Edgar Filing: MCRAE INDUSTRIES INC

McRae Industries, Inc.

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

FORM 10-K


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 August 3, 2002

Commission file number: 1-8578

McRAE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)


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 registered
Class A Common Stock, $1 Par Value		American Stock Exchange




Class 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 or any amendment of this Form 10-K. o

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 October 25, 2002 was approximately $10,666,000 and $2,321,000, respectively. On October 25, 2002, 1,879,072 Class A shares and 889,427 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 to be held on December 19, 2002 are incorporated by reference into Parts II and III.

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; manufacturing and selling military combat boots, western and work boots; and selling, leasing, and servicing office equipment. Our commercial printing and packaging business was discontinued during fiscal 2001. Additional financial information about these lines of business can be found in Note 16 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 99% owned subsidiary. Compsee markets, sells, and services its products directly through sales centers located throughout the United States.

Compsee designs and manufactures QuickReader and QuickLink bar code readers. 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, which was introduced in fiscal 1996, and the APEX III, which was introduced in fiscal 2001. These products were well received in the market and provided 19%, 13%, and 10% of Compsee sales for fiscal 2002, 2001, and 2000, respectively. During fiscal 2000 Compsee purchased an enterprise integration software program that enhances and facilitates mobile bar code applications. This software allows customers to develop wireless system applications quickly and efficiently. During the last half of fiscal 2001, Compsee introduced the APEX III portable data collector. This product provides batch and wireless data collection capability. The APEX IV portable data collection unit was introduced to the market during the first quarter of fiscal 2003. This unit is a more rugged, pistol grip version of the APEX III product. 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 in the industry include PSC, Unitech, and Handheld Products.

Net revenues derived from this unit in fiscal 2002, 2001, and 2000 were 15%, 22%, and 29% of the Company’s consolidated net revenues, respectively. QuickReader, QuickLink, and Turbowedge bar code readers developed and marketed by Compsee accounted for 9%, 11%, and 11% of Compsee’s net revenues for fiscal 2002, 2001, and 2000, respectively, and for 1%, 3%, and 3% of the Company’s consolidated net revenues during fiscal 2002, 2001, and 2000, respectively.

Footwear Manufacturing

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. On April 30, 1996, we acquired American West Trading Company (American West), which manufactures western and work boots, and has manufactured military dress oxfords and military safety boots.

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.” All recent Government contracts for vulcanized military boots have been awarded to four manufacturers including us.

We currently provide military boots to the Government under a contract dated April 15, 1997 (the Contract). In September 2001, the Government awarded us a contract that required us to increase our production levels of military combat boots as a result of the anticipated deployment of troops in the war on terrorism. The increased production levels represented a significant increase over the quantities normally purchased by the Government under the Contract.

The Contract, which was set to expire on April 15, 2002, has been extended twice. The first extension extended the Contract ordering period through July 19, 2002 and provided for a minimum order of military combat boots of 103,676 pair consisting of the three current styles of direct molded sole boots covered by the Contract. These boots are scheduled for delivery during the first and second quarters of fiscal 2003 and will have an approximate $6.3 million impact on revenues. The second extension extended the Contract ordering period through December 31, 2002 and provided for a minimum order quantity of 45,000 pair and a maximum order quantity of 80,000 pair. Based on orders received to date, we expect this Contract extension to have a $5.1 million impact on revenues. The Government has issued two solicitations for future military combat boot requirements. One solicitation covers the three current styles of military combat boots. The second solicitation covers the newly adopted infantry combat boot, which incorporates a waterproof membrane construction. This boot will replace the current vulcanized style of standard issue combat boot that has historically accounted for the majority of the Government’s order under the Contract. We have submitted bids for both solicitations and are awaiting the Government’s award decisions, which we expect to occur in November 2002. There are no assurances, however, that we will be successful in obtaining either of these contracts to produce boots for the Government.

No one company dominates the Government military boot industry. Our major competitors in the direct molded sole 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 $14.3 million, $11.7 million, and $7.2 million, for fiscal 2002, 2001, and 2000, respectively. Such sales constituted 19%, 20%, and 13% of consolidated net revenues in fiscal 2002, 2001, and 2000, respectively. Sales of military boots to foreign countries were $4.9 million, $4.6 million, and $4.7 million for the past three fiscal years, respectively. For fiscal 2002, all of our foreign country sales were to Israel as compared to 89% for fiscal 2001.

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.

Leather and synthetic rubber are the principal material components used in the boot manufacturing process. Pursuant to Government contracts for military combat boots, all materials used in manufacturing these boots must be and are produced in the

United States and must be certified as conforming to military specifications. The synthetic rubber we use in our military combat boots is available from only 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.

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.

Dan Post Boot Company (Dan Post) (formerly American West) designs, manufactures, sells, and distributes 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.

On June 29, 2001, Dan Post acquired the Dingo brand name and certain inventory from Lucchese, Inc., a wholly owned subsidiary of Arena Brands, Inc. The Dingo footwear line provides a “lifestyle” product to supplement our western boot products. Also, in early October 2001, we purchased the Dan Post brand name and certain inventory from Lucchese, Inc. The Dan Post brand is a high quality, traditional western product and is well recognized by both retailers and consumers. This addition to the product mix allows us to compete in the hand crafted boot market.

In addition to the western and work boot product lines, in fiscal 1997 we began producing two styles of military footwear (military dress oxfords and military safety shoes) and can bid on future “welt” construction military solicitations to supplement the western boot product lines. We had no sales of military footwear (excluding direct molded sole boots) in fiscal 2002 as compared to $520,000, and $734,000 in fiscal 2001 and 2000, respectively.

During fiscal 2000, we expanded our western boot product line with imported children’s boots from India and China. In addition, we import western boots for adults from Brazil, Mexico, and China.

During fiscal 1997, we consolidated all our western and work boots manufacturing operations into our Waverly, Tennessee facility. We sold our Dresden, Tennessee facility during fiscal 2002 and moved the storage, warehouse, and shipping functions housed at this facility to a 77,000 square foot leased facility in Waverly, Tennessee. The “upper” parts of boots produced at our plant are constructed from leather and/or synthetic material and the sole and heels consist of either leather, rubber and/or rubber-plastic blended material. All raw materials necessary for manufacturing the boots are readily available from several suppliers, both domestic and foreign.

The western and work boot markets are highly competitive. We are not aware of any reliable statistics that would enable us to determine our relevant position 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 $19.4 million, $9.4 million, and $7.9 million of consolidated net revenues for fiscal 2002, 2001, and 2000, respectively.

The Company’s backlog of firm orders for military combat boots at August 3, 2002 and July 28, 2001 totaled approximately $5.5 million and $3 million, respectively. We expect to fill all of the backlog as of August 3, 2002 during the current fiscal

year. The backlog of firm orders for western and work boots at August 3, 2002 and July 28, 2001 totaled approximately $2.6 million and $1.4 million, respectively. We expect to fill all of the backlog as of August 3, 2002 during the current fiscal year.

Net revenues derived from the military combat boot segment in fiscal 2002, 2001, and 2000 were 27%, 29%, and 21%, respectively, of the Company’s consolidated net revenues.

Net revenues derived from the western and work boot segment in fiscal 2002, 2001, and 2000 were 25%, 16%, and 14%, respectively, of the Company’s consolidated net revenues.

Office Products

McRae Office Solutions, Inc. (Office Solutions), formerly McRae Graphics, Inc., a wholly owned subsidiary, is a non-exclusive distributor of Toshiba photocopier and facsimile machines in North Carolina and parts of Virginia and South Carolina. Office Solutions operates eight district sales offices throughout the state of North Carolina. Office Solutions is also a distributor in North Carolina of RISO digital duplicators. During fiscal 2002, the OKI color copier line was added to the product mix. Machines, components, and certain supplies sold by Office Solutions during fiscal 2002 are generally available only from Toshiba, RISO and OKI.

Office Solutions has three primary channels of distribution for its products. The first channel is providing equipment to North Carolina state agencies by being a preferred vendor for the State of North Carolina. The state contract business accounted for 6.1%, 6.1%, and 0.7% of Office Solutions net revenues for fiscal 2002, 2001, and 2000, respectively.

The second channel is the Special Markets Group, which focuses on school systems throughout the state of North Carolina. These school systems, many of which are county-wide, pay a specified price for each copy made. This price covers the equipment, service, and supply costs. Currently, we have equipment in 1,200 schools that generate over 1 billion copies per year. The Special Markets Group accounted for 60.1%, 50.0%, and 43.7% of Office Solutions net revenues for fiscal 2002, 2001, and 2000, respectively.

The third channel is the Commercial Accounts Market. This group targets religious organizations and small to mid-size companies and offers its customers an efficient, cost-effective solution for their print ministries and general office printing requirements. The Commercial Accounts group provided 33.8%, 43.9%, and 55.6% of Office Solutions net revenues for fiscal 2002, 2001, and 2000, respectively.

