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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 1, 1998
COMMISSION FILE NUMBER: 1-8578
MCRAE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 56-0706710
(State of Incorporation) (I.R.S. Employer Identification No.)
400 NORTH MAIN STREET, MOUNT GILEAD, NORTH CAROLINA 27306
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (910)439-6147
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock, $1 Par Value American Stock Exchange
Class B Common Stock, $1 Par Value American Stock Exchange
Securities Registered Pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment of
this Form 10-K. [ ]
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 21, 1998 was
approximately $5,940,000 and $1,870,000, respectively. On October 21, 1998,
1,819,728 Class A shares and 948,771 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 17, 1998 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 related
printing devices; manufacturing and selling military combat boots, western and
work boots; selling, leasing, and servicing office equipment; and commercial
printing.
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 94% owned
subsidiary. Compsee markets, sells, and services its products directly through
sales centers located throughout the United States. Compsee also sells its
products in Central and South America, Europe, Australia, the Middle East, and
the Pacific Rim countries through foreign distributors. Compsee's export sales
were 1% of the Registrant's consolidated net revenues for each of the last
three fiscal years.
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. This product was well received in the market and provided 13% and
8% of Compsee sales for fiscal 1998 and 1997, 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.
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 competitors in the
industry include Percon, Unitech, UBI, and Handheld Products.
Net revenues derived from this segment in fiscal 1998, 1997, and 1996 were 28%,
27%, and 33% of the Registrant's consolidated net revenues, respectively.
QuickReaders and QuickLink bar code readers developed and marketed by Compsee
accounted for 12%, 25%, and 18% of Compsee's net revenues and for 3%, 7%, and
6%, respectively, of the Registrant's consolidated net revenues during fiscal
1998, 1997, and 1996. There was no significant backlog of firm orders for this
segment at August 1, 1998.
FOOTWEAR MANUFACTURING
The Registrant's footwear manufacturing operations include the manufacture and
sale of military combat boots, military dress oxfords, military safety boots,
western 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 Trading Company
(American West) which manufactures western boots, work boots, military dress
oxfords, and military safety boots.
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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, of which the Registrant is one.
The Registrant is currently in the second year of the most recent contract
awarded by the Government in April 1997 (the Contract). The Contract provides
for a base year and four one year extensions which may be exercised by the
Government at its sole discretion for the purchase of additional option
quantities of military combat boots. The current option period will expire in
April 1999. There can be no assurances that the Government will exercise the
subsequent renewal options under the Contract or that the Registrant would be
successful in any solicitation of another contract with the Government upon
termination of the current Contract.
No one company dominates the Government military boot industry. Price, quality,
manufacturing efficiency, and delivery are the areas emphasized by the
Registrant to strengthen its competitive position. The Registrant also sells
boots to civilian and other military customers including other countries.
Military boot sales to the U.S. Government were $9.1 million, $11.5 million,
and $12.8 million, for fiscal 1998, 1997, and 1996, respectively, under the
current and predecessor contracts.
The Registrant's contracts with the Government are subject to partial or
complete termination under certain specified circumstances including, but not
limited to, the following: for the convenience of the Government, for the lack
of funding, and for the Registrant's actual or anticipated failure to perform
its contractual obligations. If a contract is partially or completely
terminated for its convenience, the Government may negotiate a settlement with
the Registrant to cover costs already incurred. The Registrant has never had a
contract either partially or completely terminated.
Leather and synthetic rubber, which have been and currently are generally
available from several sources, are the principal material components used in
the boot manufacturing process. Pursuant to Government contracts for military
combat boots, all materials used in manufacturing these boots must be and are
produced in the United States and must be certified as conforming to military
specifications.
The Registrant has a technical assistance agreement with Ro-Search, Inc., a
subsidiary of Wellco, Inc., a competitor to which the Registrant pays a fee for
each pair of Direct Molded Sole boots it produces.
American West designs, manufactures, sells, and distributes western and work
boots for men and women who wear boots for work and everyday activities,
including casual wear. American West 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.
In addition to the western and work boot product lines, American West began
producing two new styles of military footwear (military dress oxfords and
military safety shoes) in fiscal 1997. Net revenues from military sales from
American West amounted to approximately $3.1 million and $750,000 in fiscal
1998 and 1997, respectively, and are in addition to military combat boot sales
under the Contract described above.
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During fiscal 1997, American West consolidated its manufacturing operation by
combining all manufacturing operations at the Waverly facility. The Dresden
location continues to provide storage, warehouse and shipping functions. The
"upper" parts of boots produced at American West are constructed from leather
and/or synthetic material and the sole and heels consist of either leather,
rubber and 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 and dominated by
approximately six to eight major companies. Texas/Larado and Hats/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 ranged
priced boots where competition is principally based on price and product
quality.
American West coordinates its manufacturing and inventory according to the
seasonality of its business which tends to have higher sales occurring
generally in the fall and winter months. American West contributed $10.9
million and $12.9 million, or 18% and 22%, in consolidated net revenues for
fiscal 1998 and 1997, respectively. During the three months following the
acquisition of American West in fiscal 1996, American West contributed $4.2
million or 9% of the Registrant's consolidated net revenues in fiscal 1996.
Prior to its acquisition, American West had sales of $18.7 million for its
fiscal year ending December 31, 1995. Sales to Walmart were $3.4 million and
$4.1 million for fiscal 1998 and 1997, respectively.
The Registrant's backlog of firm orders for military combat boots and shoes at
August 1, 1998 and August 2, 1997 totaled approximately $5,000,000 (all of
which is expected to be filled during the current fiscal year) and $7,700,000,
respectively. The backlog of firm orders for western and work boots at August
1, 1998 totaled approximately $181,000 (all of which is expected to be filled
during the current year).
Net revenues derived from this segment in fiscal 1998, 1997, and 1996 were 37%,
43%, and 36%, respectively, of the Registrant's consolidated net 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 and
parts of Virginia and South Carolina. Graphics operates eight 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 sold by Graphics during fiscal 1998 are
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 materials 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.
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Net revenues derived from this segment during fiscal 1998, 1997, and 1996 were
35%, 29%, and 30%, respectively, of the Registrant's consolidated net revenues.
There was no significant backlog of firm orders for this segment at August 1,
1998.
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 discontinued its direct operation in the food and lodging
industry during fiscal 1997 by leasing the 24 room motel and adjacent 200 seat
family style restaurant in Troy, North Carolina to independent third parties.
In July 1998, the Registrant agreed to cancel the lease with the restaurant
tenant and is currently interviewing for a replacement tenant.
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.
EMPLOYMENT
As of August 1, 1998, the Registrant employed approximately 491 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 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 the principal facilities of the Registrant and its subsidiaries, all of
which are owned by the Registrant and/or its subsidiaries.
LOCATION PRINCIPAL USE SIZE
-------- ------------- ----
400 North Main Street Corporate headquarters, 71,000 square
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. Compsee sales office 5,250 square
Palm Bay, Florida feet
Highway 109 North Footwear warehouse 3,500 square
Mt. Gilead, N.C. feet
Highway 109 Printing warehouse 11,200 square
Richmond County, N.C. feet
Highway 24-27 Footwear manufacturing and 35,000 square
Troy, N.C. warehousing feet
Highway 109 North Footwear storage 4,800 square
Mt. Gilead, N.C. feet
111 Main Street Printing operation 11,520 square
Mt. Gilead, N.C. feet
601 E. Railroad Street Footwear manufacturing 71,520 square
Waverly, TN feet
100 Hillcrest Street Footwear storage and warehouse 76,720 square
Dresden, TN 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 August 1, 1998 that is being
held for investment purposes.
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 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 21, 1998, there
were approximately 466 record holders of the Registrant's Class A Common Stock
and approximately 413 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 1998 FISCAL 1997
-------------------------- -------------------------
CASH CASH
SALES PRICE DIVIDENDS SALES PRICE DIVIDENDS
QUARTER HIGH LOW DECLARED HIGH LOW DECLARED
- ------- ---- --- --------- ------ ----- ---------
First $10.25 $8.63 $.0900 $ 8.00 $7.38 $.0875
Second 9.38 7.56 .0900 10.13 8.00 .0900
Third 8.13 6.88 .0900 9.63 7.50 .0900
Fourth 8.25 6.69 .0900 9.13 7.38 .0900
CLASS B COMMON STOCK:
FISCAL 1998 FISCAL 1997
SALES PRICE SALES PRICE
QUARTER HIGH LOW HIGH LOW
- ------- ------ ----- ------ ------
First $10.00 $8.50 $ 7.63 $7.00
Second 9.13 7.63 10.13 8.25
Third 7.75 7.50 9.25 7.50
Fourth 7.75 7.25 8.75 7.13
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 Registrant
acquired the stock of American West Trading Company (American West) on April
30, 1996. The results of the Registrant include the results of American West as
of April 30, 1996, the date of its acquisition. The Selected Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto, "Management's Discussion and Analysis of
Financial Conditions and Results of Operations", and the other financial data
included elsewhere herein.
