##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION  FORM 10-K/A (Amendment No.1) x
    
    ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended July 31, 2004 Commission file number: 1-8578 McRAE INDUSTRIES, INC.  Delaware
    
    56-0706710(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 400 North Main Street, Mount Gilead, North Carolina 27306
(Address of Principal Executive Offices) Registrants telephone number, including area code: (910) 439-6147 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredClass A Common Stock, $1 Par Value
    
    American Stock ExchangeClass B Common Stock, $1 Par Value
    
    American Stock Exchange
 Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x     No o Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K/A or any amendment of this Form 10-K/A. x Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes
o     No x The aggregate market value of shares of the Registrants $1 par value
Class A and Class B Common Stock held by non-affiliates as of January
30, 2004 was approximately $10,888,117 and $1,506,134, respectively.
On October 27, 2004, 1,943,543 Class A shares and 824,956 Class B shares of the Registrants Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual shareholders meeting
held on December 16, 2004 are incorporated by reference in Part III. 1




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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 to Form 10-K
(Amendment No. 1) to reflect the restatement of its financial
statements for the fiscal year ended July 31, 2004 included in its
Annual Report on Form 10-K originally filed on October 29, 2004. The
restatement corrects compilation errors in the military boot
operations year-end physical inventory. Refer to Note 15 in the
notes to the financial statements included in this Amendment No. 1
for a complete description and quantification of the restatement. No
periods covered by the Companys financial statements other than the
fiscal year ended July 31, 2004 are affected by the restatement. The following items of the original Form 10-K are amended in this
Amendment No. 1 in order to reflect the restatement: 
 Item 6. Selected Consolidated Financial Data 
 Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations 
 Item 8. Financial Statements and Supplementary Data 
 Item 9A. Disclosure Controls and Procedures 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 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 Form
10-K and other than the discussion regarding our internal control
over financial reporting contained in Item 9A of Part II, this
Amendment No. 1 does not reflect events occurring after the original
filing of the Form 10-K on October 29, 2004. 2




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PART I ITEM 1. BUSINESS McRae Industries, Inc., (the Company, which may be referred to as we, us
or our), is a Delaware corporation organized in 1983 and is the successor to
a North Carolina corporation organized in 1959. Our principal lines of business
are: manufacturing and selling bar code reading and related printing devices
and manufacturing and selling military combat boots, western and work boots.
Our office products business was sold in September 2004 and our commercial
printing and packaging business was discontinued during fiscal 2001. Additional
financial information about these lines of business can be found in Note 14 to
the financial statements. Bar Code Operations Our bar code unit manufactures and sells bar code reading and printing devices
and other items related to optical data collection, including licensing and
selling computer software, through Compsee, Inc. (Compsee), a wholly owned
subsidiary as of June 2004 and majority owned prior to June 2004. Compsee
markets, sells, and services its products directly through sales centers
located throughout the United States. Compsee designs and manufactures QuickReader, QuickLink, Turbowedge stationary
bar code readers, and APEX portable bar code scanners. Principal materials used
in Compsees assembly operations consist of various electrical and electronic
components that are readily available from a number of sources. Compsees
portable bar code scanner equipment includes the APEX II, APEX III, and APEX
IV. The APEX II was introduced in fiscal 1996 and the APEX III was introduced
in fiscal 2001. The APEX III provides batch and wireless data collection
capability. The APEX IV is a more rugged, pistol grip version of the APEX III
product. The APEX products have generally been well received in the market and
provided 17%, 15%, and 19% of Compsee sales for fiscal 2004, 2003, and 2002,
respectively. QuickReader, QuickLink, and Turbowedge bar code readers developed
and marketed by Compsee accounted for 10%, 6%, and 9% of Compsees net revenues
for fiscal 2004, 2003, and 2002, respectively, and for 2%, 2%, and 2% of the
Companys consolidated net revenues from continuing operations during fiscal
2004, 2003, and 2002, respectively. Compsee expects to begin shipment of its
new state of the art windows ce.net wireless portable data collector in the
second quarter of fiscal 2005. Compsee also purchases and re-sells bar code
products to compliment their manufactured product lines. Purchased bar code
products for resale accounted for 72%, 73%, and 71% of Compsees net revenues
for fiscal 2004, 2003, and 2002, respectively. The markets in which this business unit operates are generally highly
competitive. We are not aware of any reliable statistics that would enable us
to determine the relative position of Compsee or its products within the
industry. Competition in the industry is principally based on product
features, customer service, and price. Our major competitors for our
manufactured products in the industry, some of which are larger companies that
have greater financial, development, marketing, and distribution resources than
we do, include PSC, Intermec, Handheld Products, and Symbol Technologies. Compsees backlog of firm orders for bar code products at July 31, 2004 and
August 2, 2003 totaled approximately $326,000 and $564,000, respectively. We
expect to fill all of the backlog as of July 31, 2004 during the 2005 fiscal
year. Net revenues derived from this unit in fiscal 2004, 2003, and 2002 were 15%,
18%, and 22% of the Companys consolidated net revenues from continuing
operations, respectively. Military Combat Boots Our footwear manufacturing operations include the manufacture and sale of
military combat boots. We have manufactured direct molded sole military combat
boots for the United States Government (the Government) since 1966. Whenever the Government determines a need for combat boots, it solicits bid
responses from U.S. boot manufacturers. The solicitation process typically
includes the evaluation by the Government 3




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of written technical and cost proposals. The Government awards contracts on
negotiated per pair contract prices based on actual and estimated allowable
costs plus a reasonable profit margin. This profit margin is subject to the
Governments determination that the prices are fair and reasonable. From
1965 to 2002, the basic issue combat boots required vulcanized construction.
Now, basic issue combat boots allow and accept a variety of footwear
constructions. As a result, as many as 12 bidders have responded to military
boot solicitations with awards being made to only two or three manufacturers.
All recent Government contracts for vulcanized military boots have been awarded
to four manufacturers including us. 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. On September 30, 2004, the Government exercised the first year option,
which provides for a minimum and a 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. During the third quarter of fiscal 2004, the U.S. Army changed their Type I and
Type II Black Desert hot weather boot specification from a single vulcanized
outsole to a three-layer outsole design. This three-layer outsole design can be
made with our vulcanizing equipment. Our current contract with the Government
was modified to incorporate this new three-layer outsole and we have produced
boots that meet the new specifications. We have been advised that the future
option quantities against this contract, if they are invoked, will require this
new design because this new three-layer outsole construction is well liked and
accepted by our troops. No one company dominates the Government military boot industry. Our major
competitors in the direct molded sole vulcanized military boot market include
Wellco, Inc., Belleville Shoe Manufacturing Company, and Altama Delta
Corporation. Price, quality, manufacturing efficiency, and delivery are the
areas we emphasize to strengthen our competitive position. We also sell boots
to civilian and other military customers including other countries. Military
boot sales under the Government contract were $36.0 million, $15.7 million, and
$14.3 million, for fiscal 2004, 2003, and 2002, respectively. Such sales
constituted 51%, 29%, and 28% of consolidated net revenues from continuing
operations in fiscal 2004, 2003, and 2002, respectively. Sales of military
boots to foreign countries were $3.1 million, $5.3 million, and $4.9 million
for the past three fiscal years, respectively. For the last three fiscal years,
all of our foreign country sales were to Israel. The Companys backlog of firm orders for military combat boots at July 31, 2004
and August 2, 2003 totaled approximately $12.9 million and $6.8 million,
respectively. We expect to fill all of the backlog as of July 31, 2004 during
the 2005 fiscal year. Net revenues derived from the military combat boot segment in fiscal 2004,
2003, and 2002 were 57%, 41%, and 39%, respectively, of the Companys
consolidated net revenues from continuing operations. Our contracts with the Government are subject to partial or complete
termination under certain specified circumstances including, but not limited
to, the following: for the convenience of the Government, for the lack of
funding, and for our actual or anticipated failure to perform our contractual
obligations. If a contract is partially or completely terminated for its
convenience, the Government is required to negotiate a settlement with us to
cover costs already incurred. We have never had a contract either partially or
completely terminated by the Government. Leather, synthetic rubber, and the specified rubber Vibram outsoles are the
principal material components used in the boot manufacturing process. Pursuant
to Government contract requirements for military combat boots, all materials
used in manufacturing these boots must be and are produced in the United States
and must be certified as conforming to military specifications. The synthetic
rubber we use in our military combat boots is available from one domestic
supplier, therefore, if this domestic supplier is not able to provide us with
synthetic rubber, it would be necessary for us to get an exemption from the
Government to purchase this material in the foreign market. There is only one
certified domestic supplier that can provide the Vibram rubber outsoles and we
are dependent on its ability to supply our needs. 4




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We have a technical assistance agreement with Ro-Search, Inc., a subsidiary of
Wellco, Inc., a competitor to whom we pay a fee for each pair of direct molded
sole boots we produce. Western and Work Boots Dan Post Boot Company (Dan Post), formerly American West, designs, imports, and
sells, western and work boots for men, women, and children. Dan Post utilizes
seasoned and highly respected independent sales representatives to market and
sell its boots nationwide to major retail discount stores, regional specialty
chain stores, major western boot distributors, and direct mail catalogs. The
boots are marketed primarily under the retailers private label and under the
Dan Post, Dingo, and American West Trading brands. The Dingo footwear line provides a lifestyle product to supplement our
western boot products. The Dan Post brand is a high quality, traditional
western product and is well recognized by both retailers and consumers. In December 2003, our Waverly, Tennessee facility was converted to a military
combat boot factory due to the high demand for military production to fight
terrorism, and we began importing our western boot products primarily from
China, India, Mexico, and Brazil. During fiscal 2000, we expanded our western boot product line with imported
childrens boots we purchased from India and China. With the conversion of the
Waverly plant in December 2003, all adult products are imported from Brazil,
Mexico, and China. During fiscal 2005, we will continue to import from these
countries to maintain higher margins. All of our imported boots are produced by
contract manufacturers based on specifications that we provide. The western and work boot markets are highly competitive. We are not aware of
any reliable statistics that would enable us to determine Dan Posts or its
products relative positions within the industry; however, we believe we have
established a solid position in the market for all price ranges. Dan Post manages its manufacturing and inventory according to the seasonality
of its business, which tends to have higher sales occurring generally in the
fall and winter months. Dan Post contributed $20.2 million, $22.6 million, and
$20.15 million of consolidated net revenues from continuing operations for
fiscal 2004, 2003, and 2002, respectively. The backlog of firm orders for western and work boots at July 31, 2004 and
August 2, 2003 totaled approximately $2.0 million and $1.2 million,
respectively. We expect to fill all of the backlog as of July 31, 2004 during
the 2005 fiscal year. Net revenues derived from the western and work boot segment in fiscal 2004,
2003, and 2002 were 28%, 41%, and 39%, respectively, of the Companys
consolidated net revenues from continuing operations. Discontinued Operations In September 2004, our wholly owned subsidiary, McRae Office Solutions, Inc.,
sold substantially all of its assets to Connected Office Products, Inc., a
wholly owned subsidiary of TOPAC U.S.A., Inc., for $11,000,000, subject to
adjustment based on the net book value of the acquired assets as of August 28,
2004. As a result, the office products business segment is shown as a disposal
of a segment of business. In the first quarter of fiscal 2005, we will
recognize a gain of approximately $3.0 million on the sale, subject to purchase
price adjustments. Accordingly, the operating results of the office products
business segment have been classified as a discontinued operation for all
periods presented in the Companys consolidated financial statements included
in this Report. Other Businesses 5




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The Companys Financing and Leasing Division manages our short-term investments
and marketable securities. This division is also engaged in equipment leasing
and the financing of receivables for other businesses and individuals. Foreign Sales Our only business that experiences significant foreign sales is the military
boot business. Sales of military boots to foreign countries were $3.1 million
(7.7%) of total military boot sales), $5.3 million (23.8%), and $4.9 million
(24.5%) during fiscal 2004, 2003, and 2002, respectively. For the last three
fiscal years, all of our foreign country sales were to Israel. Other Investment Interests We own land in North and South Carolina that is being held for investment
purposes. Regulation We are subject to various laws and regulations concerning environmental matters
and employee safety and health. We believe we are operating in substantial
compliance with these laws and regulations. Employment As of July 31, 2004, we employed approximately 640 persons in all divisions and
subsidiaries. None of our employees are represented by collective bargaining or
a labor union. We consider our relations with our employees to be good. Financial Information about Operating Segments Financial information for the past three fiscal years with respect to our
operating segments are incorporated herein by reference to Note 14 to the
consolidated financial statements included in this Report. Research and Development Research and development costs related to development of future bar code
products amounted to $1,452,000, $914,000, and $646,000 for fiscal 2004, 2003,
and 2002, respectively. 6




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ITEM 2. PROPERTIES The following table describes the location, principal use, and approximate size
of the principal facilities used in our business. Except for the Tennessee
warehouse, which we lease, we own all of these facilities. Location
    
    Principal Use
    
    Size400 North Main Street
    
    Corporate headquarters,
    
    71,000 square feetMt. Gilead, N.C.
    
    manufacturing, and salesHighway 109 North
    
    Footwear manufacturing
    
    57,600 square feetMt. Gilead, N.C.2500 Port Malabar Blvd.
    