In fiscal 2000, Office Solutions purchased the rights to a software package designed to scan, store, and provide easy retrieval of various document types. During fiscal 2001 and 2002 this software was reformatted to conform with current technology. This product is expected to be part of the product mix in fiscal 2003.

The office products business is generally highly competitive, with price and service being the dominant factors. We are not aware of any reliable statistics that would indicate our relative position within this industry in the geographical area in which we compete.

Net revenues derived from the office products segment during fiscal 2002, 2001, and 2000 were 33%, 33%, and 36%, respectively, of the Company’s consolidated net revenues.

Other Businesses

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 $4.9 million (24.4% of total military boot sales), $4.6 million (27.4%) and $4.7 million (37.9%) during fiscal 2002, 2001, and 2000, respectively. In fiscal 2002, all of our foreign country sales were to Israel as compared to 89% in fiscal 2001.

Other Investment Interests

We own approximately 13% of the outstanding Common Stock and all of the outstanding 20% cumulative convertible preferred stock of American Mortgage and Investment Company (AMIC). In addition, at August 3, 2002 we had a total of $395,000 of notes and accounts receivable due from AMIC. AMIC is located in Charleston, South Carolina and is engaged in real estate development and sales, primarily lots for single family dwellings, in the coastal region of South Carolina. D. Gary McRae, President of the Company, is President of AMIC. During fiscal 2002 we received payments of approximately $107,000 from AMIC. At August 3, 2002, we had recorded investments in and advances to AMIC of approximately $395,000. AMIC has been operating under Chapter X of the United States Bankruptcy Act since 1974.

Environmental 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 August 3, 2002, we employed approximately 615 persons in all divisions and subsidiaries. None of our employees are represented by collective bargaining or a labor union. We consider our relationship 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 16 to the consolidated financial statements included in this Report.

Research and Development

Research and development costs related to development of future bar code and imaging software products amounted to $1,045,000, $561,000, and $538,000 for fiscal 2002, 2001, and 2000, 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	Size

400 North Main Street	Corporate headquarters,	71,000 square feet




Mt. Gilead, N.C.	manufacturing, and sales









Highway 109 North	Footwear manufacturing	57,600 square feet




Mt. Gilead, N.C.









2500 Port Malabar Blvd.	Compsee bar code sales office	5,250 square feet




Palm Bay, Florida









Highway 109 North	Footwear warehouse	3,500 square feet




Mt. Gilead, N.C.









Highway 109	Footwear storage	11,200 square feet




Richmond County, N.C.









Highway 24-27	Footwear manufacturing and	35,000 square feet




Troy, N.C.	warehousing









Highway 109 North	Footwear storage	4,800 square feet




Mt. Gilead, N.C.









601 E. Railroad Street	Footwear manufacturing	71,520 square feet




Waverly, TN









5576 Highway 70 West	Footwear warehouse	77,000 square feet




Waverly, TN

In addition to these principal locations, we lease other sales offices throughout the United States. We also own approximately 500 acres of undeveloped land located in North Carolina on August 3, 2002 that is being held for investment purposes.

The Waverly, Tennessee facility is encumbered by a deed of trust in favor of The Fidelity Bank to secure a loan in the amount of approximately $4.2 million.

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 25, 2002, there were approximately 410 record holders of Class A Common Stock and approximately 381 record holders of the Class B Common Stock. High and low stock prices and dividends declared per share for the last two fiscal years were:

CLASS A COMMON STOCK:


	Fiscal 2002						Fiscal 2001

	Sales Price				Cash		Sales Price				Cash
					Dividends						Dividends
Quarter	High		Low		Declared		High		Low		Declared

First	$	5.80	$	3.50	$	.05	$	5.63	$	4.75	$	.09




Second		5.88		4.80		.05		5.38		4.88		.09




Third		5.98		5.30		.05		5.24		3.95		.05




Fourth		7.50		5.70		.06		4.25		3.85		.05

CLASS B COMMON STOCK:


	Fiscal 2002				Fiscal 2001

	Sales Price				Sales Price

Quarter	High		Low		High		Low

First	$	5.55	$	3.80	$	5.75	$	5.00




Second		5.60		4.95		5.38		5.13




Third		5.95		5.40		5.30		4.10




Fourth		7.40		5.85		4.25		3.90

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. 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. 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.


Fiscal Years Ended	8-3-02		7-28-01			7-29-00			7-31-99			8-1-98

Income Statement Data:




Net revenues	$	74,531,000	$	57,145,000		$	57,141,000		$	48,289,000		$	57,151,000




Net earnings (loss) from continuing operations		2,585,000		(571,000	)		1,502,000			815,000			2,192,000




Net earnings (loss) from discontinued operations		—		(126,000	)		(145,000	)		(33,000	)		73,000




Net earnings (loss)		2,585,000		(697,000	)		1,357,000			782,000			2,265,000




Net earnings (loss) from continuing operations per common share:		0.93		(0.21	)		0.54			0.29			0.79

Balance Sheet Data:




Total assets	$	41,929,000	$	38,977,000		$	42,697,000		$	39,951,000		$	40,457,000




Long-term liabilities		3,900,000		4,598,000			5,057,000			5,280,000			5,594,000




Working capital		23,829,000		21,202,000			22,520,000			20,962,000			21,408,000




Shareholders’ equity		29,581,000		27,371,000			28,589,000			27,901,000			27,784,000




Weighted average number of common shares outstanding(a)		2,768,499		2,768,499			2,768,499			2,768,499			2,768,499




Cash dividends declared per common share(b)	$	0.21	$	0.28		$	0.36		$	0.36		$	0.36

(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

CRITICAL ACCOUNTING ESTIMATES

Our timely preparation of financial reports and related disclosures requires us to use estimates and assumptions that may cause actual results to be materially different from our estimated results. Specifically, we use estimates when accounting for depreciation, amortization, cost per copy contract contingencies, useful lives for intangible assets, and asset valuation allowances (including those for bad debts, inventory, and deferred income tax asset valuation allowances). Our most critical accounting estimates include the following:

Contract Contingencies

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

Intangible Assets

We determine the utility of goodwill and trademarks based on estimated future cash flows and test for impairment in accordance with applicable accounting pronouncements. Effective August 4, 2002 we have adopted Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”. Our intangible assets are not impaired under this pronouncement.

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

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. In accordance with guidance issued under Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” revenues from bill and hold transactions are recognized at the time of acceptance by the QAR.

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 four primary business units: our bar code unit operates under the name Compsee, Inc. (Compsee); our office products unit operates under the name McRae Office Solutions, Inc. (Office Solutions); 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 commercial printing unit, which was discontinued in fiscal 2001, operated under the name Rae-Print, Inc. We also operate other smaller businesses.

A summary of net revenues; gross profits; selling, general and administrative expenses; and operating profits of our major business units for fiscal years 2000 through 2002 is presented in the following table. Certain reclassifications have been made to the prior year amounts to conform with the current year presentation. In particular, the prior year amounts have been adjusted to reflect the discontinuance of the commercial printing unit in fiscal 2001.


		Fiscal Year									Percent change						Fiscal Year
		2002			2001			2000			over prior period						2002		2001		2000

		Dollars (In thousands)									2002			2001			Percent of Net Revenues

Net Revenues




	Bar Code	$	10,881		$	12,454		$	16,422			(12.6	)		(24.2	)		15		22		29




	Office Products		24,732			18,640			20,678			32.7			(9.9	)		33		33		36




	Military Boots		20,030			16,792			12,395			19.3			35.5			27		29		21




	Western/Work Boots		19,360			9,371			7,866			106.6			19.1			25		16		14




	Eliminations/Other		(472	)		(112	)		(220	)	NM			NM				0		0		0

	Consolidated	$	74,531		$	57,145		$	57,141			30.4			0.0			100		100		100



Gross Profit																Gross Profit Percentage

	Bar Code	$	3,124	$	3,668		$	5,319			(14.8	)		(31.0	)		29	29	32




	Office Products		6,260		3,492			5,726			79.3			(39.0	)		25	19	28




	Military Boots		5,517		4,034			2,786			36.8			44.8			28	24	22




	Western/Work Boots		4,911		1,715			1,106			186.4			55.1			25	18	14




	Eliminations/Other		3		(27	)		(74	)	NM			NM				0	0	0

	Consolidated	$	19,815	$	12,882		$	14,863			53.8			(13.3	)		27	23	26


Selling, General and Administrative Expenses																Percentage of Net Revenues

	Bar Code	$	4,971		$	5,601		$	5,525			(11.2	)		1.4		46	45	34




	Office Products		5,631			5,520			4,688			2.0			17.7		23	30	23




	Military Boots		800			628			457			27.4			37.4		4	4	4




	Western/Work Boots		3,912			2,265			1,648			72.7			37.4		20	24	21




	Eliminations/Other		(59	)		(84	)		(22	)	NM			NM			0	0	0

	Consolidated	$	15,255		$	13,930		$	12,296			9.5			13.3		21	25	22


Operating Profit (Loss)																Percentage of Net Revenues

	Bar Code	$	(1,847	)	$	(1,933	)	$	(206	)		4.4		(838.3	)		(17	)	(16	)	(2	)




	Office Products		629			(2,028	)		1,038			131.0		(295.4	)		2		(11	)	5




	Military Boots		4,717			3,406			2,329			38.5		46.2			24		20		18




	Western/Work Boots		999			(550	)		(542	)		281.6		(1.5	)		5		(6	)	(7	)




	Eliminations/Other		62			57			(52	)	NM		NM				0		0		0

	Consolidated	$	4,560		$	(1,048	)	$	2,567			535.1		(140.8	)		6		(2	)	4

CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

Consolidated net revenues for fiscal 2002 climbed to a record level of $74.5 million, up 30.4% from the $57.1 million reported for fiscal 2001. This increase in consolidated net revenues was primarily the result of higher demand for military combat boots, western boots, and office products, partially offset by a 12.6% decrease in bar code business net revenues.