FISCAL YEAR ENDED 8-1-98 8-2-97 8-3-96 7-29-95 7-30-94
------------ ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Net revenues $ 60,087,000 $58,480,000 $48,724,000 $40,624,000 $39,454,000
Net earnings 2,265,000 2,339,000 2,282,000 2,184,000 2,633,000
Net earnings,
per common share: 0.82 0.85 0.84 0.80 0.97
------------ ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Total assets $ 40,457,000 $39,725,000 $39,561,000 $29,583,000 $28,136,000
Long-term liabilities 5,594,000 5,854,000 6,285,000 -0- -0-
Working capital 21,408,000 18,412,000 16,953,000 12,306,000 12,639,000
Shareholders' equity 27,784,000 26,174,000 24,364,000 22,669,000 21,101,000
Weighted average
number of common
shares outstanding(a) 2,768,499 2,761,825 2,731,334 2,731,210 2,729,710
Cash dividends
declared per common
share(b) $ 0.36 $ 0.36 $ 0.35 $ 0.35 $ 0.345
------------ ----------- ----------- ----------- -----------
(a) Includes both Class A and Class B Common Stock
(b) Dividends were paid only on Class A Common Stock
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS SEGMENTS
The Company has four primary business units: the bar code unit operates under
the name Compsee, Inc. (Compsee); the office products unit operates under the
name McRae Graphics, Inc. (McRae Graphics); the footwear unit operates under
the names McRae Footwear and American West Trading Company; and the commercial
printing unit operates under the name Rae-Print, Inc. (Rae-Print). The Company
also operates other smaller businesses.
A summary of the net revenues; gross profits; selling, general and
administrative expenses; and operating profits of the major business units for
fiscal years 1996 through 1998 is presented in the following chart. Certain
reclassifications have been made to the prior year amounts to conform with the
current year presentation.
FISCAL YEAR PERCENT CHANGE FISCAL YEAR
1998 1997 1996 OVER PRIOR PERIOD 1998 1997 1996
DOLLARS (IN THOUSANDS) 1998 1997 PERCENT OF NET REVENUES
------------------------- ----------------- --------------------------
NET REVENUES
Bar Code $17,084 $15,944 $15,994 7.2 (0.3) 28 27 33
Office Products 18,051 14,857 12,802 21.5 16.1 30 25 26
Footwear 22,032 25,379 17,490 (13.2) 45.1 37 43 36
Printing 2,936 2,083 1,814 41.0 14.8 5 4 4
Eliminations/other (16) 217 624 NM NM 0 1 1
------------------------- ------- ------ --------------------------
Consolidated $60,087 $58,480 $48,724 2.7 20.0 100 100 100
GROSS PROFIT GROSS PROFIT PERCENTAGE
--------------------------
Bar Code $ 6,254 $ 6,400 $ 6,383 (2.3) .3 37 40 40
Office Products 5,934 4,696 4,232 26.4 11.0 33 33 33
Footwear 3,099 4,424 3,744 (30.0) 18.2 14 17 21
Printing 305 217 186 40.5 16.7 10 10 10
Eliminations/other (92) (126) (291) NM NM
------------------------- ------- ------ --------------------------
Consolidated $15,500 $15,611 $14,254 (.7) 9.5 26 27 29
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES PERCENTAGE OF NET REVENUES
--------------------------
Bar Code $ 5,324 $ 5,071 $ 5,436 5.0 (6.7) 31 32 34
Office Products 4,394 4,288 4,637 2.5 (7.5) 24 31 36
Footwear 1,904 2,202 986 (13.5) 123.3 9 9 6
Printing 219 199 209 10.1 (4.8) 7 10 12
Eliminations/other 41 6 (356) NM NM
------------------------- ------- ------ -------------------------
Consolidated $11,882 $11,766 $10,912 1.0 7.8 20 21 22
OPERATING PROFIT PERCENTAGE OF NET REVENUES
--------------------------
Bar Code $ 930 $ 1,329 $ 947 (30.0) 40.3 5 8 6
Office Products 1,540 408 (405) 277.5 200.7 9 3 (3)
Footwear 1,195 2,222 2,758 (46.2) (19.4) 5 9 16
Printing 86 18 (23) 377.8 178.3 3 1 (1)
Eliminations/other (133) (132) 65 NM NM
------------------------ ------- ------ --------------------------
Consolidated $ 3,618 $ 3,845 $ 3,342 (5.9) 15.1 6 7 7
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CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net revenues for the Company reached $60.1 million, a 2.7%
increase over the record net revenues recorded for fiscal 1997. The increase in
net revenues was primarily attributable to the office products unit which
contributed a $3.2 million increase over net revenues for fiscal 1997. The bar
code and printing units contributed $1.1 million and $853,000, respectively, to
the increase in consolidated net revenues for fiscal 1998. These increases were
partially offset by the footwear unit, which posted a 13.2% decrease, or $3.3
million, in net revenues from fiscal 1997.
Gross profit for fiscal 1998 amounted to $15.5 million, down $111,000 from the
amount reported in fiscal 1997. Gross profit as a percent of net revenues also
declined from 27% to 26%. The bar code and footwear units were primarily
responsible for the decline in gross profit with each unit reporting a 3% drop
in gross profit percent from the level reported for fiscal 1997. The lower
margins primarily resulted from competitive price pressures in the bar code
unit and higher unit costs associated with reduced footwear production levels.
Selling, general and administrative (SG&A) expenses increased by $116,000, or
1%, over the 1997 percentage primarily due to increased expenditures for
research and development, professional services, and employee benefits. The
higher costs were partially offset by cost reductions in group health and life
insurance, royalties, and bad debt write-offs.
Consolidated operating profit declined from $3.8 million in fiscal 1997 to $3.6
million in fiscal 1998 primarily due to lower operating profit from the bar
code and footwear units which was partially offset by increases in operating
profit in the office products and printing units. Total operating profit as a
percentage of net revenues was 6% for fiscal 1998, a decline from 7% for fiscal
1997.
BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 1998 COMPARED TO FISCAL 1997
Compsee is a manufacturer and distributor of "hi-tech" bar code reading and
printing devices and other peripheral equipment and supplies related to optical
data collection. Compsee is a global company and continues to seek new markets
throughout the United States and other parts of the world.
Net revenues for fiscal 1998 were $17.1 million, an increase of 7.2% over
fiscal 1997, primarily as a result of the introduction in fiscal 1998 of a
"system" sales strategy and an increased contribution by its portable
manufactured products. Price pressures in the highly competitive bar code
industry, however, continued to suppress gross profit margins which declined
from 40% in fiscal 1997 to 37% for fiscal 1998. SG&A expenses in fiscal 1998
amounted to $5.3 million, a 5% increase over fiscal 1997 and was primarily
attributable to increased research and development expenditures in fiscal 1998.
As a percentage of net revenues, however, SG&A expenses decreased from the 32%
in fiscal 1997 to 31% in fiscal 1998 primarily as a result of lower sales
salaries and commissions, group life and health insurance costs, advertising
and marketing expenses, and corporate allocations. Lower profit margins coupled
with higher R&D expenditures resulted in a 30.0% decrease in operating profit
for fiscal 1998.
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OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 1998 COMPARED TO FISCAL 1997
McRae Graphics distributes Toshiba photocopiers, Toshiba facsimile machines,
and RISO digital printing equipment throughout the state of North Carolina and
parts of Virginia and South Carolina. McRae Graphics also provides service and
supplies for these products.
