McRae Industries, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the Quarter Ended October 29, 2005.
OR
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o |
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Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 1-8578
McRae Industries, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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56-0706710
(I.R.S. Employer Identification No.) |
400 North Main Street
Mt. Gilead, North Carolina 27306
(Address of principal executive offices)
Telephone Number (910) 439-6147
(Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2).
Yes o No þ
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No o
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practical date.
Common Stock, $l Par Value Class A: 2,070,584 shares as of December 9, 2005.
Common Stock, $1Par Value Class B: 500,193 shares as of December 9, 2005.
1
McRae Industries, Inc. and Subsidiaries
INDEX
PART I. FINANCIAL INFORMATION
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Page No. |
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ITEM 1. |
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Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets |
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3-4 |
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Condensed Consolidated Statements of Operations |
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5 |
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Condensed Consolidated Statements of Cash Flows |
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6 |
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Notes to Condensed Consolidated Financial Statements |
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7-9 |
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ITEM 2. |
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Managements Discussion And Analysis of Financial
Condition and Results of Operations |
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10-15 |
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ITEM 3. |
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Quantitative and Qualitative Disclosures about
Market Risk |
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15 |
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ITEM 4. |
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Disclosure Controls and Procedures |
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16 |
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PART II. OTHER INFORMATION |
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ITEM 1. |
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Legal Proceedings |
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16 |
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ITEM 2. |
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Changes in Securities and Use of Proceeds |
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16 |
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ITEM 3. |
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Defaults upon Senior Securities |
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16 |
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ITEM 4. |
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Submission of Matters to a Vote of Security Holders |
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16 |
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ITEM 5. |
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Other Information |
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16 |
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ITEM 6. |
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Exhibits |
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17 |
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Signatures |
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18 |
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2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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October 29, 2005 |
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July 30, 2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
10,299 |
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$ |
9,238 |
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Accounts and notes receivable, net |
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10,912 |
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9,758 |
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Inventories, net |
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12,046 |
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12,721 |
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Assets held for sale |
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325 |
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325 |
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Income tax receivable |
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270 |
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840 |
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Prepaid expenses and other current assets |
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367 |
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159 |
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Total current assets |
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34,219 |
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33,041 |
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Property and equipment, net |
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2,629 |
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2,640 |
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Other assets: |
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Notes receivable |
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33 |
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36 |
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Real estate held for investment |
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1,991 |
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1,882 |
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Goodwill |
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362 |
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362 |
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Amount due from split-dollar life insurance |
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2,220 |
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2,220 |
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Trademarks |
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2,824 |
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2,824 |
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Other |
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5 |
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5 |
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Total other assets |
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7,435 |
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7,329 |
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Total assets |
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$ |
44,283 |
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$ |
43,010 |
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See notes to condensed consolidated financial statements
3
McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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October 29, 2005 |
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July 30, 2005 |
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Liabilities and Shareholders Equity |
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Current liabilities: |
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Notes payable |
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$ |
169 |
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$ |
174 |
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Accounts Payable |
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3,659 |
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3,793 |
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Accrued employee benefits |
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773 |
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480 |
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Accrued payroll and payroll taxes |
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815 |
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683 |
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Other |
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966 |
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894 |
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Total current liabilities |
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6,382 |
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6,024 |
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Shareholders equity: |
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Common Stock: |
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Class A, $1 par; Authorized 5,000,000 shares; Issued
and outstanding, and 2,240,841 shares, respectively |
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2,241 |
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2,241 |
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Class B, $1 par; Authorized 2,500,000 shares; Issued
and outstanding, and 527,658 shares, respectively |
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527 |
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527 |
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Additional paid-in capital |
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791 |
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791 |
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Retained earnings |
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34,342 |
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33,427 |
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Total shareholders equity |
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37,901 |
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36,986 |
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Total liabilities and shareholders equity |
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$ |
44,283 |
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$ |
43,010 |
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See notes to condensed consolidated financial statements
4
McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
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Three Months Ended |
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October 29, 2005 |
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October 30, 2004 |
