
Waverly, TN Footwear manufacturing 71,520 square feet
100 Hillcrest Street
Dresden, TN Footwear storage and warehouse 5,000 square feet
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 28, 2001 that is being held for
investment purposes.
The Waverly, Tennessee and Dresden, Tennessee facilities are encumbered by a deed of trust in favor of The Fidelity Bank to
secure a loan in the amount of approximately $5,000,000.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Each of the Registrant's classes of Common Stock is traded on the American Stock Exchange (ticker symbol MRI-A and
MRI-B). As of October 22, 2001, there were approximately 418 record holders of the Registrant's Class A Common Stock and
approximately 388 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 2001 Fiscal 2000
Sales Price Cash Sales Price Cash
Dividends Dividends
Quarter High Low Declared High Low Declared
First $ 5.63 $ 4.75 $ .09 $ 6.13 $ 4.94 $ .09
Second 5.38 4.88 .09 5.63 4.75 09
Third 5.24 3.95 .05 5.75 4.94 09
Fourth 4.25 3.85 .05 6.38 4.13 09
CLASS B COMMON STOCK:
Fiscal 2001 Fiscal 2000
Sales Price Sales Price
Quarter High Low High Low
First $ 5.75 $ 5.00 $ 5.88 $ 5.38
Second 5.38 5.13 5.38 5.13
Third 5.30 4.10 5.63 5.00
Fourth 4.25 3.90 6.50 4.13
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 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.
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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 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.
Fiscal Years Ended 7-28-01 7-29-00 7-31-99 8-1-98 8-2-97
Income Statement
Data:
Net revenues $ 57,145,000 $ 57,141,000 $ 48,289,000 $ 57,151,000 $ 56,397,000
Net
(loss) earnings from
continuing operations (571,000 ) 1,502,000 815,000 2,192,000 2,312,000
Net
(loss) earnings from
discontinued operations (126,000 ) (145,000 ) (33,000 ) 73,000 27,000
Net
(loss) earnings (697,000 ) 1,357,000 782,000 2,265,000 2,339,000
Net
(loss) earnings, from
continuing operations per
common share: (0.21 ) 0.54 0.29 0.79 0.84
Balance Sheet
Data:
Total assets $ 38,977,000 $ 42,697,000 $ 39,951,000 $ 40,457,000 $ 39,725,000
Long-term
liabilities 4,598,000 5,057,000 5,280,000 5,594,000 5,854,000
Working capital 21,202,000 22,520,000 20,962,000 21,408,000 18,412,000
Shareholders'
equity 27,371,000 28,589,000 27,901,000 27,784,000 26,174,000
Weighted average
number of common shares
outstanding(a) 2,768,499 2,768,499 2,768,499 2,768,499 2,761,825
Cash dividends
declared per common
share(b) $ 0.28 $ 0.36 $ 0.36 $ 0.36 $ 0.36
----------------------
(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 Registrant has four 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 and the western and work boot unit operates under the name American West Trading
Company (American West). The commercial printing unit, which was discontinued in fiscal 2001, operated 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 1999 through 2001 is presented in the following chart. Certain reclassifications have
been made to the prior year amounts to conform with the current year presentation. In particular, the prior year amounts
have been adjusted to reflect the discontinuance of the commercial printing unit in fiscal 2001.
Fiscal Year Percent change Fiscal Year
2001 2000 1999 over prior period 2001 2000 1999
Dollars (In thousands) 2001 2000 Percent of Net Revenues
Net
Revenues
Bar Code $ 12,454 $ 16,422 $ 14,695 (24.2 ) 11.8 22 29 31
Office
Products 18,640 20,678 19,846 (9.9 ) 4.2 33 36 41
Military
Boots 16,792 12,395 7,365 35.5 68.3 29 21 15
Western/W
Boots 9,371 7,866 6,402 19.1 22.9 16 14 13
Eliminations/other (112 ) (220 ) (19 ) NM NM 0 0 0
Consolidated $ 57,145 $ 57,141 $ 48,289 0.0 18.3 100 100 100
Gross Profit Percentage
Gross Profit
Bar Code $ 3,668 $ 5,319 $ 5,233 (31.0 ) 1.6 29 32 36
Office
Products 3,492 5,726 6,129 (39.0 ) (6.6 ) 19 28 31
Military
Boots 4,034 2,786 1,663 44.8 67.5 24 22 23
Western/W
Boots 1,715 1,106 703 55.1 57.3 18 14 11
Eliminations/other (27 ) (74 ) (80 ) NM NM 0 0 0
Consolidated $ 12,882 $ 14,863 $ 13,648 (13.3 ) 8.9 23 26 28
Percentage of Net Revenues
Selling, General and Administrative Expenses
Bar Code $ 5,601 $ 5,525 $ 5,087 1.4 8.6 45 34 35
Office
Products 5,520 4,688 5,408 17.7 (13.3 ) 30 23 27
Military
Boots 628 457 347 37.4 31.7 4 4 5
Western/W
Boots 2,265 1,648 1,407 37.4 17.1 24 21 22
Eliminations/other (84 ) (22 ) (8 ) NM NM 0 0 0
Consolidated $ 13,930 $ 12,296 $ 12,241 13.3 .4 25 22 25
Percentage of Net Revenues
Operating Profit (Loss)