Net revenues for the business unit reached $18.1 million, a 21.5% increase over
the net revenues reported for fiscal 1997. The increase was primarily
attributable to strong demand for office products and to continued placement of
equipment in large county-wide educational systems. Gross profit as a percent
of related net revenues for fiscal 1998 was 33%, consistent with the levels
reported for the past two fiscal years. SG&A expenses increased slightly in
fiscal 1998 as compared to fiscal 1997, but as a percentage of net revenues
declined from 31% in fiscal 1997 to 24% in fiscal 1998 as higher sales salaries
and commissions were partially offset by reduced expenditures for group life
and health insurance, administrative salaries, telephone expenses, and
corporate allocations. Operating profits reached $1.5 million in fiscal 1998, a
278% increase over operating profits for fiscal 1997.
FOOTWEAR UNIT RESULTS OF OPERATIONS, FISCAL 1998 COMPARED TO FISCAL 1997
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 while the western and
work boot products are for dress and casual wear for men and women.
Net revenues for the footwear unit decreased from $25.4 million for fiscal 1997
to $22.0 million in fiscal 1998 primarily due to lower footwear requirements of
the U.S. Government and to a soft western and work boot market. Gross profit as
a percentage of related net revenues fell from 17% in fiscal 1997 to 14% in
fiscal 1998 primarily as a result of higher unit costs of factory overhead
associated with lower production levels. These higher unit costs were offset by
reduced workforce levels in late fiscal 1997 and at various times during fiscal
1998. During fiscal 1998, the work force of the footwear unit was reduced by
104 full time employees. As of August 1, 1998, the unit employed 208 employees.
SG&A expenses were down approximately $300,000 attributable to lower selling
and administrative salaries, royalties, and bad debt expenses. Operating
profits for this business unit were down approximately $1.0 million as compared
to fiscal 1997.
The Company recently received notification from the Government that it intends
to exercise its option to extend the Contract for a third year to cover the
period from April 1999 to April 2000 which, at a minimum, is 24% higher than
the amount awarded for the twelve months ending in April 1999. The Company is
currently in the second 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 optional quantities of military
combat boots. The current option will expire in April 1999. There can be no
assurances that the Government will exercise the subsequent renewal option
under the Contract or that the Company would be successful in any solicitation
of another contract with the Government upon termination of the current
Contract.
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OTHER BUSINESS UNIT RESULTS OF OPERATIONS, FISCAL 1998 COMPARED TO FISCAL 1997
Net revenues for the printing unit increased 41% compared to net revenues for
fiscal 1997 as demand for printed material increased. Gross profit as a percent
of related net revenues remained unchanged at 10%. SG&A expenses as a percent
of net revenues continued to decline from 10% in fiscal 1997 to 7% in fiscal
1998. Higher net revenues and lower SG&A expenditures resulted in a 378%
increase in operating profit for the current fiscal year compared to fiscal
1997.
CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 1997 COMPARED TO FISCAL 1996
The Registrant's consolidated net revenues reached a record high of $58.5
million for fiscal 1997 as compared to $48.7 million for fiscal 1996. The 20.0%
increase in net revenues for fiscal 1997 was largely attributable to the
footwear unit which reported an increase in net revenues of 45% over results
for fiscal 1996. The acquisition of American West, on April 30, 1996
contributed $12.9 million in net revenues for fiscal 1997, accounting for $8.7
million of the total increase, as compared to a three month contribution to net
revenues of $4.2 million for fiscal 1996. The contribution from American West
to the increase in the consolidated net revenues was slightly offset by a
decline of $700,000 in the sales of military combat boots, a decrease of 6%, as
a result of the completion of one military boot contract and the U. S.
Government's delay in awarding a new military boot contract from December 1996
to April 1997. The office products and printing units contributed $2.1 million
and $269,000, respectively, to the increase in consolidated net revenues while
the bar code unit's net revenues remained relatively flat between fiscal 1996
and fiscal 1997.
Gross profit increased $1.6 million in fiscal 1997 primarily due to the
increase in net revenues. Gross profit as a percentage of net revenues,
however, declined from fiscal 1996 primarily as a result of the increasing
contribution on a consolidated basis of the western and work boot product line
which typically carries a smaller profit margin than the Registrant's other
product lines. Profit margins in fiscal 1997 for the other business segments
were consistent with profit margin levels for fiscal 1996.
Selling, general and administrative (SG&A) expenses on a consolidated basis
continued to decline as a percentage of net revenues from 22% in fiscal 1996 to
21% in fiscal 1997. Each of the primary business units, except for the footwear
segment, posted declines in total dollars spent on SG&A due to lower
expenditures for employees benefits, administrative salaries, health care, and
professional fees. SG&A expenses for the footwear unit increased $1.2 million
over fiscal 1996 primarily as a result of the additional expenses associated
with the western and work boot product line which was acquired in April 1996.
Total operating profit for fiscal 1997 increased 15.1% over the results posted
for fiscal 1996 primarily due to increased operating profit from the bar code
and office products units slightly offset by a decline in the footwear unit.
Total operating profit for fiscal 1997 as a percentage of consolidated net
revenues remained flat at 7% primarily due to an increase in revenue from lower
margin products which was offset by cost containment and increased operating
efficiencies.
12
13
BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues for fiscal 1997 were $15.9 million, down 0.3% compared to fiscal
1996, primarily due to increased competition from new entrants in the industry
and related pricing pressures. The slight decline in net revenue was more than
offset by effective cost containment and reduced SG&A expenses primarily due to
lower telephone expense, professional fees, and corporate charges resulting in
an increase of $382,000 in operating profit for the business unit.
OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues for the business unit climbed to a record level of $14.9 million
for fiscal 1997, a 16% increase over the $12.8 million reported for fiscal 1996
due primarily to the placement of equipment in several county-wide educational
systems. Gross profit grew to $4.9 million, an approximate 17% increase over
the fiscal 1996 level of $4.2 million and remained flat as a percent of net
revenues. SG&A expenses decreased in fiscal 1997 due primarily to lower
administrative salaries, health care costs, and advertising expenditures.
Increased revenues and reduced SG&A expenses resulted in increased operating
profits of $408,000 in fiscal 1997 as compared to an operating loss of $405,000
in fiscal 1996.
FOOTWEAR UNIT RESULTS OF OPERATIONS, FISCAL 1997 COMPARED TO FISCAL 1996
The footwear business unit manufactures and distributes military combat boots
and western and work boots. In response to a decline in military boot orders by
the Defense Department, this business began producing boots for other markets
in fiscal 1995. Shipments on a 1993 U.S. Government contract were completed in
December, 1996. A new U.S. Government contract covering a five year period was
awarded to the Company on April 15, 1997. The Contract provides for an initial
one year term with four one year renewal periods which may be exercised at the
sole discretion of the Government. The western and work boot product line was
added with the acquisition of American West in April 1996. American West is a
manufacturer of high quality, low cost western and work boots for dress and
casual wear for men, women, and children. During fiscal 1997, American West
also produced military boots.
Net revenues for the footwear segment increased $7.9 million, up 45% from
fiscal 1996. The western and work boot product line contributed 51% of the
unit's total net revenues for fiscal 1997 as compared to 24% in fiscal 1996 due
to the inclusion of the product line for a full, twelve months of operations in
the current fiscal year versus three months for the previous fiscal year. Gross
profit as a percentage of net revenues decreased due to the increasing
proportion of the lower margin western and work boot product line to the total
product mix of the footwear segment. SG&A expense increased primarily due to
the inclusion of the western and work boot product line for an entire year in
fiscal 1997 and the consolidation of the manufacturing of this product line as
described below. Operating profit decreased due to lower margins and higher
support costs associated with the western and work boot product line and the
decrease in net revenues from the sales of military combat boots. In an effort
to bolster future operating profit from this business unit, American West
consolidated its manufacturing at the Waverly, Tennessee plant. The Dresden
facility continues to provide storage, warehousing, and distribution support.
The Registrant expects this consolidation to lower manufacturing and overhead
costs through greater production efficiencies and economies of scale; however,
there can be no assurances that such costs will be lowered. As a result of the
consolidation, employment during fiscal 1997 decreased by approximately 100
employees.
13
14
OTHER BUSINESS UNIT RESULTS OF OPERATIONS, FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues for the printing unit in fiscal 1997 increased 15% over fiscal
1996. Gross profit kept pace with the fiscal 1996 level as high paper and scrap
costs continued to depress profit margins. SG&A expense was down slightly from
the fiscal 1996 level due to lower selling costs and corporate expenses. This
unit posted a small operating profit due to increased revenues and decreased
SG&A expenses.