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Net revenues |
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$ |
18,560 |
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$ |
20,434 |
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Cost of revenues |
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13,276 |
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15,847 |
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Research & development |
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191 |
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304 |
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Selling, general and administrative expenses |
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3,508 |
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3,071 |
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Other expense (income), net |
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(104 |
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(54 |
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Interest expense |
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4 |
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22 |
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Total costs and expenses |
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16,875 |
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19,190 |
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Earnings from continuing operations before income taxes |
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1,685 |
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1,244 |
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Provision for income taxes |
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590 |
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437 |
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Net earnings from continuing operations |
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1,095 |
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807 |
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Discontinued operations: |
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Loss from operations of discontinued business |
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0 |
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(438 |
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Income tax benefit |
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0 |
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170 |
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Estimated gain on disposal of business, net of income taxes |
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0 |
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2,174 |
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Net earnings |
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$ |
1,095 |
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$ |
2,713 |
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Earnings per common share: |
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Earnings per common share from continuing operations: |
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Basic earnings per share: |
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Class A |
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$ |
.57 |
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$ |
.48 |
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Class B |
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0 |
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0 |
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Diluted earnings per share: |
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Class A |
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.46 |
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.33 |
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Class B |
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N/A |
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N/A |
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Earnings per common share from discontinued operations: |
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Basic earnings per share: |
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Class A |
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0 |
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.98 |
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Class B |
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0 |
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0 |
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Diluted earnings per share: |
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Class A |
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0 |
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.69 |
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Class B |
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N/A |
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N/A |
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Net earnings per common share: |
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Basic earnings per share: |
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Class A |
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.57 |
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1.46 |
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Class B |
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0 |
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0 |
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Diluted earnings per share: |
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Class A |
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.46 |
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1.02 |
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Class B |
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N/A |
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N/A |
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Weighted average number of common shares outstanding: |
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Class A |
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2,240,841 |
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1,943,543 |
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Class B |
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527,658 |
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824,956 |
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Total |
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2,768,499 |
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2,768,499 |
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See notes to condensed consolidated financial statements
5
McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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October 29, 2005 |
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October 30, 2004 |
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Net cash provided by operating activities |
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$ |
471 |
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$ |
1,443 |
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Cash flows from investing activities: |
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Proceeds from sales of assets |
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898 |
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9,904 |
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Purchase of trade names and other assets |
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0 |
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(22 |
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Capital expenditures |
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(126 |
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(101 |
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Net collections of long-term receivables |
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3 |
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3 |
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Net cash provided by investing activities |
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775 |
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9,784 |
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Cash flows from financing activities: |
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Principal repayments of notes payable |
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(5 |
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(3,128 |
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Dividends paid |
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(180 |
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(116 |
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Net cash used in financing activities |
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(185 |
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(3,244 |
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Net increase in cash and cash equivalents |
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1,061 |
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7,983 |
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Cash and cash equivalents at beginning of period |
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9,238 |
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2,464 |
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Cash and cash equivalents at end of period |
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$ |
10,299 |
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$ |
10,447 |
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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 by
the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all of the information and footnotes required by the accounting
principles generally accepted in the United States of America for complete financial statements.
In addition, all adjustments (consisting only of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three months ended October
29, 2005 are not necessarily indicative of the results that may be expected for the year ending
July 29, 2006. The interim condensed consolidated financial information should be read in
conjunction with the Companys July 30, 2005 audited consolidated financial statements and
footnotes thereto included in the McRae Industries, Inc. Annual Report filed on Form 10-K with the
SEC on October 28, 2005.
Certain reclassifications have been made to the prior years financial statements to conform with
the current years presentation. In particular, our office products business, which was sold on
September 9, 2004, has been recorded as a discontinued operation for all periods in this report.
