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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
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 August 3, 1996
Commission file number 1-8578
McRAE INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 56-0706710
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(State of Incorporation) (I.R.S.Employer Identification No.)
402 North Main Street, Mount Gilead, North Carolina 27306
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(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: (910)439-6147
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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
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
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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. [ ]
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 25, 1996 was
approximately $6,800,000 and $1,800,000 respectively. On October 25, 1996,
1,788,464 Class A shares and 951,035 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 19, 1996 are incorporated by reference into Part III.
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Part I
ITEM I. 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 printing
devices, manufacturing and selling military combat boots, western and work
boots, selling, leasing, and servicing office equipment, and commercial
printing. On April 30, 1996, the Registrant acquired American West Trading
Company (American West) which manufactures western and work boots.
Bar Code Operations
The bar code segment, 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 92% owned
subsidiary. At August 3, 1996, Compsee had sales centers located throughout
the United States and 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 1%, 1% and 2% of the
Registrant's consolidated gross revenues in fiscal 1996, 1995 and 1994,
respectively.
Compsee designs and manufacturers 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.
The markets in which this business segment 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 participants in the
industry include Percon, Unitech and UBI.
Revenues derived from this segment in fiscal 1996, 1995, and 1994 were 33%,
43%, and 33% of the Registrant's total revenues, respectively. QuickReaders
and QuickLink bar code readers developed and marketed by Compsee accounted for
18%, 16%, and 29% of Compsee's sales and for 6%, 7%, and 10% respectively, of
the Registrant's total revenues during fiscal 1996, 1995, and 1994. There was
no significant backlog of firm orders for this segment at August 3, 1996.
Footwear Manufacturing
The Registrant's footwear manufacturing operations include the manufacture and
sale of military combat boots, western boots and work 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 which manufactures western and work boots.
The Registrant manufactures Direct Molded Sole combat boots for the United
States Government (the Government). 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 several U.S. boot manufacturers. The
solicitation process typically includes the evaluation of written technical
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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, of which the Registrant is one. 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 to the U.S. Government were $12.8 million, $8.8 million and
$13.8 million, for fiscal 1996, 1995 and 1994, respectively.
The Registrant's contracts with the Government are subject to partial or
complete termination under certain specified circumstances. The Government has
the authority to partially or completely terminate a contract for the
convenience of the Government. The Government may negotiate a settlement with
the Registrant in such event to cover costs already incurred. The Government
may exercise broad discretion in deciding whether to terminate a contract on
grounds of convenience, including termination due to lack of funding. The
Government also has the authority to partially or completely terminate a
contract because of the Registrant's actual or anticipated failure to perform
its contractual obligations. 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, women and children who wear boots for work and everyday
activities, including casual wear. American West markets and sells 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 with a smaller proportion of sales under the "American
West Trading Company" brand.
American West has two manufacturing facilities located in Dresden and Waverly,
Tennessee. The "upper" parts are constructed from leather and/or synthetic
material and the sole and heels consist of either leather, rubber and
rubber-plastic blended material. All raw materials necessary for manufacturing
the boots are readily available from several suppliers, both domestic and
abroad. American West utilizes three construction methods: Goodyear welt,
injection molding and cement process.
The western/work boot markets are highly competitive and dominated by
approximately six to eight major companies. Justin Industries, Inc. and ACME
Boot Company are the market leaders of the western and work boot market. 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 range
priced boots where competition is principally based on price and product
quality.
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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. Sales by American West in fiscal 1996,
since its acquisition by the Registrant, were $4.2 million or 9% of the
Registrant's consolidated gross revenues. Prior to its acquisition, American
West had sales of $18.7 million for each of its fiscal years ending December
31, 1995 and 1994. For the twelve month period ending December 31, 1995, sales
by American West to Walmart were $6.2 million.
The Registrant's backlog of firm orders for military combat boots at August 3,
1996 and July 29, 1995 totaled approximately $8,400,000 (all of which is
expected to be filled during the current year) and $8,000,000, respectively.
The backlog of firm orders for western and work boots at August 3, 1996 totaled
approximately $800,000.
Revenues derived from this segment in fiscal 1996, 1995, and 1994 were 36%, 22%
and 35%, respectively, of the Registrant's total revenues.
Office Products and Printing Business
McRae Graphics, Inc. (Graphics), a wholly owned subsidiary, is a non-exclusive
distributor of Toshiba photocopier and facsimile machines in North Carolina.
Graphics operates nine district sales offices throughout the state of North
Carolina. Graphics is also the sole distributor in North Carolina of RISO
digital duplicators. Machines, components and certain supplies which were sold
by Graphics during fiscal 1996 were generally available only from Toshiba and
RISO.
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 material principally for the textile industry as well as for
commercial and industrial customers. 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.
Revenues derived from this segment during fiscal 1996, 1995, and 1994 were 30%,
33% and 30%, respectively, of the Registrant's total revenues. There was no
significant backlog of firm orders for this segment at August 3, 1996.
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.
The Registrant is also engaged in the food and lodging industry. It owns and
operates a 24 room motel and an adjacent 200 seat family style restaurant in
Troy, North Carolina. Competition from similar businesses in the immediate
vicinity is moderate.
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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. B.J.
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.
Employment
As of August 3, 1996 The Registrant employed approximately 850 persons in all
divisions and subsidiaries. None of the Company's employees are represented by
collective bargaining or a labor union. The Company considers its relationship
with its employees to be good.
Financial Information About Industry Segments
Financial information for the past three fiscal years with respect to the
Registrant's industry segments are incorporated herein by reference to note 16
to the consolidated financial statements included in this Report.
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ITEM 2. PROPERTIES
The following table describes the location, principal use and approximate size
of all 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
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402 North Main Street Corporate headquarters, 71,000 square
Mt. Gilead, N.C. manufacturing, and sales feet
Highway 109 North Footwear manufacturing 57,600 square
Mt. Gilead, N.C. feet
2500 Port Malabar Blvd International Sales 5,250 square
Palm Bay, Florida Office feet
Highway 109 North Warehouse 3,500 square
Mt. Gilead, N.C. feet
Highway 109 Warehouse 11,200 square
Richmond County, N.C. feet
Highway 24-27 Manufacturing and 35,000 square
Troy, N.C. warehousing feet
Highway 109 North Leased space 4,800 square
Mt. Gilead, N.C. feet
111 Main Street Printing Operation 11,520 square
Mt. Gilead, N.C. feet
Highway 24-27 Motel and restaurant 24 room motel
Troy, N.C. 6,625 square
foot restaurant
Highway 24-27 Warehouse leased 11,760 square
Troy, N.C. to automobile feet
dealership owned by
B.J. McRae
Highway 24-27 Warehouse leased 4,800 square
Troy, N.C. to automobile feet
dealership owned by
B.J. McRae
601 E. Railroad Street Manufacturing 71,520 square
Waverly, TN feet
Hillcrest Street Manufacturing and 76,720 square
Dresden, TN Warehouse 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 at August 3, 1996 that is being
held for investment purposes.