Consolidated gross profit grew to $19.8 million for fiscal 2002, up 53.8% from $12.8 million for fiscal 2001. Gross profit as a percentage of net revenues improved from 23% for fiscal 2001 to 27% for fiscal 2002. This increase in gross profit performance was primarily the result of increased revenues, lower per unit manufacturing costs, and the positive impact of increased high margin import product sales.

Consolidated selling, general and administrative (SG&A) expenses for fiscal 2002 were $15.3 million, an increase of 9.5% over the $13.9 million reported for fiscal 2001. This increase in SG&A expenses was primarily attributable to higher expenditures for research and development, professional fees, office and warehouse rentals, employee benefit costs, and write-offs associated with sales related computer software. As a percentage of consolidated net revenues, SG&A expenses for fiscal 2002 were 21% as compared to 25% for fiscal 2001.

As a result of the above, consolidated operating profit increased $5.6 million to $4.6 million for fiscal 2002 as compared to an operating loss of $1.0 million for fiscal 2001.

Our results of operations for fiscal 2002 were not impacted by the discontinuance of our commercial printing business that occurred in fiscal 2001. Operating results for fiscal 2001 and fiscal 2000 have been adjusted to reflect the discontinuance of the commercial printing unit.

BAR CODE UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

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 fiscal 2002 were $10.9 million, a decrease of 12.6% from net revenues of $12.5 million for fiscal 2001. This decrease was primarily due to lower product demand resulting from a weak economy, increased competition and a delay in marketing the new APEX III product.

Primarily as a result of reduced net revenues, gross profit fell 14.8% to $3.1 million for fiscal 2002 as compared to $3.7 million for fiscal 2001. Gross profit as a percentage of net revenue was consistent at 29% for both fiscal 2002 and 2001 indicating that demand for higher margin manufactured bar code products continued to be depressed.

Selling, general and administrative (SG&A) expenses for fiscal 2002 were down 11.2%, to $5.0 million as compared to $5.6 million for fiscal 2001. The decline in SG&A expenses resulted primarily from lower salary and related costs associated with reduced sales, support and administrative staff. These reductions in SG&A costs were partially offset by a 30% increase in research and development expenditures included in SG&A, from $496,000 for fiscal 2001 to $646,000 for fiscal 2002. In addition, SG&A expenses were impacted by our write-off of our remaining $150,000 investment in software purchased in fiscal 2000 to enhance our “system” sales strategy. We

considered this investment to be impaired because it is no longer used in our operations.

As a result of the above, operating loss for fiscal 2002 amounted to $1.8 million as compared to the operating loss of $1.9 million for fiscal 2001.

The bar code business continues to be a very competitive market. Success in this business is dependent on the introduction of new market-driven products in a growing economy. While the economic issues are beyond our control, continued spending on research and development to develop new products is of great importance. As a result, we expect to spend approximately $1.0 million in fiscal 2003 on research and development to enhance our product mix and improve our ability to meet the needs of our customers.

OFFICE PRODUCTS UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

McRae Office Solutions distributes Toshiba photocopiers, Toshiba facsimile machines, RISO digital printing equipment, OKI color copiers and provides related service and supplies for these products throughout the state of North Carolina and parts of Virginia and South Carolina.

Net revenues for fiscal 2002 were $24.7 million, an increase of 32.7% over net revenues of $18.6 million for fiscal 2001. This increase in net revenues resulted from the continued expansion in the number of our county-wide educational programs, the successful renewal of older county-wide programs using a combination of both new and used equipment for an additional 60 month period, and higher supply and service revenues attributable to the growth in the number of units in service.

Gross profit for fiscal 2002 amounted to $6.3 million, an increase of 79.3% over the $3.5 million reported for fiscal 2001. This increase in gross profit resulted from higher net revenues and improved gross margins. Gross profit as a percentage of net revenues grew from 19% for fiscal 2001 to 25% for fiscal 2002 primarily as a result of the successful implementation of our renewal strategy associated with county-wide educational programs and the increase in higher margin supply and service revenues.

Selling, general and administrative (SG&A) expenses for fiscal 2002 were $5.6 million, up 2.0% from $5.5 million for fiscal 2001. This slight increase in SG&A expenses was due to research and development costs of approximately $399,000 related to the continued development of our imaging software. These expenses were partially offset by lower sales salaries, rental equipment, and advertising costs. As a percentage of net revenues, SG&A expenses were down from 30% for fiscal 2001 to 23% for fiscal 2002.

As a result of the above, operating profit increased $2.7 million, or 131.0%, to $629,000 for fiscal 2002 as compared to an operating loss of $2.0 million for fiscal 2001.

The office products business is an extremely competitive business. Our growth for the past several years was the result of successfully placing large quantities of office equipment in county-wide education systems. Continued growth in this business will be dependent on our ability to grow commercial market sales and to continue to successfully renew the county-wide education system programs that we currently service.

FOOTWEAR UNIT RESULTS OF OPERATIONS, FISCAL 2002 COMPARED TO FISCAL 2001

Our footwear business unit manufactures and distributes military combat boots, military dress shoes, military safety boots, western boots and work boots. Our military footwear is sold primarily to the U.S. Government and foreign governments, while our western and work boot products are sold as dress and casual wear for consumers. This business unit also imports western boots from several countries around the world.

Net revenues for the military combat boot business for fiscal 2002 increased 19.3%, to $20.0 million as compared to net revenues of $16.8 million for fiscal 2001. This growth in net revenues was primarily the result of increased requirements for military combat boots by the U.S. Government (Government) primarily related to the deployment of troops engaged in the war on terrorism. Military boot sales to foreign governments for fiscal 2002 were $4.9 million as compared to $4.6 million for fiscal 2001.

Gross profit for the military combat boot business for fiscal 2002 grew to $5.5 million, up 36.8% from $4.0 million for fiscal 2001. The increase in gross profit was due to higher military boot sales and lower unit costs related to fixed manufacturing costs being spread over higher production levels. Gross profit as a percentage of net revenues increased from 24% for fiscal 2001 to 28% for fiscal 2002 as a result of these lower unit costs.

Selling, general and administrative (SG&A) expenses for fiscal 2002 amounted to $800,000, up 27.4% from $628,000 for fiscal 2001. The increase in SG&A expenses was the result of additional selling expenses associated with the commercial military boot business and higher employee benefit costs. As a percentage of net revenues, SG&A expenses remained steady at 4% for fiscal 2002 and 2001, respectively.

As a result of the above, operating profit for the military combat boot business for fiscal 2002 grew $1.3 million, to $4.7 million as compared to $3.4 million for fiscal 2001.

We currently provide military boots to the Government under a contract dated April 15, 1997 (the Contract). In September 2001, the Government instructed us to increase our production levels of military combat boots as a result of the anticipated deployment of troops in the war on terrorism. The increased production levels represented a significant increase over the quantities normally purchased by the Government under the Contract. The Contract, which was set to expire on April 15, 2002, has been extended twice. The first extension extended the Contract ordering period through July 19, 2002 and provided for a minimum order of military combat boots of 103,676 pair consisting of the three current styles of direct molded sole boots covered by the Contract. These boots are scheduled for delivery during the first and second quarters of fiscal 2003 and will have an approximate $6.3 million impact on revenues. The second extension extended the Contract ordering period through December 31, 2002 and provided for a minimum order quantity pair and a maximum order quantity of 80,000 pair. Based on orders received to date, we expect this Contract extension to have a $5.1 million impact on revenues.

The Government has issued two solicitations to replace its expiring direct molded sole contracts, including the Contract. The first solicitation covers the three direct molded sole styles of vulcanized military combat boots. The second solicitation covers the newly adopted waterproof membrane type of standard issue combat boot, which will replace the current molded style standard issue combat boot that has historically accounted for the majority of the Government’s order under the Contract. We have submitted bids for both solicitations and are awaiting the Government’s award decisions, which we expect to occur in November 2002. There are no

assurances, however, that we will be successful in obtaining either of these contracts to produce boots for the Government. The Company’s operating results could be materially adversely affected if it is not successful in obtaining either of these contracts to produce boots for the Government.

