##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q



|(x) |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|--- |  | ---------------------------------------------------------------------------------------

For the Quarter Ended November 1, 2003

OR

( )  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)

Delaware
    
    56-0706710(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)


400 North Main Street
Mt. Gilead, North Carolina 27306
(Address of principal executive offices)

Telephone Number (910) 439-6147
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes X No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

Yes  No X

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 1,919,972 shares as of December 10, 2003.
Common Stock, $1 Par ValueClass B 848,527 shares as of December 10, 2003.

1



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McRae Industries, Inc. and Subsidiaries

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1.
    
    Condensed Consolidated Financial Statements
    
    Page No.Condensed Consolidated Balance Sheet
    
    3-4Condensed Consolidated Statement of Operations
    
    5Condensed Consolidated Statement of Cash Flows
    
    6Notes to Condensed Consolidated Financial Statements
    
    7-8ITEM 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    9-14ITEM 3.
    
    Quantitative and Qualitative Disclosures about
Market Risk
    
    14ITEM 4.
    
    Controls and Procedures
    
    14PART II. OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    15ITEM 2.
    
    Changes in Securitiesand Use of Proceeds
    
    15ITEM 3.
    
    Default upon Senior Securities
    
    15ITEM 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    15ITEM 5.
    
    Other Information
    
    15ITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    15Signatures
    
    16


2



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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)

November 1, 2003
    
    August 2, 2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,808
    
    
    $
    6,192Accounts and notes receivable, net
    
    
    12,529
    
    
    
    10,334Inventories (See Note B)
    
    
    16,031
    
    
    
    17,559Net investment in capitalized leases
    
    
    146
    
    
    
    146Prepaid income tax
    
    
    702
    
    
    
    314Prepaid expenses and other current assets
    
    
    358
    
    
    
    242Total current assets
    
    
    33,574
    
    
    
    34,787Property and equipment, net
    
    
    4,852
    
    
    
    4,541Other assets:Net investment in capitalized leases
    
    
    1,634
    
    
    
    1,716Notes receivable
    
    
    56
    
    
    
    71Real estate held for investment
    
    
    1,399
    
    
    
    1,390Goodwill
    
    
    362
    
    
    
    362Cash surrender value of life insurance
    
    
    2,220
    
    
    
    2,220Trademarks
    
    
    1,049
    
    
    
    1,049Other
    
    
    13
    
    
    
    13Total other assets
    
    
    6,733
    
    
    
    6,821$
    45,159
    
    
    $
    46,149


See notes to condensed consolidated financial statements

3



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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)



See notes to condensed consolidated financial statements

4

|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |        |       |        | 
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------------------- | ------ | ---------------- | ------ | -------------- | ------ | ----- | ------ | 
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        | November 1, 2003 |        | August 2, 2003
|Liabilities
        and Shareholders Equity         |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|Current
        liabilities:                         |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Notes
        payable, banks  current portion |                                    | $      | 577              |        |                | $      | 577   |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Accounts
        payable                       |                                    |        | 3,974            |        |                |        | 5,211 |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Accrued
        employee benefits              |                                    |        | 552              |        |                |        | 427   |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Deferred
        revenues                      |                                    |        | 872              |        |                |        | 1,012 |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Accrued
        payroll and payroll taxes      |                                    |        | 885              |        |                |        | 913   |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Contract
        contingencies                 |                                    |        | 400              |        |                |        | 400   |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Other                                          |                                    |        | 1,059            |        |                |        | 1,044 |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | Total
        current liabilities              |                                    |        | 8,319            |        |                |        | 9,584 |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|Notes
        payable, banks, net of current portion |                                                                                                                                                                                                               |                                                | 3,165                              |        |                  |        | 3,307          |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|Lease
        guarantees                             |                                                                                                                                                                                                               |                                                | 1,538                              |        |                  |        | 1,568          |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|Minority
        interest                            |                                                                                                                                                                                                               |                                                | 86                                 |        |                  |        | 88             |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     | Shareholders
        equity:
        Common stock:
             Class A, $1 par; Authorized 5,000,000
             shares; Issued and outstanding, 1,919,972
             and 1,914,972 shares, respectively |                                                |                                    | 1,920  |                  |        |                | 1,915  |      
|                                                     | Class B,
        $1 par; Authorized 2,500,000
             shares; Issued and outstanding, 848,527
             and 853,527 shares, respectively                                                              |                                                |                                    | 849    |                  |        |                | 853    |      
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     | Additional paid-in capital                                                                                                                                                                                    |                                                |                                    | 791    |                  |        |                | 791    |      
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     | Retained
        earnings                                                                                                                                                                                     |                                                |                                    | 28,491 |                  |        |                | 28,043 |      
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               |                                                | Total
        shareholders equity |        |                  | 32,051 |                |        |       | 31,602 | 
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       
|                                                     |                                                                                                                                                                                                               | $                                              | 45,159                             |        |                  | $      | 46,149         |       
|                                                     |                                                                                                                                                                                                               |                                                |                                    |        |                  |        |                |       