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ITEM 3. LEGAL PROCEEDINGS
The Registrant, a subsidiary and certain affiliates of the Registrant,
including AMIC, are parties to certain litigation incidental to their
businesses. See Note 13 to the Consolidated Financial Statements. Management
does not believe that the resolution of 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 STOCK 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 25, 1996, there
were approximately 510 record holders of the Registrant's Class A Common Stock
and approximately 430 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 1996 Fiscal 1995
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Cash Cash
Sales Price Dividends Sales Price Dividends
Quarter High Low Declared High Low Declared
- ------- ---- --- -------- ---- --- --------
First $7.94 $6.38 $.0875 $9.25 $6.75 $.0875
Second 8.44 6.31 .0875 7.75 6.88 .0875
Third 7.94 6.50 .0875 7.13 5.88 .0875
Fourth 8.63 7.06 .0875 7.25 5.81 .0875
CLASS B COMMON STOCK
Fiscal 1996 Fiscal 1995
Sales Price Sales Price
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Quarter High Low High Low
- ------- ---- --- ---- ---
First $7.50 $6.38 $8.38 $6.75
Second 8.00 6.69 7.38 6.63
Third 7.50 6.75 7.00 5.88
Fourth 8.50 7.38 7.00 5.88
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. Any
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 two fiscal years. There is 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 Company.
ITEM 6. SELECTED FINANCIAL DATA
The following Selected Consolidated Financial Data of the Company presented
below for each of the five years in the period indicated has been derived from
the Company's audited consolidated financial statements. The Company acquired
American West Trading Company (American West) on April 30, 1996 from its
shareholders. The results of the
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Company include the results of American West since April 30, 1996, the day of
its acquisition by the Company. 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 Year Ended 8-3-96 7-29-95 7-30-94 7-31-93 8-2-92
Income Statement Data:
Net revenues $48,724,000 $40,624,000 $39,454,000 33,541,000 31,653,000
Net earnings 2,282,000 2,184,000 2,633,000 2,210,000 2,177,000
Net earnings,
per common share: 0.84 0.80 0.97 0.81 0.80
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Balance Sheet Data:
Total assets $39,561,000 $29,583,000 $28,136,000 $25,880,000 $23,465,000
Long-term liabilities 6,285,000 -0- -0- 294,000 239,000
Working Capital 16,953,000 12,306,000 12,639,000 12,288,000 11,235,000
Shareholders' equity 24,364,000 22,669,000 21,101,000 19,061,000 17,430,000
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Weighted average number
of Common Shares
Outstanding (a) 2,731,334 2,731,210 2,729,710 2,729,210 2,721,810
Cash dividends declared
per Common Share (b) $ .35 $ .35 $ .345 $ 0.34 $ 0.32
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(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
The Company reported revenues of $48.7 million for the 1996 fiscal year
compared to $40.6 million for the same period in 1995 and $39.5 million in
1994. Consolidated revenues reached record levels for the fourth consecutive
year. The footwear unit's revenue increased 94%, approximately 47% or $4.2
million of the increase, resulted from the acquisition of American West Trading
Company (American West) on April 30, 1996 in a transaction accounted for as a
purchase. The operating results of American West, which manufactures and sells
western and work boots, are included in the Company's results of operations
since the date of its acquisition. The Registrant expects that the inclusion of
the operating results of American West, for a complete-fiscal year in 1997, to
increase its revenues from the footwear segment. Increased U.S. Government
requirements and sales of military combat boots to foreign governments
contributed to the remaining $4.3 million increase in revenues in the footwear
division in fiscal 1996. The bar code and office products unit sales declined
from a combined 73% of consolidated revenues in fiscal 1995 to a combined 59% of
consolidated revenues in fiscal 1996. Consolidated operating profits declined
slightly from the fiscal 1995 level as a result of a 4% reduction in the gross
profit percent.
The following chart sets forth the net revenues, gross profits, selling,
general and administrative expenses, and operating profits of the major
business units for the fiscal years 1994 through 1996.
Fiscal Year Fiscal Year
1996 1995 1994 1996 1995 1994
Net Revenues Dollars (In thousands) Percent of Total Revenues
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Bar Code $15,994 $17,315 $13,205 33 43 33
Office Products 12,802 11,919 9,872 26 29 25
Footwear 17,490 9,004 13,777 36 22 35
Printing 1,814 1,702 1,782 4 4 5
Eliminations and other 624 684 818 1 2 2
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Consolidated $48,724 $40,624 $39,454 100 100 100
Gross Profit Gross Profit Percentage
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Bar Code $ 6,383 $ 7,246 $ 6,077 40 42 46
Office Products 4,232 4,189 3,750 33 35 38
Footwear 3,744 1,576 2,985 21 18 22
Printing 186 272 286 10 16 16
Eliminations and other (291) (48) (61)
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Consolidated $14,254 $13,235 $13,037 29 33 33
Selling, General and Administrative Expenses Percentage of Sales
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Bar Code $ 5,436 $ 5,237 4,567 34 30 35
Office Products 4,637 4,198 3,535 36 35 36
Footwear 1,109 455 475 6 5 3
Printing 209 185 251 12 11 14
Eliminations and other (346) (145) 143
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Consolidated $11,045 9,930 8,971 23 25 23
Operating Profit Percent of Sales
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Bar Code $ 947 $ 2,109 $1,510 6 12 11
Office Products (405) (9) 215 (3) 0 2
Footwear 2,635 1,121 2,510 15 12 18
Printing (23) 87 35 (1) 5 2
Eliminations and other 55 (3) (204)
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Consolidated $ 3,209 3,305 4,066 7 8 10
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The results reported in the chart reveal several different trends in the
Company's revenue mix. The office products unit posted another year of record
revenues with an increase of 7% over fiscal 1995. At the same time, the bar
code unit experienced a 7% decline in revenues from the prior year. The major
contributor to the Company's record consolidated revenue level was the footwear
unit which increased revenue by 94% as a result of increased U.S. Government
requirements, sales of combat boots to foreign governments and the acquisition
of American West.
Gross profit margins fell 4% on a consolidated basis for fiscal 1996 compared
to fiscal 1995 and were flat from fiscal 1995 to 1994. The bar code and office
products units continued to experience downward trends in gross margins, and
the footwear unit posted a 3% increase to 21% over fiscal 1995 and nearly
matched the 22% level recorded in fiscal 1994. The bar code unit continued to
yield margin to competitive pricing pressure in 1996 as several major product
lines experienced reductions in selling price levels. The office products'
margins have continued to decrease as a result of increased service costs and
higher costs associated with sales-type leases and cost per copy rental
programs. Gross margins for the footwear unit increased as a result of fixed
overhead being spread over a larger production of military combat boots which
was slightly offset by lower margins on the western and work boot product line.