Net revenues for the western and work boot business increased to $19.4 million for fiscal 2002, up 106.6% from $9.4 million for fiscal 2001. This significant growth in net revenues was primarily attributable to high demand for our Dan Post and Dingo branded products (driven in part by the Company’s acquisition of the Dingo and Dan Post brand names in June and October, 2001, respectively), a slight resurgence in the western boot market, and employment of successful sales and marketing strategies.

Gross profit for the western and work boot business for fiscal 2002 grew 186.4%, from $1.7 million for fiscal 2001 to $4.9 million for the current fiscal year. Gross profit as a percentage of net revenues was 25% for fiscal 2002 as compared to 18% for fiscal 2001. This improvement in gross profit was primarily due to higher net revenues, the positive impact of increased sales of higher margin imported products, and increased sales prices on our manufactured products.

Selling, general and administrative (SG&A) expenses were $1.7 million higher for fiscal 2002 as compared to fiscal 2001 primarily as a result of implementing a support structure to manage the significant increase in business. Specifically, we spent more for sales related salaries, commissions, warehousing costs, travel expenses, administrative salaries, employee related benefits, professional fees, product advertising costs, and bad debt charges. As a percentage of net revenues, SG&A expenses for fiscal 2002 were 20% as compared to 24% for fiscal 2001.

As a result of the above, operating profit for the western and work boot business for fiscal 2002 amounted to $1.0 million, as compared to a $550,000 operating loss for fiscal 2001.

The western and work boot market continues to be highly competitive and dynamic. Market consolidation and piqued interest in western footwear by consumers gives us a guarded optimism about the future. We believe that our diversified and branded product line has positioned us to be a major player in the western boot market in the future.

CONSOLIDATED RESULTS OF OPERATIONS, FISCAL 2001 COMPARED TO FISCAL 2000

Consolidated net revenues for fiscal 2001 amounted to $57.1 million and were flat as compared to consolidated net revenues for fiscal 2000. The military combat boot business and the western and work boot business posted increased net revenues of 35.5% and 19.1%, respectively, over the net revenues reported for fiscal 2000. Net revenues for the bar code business and office products business declined 24.2% and 9.9%, respectively, as compared to the net revenues reported for fiscal 2000.

Consolidated gross profit fell from $14.9 million reported for fiscal 2000 to $12.9 million for fiscal 2001 and as a percentage of consolidated net revenues from 26% to 23% for the same comparative fiscal periods. These declines were primarily attributable to decreased product sales and competitive price pressures in the higher

margined bar code and office products businesses, partially offset by increased demand for footwear products.

Consolidated selling, general and administrative (SG&A) expenses increased by approximately $1.6 million, or 13.3%, from the $12.3 million reported for fiscal 2000 to $13.9 million for fiscal 2001. The increase in SG&A expenditures was primarily the result of higher personnel related costs; advertising and promotional expenses; bad debt charges; and impaired goodwill write-offs, partially offset by lower professional fees, business insurance costs, and general maintenance expenditures.

A consolidated operating loss of $1.0 million was reported for fiscal 2001 as compared to an operating profit of $2.6 million for fiscal 2000. The decrease in operating profit resulted from lower gross margins and increased SG&A costs.

The Company’s results of operations for fiscal 2001 and fiscal 2000 have been adjusted to reflect the discontinuance of the commercial printing unit during fiscal 2001.

Bar Code Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

Net revenues for fiscal 2001 amounted to $12.5 million, down 24.2% from the $16.4 million reported for fiscal 2000. This decrease in net revenues was primarily attributable to lower product demand resulting from a soft economic climate, increased competition, and the delay in bringing the new APEX III product to market.

Gross profit declined from $5.3 million for fiscal 2000 to $3.7 million for fiscal 2001 and as a percentage of net revenues from 32% to 29%, respectively, for the same reporting periods. The lower gross profit was the result of decreased sales, competitive price pressure in the market, depressed software support business, and write-offs for obsolete inventory.

SG&A expenses were up slightly, from $5.5 million for fiscal 2000 to $5.6 million for fiscal 2001. This increase in SG&A costs was primarily attributable to bad debt write-offs, impaired goodwill write-offs, and new product development charges. Goodwill was considered impaired based on the carrying value of the goodwill exceeding the future cash flows of products incorporating the purchased technology. These increased SG&A costs were partially offset by cost containment programs that decreased sales personnel related expenses, advertising and promotional costs, and professional fees.

Lower sales and depressed margins coupled with increased SG&A expenses produced a $1.9 million operating loss for fiscal 2001 as compared to an approximate $206,000 loss for fiscal 2000.

Office Products Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

Net revenues decreased 9.9% to $18.6 million for fiscal 2001, down from the $20.7 million reported for fiscal 2000. This decline in net revenues was primarily attributable to lower commercial account sales that resulted from a smaller, less experienced sales force; a procurement freeze placed on North Carolina state contract purchases; and competitive pressure in the county-wide educational system program.

Gross profit amounted to $3.5 million for fiscal 2001, down 39.0% from the $5.7 million reported for fiscal 2000. As a percentage of net revenues, gross profit fell from 28% to 19% for fiscal 2000 and 2001, respectively. The decline in gross profit resulted from lower sales volume; a higher percentage of lower margined county-wide

educational system sales in the overall sales mix; inventory write-offs; and increased loss contingencies related to future costs associated with the county-wide educational system programs.

SG&A expenses increased by approximately $832,000 or 17.7% from fiscal 2000 to fiscal 2001 and was primarily attributable to sales and administrative personnel costs; office and equipment rental expenditures; advertising and promotional costs; and bad debt write-offs. Lower professional fees provided a partial offset to the higher SG&A costs. The decrease in net revenues, decline in gross profit, and higher SG&A costs resulted in an operating loss of approximately $2.0 million for fiscal 2001 as compared to a $1.0 million operating profit for fiscal 2000.

Footwear Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

Net revenues for the military combat boot business for fiscal 2001 amounted to approximately $16.8 million, an increase of 35.5% over the $12.4 million reported for fiscal 2000. This increase in net revenues was primarily attributable to higher boot requirements by the U.S. Government. Demand for military boots by foreign governments remained strong in fiscal 2001 as revenues remained consistent with fiscal 2000.

Gross profit increased 44.8% to $4.0 million for fiscal 2001, up from the $2.8 million reported for fiscal 2000 primarily as a result of the increase in net revenues. As a percentage of net revenues, gross profit increased from 22% for fiscal 2000 to 24% for fiscal 2001. This improvement in gross profit percentage was attributable to lower per unit costs associated with higher production levels.

SG&A expenses grew from $457,000 in fiscal 2000 to $628,000 for fiscal 2001 and resulted from increased professional fees, employee benefit costs, and higher corporate allocations.

The operating profit for the military combat boot business for fiscal 2001 amounted to $3.4 million, an increase of 46.2% over the $2.3 million reported for fiscal 2000.

Net revenues for the western and work boot business for fiscal 2001 amounted to approximately $9.4 million, an increase of $1.5 million or 19.1% over the amount reported for fiscal 2000. This growth in net revenues is primarily attributable to increased market penetration by the sales force and higher demand for imported western boots for women and children.

Gross profit climbed to $1.8 million for fiscal 2001, up 55.1% from the $1.1 million for fiscal 2000 and as a percentage of net revenues was 18% for fiscal 2001 as compared to 14% for fiscal 2000. These increases were primarily the result of higher net revenues, increase sales prices on manufactured products, and higher margins on sales of imported products.

SG&A expenses for fiscal 2001 amounted to $2.3 million, approximately $600,000 greater than the amount reported for fiscal 2000. This increase in SG&A expenditures was primarily attributable to additional personnel and related costs, higher advertising and promotional outlays, bad debt write-offs, and larger professional fee charges.

The operating loss of $550,000 for the western and work boot business for fiscal 2001 was slightly higher than the $542,000 operating loss for fiscal 2000 as the growth in SG&A expenses outpaced the growth in net revenues and gross profit.

Other Business Unit Results of Operations, Fiscal 2001 Compared to Fiscal 2000

In August 2000, we decided to phase out and discontinue the operations of the printing and packaging business. Normal operations of this unit ceased on April 28, 2001. Net revenues amounted to approximately $2.0 million and the loss from operations amounted to $41,000, net of income tax benefit. The loss on disposal amounted to $85,000, net of income tax benefit. The remaining assets had an estimated fair value of $200,000.

FINANCIAL CONDITION AND LIQUIDITY

Our financial condition remained strong at August 3, 2002 as cash and cash equivalents amounted to approximately $5.8 million. Working capital equaled $23.8 million and the current ratio was 3.85 to 1.

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 adequate bank financing arrangements.

We have two lines of credit with a bank totaling $4.75 million, all of which was available at August 3, 2002. One credit line totaling $1.75 million expires in June 2003. The other credit line totaling $3.0 million expires in November 2002. It is our belief that current cash and cash equivalents ($5.8 million at August 3, 2002), cash generated from operations, and the available lines of credit will be sufficient to meet our capital requirements for fiscal 2003. We do not have any off-balance sheet financing arrangements.

