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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q/A (Amendment No. 1)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarter Ended January 29, 2005
OR o
    
    Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934For the transition period from __________________ to ____________________
 Commission file number 1-8578 McRae Industries, Inc.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    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
(Registrants telephone number, including area code)  Yes
o
           No
þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes
o
           No
þ 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: 1,948,153 shares as of March 11, 2005.
Common Stock, $1 Par ValueClass B: 817,846 shares as of
March 11, 2005.




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INTRODUCTORY NOTE McRae Industries, Inc. (the Company, which may be referred to as we, us, or our) is
filing this Amendment No. 1 (Amendment No. 1) to the Form 10-Q originally filed March 15, 2005
(the original filing), to reflect a revised discussion concerning the Companys disclosure
controls and procedures and internal control over financial reporting in the Disclosure Controls
and Proceduresand Managements Discussion and Analysis
of Financial Condition and Results of Operationssections of the original filing. Except as set forth above and for such other
changes as required by applicable law, no attempt has been made in this Amendment No. 1 to modify
or update the disclosures as presented in the original filing and other than the discussion
regarding our internal control over financial reporting contained in Part I, Item 4, this Amendment
No. 1 does not reflect events occurring after the date of the
original filing on March 15, 2005. 2




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PART I. FINANCIAL INFORMATION 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/A for the fiscal year ended July 31, 2004 including the financial information and managements
discussion and analysis contained therein. INTERNAL CONTROL OVER FINANCIAL REPORTING In connection with the audit of our consolidated financial statements for the fiscal year ended
July 31, 2004, our independent auditors informed us that they had discovered 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 Companys operating divisions and which have
been present since the Companys inception, are generally the result of incompatible duties,
undocumented controls, lack of monitoring controls and the lack of an internal audit function.
Additionally, the discovery of compilation errors in the military boot operations fiscal 2004
year-end inventory required us to restate our financial statements as of July 31, 2004 and for the
fiscal year then ended included in our Annual Report on Form 10-K originally filed by us on October
29, 2004. Upon completion by our independent auditors of their review of the accounting for
inventory in our financial statements as previously reported for fiscal 2004, our independent
auditors informed us that in their view there were material internal control weaknesses related to
the compilation of the Companys inventory. We have performed substantial additional procedures including, but not limited to, documentation of
our procedures, identification of key control weaknesses, and initiation of an appropriate
remediation process in an effort to ensure that these internal control deficiencies do not lead to
further material misstatements in our consolidated financial statements and to enable the
completion of the independent auditors audit of our consolidated financial statements. 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 assets). Our most critical accounting estimates include the
following: Intangible Assets We determine the utility of goodwill and trademarks based on estimated future cash flows and test
for impairment in accordance with applicable accounting pronouncements. We estimate future cash
flows based on historical performance and our knowledge of known factors likely to impact future
cash flows. Actual future performance may be different from managements projections. 3




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Inventories Inventories are recorded at the lower of cost or market value. 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. Revenue Recognition We recognize revenue under our current boot contract when the boots are inspected and accepted by
the Governments 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. 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 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 establish a valuation allowance. To the extent we establish a valuation allowance or
increase this allowance in a period, we 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 would establish an additional valuation
allowance, which could materially impact our financial position and results of operations. FINANCIAL CONDITION AND LIQUIDITY Our cash and cash equivalents for the six months ended January 29, 2005, totaled approximately
$13.4 million as compared to approximately $2.5 million at July 31, 2004. Working capital at the
end of the first six months of fiscal 2005 amounted to $29.2 million, up slightly from $28.8
million at July 31, 2004. Currently, we have two lines of credit with a bank totaling $4.75 million, all of which was
available at January 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 $3.0 million credit line expires in November 2005. 4




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We believe that our current cash and cash equivalents, cash generated from operations, and
available lines of credit will be sufficient to meet our capital requirements for the remainder of
fiscal 2005. Our contractual commitments for fiscal 2005 are approximately $178,000. Selected cash flow data for the first six months of fiscal 2005 are presented below (in thousands): For the Six MonthsEndedJanuary 29, 2005Source (Use) of CashOperating activities:Net earnings from continuing operations adjusted for depreciation
    