FINANCIAL CONDITION
The Registrant continued to have a strong financial position at August 1, 1998.
Working capital increased from $18.4 million at the end of fiscal 1997 to $21.4
million at fiscal 1998 year end.
Operating activities provided positive cash flow of approximately $1.6 million.
Earnings from operations, adjusted for depreciation and amortization,
contributed a $3.8 million in positive cash flow. The increase in cash flow was
partially offset by an increase in accounts receivable of approximately $2.8
million primarily attributable to billing and collection timing differences
related to the fourth quarters of fiscal 1998 and fiscal 1997. Inventory levels
for fiscal 1998 fell by approximately $450,000 as the market for footwear
products military combat boots and western and work boots - continued to
decline. Increases in accounts payable and income taxes accounted for an
increase in cash of approximately $500,000 as payment of normal trade accounts
and fourth quarter income taxes were made after year end.
The Registrant made capital expenditures for fiscal 1998 of $1.7 million
primarily for the acquisition of rental machines for the office products unit,
a new corporate telephone system, and various office and manufacturing
equipment. Payments from related parties amounted to approximately $2.0 million
with almost $1.6 million coming from the estate of the former president to
settle amounts due the Registrant attributable to the automobile dealership.
Net collections on long term receivables produced positive cash flow of almost
$400,000 as the Registrant's financing and leasing unit discontinued financing
vehicles for the automobile dealership. The Registrant used $220,000 of cash to
increase its ownership in the bar code unit from 92% to 94% and $213,000 for
investments in land and split dollar life insurance polices.
The Registrant's primary sources of liquidity at August 1, 1998, in addition to
continuing profitable operations, consisted of cash, cash equivalents, and
short term investments totaling approximately $5.8 million and $2.75 million in
two lines of credit, all of which was available at year end. 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 1999.
ENVIRONMENTAL MATTERS AND INFLATION
The Registrant is subject to various laws and regulations concerning
environmental matters and employee safety and health. The Registrant has been
able to comply with such laws and regulations with no material adverse effect
on its business. In the opinion of management, the Registrant is not in
violation of any environmental laws or regulations that would have a material
adverse effect on the financial condition of the Registrant.
The Registrant does not believe inflation has had a material impact on sales or
operating results for the periods covered in this discussion.
14
15
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" was issued. SFAS No. 128 requires disclosures of "basic"
and "diluted" earnings per share where potential common stock may be issued in
the future. SFAS No. 128 is effective for the Registrant for periods ending
after December 15, 1997. Since the Registrant has no diluted instruments, only
basic earnings per share information is disclosed.
Also in February 1997, SFAS No. 129, "Disclosures of Capital Structure", was
issued. SFAS No. 129 requires information about capital structure to be
disclosed in three separate categories information about securities,
liquidation preference of preferred stock, and redeemable stock. SFAS No. 129
is effective for the Registrant's fiscal periods ending after December 15,
1997. The Registrant is in compliance with this reporting requirement.
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", was issued. SFAS No. 130 requires disclosures of
comprehensive income (which is defined as "the change in equity during a period
excluding changes resulting from investments by stockholders and distributions
to stockholders") and its components. SFAS No. 130 will be effective for the
Registrant beginning with the fiscal year ending July 31, 1999, and requires
reclassification of comparative years. Comprehensive income would not be
significantly different from net income during the three years ended August 1,
1998.
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. SFAS No. 131 will
be effective for the Registrant for the fiscal year ending July 31, 1999.
Management is evaluating the effect of SFAS No. 131 on the Registrant's future
disclosures.
YEAR 2000 ISSUES
Many computers and software programs were designed to accommodate only
two-digit date fields to represent a given year (e.g. "98" represents 1998). It
is possible that such systems will not be able to accurately process data
containing information related to the calendar year 2000 or later. The "year
2000 issue" has the potential to affect the Registrant through the failure to
process business transactions both at the Registrant and between the Registrant
and its business partners. In addition, claims to cover costs associated with
the issue may be asserted against insurance contracts in which the Registrant
participates.
In April 1998, the Registrant designated "a year 2000 team" consisting of the
chief executive officer, the principal financial and accounting officer and the
manager of information systems. A Year 2000 (Y2K) Plan was developed,
communicated to the board of directors and senior management, and implemented.
The Y2K plan is designed to (i) assess compliance of internally used computer
hardware and software programs; (ii) determine compliance issues with
infra-structure systems such as telephone systems, production line equipment,
shipping systems, and facility heating and air conditioning equipment; (iii)
conduct Y2K compliance surveys with mission critical business partners to
include major customers and suppliers of goods and services; (iv) implement
appropriate testing procedures to measure actual compliance; and (v) develop
and institute contingency plans to mitigate any unforeseen Y2K issues.
15
16
The Registrant has reviewed virtually all of its internally used computer
hardware and software for year 2000 compliance. Non-compliant hardware has
either been replaced, scheduled for replacement, or placed in non-mission
critical functions. The critical computerized business systems utilized by the
Registrant are primarily based on software products licensed from third parties
that specialize in software development. These software vendors indicate that
their products will be made compliant on a timely basis. In addition to
purchased software, there are some program applications that have been
developed internally. These programs are being assessed and those deemed to be
critical to the business will be modified or replaced.
While the Registrant believes that its computer hardware, licensed software,
and internally generated software critical to its business will be compliant on
a timely basis, there can be no assurance that every such product will be
compliant on a timely basis and there can be no assurance that there will be no
material disruption to the Registrant's business if such products are not
compliant. The Registrant believes that the actual expenses involved in making
the internal processing system year 2000 compliant will not be material when
completed.
The Registrant is in the process of surveying its mission critical business
partners who provide goods and services. As a result, a thorough assessment of
any significant barriers to year 2000 compliance has not been completed. Final
assessment and development of any related contingency plans to prevent a
material disruption in the Registrant's business is scheduled for completion by
December 31, 1998. The costs associated with this phase of the plan are being
expensed as incurred and are not expected to be material. Because the
Registrant relies on the business activities of its many business partners to
be year 2000 compliant, there can be no assurance that there will not be a
material disruption to the Registrant's business or an increase in the cost of
doing business.
The Registrant expects to utilize calendar 1999 to continue its evaluation
efforts regarding all phases of year 2000 compliance. Pertinent contingency
plans will be developed based on substantive determination that year 2000
non-compliance situations exist which could be disruptive and costly to the
Registrant's business activities in the year 2000 and beyond.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report includes certain
forward-looking statements as such term is defined in Section 27A of the
Securities Act and Section 21E of the Exchange Act. These forward-looking
statements involve certain risks and uncertainties, including but not limited
to acquisitions, additional financing requirements, development of new products
and services, the effect of competitive products and pricing, risks unique to
selling goods to the Government (including termination of the Contract), and
the effect of general economic conditions, that could cause actual results to
differ materially from those in such forward-looking statements.
16
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
PAGE
----
1. INDEPENDENT AUDITOR'S REPORT 18
2. MCRAE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS:
Consolidated Balance Sheets as of August 1, 1998 and August 2, 1997 19-20
Consolidated Statements of Operations for the Years Ended August 1, 1998,
August 2, 1997, and August 3, 1996 21
Consolidated Statements of Shareholders' Equity for the Years Ended
August 1, 1998, August 2, 1997, and August 3, 1996 22
Consolidated Statements of Cash Flows for the Years Ended August 1, 1998,
August 2, 1997, and August 3, 1996 23
Notes to Consolidated Financial Statements 24-36
3. FINANCIAL STATEMENT SCHEDULE:
Schedule II 37
Schedules other than those listed above have been omitted because they are not
applicable or the required information is shown in the financial statements of
the notes thereto.