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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

Three Months EndedNovember 1,
    
    November 2,2003
    
    2002Net revenues
    
    $
    21,396
    
    
    $
    19,797Costs and expenses:Cost of revenues
    
    
    16,295
    
    
    
    15,062Research & development
    
    
    354
    
    
    
    160Selling, general and administrative
    
    
    3,862
    
    
    
    3,674Other expense (income), net
    
    
    (14
    )
    
    
    (28
    )Interest expense
    
    
    37
    
    
    
    49Total costs and expenses
    
    
    20,534
    
    
    
    18,917Earnings from operations before
income taxes and minority interest
    
    
    862
    
    
    
    880Provision for income taxes
    
    
    302
    
    
    
    342Minority shareholders interest
in loss of subsidiary
    
    
    (2
    )
    
    
    (1
    )Net earnings
    
    $
    562
    
    
    $
    539Net earnings per common share
    
    $
    .20
    
    
    $
    .19Weighted average number of
common shares outstanding
    
    
    2,768,499
    
    
    
    2,768,499


See notes to condensed consolidated financial statements

5



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McRae Industries, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)

Three Months EndedNovember 1, 2003
    
    November 2, 2002Net cash used in operating
activities
    
    $
    (2,083
    )
    
    $
    (3,238
    )Cash flows from investing activities:Proceeds from sales of assets
    
    
    5
    
    
    
    1Purchase of trade names and other assets
    
    
    (9
    )
    
    
    (150
    )Capital expenditures
    
    
    (55
    )
    
    
    (125
    )Net collections of long-term receivables
    
    
    15
    
    
    
    26Net cash used in investing activities
    
    
    (44
    )
    
    
    (248
    )Cash flows from financing activities:Principal repayments of notes payable
    
    
    (142
    )
    
    
    (129
    )Dividends paid
    
    
    (115
    )
    
    
    (113
    )Net cash used in financing activities
    
    
    (257
    )
    
    
    (242
    )Net decrease in cash and cash
equivalents
    
    
    (2,384
    )
    
    
    (3,728
    )Cash and cash equivalents at beginning
of period
    
    
    6,192
    
    
    
    5,822Cash and cash equivalents at end of period
    
    $
    3,808
    
    
    $
    2,094


NOTE:
    
    Non-cash operating and investing activities excluded from this statement
of cash flows relate to the transfer of office equipment from inventory to
property and equipment amounted to $554,000 and $306,000 for the first
quarters of fiscal 2004 and 2003, respectively.


See notes to condensed consolidated financial statements

6



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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 regulation 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 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 November 1, 2003 are not necessarily
indicative of the results that may be expected for the year ending July 31,
2004. The interim condensed consolidated financial information should be read
in conjunction with the Companys August 2, 2003 audited consolidated financial
statements and footnotes thereto included in the McRae Industries, Inc. Annual
Report on Form 10-K filed with the SEC.

Certain reclassifications have been made to the prior years financial
statements to conform with the current years presentation.

