##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K/A
 (Amendment No. 2)
 þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 o 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 þ 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. þ Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). o þ
 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.




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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. 2 (Amendment No. 2) to the Form 10-K originally filed October 29, 2004, as
amended by the Form 10-K/A filed December 23, 2004 (the original filing), to reflect a revised
discussion concerning the Companys disclosure controls and procedures and internal control over
financial reporting in the Disclosure Controls and Proceduresand Managements Discussion and
Analysis of Financial Condition and Results of Operationssections of the original filing. This Amendment
No. 2 presents a complete restatement of the original filing.
Except as set forth above and for such other changes as required by applicable law, no attempt has
been made in this Amendment No. 2 to modify or update the disclosures as presented in the original
filing and other than the discussion regarding our internal control over financial reporting
contained in Item 9A of Part II, this Amendment No. 2 does not reflect events occurring after the
original filing of the Form 10-K on October 29, 2004. 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. 1




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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
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 2




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##### 



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. 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 3




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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. 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,Mt. Gilead, N.C.
    
    manufacturing, and sales
    
    71,000 square feetHighway 109 NorthMt. Gilead, N.C.
    
    Footwear manufacturing
    
    57,600 square feet2500 Port Malabar Blvd.Palm Bay, Florida
    
    Compsee bar code sales office
    
    5,250 square feetHighway 109 NorthMt. Gilead, N.C.
    
    Footwear warehouse
    
    3,500 square feetHighway 109Richmond County, N.C.
    
    Footwear storage
    
    11,200 square feet
 4




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Location
    
    Principal Use
    
    SizeHighway 24-27
    
    Footwear manufacturing andTroy, N.C.
    
    warehousing
    
    60,000 square feetHighway 109 NorthMt. Gilead, N.C.
    
    Footwear storage
    
    4,800 square feet601 E. Railroad StreetWaverly, TN
    
    Footwear manufacturing
    
    71,520 square feet5576 Highway 70 WestWaverly, TN
    
    Footwear warehouse
    
    77,000 square feet
 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. 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: 5




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CLASS A COMMON STOCK: Fiscal 2004
    
    
    Fiscal 2003Cash
    
    
    
    
    
    
    
    
    
    
    CashSales
    
    
    Price
    
    
    Dividends
    
    
    Sales
    
    
    Price
    
    
    DividendsQuarter
    
    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. 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
 6




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(a)
    
    Includes both Class A and Class B Common Stock(b)
    
    Dividends were paid only on Class A Common Stock ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTERNAL CONTROL OVER FINANCIAL REPORTING In connection with the audit of our consolidated financial statements for the fiscal year ended
July 31, 2004, our independent auditors informed us that they had discovered significant
deficiencies in our internal control over financial reporting that in the aggregate constituted
material weaknesses under standards established by the Public Company Accounting Oversight Board.
These deficiencies, which were noted across all of the Companys operating divisions and which have
been present since the Companys inception, are generally the result of incompatible duties,
undocumented controls, lack of monitoring controls and the lack of an internal audit function.
Additionally, the discovery of compilation errors in the military boot operations fiscal 2004
year-end inventory required us to restate our financial statements as of July 31, 2004 and for the
fiscal year then ended included in our Annual Report on Form 10-K originally filed by us on October
29, 2004. Upon completion by our independent auditors of their review of the accounting for
inventory in our financial statements as previously reported for fiscal 2004, our independent
auditors informed us that in their view there were material internal control weaknesses related to
the compilation of the Companys inventory. We have performed substantial
additional procedures including, but not limited to, documentation of
our procedures, identification of key control weaknesses, and
initiation of an appropriate remediation process in an effort to ensure that these internal
control deficiencies do not lead to further material misstatements in our consolidated financial
statements and to enable the completion of the independent auditors audit of our consolidated
financial statements. CRITICAL ACCOUNTING 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 7




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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. 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. 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. 8




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Fiscal Year
    
    
    
    
    
    
    Percent change2004
    
    
    2003
    
    
    2002
    
    
    over prior period
    
    
    
    
    
    
    Fiscal Year(In thousands)
    
    
    
    
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2002Percentage 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 ExpenseBar 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
 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. 9




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##### 



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. 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. 10




---



##### 



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 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. 11




---



##### 



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. 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 12




---



##### 



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. 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 13




---



##### 



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. 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 14




---



##### 



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. 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). 15




---



##### 



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
    
    
    172.
    
    McRae Industries, Inc. and Subsidiaries Consolidated Financial Statements:Consolidated Balance Sheets as of July 31, 2004 and August 2, 2003.
    
    
    18-19Consolidated Statements of Operations for the Years Ended July 31, 2004
August 2, 2003, and August 3, 2002.
    
    
    20Consolidated Statements of Shareholders Equity for the Years Ended July
31, 2004, August 2, 2003, and August 3, 2002.
    