17
18
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 1, 1998, and August 2, 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended August 1, 1998, and the
financial statement schedule listed under Item 8. These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and schedule
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of McRae Industries,
Inc. and subsidiaries as of August 1, 1998, and August 2, 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended August 1, 1998, 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 5, 1998
NationsBank Plaza, Suite 2500
Charlotte, North Carolina 28280
Telephone 704-377-0220 Telefax 704-377-7612
Certified Public Accountants
18
19
CONSOLIDATED BALANCE SHEETS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
AUGUST 1, AUGUST 2,
1998 1997
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,766,000 $ 5,473,000
Marketable securities (Note 3) 63,000 64,000
Accounts receivable, less allowances for
doubtful accounts of $567,000 and
$606,000, respectively (Note 7) 9,108,000 6,306,000
Notes receivable, current portion
Employees 96,000 129,000
Other 264,000 275,000
Inventories (Notes 4 and 7) 11,468,000 11,924,000
Net investment in capitalized leases,
current portion (Note 5) 786,000 866,000
Prepaid expenses and other current assets 242,000 203,000
----------- -----------
Total current assets 27,793,000 25,240,000
Property, plant and equipment, net (Notes 6 and 7) 6,360,000 6,409,000
Other assets:
Notes and accounts receivable, related
entities (Notes 12 and 13) 965,000 2,676,000
Net investment in capitalized leases,
net of current portion (Note 5) 1,939,000 1,808,000
Notes receivable, net of current portion
Employees 249,000 318,000
Other 749,000 1,045,000
Real estate held for investment 494,000 486,000
Goodwill (Note 2) 589,000 629,000
Other 1,319,000 1,114,000
----------- -----------
Total other assets 6,304,000 8,076,000
----------- -----------
Total assets $40,457,000 $39,725,000
----------- -----------
See notes to consolidated financial statements
19
20
CONSOLIDATED BALANCE SHEETS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
AUGUST 1, AUGUST 2,
1998 1997
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 7) $ 798,000
Current portion of notes payable, banks (Note 7) $ 271,000 314,000
Accounts payable 2,024,000 1,802,000
Accrued employee benefits (Note 8) 550,000 601,000
Deferred revenues 1,536,000 1,517,000
Accrued payroll and payroll taxes 561,000 642,000
Income taxes (Note 9) 821,000 532,000
Other 622,000 622,000
----------- -----------
Total current liabilities 6,385,000 6,828,000
Notes payable, banks, net of current portion (Note 7) 5,594,000 5,854,000
Minority interest (Note 10) 694,000 869,000
Commitments and contingencies (Note 10)
Shareholders' equity: (Note 11)
Common stock:
Class A, $1 par value; authorized
5,000,000 shares; issued and outstanding,
1,819,728 and 1,816,332 shares, respectively 1,820,000 1,817,000
Class B, $1 par value; authorized
2,500,000 shares; issued and outstanding,
948,771 and 952,167 shares, respectively 949,000 952,000
Additional paid-in capital 791,000 791,000
Retained earnings 24,224,000 22,614,000
----------- -----------
Total shareholders' equity 27,784,000 26,174,000
----------- -----------
Total liabilities and shareholders' equity $40,457,000 $39,725,000
----------- -----------
See notes to consolidated financial statements
20
21
CONSOLIDATED STATEMENTS OF OPERATIONS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED AUGUST 1, AUGUST 2, AUGUST 3,
1998 1997 1996
------------ ------------ ------------
Net revenues $ 60,087,000 $ 58,480,000 $ 48,724,000
Cost of revenues 44,587,000 42,869,000 34,470,000
Gross profit 15,500,000 15,611,000 14,254,000
Selling, general and
administrative expenses 11,882,000 11,766,000 10,912,000
Earnings from operations 3,618,000 3,845,000 3,342,000
Other income, net 759,000 514,000 503,000
Interest expense (Note 7) (513,000) (500,000) (133,000)
Earnings before income
taxes and minority interest 3,864,000 3,859,000 3,712,000
Provision for income taxes (Note 9) 1,554,000 1,448,000 1,369,000
Minority shareholder's interest
in earnings of subsidiary (Note 10) 45,000 72,000 61,000
------------ ------------ ------------
Net earnings $ 2,265,000 $ 2,339,000 $ 2,282,000
------------ ------------ ------------
Net earnings per common share $ 0.82 $ 0.85 $ 0.84
Weighted average number of
common shares outstanding 2,768,499 2,761,825 2,731,334
------------ ------------ ------------
See notes to consolidated financial statements
21
22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
COMMON STOCK, $1 PAR VALUE
CLASS A CLASS B ADDITIONAL RETAINED
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL EARNINGS
-----------------------------------------------------------------------------------
BALANCE, JULY 29, 1995 1,778,573 1,778,000 952,637 953,000 676,000 19,262,000
Shares issued 8,289 8,000 29,000
Conversion of Class B to
Class A stock 1,424 2,000 (1,424) (2,000)
Cash dividend ($.35 per
Class A common stock) (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
Shares issued 14,500 15,000 14,500 15,000 86,000
Conversion of Class B to 13,546 14,000 (13,546) (14,000)
Class A stock
Cash dividend ($.36 per
Class A common stock) (645,000)
Net earnings 2,339,000
-----------------------------------------------------------------------------------
BALANCE, AUGUST 2, 1997 1,816,332 $1,817,000 952,167 $952,000 $791,000 $22,614,000
Conversion of Class B to
Class A stock 3,396 3,000 (3,396) (3,000)
Cash dividend ($.36 per
Class A common stock) (655,000)
Net earnings 2,265,000
-----------------------------------------------------------------------------------
BALANCE, AUGUST 1, 1998 1,819,728 $1,820,000 948,771 $949,000 $791,000 $24,224,000
-----------------------------------------------------------------------------------
See notes to consolidated financial statements
22
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED AUGUST 1, AUGUST 2, AUGUST 3,
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,265,000 $ 2,339,000 $ 2,282,000
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 1,529,000 1,610,000 1,072,000
Equity in net (income) loss of investee (101,000) (81,000) 16,000
Minority shareholder's interest in earnings
of subsidiary 45,000 72,000 61,000
Gain on sale of assets (75,000) (57,000) (171,000)
Gain on realization of officer life insurance (174,000)
Changes in operating assets and liabilities,
net of effects from purchase of subsidiaries:
Accounts receivable (2,802,000) 3,896,000 (3,389,000)
Inventories 456,000 716,000 (950,000)
Net investment in capitalized leases (51,000) 90,000 (131,000)
Prepaid expenses and other current assets (39,000) 7,000 142,000
Accounts payable 222,000 (1,095,000) (134,000)
Accrued employee benefits (51,000) (245,000) (455,000)
Deferred revenues 19,000 63,000 119,000
Accrued payroll and payroll taxes (81,000) (90,000) 40,000
Income taxes 289,000 (227,000) 406,000
Other 42,000 121,000
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)OPERATING ACTIVITIES 1,625,000 6,866,000 (971,000)
CASH FLOWS FROM INVESTING ACTIVITIES: ----------- ----------- -----------
Purchase of subsidiaries, net of cash acquired (614,000)
Proceeds from sale of property 295,000 475,000 9,000
Purchases of short term investments (71,000)
Proceeds from sale of short term investments 1,000 1,000 3,414,000
Proceeds from officers life insurance 329,000
Purchase of other assets (213,000) (220,000) (340,000)
Purchase of minority interest (220,000) (184,000)
Capital expenditures (1,660,000) (1,217,000) (1,487,000)
Advances to related parties (182,000) (316,000) (513,000)
Collections from related parties 1,994,000 80,000 422,000
Advances on notes receivable (961,000) (1,526,000) (614,000)
Collections on notes receivable 1,370,000 1,115,000 565,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 424,000 (1,279,000) 587,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing of long-term debt and notes payable 5,389,000
Net borrowings(payments) on lines of credit (798,000) 398,000 400,000
Principal repayments of long-term debt (303,000) (506,000) (4,865,000)
Proceeds from exercise of stock options and
issuance of common stock 58,000 37,000
Dividends paid (655,000) (645,000) (624,000)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,756,000) (695,000) 337,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS 293,000 4,892,000 (47,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,473,000 581,000 628,000
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,766,000 $ 5,473,000 $ 581,000
----------- ----------- -----------
See notes to consolidated financial statements
23
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
For the Years Ended August 1, 1998, August 2, 1997, and August 3, 1996
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
Investments in marketable equity and debt securities have been classified as
available for sale and as a result are stated at fair value based on quoted
market prices. Unrealized holding gains and losses, if applicable, are included
as a separate component of shareholders' equity until realized.
INVENTORIES
Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method for military boots and photocopier inventories and
using the first-in, first-out (FIFO) method for all other inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method for financial reporting purposes and
by accelerated methods for income tax purposes.
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.