Bar Code $ (1,933 ) $ (206 ) $ 146 (838.3 ) (241.1 ) (16 ) (2 ) 1
Office
Products (2,028 ) 1,038 721 (295.4 ) 44.0 (11 ) 5 4
Military
Boots 3,406 2,329 1,316 46.2 77.0 20 18 18
Western/W
Boots (550 ) (542 ) (704 ) (1.5 ) 23.0 (6 ) (7 ) (11 )
Eliminations/other 57 (52 ) (72 ) NM NM 0 0 0
Consolidated $ (1,048 ) $ 2,567 $ 1,407 (140.8 ) 82.4 (2 ) 4 3
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CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2001 COMPARED TO FISCAL 2000
Consolidated net revenues for fiscal 2001 amounted to $57.1 million and were flat as compared to the consolidated net
revenues for fiscal 2000. The military combat boot business and the western and work boot business posted increased net
revenues of 35.5% and 19.1%, respectively, over the net revenues reported for fiscal 2000. Net revenues for the bar code
business and office products business declined 24.2% and 9.9%, respectively, as compared to the net revenues reported for
fiscal 2000.
Consolidated gross profit fell from $14.9 million reported for fiscal 2000 to $12.9 million for fiscal 2001 and as a
percentage of consolidated net revenues from 26% to 23% for the same comparative fiscal periods. These declines were
primarily attributable to decreased product sales and competitive price pressures in the higher margined bar code and office
products businesses and were partially offset by increased demand for footwear products.
Consolidated selling, general and administrative (SG&A) expenses increased by approximately $1.6 million, or 13.3%, from the
$12.3 million reported for fiscal 2000 to $13.9 million for fiscal 2001. The increase in SG&A expenditures was primarily the
result of higher personnel related costs; advertising and promotional expenses; bad debt charges; and impaired goodwill
write-offs which were partially offset by lower professional fees, business insurance costs, and general maintenance
expenditures.
A consolidated operating loss of $1.0 million was reported for fiscal 2001 as compared to an operating profit of
$2.6 million for fiscal 2000. The decrease in operating profit resulted from lower gross margins and increased SG&A costs.
The Registrant's results of operations for fiscal 2001 and fiscal 2000 have been adjusted to reflect the discontinuance of
the commercial printing unit during fiscal 2001.
BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 2001 COMPARED TO FISCAL 2000
Compsee is a manufacturer and distributor of "hi-tech" bar code reading and printing devices, other peripheral equipment,
and supplies related to optical data collection. Compsee is a global company and continues to explore new markets throughout
the United States and other parts of the world.
Net revenues for fiscal 2001 amounted to $12.5 million, down 24.2% from the $16.4 million reported for fiscal 2000. This
decrease in net revenues was primarily attributable to lower product demand resulting from a soft economic climate,
increased competition, and the delay in bringing the new APEX III product to market. Gross profit declined from $5.3 million
for fiscal 2000 to $3.7 million for fiscal 2001 and as a percentage of net revenues from 32% to 29%, respectively, for the
same reporting periods. The lower gross profit was the result of decreased sales, competitive price pressure in the market,
depressed software support business, and write-offs for obsolete inventory. SG&A expenses were up slightly, from
$5.5 million for fiscal 2000 to $5.6 million for fiscal 2001. This increase in SG&A costs was primarily attributable to bad
debt write-offs, impaired goodwill write-offs, and new product development charges. Goodwill was considered impaired based
on the carrying value of the goodwill exceeding the undiscounted cash flows of products incorporating the purchased
technology. These increased SG&A costs were partially offset by cost containment programs that decreased sales personnel
related expenses, advertising and promotional costs, and professional fees. Lower sales and depressed margins coupled with
increased SG&A expenses produced a $1.9 million operating loss for fiscal 2001 as compared to an approximate $206,000 loss
for fiscal 2000.
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OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 2001 COMPARED TO FISCAL 2000
McRae Office Solutions distributes Toshiba photocopiers, Toshiba facsimile machines, RISO digital printing equipment and
provides related service and supplies for these products throughout the state of North Carolina and parts of Virginia and
South Carolina.