NOTE B  INVENTORIES

The components of inventory consist of the following (in thousands):

November 1, 2003
    
    August 2, 2003Raw materials
    
    $
    2,509
    
    
    $
    3,293Work-in-process
    
    
    1,084
    
    
    
    1,081Finished goods
    
    
    12,438
    
    
    
    13,185$
    16,031
    
    
    $
    17,559


NOTE C  SUBSEQUENT EVENTS

On November 25, 2003, the Company declared a cash dividend of $.06 cents per
share on its Class A Common Stock payable on December 26, 2003 to shareholders
of record on December 12, 2003.

7



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NOTE E  SUMMARY OF BUSINESS SEGMENTS

Three Months EndedNovember 1,
    
    November 2,2003
    
    2002(Dollars in thousands)Net revenuesBar Code
    
    $
    2,256
    
    
    $
    2,921Office Products
    
    
    5,373
    
    
    
    4,841Military Boots
    
    
    8,321
    
    
    
    5,198Western/Work Boots
    
    
    5,879
    
    
    
    6,760Eliminations/Other
    
    
    (433
    )
    
    
    7721,396
    
    
    
    19,797Net earnings (loss)
from operationsBar Code
    
    
    (363
    )
    
    
    (218
    )Office Products
    
    
    (421
    )
    
    
    (338
    )Military Boots
    
    
    1,484
    
    
    
    829Western/Work Boots
    
    
    13
    
    
    
    481Eliminations/Other
    
    
    149
    
    
    
    126862
    
    
    
    880Provision for income
taxes
    
    
    302
    
    
    
    342Minority shareholders
interest
    
    
    (2
    )
    
    
    (1
    )Net earnings
    
    $
    562
    
    
    $
    539


November 1,
    
    August 2,2003
    
    2003AssetsBar Code
    
    $
    4,933
    
    
    $
    4,987Office Products
    
    
    12,288
    
    
    
    13,074Military Boots
    
    
    6,491
    
    
    
    6,328Western/Work Boots
    
    
    13,440
    
    
    
    14,214Eliminations/Other
    
    
    8,007
    
    
    
    7,546$
    45,159
    
    
    $
    46,149


8



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the attached
unaudited condensed consolidated financial statements and notes thereto, and
with the Companys Annual Report on Form 10-K for the fiscal year ended August
2, 2003, including the financial information and managements 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, cost per copy contract
contingencies, 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 estimates include the
following:

Contract Contingencies

Our office products business leases equipment (usually for a sixty-month
period) to county-wide education systems and sells the lease to third party
leasing companies. Under this program the school system is billed on a
monthly, quarterly or annual basis at a specified rate for each copy they
make. The cost per copy charged to the school system is designed to cover the
equipment cost, supplies (except for paper and staples), service, and a
finance charge. On a quarterly basis, on a program-by-program basis, we
project an expected outcome over the life of the program. We use historical
copy usage to predict the number of copies to be made over the remaining life
of the program. We adjust this estimate of the number of expected future
copies based on known factors that will influence copy rates in each program.
We use historical service and supply costs incurred on each program to
estimate future service and supply costs on a per copy basis. We adjust these
estimated costs for known factors that will impact service and supplies in the
future. We also estimate any other costs expected to be incurred such as
depreciation on rental equipment. On programs where the sum of the estimated
future costs exceeds the expected future revenue, we recognize a provision for
100% of the expected losses for these programs.

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.

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

9



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##### 



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. 101, 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 in 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.

FINANCIAL CONDITION AND LIQUIDITY

Our cash and cash equivalents at the end of the first quarter of fiscal 2004
totaled $3.8 million as compared to $6.2 million reported for the end of fiscal
2003. Working capital amounted to $25.3 million at the end of the first quarter
of fiscal 2004 as compared to $25.2 million at August 2, 2003.