    Compsee bar code sales office
    
    5,250 square feetPalm Bay, FloridaHighway 109 North
    
    Footwear warehouse
    
    3,500 square feetMt. Gilead, N.C.Highway 109
    
    Footwear storage
    
    11,200 square feetRichmond County, N.C.Highway 24-27
    
    Footwear manufacturing and
    
    60,000 square feetTroy, N.C.
    
    warehousingHighway 109 North
    
    Footwear storage
    
    4,800 square feetMt. Gilead, N.C.601 E. Railroad Street
    
    Footwear manufacturing
    
    71,520 square feetWaverly, TN5576 Highway 70 West
    
    Footwear warehouse
    
    77,000 square feetWaverly, TN
 In addition to these principal locations, we lease other sales offices
throughout the United States. Under the terms of a lease agreement entered into in connection with the sale
of our office products business, we lease a portion of our corporate
headquarters facility to Connected Office Products, Inc. As of July 31, 2004, our Waverly, Tennessee manufacturing facility was
encumbered by a deed of trust in favor of The Fidelity Bank to secure a loan in
the amount of approximately $3.1 million. This loan was paid in full in
September 2004. We believe that our current facilities are adequate for current and future
operations. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7




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PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Each of our classes of Common Stock is traded on the American Stock Exchange
(ticker symbols MRI.A and MRI.B). As of October 27, 2004, there were
approximately 377 record holders of Class A Common Stock and approximately 373
record holders of Class B Common Stock. High and low stock prices and dividends
declared per share for the last two fiscal years were: CLASS A COMMON STOCK: Fiscal 2004
    
    Fiscal 2003Sales
    
    Price
    
    CashDividends
    
    Sales
    
    Price
    
    CashDividendsQuarter
    
    High
    
    Low
    
    Declared
    
    High
    
    Low
    
    DeclaredFirst
    
    $
    9.30
    
    
    $
    6.36
    
    
    $
    .06
    
    
    $
    8.80
    
    
    $
    7.02
    
    
    $
    .06Second
    
    
    11.00
    
    
    
    8.85
    
    
    
    .06
    
    
    
    9.45
    
    
    
    7.15
    
    
    
    .06Third
    
    
    11.75
    
    
    
    9.49
    
    
    
    .06
    
    
    
    8.20
    
    
    
    7.20
    
    
    
    .06Fourth
    
    
    10.30
    
    
    
    9.05
    
    
    
    .06
    
    
    
    7.38
    
    
    
    6.07
    
    
    
    .06
 CLASS B COMMON STOCK: Fiscal
2004
    
    Fiscal 2003Sales
    
    Price
    
    Sales
    
    PriceQuarter
    
    High
    
    Low
    
    High
    
    LowFirst
    
    $
    8.75
    
    
    $
    6.50
    
    
    $
    8.90
    
    
    $
    6.95Second
    
    
    10.75
    
    
    
    8.80
    
    
    
    9.35
    
    
    
    7.50Third
    
    
    11.50
    
    
    
    9.60
    
    
    
    8.05
    
    
    
    7.20Fourth
    
    
    10.15
    
    
    
    9.15
    
    
    
    7.15
    
    
    
    6.20
 While we have no formal policy with respect to payment of dividends, we expect
to continue paying regular cash dividends on our Class A Common Stock.
Dividends paid on Class B Common Stock, if any, must also be paid on Class A
Common Stock in an equal amount. Dividends paid on Class A Common Stock, if
any, are not also required to be paid on Class B Common Stock. We did not pay
any dividends on Class B Common Stock during the prior three fiscal years.
There can be no assurance as to future dividends on either class of Common
Stock, as the payment of any dividends is dependent on future actions of the
Board of Directors, earnings, capital requirements, and financial condition of
the Company. 8




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following Selected Consolidated Financial Data of the Company presented
below for each of the five years in the period indicated has been derived from
our audited and consolidated financial statements as adjusted to reflect the
office products business as a discontinued operation. The Selected Consolidated
Financial Data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto, Managements Discussion and Analysis of
Financial Conditions and Results of Operations, and the other financial data
included elsewhere herein. (In thousands, except for per share data)Fiscal Years Ended
    
    7-31-04
    
    8-2-03
    
    8-3-02
    
    7-28-01
    
    7-29-00Income Statement Data:Net revenues
    
    $
    70,496
    
    
    $
    54,501
    
    
    $
    50,745
    
    
    $
    38,505
    
    
    $
    36,463Net earnings
from continuing
operations
    
    
    3,206
    
    
    
    2,447
    
    
    
    2,179
    
    
    
    830
    
    
    
    958Net (loss) earnings
from discontinued
operations
    
    
    (197
    )
    
    
    30
    
    
    
    406
    
    
    
    (1,527
    )
    
    
    399Net earnings (loss)
    
    
    3,009
    
    
    
    2,477
    
    
    
    2,585
    
    
    
    (697
    )
    
    
    1,357Net earnings
from continuing
operations per
common share:
    
    
    1.16
    
    
    
    0.88
    
    
    
    0.79
    
    
    
    0.30
    
    
    
    0.35Balance Sheet Data:Total assets
    
    $
    49,548
    
    
    $
    46,149
    
    
    $
    41,929
    
    
    $
    38,977
    
    
    $
    42,697Long-term liabilities
    
    
    3,082
    
    
    
    3,307
    
    
    
    3,900
    
    
    
    4,598
    
    
    
    5,057Working capital
    
    
    28,794
    
    
    
    27,377
    
    
    
    23,829
    
    
    
    21,202
    
    
    
    22,520Shareholders equity
    
    
    34,148
    
    
    
    31,602
    
    
    
    29,581
    
    
    
    27,371
    
    
    
    28,589Weighted average
number of common
shares outstanding(a)
    
    
    2,768,499
    
    
    
    2,768,499
    
    
    
    2,768,499
    
    
    
    2,768,499
    
    
    
    2,768,499Cash dividends
declared per common
share(b)
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.21
    
    
    $
    0.28
    
    
    $
    0.36
 (a) Includes both Class A and Class B Common Stock
(b) Dividends were paid only on Class A Common Stock 9




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES 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 policies include the
following: Contract Contingencies Our office products business, which we sold in September 2004, leased equipment
(usually for a sixty-month period) to countywide education systems and sold the
lease to third party leasing companies. Under this program the school system
was 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 was designed to
cover the equipment cost, supplies (except for paper and staples), service, and
a finance charge. Prior to the sale of the office products business, on a
quarterly basis, on a program-by-program basis, we projected an expected
outcome over the life of the program. We used historical copy usage to predict
the number of copies to be made over the remaining life of the program. We
adjusted this estimate of the number of expected future copies based on known
factors that would influence copy rates in each program. We used historical
service and supply costs incurred on each program to estimate future service
and supply costs on a per copy basis. We adjusted these estimated costs for
known factors that would impact service and supplies in the future. We also
estimated any other costs expected to be incurred such as depreciation on
rental equipment. On programs where the sum of the estimated future costs
exceeded the expected future revenue, we recognized 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
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. 10




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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. 11




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DESCRIPTION OF BUSINESS SEGMENTS We have three primary business units: our bar code unit operates under the name
Compsee, Inc. (Compsee); our military boot unit operates under the name McRae
Footwear and our western and work boot unit operates under the name Dan Post
Boot Company (Dan Post), formerly American West Trading Company. Our office
products business, which we sold in September 2004 to Connected Office
Products, Inc. operated under the name McRae Office Solutions, Inc. We also
operate other smaller businesses. A summary of net revenues; gross profits; selling, general and administrative
expenses; and operating profits (loss) of our major business units for fiscal
years 2002 through 2004 is presented in the following table. Certain
reclassifications have been made to the prior year amounts to conform with the
current year presentation. Fiscal Year
    
    Percent change2004
    
    2003
    
    2002
    
    over prior period
    
    Fiscal Year(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2002Percent of Net RevenuesNet RevenuesBar Code
    
    $
    10,875
    
    
    $
    9,776
    
    
    $
    11,034
    
    
    
    11.2
    
    
    
    (11.4
    )
    
    
    15
    
    
    
    18
    
    
    
    22Military Boots
    
    
    40,104
    
    
    
    22,272
    
    
    
    20,030
    
    
    
    80.0
    
    
    
    11.2
    
    
    
    57
    
    
    
    41
    
    
    
    39Western/Work Boots
    
    
    20,169
    
    
    
    22,618
    
    
    
    20,153
    
    
    
    (10.8
    )
    
    
    12.2
    
    
    
    28
    
    
    
    41
    
    
    
    39Eliminations/Other
    
    
    (652
    )
    
    
    (165
    )
    
    
    (472
    )
    
    NM
    
    NM
    
    
    0
    
    
    
    0
    
    
    
    0Consolidated
    
    $
    70,496
    
    
    $
    54,501
    
    
    $
    50,745
    
    
    
    29.3
    
    
    
    7.4
    
    
    
    100
    
    
    
    100
    
    
    
    100
 Gross Profit PercentageGross ProfitBar Code
    
    $
    3,244
    
    
    $
    2,619
    
    
    $
    3,124
    
    
    
    23.9
    
    
    
    (16.2
    )
    
    
    30
    
    
    
    27
    
    
    
    28Military Boots
    
    
    6,632
    
    
    
    4,772
    
    
    
    5,517
    
    
    
    39.0
    
    
    
    (13.5
    )
    
    
    16
    
    
    
    21
    
    
    
    28Western/Work Boots
    
    
    4,961
    
    
    
    5,743
    
    
    
    4,911
    
    
    
    (13.6
    )
    
    
    16.9
    
    
    
    25
    
    
    
    25
    
    
    
    25Eliminations/Other
    
    
    166
    
    
    
    285
    
    
    
    3
    
    
    NM
    
    NM
    
    
    0
    
    
    
    0
    
    
    
    0Consolidated
    
    $
    15,003
    
    
    $
    13,419
    
    
    $
    13,555
    
    
    
    11.8
    
    
    
    (1.0
    )
    
    
    21
    
    
    
    25
    
    
    
    27
 Percentage of Net RevenuesSelling, General and
Administrative ExpensesBar Code
    
    $
    4,341
    
    
    $
    4,155
    
    
    $
    4,971
    
    
    
    4.5
    
    
    
    (16.4
    )
    
    
    40
    
    
    
    43
    
    
    
    45Military Boots
    
    
    1,485
    
    
    