Consolidated selling, general and administrative (SG&A)expenses as a percentage
of sales decreased 2% in fiscal 1996 from fiscal 1995 levels and matched the
1994 level. The bar code unit experienced a sizable increase in SG & A as a
percentage of sales as a result of increased health insurance costs, research
and development expenditures and professional fees. The footwear unit
experienced a 144% increase in SG&A over fiscal 1995 caused primarily by the
acquisition of the western boot product line.
Total operating profit for fiscal 1996 as a percentage of total revenue dropped
to 7% from 8% in fiscal 1995 and 10% in fiscal 1994. The decline in bar code
revenue and the reduction in gross margins on a consolidated unit basis were
the major causal factors of the decrease in consolidated operating profit in
fiscal 1996.
BUSINESS SEGMENTS
The Company has three primary business units: the bar code unit operates under
the name of Compsee, the office products unit operates under the name of McRae
Graphics, and the footwear manufacturing unit operates under the names of McRae
Footwear and American West Trading Company. The Company also operates several
other smaller businesses that are included in the other category in the above
chart.
BAR CODE OPERATIONS
Compsee manufactures and distributes bar code reading and printing devices and
other items related to optical data collection. Compsee continues to
concentrate its efforts to expand into new markets throughout the United States
and other parts of the world, and currently has sales agents in the United
States, Central and South America, Europe, Australia, the Middle East, and some
Pacific Rim countries.
Total revenues for fiscal 1996 were 7% lower than those reported in fiscal 1995
which were 31% higher than 1994 revenues. Several product lines were affected
by significant competitive pressures on pricing during the year which
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resulted in lower revenues and gross margins for the business unit. In addition,
selling, general and administrative expenses increased 4% over fiscal 1995 from
higher health insurance costs, research and development expenditures and
professional fees. All of these factors were responsible for the 6% decline in
operating profits from fiscal 1995.
OFFICE PRODUCTS
McRae Graphics sells and services certain office equipment of two major lines
of photocopier, facsimile, and digital printing equipment through nine offices
in North Carolina.
Total revenues for fiscal 1996 were 7% higher than in fiscal 1995 which was 21%
higher than the fiscal 1994 revenues. Revenues have continued to grow for five
consecutive years. McRae Graphics sells various equipment and supplies and
services the equipment it sells. Gross margins decreased approximately two
percentage points during fiscal 1996. This was primarily attributed to a
decline in service margins. Selling, general and administrative expenses
increased to 36% of revenues for fiscal 1996 because of higher administrative
salaries, health care costs and depreciation expense on rental machines. The
higher cost of sales and selling and general and administrative expenses out
paced the increase in revenues and resulted in a net operating loss for fiscal
1996.
FOOTWEAR
McRae Footwear manufactures military combat, western and work boots. Military
combat boots are manufactured primarily for the United States Government
(Government). In an effort to offset losses of production caused by the
Defense Department's overall reduction of combat boot orders in recent years,
the Company began producing boots for other markets in fiscal 1995. This
segment is currently operating under the third and final year of a three year
contract with the Government. A new contract covering a five year period is
currently being negotiated. The Company believes that it is well positioned to
successfully negotiate a new contract with the Government; however, there can
be no assurances that the terms of any such contract will be favorable to the
Company or that any such contract will be awarded.
In addition to producing combat boots for other markets, the Company purchased
American West Trading Company (American West), a high quality, low cost
producer of men's, women's and children's western and work boots, in April
1996. Total revenues for the footwear segment increased to $17.5 million, up
94% over fiscal 1995 which had declined 35% from fiscal 1994. Combat boots
accounted for 76% of the revenues for the footwear segment while the western
and work boot product line contributed 24% in fiscal 1996. Higher production
levels of military combat boots, slightly offset by lower gross margins in the
western and work boot product line, resulted in a positive 3% increase in gross
margin as a percentage of sales as fixed overhead was spread over an increased
production level of military combat boots. Selling, general and administrative
expenses increased 144% over fiscal 1995 which was flat compared to fiscal
1994. The increase was largely attributable to the acquisition of the western
and work boot operation.
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OTHER OPERATIONS AND INFLATION
The printing unit's performance in fiscal 1996 was adversely affected by rising
paper prices and scrap costs. The primary cause of the large change in
operating profit in the other category during fiscal 1995 was the recovery of a
bad debt of approximately $85,000 in our financing and leasing unit.
Inflation, in the opinion of management, has not been a significant factor in
the Company's operations for the last three fiscal years.
FINANCIAL CONDITION
The Company continues to have a strong balance sheet with a current ratio of
over 3:1. Total assets grew approximately 34% during fiscal 1996, while
stockholders' equity grew over 7% during the same period.
The expansion in operations for the footwear unit as a result of increased
sales activity and the acquisition of American West contributed to the
substantial increase in accounts receivable and inventory levels as compared to
fiscal 1995. The 81% increase in receivables is directly related to higher
military combat boot sales coupled with a delay in collection of Government
receivables and timing of purchases by customers of the western and work boot
product line. The 74% increase in inventory over last year is largely
attributed to the buildup of western and work boot inventory to fill greater
seasonal demands occurring during the fall and winter months of the year.
Higher sales activity also prompted a slight upward adjustment in the allowance
for bad debts. Accrued employee benefits used cash of $455,000 as a result of
higher payments during fiscal 1996.
Investing activities resulted in net cash provided of $583,000 including
$614,000 to purchase the western boot manufacturing company. Short term
investments were liquidated resulting in a source of cash amounting to almost
$3.4 million. The Company used these funds to restructure acquisition debt
assumed and to finance operations. Fixed assets increased by capital
expenditures of approximately $1.5 million as the Company continued to add to
and update its manufacturing machinery and equipment as well as its computer
and support programs.
Net cash provided by financing activities amounted to $337,000. New bank loans
approximating $6 million were negotiated to replace the debt assumed by the
Company in the purchase of American West. The Company paid dividends during the
fiscal year which totaled $624,000.
At August 3, 1996, the Company had lines of credit with several banks totalling
$3.75 million, of which $3.35 million was available to the Company. The Company
will continue to have cash requirements to support working and capital needs as
well as debt payment and servicing. To meet these cash requirements, the
Company intends to use internally generated funds and to borrow under its lines
of credit, if necessary. Management believes that the cash generated from these
sources will be adequate to meet the Company's cash requirements during the
next fiscal year.