Net revenues decreased 9.9%, down from the $20.7 million reported for fiscal 2000 to $18.6 million reported for fiscal
2001. This decline in net revenues was primarily attributable to lower commercial account sales that resulted from a
smaller, less experienced sales force; a procurement freeze placed on North Carolina state contract purchases; and
competitive pressure in the county-wide educational system program. Gross profit amounted to $3.5 million for fiscal 2001,
down 39.0% from the $5.7 million reported for fiscal 2000. As a percentage of net revenues, gross profit fell from 28% to
19% for fiscal 2000 and 2001, respectively. The decline in gross profit resulted from lower sales volume; a higher
percentage of lower margined county-wide educational system sales in the overall sales mix; inventory write-offs; and
increased loss contingencies related to future costs associated with the county-wide educational system programs. SG&A
expenses increased by approximately $832,000 or 17.7% from fiscal 2000 to fiscal 2001 and was primarily attributable to
sales and administrative personnel costs; office and equipment rental expenditures; advertising and promotional costs; and
bad debt write-offs. Lower professional fees provided a partial offset to the higher SG&A costs. The decrease in net
revenues, decline in gross profit, and higher SG&A costs resulted in an operating loss of approximately $2.0 million for
fiscal 2001 as compared to a $1.0 million operating profit for fiscal 2000.
FOOTWEAR UNIT RESULTS OF OPERATIONS, FISCAL 2001 COMPARED TO FISCAL 2000
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 several countries around the world primarily for women and children.
Net revenues for the military combat boot business for fiscal 2001 amounted to approximately $16.8 million, an increase of
35.5% over the $12.4 million reported for fiscal 2000. This increase in net revenues was primarily attributable to higher
boot requirements by the U. S. Government. Demand for military boots by foreign governments remained strong in fiscal 2001
as revenues remained consistent with fiscal 2000. Gross profit increased 44.8%, up from the $2.8 million reported for fiscal
2000 to $4.0 million for fiscal 2001 and resulted primarily from the increase in net revenues. As a percentage of net
revenues, gross profit increased from 22% for fiscal 2000 to 24% for fiscal 2001. This improvement in gross profit
percentage was attributable to lower per unit costs associated with higher production levels. SG&A expenses grew from
$457,000 in fiscal 2000 to $628,000 for fiscal 2001 and resulted from increased professional fees, employee benefit costs
and higher corporate allocations. The operating profit for fiscal 2001 amounted to $3.4 million, an increase of 46.2 % over
the $2.3 million reported for fiscal 2000.
The Registrant's military footwear business is currently operating in the final year of the most recent contract (the
Contract) awarded by the United States Government (the Government) in April 1997. The Contract provides for a base year and
four one-year extensions that may be exercised by the Government at its sole discretion for the purchase of additional
option quantities of military combat boots. While the Government exercised the final year's option, there was no indication
of a specified quantity of military combat boots to be purchased under this option. In addition, the Government has
indicated that it will switch to a new type of military combat boot and has issued a solicitation
12
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for bids to which the Registrant has responded. While the Registrant has positioned itself to manufacture the new type of
military combat boots and continues to manufacture boots for the Contract option, there are no assurances that the
Government will continue to order any boots under the Contract option or that the Registrant will be successful in the
solicitation of the right to manufacture the new type of military boot.
In September 2001, the Government notified the Registrant to increase its production levels of military combat boots as a
result of the deployment of U. S. troops on the war against terrorism. The increased production levels represent an
approximate 60% increase over the quantities normally purchased by the Government under the Contract. This increase is
expected to have a favorable impact on the Registrant's net revenues of an additional $2 million to $4 million for fiscal
2002, or more if the increased production levels are sustained throughout the remainder of fiscal 2002.
Net revenues for the western and work boot business for fiscal 2001 amounted to approximately $9.4 million, an increase of
$1.5 million or 19.1% over the amount reported for fiscal 2000. This growth in net revenues is primarily attributable to
increased market penetration by the sales force and higher demand for imported western boots for women and children. Gross
profit climbed to $1.8 million for fiscal 2001, up 55.1% from the $1.1 million for fiscal 2000 and as percentage of net
revenues was 18% for fiscal 2001 as compared to 14% for fiscal 2000. These increases were primarily the result of higher net
revenues, lower per unit costs associated with higher production levels, and higher margins on sales of imported
products. SG&A expenses for fiscal 2001 amounted to $2.3 million, approximately $600,000 greater than the amount reported
for fiscal 2000. This increase in SG&A expenditures was primarily attributable to additional personnel and related costs;
higher advertising and promotional outlays, bad debt write-offs, and larger professional fee charges. The operating loss of
$550,000 for fiscal 2001 was slightly higher than the $542,000 operating loss for fiscal 2000 as SG&A expenses outpaced the
growth in net revenues and gross profit.