Currently, we have two lines of credit with a bank totaling $4.75 million, all
of which was available at November 1, 2003. One credit line totaling $1.75
million expires in June 2004. The $3.0 million credit line expires in November
2004. 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 2004. We do not currently
utilize any off-balance sheet financing arrangements and do not anticipate
doing so in the future. Our contractual commitments for fiscal 2004 are
approximately $833,000.

Selected cash flow data for the first quarter of fiscal 2004 and 2003 are
presented below (in thousands of dollars):

For the Quarters EndedNovember 1, 2003
    
    November 2, 2002Source (Use) of CashOperating activities:Net earnings adjusted for depreciation
and amortization
    
    $
    856
    
    
    $
    831Accounts receivable
    
    
    (2,195
    )
    
    
    (3,313
    )Inventories
    
    
    1,528
    
    
    
    (824
    )Accounts payable
    
    
    (1,237
    )
    
    
    119Net cash used in operating activities
    
    
    (2,083
    )
    
    
    (3,238
    )


10



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Net cash used in operating activities amounted to approximately $2.1 million as
adjusted for non-cash transfers from inventory to rental equipment for the
office products business. For the first quarter of fiscal 2004, net earnings
plus depreciation and amortization totaled $856,000. Accounts receivable grew
approximately $2.2 million primarily attributable to timing of customer
payments in the footwear and office products businesses. Inventories decreased
by approximately $1.5 million primarily as a result of timing of military boot
shipments to the U.S. Government and the planned reduction in the number of
boot styles in the western boot business. The office products business
inventory increased by approximately $413,000 to replace inventory used during
the fourth quarter of fiscal 2003.

Capital expenditures were approximately $55,000 primarily for production and
computer equipment. Rental equipment related to the office products business
cost per copy program increased by approximately $554,000 for the first quarter
of fiscal 2004.

Our debt service used approximately $179,000 of cash for principal and interest
payments. Dividends paid during the first quarter amounted to nearly $115,000.

The increase in military boot sales to the U.S. Government may require
substantial investments for equipment and plant facilities, which could have an
adverse effect on our liquidity. (See discussion below under Military Boot
Business).

FIRST QUARTER FISCAL 2004, COMPARED TO FIRST QUARTER FISCAL 2003

Consolidated net revenues for the first quarter of fiscal 2004 totaled $21.4
million as compared to $19.8 million reported for the first quarter of fiscal
2003. This increase in net revenues resulted primarily from the continued high
demand for military combat boots for the U.S. Government and improved
equipment, service and supply sales in the office products business. Lower
sales in the bar code and western boot business partially offset the revenue
increase.

Consolidated gross profit amounted to $5.1 million for the first quarter of
fiscal 2004 as compared to $4.7 million for the same period of fiscal 2003.
This growth in gross profit was primarily attributable to the increase in net
revenues. Gross profit as a percentage of net revenues was essentially the same
for the first quarters of fiscal 2003 and 2004.

Consolidated research and development for the first quarter of fiscal 2004
totaled $354,000, up from $160,000 for the first quarter of fiscal 2003
primarily attributable to the development of a new bar code product.

Consolidated selling, general and administrative (SG&A) expenses totaled $3.9
million for the first quarter of fiscal 2004 as compared to $3.7 million for
the first quarter of fiscal 2003. As a percentage of net revenues, SG&A
expenditures decreased from 18.6% for the first quarter of fiscal 2003 to 18.1%
for the first quarter of fiscal 2004.

As a result of the above, consolidated earnings from operations amounted to
$862,000 for the first quarter of fiscal 2004 as compared to $880,000 for the
first quarter of fiscal 2003.

Bar Code Business

Net revenues for the bar code business totaled $2.3 million for the first
quarter of fiscal 2004 as compared to $2.9 million for the first quarter of
fiscal 2003. This decline in net revenues resulted primarily from continued
weakness in the bar code products market.

11



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##### 



Gross profit amounted to $639,000 for the first quarter of fiscal 2004 as
compared to $800,000 for the same period of fiscal 2003. The decrease in gross
profit was attributable to lower net revenues. Gross profit as a percentage of
net revenues improved slightly from 27.8% for the first quarter of fiscal 2003
to 28.5% for the first quarter of fiscal 2004.