    $
    1,579Accounts receivable
    
    
    1,482Inventories
    
    
    5,520Accounts payable
    
    
    (2,202
    )Net cash provided by operating activities
    
    
    5,194Net cash provided by discontinued operations
    
    
    9,403
 Net cash provided by operating activities for the first six months of fiscal 2005 totaled
approximately $5.2 million. Net earnings from continuing operations, adjusted for depreciation,
provided $1.6 million of cash. Trade accounts receivable provided $1.5 million of cash primarily
attributable to the timing of collection of accounts related to heavy first quarter sales with
declining second quarter sales to the U.S. Government. Inventory fell by approximately $5.5 million
primarily the result of higher than anticipated demand for western and work boot products and the
decline in military boot requirements by the U.S. Government. The decrease in accounts payable used
approximately $2.2 million of cash primarily attributable to the timing of payments for inventory
related to the military boot and western and work boot businesses. Capital expenditures consisting primarily of production molds for the new bar code product totaled
approximately $113,000. For the first six months of fiscal 2005, we used approximately $3.1 million to
reduce our long-term debt obligations. Dividend payments amounted to approximately $272,000. The decrease in military boot requirements by the U.S. Government may adversely impact the
Companys liquidity over the long run. Off-Balance Sheet Arrangements We do not currently utilize any off-balance sheet financing arrangements and do not anticipate
doing so in the future. 5




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SECOND QUARTER FISCAL 2005 COMPARED TO SECOND QUARTER FISCAL 2004 Consolidated net revenues from continuing operations for the second quarter of fiscal 2005 amounted
to $15.5 million as compared to $14.9 million for fiscal 2004. This increase in net revenues
resulted from higher demand for western and work boot business and bar code business products and
was partially offset by lower military boot requirements by the U.S. Government. Consolidated gross profit for the second quarter of fiscal 2005 amounted to $3.8 million, an
increase of 31.0% over the $2.9 million reported for fiscal 2004. As a percentage of net revenues,
gross profit for the second quarter of fiscal 2005 was 24.5% as compared to 19.5% for the same
period of fiscal 2004. This increase in gross profit was primarily due to increased net revenues
and higher margins on imported western and work boots. Consolidated research and development (R&D) from continuing operations for the second quarter of
fiscal 2005 amounted to $289,000 as compared to $449,000 for the same period of fiscal 2004 as the
new bar code product moved from the development stage to the production stage. Consolidated selling, general and administrative (SG&A) expenses from continuing operations
totaled $2.8 million, an increase of 21.7% over the $2.3 million reported for the second quarter of
fiscal 2004. As a percentage of net revenues, SG&A expenditures for the second quarter of fiscal
2005 were 18.1% as compared to 15.4% for the second quarter of fiscal 2004. This increase in SG&A
expenses resulted primarily from higher expenditures for sales commissions, advertising costs,
professional fees (including significant costs incurred to achieve compliance with the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002), and employee benefit costs, which were partially
offset by lower group health insurance costs, primarily attributable to the sale of our McRae
Office Solutions business and bad debt expenses. As a result of the above, consolidated operating profit from continuing operations amounted to
$663,000 for the second quarter of fiscal 2005 as compared to consolidated operating profit from
continuing operations of $170,000 for the second quarter of fiscal 2004. Bar Code Business Net revenues for the bar code business for the second quarter of fiscal 2005 amounted to $2.9
million as compared to $2.7 million for fiscal 2004. This growth in net revenues resulted
primarily from an improved market for technology products. Our new product, which was introduced to
the market late in the second quarter, had only a minimal impact on net revenues. However, we
expect increased contributions from this product for the remainder of this fiscal year. Gross profit totaled $811,000 for the second quarter of fiscal 2005, up from $792,000 for the same
period of fiscal 2004 primarily attributable to the increase in net revenues. As a percentage of
net revenues, gross profit fell from 29.3% for the second quarter of fiscal 2004 to 28.0% for the
second quarter of fiscal 2005 primarily the result of lower margin resale products comprising a
larger percentage of the overall sales mix. 6