    997
    
    
    
    800
    
    
    
    48.9
    
    
    
    24.6
    
    
    
    4
    
    
    
    4
    
    
    
    4Western/Work Boots
    

    
    4,612
    
    
    
    4,550
    
    
    
    3,912
    
    
    
    1.4
    
    
    
    16.3
    
    
    
    23
    
    
    
    20
    
    
    
    20Eliminations/Other
    
    
    194
    
    
    
    156
    
    
    
    7
    
    
    NM
    
    NM
    
    
    0
    
    
    
    0
    
    
    
    0Consolidated
    
    $
    10,632
    
    
    $
    9,858
    
    
    $
    9,690
    
    
    
    7.9
    
    
    
    1.7
    
    
    
    15
    
    
    
    18
    
    
    
    19
 Percentage of Net RevenuesOperating Profit (Loss)Bar Code
    
    $
    (1,097
    )
    
    $
    (1,536
    )
    
    $
    (1,847
    )
    
    
    28.5
    
    
    
    16.8
    
    
    
    (10
    )
    
    
    (16
    )
    
    
    (17
    )Military Boots
    
    
    5,147
    
    
    
    3,775
    
    
    
    4,717
    
    
    
    36.3
    
    
    
    (20.0
    )
    
    
    13
    
    
    
    17
    
    
    
    24Western/Work Boots
    
    
    349
    
    
    
    1,193
    
    
    
    999
    
    
    
    (70.8
    )
    
    
    19.4
    
    
    
    2
    
    
    
    5
    
    
    
    5Eliminations/Other
    
    
    (28
    )
    
    
    129
    
    
    
    (4
    )
    
    NM
    
    NM
    
    
    0
    
    
    
    0
    
    
    
    0Consolidated
    
    $
    4,371
    
    
    $
    3,561
    
    
    $
    3,865
    
    
    
    22.7
    
    
    
    (7.8
    )
    
    
    6
    
    
    
    7
    
    
    
    8
 12




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##### 



CONSOLIDATED RESULTS OF CONTINUING OPERATIONS, FISCAL 2004 COMPARED TO FISCAL
2003 Consolidated net revenues from continuing operations totaled $70.5 million for
fiscal 2004 as compared to $54.5 million for fiscal 2003. This 29% increase in
consolidated net revenues from continuing operations was primarily attributable
to significant demand for military combat boots by the U.S. Government
(Government) to support our troops engaged in the fight against terrorism
throughout the world. Weak demand for western and work boots partially offset
this surge in net revenues as net revenues for this business declined by
approximately $2.4 million over the results posted for fiscal 2003. Consolidated gross profit from continuing operations for fiscal 2004 amounted
to $15.0 million, up 12% from $13.4 million for fiscal 2003. This growth in
gross profit was primarily the result of increased net revenues. As a
percentage of net revenues, gross profit decreased from 25% for fiscal 2003 to
21% for fiscal 2004 primarily attributable to lower margins in the military
boot business, which accounted for approximately 57% of the overall sales mix. Consolidated selling, general and administrative (SG&A), and research and
development (R&D) expenses from continuing operations were $10.6 million for
fiscal 2004 as compared to $9.9 million for fiscal 2003. The increase in SG&A
expenses was primarily the result of higher expenditures for R&D, group health
insurance, professional fees, marketing activities and bad debt charges, which
were partially offset by decreased expenditures for sales related compensation,
travel, and office rentals. As a percentage of net revenues, SG&A expenses
decreased from 18% for fiscal 2003 to 15% for fiscal 2004. As a result of the above, fiscal 2004 operating profit from continuing
operations totaled $4.4 million as compared to $3.6 million for fiscal 2003. BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 2004 COMPARED TO FISCAL 2003 Compsee is a manufacturer and distributor of bar code reading and printing
devices, other peripheral equipment, and supplies related to optical data
collection. Compsee markets, sells, and services its products primarily
through sales centers located throughout the United States. Compsee continues
to explore new markets throughout the United States and other parts of the
world. Net revenues for the bar code business increased from $9.8 million for fiscal
2003 to $10.9 million for fiscal 2004 primarily as a result of improvement in
the market for bar code products. We expect revenues to continue to grow in
fiscal 2005 with continued improvement in the bar code market and the
introduction of a new bar code product in the second quarter of fiscal 2005. Gross profit for the bar code business grew from $2.6 million for fiscal 2003
to $3.2 million for fiscal 2004 as a result of increased sales and improved
profit margin. Gross profit as a percentage of net revenues was 30% for fiscal
2004 as compared to 27% for fiscal 2003. This improvement in gross profit
percentage was primarily the result of increased sales of higher margin
manufactured products in the overall bar code sales mix. SG&A and R&D expenditures amounted to $4.3 million for fiscal 2004 as compared
to $4.2 million for fiscal 2003. R&D costs were up approximately $500,000 as
efforts to complete development of the new bar code product intensified. SG&A
expenses for sales salaries and commissions, marketing activities, travel
costs, postage, and depreciation were lower as a result of effective cost
containment measures. As a result of the above, the bar code business operating loss fell from $1.5
million for fiscal 2003 to $1.1 million for fiscal 2004. 13




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##### 



MILITARY BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2004 COMPARED TO FISCAL 2003 Our military boot unit manufactures and distributes military combat boots
primarily to the U.S. Government (the Government), foreign governments, and
selected commercial surplus outlets. Net revenues for the military boot business for fiscal 2004 totaled $40.1
million as compared to $22.3 million for fiscal 2003. This growth in net
revenues was the result of significantly increased demand for military combat
boots by the Government. Military boot sales to the Government were $36.0
million for fiscal 2004 as compared to $15.7 million for fiscal 2003. The
increase in net revenues for fiscal 2004 was partially offset by reduced
foreign and commercial military boot sales. Gross profit grew from $4.8 million for fiscal 2003 to $6.6 million for fiscal
2004 primarily due to the increase in net revenues. In August 2004, the
Government approved an economic price adjustment for increased material costs
based on a change in cost estimates from a contract in prior years, which
contributed approximately $490,000 to the increase in gross profit. As a
percentage of net revenues, gross profit fell from 21% for fiscal 2003 to 16%
for fiscal 2004. This decline in gross profit percentage was primarily the
result of lower per unit selling prices and higher per unit manufacturing costs
associated with training new production workers, higher subcontract costs, and
difficulties encountered in producing multiple boot constructions. SG&A expenses for fiscal 2004 amounted to $1.5 million as compared to $1.0
million for fiscal 2003. This increase in SG&A expenses was primarily the
result of higher group health insurance costs, professional fees, and employee
benefit expenses. As a result of the above, operating profit for fiscal 2004 totaled $5.1 million
as compared to $3.8 million for fiscal 2003. 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. On September 30, 2004, the Government exercised the first year option,
which provides for a minimum and a 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. During the third quarter of fiscal 2004, the U.S. Army changed its Type I and
Type II Black Desert hot weather boot specification from a single vulcanized
outsole to a three-layer outsole design. This three-layer outsole design can be
made with our vulcanizing equipment. Our current contract with the Government
was modified to incorporate this new three-layer outsole and we have produced
boots that meet the new specifications. We have been advised that the future
option quantities against this contract, if they are invoked, will require this
new design because this new three-layer outsole construction is well liked and
accepted by our troops. Our contracts with the Government are subject to partial or complete
termination under certain specified circumstances including, but not limited
to, the following: for the convenience of the Government, for the lack of
funding, and for our actual or anticipated failure to perform our contractual
obligations. If a contract is partially or completely terminated for its
convenience, the Government is required to negotiate a settlement with us to
cover costs already incurred. We have never had a contract either partially or
completely terminated. WESTERN AND WORK BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2004 COMPARED TO
FISCAL 2003 Our western and work boot business imports and sells various boot styles for
men, women, and children for dress and casual wear. Net revenues for the western and work boot business totaled $20.2 million for
fiscal 2004 as compared to $22.6 million for fiscal 2003. This decrease in net
revenues resulted primarily from a soft market for western and work boots,
partially offset by military boot sales to our 14




---



##### 



military boot unit, which amounted to approximately $836,000 for fiscal 2004 as
compared to $563,000 for fiscal 2003. Gross profit for fiscal 2004 amounted to $5.0 million as compared to $5.7
million for fiscal 2003. This decrease in gross profit resulted primarily from
the decline in net revenues. Gross profit as a percentage of net revenues held
steady at 25% for both fiscal 2004 and 2003. Manufacturing inefficiencies
associated with military boot production for the first six months of fiscal
2004 and inventory write-offs related to discontinuing western boot
manufacturing were offset by higher margins on imported western and work boot
products. SG&A expenses were $4.6 million for both fiscal 2004 and 2003. Higher bad debt
expenses for fiscal 2004 were offset by lower expenditures for sales
commissions, travel, and advertising. As a result of the above, operating profit totaled $349,000 for fiscal 2004 as
compared to $1.2 million for fiscal 2003. DISCONTINUED OPERATIONS, FISCAL 2004 COMPARED TO FISCAL 2003 McRae Office Solutions distributed Toshiba photocopiers, Toshiba facsimile
machines, RISO digital printing equipment, OKI color copiers and printers and
provided related service and supplies for these products throughout North
Carolina and parts of Virginia and South Carolina. We sold our office products business in September 2004. As a result, the office
products business segment is shown as a disposal of a segment of business.
Accordingly, the operating results of the office products business segment have
been classified as a discontinued operation for all periods presented in the
Companys consolidated financial statements included in this Report. Net revenues for the discontinued office products business amounted to $23.9
million for fiscal 2004 as compared to $22.5 million for fiscal 2003. The
increase was primarily due to the higher service and supply revenues related to
the growth of machines in service. Gross profit totaled approximately $6.0 million for both fiscal 2004 and 2003.
As a percentage of net revenues, gross profit declined from 26.7% for fiscal
2003 to 25.1% for fiscal 2004 primarily attributable to lower commercial sales
that normally have higher margins and decreased seasonal school billings. SG&A expenses were $6.1 million for fiscal 2004 as compared to $5.8 million for
fiscal 2003 as a result of increased costs for sales and administrative
salaries, professional fees and group health insurance, which were partially
offset by reduced costs for advertising, equipment rental, property taxes, and
bad debt. As a result of the above, the operating loss for fiscal 2004 amounted to
$111,000 as compared to an operating profit of $231,000 for fiscal 2003. CONSOLIDATED RESULTS OF CONTINUING OPERATIONS, FISCAL 2003 COMPARED TO FISCAL
2002 Consolidated net revenues from continuing operations for fiscal 2003 reached
$54.5 million, up 7.4% from $50.7 million for fiscal 2002. This growth in
consolidated net revenues was the result of significantly higher requirements
for military boots by the U.S. Government (the Government) and increased sales
of our branded western boot products. Lower net revenues in the bar code
business partially offset the net revenue increase of the footwear businesses. Consolidated gross profit from continuing operations for fiscal 2003 amounted
to $13.4 million as compared to $13.6 million for fiscal 2002. Gross profit as
a percentage of net revenues decreased from 27% for fiscal 2002 to 25% for
fiscal 2003. These declines in consolidated gross profit were primarily the
result of lower product sales prices, higher per unit manufacturing costs,
changing product sales mixes, and depressed market conditions. 15