NOTE B INVENTORIES
The components of inventory consist of the following (in thousands):
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October 29, 2005 |
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July 30, 2005 |
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Raw materials |
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$ |
2,070 |
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$ |
2,217 |
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Work-in-process |
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526 |
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446 |
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Finished goods |
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9,450 |
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10,058 |
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$ |
12,046 |
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$ |
12,721 |
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NOTE C SUBSEQUENT EVENTS
At a special meeting held on November 17, 2005 the Companys stockholders approved a 1-for-200
reverse stock split, to be followed immediately by a 200-for-1 forward stock split, of the
outstanding shares of both classes of its common stock (Class A and Class B)(the transaction) for
the purpose of permitting the company to deregister the common stock under the Securities Exchange
Act of 1934 (the Exchange Act) and thereby eliminate the significant expense required to comply
with the reporting and other requirements thereunder.
To implement the transaction, the Company filed certificates of amendment to its certificate of
incorporation with the Secretary of State of Delaware as a result of which the transaction took
effect as of 11:59 p.m. (eastern time) on December 1, 2005.
Pursuant
to the transaction, stockholders of record holding fewer than 200 shares of the Companys common
stock (Class A or Class B) immediately before the transaction had their shares cancelled and
converted into the right to receive from the Company a cash payment of $14.25 for each such share
owned before the reverse stock split. Stockholders owning 200 or more shares of a class of common
stock (Class A or Class B) immediately before the
transaction will continue to hold the same number of shares of that
class after
7
completion of the transaction and will not receive any cash payment for their shares of that
class. The Company expects to pay approximately $2.78 million to purchase shares cashed out in the
transaction.
As a result of the transaction, the number of holders of record for each class of the Companys
common stock was reduced to fewer than 300, which will enable the company to terminate the
registration of its common stock under the Exchange Act. In connection with the transaction,
trading of the common stock on the American Stock Exchange was suspended. As previously announced,
on November 4, 2005 the Company filed an application with the SEC to voluntarily delist and
deregister the common stock. The Company expects to receive an order from the SEC effecting the
delisting during the week beginning December 12, 2005.
The common stock is currently quoted in the Pink Sheets and stockholders will continue to be able
to trade their shares in the over-the-counter markets or private transactions.
On December 2, 2005, the Company sold the Waverly, Tennessee manufacturing plant for $525,000 less
applicable selling expenses. The estimated gain on the sale of this property amounted to
approximately $200,000.
On December 5, 2005, the Company declared a cash dividend of $.08 per share on its Class A Common
Stock payable on December 30, 2005, to shareholders of record on December 16, 2005.
NOTE D
DISCONTINUED OPERATIONS
On September 9, 2004, McRae Industries, Inc. entered into a definitive agreement under which
it sold substantially all the assets of its McRae Office Solutions, Inc. subsidiary to Connected
Office Products, Inc. (COPI). COPI is a subsidiary of TOPAC U.S.A., Inc., which is headquartered in
Irvine, California, and operates a network of wholly owned subsidiaries involved in the sales,
service, and distribution of office products. Under the terms of the Asset Purchase Agreement, COPI
purchased substantially all of the assets of McRae Office Solutions, Inc. for $10,894,000. The
office products business has been recorded as a discontinued operation for all periods in this
report.
The office products business incurred a net loss from operations of $268,000, net of income tax
benefit for the first quarter of fiscal 2005.
The estimated gain on the sale of the office products business assets totaled approximately $2.1
million net of a $1.3 million tax provision.