24
25
Sales under long-term government contracts are recognized as revenues when the
deliveries are made. Certain orders under the current Government contract
awarded in April 1997 require the Company to manufacture and store the goods
for the Government. The Company has also recorded receivables of $367,000 at
August 2, 1997, under the Government contract's economic price adjustment
clause for increases in leather prices.
All other sales of the Company are recognized as revenues when goods are
shipped by the Company.
GOODWILL
Goodwill represents the excess of the purchase prices over the fair value of
the net assets acquired in business combinations in prior years and is being
amortized by the straight-line method over periods ranging up to 20 years. On a
periodic basis, the Company estimates the future undiscounted cash flow of the
businesses to which goodwill relates to assess that the carrying value of such
goodwill has not been impaired.
INCOME TAXES
A deferred tax asset or liability is recorded for all temporary differences
between financial and tax reporting using enacted tax rates. Deferred tax
expense (benefit) results from the change during the year of the deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of shares of common
stock outstanding during the year.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" was issued. SFAS No. 128 requires disclosures of "basic"
and "diluted" earnings per share where potential common stock may be issued in
the future. SFAS No. 128 is effective for the Company for periods ending after
December 15, 1997. Since the Registrant has no diluted instruments, only basic
earnings per share information is disclosed.
Also in February 1997, SFAS No. 129, "Disclosures of Capital Structure", was
issued. SFAS No. 129 requires information about capital structure to be
disclosed in three separate categories information about securities,
liquidation preference of preferred stock, and redeemable stock. SFAS No. 129
is effective for the Company's fiscal periods ending after December 15, 1997.
The Registrant is in compliance with this reporting requirement.
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income", was issued. SFAS No. 130 requires disclosures of
comprehensive income (which is defined as "the change in equity during a period
excluding changes resulting from investments by stockholders and distributions
to stockholders") and its components. SFAS No. 130 will be effective for the
Company beginning with the fiscal year ending July 31, 1999, and requires
reclassification of comparative years. Comprehensive income would not be
significantly different from net income during the three years ended August 1,
1998.
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26
Also in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", was issued. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. SFAS No. 131 will
be effective for the Registrant for the fiscal year ending July 31, 1999.
Management is evaluating the effect of SFAS No. 131 on the Company's future
disclosures.
RESEARCH AND DEVELOPMENT
Research and development costs related to future products are expensed in the
year incurred. Research and development expense for fiscal 1998, 1997, and 1996
were $572,000, $256,000, and $277,000, respectively.
ADVERTISING
The Company expenses advertising costs when incurred. Advertising expense
amounted to $278,000, $218,000, and $222,000 for fiscal 1998, 1997, and 1996,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements and notes thereto to conform with the current year presentation.
2. ACQUISITIONS
On April 30, 1996, the Company purchased all of the outstanding common stock of
American West Trading Company (American West). American West is a manufacturer
and distributor of western and work boots. American West sells its boots
nationwide to major retail and specialty 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. The acquisition has been accounted for as
a purchase; operations of the Company acquired have been included in the
accompanying consolidated financial statements from the respective date of
acquisition.
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
YEAR ENDED
AUGUST 3, 1996
--------------
Net Revenues $ 61,421,000
Net Earnings $ 2,291,000
Net Earnings per Share $ 0.84
26
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3. MARKETABLE SECURITIES
The following is a summary of the estimated fair market value of available for
sale securities:
1998 1997
-------- --------
Municipal Bonds $ 55,000 $ 55,000
Common Stocks 8,000 9,000
-------- --------
$ 63,000 $ 64,000
-------- --------
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 August 1, 1998 or August 2, 1997 and, as such, were not
recorded.
4. INVENTORIES
Current costs exceed the LIFO value of inventories by approximately $789,000
and $978,000 at August 1, 1998 and August 2, 1997, respectively. Year-end
inventories valued under the LIFO method were $5,251,000 and $5,015,000 at
August 1, 1998 and August 2, 1997, respectively. During fiscal year 1998, LIFO
inventory quantities were reduced resulting in a partial liquidation of the
LIFO bases, the effect of which increased net earnings by $115,000. The
components of inventory at each year end are as follows:
1998 1997
------------ ------------
Raw materials $ 2,366,000 $ 2,314,000
Work-in-process 413,000 771,000
Finished goods 8,689,000 8,839,000
------------ ------------
$ 11,468,000 $ 11,924,000
------------ ------------
5. LEASES
The Company leases photocopier products under sales-type leases. The Company's
net investment in these leases is as follows:
1998 1997
------------ -----------
Minimum lease payments receivable $ 3,197,000 $ 3,030,000
Estimated unguaranteed residual values 219,000 251,000
Unearned income (540,000) (491,000)
Allowance for doubtful accounts (151,000) (116,000)
------------ -----------
Net investment 2,725,000 2,674,000
Less: Current portion 786,000 866,000
------------ -----------
$ 1,939,000 $ 1,808,000
------------ -----------
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The scheduled maturities for the above minimum lease payments receivable at
August 1, 1998 are as follows:
FISCAL YEAR ENDING
1999 $ 1,113,000
2000 845,000
2001 601,000
2002 405,000
2003 and thereafter 233,000
-----------
Total minimum lease payments receivable $ 3,197,000
-----------
6. PROPERTY, PLANT AND EQUIPMENT
1998 1997
----------- ------------
Land and improvements $ 740,000 $ 737,000
Buildings 4,231,000 4,181,000
Machinery and equipment 7,560,000 7,178,000
Furniture and fixtures 2,949,000 2,674,000
----------- ------------
15,480,000 14,770,000
Less: Accumulated depreciation 9,120,000 8,361,000
------------ ------------
$ 6,360,000 $ 6,409,000
------------ ------------
7. NOTES PAYABLE AND LINES OF CREDIT
NOTES PAYABLE:
AUGUST 1, 1998 AUGUST 2, 1997
-------------- --------------
Note payable, bank, due in monthly installments of $56,477 including interest
at the prime rate less 0.5% through July, 2011. All of the inventory, accounts
receivable and property, plant and equipment, which originally cost $8,991,000,
of the Company's American West subsidiary are pledged as collateral. $ 5,562,000 $5,784,000
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. 303,000 322,000
Other notes payable, repaid in April, 1998 62,000
----------- ----------
5,865,000 6,168,000
Less current portion 271,000 314,000
----------- ----------
$ 5,594,000 $5,854,000
----------- ----------
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29
ANNUAL MATURITIES OF LONG-TERM DEBT ARE AS FOLLOWS:
FISCAL YEAR ENDING:
1999 $ 271,000
2000 267,000
2001 302,000
2002 326,000
2003 351,000
thereafter 4,348,000
----------
$5,865,000
----------
LINES OF CREDIT:
The Company has a $1,000,000 revolving line of credit with a bank.
Substantially all of the inventory, accounts receivable, and property, which
originally cost $8,991,000, of the Company's American West subsidiary, are
pledged as collateral. The Company had no outstanding borrowings under the line
of credit as of August 1, 1998 and $798,000 at August 2, 1997. The line of
credit provides for interest on outstanding balances to be payable monthly at
the prime rate less 0.5%.
The Company has an additional $1,750,000 line of credit with a bank. This line
is restricted to 100% of the outstanding accounts receivable due from the U. S.
Government. There were no outstanding borrowings under this line of credit as
of August 1, 1998 and August 2, 1997, respectively. The line of credit provides
for interest on outstanding balances to be payable monthly at the prime rate
less 0.5%.
Cash paid for interest during fiscal years 1998, 1997, and 1996 was
approximately $513,000, $500,000, and $133,000, respectively.
8. 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 Company had a noncontributory defined benefit pension plan covering
substantially all employees. On September 30, 1992 the Board of Directors
decided to terminate the defined benefit pension plan. The plan was settled and
all participants were provided benefits as of August 3, 1996. The plan's
actuarially determined liability as a result of the plan's termination was
$173,000, which was included in accrued employee benefits as of August 3, 1996
and was paid during the year ended August 2, 1997. 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 were invested principally
in collective funds consisting of short-term cash, fixed-income and equity
investments.
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.
29
30
In fiscal year 1997, the Company adopted 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
$205,000 and $103,000 for the years ended August 1, 1998 and August 2, 1997,
respectively.
Employee benefit program expense amounted to $491,000, $380,000, and $525,000
in 1998, 1997, and 1996, respectively. To the extent the amount of these
benefits are not disbursed, the Board may, at its sole discretion, reduce any
remaining accruals.