Below is a table detailing, by fiscal year maturity dates, our contractual commitments as of August 3, 2002 (amounts in thousands):


Commitment		2003		2004		2005		2006		2007		Thereafter

Bank loans		$	527	$	544	$	568	$	593	$	619	$	1,576




Operating leases			308		115		59		9		4		0

	Total	$	835	$	659	$	627	$	602	$	623	$	1,576

Selected cash flow data is presented below (in thousands of dollars):


Source (Use) of Cash		For Years Ended

		August 3, 2002			July 28, 2001

Operating activities




	Net earnings adjusted for depreciation and amortization	$	4,421		$	852




	Accounts receivable		(4,394	)		1,382




	Inventories		(2,686	)		1,635




Net cash provided by operating activities			490			2,822




Investing activities




	Purchase of trademarks		(800	)		(250	)




	Capital expenditures		(691	)		(318	)




Financing activities




	Principal repayment of long-term debt		(579	)		(298	)




	Dividends paid		(374	)		(521	)

Net cash generated by operating activities during fiscal 2002 amounted to $239,000. In fiscal 2002, net earnings plus depreciation and amortization totaled $4.4 million, a 419% increase as compared to fiscal 2001 as a result of our increased sales and improved operating performance. The increase in accounts receivable balances for fiscal 2002 used approximately $4.4 million of cash primarily attributable to the growth in net revenues related to our military combat boot business, western boot business and office products business. Inventory levels in the military boot business and the western boot business were increased to meet the Government’s requirements for military boots and to prepare for the higher demand for western boots for the fall selling season. This increase in inventory used approximately $2.7 million of cash.

In the first quarter of fiscal 2002, we used $800,000 to purchase the Dan Post trademark. This acquisition played a key role in the success of our western boot business for fiscal 2002. Capital expenditures used approximately $691,000 of cash primarily for computer equipment, office equipment and manufacturing equipment for the footwear businesses.

Financing activities for fiscal 2002 used $953,000 for debt principal payments and dividends. The increase in debt reduction resulted from lower interest rates on our monthly loan payment of $59,000 and the application of proceeds from the Tennessee warehouse sale to the outstanding indebtedness.

Our western boot business experienced dramatic growth in fiscal 2002. Our efforts to continue expanding this business in fiscal 2003 could negatively impact our liquidity. Similarly, if our military boot business’s sales fall, either because we are unable to win a new contract to replace the current Contract which expires in December 2002 or because the Government’s level of orders under a new contract is reduced, our future liquidity could be significantly adversely impacted.

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

In June 2001, Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, was issued and established the accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 is effective for us at the beginning of fiscal 2003. The Company has adopted SFAS No. 142 and in accordance with its rules, we have tested the purchased goodwill related to the bar code business and do not believe that it is impaired at this time.

In July 2001, SFAS No. 143, “Accounting for Asset Retirement Obligations”, was issued and established the accounting and reporting standards associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective for the Company for fiscal years beginning after June 15, 2002. We currently have no assets subject to the provisions of this statement.

In August 2001, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, was issued and established the accounting and reporting requirements associated with long-lived asset impairment and disposal. SFAS No. 144 is effective for the Company for fiscal 2003. We have adopted this standard with no impact on our financial statements.

In April 2002, SFAS No. 145, “Rescission of FASB Statements No.4, 44, and 64, “Amendment of FASB Statement No. 13, and Technical Corrections”, was issued and established the accounting and reporting standards associated with the reporting of gains and losses from extinguishment of debt and to provide consistent accounting treatment for certain lease modifications that have similar economic effects as a sale-leaseback transaction. We have adopted this standard with no impact on our financial statements.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, was issued and established the accounting and reporting standards associated with the proper recognition of certain costs related to exit or disposal activities. SFAS No. 146 applies to exit or disposal activities initiated after December 31, 2002. Currently, we have no exit or disposal plans.

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 and Section 21E of the Exchange Act. 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, 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 wholly owned subsidiary, Dan Post Boot Company. As of August 3, 2002, there was no outstanding indebtedness under the lines of credit and $4.2 million 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 $19,000 (assuming that our aggregate borrowings under the credit facilities averaged $3.9 million during a fiscal year).

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following documents are filed as part of this report:




1.	Independent Auditor’s Report	23




2.	McRae Industries, Inc. and Subsidiaries Consolidated Financial Statements:




	Consolidated Balance Sheets as of August 3, 2002 and July 28, 2001	24-25




	Consolidated Statements of Operations for the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000	26




	Consolidated Statements of Shareholders’ Equity for the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000	27




	Consolidated Statements of Cash Flows for the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000	28




	Notes to Consolidated Financial Statements	29-41




3.	Financial Statement Schedule:




	Schedule II	42




	Schedules 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

Grant Thornton LLP

Report of Independent Certified Public Accountants

To the Board of Directors
and Shareholders of
McRae Industries, Inc.:

We have audited the accompanying consolidated balance sheets of McRae Industries, Inc. and subsidiaries as of August 3, 2002, and July 28, 2001, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended August 3, 2002. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. 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 August 3, 2002, and July 28, 2001, and the results of their operations and their cash flows for each of the three years in the period ended August 3, 2002, in conformity with accounting principles generally accepted in the United States. Further, in our opinion, the financial statement schedule referred to above presents fairly, in all material respects, the information stated therein, when considered in relation to the financial statements taken as a whole.

/s/ Grant Thornton LLP

October 16, 2002

100 North Tryon Street, Suite 3800
Charlotte, North Carolina 28202
Telephone 704-377-0220 Telefax 704-337-2977
Certified Public Accountants

CONSOLIDATED BALANCE SHEETS

McRae Industries, Inc. and Subsidiaries


		August 3,		July 28,
		2002		2001

ASSETS




Current assets:




	Cash and cash equivalents	$	5,822,000	$	7,341,000




	Accounts receivable, less allowances for doubtful accounts of $374,000 and $273,000, respectively (Note 5)		9,442,000		5,048,000




	Notes receivable, current portion




	Employees		17,000		311,000




	Other		58,000		83,000




	Inventories (Notes 2 and 5)		16,241,000		13,806,000




	Net investment in capitalized leases, current portion (Note 3)		254,000		567,000




	Income tax receivable (Note 7)		242,000		881,000




	Prepaid expenses and other current assets		104,000		65,000

	Total current assets		32,180,000		28,102,000




Property and equipment, net (Notes 4 and 5)			4,458,000		5,204,000




Other assets:




	Notes and accounts receivable, related entities (Notes 10 and 11)		395,000		527,000




	Net investment in capitalized leases, net of current portion (Note 3)		441,000		960,000




	Notes receivable, net of current portion




	Employees		3,000		4,000




	Other		124,000		199,000




	Real estate held for investment		652,000		652,000




	Goodwill		362,000		392,000




	Cash surrender value life insurance (Note 12)		2,251,000		2,041,000




	Trademarks		1,049,000		249,000




	Other		14,000		647,000

	Total other assets		5,291,000		5,671,000

	Total assets	$	41,929,000	$	38,977,000

See notes to consolidated financial statements

CONSOLIDATED BALANCE SHEETS

McRae Industries, Inc. and Subsidiaries


			August 3,		July 28,
			2002		2001

LIABILITIES AND SHAREHOLDERS’ EQUITY




Current liabilities:




	Current portion of notes payable, banks (Note 5)		$	527,000	$	407,000




	Accounts payable			4,361,000		3,545,000




	Accrued employee benefits (Note 6)			475,000		239,000




	Deferred revenues			1,039,000		983,000




	Accrued payroll and payroll taxes			753,000		578,000




	Contract contingencies			669,000		650,000




	Other			527,000		498,000

	Total current liabilities			8,351,000		6,900,000




Notes payable, banks, net of current portion (Note 5)				3,900,000		4,598,000




Minority interest (Note 8)				97,000		108,000




Commitments and contingencies (Note 8)




Shareholders’ equity: (Note 9)




Common stock




	Class A, $1 par value; authorized 5,000,000 shares; issued and outstanding, 1,879,072 and 1,861,817 shares, respectively			1,879,000		1,862,000




	Class B, $1 par value; authorized 2,500,000 shares; issued and outstanding, 889,427 and 906,682 shares, respectively			889,000		907,000




Additional paid-in capital				791,000		791,000




Retained earnings				26,022,000		23,811,000

Total shareholders’ equity				29,581,000		27,371,000

		Total liabilities and shareholders’ equity	$	41,929,000	$	38,977,000

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF OPERATIONS

McRae Industries, Inc. and Subsidiaries


			August 3,			July 28,			July 29,
For the Years Ended			2002			2001			2000

Net revenues			$	74,531,000		$	57,145,000		$	57,141,000




Cost of revenues				54,716,000			44,263,000			42,278,000





Gross profit				19,815,000			12,882,000			14,863,000




Selling, general and administrative expenses				15,255,000			13,930,000			12,296,000





Operating profit (loss) from continuing operations				4,560,000			(1,048,000	)		2,567,000




Other income (loss), net				(47,000	)		502,000			312,000




Interest expense (Note 5)				(246,000	)		(413,000	)		(391,000	)