---



##### 



Consolidated selling, general and administrative (SG&A) expenses from
continuing operations were approximately $9.9 million for fiscal 2003, an
increase of 1.7% over the $9.7 million reported for fiscal 2002. The additional
SG&A costs were primarily attributable to increased research and development
costs, advertising and marketing expenditures, group health insurance costs,
and professional fees. As a result of the lower gross profit and higher SG&A costs, consolidated
operating profit from continuing operations fell from $3.9 million for fiscal
2002 to $3.6 million for fiscal 2003. BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO FISCAL 2002 Net revenues for the bar code business fell nearly 11.4%, down from $11.0
million for fiscal 2002 to $9.8 million for fiscal 2003. This decline in net
revenues was primarily the result of competitive pressures in a depressed bar
code market, the maturation of the Apex II and III manufactured products, and
the delay in getting the Apex IV product to market. Gross profit for fiscal 2003 amounted to $2.6 million as compared to $3.1
million for fiscal 2002. Gross profit as a percentage of net revenues dropped
from 28% for fiscal 2002 to 27% for fiscal 2003. This decrease in gross profit
was primarily attributable to lower net revenues and a reduced proportion of
higher margin manufactured products in the sales mix. SG&A expenses for fiscal 2003 were $4.2 million, down 16.4% from $5.0 million
for fiscal 2002. The decrease in SG&A costs were primarily the result of
effective cost containment strategies that lowered sales and administrative
salaries, advertising expenditures, telephone costs, and amortization charges.
These reduced SG&A costs were partially offset by higher research and
development expenditures that increased from $646,000 for fiscal 2002 to
$914,000 for fiscal 2003. As a result of the above, the bar code business loss from operations amounted
to $1.5 million for fiscal 2003 as compared to a loss from operations of $1.8
million for fiscal 2002. MILITARY BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO FISCAL 2002 Net revenues for fiscal 2003 totaled $22.3 million, up 11.2% from $20.0 million
for fiscal 2002. This growth in net revenues was the result of increased
requirements for military combat boots by the Government primarily attributable
to various conflicts associated with the war on terrorism. Military boot sales
to foreign governments for fiscal 2003 were $5.3 million as compared to $4.9
million for fiscal 2002. Gross profit amounted to $4.8 million for fiscal 2003 as compared to $5.5
million for fiscal 2002. As a percentage of net revenues, gross profit fell
from 28% for fiscal 2002 to 21% for fiscal 2003. This decline in gross profit
was primarily the result of lower sales prices, higher levels of lower margin
desert boots in the overall sales mix, and increased per unit manufacturing
costs. SG&A expenses for fiscal 2003 were $997,000 as compared to $800,000 for fiscal
2002. This increase in SG&A costs were primarily attributable to higher
administrative salaries, group health insurance costs, and professional fees.
These higher costs were partially offset by decreased sales salaries and
related expenses. As a result of the above, the operating profit for fiscal 2003 fell to $3.8
million, down from $4.7 million for fiscal 2002. 16




---



##### 



WESTERN AND WORK BOOT UNIT RESULTS OF OPERATIONS, FISCAL 2003 COMPARED TO
FISCAL 2002 Net revenues for fiscal 2003 increased 12.2%, up from $20.15 million for fiscal
2002 to $22.6 million for fiscal 2003. This increase was primarily attributable
to strong demand for our Dan Post and Dingo branded products. Gross profit totaled $5.7 million for fiscal 2003, an increase of 16.9% over
the $4.9 million for fiscal 2002. Gross profit as a percentage of net revenues
was 25% for both fiscal 2003 and fiscal 2002. The increase in gross profit
resulted primarily from the increased revenue for fiscal 2003. SG&A expenses for fiscal 2003 amounted to $4.6 million as compared to $3.9
million for fiscal 2002. The increase in SG&A costs resulted primarily from
higher sales commissions, sales and marketing expenses, group health insurance
costs, professional fees, and administrative salaries. As a result of the above, operating profit increased from $999,000 for fiscal
2002 to $1.2 million for fiscal 2003. DISCONTINUED OPERATIONS, FISCAL 2003 COMPARED TO FISCAL 2002 Discontinued operations net revenues for fiscal 2003 were $22.5 million, a
decline from $24.7 million for fiscal 2002. Net revenue decreased as a result
of lower sales to county-wide educational systems, partly as a result of our
focus on improving service to existing customers. Gross profit amounted to $6.0 million for fiscal 2003 as compared to $6.3
million for fiscal 2002. As a percentage of net revenues, gross profit
increased from 25% for fiscal 2002 to 27% for fiscal 2003. The decrease in
gross profit dollars as a result of lower net revenues was partially offset by
increased contributions of higher margin commercial and state contract sales. SG&A expenses for fiscal 2003 amounted to $5.8 million, up 3.8% from $5.6
million for fiscal 2002. This increase in SG&A expenses was primarily the
result of higher sales salaries and commissions, advertising costs, property
taxes, group health insurance, and professional fees. These expenses were
partially offset by reduced research and development costs. As a result of the above, the operating profit decreased from $629,000 for
fiscal 2002 to $231,000 for fiscal 2003. FINANCIAL CONDITION AND LIQUIDITY We measure our liquidity by our ability to generate cash to fund our
operations, investment activities, and financing requirements. Our liquidity
position is sensitive to and dependent on cash generated from operations, the
level of capital expenditures, reductions in debt, payment of quarterly
dividends, and our access to bank financing arrangements. At July 31, 2004, cash and cash equivalents amounted to approximately $2.5
million. Working capital equaled $28.8 million and the current ratio, defined
as current assets divided by current liabilities, was 3.3 to 1. 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
will receive the remainder of the purchase price, subject to adjustments based
on the net book value of the acquired assets as of August 28, 2004 and any
indemnification claims made by the purchaser, in September 2005. We expect the
proceeds from the sale to provide 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. 17




---



##### 



We have two lines of credit with a bank totaling $4.75 million, all of which
was available at July 31, 2004. 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 2005. The other credit line
totaling $3.0 million expires in November 2004. We believe that current cash
and cash equivalents ($2.5 million at July 31, 2004), cash generated from
operations and the sale of our office products business, and the available
lines of credit will be sufficient to meet our capital requirements for fiscal
2005. We expect to use the proceeds from the sale of the office products
business to reduce debt, expand and retool our military and western boot
businesses, and provide capital support for our bar code business research and
development efforts. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet financing arrangements. CONTRACTUAL OBLIGATIONS The table below details by fiscal year maturity dates our contractual
commitments as of July 31, 2004 (amounts in thousands): Commitment
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterBank loans
    
    $
    3,172
    
    
    $
    62
    
    
    $
    64
    
    
    $
    66
    
    
    $
    251
    
    
    $
    88Operating leases
    
    
    98
    
    
    
    8
    
    
    
    4
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    3,270
    
    
    $
    70
    
    
    $
    68
    
    
    $
    66
    
    
    $
    251
    
    
    $
    88
 Selected cash flow data is presented below (in thousands): For Years EndedSource (Use) of Cash
    
    July 31, 2004
    
    August 2, 2003Operating activitiesNet earnings adjusted for depreciation
and amortization
    
    $
    3,736
    
    
    $
    3,061Accounts receivable
    
    
    (3,564
    )
    
    
    (583
    )Inventories
    
    
    (1,893
    )
    
    
    (1,306
    )Net cash provided by operating activities
    
    
    281
    
    
    
    1,195Investing activitiesSale of property
    
    
    142
    
    
    
    377Capital expenditures
    
    
    (1,370
    )
    
    
    (249
    )Financing activitiesProceeds from bank loan
    
    
    401
    
    
    
    Principal repayment of long-term debt
    
    
    (582
    )
    
    
    (542
    )Dividends paid
    
    
    (463
    )
    
    
    (456
    )
 Net cash provided by operating activities during fiscal 2004 totaled
approximately $281,000. Net earnings plus depreciation contributed a positive
cash flow of approximately $3.7 million. The trade accounts receivable balance
increased by almost $3.6 million, which was primarily attributable to expanded
sales of military combat boots to the Government, to the timing of higher
fourth quarter sales in the bar code business, and to state and federal income
tax refunds. Inventory balances increased by approximately $1.9 million as a
result of increased demand for military boots, which was offset partially by
lower bar code and western boot inventories. 18




---



##### 



Capital expenditures for fiscal 2004 amounted to approximately $1.4 million
primarily for footwear and bar code manufacturing equipment, computer equipment
upgrades, and a 25,000 square foot addition to our military boot warehouse. Our financing activities in fiscal 2004 used approximately $1.0 million of cash
to pay dividends and reduce our debt. In addition, during fiscal 2004 we
borrowed $401,000 to finance the expansion of our military boot warehouse. INFLATION Management does not believe inflation has had a material impact on sales or
operating results for the periods covered in this discussion. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS There were no accounting standards issued for fiscal 2004 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 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. ITEM 7A. 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 and a term loan through our military boot
business (the term loan through our wholly owned subsidiary, Dan Post Boot
Company was paid off in September 2004). As of July 31, 2004, there was no
outstanding indebtedness under the lines of credit and approximately $400,000
was outstanding on the term loan. 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. A 10%
increase in the interest rates under these credit facilities would increase
annual interest expense by approximately $2,000 (assuming that our aggregate
borrowings under the credit facilities averaged $395,000 during a fiscal year). 19




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following documents are filed as part of this report: 1.
    
    Report of Independent Registered Public Accounting Firm
    
    
    212.
    
    McRae Industries, Inc. and Subsidiaries Consolidated Financial
Statements:Consolidated Balance Sheets as of July 31, 2004 and August 2, 2003.
    
    
    22-23Consolidated Statements of Operations for the Years Ended July 31, 2004
August 2, 2003, and August 3, 2002.
    
    
    24Consolidated Statements of Shareholders Equity for the Years Ended
July 31, 2004, August 2, 2003, and August 3, 2002.
    
    
    25Consolidated Statements of Cash Flows for the Years Ended July 31, 2004,
August 2, 2003, and August 3, 2002.
    
    
    26Notes to Consolidated Financial Statements.
    
    
    27-403.
    
    Financial Statement Schedule:Schedule II
    
    
    41Schedules other than those listed above have been omitted
because they are not applicable or the required information
is shown in the financial statements or the notes thereto.
 20




---



##### 



Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of
McRae Industries, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of McRae
Industries, Inc. (a Delaware corporation) and Subsidiaries as of July 31,
2004 and August 2, 2003, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the three years
in the period ended July 31, 2004. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is
to express an opinion on these consolidated financial statements based on
our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of McRae
Industries, Inc. and Subsidiaries as of July 31, 2004 and August 2, 2003,
and the results of their operations and their cash flows for each of the
three years in the period ended July 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. We have also audited Schedule II for each of the three years in the period
ended July 31, 2004. In our opinion, this schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information therein. As discussed in Note 15, the consolidated financial statements as of July
31, 2004, and for the year then ended have been restated to reflect
adjustments related to an overstatement of the Companys inventory, income
tax accrual and shareholders equity and an understatement of cost of
revenues. /s/ Grant Thornton LLP  Charlotte, North Carolina
October 26, 2004 (except for Note 15,
as to which the date is December 22, 2004) 21




---



##### 



CONSOLIDATED BALANCE SHEETSMcRae Industries, Inc. and Subsidiaries (In thousands)July 31, 2004As restated
    
    August 2,(Note 15)
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,463
    
    
    $
    3,835Accounts receivable, less allowances for
doubtful accounts of $339,000 and
$431,000, respectively
    
    
    11,245
    
    
    
    8,116Notes receivable, current portionEmployees
    
    
    0
    
    
    
    2Other
    
    
    25
    
    
    
    56Inventories
    
    
    14,810
    
    
    
    12,917Income tax receivable
    
    
    676
    
    
    
    283Prepaid expenses and other current assets
    
    
    271
    
    
    
    211Assets held for sale from discontinued operations
    
    
    11,622
    
    
    
    13,109Total current assets
    
    
    41,112
    
    
    
    38,529Property and equipment, net
    
    
    3,342
    
    
    
    2,523Other assets:Notes receivable, net of current portionEmployees
    
    
    0
    
    
    
    2Other
    
    
    36
    
    
    
    69Real estate held for investment
    
    
    1,422
    
    
    
    1,390Goodwill
    
    
    362
    
    
    
    362Cash surrender value life insurance
    
    
    2,220
    
    
    