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ENVIRONMENTAL MATTERS
The Company is subject to various laws and regulations concerning environmental
matters and employee safety and health in the United States. The Company has
been able to comply with such laws and regulations without any material adverse
effect on its business. In the opinion of management, the Company is not in
violation of any environmental laws or regulations that would have a material
adverse effect on the financial condition of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
Page
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1. Independent auditor's report 15
2. McRae Industries, Inc. and Subsidiaries consolidated financial
statements:
Consolidated Balance Sheets as of August 3, 1996 and July 29, 1995 16
Consolidated Statements of Operations for the Years Ended August 3,
1996, July 29, 1995, and July 30, 1994 17
Consolidated Statements of Cash Flow for the Years Ended August 3,
1996, July 29, 1995, and July 30, 1994 18
Consolidated Statements of Shareholders' Equity for the Years Ended
August 3, 1996, July 29, 1995, and July 30, 1994 19
Notes to Consolidated Financial Statements 20-32
3. Financial Statement Schedules:
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
13
14
PART III
Items 10 through 13 are incorporated herein by reference to the sections
captioned Principal Shareholder and Holdings of Management, Election of
Directors, Director Compensation, Executive Officers, Audit and Incentive Stock
Option Committee Interlocks and Insider Participation, Certain Relationships
and Related Transactions, Executive Compensation, Pension Plan and Section
16(a) Beneficial Ownership Reporting Compliance in the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held December 19, 1996.
14
15
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 August 3, 1996 and July 29, 1995, and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended August 3, 1996 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 audit 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 August 3, 1996, and July 29, 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended August 3, 1996, 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 11, 1996
NationsBank Suite 3500 Charlotte, North Carolina 28280
Telephone 704-377-0220 Telefax 704--377-7612
Certified Public Accountants and Business Advisors
15
16
CONSOLIDATED BALANCE SHEETS
McRae Industries, Inc. and Subsidiaries August 3, July 29,
1996 1995
- -----------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 581,000 $ 628,000
Marketable securities (Note 3) 65,000 3,244,000
Accounts and notes receivable, less allowances
for doubtful accounts of $301,000 and $80,000
respectively (Note 7) 10,606,000 5,860,000
Inventories (Notes 4 and 7) 12,640,000 7,273,000
Net investment in capitalized leases (Note 5) 966,000 944,000
Prepaid expenses and other current assets 210,000 352,000
- -----------------------------------------------------------------------------------------
Total Current Assets 25,068,000 18,301,000
Property, Plant and Equipment, net (Notes 6 and 7) 7,172,000 4,541,000
Other Assets:
Notes and accounts receivable, related
entities (Notes 5, 12 and 13) 2,359,000 2,287,000
Net investment in capitalized leases (Note 5) 1,798,000 1,690,000
Notes receivable 952,000 903,000
Real estate held for investment 478,000 426,000
Goodwill (Note 2) 674,000 708,000
Other 1,060,000 727,000
- -----------------------------------------------------------------------------------------
7,321,000 6,741,000
- -----------------------------------------------------------------------------------------
$39,561,000 $29,583,000
- -----------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to banks (Note 7) $ 789,000
Accounts payable 2,897,000 $ 1,897,000
Accrued employee benefits (Note 8) 846,000 1,301,000
Deferred revenues 1,454,000 1,335,000
Accrued payroll and payroll taxes 790,000 595,000
Due to related parties - 55,000
Income taxes (Note 9 ) 759,000 353,000
Other 580,000 459,000
- -----------------------------------------------------------------------------------------
Total Current Liabilities 8,115,000 5,995,000
Notes Payable to Banks, net of current portion (Note 7) 6,285,000
Minority Interest (Note 10) 797,000 919,000
Commitments and Contingencies (Note 10 and 13)
Shareholders' Equity: (Note 11)
Common Stock:
Class "A", $1 par value; authorized 5,000,000 shares;
issued and outstanding, 1,788,286 and 1,778,573
shares respectively 1,788,000 1,778,000
Class"B", $1 par value; authorized 2,500,000 shares;
issued and outstanding, 951,213 and 952,637
shares, respectively 951,000 953,000
Additional Paid-In Capital 705,000 676,000
Retained Earnings 20,920,000 19,262,000
- -----------------------------------------------------------------------------------------
24,364,000 22,669,000
- -----------------------------------------------------------------------------------------
$39,561,000 $29,583,000
- -----------------------------------------------------------------------------------------
See notes to consolidated financial statements
16
17
CONSOLIDATED STATEMENTS OF OPERATIONS
McRae Industries, Inc. and Subsidiaries
For the Years Ended August 3, July 29, July 30,
1996 1995 1994
- ------------------------------------------------------------------------------------
Net revenue $48,724,000 $40,624,000 $39,454,000
Cost of revenues 34,470,000 27,389,000 26,417,000
Gross profit 14,254,000 13,235,000 13,037,000
Selling, general and administrative 11,045,000 9,930,000 8,971,000
Earnings from operations 3,209,000 3,305,000 4,066,000
Other income, net 503,000 429,000 292,000
Earnings before income
taxes and minority interest 3,712,000 3,734,000 4,358,000
Provision for income taxes (Note 9) 1,369,000 1,403,000 1,599,000
Minority shareholder's interest
in earnings of subsidiary (Note 10) 61,000 147,000 126,000
- ------------------------------------------------------------------------------------
Net earnings $ 2,282,000 $ 2,184,000 $ 2,633,000
- ------------------------------------------------------------------------------------
Net earnings per Common Share $ 0.84 $ 0.80 $ 0.97
Weighted average number of
Common Shares outstanding 2,731,334 2,731,210 2,729,710
- ------------------------------------------------------------------------------------
See notes to consolidated financial statements.