Earnings (loss) from continuing operations before income taxes and minority interest				4,267,000			(959,000	)		2,488,000




Provision (benefit) for income taxes (Note 7)				1,693,000			(375,000	)		979,000




Minority interest (Note 8)				11,000			13,000			(7,000	)

Net earnings (loss) from continuing operations				2,585,000			(571,000	)		1,502,000

Discontinued operations: (Note 14)				—			(41,000	)		(145,000	)




		Loss from discontinued operations, net of income tax benefits of $(19,000) for 2001 and $(93,000) for 2000		—			(41,000	)		(145,000	)




		Loss on disposal of business segment net of income tax benefit of $39,000 for fiscal 2001		—			(85,000	)		—

Net earnings (loss)			$	2,585,000		$	(697,000	)	$	1,357,000

Earnings (loss) per common share:




	Earnings (loss) from continuing operations		$	.93		$	(.21	)	$	.54




	Loss from discontinued operations			—			(.04	)		(.05	)

	Net earnings (loss)		$	.93		$	(.25	)	$	.49

Weighted average number of common shares outstanding				2,768,499			2,768,499			2,768,499

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
McRae Industries, Inc. and Subsidiaries


	Common Stock, $1 par value

	Class A				Class B						Additional		Retained
	Shares		Amount		Shares			Amount			Paid-in Capital		Earnings

Balance, July 31, 1999		1,857,774	$	1,858,000		910,725		$	911,000		$	791,000	$	24,341,000




Conversion of Class B to Class A stock		1,918		2,000		(1,918	)		(2,000	)




Cash dividend ($.36 per Class A common stock)														(669,000	)




Net earnings														1,357,000

Balance, July 29, 2000		1,859,692		1,860,000		908,807			909,000			791,000		25,029,000




Conversion of Class B to Class A stock		2,125		2,000		(2,125	)		(2,000	)




Cash dividend ($.28 per Class A common stock)														(521,000	)




Net loss														(697,000	)

Balance, July 28, 2001		1,861,817		1,862,000		906,682			907,000			791,000		23,811,000




Conversion of Class B to Class A stock		17,255		17,000		(17,255	)		(18,000	)




Cash Dividend ($.20 per Class A common stock)														(374,000	)




Net earnings														2,585,000

Balance, August 3, 2002		1,879,072	$	1,879,000		889,427		$	889,000		$	791,000	$	26,022,000

See notes to consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS
McRae Industries, Inc. and Subsidiaries


		August 3,			July 28,			July 29,
For the Years Ended		2002			2001			2000

Cash Flows from Operating Activities:




Net earnings (loss)		$	2,585,000		$	(697,000	)	$	1,357,000




Adjustments to reconcile net earnings to net cash provided by operating activities:




	Depreciation and amortization		1,836,000			1,549,000			1,525,000




	Equity in net (income) loss of investee		25,000			(83,000	)		40,000




	Minority shareholder’s interest in earnings (loss) of subsidiary		(11,000	)		(13,000	)		7,000




	Loss on sale of assets		122,000			39,000			59,000




	Contract contingencies		19,000			224,000			426,000




Changes in operating assets and liabilities:




	Accounts receivable		(4,394,000	)		1,382,000			1,136,000




	Inventories		(2,686,000	)		1,635,000			(2,738,000	)




	Net investment in capitalized leases		831,000			603,000			948,000




	Prepaid expenses and other current assets		(39,000	)		22,000			130,000




	Accounts payable		816,000			(1,131,000	)		2,087,000




	Accrued employee benefits		235,000			(37,000	)		26,000




	Deferred revenues		56,000			(56,000	)		(299,000	)




	Accrued payroll and payroll taxes		176,000			(36,000	)		(23,000	)




	Income taxes		639,000			(1,359,000	)		367,000




	Other		29,000			(72,000	)		(258,000	)

	Net cash provided by operating activities		239,000			1,970,000			4,790,000

Cash Flows from Investing Activities:




Proceeds from sale of property			105,000			107,000			24,000




Proceeds from sale of short term investments			—			55,000			2,000




Purchase of land			—			(16,000	)		(151,000	)




Purchase of other assets			79,000			(83,000	)		(963,000	)




Purchase of trademarks			(800,000	)		(250,000	)		—




Purchase of minority interest			—			(605,000	)		—




Capital expenditures			(691,000	)		(318,000	)		(854,000	)




Advances to related parties			(99,000	)		(206,000	)		(108,000	)




Collections from related parties			206,000			414,000			357,000




Advances on notes receivable			—			(300,000	)		—




Collections on notes receivable			395,000			173,000			361,000

	Net cash used in investing activities		(805,000	)		(1,029,000	)		(1,332,000	)

Cash Flows from Financing Activities:




Principal repayments of long-term debt			(579,000	)		(298,000	)		(271,000	)




Dividends paid			(374,000	)		(521,000	)		(669,000	)

	Net cash used in financing activities		(953,000	)		(819,000	)		(940,000	)

Net (Decrease) Increase in Cash and Cash Equivalents			(1,519,000	)		122,000			2,518,000




Cash and Cash Equivalents at Beginning of Year			7,341,000			7,219,000			4,701,000

Cash and Cash Equivalents at End of Year		$	5,822,000		$	7,341,000		$	7,219,000

Note:

Non-cash operating and investing activities excluded from this statement of cash flows relate to the transfer of office equipment from inventory to property and equipment which amounted to $251,000, $852,000 and $95,000 in fiscal 2002, 2001 and 2000, respectively.

See notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
McRae Industries, Inc. and Subsidiaries

For the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000

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. The investment in an investee (American Mortgage & Investment Company as described in Note 11) is accounted for on the equity method. Significant inter-company 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 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.

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.

Inventories

Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method for military boots and photocopier inventories 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 3 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.

The Company sells equipment under sales-type equipment to third party leasing companies. Sales of the equipment under cost per copy lease agreements are recognized when third party or sales-type lease agreements are signed and the equipment is installed. Revenue from copy usage is recognized when billed quarterly or monthly based on the actual usage. Maintenance and supply expenses related to these cost per copy lease agreements are recognized as incurred. Provision for losses are recognized when determined.

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. In accordance with guidance issued under Securities and Exchange Commission Staff Accounting Bulletin No. 101, “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

Goodwill represents the excess of the purchase prices over the fair value of the net assets acquired in business combinations in prior years and is being amortized by the straight-line method over periods ranging up to 20 years. On a periodic basis, the Company estimates the future undiscounted cash flow of the businesses to which goodwill relates to assess that the carrying value of such goodwill has not been impaired. During fiscal 2001, the Company wrote-off approximately $78,000 of impaired goodwill related to the bar code business. This goodwill was considered impaired based on the future cash flow of the products incorporating the purchased technology.

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.

Recently Issued Accounting Standards

Research and Development

Research and development costs related to future products are expensed in the year incurred and is included in SG&A expenses. Research and development expenses for fiscal 2002, 2001, and 2000 were $1,045,000, $561,000, and $538,000, respectively.

Advertising

The Company expenses advertising costs when incurred. Advertising expense amounted to $505,000, $406,000, and $157,000 for fiscal 2002, 2001, and 2000, respectively.

Reclassifications

Certain reclassifications have been made to the prior years’ financial statements and notes thereto to conform with the current year presentation. In particular, the prior year’s financial statements and notes have been adjusted to reflect the discontinuance of the commercial printing business in fiscal 2001.

2. INVENTORIES

Current costs exceed the LIFO value of inventories by approximately $773,000 and $837,000 at August 3, 2002 and July 28, 2001, respectively. Year-end inventories valued under the LIFO method were $6,637,000 and $5,483,000 at August 3, 2002, and July 28, 2001, respectively. A decrease in fiscal 2002 LIFO reserves was due to changes in FIFO pricing which resulted in increased net earnings of $39,000. The increase in fiscal 2001 LIFO reserves was due to changes in FIFO pricing which resulted in decreased net earnings of $74,000. The components of inventory at each year-end are as follows:


	2002		2001

Raw materials	$	3,332,000	$	2,843,000




Work-in-process		1,049,000		746,000




Finished goods		11,860,000		10,217,000

	$	16,241,000	$	13,806,000

3. LEASES

The Company leases photocopier products under sales-type leases. The Company’s net investment in these leases is as follows:


	2002			2001

Minimum lease payments receivable	$	770,000		$	1,663,000




Estimated unguaranteed residual values		68,000			116,000




Unearned income		(63,000	)		(172,000	)




Allowance for doubtful accounts		(80,000	)		(80,000	)

Net investment		695,000			1,527,000




Less: Current portion		254,000			567,000

	$	441,000		$	960,000

The scheduled maturities for the above minimum lease payments receivable at August 3, 2002 are as follows:


Fiscal Years Ending
2003	$	374,000




2004		223,000




2005		130,000




2006		40,000




2007 and thereafter		3,000

Total minimum lease payments receivable	$	770,000

4. PROPERTY AND EQUIPMENT


	2002		2001

Land and improvements	$	727,000	$	762,000




Buildings		4,009,000		4,279,000




Machinery and equipment		7,135,000		7,980,000




Furniture and fixtures		2,525,000		2,364,000

		14,396,000		15,385,000




Less: Accumulated depreciation		9,938,000		10,181,000

	$	4,458,000	$	5,204,000

Depreciation expense for fiscal 2002, 2001, and 2000 was $1,461,000, $1,431,000, and $1,484,000, respectively.

