UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTER ENDED OCTOBER 27, 2001
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-8578
MCRAE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 56-0706710
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 NORTH MAIN STREET
MT. GILEAD, NORTH CAROLINA 27306
(Address of principal executive offices)
TELEPHONE NUMBER (910) 439-6147
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $l Par Value--Class A 1,871,617 shares as of December 6, 2001.
Common Stock, $1 Par Value--Class B 896,882 shares as of December 6, 2001.
1
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet 3-4
Condensed Consolidated Statement of Operations 5
Condensed Consolidated Statement of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 11
ITEM 3. DEFAULT UPON SENIOR SECURITIES 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
(In thousands, except share and per share data)
October 27, 2001 July 28, 2001
(Unaudited) (Note)
---------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,754 $ 7,341
Securities 5 5
Accounts and notes receivable, net 8,144 5,442
Inventories (See Note B) 17,538 13,806
Net investment in capitalized leases 567 567
Income tax receivable 549 881
Prepaid expenses and other current assets 121 60
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Total current assets 29,678 28,102
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Property, plant and equipment, net 5,638 5,204
Other assets:
Receivables, related entities 465 527
Net investment in capitalized leases 822 960
Notes receivable 184 203
Real estate held for investment 652 652
Goodwill 384 392
Cash surrender value of life insurance 2,041 2,041
Other 1,656 896
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Total other assets 6,204 5,671
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$41,520 $38,977
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See notes to condensed consolidated financial statements
3
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except share and per share data)
October 27, 2001 July 28, 2001
(Unaudited) (Note)
---------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks - current portion $ 407 $ 407
Accounts payable 6,200 3,545
Accrued employee benefits 298 239
Deferred revenues 816 983
Accrued payroll and payroll taxes 548 578
Income taxes -- --
Contract contingencies 669 650
Other 517 498
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Total current liabilities 9,455 6,900
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Notes payable, banks, net of current portion 4,493 4,598
Minority interest 105 108
Shareholders' equity:
Common stock:
Class A, $1 par; Authorized 5,000,000
shares; Issued and outstanding,
1,861,817 shares 1,862 1,862
Class B, $1 par; Authorized 2,500,000
shares; Issued and outstanding,
906,682 shares 907 907
Additional paid-in capital 791 791
Retained earnings 23,907 23,811
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Total shareholders' equity 27,467 27,371
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$41,520 $38,977
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NOTE - The condensed consolidated balance sheet at July 28, 2001 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements
4
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended
October 27, October 28,
2001 2000
----------- -----------
Net revenues $ 14,553 $ 16,524
Costs and expenses:
Cost of revenues 10,835 12,628
Research & development 138 123
Selling, general and administrative 3,246 3,342
Other expense (income), net (44) (125)
Interest expense 77 102
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Total costs and expenses 14,252 16,070
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Earnings from continuing operations before
income taxes and minority interest 301 454
Provision for income taxes 115 189
Minority shareholder's interest
in earnings of subsidiary (3) (1)
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Net earnings from continuing operations $ 189 $ 266
Discontinued operations: (See Note C)
Income from operations of
discontinued business, net of income
tax expense of $34,000 -- 52
Estimated loss on disposal of business, net
of income tax benefit of $185,000
fiscal -- (290)
----------- -----------
Net earnings $ 189 $ 28
=========== ===========
Net earnings (loss) per common share-basic:
Earnings from continuing operations $ .07 $ .10
Discontinued operations -- (.09)
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Net earnings $ .07 $ .01
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Weighted average number of
common shares outstanding 2,768,499 2,768,499
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See notes to condensed consolidated financial statements
5
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
October 27, 2001 October 28, 2000
---------------- ----------------
Net cash used in operating
activities $(2,872) $(1,001)
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Cash flows from investing activities:
Proceeds from sales of assets -- 75
Purchase of trade names (800) --
Net collections from related parties 61 (91)
Capital expenditures (798) (206)
Net payments of long-term receivables 20 65
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Net cash used in investing activities (1,517) (157)
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Cash flows from financing activities:
Principal repayments of notes payable (105) (60)
Dividends paid (93) (167)
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Net cash used in financing activities (198) (227)
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Net decrease in cash and cash
equivalents (4,587) (1,385)
Cash and cash equivalents at beginning
of period 7,341 7,223
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Cash and cash equivalents at end of period $ 2,754 $ 5,838
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See notes to condensed consolidated financial statements
6
MCRAE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended October 27,
2001 are not necessarily indicative of the results that may be expected for the
year ending August 3, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the McRae Industries,
Inc. Annual Report on Form 10-K for the year ended July 28, 2001.