8
NOTE E
SUMMARY OF BUSINESS SEGMENTS
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 29, |
|
|
October 30, |
|
|
|
2005 |
|
|
2004 |
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from continuing operations |
|
|
|
|
|
|
|
|
Bar Code |
|
$ |
4,024 |
|
|
$ |
2,802 |
|
Military Boots |
|
|
4,655 |
|
|
|
11,516 |
|
Western/Work Boots |
|
|
9,795 |
|
|
|
6,089 |
|
Eliminations/Other |
|
|
86 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
18,560 |
|
|
|
20,434 |
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings from continuing operations |
|
|
|
|
|
|
|
|
Bar Code |
|
|
(115 |
) |
|
|
(454 |
) |
Military Boots |
|
|
461 |
|
|
|
931 |
|
Western/Work Boots |
|
|
1,047 |
|
|
|
613 |
|
Eliminations/Other |
|
|
292 |
|
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
1,685 |
|
|
|
1,244 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
590 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations |
|
|
1,095 |
|
|
|
807 |
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations, net of tax expense |
|
|
0 |
|
|
|
1,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
1,095 |
|
|
$ |
2,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 29, |
|
|
July 30, |
|
|
|
2005 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bar Code |
|
$ |
6,462 |
|
|
$ |
5,584 |
|
Military Boots |
|
|
4,402 |
|
|
|
4,577 |
|
Western/Work Boots |
|
|
19,795 |
|
|
|
18,305 |
|
Eliminations/Other |
|
|
13,624 |
|
|
|
14,544 |
|
|
|
|
|
|
|
|
|
|
$ |
44,283 |
|
|
$ |
43,010 |
|
|
|
|
|
|
|
|
9
ITEM 2. MANAGEMENTS 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 Companys Annual Report on Form
10-K for the fiscal year ended July 30, 2005 including the financial information and managements
discussion and analysis contained therein.
CRITICAL ACCOUNTING ESTIMATES
Our timely preparation of financial reports and related disclosures requires us to use
estimates and assumptions that may cause actual results to be materially different from our
estimated results. Specifically, we use estimates when accounting for depreciation, amortization,
useful lives for intangible assets, and asset valuation allowances (including those for bad debts,
inventory, and deferred income tax asset valuation allowances). Our most critical accounting
policies include the following:
Inventories
Inventories are stated at the lower of cost or market value using the last-in, first-out (LIFO)
method for military boots and using the first-in first-out (FIFO) method for all other inventories.
We regularly review inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast and demand requirements for the next twelve
months. Actual demand and market conditions may be different from those projected by our management
as a result of technological changes in the bar code business products, fashion cycles and trends
in the western boot business, and the overall financial condition of competitors in the western and
work boot business. A percentage point error in our inventory allowances would have approximated
$3,000 for the quarter ended October 29, 2005.
Goodwill, Intangible Assets, and Long-Lived Assets
On an annual or a more frequent basis as circumstances or events might indicate, we evaluate our
goodwill and trade names under the provision of Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets. We use a discounted cash flow methodology to test
for impairment based on estimated future cash flows derived from historical performance and our
knowledge of known factors likely to impact future cash flows. Historically, we have generated
sufficient returns to recover the cost of goodwill and trade names. If future cash flows related
to these assets decline as a result of market factors, competition or otherwise, a write down to
fair value may be required which could have a material adverse impact on earnings.
Revenue Recognition
Our contract with the Government is a fixed bid price agreement. We recognize revenue under our
current boot contract when the boots are inspected and accepted by the Governments Quality
Assurance Representative (QAR), thereby transferring ownership to the Government. Pursuant to the
contract, the boots become Government-owned property after inspection and acceptance by the QAR.
The boots are transferred and stored in our warehouse, which is a designated storage facility
approved by the Government, and accounted for as bill and hold sales in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition in
Financial Statements.
We recognize revenues associated with the economic price adjustment (EPA) clause in our military
boot contracts. This clause allows us to bill the Government after the contract expires to recover
the changes in our leather cost over the life of the contract.
10
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process involves
us estimating our actual current exposure together with assessing temporary differences resulting
from differing treatment of items, such as leasing activity, allowances, and depreciation, for tax
and accounting purposes. These differences result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we must include an expense within the
tax provision in the statement of operations. Significant management judgment is required in
determining our provision for income taxes, our deferred tax assets and liabilities, and any
valuation allowance recorded against our net deferred tax assets. In the event that actual results
differ from these estimates or we adjust these estimates in future periods, we may need to
establish an additional valuation allowance, which could materially impact our financial position
and results of operations. Changes in tax laws and rates may affect recorded deferred tax assets
and liabilities in the future. It is possible that the Internal Revenue Service could disagree
with managements timing of deductions or revenue recognition, which would affect recorded tax
assets and liabilities. Management believes that changes in these estimates would not result in a
material effect on the Companys results of operations, cash flows, or financial position.