9. INCOME TAXES
Significant components of the provision for income taxes are as follows:
1998 1997 1996
---- ---- ----
CURRENT EXPENSE (BENEFIT)
Federal $ 1,327,000 $ 1,221,000 $1,062,000
State 302,000 276,000 276,000
----------- ----------- ----------
1,629,000 1,497,000 1,338,000
----------- ----------- ----------
DEFERRED EXPENSE (BENEFIT)
Federal (64,000) (42,000) 27,000
State (11,000) (7,000) 4,000
----------- ----------- ----------
(75,000) (49,000) 31,000
----------- ----------- ----------
$ 1,554,000 $ 1,448,000 $1,369,000
----------- ----------- ----------
The components of the provision for deferred income taxes are as follows:
1998 1997 1996
----------- ----------- ----------
Depreciation $ (64,000) $ (86,000) $ 119,000
Leasing activities 18,000 (14,000) 48,000
Accrued employee benefits (10,000) 39,000 207,000
Allowances for doubtful accounts (71,000) (55,000) (95,000)
Inventory 42,000 9,000 (123,000)
Other 10,000 58,000 (125,000)
----------- ----------- ----------
Deferred income taxes, expense
(benefit) $ (75,000) $ (49,000) $ 31,000
----------- ----------- ----------
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Deferred tax liabilities and assets at each year end are as follows:
DEFERRED TAX LIABILITIES:
1998 1997
-------- --------
Depreciation $237,000 $301,000
Leasing activities 584,000 556,000
-------- --------
Total deferred tax liabilities 821,000 857,000
-------- --------
DEFERRED TAX ASSETS:
Accrued employee benefits 138,000 128,000
Allowances for doubtful accounts 305,000 233,000
Inventory 113,000 156,000
-------- --------
Total deferred tax assets 556,000 517,000
-------- --------
Net deferred tax liabilities $265,000 $340,000
-------- --------
The reconciliation of income tax computed at the U. S. federal statutory tax
rate to actual income tax expense are (in thousands):
1998 1997 1996
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
Tax at U. S. statutory rate $1,314 34.0% $1,312 34.0% $1,262 34.0%
State income taxes, net of
federal tax benefit 244 6.3 243 6.3 154 6.3
Other - net (4) (.1) (107) (2.8) (47) (3.4)
-------------- -------------- --------------
$1,554 40.2% $1,448 37.5% $1,369 36.9%
-------------- -------------- --------------
Total income tax payments during fiscal years 1998, 1997 and 1996 were
approximately $1,343,000, $1,643,000, and $958,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
The Company leases certain sales offices and equipment under non-cancelable
operating leases. Rental expenses on all operating leases were $432,000,
$519,000, and $343,000 for fiscal 1998, 1997, and 1996. The future minimum
annual rental payments under non-cancelable operating leases are as follows:
Fiscal Year Ending
1999 $237,000
2000 165,000
2001 128,000
2002 112,000
2003 37,000
--------
$679,000
========
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MINORITY INTEREST
The Company has entered into a restrictive stock agreement with the minority
shareholder of its majority owned subsidiary. Under the terms of the agreement,
the Company has the right of first refusal to purchase at any time any shares
representing the minority interest in the subsidiary at a defined book value of
said shares. The minority shareholder has the right to sell twenty percent of
his shares per year to the Company, at the defined book value of such shares,
provided the minority shareholder remains employed by the subsidiary.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments,
receivables, and capitalized leases. The Company maintains substantially all of
its cash and certificates of deposits with various financial institutions in
amounts which are in excess of the federally insured limits. Management
performs periodic evaluations of the relative credit standing of those
financial institutions.
Concentrations of credit risk with respect to receivables and capitalized
leases are limited due to the large number of entities comprising the Company's
customer base and their dispersion across many different industries. The
Company does not require collateral on trade accounts receivable. As of August
1, 1998, eleven customers accounted for 48% of accounts receivable and three
customers accounted for 26% of net investment in capitalized leases.
OTHER
Under the terms of sale to the U.S. Government, the negotiated contract prices
of combat boots are subject to renegotiation if certain conditions are present.
Management is of the opinion that renegotiation, if any, will have no material
adverse effect on the Company's consolidated financial position or results of
operations.
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.
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33
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 1998 1997 1996
CLASS CLASS CLASS
A B A B A B
------------------------------------------------
Outstanding and exercisable at
beginning of year 0 0 14,500 14,500 14,690 14,500
Exercised
($2.125 per share - Class A,
$1.875 per share - Class B) 0 0 (14,500) (14,500) (190) 0
--------------------------------------------------
Outstanding and exercisable at
end of year ($2.125 per share
Class A, $1.875 per share -
Class B) 0 0 0 0 14,500 14,500
---------------------------------------------------
At August 1, 1998, 71,500 shares of Class A and 71,500 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:
1998 1997
------------ ------------
Investments in and advances to investee (see Note 13) $ 693,000 $ 822,000
McRae Chevrolet-Buick, Inc., guaranteed by the estate of the
former President of the Company, with interest
at federal funds rate plus 2%. 15,000 1,225,000
Notes receivable, other, guaranteed
by the estate of the former President of the Company -0- 272,000
Notes receivable from the estate of the former President of the
Company, unsecured, with interest at federal funds
rate plus 2%. 257,000 357,000
----------- ------------
$ 965,000 $ 2,676,000
----------- ------------
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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 President of the Company is also the President of the
Investee. The Company adjusts its investment in and advances to the investee by
the equity method. Summarized financial data of the investee is as follows:
1998 1997 1996
---------- ---------- ----------
BALANCE SHEET
Assets $1,572,000 $1,679,000 $1,474,000
Liabilities 1,688,000 1,896,000 1,772,000
Shareholders' deficiency (116,000) (217,000) (298,000)
RESULTS OF OPERATIONS
Revenues $ 469,000 $ 428,000 $ 195,000
Net income (loss) 101,000 81,000 (16,000)
The following table summarizes the activity of the Company's investment in
investee:
1998 1997 1996
---------- ---------- ----------
Beginning investment $ 822,000 $ 631,000 $ 600,000
Equity in income (loss) 101,000 81,000 (16,000)
Additional investments (repayments) (230,000) 110,000 47,000
---------- ---------- ----------
Ending investment $ 693,000 $ 822,000 $ 631,000
----------- ---------- ----------
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 flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturites.
OTHER ASSETS: Other assets primarily represent officer's life insurance
policies recorded at their cash surrender value which approximates 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
34
35
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.
CARRYING FAIR
ASSETS AMOUNT VALUE
---------- ----------
Cash and cash equivalents $5,766,000 $5,766,000
Short term investments 63,000 63,000
Notes receivable, related entities 965,000 965,000
Notes receivable, current and long term 1,358,000 1,358,000
Other assets 1,319,000 1,319,000
LIABILITIES
Deferred revenues 1,536,000 1,536,000
Long and short term debt 5,865,000 5,865,000
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth unaudited quarterly financial information for
the years ended August 1, 1998 and August 2, 1997:
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
AUGUST 1, 1998
Net revenues $14,965,000 $15,115,000 $13,803,000 $16,204,000
Gross profit 3,883,000 3,828,000 3,615,000 4,174,000
Net earnings 568,000 595,000 364,000 738,000
Net earnings per common share .21 .21 .13 .27
AUGUST 2, 1997
Net revenues $17,141,000 $15,147,000 $12,646,000 $13,546,000
Gross profit 4,494,000 4,389,000 3,191,000 3,537,000
Net earnings 890,000 718,000 427,000 304,000
Net earnings per common share .32 .26 .15 .12
The fourth quarter of fiscal 1998 includes an adjustment to record research and
development costs which decreased net earnings by $110,000, or $0.04 per common
share, net of income taxes and an adjustment to decrease accrued employee
benefits which increased net earnings by $124,000, or $0.04 per common share,
net of income taxes.
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36
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
related printing devices and other products related to optical data collection
to customers throughout the United States. The office products and printing
segment sells, provides maintenance and leases Toshiba photocopiers, Toshiba
facsimile machines, and RISO digital/duplicators, and operates a commercial
printing company principally to customers in North Carolina and parts of
Virginia and South Carolina. Machines, components, and certain supplies sold by
the office products and printing segment are generally available only from
Toshiba and RISO. The footwear segment manufactures combat boots, military
dress oxfords, and military safety boots, principally for the U.S. Government,
and western and work boots for customers throughout the United States. Total
consolidated revenues related to sales to the U.S. Government were 20% in 1998,
21% in 1997, and 26% in 1996. There were no significant intersegment sales or
transfers during 1998, 1997, and 1996. 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.