Certain reclassifications have been made to the prior year's financial
statements to conform with the current year's presentation.
NOTE B - INVENTORIES
An actual valuation of inventory under the LIFO method can be made only at the
end of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Because these are subject to
forces beyond management's control, interim calculations are subject to change
based on the final year-end LIFO inventory valuation.
The components of inventory consist of the following (in thousands):
October 27, 2001 July 28, 2001
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Raw materials $ 2,608,000 $ 2,843,000
Work-in-process 723,000 746,000
Finished goods 14,207,000 10,217,000
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$17,538,000 $13,806,000
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NOTE C - DISCONTINUED OPERATIONS OF BUSINESS SEGMENT
In August 2000, the Company's management decided to phase out and discontinue
the operations of the printing and packaging business. Normal business
operations ceased on April 28, 2001. Assets with an estimated fair market value
of $200,000 were transferred to the parent company at July 28, 2001.
For the quarter ending October 28, 2000, the printing business reported net
earnings of $52,000, net of $34,000 of tax expense. A reserve for estimated loss
on discontinuance of this business amounted to $290,000, net of $185,000 of tax
benefit. Net earnings per share as a result of the discontinued operations were
reduced by $.09 per share for the first quarter of fiscal 2001. The results of
the printing and packaging business operations have been reported separately as
discontinued operations in the Condensed Consolidated Statement of Operations.
7
NOTE D - SUBSEQUENT EVENTS
On November 28, 2001, the Company declared a cash dividend of $.05 cents per
share on its Class A Common Stock payable on December 28, 2001 to shareholders
of record on December 14, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto, and
with the Company's Annual Report on Form 10-K for the fiscal year ended July 28,
2001, including the financial information and management's discussion and
analysis contained therein.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition remained strong as of October 27, 2001 as cash
and cash equivalents and working capital amounted to $2.8 million and $20.2
million, respectively. The current ratio was a solid 3.1 to 1 at the end of the
quarter.
Cash used in operating activities amounted to approximately $2.9 million. Net
income from operations, adjusted for depreciation and amortization, provided a
positive cash flow of approximately $600,000. The increase in accounts and notes
receivable used approximately $2.7 million of cash primarily attributable to
increased sales in the western boot business and the timing in the collection of
open accounts in the footwear and office products businesses. Approximately $3.7
million of cash was used to expand inventories in the footwear and office
products businesses because of increased combat boot requirements by the U.S
Government, anticipated market demand for the new branded products in the
western boot business, and scheduled delivery in the second quarter of office
equipment to several large county-wide educational systems. Of this $3.7 million
amount, approximately $1.6 million reflects cash used to acquire inventories in
connection with the Company's acquisition of the "Dan Post" brand name for
western boots in October 2001. Payment for a significant portion of the
inventory build-up was not made until after quarter-end, providing approximately
$2.7 million of cash and increasing trade accounts payable for the first
quarter. Income tax refunds and lower estimated tax payments produced a positive
cash flow of approximately $332,000.
Investing activities used approximately $1.5 million of cash. Capital
expenditures used approximately $798,000 of cash, primarily for rental equipment
to support county-wide school programs and certain equipment related to the
recent Dan Post acquisition. This equipment related to the Dan Post brand name
was purchased for approximately $200,000. In addition, the "Dan Post" brand name
was purchased for $800,000.
The Company used $93,000 of cash to pay quarterly dividends and $105,000 to
reduce the principal amount of long-term debt.