OTHER BUSINESS UNIT RESULTS OF OPERATIONS, FISCAL 2001 COMPARED TO FISCAL 2000
In August 2000, the Registrant's management decided to phase out and discontinue the operations of the printing and
packaging business. Normal operations of this unit ceased on April 28, 2001. Net revenues amounted to approximately
$2.0 million and the loss from operations amounted to $41,000, net of income tax benefit. The loss on disposal amounted to
$85,000, net of income tax benefit. The remaining assets have an estimated fair value of $200,000.
CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2000 COMPARED TO FISCAL 1999
Consolidated net revenues for fiscal 2000 amounted to $57.1 million, an increase of 18.3% over the $48.3 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 28% reported for fiscal 1999 to 26% 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 25% for fiscal 1999 to
22% for fiscal 2000. Lower sales salaries, sales commissions, and advertising and promotional costs were partially offset by
increases in
13
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sales travel expenses, group health insurance costs, professional fees, and bad debt expense.
Consolidated operating profit increased 82.4% from the $1.4 million reported for fiscal 1999 to the $2.6 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.
The Registrant's results of operations for fiscal 2000 and fiscal 1999 have been adjusted to reflect the discontinuance of
the commercial printing unit during 2001.
Bar Code Unit Results of Operations, Fiscal 2000 Compared to Fiscal 1999
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
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
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 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.
14
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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 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 Compared 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 Registrant's management decided to phase out and discontinue the operations of
this business during fiscal year 2001.
FINANCIAL CONDITION
The Registrant's financial condition at July 28, 2001 continued to be strong as cash and cash equivalents amounted to
approximately $7.3 million. Working capital amounted to $21.2 million with a current ratio of 4.1 to 1.
Operating activities generated approximately $2.8 million of cash. Earnings from operations, adjusted for depreciation and
amortization, provided approximately $852,000 of positive cash flow. The decrease in trade accounts receivable contributed
approximately $1.4 million of cash as the timing of collection of open accounts for the bar code and military business
outpaced sales and the funding of large county-wide educational system sales before year-end. The western boot business
partially offset the trade accounts receivable reduction by approximately $400,000 as collection on higher fourth quarter
sales were made after year-end. Inventory reductions accounted for approximately $2.5 million of cash and were primarily
attributable to heavy fourth quarter sales to county-wide educational systems and the asset disposal related to the printing
and packaging business. The decrease in inventory was partially offset by an inventory buildup in the western boot business
as a result of increased demand for western boot products and the purchase of inventory related to the Dingo brand. Net
investment in capitalized leases provided approximately $603,000 of cash as a result of using third party financing to fund
a larger percentage of the office products business sales. The decrease in accounts payable used approximately $1.1 million
of cash primarily attributable to the elimination of VEST quantity deficiencies under the Contract with the
Government. Contract contingency reserves increased by $224,000 to cover future service and supply costs associated with the
county-wide education system cost per copy program. Income tax liabilities decreased by approximately $1.4 million as result
of the current year's operating loss and the payment of the final installment of fiscal 2000 tax liability and first quarter
estimated tax amounts.
15
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Investing activities used approximately $1.9 million of cash. Capital expenditures amounted to approximately $1.3 million
primarily for rental equipment for the county-wide education cost per copy program, various manufacturing equipment,
computer equipment, and office machines. Other asset purchases used $333,000 of cash and related primarily to the purchase
of the Dingo brand name. The purchase of 5% of the bar code business (Compsee) common stock from the minority shareholder
used approximately $605,000 of cash.
Quarterly dividend payments and principal payments on long-term debt used approximately $521,000 and $298,000 of cash,
respectively.
The Registrant's primary sources of liquidity at July 28, 2001 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 2002, including the purchase the Dan Post brand name and
certain inventory amounting to approximately $2.6 million.
INFLATION
The Registrant does not believe inflation has had a material impact on sales or operating results for the periods covered in
this discussion.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued and established the
accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 became 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.
In June 2001, SFAS No. 141, "Business Combinations" was issued and established the accounting and reporting for business
combinations. SFAS No. 141 is effective for the Registrant for periods after June 30, 2001. The Registrant is in compliance
with this reporting requirement.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued and established the accounting and reporting
for acquired goodwill and other intangible assets. SFAS No. 142 is effective for the Registrant for periods beginning after
December 15, 2001. The Registrant is evaluating the effects of this pronouncement on recorded goodwill and trade names.