FINANCIAL CONDITION AND LIQUIDITY
Under the terms of the Asset Purchase Agreement pursuant to which we sold our office products
business in September 2004, we received $9.9 million on September 9, 2004 and on September 9, 2005
we received an additional $912,000 as payment of the remainder of the purchase price. The proceeds
from the sale provided a total of approximately $7.0 million of cash after income taxes. In
September 2004, we used approximately $3.1 million to pay off the long-term note related to our
western and work boot business.
At a special meeting held on November 17, 2005 the Companys stockholders approved a 1-for-200
reverse stock split, to be followed immediately by a 200-for-1 forward stock split, of the
outstanding shares of both classes of its common stock (Class A and Class B)(the transaction) for
the purpose of permitting the company to deregister the common stock under the Securities Exchange
Act of 1934 and thereby eliminate the significant expense required to comply with the reporting and
other requirements thereunder. To implement the transaction, the Company filed certificates of
amendment to its certificate of incorporation with the Secretary of State of Delaware as a result
of which the transaction took effect as of 11:59 p.m. (eastern time) on December 1, 2005. Pursuant
to the transaction, stockholders holding fewer than 200 shares of the Companys common stock (Class
A or Class B) immediately before the transaction had their shares cancelled and converted into the
right to receive from the Company a cash payment of $14.25 for each share owned before the reverse
stock split. The Company expects to pay approximately $2.78 million to purchase shares cashed out
in the transaction.
We have two lines of credit with a bank totaling $4.75 million, all of which was available at
October 29, 2005. One credit line totaling $1.75 million (which is restricted to one hundred
percent of the outstanding accounts receivable due from the U.S. Government) expires in January
2006. The other credit line totaling $3.0 million expires in November 2006. We intend to renew
these credit lines before their respective expiration dates. We believe that current cash and cash
equivalents ($10.3 million at October 29, 2005), cash generated from operations, and the available
lines of credit will be sufficient to pay the cost to purchase shares acquired pursuant to the
reverse/forward stock split and to meet our capital requirements for fiscal 2006.
11
Our cash and cash equivalents at the end of the first quarter of fiscal 2006 totaled $10.3 million
as compared to approximately $9.2 million reported for the end of fiscal 2005. Working capital
amounted to $27.8 million at the end of the first quarter 2006 as compared to $27.0 million at July
30, 2005.
Selected cash flow data for the first quarter of fiscal 2006 is presented below (in thousands):
|
|
|
|
|
|
|
For the Quarter Ended |
Source (Use) of Cash |
|
October 29, 2005 |
Operating activities: |
|
|
|
|
Net earnings adjusted for depreciation and amortization |
|
$ |
1,231 |
|
Accounts receivable |
|
|
(1,154 |
) |
Inventories |
|
|
675 |
|
Accounts payable |
|
|
(134 |
) |
Income taxes |
|
|
570 |
|
Net cash provided by operating activities |
|
|
471 |
|
Net cash provided by operating activities for the first quarter of fiscal 2006 totaled
approximately $471,000. Net earnings, adjusted for depreciation, provided $1.2 million of cash.
Accounts and notes receivable used approximately $1.2 million of cash primarily attributable to the
increase in sales for the western boot and bar code businesses in October 2005 as compared to July
2005, which was partially offset by the final $894,000 payment related to the sale of our office
products business. The decline in inventory levels in the western boot and barcode businesses
related to their strong October sales and provided approximately $900,000 of cash, which was
partially offset by an increase of approximately $240,000 in the military boot business inventory
levels to support future boot production.
Capital expenditures totaled approximately $126,000 primarily for machinery and warehouse equipment
for the western and military boot businesses.
Dividends paid during the first quarter amounted to approximately $180,000.
Off-Balance Sheet Arrangements
We do not currently utilize any off-balance sheet financing arrangements and do not anticipate
doing so in the future.
FIRST QUARTER FISCAL 2006 COMPARED TO FIRST QUARTER FISCAL 2005
Consolidated net revenues from continuing operations for the first quarter of fiscal 2006
amounted to $18.6 million as compared to $20.4 million for the first quarter of fiscal 2005. This
9% decline in net revenues was primarily attributable to reduced military boot requirements for the
U. S. Government (the Government), which was partially offset by increased sales of bar code and
western and work boot products.