5. NOTES PAYABLE AND LINES OF CREDIT

NOTES PAYABLE:


	August 3, 2002		July 28, 2001

Note payable, bank, due in monthly installments of $56,477 including interest at the prime rate less 0.5% through July, 2011. All inventory, accounts receivable and property and equipment, which originally cost $8,991,000, of the Company’s Dan Post subsidiary are pledged as collateral.	$	4,196,000	$	4,755,000




Note 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, which originally cost $847,000, of the Company’s Dan Post subsidiary, are pledged as collateral.		231,000		250,000

		4,427,000		5,005,000




Less: Current portion		527,000		407,000

	$	3,900,000	$	4,598,000

Annual maturities of long-term debt are as follows:


Fiscal Years Ending:
2003	$	527,000




2004		544,000




2005		568,000




2006		593,000




2007		619,000




thereafter		1,576,000

	$	4,427,000

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 August 3, 2002 and July 28, 2001. 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 2002 and is secured by the inventory and accounts receivable of Dan Post.

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 August 3, 2002 and July 28, 2001. The line of credit expires in June 2003 and provides for interest on outstanding balances to be payable monthly at the prime rate.

Cash paid for interest during fiscal years 2002, 2001, and 2000 was approximately $246,000, $403,000, and $430,000, respectively.

6. 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 and B Common Stock of the Company and collective funds consisting of short-term cash, fixed-income, and equity investments.

The Company has a 401-K retirement plan, which covers substantially all employees. Employees can contribute up to 15% 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 $176,000, $184,000, and $191,000 for the fiscal years ended August 3, 2002, July 28, 2001, and July 29, 2000, respectively.

Employee benefit program expense amounted to $433,000, $239,000, and $261,000 in 2002, 2001, and 2000, respectively. To the extent the amounts of these benefits are not disbursed, the Board may, at its sole discretion, reduce any remaining accruals.

7. INCOME TAXES

Significant components of the provision for income taxes are as follows:


		2002			2001			2000

Current expense (benefit)




	Federal	$	1,729,000		$	(23,000	)	$	929,000




	State		398,000			294,000			287,000

			2,127,000			271,000			1,216,000

Deferred expense (benefit)




	Federal		(369,000	)		(549,000	)		(201,000	)




	State		(65,000	)		(97,000	)		(36,000	)

			(434,000	)		(646,000	)		(237,000	)

		$	1,693,000		$	(375,000	)	$	979,000

The components of the provision for deferred income taxes are as follows:


		2002			2001			2000

Depreciation		$	(84,000	)	$	(73,000	)	$	(115,000	)




Leasing activities			(213,000	)		(173,000	)		(111,000	)




Accrued employee benefits			(92,000	)		10,000			(85,000	)




Allowances for doubtful accounts			(37,000	)		37,000			50,000




Inventory			(3,000	)		(6,000	)		24,000




Contract contingencies			(7,000	)		(255,000	)		—




State net operating loss carry forward			141,000			(201,000	)		—




Other			(139,000	)		15,000			—

	Deferred income taxes, expense (benefit)	$	(434,000	)	$	(646,000	)	$	(237,000	)

Deferred tax liabilities and assets at each year-end are as follows:


Deferred tax liabilities:
			2002			2001

		Depreciation	$	0		$	(18,000	)




		Leasing activities		(218,000	)		(430,000	)

		Total deferred tax liabilities		(218,000	)		(448,000	)

Deferred tax assets:




		Depreciation		66,000			0




		Accrued employee benefits		186,000			94,000




		Allowances for doubtful accounts		192,000			155,000




		Inventory		249,000			159,000




		Contract contingency		263,000			255,000




		State net operating loss carry forward		60,000			201,000




		Other		88,000			32,000

		Total deferred tax assets		1,104,000			896,000

	Net deferred tax asset		$	886,000		$	448,000

State net operating loss carry forwards will expire in fiscal 2017.

The reconciliation of income tax computed at the U.S. federal statutory tax rate to actual income tax expense are (in thousands):


	2002						2001						2000
	Amount			Percent			Amount			Percent			Amount			Percent

Tax at U.S. statutory rate	$	1,451			34.0	%	$	(326	)		(34.0	)%	$	849			34.0	%




State income taxes, net of federal tax benefit		269			6.3			(60	)		(6.3	)		157			6.3




Other — net		(27	)		(0.6	)		11			1.2			(27	)		(0.9	)

	$	1,693			39.7	%	$	(375	)		(39.1	)%	$	979			39.4	%

Total income tax payments during fiscal years 2002, 2001, and 2000 were approximately $393,000, $965,000, and $671,000, respectively.

8. 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 $791,000, $786,000, and $487,000 for fiscal 2002, 2001, and 2000. The future minimum annual rental payments under non-cancelable operating leases are as follows:


Fiscal Years Ending
2003	$	308,000




2004		115,000




2005		59,000




2006		9,000




2007		4,000

	$	495,000

Minority Interest

The Company has entered into a restrictive stock agreement with the minority shareholder of its majority owned subsidiary. Under the terms of the agreement, the Company has the right of first refusal to purchase at any time any shares representing the minority interest in the subsidiary at a defined book value of said shares. The minority shareholder has the right to sell twenty percent of his shares per year to the Company, at the defined book value of such shares, provided the minority shareholder remains employed by the subsidiary.

Concentrations

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments, receivables, and capitalized leases. 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 and capitalized leases 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 August 3, 2002, thirteen customers accounted for 41% of accounts receivable and five customers accounted for 52% of the net investment in capitalized leases.

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.

The Company purchases Toshiba, RISO, and OKI copiers, office machines, parts, and supplies from Toshiba America Business Solutions, Inc., RISO, Inc., and OKI Data Americas, Inc. These products are generally only available from these suppliers. Purchases are made at the prevailing prices charged by these suppliers in the United States market unless alternative pricing is negotiated by the Company.

Sales to the U.S. Government amounted to 19%, 20%, and 13% of total consolidated net revenues for fiscal 2002, 2001, and 2000, 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 is of the opinion that renegotiation, if any, will have no material adverse effect on the Company’s consolidated financial position or results of operations.

The Company has committed to provide maintenance and supplies (excluding paper) on $24.6 million of office products equipment under certain lease agreements. Under these lease agreements, customers are charged on a cost per copy basis. The terms of the lease agreements range from three to six years. The copy usage over the lease term should cover the cost of the equipment, supplies, and service. The average cost per copy rate in these lease agreements is approximately $0.02. The Company estimates future revenues and expenses under each agreement. The Company accrues estimated losses on programs where estimated future expenses exceed estimated future revenues. As a result of this contingency, the Company has provided approximately $19,000 in fiscal 2002 and $224,000 in fiscal 2001 to offset possible losses on certain agreements.

9. SHAREHOLDERS’ EQUITY

Common Stock

Each share of Class A Common Stock is entitled to one-tenth vote and each share of Class B Common Stock is entitled to one full vote at meetings of shareholders, except that Class A shareholders are entitled to elect 25% and Class B shareholders are entitled to elect 75% of the directors. 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 August 3, 2002, there were 100,000 shares available for future grants under the Plan.

10. RELATED PARTY TRANSACTIONS

Notes and accounts receivable from related entities that are included in the balance sheet are as follows:


	2002		2001

Investments in and advances to investee (see Note 11)	$	395,000	$	527,000

11. INVESTMENT IN AMIC

The Company has an investment in a real estate development company, American Mortgage & Investment Company (AMIC). AMIC has been operating under Chapter X of the United States Bankruptcy Act since 1974, and the court has imposed certain restrictions under a Plan of Reorganization. The President of the Company is also the President of AMIC. The Company records its investment in AMIC by the equity method. Summarized financial data of AMIC is as follows:


		2002			2001			2000

Balance Sheet




	Assets	$	1,338,000		$	1,457,000		$	1,543,000




	Liabilities		1,465,000			1,559,000			1,728,000




	Shareholders’ deficiency		(127,000	)		(102,000	)		(185,000	)




Results of Operations




	Revenues	$	375,000		$	573,000		$	165,000




	Net income (loss)		(25,000	)		83,000			(40,000	)

The following table summarizes the activity of the Company’s investment in AMIC:


	2002			2001			2000

Beginning investment	$	527,000		$	652,000		$	729,000




Equity in income (loss)		(25,000	)		83,000			(40,000	)




Additional investments (repayments)		(107,000	)		(208,000	)		(37,000	)

Ending investment	$	395,000		$	527,000		$	652,000

12. 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.

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.