In 1999, SAB 101 "Revenue Recognition in Financial Statements" was released by the SEC to provide additional guidance in
interpreting revenue recognition under generally accepted accounting principals. SAB 101 was effective for the Registrant no
later than the fourth quarter of fiscal year 2001. This SAB had no effect on the Registrant's revenue recognition
procedures.
16
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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 the impact of the war on terrorism and 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 Registrant 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 28, 2001, there was no outstanding
indebtedness under the lines of credit and $4.8 million was outstanding on the term loan. The Registrant does not buy or
sell derivative financial instruments for trading purposes. Borrowings under the Registrant'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 Registrant 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 Registrant's credit
facilities would increase annual interest expense by approximately $35,000 (assuming the Registrant's aggregate borrowings
under the credit facilities averaged $4.7 million during a fiscal year).
17
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
Page
1. Independent Auditor's Report 19
2. McRae Industries, Inc. and Subsidiaries Consolidated Financial Statements:
Consolidated Balance Sheets as of July 28, 2001 and July 29, 2000. 20-21
Consolidated Statements of Operations for the Years Ended July 28, 2001, July 29, 2000, and July 31, 1999. 22
Consolidated Statements of Shareholders' Equity for the Years Ended July 28, 2001, July 29, 2000, and
July 31, 1999. 23
Consolidated Statements of Cash Flows for the Years Ended July 28, 2001, July 29, 2000, and July 31, 1999. 24
Notes to Consolidated Financial Statements 25-37
3. Financial Statement Schedule:
Schedule II 38
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.
18
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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 28, 2001,
and July 29, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of
the three years in the period ended July 28, 2001, 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 United States 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 28, 2001, and July 29, 2000, and the results of
their operations and their cash flows for each of the three years in the period ended July 28, 2001, in conformity with
United States 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 16, 2001
Bank of America Plaza, Suite 2500
Charlotte, North Carolina 28280
Telephone 704-377-0220 Telefax 704-377-7612
Certified Public Accountants
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CONSOLIDATED BALANCE SHEETS
McRae Industries, Inc. and Subsidiaries
July 28, July 29,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $ 7,341,000 $ 7,219,000
Marketable securities (Note 2) 5,000 61,000
Accounts receivable, less allowances for doubtful accounts of
$273,000 and $328,000, respectively (Note 6) 5,048,000 6,430,000
Notes receivable, current portion
Employees 311,000 50,000
Other 83,000 114,000
Inventories (Notes 3 and 6) 13,806,000 16,294,000
Net investment in capitalized leases, current portion (Note 4) 567,000 595,000
Income tax receivable (Note 8) 881,000 --
Prepaid expenses and other current assets 60,000 82,000
Total current assets 28,102,000 30,845,000
Property and equipment, net (Notes 5 and 6) 5,204,000 5,601,000
Other assets:
Notes and accounts receivable, related entities (Notes 11 and 12) 527,000 652,000
Net investment in capitalized leases, net of current portion (Note 4) 960,000 1,533,000
Notes receivable, net of current portion
Employees 4,000 33,000
Other 199,000 273,000
Real estate held for investment 652,000 645,000
Goodwill 392,000 510,000
Cash surrender value life insurance (Note 13) 2,041,000 1,830,000
Other 896,000 775,000
Total other assets 5,671,000 6,251,000
Total assets $ 38,977,000 $ 42,697,000
See notes to consolidated financial statements
20
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CONSOLIDATED BALANCE SHEETS
McRae Industries, Inc. and Subsidiaries
July 28, July 29,
2001 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable, banks (Note 6) $ 407,000 247,000
Accounts payable 3,545,000 4,676,000
Accrued employee benefits (Note 7) 239,000 276,000
Deferred revenues 983,000 1,039,000
Accrued payroll and payroll taxes 578,000 613,000
Income taxes (Note 8) -- 478,000
Contract contingencies 650,000 426,000
Other 498,000 570,000
Total current liabilities 6,900,000 8,325,000
Notes payable, banks, net of current portion (Note 6) 4,598,000 5,057,000
Minority interest (Note 9) 108,000 726,000
Commitments and contingencies (Note 9)
Shareholders' equity: (Note 10)
Common stock:
Class A, $1 par value; authorized 5,000,000 shares; issued and
outstanding, 1,861,817 and 1,859,692 shares, respectively 1,862,000 1,860,000
Class B, $1 par value; authorized 2,500,000 shares; issued and
outstanding, 906,682 and 908,807 shares, respectively 907,000 909,000
Additional paid-in capital 791,000 791,000
Retained earnings 23,811,000 25,029,000
Total shareholders' equity 27,371,000 28,589,000
Total liabilities and shareholders' equity $ 38,977,000 $ 42,697,000