The Company currently has two lines of credit with a bank totaling $4.75
million, all of which was available at October 27, 2001. It is management's
opinion that the future cash flows from operations, currently available cash and
cash equivalents, and unused lines of credit will be sufficient to meet the
Company's future working capital, capital expenditures, and debt repayment
requirements.
8
FIRST QUARTER FISCAL 2002, COMPARED TO FIRST QUARTER FISCAL 2001
Consolidated net revenues for the first quarter of fiscal 2002 amounted to $14.6
million, down 12% from $16.5 million reported for the first quarter of fiscal
2001. This decrease in net revenues was primarily attributable to the following
factors: (1) military combat boot net revenues declined approximately $1.0
million as a result of the Government satisfying portions of their current boot
requirements by utilizing the Contract's Vendor Enhanced Storage and
Transportation (VEST) program. Military combat boots related to the VEST program
were purchased in fiscal 1997 and fiscal 1998 and stored for the Government's
future use; (2) bar code net revenues decreased approximately $1.3 million due
to economic and competitive pressures in the high technology market; and (3)
office products net revenues fell $1.1 million as several large county-wide
educational system sales were pushed to the second quarter. The decrease in net
revenues was partially offset by the $1.3 million increase in the western boot
business that resulted from higher demand for imported and newly-acquired
branded products.
Consolidated gross profit amounted to $3.7 million for the first quarter of
fiscal 2002 as compared to $3.9 million for the first quarter of fiscal 2001.
This 4.5% decrease in gross profit resulted primarily from lower net revenues
for the current reporting period as compared to the same period of fiscal 2001.
Gross profit as a percentage of net revenues improved from 23.6% for the first
quarter of fiscal 2001 to 25.6% for the first quarter of fiscal 2002. This 8.4%
gain in gross profit percentage resulted from lower unit costs associated with
production efficiencies in the military boot business, increased sales of
higher-margin imported and branded western boots, and the negotiation of
favorable buy-out arrangements for county-wide educational system equipment
associated with the office products business.
Selling, general and administrative (SG&A) expenditures for the first quarter of
fiscal 2002 were $3.2 million as compared to $3.3 million for the first quarter
of fiscal 2001. The SG&A expense reductions were primarily the result of lower
sales-related personnel costs, reduced sales travel expenditures, and smaller
outlays for sales and marketing material for the bar code business. The office
products business also experienced a slight reduction in SG&A expenditures
primarily attributable to reduced advertising costs. These decreases were
partially offset by increased SG&A expenses associated with the western boot
business as sales salaries, commissions, and related promotional materials were
higher for the first quarter of fiscal 2002. Professional fees for the first
quarter of fiscal 2002 were higher than those for the same period of fiscal 2001
as a result of expenditures related to the purchase of the Dan Post boot brand
name.
The Company's military footwear business is in the final year of the most recent
contract (the Contract) awarded by the United States Government (the Government)
in April 1997. The Contract provides for a base year and four one-year
extensions that may be exercised by the Government at its sole discretion for
the purchase of additional option quantities of military combat boots. The
current option will expire in April 2002. Although the Government continues to
evaluate a new military combat boot construction that is not compatible with the
Company's current manufacturing process, the Company expects the Government to
solicit bids for a new contract that will be similar in all material respects to
the one that expires in April 2002, except for a reduction in the maximum and
minimum quantity of boots to be purchased. While the Company has taken the
appropriate actions to accommodate any military combat boot specification
changes, there can be no assurances that the Company will be successful in
obtaining another contract with the Government upon termination of the current
Contract.
9
In September 2001, the Government notified the Company to increase its
production levels of military combat boots as a result of the deployment of U.S.
troops on the war against terrorism. The increased production levels represent
an approximate 60% increase over the quantities normally purchased by the
Government under the Contract. This increase is expected to have a favorable
impact on the Company's net revenues of an additional $2 million to $4 million
for fiscal 2002, or more of the increased production levels are sustained
throughout the remainder of fiscal 2002.