17
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
McRae Industries, Inc. and Subsidiaries
For the Years Ended August 3, July 29, July 30,
1996 1995 1994
- ------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net earnings $2,282,000 $2,184,000 $2,633,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,072,000 807,000 610,000
Equity in net (income) loss of
investee 16,000 (25,000) 34,000
Minority shareholder's interest in
earnings of subsidiary 61,000 147,000 126,000
Gain on sale of assets (171,000)
Changes in operating assets and liabilities,
net of effects from purchase of subsidiaries:
Accounts and notes receivable (3,389,000) (965,000) (467,000)
Inventories (950,000) (1,593,000) 360,000
Net investment in capitalized leases (131,000) (554,000) (261,000)
Prepaid expenses and other current
assets 146,000 (94,000) (50,000)
Accounts payable (134,000) 235,000 (481,000)
Accrued employee benefits (455,000) 11,000 237,000
Deferred revenues 119,000 208,000 149,000
Accrued payroll and payroll taxes 40,000 119,000 3,000
Income taxes 406,000 (186,000) 423,000
Other 121,000 (305,000) 33,000
- ------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities (967,000) (11,000) 3,349,000
- ------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of subsidiaries, net of cash
acquired (614,000) (646,000)
Disposal of property 9,000 27,000
Purchases of short term investments (71,000) (2,373,000) (21,000)
Proceeds from sale of short term investments 3,414,000
Purchase of other assets (340,000)
Purchase of minority interest (184,000)
Capital expenditures (1,487,000) (956,000) (1,668,000)
Net advances to related parties (144,000) (207,000) (121,000)
Net (advances) collections on notes
receivable 2,000 (182,000)
- ------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities 583,000 (4,180,000) (1,965,000)
- ------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Borrowing of long-term debt and notes
payable 5,789,000 400,000
Principal repayments of long-term debt
and notes payable (4,865,000) (1,107,000) (747,000)
Proceeds from exercise of stock options 4,000
Issuance of common stock 37,000
Dividends paid (624,000) (616,000) (597,000)
- ------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities 337,000 (1,723,000) (940,000)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash
Equivalents (47,000) (5,914,000) 444,000
Cash, Cash Equivalents at Beginning of Year 628,000 6,542,000 6,098,000
Cash, Cash Equivalents at End of Year $ 581,000 $ 628,000 $6,542,000
- ------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
18
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
McRae Industries, Inc. and Subsidiaries
Common Stock, $1 par value
--------------------------
Class "A" Class "B"
-------------------------------------------- Additional Retained
Shares Amount Shares Amount Paid-in Capital Earnings
- ------------------------------------------------------------------------------------------------------------------
Balance, August 1, 1993 1,731,323 $1,731,000 997,887 $998,000 $674,000 $15,658,000
Conversion of Class "B" to
Class "A" stock 3,040 3,000 (3,040) (3,000)
Cash dividend ($.34 per Class "A"
common share) (597,000)
Exercise of Stock Options 1,000 1,000 1,000 1,000 2,000
Net earnings 2,633,000
- ------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1994 1,735,363 1,735,000 995,847 996,000 676,000 17,694,000
Conversion of Class "B" to
Class "A" stock 43,210 43,000 (43,210) (43,000)
Cash dividend ($.35 per Class "A"
common share) (616,000)
Net Earnings 2,184,000
- ------------------------------------------------------------------------------------------------------------------
Balance, July 29, 1995 1,778,573 1,778,000 952,637 953,000 676,000 19,262,000
Shares issued 8,289 8,000 29,000
Conversion of Class "B" to
Class "A" stock 1,424 2,000 (1,424) (2,000)
Cash dividend ($.35 per Class "A"
common share) (624,000)
Net earnings 2,282,000
- ------------------------------------------------------------------------------------------------------------------
Balance August 3, 1996 1,788,286 $1,788,000 951,213 $951,000 $705,000 $20,920,000
- ------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
19
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McRae Industries, Inc. and Subsidiaries
For the Years Ended August 3, 1996, July 29, 1995 and July 30, 1994
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
intercompany 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.
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
Marketable Securities consist of certificates of deposit with an original
maturity date of more than three months and debt and equity securities.
Certificates of deposit are stated at cost and the securities are stated at
approximate fair values based on quoted market prices.
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. The
effect of this change in accounting principle was not material to the financial
statements.
Inventories
Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method for the 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 a straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes.
Service Revenue Recognition
Service maintenance agreements are sold for certain products. When such
revenues are recorded prior to providing repair and maintenance service, the
revenues are deferred and recognized over the term of the related agreements.
Government Contract Revenue Recognition
Sales under long-term government contracts are recognized as revenues when the
deliveries are made. In addition, the Company has recorded receivables of
$370,000 at August 3, 1996, under the government contract's economic price
adjustment clause for increases in leather prices.
20
21
Goodwill
Goodwill is 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
The Company records provision for income taxes using the liability method of
accounting for income taxes under SFAS No. 109 Accounting for 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.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements and notes thereto to conform with the current year presentation.
2. ACQUISITIONS
All acquisitions have been accounted for as purchases; operations of the
companies acquired have been included in the accompanying consolidated
financial statements from their respective dates of acquisition. The excesses
of the purchase prices over fair value of the net assets acquired are included
in goodwill. Supplemental information, combining the acquired companies on a
pro forma basis as though they were acquired at the beginning of the fiscal
years, has not been presented for the DataScan Corporation and Systems
Integrators, Inc. acquisitions because it would have an immaterial effect on
the net revenues and income for the periods presented.
In September 1994, the Company acquired DataScan Corporation, a reseller of bar
code products located in South Carolina, for approximately $523,000. The
excess of the purchase price over the fair value of the net assets acquired of
approximately $600,000 was recorded as goodwill and is being amortized by the
straight-line method over twenty years.
In June 1995, the Company acquired Systems Integrators, Inc., a consulting
firm primarily engaged in programming bar code related products, for
approximately $315,000. The excess of the purchase price over the fair value
of the net assets acquired of approximately $138,000 was recorded as goodwill
and is being amortized by the straight-line method over fifteen years.
On April 30, 1996, the Company purchased all of the outstanding common stock
of American West Trading Company (American West) from its shareholders.
American West is a manufacturer and distributor of western and work boots with
manufacturing facilities located in Dresden and Waverly, Tennessee. American
West sells it's boots nationwide to major retail and speciality chain stores.
The Company purchased 4,000,000 shares of American West Common Stock for
$490,000 in cash and notes and $60,000 of the Company's Class A Common Stock.
The purchase price approximated the fair values of the net assets acquired. In
addition, a deferred earn-out amount will be paid subject to certain conditions
being met over a sixty month period.
21
22
The unaudited proforma financial information which follows assumes the
acquisition of American West occurred at the beginning of the respective year
presented after giving effect to certain adjustments. The proforma financial
information does not purport to be indicative of the results of operations that
would have occurred had the transaction taken place at the beginning of the
period presented or of future results of operations.
(Unaudited)
Proforma Results of Operations
Years Ended
August 3, 1996 July 29, 1995
----------------------------------
Net Revenues $ 61,421,000 $ 58,542,000
Net Earnings $ 2,291,000 $ 1,785,000
Net Earnings per Share $ 0.84 $ 0.65
3. MARKETABLE SECURITIES
The following is a summary of the estimated fair market value of available for
sale securities:
1996 1995
Certificates of Deposit $2,332,000
Mutual Funds 551,000
Municipal Bonds $55,000 354,000
Common Stocks 10,000 7,000
------- ----------
$65,000 $3,244,000
At July 29, 1995 all certificates of deposit had contractual maturities of one
year or less. 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. Unrealized gains and losses
were not material at August 3, 1996 or July 29, 1995.