See notes to consolidated financial statements
21
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CONSOLIDATED STATEMENTS OF OPERATIONS
McRae Industries, Inc. and Subsidiaries
For the Years Ended July 28, July 29, July 31,
2001 2000 1999
Net revenues $ 57,145,000 $ 57,141,000 $ 48,289,000
Cost of revenues 44,263,000 42,278,000 34,641,000
Gross profit 12,882,000 14,863,000 13,648,000
Selling, general and administrative expenses 13,930,000 12,296,000 12,241,000
Operating profit (loss) from continuing
operations (1,048,000 ) 2,567,000 1,407,000
Other income, net 502,000 312,000 322,000
Interest expense (Note 6) (413,000 ) (391,000 ) (420,000 )
Earnings (loss) from continuing operations
before income taxes and minority interest (959,000 ) 2,488,000 1,309,000
Provision (benefit) for income taxes (Note 8) (375,000 ) 979,000 470,000
Minority interest (Note 9) 13,000 (7,000 ) (24,000 )
Net earnings (loss) from continuing operations (571,000 ) 1,502,000 815,000
Discontinued operations: (Note 15) Loss from
discontinued operations, net of income tax benefits of
$(19,000) for 2001, $(93,000) for 2000, and $(18,000) for
1999 (41,000 ) (145,000 ) (33,000 )
Loss on disposal of business segment net of
income tax benefit of $39,000 for fiscal 2001 (85,000 ) -- --
Net earnings (loss) $ (697,000 ) $ 1,357,000 $ 782,000
Earnings (loss) per common share:
Earnings (loss) from continuing operations $ (.21 ) $ .54 $ .29
Loss from discontinued operations (0.4 ) (.05 ) (.01 )
Net earnings (loss) $ (0.25 ) $ 0.49 $ 0.28
Weighted average number of common shares
outstanding 2,768,499 2,768,499 2,768,499
See notes to consolidated financial statements
22
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
McRae Industries, Inc. and Subsidiaries
Common Stock, $1 par value
Class A Class B Additional Retained
Paid-in
Shares Amount Shares Amount Capital Earnings
Balance
August 1, 1998 1,819,728 $ 1,820,000 948,771 $ 949,000 $ 791,000 $ 24,224,000
Convers
of Class B to
Class
stock 38,046 38,000 (38,046 ) (38,000 )
Cash
dividend ($.36
per Class A
common stock) (665,000 )
Net
earnings 782,000
Balance
July 31, 1999 1,857,774 1,858,000 910,725 911,000 791,000 24,341,000
Convers
of Class B to
Class A stock 1,918 2,000 (1,918 ) (2,000 )
Cash
dividend ($.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
Convers
of Class B to
Class A stock 2,125 2,000 (2,125 ) (2,000 )
Cash
dividend ($.28
per Class A
common stock) (521,000 )
Net
loss (697,000 )
Balance
July 28, 2001 1,861,817 $ 1,862,000 906,682 $ 907,000 $ 791,000 $ 23,811,000
See notes to consolidated financial statements
23
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CONSOLIDATED STATEMENTS OF CASH FLOWS
McRae Industries, Inc. and Subsidiaries
For the Years Ended July 28, July 29, July 31,
2001 2000 1999
Cash Flows from Operating Activities:
Net earnings (loss) $ (697,000 ) $ 1,357,000 $ 782,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,549,000 1,525,000 1,566,000
Equity in net (income) loss of investee (83,000 ) 40,000 29,000
Minority shareholder's interest in earnings
(loss) of subsidiary (13,000 ) 7,000 24,000
Loss (Gain) on sale of assets 39,000 59,000 (7,000 )
Contract contingencies 224,000 426,000
Changes in operating assets and liabilities:
Accounts receivable 1,382,000 1,136,000 1,542,000
Inventories 2,487,000 (2,833,000 ) (1,993,000 )
Net investment in capitalized leases 603,000 948,000 (351,000 )
Prepaid expenses and other current assets 22,000 130,000 30,000
Accounts payable (1,131,000 ) 2,087,000 565,000
Accrued employee benefits (37,000 ) 26,000 (300,000 )
Deferred revenues (56,000 ) (299,000 ) (198,000 )
Accrued payroll and payroll taxes (36,000 ) (23,000 ) 75,000
Income taxes (1,359,000 ) 367,000 (710,000 )
Other (72,000 ) (258,000 ) 210,000
Net cash provided by operating activities 2,822,000 4,695,000 1,264,000
Cash Flows from Investing Activities:
Proceeds from sale of property 214,000 632,000 226,000
Proceeds from sale of short term investments 55,000 2,000
Purchase of land (16,000 ) (151,000 )
Purchase of other assets (333,000 ) (963,000 ) (322,000 )
Purchase of minority interest (605,000 )
Capital expenditures (1,277,000 ) (1,367,000 ) (1,795,000 )
Advances to related parties (206,000 ) (108,000 ) (66,000 )
Collections from related parties 414,000 357,000 61,000
Advances on notes receivable (300,000 ) (5,000 )
Collections on notes receivable 173,000 361,000 531,000
Net cash (used in) provided by investing
activities (1,881,000 ) (1,237,000 ) (1,370,000 )
Cash Flows from Financing Activities:
Principal repayments of long-term debt (298,000 ) (271,000 ) (290,000 )
Dividends paid (521,000 ) (669,000 ) (665,000 )
Net cash (used in) financing activities (819,000 ) (940,000 ) (955,000 )
Net Increase (Decrease) in Cash and Cash
Equivalents 122,000 2,518,000 (1,061,000 )
Cash and Cash Equivalents at Beginning of Year 7,219,000 4,701,000 5,762,000
Cash and Cash Equivalents at End of Year $ 7,341,000 $ 7,219,000 $ 4,701,000
See notes to consolidated financial statements
24
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McRae Industries, Inc. and Subsidiaries
For the Years Ended July 28, 2001, July 29, 2000, and July 31, 1999
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 and Equipment
Property 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.