Consolidated gross profit from continuing operations for the first quarter of fiscal 2006 totaled
$5.3 million, an increase of approximately 15.2% over the $4.6 million reported for the first
quarter of fiscal 2005. As a percentage of net revenues, gross profit grew from 22.4% for the first
quarter of fiscal 2005 to 28.5% for the first quarter of fiscal 2006. This improvement in gross
profit was primarily the result of a greater proportion of higher margin western and work boot
products in the overall sales mix.
12
Consolidated research and development costs fell from $304,000 for the first quarter of fiscal 2005
to $191,000 for the first quarter of fiscal 2006 as a result of the new bar code products
introduction into the market.
Consolidated selling, general and administrative (SG&A) expenses for the first quarter of fiscal
2006 totaled $3.5 million as compared to $3.1 million for the first quarter of fiscal 2005. This
rise in SG&A expenses was primarily attributable to increased expenditures for sales salaries and
commissions, sales travel costs, marketing and advertising costs, administrative salaries and
employee benefit costs, which were partially offset by reduced expenditures for group health
insurance costs and professional fees.
As a result of the above, consolidated operating profit for the first quarter of fiscal 2006
amounted to $1.6 million as compared to $1.2 million for the first quarter of fiscal 2005.
Bar Code Business
Net revenues for the bar code business for the first quarter of fiscal 2006 were $4.0 million
as compared to $2.8 million for the first quarter of fiscal 2005 primarily the result of a couple
of large orders for system hardware and related printers. New product (MAT) sales continued to run
below expectations, but market interest in the product is beginning to grow.
Gross profit grew from $715,000 for the first quarter of fiscal 2005 to $906,000 for the first
quarter of fiscal 2006 resulting primarily from the increase in net revenues. As a percentage of
net revenues, gross profit fell from 25.5% for the first quarter of fiscal 2005 to 22.5% for the
first quarter of fiscal 2006 primarily attributable to the sales mix consisting predominately of
lower margin manufactured product sales.
Research and development costs for the first quarter of fiscal 2006 totaled $191,000 as compared to
$304,000 for the first quarter of fiscal 2005 as expenditures for the recently launched bar code
product subsided.
SG&A expenses were fairly consistent at $842,000 and $863,000 for the first quarter of fiscal 2006
and 2005, respectively, as higher sales salaries and commissions, travel related costs, and
marketing expenditures were partially offset by lower corporate charges resulting from decreased
health insurance costs, professional fees, and administrative salaries.
As a result of the above, the operating loss for the first quarter of fiscal 2006 amounted to
$127,000 as compared to an operating loss of $451,000 for the first quarter of fiscal 2005.
Military Boot Business
Net revenues for the military boot business fell from $11.5 million for the first quarter of
fiscal 2005 to $4.7 million for the first quarter of fiscal 2006 primarily the result of the
completion of the surge requirement under our military boot contract with the Government in the
first quarter of fiscal 2005. Military boot sales to foreign governments and the commercial market
were down approximately $378,000 in the first quarter of fiscal 2006 as compared to the first
quarter of fiscal 2005 primarily attributable to increased competition in these markets.
Gross profit for the first quarter of fiscal 2006 totaled approximately $800,000 as compared to
approximately $1.8 million for the first quarter of fiscal 2005. This significant decrease in gross
profit was primarily attributable to decreased net revenues. As a percentage of net revenues, gross
profit improved from 15% for the first quarter of fiscal 2005 to 17% for the first quarter of
fiscal 2006 primarily the result of a combination of lower material and mold rental costs and the
elimination of less efficient subcontracting operations.
13
SG&A expenses for the first quarter of fiscal 2006 amounted to $339,000, down from $805,000 for the
first quarter of fiscal 2005. The decline in SG&A expenses were primarily the result of reduced
employee benefit costs and corporate overhead charges, which were down due to lower group health
insurance costs and professional fees.