    2,220Trademarks
    
    
    1,049
    
    
    
    1,049Other
    
    
    5
    
    
    
    5Total other assets
    
    
    5,094
    
    
    
    5,097Total assets
    
    $
    49,548
    
    
    $
    46,149
 See notes to consolidated financial statements 22




---



##### 



CONSOLIDATED BALANCE SHEETSMcRae Industries, Inc. and Subsidiaries (In thousands)July 31, 2004As restated
    
    August 2,(Note 15)
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current portion of notes payable, banks
    
    $
    621
    
    
    $
    577Accounts payable
    
    
    4,672
    
    
    
    2,580Accrued employee benefits
    
    
    524
    
    
    
    427Accrued payroll and payroll taxes
    
    
    865
    
    
    
    903Liabilities held for sale from discontinued operations
    
    
    4,587
    
    
    
    5,640Other
    
    
    1,049
    
    
    
    1,025Total current liabilities
    
    
    12,318
    
    
    
    11,152Notes payable, banks, net of current portion
    
    
    3,082
    
    
    
    3,307Minority interest
    
    
    0
    
    
    
    88Shareholders equity:Common stock:Class A, $1 par value; authorized
5,000,000 shares; issued and outstanding,
1,943,543 and 1,914,972 shares, respectively
    
    
    1,943
    
    
    
    1,915Class B, $1 par value; authorized
2,500,000 shares; issued and outstanding,
824,956 and 853,527 shares, respectively
    
    
    825
    
    
    
    853Additional paid-in capital
    
    
    791
    
    
    
    791Retained earnings
    
    
    30,589
    
    
    
    28,043Total shareholders equity
    
    
    34,148
    
    
    
    31,602Total liabilities and shareholders equity
    
    $
    49,548
    
    
    $
    46,149
 See notes to consolidated financial statements 23




---



##### 



CONSOLIDATED STATEMENTS OF OPERATIONSMcRae Industries, Inc. and Subsidiaries (In thousands, except for per share data)July 31,2004As restated
    
    August 2,
    
    August 3,For the Years Ended
    
    (Note 15)
    
    2003
    
    2002Net revenues
    
    $
    70,496
    
    
    $
    54,501
    
    
    $
    50,745Cost of revenues
    
    
    55,493
    
    
    
    41,082
    
    
    
    37,190Gross profit
    
    
    15,003
    
    
    
    13,419
    
    
    
    13,555Selling, general and
administrative expenses
    
    
    10,632
    
    
    
    9,858
    
    
    
    9,690Operating profit from
continuing operations
    
    
    4,371
    
    
    
    3,561
    
    
    
    3,865Other income, net
    
    
    329
    
    
    
    604
    
    
    
    24Interest expense
    
    
    (144
    )
    
    
    (175
    )
    
    
    (239
    )Earnings from continuing
operations before income taxes
and minority interest
    
    
    4,556
    
    
    
    3,990
    
    
    
    3,650Provision for income taxes
    
    
    1,352
    
    
    
    1,552
    
    
    
    1,482Minority interest
    
    
    2
    
    
    
    9
    
    
    
    11Net earnings from continuing operations
    
    
    3,206
    
    
    
    2,447
    
    
    
    2,179Discontinued operations:Earnings (loss) from discontinued
operations, net of income tax (benefit)
provision of $(72,000), $88,000, and
$211,000 for 2004, 2003, and 2002.
    
    
    (197
    )
    
    
    30
    
    
    
    406Net earnings
    
    $
    3,009
    
    
    $
    2,477
    
    
    $
    2,585Earnings per common share:Earnings from continuing
operations
    
    $
    1.16
    
    
    $
    .88
    
    
    $
    .79Earnings (loss) from discontinued
operations
    
    
    (.07
    )
    
    
    .01
    
    
    
    .14Net earnings
    
    $
    1.09
    
    
    $
    .89
    
    
    $
    .93Weighted average number of
common shares outstanding
    
    
    2,768,499
    
    
    
    2,768,499
    
    
    
    2,768,499
 See notes to consolidated financial statements 24




---



##### 



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYMcRae Industries, Inc. and Subsidiaries (Dollars in thousands)Common Stock, $1 par valueClass A
    
    Class B
    
    Additional
    
    RetainedShares
    
    Amount
    
    Shares
    
    Amount
    
    Paid-in Capital
    
    EarningsBalance, July 28, 2001
    
    
    1,861,817
    
    
    $
    1,862
    
    
    
    906,682
    
    
    $
    907
    
    
    $
    791
    
    
    $
    23,811Conversion of Class B to
Class A stock
    
    
    17,255
    
    
    
    17
    
    
    
    (17,255
    )
    
    
    (18
    )Cash Dividend ($.20 per
Class A common stock)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (374
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,585Balance, August 3, 2002
    
    
    1,879,072
    
    
    
    1,879
    
    
    
    889,427
    
    
    
    889
    
    
    
    791
    
    
    
    26,022Conversion of Class B to
Class A stock
    
    
    35,900
    
    
    
    36
    
    
    
    (35,900
    )
    
    
    (36
    )Cash Dividend ($.24 per
Class A common stock)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (456
    )Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,477Balance, August 2, 2003
    
    
    1,914,972
    
    
    
    1,915
    
    
    
    853,527
    
    
    
    853
    
    
    
    791
    
    
    
    28,043Conversion of Class B to
Class A stock
    
    
    28,571
    
    
    
    28
    
    
    
    (28,571
    )
    
    
    (28
    )Cash Dividend ($.24 per
Class A common stock)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (463
    )Net earningsAs restated (Note 15)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,009Balance, July 31, 2004
    
    
    1,943,543
    
    
    $
    1,943
    
    
    
    824,956
    
    
    $
    825
    
    
    $
    791
    
    
    $
    30,589As restated (Note 15)
 See notes to consolidated financial statements 25




---



##### 



CONSOLIDATED STATEMENTS OF CASH FLOWSMcRae Industries, Inc. and Subsidiaries (In thousands)July 31,2004As restated
    
    August 2,
    
    August 3,For the Years Ended
    
    (Note 15)
    
    2003
    
    2002Cash Flows from Operating Activities:Net earnings from continuing operations
    
    $
    3,206
    
    
    $
    2,447
    
    
    $
    2,179Adjustments to reconcile net earnings from
continuing operations to net cash provided
by operating activities:Depreciation and amortization
    
    
    530
    
    
    
    614
    
    
    
    961Minority shareholders interest in earnings
(loss) of subsidiary
    
    
    (2
    )
    
    
    (9
    )
    
    
    (11
    )Loss (gain) on sale of assets
    
    
    (73
    )
    
    
    (326
    )
    
    
    122Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,564
    )
    
    
    (583
    )
    
    
    (3,459
    )Inventories
    
    
    (1,893
    )
    
    
    (1,306
    )
    
    
    (2,454
    )Prepaid expenses and other current assets
    
    
    (139
    )
    
    
    72
    
    
    
    (51
    )Accounts payable
    
    
    2,093
    
    
    
    273
    
    
    
    780Accrued employee benefits
    
    
    97
    
    
    
    (48
    )
    
    
    235Deferred revenues
    
    
    
    
    
    
    
    
    
    
    (2
    )Accrued payroll and payroll taxes
    
    
    (38
    )
    
    
    160
    
    
    
    170Income taxes
    
    
    41
    
    
    
    (57
    )
    
    
    627Other
    
    
    23
    
    
    
    (42
    )
    
    
    246Net cash provided by (used in) operating activities
    
    
    281
    
    
    
    1,195
    
    
    
    (657
    )Cash Flows from Investing Activities:Proceeds from sale of property
    
    
    142
    
    
    
    377
    
    
    
    106Proceeds from sale of short term investments
    
    
    
    
    
    
    18
    
    
    
    Purchase of other assets
    
    
    
    
    
    
    (150
    )
    
    
    (342
    )Purchase of trademarks
    
    
    
    
    
    
    
    
    
    
    (800
    )Purchase of minority interest
    
    
    (85
    )
    
    
    
    
    
    
    Capital expenditures
    
    
    (1,370
    )
    
    
    (249
    )
    
    
    (552
    )Collections on notes receivable
    
    
    68
    
    
    
    73
    
    
    
    95Net cash (used in) provided by investing activities
    
    
    (1,245
    )
    
    
    69
    
    
    
    (1,493
    )Cash Flows from Financing Activities:Proceeds from bank loan
    
    
    401
    
    
    
    
    
    
    
    Principal repayments of long-term debt
    
    
    (582
    )
    
    
    (542
    )
    
    
    (579
    )Dividends paid
    
    
    (463
    )
    
    
    (456
    )
    
    
    (374
    )Net cash used in financing activities
    
    
    (644
    )
    
    
    (998
    )
    
    
    (953
    )Net cash provided by (used in)
discontinued operations
    
    
    236
    
    
    
    (26
    )
    
    
    2,136Net (Decrease) Increase in Cash and Cash
Equivalents
    
    
    (1,372
    )
    
    
    240
    
    
    
    (967
    )Cash and Cash Equivalents at Beginning of Year
    
    
    3,835
    
    
    
    3,595
    
    
    
    4,562Cash and Cash Equivalents at End of Year
    
    $
    2,463
    
    
    $
    3,835
    
    
    $
    3,595
 See notes to consolidated financial statements 26




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSMcRae Industries, Inc. and Subsidiaries
For the Years Ended July 31, 2004, August 2, 2003, and August 3, 2002. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company and
its subsidiaries. Minority interest represents the minority shareholders
proportionate share of the equity of a majority-owned subsidiary. Significant
intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The timely preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Actual results could differ from those estimates.
Significant estimates expected to change in the near term include the allowance
for contract contingencies. The economic price adjustment related to our
military combat boot contract is subject to certain price variations for
leather. The Company estimated the economic price adjustment to be received from the
Government for changes in leather prices under an expired military boot
contract. The estimate was based on the Companys interpretation of the
contract provisions. Based on the Governments interpretation of the contract
provisions, the Company was notified it will receive approximately $490,000 in
excess of its estimate. Cash and Cash Equivalents Cash equivalents consist of highly liquid debt instruments such as certificates
of deposit and commercial paper purchased with an original maturity date of
three months or less. Accounts Receivable Accounts receivable are stated at amounts expected to be collected from
outstanding balances. Probable uncollectible accounts are provided for by a
charge to earnings and a credit to a valuation allowance based on the
assessment of the current status of individual accounts. Balances that are
still outstanding after using reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to accounts
receivable. The Company performs on-going credit evaluations of its customers
financial condition and establishes an allowance for losses on trade
receivables based upon factors surrounding the credit risk of specific
customers, historical trends, and other information. Inventories Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method for military boots and using the first-in, first-out
(FIFO) method for all other inventories. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are
provided on the straight-line method for financial reporting purposes and by
accelerated methods for income tax purposes. Useful lives range from three
years for computer equipment to thirty-one and one-half years for buildings. 27