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Selling, general and administrative (SG&A) and research and development (R&D) costs for the second
quarters of both fiscal 2005 and 2004 amounted to approximately $1.2 million. R&D costs fell from
$450,000 for the second quarter of fiscal 2004 to $289,000 for the second quarter of fiscal 2005 as
the new bar code product moved from development to production. SG&A expenses increased
approximately $150,000 primarily attributable to higher sales and marketing costs and professional
fee expenditures. As a result of the above, the bar code business loss from operations totaled $347,000 for the
second quarter of fiscal 2005 as compared to a loss from operations of $370,000 for the second
quarter of fiscal 2004. Military Boot Business Net revenues for the military boot business for the second quarter of fiscal 2005 amounted to $6.5
million, a decrease of 12.2% from the $7.4 million reported for the same period of fiscal 2004.
This decrease in net revenues resulted primarily from lower military boot requirements for the U.S.
Government (the Government), which was partially offset by slightly higher sales of military boots
to Israel. Gross profit for the second quarter of fiscal 2005 was approximately $856,000, down from $923,000
for the second quarter of fiscal 2004 primarily the result of reduced net revenues. As a
percentage of net revenues, gross profit grew from 12.5% for the second quarter of fiscal 2004 to
13.2% for the second quarter of fiscal 2005 primarily attributable to lower per unit costs
resulting from manufacturing efficiencies associated with increased production levels and a greater
proportion of higher margin sales to Israel in the sales mix. Selling, general and administrative expenses for the military boot business for the second quarter
of fiscal 2005 totaled approximately $569,000, an increase from the $338,000 reported for the
second quarter of fiscal 2004. This increase is primarily attributable to higher group health
insurance costs and professional fees due to an increased allocation of overhead expenses due to
the sale of our McRae Office Solutions business. As a result of the above, the military boot business earnings from operations for the second
quarter of fiscal 2005 amounted to $287,000, as compared to $586,000 reported for the second
quarter of fiscal 2004. On September 30, 2004, the U.S. Government (the Government) exercised the first year option under
our Contract with the Government awarded to us on September 30, 2003 (the Contract). Since the
completion of the surge requirement in the first quarter of fiscal 2005, the Government has
reduced its production requirement and the minimum boot requirement under the Contract has been
reduced from 276,460 pair to 138,230 pair. In addition, we were not successful in securing a recent
Government contract to supplement our current Contract. As a result, on March 3, 2005 we decided to
consolidate all military boot production at our North Carolina plant by closing our Tennessee
manufacturing facility effective March 18, 2005. The closing of this plant will impact 120
employees and we estimate will cause us to incur approximately $130,000 to $140,000 in severance
costs. We are currently evaluating asset 7




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impairment issues (the Tennessee manufacturing facility currently has a book value of approximately
$330,000) and other matters related to the plant closing. Western and Work Boot Business Net revenues for the western and work boot business for the second quarter of fiscal 2005 totaled
$5.9 million, an increase of 15.7% over the $5.1 million reported for the second quarter of fiscal
2004 primarily the result of increased demand for western and work boot products. Indicators point
to an emerging fashion trend for these products. Gross profit for the second quarter of fiscal 2005 amounted to $1.9 million as compared to $1.2
million for the second quarter of fiscal 2004 primarily attributable to increased net revenues and
higher margins associated with the shift from manufacturing to importing our western and work
boots. As a percentage of net revenues, gross profit increased from 23.5% for the second quarter of
fiscal 2004 to 32.2% for the second quarter of fiscal 2005. SG&A expenses for the second quarter of fiscal 2005 totaled $1.3 million as compared to $1.2
million for the same period for fiscal 2004. This increase in SG&A expenses resulted primarily
from higher expenditures for sales commissions, group health insurance, office supplies, and
advertising expenses, which were slightly offset by lower bad debt charges, sales and marketing
expenses, and professional fees. As a result of the above, operating profit for the western and work boot business for the second
quarter of fiscal 2005 amounted to $587,000 as compared to an operating loss of $38,000 for the
second quarter of fiscal 2004. FIRST SIX MONTHS FISCAL 2005 COMPARED TO FIRST SIX MONTHS FISCAL 2004 Consolidated net revenues from continuing operations for the first six months of fiscal 2005
amounted to $36.0 million as compared to $30.9 million for the first six months of fiscal 2004 as
all three of our main businesses posted increased net revenues which are further discussed below. Consolidated gross profit from continuing operations for the first six months of fiscal 2005
totaled $8.4 million as compared to $7.0 million for the first six months of fiscal 2004 primarily
the result of the increase in net revenues. As a percentage of net revenues, gross profit remained
consistent at approximately 23% for the first six months of both fiscal 2005 and fiscal 2004. Consolidated research and development (R&D) expenses from continuing operations for the first six
months of fiscal 2005 was $629,000, down from $789,000 reported for the first six months from
continuing operations of fiscal 2004. This decrease resulted from the completion of the
development stage of the new bar code product, which was introduced to the market in January 2005. Consolidated selling, general and administrative (SG&A) expenses from continuing operations for the
first six months of fiscal 2005 amounted to $5.9 million as compared to $4.7 million reported for
the same period of fiscal 2004. This 25.5% growth in SG&A costs is primarily the result of
increased expenditures for group health insurance, professional fees (including 8