4. INVENTORIES
Current costs exceed the LIFO value of inventories by approximately $877,000
and $847,000 at August 3, 1996 and July 29, 1995, respectively. Year-end
inventories valued under the LIFO method were approximately $5,150,000 at
August 3, 1996 and approximately $4,500,000 at July 29, 1995. The components
of inventory at each year end are as follows:
1996 1995
Raw materials $ 2,288,000 $1,093,000
Work-in-process 1,142,000 444,000
Finished goods 9,210,000 5,736,000
- -----------------------------------------------------------------------------
$12,640,000 $7,273,000
- -----------------------------------------------------------------------------
22
23
5. LEASES
The Company leases certain photocopier products under sales-type leases. The
Company's net investment in these leases is as follows:
1996 1995
Minimum lease payments receivable $3,070,000 $2,913,000
Estimated unguaranteed residual values 267,000 242,000
Unearned income (489,000) (471,000)
Allowance for credit losses (83,000) (50,000)
- -------------------------------------------------------------------------------
Net investment $2,765,000 $2,634,000
- -------------------------------------------------------------------------------
The scheduled maturities for the above minimum lease payments receivable at
August 3, 1996 are as follows:
Fiscal Year Ending
1997 $1,238,000
1998 903,000
1999 552,000
2000 288,000
2001 and thereafter 89,000
- ----------------------------------------------------------------
Total minimum lease payments receivable $3,070,000
- ----------------------------------------------------------------
6. PROPERTY, PLANT AND EQUIPMENT
1996 1995
Land and improvements $ 769,000 $ 626,000
Buildings 4,262,000 3,324,000
Machinery and equipment 6,943,000 3,470,000
Furniture and fixtures 2,521,000 2,291,000
- -------------------------------------------------------------------------------
14,495,000 9,711,000
Less: Accumulated depreciation 7,323,000 5,170,000
- -------------------------------------------------------------------------------
7,172,000 $4,541,000
- -------------------------------------------------------------------------------
23
24
7. NOTES PAYABLE:
1996
----
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 cost $8,991,000, of one
of the Company's subsidiaries, American West,
are pledged as collateral. $6,000,000
Line of Credit due August 1, 1997. Interest
is payable monthly at the prime rate less
.5%. All of the inventory, accounts
receivable and property, plant and
equipment, which cost $8,991,000,
of one of the Company's subsidiaries,
American West, are pledged as collateral. 400,000
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
cost $847,000, of one of the Company's subsidiaries,
American West, are pledged as collateral. 340,000
Note payable, State of Tennessee, due in March, 2000.
Note is payable in 60 monthly installments of
$4,015 including interest at 1.5% and then in 24
monthly installments of $4,057 including interest at 2.5%.
Certain equipment, which cost $320,000, of one of the
Company's subsidiaries, American West, is pledged
as collateral. 160,000
Note payable, due in monthly installments of
$5,000 without interest through April 1998. 105,000
Note payable, due in monthly installments of
$1,875 including interest at 6% through
April 1998. 40,000
Note payable, due in monthly installments of
$1,915 including interest at 5% through
December 1997. 29,000
----------
7,074,000
Less current portion 789,000
----------
$6,285,000
==========
24
25
Annual maturities of long-term debt are as follows:
Fiscal year ending:
1997 $ 789,000
1998 375,000
1999 322,000
2000 316,000
2001 319,000
thereafter 4,953,000
----------
$7,074,000
==========
Interest expense payments during fiscal years 1996, 1995 and 1994 were
approximately $133,000, $48,000 and $82,000, respectively.
8. EMPLOYEE BENEFIT PLANS
The Company's employee benefit program consists of a defined benefit pension
plan, an employee stock ownership 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 Company's noncontributory defined benefit pension plan and employee stock
ownership plan cover substantially all employees. On September 30, 1992 the
Board of Directors decided to terminate the defined benefit pension plan. The
plan's actuary determined the amount owed to the pension plan as a result of
the plan's termination was $173,000. This amount has been recorded as a
liability in accrued employee benefits as of August 3, 1996. The defined
benefit pension plan provided for benefits based on length of service from date
of employment and the employee's average compensation. Plan assets are
invested principally in collective funds consisting of short-term cash,
fixed-income and equity investments.
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 8% for 1992. The expected
long-term rate of return on assets is 8%.
25
26
The following table sets forth the defined benefit pension plan's funding
status at the end of each year indicated.
1996 1995 1994
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $891,000, $873,000 and $836,000,
respectively ($891,000) ($873,000) ($836,000)
- -----------------------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date (891,000) ($875,000) ($836,000)
Plan assets at fair market value (801,000) (753,000) (768,000)
- -----------------------------------------------------------------------------------------------
Projected benefit obligation in excess of
plan assets (90,000) (122,000) (68,000)
Unrecognized net (gain) loss 173,000 92,000 41,000
Additional liability recognized for unfunded
accumulated benefit obligation (173,000) (90,000) (41,000)
- -----------------------------------------------------------------------------------------------
Net pension liability (90,000) (120,000) (68,000)
Net periodic pension costs:
Interest cost on projected benefit
obligation 67,000 67,000 67,000
Actual return on plan assets (18,000) (35,000) (17,000)
Net asset gain less (loss) during
the period (38,000) (25,000) (47,000)
- -----------------------------------------------------------------------------------------------
Net periodic pension costs $ 11,000 $ 7,000 $ 3,000
- -----------------------------------------------------------------------------------------------
The employee stock ownership plan's (ESOP) 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.
Employee benefit program expense amounted to $525,000, $725,000 and $850,000 in
1996, 1995 and 1994, respectively. To the extent the amount of these benefits
are not disbursed, the Board may, at its sole discretion, reduce any remaining
accruals.
26
27
9.INCOME TAXES
Significant components of the provision for income taxes are as follows:
1996 1995 1994
Current:
Federal $1,062,000 $1,010,000 $1,324,000
State 276,000 238,000 285,000
- -------------------------------------------------------------------------------
Total Current 1,338,000 1,248,000 1,609,000
- -------------------------------------------------------------------------------
Deferred:
Federal 27,000 133,000 (9,000)
State 4,000 22,000 (1,000)
- -------------------------------------------------------------------------------
Total deferred 31,000 155,000 (10,000)
- -------------------------------------------------------------------------------
$1,369,000 $1,403,000 $1,599,000
- -------------------------------------------------------------------------------
The components of the provision for deferred income taxes are as follows:
1996 1995 1994
---- ---- ----
Depreciation $119,000 $ 21,000 $ 16,000
Leasing activities 48,000 111,000 62,000
Employee benefit accrual 207,000 (6,000) (75,000)
Bad debt allowances (95,000) (10,000) (18,000)
Inventory (123,000) (5,000) (11,000)
Other (125,000 44,000 16,000
- -------------------------------------------------------------------------------
Provision for deferred income taxes $ 31,000 $155,000 ($10,000)
- -------------------------------------------------------------------------------
Deferred tax liabilities and assets at each year end are as follows:
Deferred tax liabilities: 1996 1995
Tax over book depreciation $387,000 $268,000
Leasing activities 580,000 522,000
- -------------------------------------------------------------------------------
Total deferred tax liabilities 967,000 790,000
- -------------------------------------------------------------------------------
Deferred tax assets:
Employee benefit accrual 167,000 373,000
Bad debt allowances 151,000 56,000
Inventory 165,000 42,000
Other reserves 95,000 (39,000)
- -------------------------------------------------------------------------------
Total deferred tax assets 578,000 432,000
- -------------------------------------------------------------------------------
Net deferred tax liability $389,000 $358,000
- -------------------------------------------------------------------------------
27
28
The reconciliation of income tax computed at the U. S. federal statutory tax
rate to actual income tax expense are (in thousands):
1996 1995 1994
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Tax at U. S. statutory rate $1,262 34.0% $1,269 34.0% $1,482 34.0%
State income taxes, net of federal
tax benefit 154 6.3 157 6.3 188 6.3
Other - net (47) (3.4) (23) (2.3) (71) ( 1.6)
- -----------------------------------------------------------------------------------------
$1,369 36.9% $1,403 38.0% $1,599 36.7%
- -----------------------------------------------------------------------------------------
Total income tax payments during fiscal years 1996, 1995 and 1994 were
approximately $958,000, $1,647,000 and $1,100,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
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 in November 1994 and each year thereafter,
at the defined book value of such shares, provided the minority shareholder
remains employed by the subsidiary.