---



##### 



Revenue Recognition Service maintenance agreements are sold for certain products. Revenues related
to these agreements are deferred and recognized over the term of the related
agreements. The Government unilaterally modified the Companys current boot contract to
require a bill and hold procedure on June 1, 2001. Under bill and hold, the
Government issues a specific boot production order which, when completed and
ready for shipment, is inspected and accepted by the Quality Assurance
Representative (QAR), thereby transferring ownership to the Government. Under
this contract modification, after inspection and acceptance by the QAR, the
boots become Government-owned property. Also, after QAR inspection and
acceptance, the Company invoices and receives payment from the Government, and
warehouses and distributes the related boots against Government-issued
requisition orders, which the Company receives five days per week.
Government-owned boots stored in the Companys warehouse are complete,
including packaging and labeling. The bill and hold procedure requires physical
segregation and specific identification of Government-owned boots and, because
they are owned by the Government, the Company cannot use them to fill any other
customers order. The Company has certain custodial responsibilities for these
boots, including loss or damage, which the Company insures. The related
insurance policies specifically provide that loss payment on finished stock and
sold personal property completed and awaiting delivery is based on the
Companys selling price. At the end of the Contract term all remaining
inventory is sent to the Government. In accordance with guidance issued under
Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements, revenues from bill and hold transactions
are recognized at the time of acceptance by the QAR. All other sales of the Company are recognized as revenues when title passes to
the buyer. Intangible Assets As of August 3, 2002, Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets, was adopted. Under SFAS No. 142,
goodwill is no longer amortized but is tested for impairment using a fair value
approach at the reporting unit level. A reporting unit is the operating
segment, or a business one level below that operating segment (the component
level) if discrete financial information is prepared and regularly reviewed by
management at the component level. An impairment charge is recognized for any
amount by which the carrying amount of a reporting units goodwill exceeds its
fair value. Discounted cash flows are used to establish fair values. Intangible
assets with indefinite lives are tested for impairment and written down to fair
value as required. Before August 3, 2002, goodwill was amortized over its estimated period of
benefit on a straight-line basis. Other intangible assets were amortized on
appropriate bases over their estimated lives. When an intangible assets
carrying value exceeded associated expected operating cash flows, it was
considered to be impaired and was written down to fair value, which was
determined based on either discounted future cash flows or appraised values. Income Taxes A deferred tax asset or liability is recorded for all temporary differences
between financial and tax-reporting using enacted tax rates. Deferred tax
expense (benefit) results from the change during the year of the deferred tax
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Earnings Per Share Earnings per share are based on the weighted average number of shares of common
stock outstanding during the year. The Company had no common stock equivalents
issued or outstanding for the three-year period ended July 31, 2004. 28




---



##### 



Recently Issued Accounting Standards There were no accounting standards issued for fiscal 2004 that were applicable
to us. Research and Development Research and development costs related to future products are expensed in the
year incurred and are included in SG&A expenses. Research and development
expenses for fiscal 2004, 2003, and 2002 were $1,452,000, $914,000, and
$646,000, respectively. Advertising The Company expenses advertising costs when incurred. Advertising expense
amounted to $244,000, $259,000, and $482,000 for fiscal 2004, 2003, and 2002,
respectively. Shipping and Handling Shipping and handling costs that are charged to and reimbursed by the customer
are recognized as revenue, while the related expenses incurred by the Company
are recorded as cost of products sold in the consolidated statements of
operations. Reclassifications Certain reclassifications have been made to the prior years financial
statements and notes thereto to conform with the current year presentation. 2. INVENTORIES Current costs exceed the LIFO value of inventories by approximately $680,000
and $765,000 at July 31, 2004 and August 2 2003, respectively. Year-end
inventories valued under the LIFO method were $5,749,000 and $2,741,000 at July
31, 2004 and August 2, 2003, respectively. For fiscal 2004, lower FIFO pricing
and higher inventory levels decreased the LIFO reserve, which increased net
earnings by approximately $43,000 as compared to an $8,000 reduction in net
earnings for fiscal 2003. The components of inventory at each year-end are as
follows: (In thousands)Fiscal Year End2004As restated(Note 15)
    
    2003Raw materials
    
    $
    3,883
    
    
    $
    3,293Work-in-process
    
    
    2,385
    
    
    
    1,081Finished goods
    
    
    8,542
    
    
    
    8,543$
    14,810
    
    
    $
    12,917
 29




---



##### 



3. PROPERTY AND EQUIPMENT (In thousands)Fiscal Year End2004
    
    2003Land and improvements
    
    $
    679
    
    
    $
    665Buildings
    
    
    4,297
    
    
    
    3,787Machinery and equipment
    
    
    4,159
    
    
    
    4,642Furniture and fixtures
    
    
    1,638
    
    
    
    1,55510,773
    
    
    
    10,649Less: Accumulated depreciation
    
    
    7,431
    
    
    
    8,126$
    3,342
    
    
    $
    2,523
 Depreciation expense for fiscal 2004, 2003, and 2002 was $530,000, $614,000,
and $654,000, respectively. Amortization expense for fiscal 2002 amounted to
$307,000. 4. NOTES PAYABLE AND LINES OF CREDIT NOTES PAYABLE: (In thousands)Fiscal Year EndJuly 31, 2004
    
    August 2, 2003Note payable, bank, due in monthly
installments of $56,477 including
interest at the prime rate less 0.5%
(3.75% as of July 31, 2004)
through July, 2011. All inventory,
accounts receivable and property
and equipment of the Companys Dan Post
subsidiary are pledged as collateral.
    
    $
    3,114
    
    
    $
    3,672Note payable, State of Tennessee, due
March 2013. Note is payable in 60 monthly
installments of $1,930 including interest at
1.5%, then 60 monthly installments of $2,073
including interest at 2.5% and then 120 monthly
installments of $2,175 including interest at 3.5%.
Land, buildings and building improvements of the
Companys Dan Post subsidiary, are pledged as
collateral.
    
    
    193
    
    
    
    212Note payable, bank, due in 59 monthly
installments of $4,460 including interest
at the prime rate less 0.5% (3.75% as of
July 31, 2004) commencing on July 2, 2004 and 1
final payment of all unpaid principal and interest
due on June 2, 2009. The warehouse building property
is pledged as collateral.
    
    
    396
    
    
    
    3,703
    
    
    
    3,884Less: Current portion
    
    
    621
    
    
    
    577$
    3,082
    
    
    $
    3,307
 30




---



##### 



In September 2004, we paid off the $3.1 million note payable. Annual maturities
of long-term debt are as follows (in thousands): Fiscal Year End:2005
    
    $
    3,1722006
    
    
    622007
    
    
    642008
    
    
    662009
    
    
    251thereafter
    
    
    88$
    3,703
 LINES OF CREDIT: The Company has an unsecured $3,000,000 revolving line of credit with a bank.
The Company had no outstanding borrowings under the line of credit as of July
31, 2004 or August 2, 2003. This line of credit provides for interest on
outstanding balances to be payable monthly at the prime rate less 0.5%. This
line of credit expires in November 2004 and is secured by the inventory and
accounts receivable of the Companys Dan Post subsidiary. The Company has an additional $1,750,000 line of credit with a bank. This
line is restricted to 100% of the outstanding accounts receivable due from the
U.S. Government. There were no outstanding borrowings under this line of credit
as of July 31, 2004 and August 2, 2003. The line of credit expires in January
2005 and provides for interest on outstanding balances to be payable monthly at
the prime rate. Cash paid for interest during fiscal years 2004, 2003, and 2002 was
approximately $144,000, $186,000, and $246,000, respectively. 5. EMPLOYEE BENEFIT PLANS The Companys employee benefit program consists of an employee stock ownership
plan, a 401-K retirement plan, a cash bonus program, incentive awards, and
other specified employee benefits as approved by the Board of Directors. At its
sole discretion, the Board of Directors determines the amount and the timing of
payment for benefits under these plans. The employee stock ownership plan (ESOP) covers substantially all employees.
Its principal investments include shares of Class A Common Stock and Class B
Common Stock of the Company and collective funds consisting of short-term cash,
fixed-income, and equity investments. There have been no contributions to the
ESOP in fiscal years 2004, 2003, or 2002. The Company has a 401-K retirement plan, which covers substantially all
employees. Employees can contribute up to 25% of their salary. At its sole
discretion, the Board of Directors determines the amount and timing of any
Company matching contribution. The Companys contribution was $152,000,
$131,000, and $128,000 for the fiscal years ended July 31, 2004, August 2,
2003, and August 3, 2002, respectively. Employee benefit program expense amounted to $463,000, $359,000, and $350,000
in 2004, 2003, and 2002, respectively. 31




---



##### 



6. INCOME TAXES Significant components of the provision for income taxes are as follows (in
thousands): 2004As restated (Note 15)
    
    2003
    
    2002Current expense (benefit)Federal
    
    $
    971
    
    
    $
    1,399
    
    
    $
    1,305State
    
    
    227
    
    
    
    218
    
    
    
    3791,198
    
    
    
    1,617
    
    
    
    1,684Deferred expense (benefit)Federal
    
    
    131
    
    
    
    (55
    )
    
    
    (172
    )State
    
    
    23
    
    
    
    (10
    )
    
    
    (30
    )$
    1,352
    
    
    $
    1,552
    
    
    $
    1,482
 The components of the provision for deferred income taxes are as follows (in
thousands): 2004As restated (Note 15)
    
    2003
    
    2002Depreciation
    
    $
    201
    
    
    $
    (39
    )
    
    $
    41Accrued employee benefits
    
    
    (37
    )
    
    
    18
    
    
    
    (92
    )Allowances for doubtful accounts
    
    
    35
    
    
    
    (31
    )
    
    
    (54
    )Inventory
    
    
    (29
    )
    
    
    (29
    )
    
    
    (69
    )State net operating loss carry forward
    
    
    (12
    )
    
    
    (115
    )
    
    
    (60
    )Other
    
    
    (4
    )
    
    
    131
    
    
    
    32Deferred income taxes, expense
(benefit)
    
    $
    154
    
    
    $
    (65
    )
    
    $
    (202
    )
 Deferred tax liabilities and assets at each year-end are as follows (in
thousands): Deferred tax liabilities: 2004As restated (Note 15)
    

    2003Depreciation
    
    $
    (41
    )
    
    $
    0Total deferred tax liabilities
    
    
    (41
    )
    
    
    0Deferred tax assets:Depreciation
    
    
    0
    
    
    
    160Accrued employee benefits
    
    
    199
    
    
    
    162Allowances for doubtful accounts
    
    
    129
    
    
    
    164Inventory
    
    
    124
    
    
    
    95State net operating loss carry
forward
    
    
    127
    
    
    
    115Other
    
    
    84
    
    
    
    264Total deferred tax asset
    
    
    663
    
    
    
    960Net deferred tax asset
    
    $
    622
    
    
    $
    960
 State net operating loss carry forwards will expire through fiscal 2017. 32




---



##### 



The reconciliation of income tax computed at the U.S. federal statutory tax
rate to actual income tax expense are (in thousands): 2004As restated (Note 15)
    
    2003
    
    2002Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    PercentTax at U.S. statutory rate
    
    $
    1,549
    
    
    
    34.0
    %
    
    $
    1,356
    
    
    
    34.0
    %
    
    $
    1,241
    
    
    
    34.0
    %State income taxes, net of
federal tax benefit
    
    
    287
    
    
    
    6.3
    
    
    
    251
    
    
    
    6.3
    
    
    
    230
    
    
    
    6.3Other  net
    
    
    (484
    )
    
    
    (9.5
    )
    
    
    (55
    )
    
    
    (1.4
    )
    
    
    11
    
    
    
    0.3$
    1,352
    
    
    
    30.8
    %
    
    $
    1,552
    
    
    
    38.9
    %
    
    $
    1,482
    
    
    
    40.6
    %
 Total income tax payments during fiscal years 2004, 2003, and 2002 were
approximately $1,657,000, $1,861,000, and $1,547,000, respectively. 7. COMMITMENTS AND CONTINGENCIES Lease Agreements The Company leases certain sales offices and equipment under non-cancelable
operating leases. Rental expenses on all operating leases were $302,000,
$340,000, and $325,000 for fiscal 2004, 2003, and 2002. The future minimum
annual rental payments under non-cancelable operating leases are as follows (in
thousands): Fiscal Year End:2005
    