SG&A and research and development costs were $1.0 million for the first quarter
of both fiscal 2004 and fiscal 2003 as reduced expenditures for sales salaries
and commissions, advertising and marketing related costs, depreciation expense,
and rental costs were partially offset by increased research and development
expenditures as previously described above.

As a result of the above, the bar code business loss from operations totaled
$363,000 for the first quarter of fiscal 2004 as compared to operating loss of
$218,000 reported for the first quarter of fiscal 2003.

Office Products Business

Net revenues for the office products business amounted to $5.4 million for the
first quarter of fiscal 2004, an increase of 12.5% over the $4.8 million
reported for the first quarter of fiscal 2003. This improvement in net revenues
was primarily attributable to increased commercial and state government
equipment sales and higher maintenance agreement revenues.

Gross profit for the first quarter of fiscal 2004 amounted to $1.1 million as
compared to $926,000 for the first quarter of fiscal 2003. This growth in gross
profit was primarily the result of higher net revenues and slightly improved
gross profit margins attributable to the increase in higher margin commercial
and state government sales. The increase in gross profit was partially offset
by higher beginning of the school year supply and service costs related to the
county-wide school system cost per copy programs. As has been typically the
case, we expect to incur lower supply and service costs for the remainder of
the school year.

SG&A expenses for the first quarter of fiscal 2004 amounted to $1.5 million, an
15% increase over $1.3 million for fiscal 2003. The rise in SG&A expenses
resulted primarily from increased expenditures for sales salaries, commissions,
and related employment costs, administrative salaries, and professional fees
that were partially offset by lower advertising and office supply expenses.

As a result of the above, the office products business loss from operations
amounted to $421,000 for the first quarter of fiscal 2004 as compared to a loss
from operations of $338,000 for the same period of fiscal 2003.

Military Boot Business

Net revenues for the military boot business for the first quarter of fiscal
2004 totaled $8.3 million as compared to $5.2 million for the first quarter of
fiscal 2003. This growth in net revenues was primarily attributable to
increased military boot requirements for the U.S. Government (the Government)
and was partially offset by lower commercial and foreign government military
boot sales.

Gross profit amounted to $1.8 million for the first quarter of fiscal 2004, an
increase of 80% over $1.0 million for the first quarter of fiscal 2003. This
increase in gross profit was primarily attributable to higher net revenues and
slightly improved profit margins resulting from lower unit costs associated
with increased production levels.

SG&A expenses totaled approximately $334,000 for the first quarter of fiscal
2004 as compared to $206,000 for the first quarter of fiscal 2003. This
increase

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resulted primarily from higher professional fees and group health insurance
costs.

As a result of the above, the military boot business earnings from operations
amounted to $1.5 million for the first quarter of fiscal 2004 as compared to
$829,000 for the first quarter of fiscal 2003.

For the first quarter of fiscal 2004, we operated under an extension of our
contract with the Government dated April 15, 1997. In early 2002, the
Government issued two solicitations for future boot requirements to replace
this contract which was set to expire on April 15, 2002. One solicitation
covered the three current direct molded sole (DMS) styles of military combat
boots, including the standard issue all-leather combat boot that has
historically accounted for the majority of the Governments orders under the
contract. The second solicitation covered the newly adopted infantry combat
boot, which incorporates a waterproof membrane construction. This boot replaces
the previous all-leather boot as the Armys standard issue combat boot.

On September 30, 2003, the Government notified us that we had been awarded a
new contract (the Contract) to produce direct molded sole military combat
boots. The Contract covers a base year and two one-year option periods. The
Contract base year provides for a minimum boot requirement of 135,102 pair and
a maximum boot requirement of 544,778 pair with a minimum and maximum dollar
value of approximately $7.4 million and $30.1 million, respectively. The first
year option provides for a minimum and maximum boot requirement of 276,460 pair
and 1,077,552 pair, respectively. The second year option ranges from a minimum
of 236,460 pair to a maximum of 852,552 pair. We expect to begin shipping boots
under this contract in the second quarter of fiscal 2004.