Credit Facilities
The Company has loan agreements with several banks pursuant to which the banks
have agreed to provide lines of credit up to $3,750,000 subject to certain
restrictions at the banks' prime interest rate.
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 which are in excess of the Federally insured limits. Management of
the Company 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 account receivables.
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.
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11. 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.
The Company has a nonqualified stock option plan. Under the terms of the stock
option plan, stock options to purchase Common Stock may be granted to selected
key employees. The Company has reserved 120,000 shares of Class A and 120,000
shares of Class B Common Stock for the nonqualified stock option plan.
Transactions involving the plan are summarized as follows:
Nonqualified Stock Option Plan 1996 1995 1994
Class Class Class
A B A B A B
--- --- --- --- --- ---
Outstanding and exercisable at
beginning of year 14,690 14,500 14,690 14,500 15,690 15,500
Exercised ($2.125 per share - Class A, $1.875
per share - Class B) (190) -0- -0- -0- (1000) (1000)
- -------------------------------------------------------------------------------------------------------
Outstanding and exercisable at end of year ($2.125
per share - Class A, $1.875 per
share - Class B) 14,500 14,500 14,690 14,500 14,690 14,500
- -------------------------------------------------------------------------------------------------------
At August 3, 1996, 143,000 shares of Class A and 143,000 shares of Class B
common stock were available for future grants under the nonqualified stock
option plan.
12. RELATED PARTY TRANSACTIONS
Notes and accounts receivable from related entities that are included in the
balance sheet are as follows:
1996 1995
Investments in and advances to investee (see Note 13) $ 631,000 $ 600,000
McRae Chevrolet Buick, guaranteed by the
President of the Company, with interest
at federal funds rate plus 2% 1,111,000 1,071,000
Notes receivable, other, guaranteed
by the President of the Company 275,000 275,000
Notes receivable from the President of
the Company, unsecured, with interest
at federal funds rate plus 2% 342,000 341,000
- -------------------------------------------------------------------------------
$2,359,000 $2,287,000
- -------------------------------------------------------------------------------
As of August 3, 1996, and July 29, 1995, there were approximately $674,000 and
$695,000, respectively, of receivables due from employees included in notes and
accounts receivable.
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13. INVESTMENT IN INVESTEE
The Company has an investment in a real estate development 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 Company adjusts its investment in and advances to the
investee by the equity method. Summarized financial data of the investee is as
follows:
1996 1995 1994
Balance Sheet
Assets $1,474,000 $1,451,000 $1,277,000
Liabilities 1,772,000 1,733,000 1,584,000
Shareholders' deficiency (298,000) (282,000) (307,000)
Results of Operations
Revenues $ 195,000 $ 215,000 $ 184,000
Net income (loss) (16,000) 25,000 (34,000)
The following table summarizes the activity of the Company's investment in
investee:
1996 1995 1994
Beginning investment $ 600,000 $ 447,000 $400,000
Equity in income (loss) (16,000) 25,000 (34,000)
Additional investments 47,000 128,000 81,000
- ------------------------------------------------------------------------------------
Ending investment $ 631,000 $ 600,000 $447,000
- ------------------------------------------------------------------------------------
The Company, a subsidiary and investee have been named co-defendants in a civil
lawsuit involving one residential real estate lot in a subdivision partially
developed by the investee. The investee has been named a defendant in a second
lawsuit also involving a residential real estate lot in the same subdivision.
The lawsuits allege various torts related to quiet title, adverse possession,
tortious interference and others. The first suit seeks unspecified
compensatory and punitive damages. The second suit seeks compensatory damages
of $15,000 and unspecified punitive damages. The Company's counsel in
connection with these lawsuits has represented that it is unable to evaluate
the probability of a favorable or unfavorable outcome nor to estimate the range
of loss, if any, in these cases. Accordingly, no provision for any liability
that may result has been made in the accompanying consolidated financial
statements.
14. 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 flow using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Other Assets: Other assets primarily represent officer's life insurance
policies recorded at its cash surrender value which approximates its fair
value.
Deferred revenues: The carrying value approximates fair value because of the
short maturity of the deferred maintenance contracts.
Long and short term debt: The carrying amounts of the borrowings under
short-term revolving credit agreements approximates 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.
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Carrying Fair
Assets Amount Value
------ -----
Cash and cash equivalents $ 581,000 $ 581,000
Short Term investments 65,000 65,000
Notes receivable, related entities 2,359,000 see (a)below
Notes receivable 951,000 1,003,000
Other assets 1,060,000 1,060,000
Liabilities
Deferred revenues 1,456,000 1,456,000
Long and short term debt 7,074,000 7,074,000
a) It is not practicable to estimate the fair value of the Notes due from
related parties to the corporation because of the inability to estimate fair
value without incurring excessive costs. See Note 11-Related Party
Transactions.
15. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth unaudited quarterly financial information for
the years ended August 3, 1996 and July 29, 1995:
First Second Third Fourth
August 3, 1996
Net revenues $10,412,000 $10,142,000 $11,069,000 $17,101,000
Gross profit 3,069,000 3,207,000 3,239,000 4,739,000
Net earnings 344,000 449,000 384,000 1,105,000
Net earnings per common share .13 .16 .14 .41
July 29, 1995
Net revenues $ 9,776,000 $10,041,000 $10,451,000 $10,356,000
Gross profit 3,106,000 3,287,000 3,371,000 3,471,000
Net earnings 467,000 533,000 525,000 659,000
Net earnings per common share .17 .20 .19 .24
The fourth quarter of 1996 includes an adjustment to decrease the Company's
LIFO Reserve which increased net earnings by $222,000 or $.08 per common share.