    $
    982006
    
    
    82007
    
    
    42008
    
    
    02009
    
    
    0$
    110
 Minority Interest In connection with the acquisition of Compsee, Inc. in May 1985, the Company
entered into a restrictive stock agreement with Compsees 1% shareholder. Under
the terms of the agreement, in June 2004, the Company purchased the remaining
shares from the minority shareholder for approximately $85,000. Concentrations Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
receivables. The Company maintains substantially all of its cash and
certificates of deposits with various financial institutions in amounts that
are in excess of the federally insured limits. Management performs periodic
evaluations of the relative credit standing of those financial institutions. Concentrations of credit risk with respect to receivables are limited due to
the large number of entities comprising the Companys customer base and their
dispersion across many different industries. The Company does not require
collateral on trade accounts receivable. As of July 31, 2004, eight customers
accounted for 49% of accounts receivable. Synthetic rubber is currently available and purchased from the only domestic
supplier. Synthetic rubber is available from foreign suppliers, however an
exemption would be required from the Government to purchase synthetic rubber in
the foreign market. There is only one certified supplier currently that can
provide the Vibram rubber outsoles and we are dependent on its 33




---



##### 



ability to supply our needs. Sales to the U.S. Government amounted to 51%, 29%, and 28% of total
consolidated net revenues from continuing operations for fiscal 2004, 2003, and
2002, respectively. Other Under the terms of sale to the U.S. Government, the negotiated contract prices
of combat boots are subject to renegotiation if certain conditions are present.
Management does not currently expect renegotiation, if any, to have a material
adverse effect on the Companys consolidated financial position or results of
operations. In August 2004, the Government approved an economic price
adjustment related to our previous military boot contract, which increased our
gross profit by approximately $490,000. 8. SHAREHOLDERS EQUITY Common Stock The Companys Bylaws provide for seven directors, two of whom are elected by
the holders of the Class A Common Stock voting as a separate class, and five of
whom are elected by the holders of the Class B Common Stock voting as a
separate class. On all other matters (except matters required by law or the
Companys Certificate of Incorporation or Bylaws to be approved by a different
vote), the holders of Class A Common Stock and Class B Common Stock vote
together as a single class with each share of Class A Common Stock entitled to
one-tenth vote and each share of Class B Common Stock entitled to one vote.
Each share of Class B Common Stock can be converted to Class A Common Stock on
a share for share basis. All dividends paid on Class B Common Stock must also
be paid on Class A Common Stock in an equal amount. During fiscal 1999, the Company adopted the McRae Industries, Inc. 1998
Incentive Equity Plan (the Plan). The Plan has reserved 100,000 shares of the
Companys Class A Common Stock for issuance to certain key employees of the
Company. At July 31, 2004, there were 100,000 shares available for future
grants under the Plan. 34




---



##### 



9. FINANCIAL INSTRUMENTS All financial instruments are held or issued for other than trading purposes. Management used the following methods and assumptions to estimate the fair
value of financial instruments: Cash and Cash Equivalents:Because of the close proximity to maturity, the
carrying value of cash and cash equivalents approximates fair value. Notes Receivable:For notes receivable, fair value is estimated by
discounting future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. Cash Surrender Value Life Insurance:Represents split-dollar life insurance
policies recorded at premiums paid value, which approximates fair value.
These policies maintain built-in loan provisions. Long and Short-term Debt:The carrying amounts of the borrowings under
short-term revolving credit agreements approximate its fair value. The fair
value of long-term debt was estimated using discounted cash flow analyses,
based on the Companys current incremental borrowing rates for similar types of
borrowing arrangements. (In thousands)Carrying
    
    FairAmount
    
    ValueAssetsCash and cash equivalents
    
    $
    2,463
    
    
    $
    2,463Notes receivable, current and long-term
    
    
    61
    
    
    
    61Cash surrender value life insurance
    
    
    2,220
    
    
    
    2,220LiabilitiesLong and short-term debt
    
    
    3,703
    
    
    
    3,703
 10. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) The following table sets forth unaudited quarterly financial information from
continuing operations for the years ended July 31, 2004 and August 2, 2003 (in
thousands): FourthAs restatedFirst
    
    Second
    
    Third
    
    (Note 15)July 31, 2004Net revenues
    
    $
    16,023
    
    
    $
    14,896
    
    
    $
    17,584
    
    
    $
    21,993Gross profit
    
    
    4,016
    
    
    
    2,941
    
    
    
    3,105
    
    
    
    4,941Operating income
    
    
    1,265
    
    
    
    172
    
    
    
    704
    
    
    
    2,230Net income
    
    
    823
    
    
    
    126
    
    
    
    479
    
    
    
    1,778Net income per
common share
    
    
    .30
    
    
    
    .04
    
    
    
    .17
    
    
    
    .65August 2, 2003Net revenues
    
    $
    14,912
    
    
    $
    13,077
    
    
    $
    12,799
    
    
    $
    13,713Gross profit
    
    
    3,809
    
    
    
    3,079
    
    
    
    3,017
    
    
    
    3,514Operating income
    
    
    1,226
    
    
    
    466
    
    
    
    626
    
    
    
    1,243Net income
    
    
    762
    
    
    
    478
    
    
    
    474
    
    
    
    733Net income per
common share
    
    
    .28
    
    
    
    .17
    
    
    
    .17
    
    
    
    .26
 35




---



##### 



11. 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. As of July 31, 2004, McRae Industries, Inc. met the criteria for reporting the
pending sale of the assets of McRae Office Solutions, Inc. subsidiary as an
asset held for sale and discontinued operations per Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), and has accounted for the discontinued operation
as such. The assets and liabilities of discontinued operations included in assets held
for sale and liabilities held for sale at July 31, 2004, represent the assets
and liabilities of the Companys McRae Office Solutions, Inc. business and are
as follows: (In thousands)July 31,
    
    August 2,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,371
    
    
    $
    2,357Accounts and note receivable
    
    
    1,358
    
    
    
    2,191Inventories (net)
    
    
    4,602
    
    
    
    4,642Current portion of lease receivable
    
    
    61
    
    
    
    146Prepaid expenses
    
    
    70
    
    
    
    31Total current assets
    
    
    7,462
    
    
    
    9,367Property and equipment, net
    
    
    2,272
    
    
    
    2,018Long term portion of net lease receivable
and guaranteed residuals
    
    
    1,881
    
    
    
    1,717Other assets
    
    
    7
    
    
    
    7Assets held for sale
    
    $
    11,622
    
    
    $
    13,109
 36




---



##### 



(In thousands)July 31,
    
    August 2,2004
    
    2003LIABILITIESCurrent liabilities:Accounts payable
    
    $
    1,584
    
    
    $
    2,636Contract contingencies
    
    
    291
    
    
    
    400Accrued payroll and payroll taxes
    
    
    10
    
    
    
    10Other accrued liabilities
    
    
    139
    
    
    
    23Total current liabilities
    
    
    2,024
    
    
    
    3,069Lease guarantees
    
    
    1,817
    
    
    
    1,568Deferred service revenue
    
    
    746
    
    
    
    1,003Liabilities held for sale
    
    $
    4,587
    
    
    $
    5,640
 Net revenues for McRae Office Solutions, Inc. for the fiscal years ended July
31, 2004, August 2, 2003, and August 3, 2002, were $23.9 million, $22.5
million, and $24.7 million, respectively. Earnings (loss) from operations for
these same periods totaled ($111,000), $231,000, and $629,000, respectively. (In thousands)Fiscal Year End2004
    
    2003
    
    2002Net revenues
    
    $
    23,873
    
    
    $
    22,541
    
    
    $
    24,732Gross profit
    
    
    6,023
    
    
    
    5,982
    
    
    
    6,260Selling, general and administrative
expense
    
    
    6,134
    
    
    
    5,751
    
    
    
    5,631Operating Profit (loss)
    
    
    (111
    )
    
    
    231
    
    
    
    629
 12. SUBSEQUENT EVENTS On September 9, 2004, we sold substantially all of the assets of our wholly
owned subsidiary, McRae Office Solutions, Inc. to Connected Office Products,
Inc., a wholly owned subsidiary of TOPAC U.S.A., Inc. for $11,000,000 subject
to adjustment based on the net book value of the acquired assets as of August
28, 2004. On September 10, 2004, the Company declared a cash dividend of $.06 per share
of its Class A Common Stock payable on October 8, 2004 to shareholders of
record on September 24, 2004. On September 27, 2004, we paid off the $3.1 million note payable related to our
western and work boot business. On September 30, 2004, the U.S. Government exercised the first year option of
the current contract awarded on September 30, 2003. The first year option
provides for a minimum and a 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. In August 2004, the Government approved an economic price adjustment related to
military boot leather costs from our previous contract. This adjustment
increased our gross profit by $490,000. 37




---



##### 



13. RELATED PARTY TRANSACTIONS We utilize Texas Boot Company, in whom we have a minimal investment, as a
subcontractor for our military combat boot operation. 38




---



##### 



14. OPERATING SEGMENT INFORMATION The Companys principal operations have been classified into three business
segments: bar code operations, military boot operations, and western and work
boot operations. The bar code operation manufactures and sells bar code reading
and related printing devices and other products related to optical data
collection to customers throughout the United States. The military boot
operation manufactures combat boots for the U.S. Government and foreign
governments. The western and work boot operation imports products for customers
throughout the United States. Total consolidated revenues related to sales to
the U.S. Government were 51% in 2004, 29% in 2003, and 28% in 2002 of total
consolidated revenues from continuing operations. There were no significant
inter-segment sales or transfers during 2004, 2003 and 2002. Operating profits
by business segment exclude allocated corporate interest income, income taxes,
minority interest, and equity in net loss of investee. Corporate assets consist
principally of cash, short-term investments, certain receivables, and real
estate held for investment. Our office products operation was sold on September 9, 2004. As a result, this
segment is reported as a discontinued operation and is not included in this
table. (In thousands) Military
    
    
    
    
    
    
    
    
    
    CorporateBoots
    
    Western/
    
    
    
    
    
    & Other
    
    ConsolidatedAs restated
    
    Work
    
    
    
    
    
    As restated
    
    As restated(Note 15)
    
    Boots
    
    Bar Code
    
    (Note 15)
    
    (Note 15)For the Year Ended July
31, 2004Net Revenues
    
    $
    40,104
    
    
    $
    20,169
    
    
    $
    10,875
    
    
    $
    (652
    )
    
    $
    70,496Earnings(loss)from
operations
    
    
    5,147
    
    
    
    349
    
    
    
    (1,097
    )
    
    
    (28
    )
    
    
    4,371Identifiable assets
    
    
    12,902
    
    
    
    13,396
    
    
    
    4,810
    
    
    
    18,440
    
    
    
    49,548Capital expenditures
    
    
    1,097
    
    
    
    101
    
    
    
    120
    
    
    
    52
    
    
    
    1,370Depreciation expense
and amortization
    
    
    161
    
    
    
    154
    
    
    
    59
    
    
    
    156
    
    
    
    530Income tax provision
(benefit)
    
    
    1,978
    
    
    
    (96
    )
    
    
    (379
    )
    
    
    (151
    )
    
    
    1,352For the Year Ended August
2, 2003Net Revenues
    
    $
    22,272
    
    
    $
    22,618
    
    
    $
    9,776
    
    
    $
    (165
    )
    
    $
    54,501Earnings(loss)from
operations
    
    
    3,775
    
    
    
    1,193
    
    
    
    (1,536
    )
    
    
    129
    
    
    
    3,561Identifiable assets
    
    
    6,328
    
    
    
    14,214
    
    
    
    4,987
    
    
    
    20,620
    
    
    
    46,149Capital expenditures
    
    
    84
    
    
    
    84
    
    
    
    52
    
    
    
    29
    
    
    
    249Depreciation expense
and amortization
    
    
    81
    
    
    
    162
    
    
    
    191
    
    
    
    180
    
    
    
    614Income tax provision
(benefit)
    
    
    1,446
    
    
    
    192
    
    
    
    (531
    )
    
    
    445
    
    
    
    1,552For the Year Ended August
3, 2002Net Revenues
    
    $
    20,030
    
    
    $
    20,153
    
    
    $
    11,034
    
    
    $
    (472
    )
    