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significant costs incurred to achieve compliance with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002), sales commissions, employee benefit costs and advertising, which were
partially offset by decreased expenditures for sales and marketing costs, and bad debt charges. As a result of the above, net earnings from continuing operations for the first six months of
fiscal 2005 totaled $1.9 million as compared to $1.4 million reported for the first six months from
continuing operations of fiscal 2004. Bar Code Business Net revenues for the first six months of fiscal 2005 totaled $5.7 million, as compared to the $4.9
million reported for the first six months of fiscal 2004. This growth in net revenues resulted
primarily from an improving market for bar code products and the introduction of our new bar code
product. Gross profit for the first six months of fiscal 2005 grew to $1.6 million, up from $1.5 million for
the first six months of fiscal 2004 primarily attributable to the increase in net revenues. As a
percentage of net revenues, gross profit decreased to 28.1% for the first six months of fiscal 2005
as compared to 30.6% reported for the first six months of fiscal 2004. This decline in gross profit
resulted primarily from lower margin purchased products being a greater part of the overall sales
mix. SG&A and R&D expenses for the first six months of fiscal 2005 amounted to $2.4 million as compared
to $2.2 million reported for the first six months of fiscal 2004. R&D expenditures fell $160,000
for the first six months of fiscal 2005 as compared to the same period of fiscal 2004 as a result
of the completion of the new bar code products development phase and movement to the production
phase. SG&A expenses totaled $1.7 million for the first six months of fiscal 2005 as compared to
$1.4 million for the first six months of fiscal 2004. This increase in SG&A expenses resulted
primarily from higher expenditures for sales commissions, group health insurance, and professional
fees, which were partially offset by lower expenditures for travel expenses. As a result of the above, the bar code business loss from operations for the first six months of
fiscal 2005 amounted to $798,000 as compared to an operating loss of $738,000 for the first six
months of fiscal 2004. Military Boot Business Net revenues for the military boot business for the first six months of fiscal 2005 amounted to
$18.0 million as compared to $15.7 million for the first six months of fiscal 2004. This 14.6%
increase in net revenues is primarily the result of the Governments surge requirement being in
effect for a greater portion of the fiscal 2005 period as compared to the fiscal 2004 period. Gross profit amounted to $2.6 million for the first six months of fiscal 2005 as compared to $2.7
million for the first six months of fiscal 2004. As a percentage of net revenues, gross profit
decreased from the 17.2% reported for the first six months of fiscal 2004 to 14.4% for the same
period of fiscal 2005. These declines in gross profit resulted primarily from lower sales prices
associated with the option year contract with the Government. 9




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SG&A expenditures for the first six months of fiscal 2005 amounted to approximately $1.4 million as
compared to $671,000 for the first six months of fiscal 2004. This increase resulted primarily
from higher expenditures for group health insurance and professional fees resulting from increased
allocation of overhead expenses due to the sale of our McRae Office Solutions business. As a result of the above, net earnings from operations for the first six months of fiscal 2005
amounted to $1.2 million as compared to the $2.1 million reported for the first six months of
fiscal 2004. Western and Work Boot Business Net revenues for the western and work boot business for the first six months of fiscal 2005 totaled
$12.0 million up from $11.0 million for the first six months of fiscal 2004 primarily attributable
to stronger demand for western and work boot products. Gross profit for the first six months of fiscal 2005 amounted to $4.0 million, a 48.1% increase
over the $2.7 million reported for the same period of fiscal 2004. Gross profit as a percentage of
net revenues grew from 24.5% for the first six months of fiscal 2004 to 33.3% for the same period
of fiscal 2005. This improvement in gross profit was primarily attributable to increased net
revenues and higher margins associated with the shift from manufacturing to importing our western
and work boots. SG&A expenditures for the first six months of fiscal 2005 were approximately $2.7 million as
compared to $2.5 million for the first six months of fiscal 2004. This increase in SG&A expenses
was primarily the result of higher expenditures for sales commissions, advertising, and employee
benefit costs. These expenditures were partially offset by lower charges for professional fees and
bad debts. As a result of the above, the western and work boot business earnings from operations for the first
six months of fiscal 2005 amounted to $1.3 million as compared to $108,000 reported for the first
six months of fiscal 2004. 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 $11,000,000 subject
to adjustment based on the net book value of the acquired assets as of August 28, 2004. Based on
the Companys post-closing calculation of the net book value of the acquired assets, the Company
expects an approximate $206,000 reduction in the purchase price, which is reflected in the gain
calculation. COPI has reviewed this calculation and has asserted a claim for an additional $248,000
reduction. We disagree with COPIs assertion and have disputed this claim. 10