In August 2000, the Company's management decided to phase out the operation of
the printing and packaging business. Net revenues from this business for the
first quarter of fiscal 2001 were $749,000. Net earnings from operations of the
discontinued business for the first quarter of fiscal 2001 amounted to $52,000
and included a gain on sale of assets of $65,000. For the first quarter of
fiscal 2001, an estimated loss on discontinuance of this business amounted to
$290,000, net of the tax benefit. This estimated loss consisted of the expected
earnings from the phase-out period of operations less the difference in the
carrying value and estimated fair value of the business assets and the expected
payments to settle all liabilities. Normal business operations for the printing
and packaging business ceased on April 28, 2001.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, SFAS No. 141, "Business Combinations", was issued and established
the accounting and reporting standards for business combinations. SFAS No. 141
is effective for the Registrant for periods after June 30, 2001. The Registrant
is in compliance with this reporting requirement.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets", was issued
and established the accounting and reporting standards for acquired goodwill and
other intangible assets. SFAS No. 142 is effective for the Registrant for
periods beginning after December 15, 2001. The Registrant is evaluating the
effects of this pronouncement on recorded goodwill and trade names.
In July 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations", was
issued and established the accounting and reporting standards associated with
the retirement of tangible long-lived assets. SFAS No. 143 is effective for the
Registrant for fiscal years beginning after June 15, 2002. The Registrant
currently has no assets subject to the provisions of this statement.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", was issued and established the accounting and reporting
requirements associated with long-lived asset impairment and disposal. SFAS
No. 144 is effective for the Registrant for fiscal years beginning after
December 15, 2001. The Registrant is evaluating the effects of this
pronouncement on its long-lived assets.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Interim Report includes certain
forward-looking statements as such term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including but not limited to statements about the Company's ability to meet
future working capital, capital expenditure, and debt repayment requirements.
These forward-looking statements involve certain risks and uncertainties,
including but not limited to the effect of acquisitions, the ability to meet
additional financing requirements, the successful development and marketing of
new products and services, the effect of competitive products and pricing, risks
unique to selling goods to the U.S. Government (including the impact of the war
on terrorism, termination of the Contract
10
and changes in the types of military boots used by the U.S. Government), and the
effect of general economic conditions, that could cause actual results to differ
materially from those in such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes due to its
aggregate $4.75 million lines of credit and a term loan through its wholly owned
subsidiary, American West Trading Company. As of October 27, 2001, there was no
outstanding indebtedness under the lines of credit and $4.7 million was
outstanding on the term loan. The Company does not buy or sell derivative
financial instruments for trading or other purposes. Borrowings under the
Company's credit facilities described above bear interest at rates based upon
the "prime rate" or "prime rate" less a margin of one-half percent offered by
the applicable lender. The Company has not entered into any swap agreements or
engaged in any other hedging activities with respect to this variable rate
indebtedness. A 10% increase in the interest rates under the Company's credit
facilities would increase annual interest expense by approximately $25,000
(assuming the Company's aggregate borrowings under the credit facilities
averaged $4.6 million during a fiscal year).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
While the Registrant and its subsidiaries are engaged in litigation from time to
time in the ordinary course of business incidental to their respective
operations, management does not believe that any such litigation is likely to
have a material adverse effect on the Registrant's consolidated financial
position or operations.
ITEMS 2, 3, 4, AND 5.
These items are not applicable and have been omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2 Asset Purchase Agreement dated October 3, 2001 between
American West Trading Company and Lucchese, Inc.
3.1 Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Registrant's Form S-14, Registration No.
2-85908).
3.2 Amendment to the Certificate of Incorporation (Incorporated by
reference to Exhibit 3 to the Registrant's Form 10-K for the
year ended August 1, 1987).
3.3 Restated Bylaws of the Registrant effective May 29, 2001.
(Incorporated by reference to Exhibit 3.3 to the Registrant's
Form 10-K for the year ended July 28, 2001).
(b) No reports on Form 8-K were filed during the quarter ended October 27,
2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MCRAE INDUSTRIES, INC.
(Registrant)
DATE: December 11, 2001 By: /s/ D. Gary McRae
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D. Gary McRae
President and CEO
(Principal Executive Officer)
DATE: December 11, 2001 By: /s/ Marvin G. Kiser, Sr.
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Marvin G. Kiser, Sr.
(Principal Accounting Officer)
12