    $
    50,745Earnings(loss)from
operations
    
    
    4,717
    
    
    
    999
    
    
    
    (1,847
    )
    
    
    (4
    )
    
    
    3,865Identifiable assets
    
    
    4,347
    
    
    
    13,536
    
    
    
    5,946
    
    
    
    18,100
    
    
    
    41,929Capital expenditures
    
    
    107
    
    
    
    380
    
    
    
    27
    
    
    
    38
    
    
    
    552Depreciation expense
and amortization
    
    
    88
    
    
    
    134
    
    
    
    533
    
    
    
    206
    
    
    
    961Income tax provision (benefit)
    
    
    1,750
    
    
    
    370
    
    
    
    (685
    )
    
    
    47
    
    
    
    1,482
 39




---



##### 



15. RESTATEMENT OF FINANCIAL STATEMENTS The financial statements for the year ended July 31, 2004 have been restated to
correct compilation errors in the military boot operations year-end physical
inventory. The effect of the compilation errors resulted in the following
changes as of July 31, 2004: As PreviouslyReported
    
    As RestatedBalance Sheet:Inventories
    
    $
    15,739
    
    
    $
    14,810Income tax receivable
    
    
    364
    
    
    
    676Accrued employee benefits
    
    
    607
    
    
    
    524Retained earnings
    
    
    31,123
    
    
    
    30,589Statement of Operations:Cost of revenues
    
    
    54,563
    
    
    
    55,493Gross profit
    
    
    15,933
    
    
    
    15,003Selling, general &
administrative expenses
    
    
    10,716
    
    
    
    10,632Earnings from continuing
operations before income
taxes and minority interest
    
    
    5,402
    
    
    
    4,556Provision for income taxes
    
    
    1,664
    
    
    
    1,352Net earnings from continuing
operations
    
    
    3,740
    
    
    
    3,206Net earnings
    
    
    3,543
    
    
    
    3,009Earnings per share:From continuing operations
    
    
    1.35
    
    
    
    1.16Net earnings
    
    
    1.28
    
    
    
    1.09
 40




---



##### 



McRAE INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II   VALUATION AND QUALIFYING ACCOUNTS ADDITIONSCHARGEDBALANCE AT
    
    CHARGED TO
    
    TO OTHER
    
    
    
    
    
    BALANCEBEGINNING
    
    COSTS AND
    
    ACCOUNTS
    
    DEDUCTION/
    
    AT END OFDESCRIPTION
    
    OF PERIOD
    
    EXPENSES
    
    DESCRIBE
    
    WRITE-OFF
    
    PERIODYear ended July 31, 2004Allowance for Doubtful Accounts
    
    $
    431,000
    
    
    $
    314,000
    
    
    
    
    
    
    $
    (406,000
    )(1)
    
    $
    339,000Allowance for Inventory Write-downs
    
    
    250,000
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    325,000Employee Benefit Accrual
    
    
    427,000
    
    
    
    463,000
    
    
    $
    10,000
    (3)
    
    
    (376,000
    )(2)
    
    
    524,000Health Insurance Accrual
    
    
    200,000
    
    
    
    70,000
    
    
    
    
    
    
    
    
    
    
    
    270,000Year ended August 2, 2003Allowance for Doubtful Accounts
    
    $
    349,000
    
    
    $
    87,000
    
    
    
    
    
    
    $
    (5,000
    )(1)
    
    $
    431,000Allowance for Inventory Write-downs
    
    
    175,000
    
    
    
    75,000
    
    
    
    
    
    
    
    
    
    
    
    250,000Employee Benefit Accrual
    
    
    474,000
    
    
    
    359,000
    
    
    $
    (55,000
    )(3)
    
    
    (351,000
    )(2)
    
    
    427,000Health Insurance Accrual
    
    
    225,000
    
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    200,000Year ended August 3, 2002Allowance for Doubtful Accounts
    
    $
    213,000
    
    
    $
    211,000
    
    
    
    
    
    
    $
    (75,000
    )(1)
    
    $
    349,000Allowance for Inventory Write-downs
    
    
    
    
    
    
    175,000
    
    
    
    
    
    
    
    
    
    
    
    175,000Employee Benefit Accrual
    
    
    239,000
    
    
    
    351,000
    
    
    $
    66,000
    (3)
    
    
    (182,000
    )(2)
    
    
    474,000Health Insurance Accrual
    
    
    250,000
    
    
    
    (25,000
    )
    
    
    
    
    
    
    
    
    
    
    225,000
  (1)
    
    Uncollectible accounts written off(2)
    
    Payments and/or expenses charged to operations(3)
    
    Changes related to discontinued operations 41




---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
FINANCIAL DISCLOSURE Not applicable. ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participations 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 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,
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. Certain of these internal control weaknesses may also constitute deficiencies
in the Companys 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 and to enable the completion of the independent auditors audit of
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 fourth quarter of fiscal 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. However, 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. 42




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ITEM 9B. OTHER INFORMATION Not applicable. PART III ITEMS 10-14. Items 10 through 14 are incorporated herein by reference to the sections
captioned PRINCIPAL STOCKHOLDERS AND HOLDINGS OF MANAGEMENT, ELECTION OF
DIRECTORS, DIRECTOR COMPENSATION, EXECUTIVE OFFICERS, COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION, EQUITY PLAN COMPENSATION
INFORMATION, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, EXECUTIVE
COMPENSATION, STOCK PERFORMANCE GRAPH, COMPENSATION COMMITTEE REPORT,
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, CODES OF ETHICS
and RATIFICATION OF APPOINTMENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
in the Registrants Proxy Statement for the Annual Meeting of Stockholders held December 16, 2004. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K  (a)
    
    (1) Report of Independent Registered Public Accounting Firm
McRae Industries, Inc. and Subsidiaries consolidated financial
statements:  Consolidated Balance Sheets as of July 31, 2004 and August 2,
2003.Consolidated Statements of Operations for the Years Ended
July 31, 2004, August 2, 2003, and August 3, 2002.Consolidated Statements of Shareholders Equity for the Years
Ended July 31, 2004, August 2, 2003, and August 3, 2002.Consolidated Statements of Cash Flows for the Years Ended July
31, 2004, August 2, 2003, and August 3, 2002.Notes to Consolidated Financial Statements.(2)
    
    Financial Statement Schedule:Schedule II(3)
    
    Exhibits:  3.1
    
    Certificate of Incorporation (Filed as Exhibit 3.1 to the Registrants
Form S-14, Registration N. 2-85908).3.2
    
    Amendment to the Certificate of Incorporation (Filed as 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 (Filed as
Exhibit 3.3 to the Registrants Form 10-K for the fiscal year ended
July 28, 2001).10.1
    
    1985 McRae Industries, Inc. Non-Qualified Stock Option Plan (Filed as
Exhibit 10 to the Registrants Form 10-K for the fiscal year ended
August 3, 1985).* 43




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10.2
    
    Technical Assistance Agreement dated September 13, 1984 between the
Registrant and Ro-Search, Incorporated (Filed as Exhibit 10.4 to the
Registrants Form 10-K for the fiscal year ended July 28, 1984).10.3
    
    Stock Purchase Agreement and Guaranty Agreement as of April 7, 1996
among Walter A. Dupuis, Kenneth O. Moore, William Glover, and McRae
Industries, Inc., (Filed as Exhibit 2 to the Registrants current report
on Form 8-K filed May 11, 1996).10.4
    
    Split Dollar Life Insurance Arrangement (Filed as Exhibit 10.10 to the
Registrants Form 10-K for the fiscal year ended August 3, 2002).10.5
    
    Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc., dated April 15, 1997 (Filed as Exhibit 10.8 to the
Registrants            Form 10-K for the fiscal year ended August 2, 1997).10.6
    
    Asset Purchase Agreement among the Company, McRae Office Solutions,
Inc., TOPAC U.S.A., Inc., and Connected Office Products, Inc. dated
September 9, 2004 (Filed as Exhibit 2.1 to the Registrants Current
Report on Form 8-K filed September 9, 2004).21
    
    Subsidiaries of the Registrant (Filed as Exhibit 21 to the
Registrants Form 10-K for the fiscal year ended July 31, 2004 filed
October 29, 2004).23
    
    Consent of Independent Registered Public Accounting Firm (Filed
herein). Page 47.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President
and CEO (Filed herein). Page 48.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice
President of Finance (Filed herein). Page 49.32.1
    
    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 50.32.2
    
    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 51.   *Denotes a management contract or compensatory plan or arrangement.  (b)
    
    Reports onForm 8-K:We did not file any reports on Form 8-K during the last quarter
of fiscal 2004. 44




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. McRAE INDUSTRIES, INC. Dated: December 22, 2004
    
    By: /s/ D. Gary McRaeD. Gary McRae
President
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated: SIGNATURE
    
    DATE/s/ D. Gary McRae
    
    December 22, 2004D. Gary McRaePresident, Treasurer, and Director(Principal Executive Officer)/s/ William H. Swan
    
    December 22, 2004William H. SwanDirector/s/ Hilton J. Cochran
    
    December 22, 2004Hilton J. CochranDirector/s/ Brady W. Dickson
    
    December 22, 2004Brady W. DicksonDirector/s/ Victor A. Karam
    
    December 22, 2004Victor A. KaramPresident  McRae Footwear and Director/s/ James W. McRae
    
    December 22, 2004James W. McRaeVice President, Secretary, and Director/s/ Marvin G, Kiser, Sr.
    
    December 22, 2004Marvin G. Kiser, Sr.Vice President of Finance(Principal Financial and Accounting Officer)
 45




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##### 



EXHIBIT INDEX  3.1
    
    Certificate of Incorporation (Filed as Exhibit 3.1 to the Registrants
Form S-14, Registration N. 2-85908).3.2
    
    Amendment to the Certificate of Incorporation (Filed as 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 (Filed as
Exhibit 3.3 to the Registrants Form 10-K for the fiscal year ended
July 28, 2001).10.1
    
    1985 McRae Industries, Inc. Non-Qualified Stock Option Plan (Filed as
Exhibit 10 to the Registrants Form 10-K for the fiscal year ended
August 3, 1985).*10.2
    
    Technical Assistance Agreement dated September 13, 1984 between the
Registrant and Ro-Search, Incorporated (Filed as Exhibit 10.4 to the
Registrants Form 10-K for the fiscal year ended July 28, 1984).10.3
    
    Stock Purchase Agreement and Guaranty Agreement as of April 7, 1996
among Walter A. Dupuis, Kenneth O. Moore, William Glover, and McRae
Industries, Inc., (Filed as Exhibit 2 to the Registrants current report
on Form 8-K filed May 11, 1996).10.4
    
    Split Dollar Life Insurance Arrangement (Filed as Exhibit 10.10 to the
Registrants Form 10-K for the fiscal year ended August 3, 2002).10.5
    
    Award/Contract between Defense Personnel Support Center and McRae
Industries, Inc., dated April 15, 1997 (Filed as Exhibit 10.8 to the
Registrants Form 10-K for the fiscal year ended August 2, 1997).10.6
    
    Asset Purchase Agreement among the Company, McRae Office Solutions,
Inc., TOPAC U.S.A., Inc., and Connected Office Products, Inc. dated
September 9, 2004 (Filed as Exhibit 2.1 to the Registrants Current
Report on Form 8-K filed September 9, 2004).21
    
    Subsidiaries of the Registrant (Filed as Exhibit 21 to the
Registrants Form 10-K for the fiscal year ended July 31, 2004 filed
October 29, 2004).23
    
    Consent of Independent Registered Public Accounting Firm (Filed
herein). Page 47.31.1
    
    Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President
and CEO (Filed herein). Page 48.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice
President of Finance (Filed herein). Page 49.32.1
    
    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 50.32.2
    
    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 51. 46