16. INDUSTRY SEGMENT INFORMATION
The Company's principal operations have been classified into three business
segments: bar code operations, office products and printing and footwear
manufacturing. The bar code segment manufactures and sells bar code reading
and printing devices and other items related to optical data collection. The
office products and printing segment sells, provides maintenance and leases
photocopiers, facsimile and digital duplicators and operates a commercial
printing company. The footwear segment manufactures combat boots, principally
for the U.S. Government, and western and work boots. Total consolidated
revenues related to sales to the U.S. Government were 26% in 1996, 22% in 1995,
and 35% in 1994. There were no significant intersegment sales or transfers
during 1996, 1995 and 1994. 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.
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32
Office
Products Corporate
and and
(In Thousands) Footwear Bar Code Printing Other Consolidated
- -------------------------------------------------------------------------------------------
For the Year Ended August 3, 1996
Net Revenues $17,490 $15,994 $14,616 $ 624 $48,724
Earnings(loss)from
operations 2,635 947 (428) 55 3,209
Identifiable assets 14,095 6,300 9,823 9,343 39,561
Capital expenditures 37 347 884 219 1,487
Depreciation expense
and amortization 254 154 256 408 1,072
- -------------------------------------------------------------------------------------------
For the Year Ended July 29, 1995
Net Revenues $ 9,004 $17,315 $13,621 $ 684 $40,624
Earnings(loss)from
operations 1,121 2,109 78 (3) 3,305
Identifiable Assets 2,435 9,474 10,500 7,174 29,583
Capital expenditures 17 205 487 247 956
Depreciation expense
and amortization 138 146 260 263 807
- -------------------------------------------------------------------------------------------
For the Year Ended July 30,1994
Net Revenues $13,777 $13,205 $11,654 $ 818 $39,454
Earnings(loss)from
operations 2,510 1,510 250 (204) 4,066
Identifiable assets 2,166 9,447 8,640 7,883 28,136
Capital expenditures 113 717 377 461 1,668
Depreciation expense
and amortization 145 75 188 202 610
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33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) (1) Independent auditor's report
McRae Industries, Inc. and Subsidiaries consolidated financial
statements:
Consolidated Balance Sheets as of August 3, 1996 and July 29,
1995
Consolidated Statements of Operations for the Years Ended
August 3, 1996, July 29, 1995, and July 30, 1994.
Consolidated Statements of Cash Flow for the Years
Ended August 3, 1996, July 29, 1995 and July 30, 1994
Consolidated Statements of Shareholders' Equity for the Years
Ended August 3, 1996, July 29, 1995 and July 30, 1994
(2) Financial Statement Schedules:
Schedule II
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated May 10, 1996 and a Form 8-K/A
dated June 29, 1996 in connection with its acquisition of American West
Trading Company. The Form 8-K/A dated June 29, 1996 includes financial
statements of American West Trading Company for the years ended December
31, 1995 and 1994 and pro forma financial information for the nine
months ended April 27, 1996 and the twelve months ended July 29,
1995.
(c) 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 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)
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 fiscal year ended August 3, 1985)*
33
34
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 Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated August 6, 1993. (Incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-K for the fiscal year ended
July 31, 1993)
10.4 Stock Purchase Agreement as of April 7, 1996 among Walter A. Dupuis,
Kenneth O. Moore, William Glover and McRae Industries 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.
10.5 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 (Filed herein).
10.6 Deed of Trust between American West Trading Company and The Fidelity
Bank, July 25, 1996 (Filed herein).
10.7 Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
July 25, 1996 (Filed herein).
21 Subsidiaries of the Registrant (Filed herein)
23 Consent of Independent Auditors (Filed herein)
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.
34
35
SCHEDULE II.. VALUATION AND QUALIFYING ACCOUNTS
McRae Industries, Inc. and Subsidiaries.
Col. A Col. B Col. C Col. D Col.E
ADDITIONS
Description Balance at (1) (2) Deductions Balance at
Beginning of Charged to Charged to Describe End of
Period Cost and Other Period
Expenses Accounts
Describe
Year ended August 3, 1996:
Deductions from assets
accounts:
Allowance for doubtful
accounts $ 130,000 $ (56,000) $ 310,000 (1) $ 384,000
Employee benefit accrual 1,301,000 425,000 (880,000)(2) 846,000
Health insurance accrual 146,000 (40,000) 86,000 (2) 192,000
Year ended July 29,1995:
Deducted from assets
accounts:
Allowance for doubtful
accounts: $ 116,000 $ 47,000 $ 61,000 (1) $ 130,000
Employee benefit accrual 1,290,000 725,000 (714,000)(2) 1,301,000
Health insurance accrual 195,000 753,000 (802,000)(2) 146,000
Year ended July 30, 1994
Deducted from assets
accounts:
Allowance for doubtful
accounts $ 70,000 $ 90,000 $ (44,000)(1) $ 116,000
Employee benefit accrual 1,053,000 850,000 (613,000)(2) 1,290,000
Health insurance accrual 125,000 935,000 (865,000)(2) 195,000
(1) Uncollectible accounts written off
(2) Payments and/or expenses charged to operations
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36
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 31, 1996 By: /s/ B. J. McRae
---------------------
B.J 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/ B. J. McRae October 31, 1996
- ---------------
President and Director
(Principal Executive Officer)
/s/ George M. Bruton
- --------------------
George M. Bruton October 31, 1996
Director
/s/ Hilton Cochran
- -----------------
Hilton Cochran October 31, 1996
Director
/s/ James W. McRae
- ------------------
James W. McRae October 31, 1996
Vice President, Secretary and Director
/s/ Victor A. Karam
- ------------------
Victor A. Karam October 31, 1996
Vice President of Footwear and Director
/s/ D. Gary McRae
- -----------------
D. Gary McRae October 31, 1996
First Vice President, Treasurer and Director
/s/ Harold W. Smith
- -------------------
Harold Smith October 31, 1996
Vice President of McRae Graphics and Director
/s/ Marvin G. Kiser, Sr.
- ------------------------
Marvin G. Kiser October 31, 1996
Controller
(Principal Financial and Accounting Officer)
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37
Exhibit Index
3.1 Certificates 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 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).
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 Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated August 6, 1993. (Incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-K for the fiscal year ended
July 31, 1993).
10.4 Stock Purchase Agreement and Guaranty Agreement as of April 7, 1996 among
Walter A. Dupuis, Kenneth O. Moore, William Glover and McRae Industries
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.
10.5 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
(Filed herein).
10.6 Deed of Trust between American West Trading Company and The Fidelity
Bank, July 25, 1996 (Filed herein).
10.7 Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
July 25, 1996 (Filed herein).
21 Subsidiaries of the Registrant (Filed herein).
23 Consent of Independent Auditors (Filed herein).
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 the purpose of Section 11 of the Securities Act of 1993 or
Section 18 of the Securities Exchange Act of 1934).
37