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.
25
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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. Provision for losses are recognized when determined.
Orders under the current U.S. Government military combat boot contract awarded in April 1997 were modified in May 2001 to
require the Company to implement a "bill and hold" program for remaining military boot shipments. Revenue on these orders is
recognized when the boots are inspected by the U. S. Government and accepted into the Company's warehouse.
All other sales of the Company are recognized as revenues when title passes to the buyer.
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. During fiscal 2001, the Company wrote-off
approximately $78,000 of impaired goodwill related to the bar code business. This goodwill was considered impaired based on
the undiscounted cash flow of the products incorporating the purchased technology.
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
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 became 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.
In June 2001, SFAS No. 141, "Business Combinations" was issued and established the accounting and reporting standards for
business combinations. SFAS No. 141 is effective for the Company for periods after June 30, 2001. The Company is in
compliance with this reporting requirement.
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In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued and established the accounting and reporting
standards for acquired goodwill and other intangible assets. SFAS No. 142 is effective for the Company for periods beginning
after December 15, 2001. The Company is evaluating the effects of this pronouncement on recorded goodwill and trade names.
In 1999, SAB 101, "Revenue Recognition in Financial Statements", was released by the SEC to provide additional guidance in
interpreting revenue recognition under generally accepted accounting principals. SAB 101 was effective for the Company no
later than the fourth quarter of fiscal year 2001. This SAB had no effect on the Company's revenue recognition procedures.
Research and Development
Research and development costs related to future products are expensed in the year incurred. Research and development
expense for fiscal 2001, 2000, and 1999 were $496,000, $538,000, and $524,000, respectively.
Advertising
The Company expenses advertising costs when incurred. Advertising expense amounted to $406,000, $157,000, and $210,000 for
fiscal 2001, 2000, and 1999, respectively.
Reclassifications
Certain reclassifications have been made to the prior years' financial statements and notes thereto to conform with the
current year presentation. In particular, the prior year's financial statements and notes have been adjusted to reflect the
discontinuance of the commercial printing business in fiscal 2001.
2. MARKETABLE SECURITIES
The following is a summary of the estimated fair market value of available for sale securities:
2001 2000
Munici
Bonds $ -0- $ 55,000
Common
Stocks 5,000 6,000
$ 5,000 $ 61,000
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 28, 2001 or July 29, 2000.
3. INVENTORIES
Current costs exceed the LIFO value of inventories by approximately $837,000 and $715,000 at July 28, 2001 and July 29,
2000, respectively. Year-end inventories valued under the LIFO method were $5,483,000 and $8,788,000 at July 28, 2001, and
July 29, 2000, respectively. An increase in fiscal 2001 LIFO reserves was due to changes in FIFO pricing which resulted in
decreased net earnings of $74,000. The decrease in fiscal 2000 LIFO reserves was due to both changes in FIFO pricing and
reduction in fiscal 1999 inventory quantities, which resulted in, increased net earnings of $18,000. The components of
inventory at each year-end are as follows:
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2001 2000
Raw
materials $ 2,843,000 $ 3,033,000
Work-in-process 746,000 979,000
Finish
goods 10,217,000 12,282,000
$ 13,806,000 $ 16,294,000
4. LEASES
The Company leases photocopier products under sales-type leases. The Company's net investment in these leases is as follows:
2001 2000
Minimum lease payments
receivable $ 1,663,000 $ 2,415,000
Estimated unguaranteed
residual values 116,000 135,000
Unearned income (172,000 ) (309,000 )
Allowance for doubtful
accounts (80,000 ) (113,000 )
Net investment 1,527,000 2,128,000
Less: Current portion 567,000 595,000
$ 960,000 $ 1,533,000
The scheduled maturities for the above minimum lease payments receivable at July 28, 2001 is as follows:
Fiscal Years Ending
2002 $ 752,000
2003 551,000
2004 252,000
2005 91,000
2006 and thereafter 17,000
Total minimum lease payments
receivable $ 1,663,000
5. PROPERTY AND EQUIPMENT
2001 2000
Land and improvements $ 762,000 $ 732,000
Buildings 4,279,000 4,268,000
Machinery and
equipment 7,980,000 8,086,000
Furniture and
fixtures 2,364,000 2,684,000
15,385,000 15,770,000
Less: Accumulated
depreciation 10,181,000 10,169,000
$ 5,204,000 $ 5,601,000
Depreciation expense for fiscal 2001, 2000, and 1999 was $1,431,000, $1,484,000, and $1,526,000, respectively.