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Discontinued operations net revenues for the first six months of fiscal 2005, which consisted of
only one month of operations, amounted to $1.3 million as compared to $9.9 million for the first
six months of fiscal 2004. The net loss from discontinued operations for the first six months of
fiscal 2005 and fiscal 2004 amounted to $270,000 and $402,000, respectively, net of income tax
benefit. The estimated gain on the sale of the office products business assets totaled approximately $2.2
million net of a $1.4 million tax provision. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In November 2004, Statement of Financial Accounting Standards (SFAS) No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 was issued to clarify the accounting for abnormal amounts of
facility expense, freight, handling costs, and wasted material (spoilage). We are currently
evaluating how this standard applies to our business. SFAS No. 151 will be effective for us in
fiscal 2006. In December 2004, SFAS No. 152, Accounting for Real Estate Time-Sharing Transactions was issued
to amend several components of FASB Statements No. 66 and No. 67. This standard is not applicable
to our business. In December 2004, SFAS No. 153, Exchange of Non-Monetary Assets was issued to amend APB Opinion
No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that do not have
commercial substance. We are currently evaluating how this standard applies to our business. SFAS
No. 153 will be effective for us in fiscal 2006. In December 2004, SFAS No. 123 (revised 2004), Share-Based Payment, was issued to establish
standards for the accounting for transactions in which an entity exchanges its equity instruments
for goods or services. We currently have no plans to participate in transactions of this type. SFAS
No. 123 (revised 2004) will be effective for us in fiscal 2006. FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly 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 Governments requirements for our
products and the Governments 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. 11




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ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures designed 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 (the Exchange Act) is recorded, processed, summarized, and reported, within
the time periods specified in Securities and Exchange Commission rules and forms. Disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
include controls and procedures designed to ensure that information required to be disclosed by the
Company in the reports we file or submit under the Exchange Act is accumulated and communicated to
our Companys management, including our Chief Executive Officer and Vice President of Finance, as
appropriate, to allow timely decisions regarding required disclosure. It should be noted that any
system of controls, however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met. 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, for the reasons discussed below, the Chief Executive Officer and
Vice President of Finance concluded that these disclosure controls and procedures were not
effective at the reasonable assurance level at such time. In connection with the audit of our consolidated financial statements for the fiscal year ended
July 31, 2004, our independent auditors informed us that they had discovered 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 Companys operating divisions and which have
been present since the Companys inception, are generally the result of incompatible duties,
undocumented controls, lack of monitoring controls and the lack of an internal audit function.
Additionally, the discovery of compilation errors in the military boot operations fiscal 2004
year-end inventory required us to restate our condensed consolidated financial statements as of
July 31, 2004 and for the fiscal year then ended included in our Annual Report on Form 10-K
originally filed by us on October 29, 2004. Upon completion by our independent auditors of their
review of the accounting for inventory in our financial statements as previously reported for
fiscal 2004, our independent auditors informed us that in their view there were material internal
control weaknesses related to the compilation of the Companys inventory. We have performed substantial additional procedures including, but not limited to, documentation of
our procedures, identification of key control weaknesses, and initiation of an appropriate
remediation process in an effort to ensure that these internal control deficiencies do not lead to
further material misstatements in our condensed consolidated financial statements and to enable the
completion of the independent auditors audit of our condensed consolidated financial statements. 12




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During the second quarter of fiscal 2005, we initiated certain corrective actions to address
certain of the internal control deficiencies that have been identified, including several relating
to our accounting for inventory at our military boot operation. Other than these actions, there
were no changes in our internal control over financial reporting that occurred during the second
quarter of fiscal 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 6. Exhibits (a) Exhibits  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).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae,
President and CEO (Filed herewith).31.2
    
    Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser,
Sr., Vice President of Finance (Filed herewith).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
(Incorporated by reference to Exhibit 32.1 to the registrants Form 10-Q for
the quarter ended January 29, 2005 filed on March 15, 2005).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 (Incorporated by reference to Exhibit 32.1 to the registrants Form
10-Q for the quarter ended January 29, 2005 filed on March 15, 2005). 13




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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:June 24, 2005
    
    By:
    
    /s/ D. Gary McRaeD. Gary McRaePresident and CEO(Principal Executive Officer)Date:June 24, 2005
    
    By:
    
    /s/ Marvin G. Kiser, Sr.Marvin G. Kiser, Sr.(Principal Accounting Officer)
 14