As a result of the above, the military boot business operating profit for the first quarter of
fiscal 2006 totaled $451,000 as compared to $932,000 for the first quarter of fiscal 2005.
On September 30, 2005, the Government exercised the second year option of the contract (the
Contract) awarded on September 30, 2003. This option covers the period from October 1, 2005 to
September 30, 2006 and provides for the purchase of a minimum quantity of military boots totaling
48,067 pair with a minimum dollar value of approximately $2,998,896. While the Government is only
obligated to this minimum quantity, we expect the actual boot requirements for fiscal 2006 to be
substantially larger than the stated minimum level based on unofficial governmental scheduling
guidance.
During fiscal 2006 we expect to submit bids to obtain one or more contracts to supply additional
boots to the Government so that we may continue to supply boots to the Government after the
extension of our current Contract expires in September 2006. There are no assurances, however, that
we will be successful in obtaining any further contracts to produce boots for the Government. The
Companys operating results could be materially adversely affected if it is not successful in
obtaining further contracts to produce boots for the Government.
Western and Work Boot Business
Net revenues for the western and work boot business grew from $6.1 million for the first
quarter of fiscal 2005 to $9.8 million for the first quarter of fiscal 2006 primarily the result of
continued strong demand for western and work boot products. This surge in demand for western boot
products resulted primarily from the current fashion trend for western products, the addition of
the Laredo brand, which was purchased from Texas Boot, Inc. (Texas Boot) on June 24, 2005, to the
product mix, and western boot market consolidation related to the exit of Texas Boot. Fashion
trends in the western boot business are highly cyclical and historically have lasted approximately
two to three years.
Gross profit for the first quarter of fiscal 2006 amounted to $3.5 million as compared to $2.1
million for the first quarter of fiscal 2005. This improvement in gross profit was primarily the
result of increased net revenues and the impact of higher profit margins attributable to greater
concentration of lower cost imported products in the overall sales mix.
SG&A expenses for the first quarter of fiscal 2006 climbed to $2.2 million, up from $1.4 million
for the first quarter of fiscal 2005. This increase in SG&A expenses resulted primarily from higher
expenditures for sales commissions, advertising, sales and marketing costs, administrative
salaries, employee benefit costs and corporate allocation charges. As a percentage of net revenues,
SG&A expenses remained steady at approximately 22%.
As a result of the above, the operating profit for the western and work boot business for the first
quarter of fiscal 2006 amounted to approximately $1.3 million as compared to $747,000 for the first
quarter of fiscal 2005.
14
Discontinued Business
On September 9, 2004, we entered into a definitive agreement under which we sold substantially
all the assets of our McRae Office Solutions, Inc. subsidiary to Connected Office Products, Inc.
(COPI). COPI is a subsidiary of TOPAC U.S.A., Inc., which is headquartered in Irvine, California,
and operates a network of wholly owned subsidiaries involved in the sales, service, and
distribution of office products. Under the terms of the Asset Purchase Agreement, COPI purchased
substantially all of the assets of McRae Office Solutions, Inc. for $10,794,000. On September 9,
2005, the Company received a payment in the amount of $912,000, which was comprised of the balance
due of $894,000 and the addition of accrued interest of $18,000. The operating results of the
office products business segment have been classified as a discontinued operation for all periods
presented in the Companys consolidated financial statements included in this Report.
There were no operating results from discontinued operations for the first quarter of fiscal 2006
as compared to net revenues of $1.3 million and an operating loss of approximately $268,000, net of
income tax benefit for the first quarter of fiscal 2005.
The estimated gain on the sale of our office products business for the first quarter of fiscal 2005
totaled approximately $2.2 million, net of a $1.4 million tax provision.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
There were no accounting standards issued during the first quarter of fiscal 2006 that were
applicable to us.