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6. NOTES PAYABLE AND LINES OF CREDIT
NOTES PAYABLE:
July 28, 2001 July 29, 2000
Note payable, bank, due in monthly installments of $56,477 including
interest at the prime rate less 0.5% through July, 2011. All inventory, accounts
receivable and property and equipment, which originally cost $8,991,000, of the
Company's American West subsidiary are pledged as collateral $ 4,755,000 $ 5,035,000
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 250,000 269,000
5,005,000 5,304,000
Less: Current portion 407,000 247,000
$ 4,598,000 $ 5,057,000
Annual maturities of long-term debt are as follows:
Fiscal Years Ending:
2002 $ 407,000
2003 432,000
2004 458,000
2005 488,000
2006 519,000
thereafter 2,701,000
$ 5,005,000
LINES OF CREDIT:
The Company has an unsecured $1,000,000 revolving line of credit with a bank. The Company had no outstanding borrowings
under the line of credit as of July 28, 2001 and July 29, 2000. This line of credit was replaced in September 2001 with a
$3,000,000 revolving line of credit with a bank and provides for interest on outstanding balances to be payable monthly at
the prime rate less 0.5%. The new line of credit expires in November 2002 and is secured by the inventory and accounts
receivable of American West.
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 28, 2001 and July 29, 2000. The line of credit expires in June 2002 and provides for interest on outstanding balances
to be payable monthly at the prime rate.
Cash paid for interest during fiscal years 2001, 2000, and 1999 was approximately $403,000, $430,000, and $420,000,
respectively.
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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 $184,000, $191,000, and $229,000 for the years ended July 28, 2001, July 29,
2000, and July 31, 1999, respectively.
Employee benefit program expense amounted to $239,000, $261,000, and $247,000 in 2001, 2000, and 1999, respectively. To the
extent the amounts 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:
2001 2000 1999
Current expense
(benefit)
Federal $ (23,000 ) $ 929,000 $ 98,000
State 294,000 287,000 138,000
271,000 1,216,000 236,000
Deferred expense
(benefit)
Federal (549,000 ) (201,000 ) 199,000
State (97,000 ) (36,000 ) 35,000
(646,000 ) (237,000 ) 234,000
$ (375,000 ) $ 979,000 $ 470,000
The components of the provision for deferred income taxes are as follows:
2001 2000 1999
Depreciation $ (73,000 ) $ (115,000 ) $ (31,000 )
Leasing activities (173,000 ) (111,000 ) 130,000
Accrued employee benefits 10,000 (85,000 ) 118,000
Allowances for doubtful accounts 37,000 50,000 64,000
Inventory (6,000 ) 24,000 (47,000 )
Contract contingencies (255,000 ) -- --
State net operating loss carry
forward (201,000 )
Other 15,000 -- --
Deferred income taxes, expense
(benefit) $ (646,000 ) $ (237,000 ) $ 234,000
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Deferred tax liabilities and assets at each year-end are as follows:
Deferred tax liabilities:
2001 2000
Depreciation $ (18,000 ) $ (91,000 )
Leasing activities (430,000 ) (603,000 )
Total deferred tax
liabilities (448,000 ) (694,000 )
Deferred tax assets:
Accrued employee benefits 94,000 104,000
Allowances for doubtful
accounts 155,000 191,000
Inventory 159,000 137,000
Contract contingency 255,000 --
State net operating loss
carry forward 201,000 --
Other 32,000 --
Total deferred tax assets 896,000 432,000
Net deferred tax asset
(liabilities) $ 448,000 $ (262,000 )
State net operating loss carry forwards will expire in fiscal 2016.
The reconciliation of income tax computed at the U. S. federal statutory tax rate to actual income tax expense are (in
thousands):