    
    21Consolidated Statements of Cash Flows for the Years Ended July 31, 2004,
August 2, 2003, and August 3, 2002.
    
    
    22Notes to Consolidated Financial Statements.
    
    
    23-353.
    
    Financial Statement Schedule:Schedule II
    
    
    36Schedules 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.
 16




---



##### 



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 LLPCharlotte, North CarolinaOctober 26, 2004 (except for Note 15,as to which the date is December 22, 2004)
 17




---



##### 



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 18




---



##### 



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 19




---



##### 



CONSOLIDATED STATEMENTS OF OPERATIONSMcRae Industries, Inc. and Subsidiaries
    

(In thousands)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 20




---



##### 



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 earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,009As restated (Note 15)Balance, July 31, 2004
    
    
    1,943,543
    
    
    $
    1,943
    
    
    
    824,956
    
    
    $
    825
    
    
    $
    791
    
    
    $
    30,589As restated (Note 15)
 See notes to consolidated financial statements 21




---



##### 



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
    
    
    
    1,493Cash 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 22




---



##### 



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. 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. 23




---



##### 



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. 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. 24




---



##### 



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
  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. 25




---



##### 



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
 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. 26




---



##### 



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.  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
    )
 27




---



##### 



Deferred tax liabilities and assets at each year-end are as follows (in thousands): 2004As restated (Note 15)
    
    
    2003Deferred tax liabilities:Depreciation
    
    $
    (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. 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
    
    
    
    .03$
    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): 28




---



##### 



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 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. 29




---



##### 



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
 30




---



##### 



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
 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: 31




---



##### 



(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
 (In thousands)July 31, 2004
    
    
    August 2, 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
 32




---



##### 



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.  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.  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. 33




---



##### 



Military
Boats
    
    
    Western/
    
    
    
    
    
    
    Corporate
& Other
    
    
    ConsolidatedAs restated
    
    
    Work
    
    
    
    
    
    As restated
    
    
    As restated(In thousands)
    
    (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
 34




---



##### 



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
 35




---



##### 



McRAE INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS ADDITIONSCHARGEDBALANCE AT
    
    
    
    CHARGED TO
    
    
    
    TO OTHER
    
    
    
    
    
    
    
    
    BALANCEBEGINNING OF
    
    
    
    COSTS AND
    
    
    
    ACCOUNTS 
    
    
    
    DEDUCTIONS 
    
    
    
    AT END OFDESCRIPTION
    
    
    PERIOD
    
    
    
    EXPENSES
    
    
    
    DESCRIBE
    
    
    
    DESCRIBE
    
    
    
    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 36




---



##### 



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 including, but not limited to, documentation of our procedures, identification of key control weaknesses, and initiation of an appropriate remediation process in an effort to ensure
that these internal control deficiencies do not lead to further material misstatements in our
consolidated financial statements and to enable the completion of the independent auditors audit
of our consolidated financial statements. 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. ITEM 9B. OTHER INFORMATION Not applicable. 37




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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).*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). 38




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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 as Exhibit 23 to the
Registrants Form 10-K/A for the fiscal year ended July 31, 2004 filed December 23, 2004).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President and CEO (Filed herewith).
Page 42.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice President of Finance
(Filed herewith). Page 43.32.1
    
    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 (Furnished herewith). Page 44.32.2
    
    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 (Furnished herewith). Page 45. *
    
    Denotes a management contract or compensatory plan or arrangement. 39




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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:  June 24, 2005
    By:
    /s/ D. Gary McRaeD. Gary McRaePresident 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
    
    
    
    June 24, 2005D. Gary McRaePresident, Treasurer, and Director(Principal Executive Officer)/s/ William H. Swan
    
    
    
    June 24, 2005William H. SwanDirector/s/ Hilton J. Cochran
    
    
    
    June 24, 2005Hilton J. CochranDirector/s/ Brady W. Dickson
    
    
    
    June 24, 2005Brady W. DicksonDirector/s/ Victor A. Karam
    
    
    
    June 24, 2005Victor A. KaramPresident  McRae Footwear and Director/s/ James W. McRae
    
    
    
    June 24, 2005James W. McRaeVice President, Secretary, and Director/s/ Marvin G, Kiser, Sr.
    
    
    
    June 24, 2005Marvin G. Kiser, Sr.Vice President of Finance and Director(Principal Financial and Accounting Officer)
 40




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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 as Exhibit 23 to the
Registrants Form 10-K/A for the fiscal year ended July 31, 2004 filed December 23, 2004).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification for D. Gary McRae, President and CEO (Filed herewith).
Page 42.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification for Marvin G. Kiser, Sr., Vice President of Finance
(Filed herewith). Page 43.32.1
    
    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 (Furnished herewith). Page 44.32.2
    
    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 (Furnished herewith). Page 45. 41