OFFICE
PRODUCTS CORPORATE
(IN THOUSANDS) FOOTWEAR BAR CODE PRINTING & OTHER CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED AUGUST 1, 1998
Net Revenues $22,032 $17,084 $20,987 $ (16) $60,087
Earnings(loss)from
operations 1,195 930 1,626 (133) 3,618
Identifiable assets 6,977 11,406 14,809 $ 7,265 40,457
Capital expenditures 132 131 1,074 323 1,660
Depreciation expense
and amortization 435 181 560 353 1,529
------- ------- ------- ------- -------
FOR THE YEAR ENDED AUGUST 2, 1997
Net Revenues $25,379 $15,944 $16,940 $ 217 $58,480
Earnings(loss)from
operations 2,222 1,329 426 (132) 3,845
Identifiable assets 9,660 7,006 12,245 $10,814 39,725
Capital expenditures 85 32 924 176 1,217
Depreciation expense
and amortization 546 210 471 383 1,610
------- ------- ------- ------- -------
FOR THE YEAR ENDED AUGUST 3, 1996
Net Revenues $17,490 $15,994 $14,616 $ 624 $48,724
Earnings(loss)from
operations 2,758 947 (428) 65 3,342
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
------- ------- ------- ------- -------
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SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
ADDITIONS
(1) (2)
DESCRIPTION BALANCE AT CHARGED TO CHARGED DEDUCTION
BALANCE
BEGINNING COSTS AND OTHER DESCRIBE AT END
OF
OF PERIOD EXPENSES ACCOUNTS PERIOD
DESCRIBE
YEAR END AUGUST 1, 1998
Deducted from Assets Accounts:
Allowance for Doubtful Accounts $ 722,000 $(343,000) $ 339,000 (1) $ 718,000
Employee Benefit Accrual 601,000 286,000 (337,000) (2) 550,000
Health Insurance Accrual 192,000 -- -- 192,000
YEAR ENDED AUGUST 2, 1997
Deducted from Assets Accounts:
Allowance for Doubtful Accounts $ 384,000 $(240,000) $ 578,000 (1) $ 722,000
Employee Benefit Accrual 846,000 380,000 (625,000) (2) 601,000
Health Insurance Accrual 192,000 -- -- 192,000
YEAR ENDED AUGUST 3, 1996
Deducted 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 Benefit Accrual 146,000 (40,000) 86,000 (2) 192,000
(1) Uncollectible accounts written off
(2) Payments and/or expenses charged to operations
37
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
PART III
Items 10 through 13 are incorporated herein by reference to the sections
captioned Principal Shareholder and Holdings of Management; Election of
Directors; Director Compensation; Executive Officers; 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 17, 1998.
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39
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 1, 1998 and August 2, 1997.
Consolidated Statements of Operations for the Years Ended August 1,
1998, August 2, 1997, and August 3, 1996.
Consolidated Statements of Shareholders' Equity for the Years Ended
August 1, 1998, August 2, 1997, and August 3, 1996.
Consolidated Statements of Cash Flows for the Years Ended August 1,
1998, August 2, 1997, and August 3, 1996.
(2) FINANCIAL STATEMENT SCHEDULE:
Schedule II
(3) EXHIBITS:
3.1 Certificate of Incorporation (Incorporated by reference to Exhibit 3.1
to the Registrant's Form S-14, Registration N. 2-85908).
3.2 Amendment to the Certificate of Incorporation (Incorporated by
reference to Exhibit 3 to the Registrant's Form 10-K for the year
ended August 1, 1987).
3.3 Amendment to the Bylaws of the Registrant effective September 10, 1993
(Incorporated by reference to Exhibit 3.3 to the Registrant's Form
10-K for the fiscal year ended July 31, 1993).
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 as of April 7, 1996 among Walter A. Dupuis,
Kenneth O. Moore, William Glover, and McRae Industries, Inc. was filed
as Exhibit 2 to the Registrant's current report on Form 8-K filed May
11, 1996 and is incorporated herein by references. 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 (Incorporated by reference
to Exhibit 10.5 to the Registrant's Form 10-K for the fiscal year
ended August 3, 1996).
10.6 Deed of Trust between American West Trading Company and The Fidelity
Bank, dated July 25, 1996 (Incorporated by reference to Exhibit 10.6
to the Registrant's Form 10-K for the fiscal year ended August 3,
1996).
10.7 Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-K for the fiscal year ended August 3, 1996).
10.8 Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated April 15, 1997 (Incorporated by reference to
Exhibit 10.8 to the Registrant's Form 10-K for the fiscal year ended
August 2, 1997).
21 Subsidiaries of the Registrant (Incorporated by reference to Exhibit
21 to the Registrant's Form 10-K for the fiscal year ended August 3,
1996).
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.
(B) REPORTS ON FORM 8-K:
The Company filed no reports on Form 8-K for the fiscal year ended
August 1, 1998.
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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 26, 1998 By: /s/D. Gary McRae
----------------
D. Gary McRae
President
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE DATE
- --------- ----
/s/D. Gary McRae October 26, 1998
- --------------------------------------------
D. Gary McRae
President, Treasurer, and Director
(Principal Executive Officer)
/s/George M. Bruton October 26, 1998
- --------------------------------------------
George M. Bruton
Director
/s/Hilton J. Cochran October 26, 1998
- --------------------------------------------
Hilton J. Cochran
Director
/s/Brady W. Dickson October 26, 1998
- --------------------------------------------
Brady W. Dickson
Director
/s/Victor A. Karam October 26, 1998
- --------------------------------------------
Victor A. Karam
President - Footwear and Director
/s/James W. McRae October 26, 1998
- --------------------------------------------
James W. McRae
Vice President, Secretary, and Director
/s/Harold W. Smith October 26, 1998
- --------------------------------------------
Harold W. Smith
Vice President - Graphics and Director
/s/Marvin G. Kiser, Sr. October 26, 1998
- --------------------------------------------
Marvin G. Kiser, Sr.
Controller
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
3.1 Certificates of Incorporation (Incorporation by reference to Exhibit
3.1 to the Registrant's Form S-14, Registration N. 2-85908).
3.2 Amendment to the Certificate of Incorporation (Incorporated by
reference to Exhibit 3 to the Registrant's Form 10-K for the fiscal
year ended August 1, 1987).
3.3 Amendment to the Bylaws of the Registrant effective September 10, 1993
(Incorporated by reference to Exhibit 3.3 to the Registrant's Form
10-K for the fiscal year ended July 31, 1993).
3.4 Restated Bylaws of the Registrant (Incorporated by reference to
Exhibit 3.4 to the Registrant's Form 10-K for the fiscal year ended
July 31, 1993).
10.1 1985 McRae Industries, Inc. Non-Qualified Stock Option Plan
(Incorporated by the reference to Exhibit 10 to the Registrant's Form
10-K for the fiscal year ended August 3, 1985).
10.2 Technical Assistance Agreement dated September 13, 1984 between the
Registrant and Ro-Search, Incorporated (Incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year July
28, 1984).
10.3 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, Inc. was filed as Exhibit 2 to the Registrant's current
report on Form 8-K filed May 11, 1996 and is incorporated herein by
reference.
10.5 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
(Incorporated by reference to Exhibit 10.5 to the Registrant's Form
10-K for the fiscal year ended August 3, 1996).
10.6 Deed of Trust between American West Trading Company and The Fidelity
Bank, dated July 25, 1996 (Incorporated by reference to Exhibit 10.6
to the Registrant's Form 10-K for the fiscal year ended August 3,
1996).
10.7 Security Agreement pertaining to inventory, accounts receivable and
equipment between American West Trading Company and The Fidelity Bank,
dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-K for the fiscal year ended August 3, 1996).
10.8 Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc. dated April 15, 1997 (Incorporated by reference to
Exhibit 10.8 to the Registrant's from 10-K for the fiscal year ended
August 2, 1997).
21 Subsidiaries of the Registrant (Incorporated by reference to Exhibit
21 to the Registrant's Form 10-K for the fiscal year ended August 3,
1996).
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).
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