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 of 1933 and Section 21E of
the Securities Exchange Act of 1934. Important factors that could cause actual results or events to
differ materially from those projected, estimated, assumed or anticipated in any such
forward-looking statements include: the effect of competitive products and pricing, risks unique to
selling goods to the Government (including variation in the Governments requirements for our
products and the Governments ability to terminate its contracts with vendors), loss of key
customers, acquisitions, supply interruptions, additional financing requirements, our expectations
about future Government orders for military boots, loss of key management personnel, our ability to
successfully develop new products and services, and the effect of general economic conditions in
our markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes related to the aggregate $4.75 million
lines of credit. As of October 29, 2005, there was no outstanding indebtedness under the lines of
credit. We do not buy or sell derivative financial instruments for trading purposes. Borrowings
under these credit facilities described above bear interest at rates based upon the Prime Rate or
the Prime Rate less a margin of one-half percent offered by the applicable lender. We have not
entered into any swap agreements or engaged in any other hedging activities with respect to this
variable rate indebtedness.
15
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief
Executive Officer and Vice President of Finance, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Vice President of Finance have
concluded that, except as discussed below, these disclosure controls and procedures are effective
to provide reasonable assurance that information required to be disclosed by us in reports that we
file under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and
reported, within the time periods specified in Securities and Exchange Commission rules and forms.
It should be noted that in designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management
necessarily is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We have designed our disclosure controls and procedures to reach
a level of reasonable assurance of achieving desired control objectives and, based on the
evaluation described above, our Chief Executive Officer and Vice President of Finance concluded
that our disclosure controls and procedures were effective at reaching that level of reasonable
assurance, except as discussed below.
In connection with the audit of our consolidated financial statements for the fiscal year ended
July 30, 2005, our independent auditors informed us that we continue to have significant
deficiencies in our internal control over financial reporting that in the aggregate constituted
material weaknesses under standards established by the Public Company Accounting Oversight Board.
These deficiencies, which were noted across all of the Companys operating divisions, are generally
the result of incompatible duties, undocumented controls, lack of monitoring controls and the lack
of an internal audit function.
Certain of these internal control weaknesses may also constitute deficiencies in the Companys
disclosure controls. We have performed substantial additional procedures in an effort to ensure
that these internal control deficiencies do not lead to further material misstatements in our
consolidated financial statements. We have initiated corrective actions to address these internal
control deficiencies, and will continue to evaluate the effectiveness of our disclosure controls
and internal controls and procedures on an ongoing basis, taking corrective action as appropriate.
There were no changes in our internal control over financial reporting that occurred during the
first quarter of fiscal 2006 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
While from time to time we are engaged in litigation incidental to our business, we are not
currently party to any material legal proceedings.
Items 2, 3, 4 and 5.
These items are not applicable and have been omitted.
16
Item 6. Exhibits
|
3.1 |
|
Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the
Registrants Form S-14, Registration No. 2-85908). |
|
|
3.2 |
|
Amendment to the Certificate of Incorporation (Incorporated by reference to
Exhibit 3 to the Registrants Form 10-K for the year ended August 1, 1987). |
|
|
3.3 |
|
Certificate of Amendment to the Certificate of Incorporation (Filed herein).
Page 19 |
|
|
3.4 |
|
Certificate of Amendment to the Certificate of Incorporation (Filed herein).
Page 21. |
|
|
3.5 |
|
Restated Bylaws of the Registrant effective May 29, 2001. (Incorporated by
reference to Exhibit 3.3 to the Registrants Form 10-K for the year ended July 28,
2001). |
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President and CEO
(Filed herein). Page 23. |
|
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice President
of Finance (Filed herein). Page 24. |
|
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350), for D. Gary McRae, President and CEO (Filed herein). Page 25. |
|
|
32.2 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. Section 1350), for Marvin G. Kiser, Sr., Vice President of Finance (Filed
herein). Page 26. |
17
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 13, 2005
|
|
|
|
By:
|
|
/s/ D. Gary McRae |
|
|
|
|
|
|
|
|
D. Gary McRae
|
|
|
|
|
|
|
|
|
President and CEO |
|
|
|
|
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
Date: December 13, 2005
|
|
|
|
By:
|
|
/s/ Marvin G. Kiser, Sr. |
|
|
|
|
|
|
|
|
Marvin G. Kiser, Sr.
|
|
|
|
|
|
|
|
|
(Principal Accounting Officer) |
|
|
18