Western and Work Boot Business

Net revenues for the western and work boot business for the first quarter of
fiscal 2004 amounted to $5.9 million, down from $6.8 million for the first
quarter of fiscal 2003. This decline in net revenues resulted primarily from a
softer retail market for western boot products.

Gross profit fell from $1.9 million for the first quarter of fiscal 2003 to
$1.5 million for the first quarter of fiscal 2004. As a percentage of net
revenues, gross profit fell from 28% for the first quarter of fiscal 2003 to
25% for the first quarter of fiscal 2004. This decline was primarily
attributable to the decrease in net revenues and production inefficiencies
related to assisting the military boot business in manufacturing combat boots
for the Government.

SG&A expenses for the first quarters of fiscal 2004 and fiscal 2003 amounted to
approximately $1.4 million. Increased charges for bad debt and professional
fees were partially offset by lower sales commissions, advertising and
marketing expenses, employee benefit costs, and travel costs. As a percentage
of net revenues, SG&A expenses were 23.7% for the first quarter of fiscal 2004
as compared to 20.6% for the first quarter of fiscal 2003.

As a result of the above, operating profit for the western and work boot
business was $13,000 for the first quarter of fiscal 2004 as compared to
$481,000 for the first quarter of fiscal 2003.

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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued and established
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This
statement is effective for us beginning with the first quarter of fiscal 2004.
We have no financial instruments that fall under this statement.

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), our expectations about future
Government orders for military boots, loss of key customers, acquisitions,
supply interruptions, additional financing requirements, 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

The Company is exposed to the impact of interest rate changes due to its
aggregate $4.75 million lines of credit and a term loan through its wholly
owned subsidiary, Dan Post Boot Company. As of November 1, 2003, there was no
outstanding indebtedness under the lines of credit and $3.5 million was
outstanding on the term loan. The Company does not buy or sell derivative
financial instruments for trading or other purposes. Borrowings under the
Companys credit facilities described above bear interest at rates based upon
the prime rate or prime rate less a margin of one-half percent offered by
the applicable lender. The Company has not entered into any swap agreements or
engaged in any other hedging activities with respect to this variable rate
indebtedness. A 50% increase in the interest rates under the Companys credit
facilities would increase annual interest expense by approximately $61,250
(assuming the Companys aggregate borrowings under the credit facilities
averaged $3.5 million during a fiscal year).

ITEM 4. 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 these disclosure controls and procedures are effective. There
were no changes in our internal control over financial reporting that occurred
during the fourth quarter of fiscal 2003 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

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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.

Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits
|--- |  | --------

3.1
    
    Certificate of Incorporation (Incorporated by reference toExhibit 3.1 to the registrants Form S-14, Registration No. 2-85908)3.2
    
    Amendment to the Certificate of Incorporation (Incorporated byreference to Exhibit 3 to the registrants Form 10-K for the yearended August 1, 1987)3.3
    
    Restated Bylaws of the registrant effective May 29, 2001.(Incorporated by reference to Exhibit 3.3 to the registrantsForm 10-K for the year ended July 28, 2001)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, Presidentand CEO (Filed herein). Page 18-19.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr.,Vice President of Finance (Filed herein). Page 20-21.32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of2002 (18 U.S.C. Section 1350), for D. Gary McRae, President and CEO(Filed herein) Page 22.32.2
    
    Certification pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 (18 U.S.C. Section 1350), for Marvin G. Kiser, Sr.,Vice President of Finance (Filed herein). Page 23.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

McRae Industries, Inc.(Registrant)Date:December 15, 2003
    
    
    
    By: /s/ D. Gary McRae      D.
Gary McRae      President
and CEO (Principal Executive Officer)Date:December 15, 2003
    
    
    
    By: /s/ Marvin G. Kiser, Sr.      Marvin
G. Kiser, Sr.      (Principal
Accounting Officer)


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