			Carrying		Fair
Assets			Amount		Value

	Cash and cash equivalents		$	5,822,000	$	5,822,000




	Notes receivable, related entities			395,000		395,000




	Notes receivable, current and long-term			202,000		202,000




	Cash surrender value life insurance			2,251,000		2,251,000




Liabilities




		Long and short-term debt		4,427,000		4,427,000

13. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

The following table sets forth unaudited quarterly financial information for the years ended August 3, 2002 and July 28, 2001:


	First			Second			Third			Fourth
August 3, 2002
Net revenues	$	14,553,000		$	20,722,000		$	18,477,000		$	20,779,000




Gross profit		3,718,000			5,342,000			4,875,000			5,880,000




Operating income (loss)		334,000			1,475,000			1,225,000			1,526,000




Net income (loss)		189,000			864,000			678,000			854,000




Net income (loss) per common share		.07			.31			.24			.31




July 28, 2001




Net revenues	$	16,525,000		$	13,835,000		$	12,786,000		$	13,999,000




Gross profit		3,896,000			3,345,000			2,951,000			2,690,000




Operating income (loss)		430,000			(137,000	)		(497,000	)		(844,000	)




Income (loss) from continuing operations		267,000			(143,000	)		(298,000	)		(397,000	)




Income (loss) from discontinued operations, net of income tax		(238,000	)		(26,000	)		(1,000	)		139,000




Net income (loss)		29,000			(169,000	)		(299,000	)		(258,000	)




Net income (loss) per common share		.01			(.06	)		(.11	)		(.09	)

Reclassifications affecting cost of sales for certain employee benefit costs have been made to the prior quarters and prior year amounts to conform with the current year presentation.

14. DISCONTINUED OPERATIONS

In August 2000, the Company adopted a plan to discontinue the operations of Rae-Print and operations ceased on April 28, 2001. This subsidiary generated revenues of approximately $2.0 million and $3.1 million and incurred operating losses of approximately $41,000 and $145,000 in fiscal 2001 and 2000, respectively. At July 28, 2001, receivables, inventory, and equipment with an estimated fair market value of $200,000 were included in accounts receivable. These assets were converted to cash during fiscal 2002.

15. SUBSEQUENT EVENTS

On August 29, 2002, the Company declared a cash dividend of $.06 cents per share of its Class A Common Stock payable on September 27, 2002 to shareholders of record on September 13, 2002.

16. OPERATING SEGMENT INFORMATION

The Company’s principal operations have been classified into four business segments: bar code operations; office products; printing and packaging; and footwear manufacturing. The bar code segment 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 office products segment sells, provides maintenance and leases Toshiba photocopiers, Toshiba facsimile machines, RISO digital duplicators, and OKI color copiers principally to customers in North Carolina and parts of Virginia and South Carolina. Machines, components, and certain supplies sold by the office products segment are generally available only from Toshiba, RISO and OKI. The footwear segment manufactures combat boots, military dress oxfords, and military safety boots for the U.S. Government and foreign governments, and western and work boots for customers throughout the United States. The printing and packaging segment provided print materials and packaging services for commercial and industrial customers, and was discontinued during fiscal 2001. Total consolidated revenues related to sales to the U.S. Government were 19% in 2002, 20% in 2001, and 13% in 2000. There were no significant inter-segment sales or transfers during 2002, 2001, and 2000. 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.


				Western/
		Military		Work						Office						Corporate
(In Thousands)		Boots		Boots			Bar Code			Products			Printing			& Other			Consolidated

For the Year Ended August 3, 2002




	Net Revenues	$	20,030	$	19,360		$	10,881		$	24,732		$	0		$	(472	)	$	74,531




	Earnings(loss)from operations		4,717		999			(1,847	)		629			0			62			4,560




	Identifiable assets		4,347		13,536			5,946			11,265			0			6,593			41,687




	Capital expenditures		107		380			27			140			0			37			691




	Depreciation expense and amortization		88		134			533			874			0			207			1,836




	Income tax provision (benefit)		1,750		370			(685	)		233			0			25			1,693




For the Year Ended July 28, 2001




	Net Revenues	$	16,792	$	9,371		$	12,454		$	18,640		$	1,979		$	(112	)	$	59,124




	Earnings(loss)from operations		3,406		(550	)		(1,933	)		(2,028	)		(65	)		57			(1,113	)




	Identifiable assets		1,552		8,599			8,748			12,903			0			6,294			38,096




	Capital expenditures		25		118			47			116			0			12			318




	Depreciation expense and amortization		103		214			224			748			32			228			1,549




	Income tax provision (benefit)		1,325		(214	)		(752	)		(789	)		(25	)		22			(433	)




For the Year Ended July 29, 2000




	Net Revenues	$	12,395	$	7,866		$	16,422		$	20,678		$	3,071		$	(220	)	$	60,212




	Earnings(loss)from operations		2,329		(542	)		(206	)		1,038			(215	)		(52	)		2,352




	Identifiable assets		2,381		5,791			11,159			15,462			1,523			6,385			42,701




	Capital expenditures		122		0			256			120			141			215			854




	Depreciation expense and amortization		108		213			168			751			29			256			1,525




	Income tax provision (benefit)		878		(204	)		(78	)		391			(81	)		20			886

McRAE INDUSTRIES, INC. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS


			ADDITIONS
			(1)			(2)
DESCRIPTION	BALANCE AT		CHARGED TO			CHARGED	DEDUCTION/			BALANCE
	BEGINNING		COSTS AND			TO OTHER	WRITE-OFF			AT END OF
	OF PERIOD		EXPENSES			ACCOUNTS				PERIOD
						DESCRIBE
Year ended August 3, 2002




Allowance for Doubtful Accounts	$	353,000	$	325,000			$	(224,000	)(1)	$	454,000




Allowance for Inventory Write-downs		40,000		222,000				—			262,000




Employee Benefit Accrual		239,000		433,000				(198,000	)(2)		474,000




Health Insurance Accrual		250,000		(25,000	)			—			225,000




Allowance for contract contingencies		650,000		19,000				—			669,000




Year ended July 28, 2001




Allowance for Doubtful Accounts	$	440,000	$	(251,000	)		$	164,000	(1)	$	353,000




Allowance for Inventory Write-downs		115,000		—				(75,000	)(2)		40,000




Employee Benefit Accrual		276,000		240,000				(277,000	)(2)		239,000




Health Insurance Accrual		250,000		—				—			250,000




Allowance for contract contingencies		426,000		224,000				—			650,000




Year ended July 29, 2000




Allowance for Doubtful Accounts	$	561,000	$	(235,000	)		$	114,000	(1)	$	440,000




Allowance for Inventory Wrote-downs		153,000		—				(37,000	)(2)		115,000




Employee Benefit Accrual		250,000		262,000				(236,000	)(2)		276,000




Health Insurance Accrual		212,000		—				38,000	(2)		250,000




Allowance for contract contingencies		—		426,000				—			426,000

(1) Uncollectible accounts written off
(2) Payments and/or expenses charged to operations

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE

The section captioned “CHANGE IN CERTIFYING ACCOUNTANTS” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held December 19, 2002 is incorporated by reference into this Item 9.

PART III

ITEMS 10-13.

Items 10 through 13 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,” AND “SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held December 19, 2002.

ITEM 14. CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures and concluded that such disclosure controls and procedures are effective. There have been no significant changes in the Company’s internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)

(1)

Independent auditor’s report
McRae Industries, Inc. and Subsidiaries consolidated financial statements:

			Consolidated Balance Sheets as of August 3, 2002 and July 28, 2001.

			Consolidated Statements of Operations for the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000.

			Consolidated Statements of Shareholders’ Equity for the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000.

			Consolidated Statements of Cash Flows for the Years Ended August 3, 2002, July 28, 2001, and July 29, 2000.

			Notes to Consolidated Financial Statements.

	(2)		Financial Statement Schedule:

			Schedule II

(3)

Exhibits:


3.1		Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form S-14, Registration N. 2-85908)









3.2		Amendment to the Certificate of Incorporation (Incorporated by reference to Exhibit 3 to the Registrant’s Form 10-K for the year ended August 1, 1987)









3.3		Restated Bylaws of the Registrant effective May 29, 2001 (Incorporated by reference to Exhibit 3.3 to the Registrant’s Form 10-K for the fiscal year ended July 28, 2001)









10.1		1985 McRae Industries, Inc. Non-Qualified Stock Option Plan (Incorporated by reference to 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 (Incorporated by reference to 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., was filed as Exhibit 2 to the Registrant’s current report on Form 8-K filed May 11, 1996 and is incorporated herein by reference.









10.4		Promissory Note, Security Agreement and Guaranty Agreement dated July 25, 1996 among American West Trading Company, as borrower, The Fidelity Bank, as lender, and the Registrant, as Guarantor (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-K for the fiscal year ended August 3, 1996)









10.5		Deed of Trust between American West Trading Company and The Fidelity Bank dated July 25, 1996 (Incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-K for the fiscal year ended August 3, 1996)









10.6		Security Agreement pertaining to inventory, accounts receivable and equipment between American West Trading Company and The Fidelity Bank, dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-K for the fiscal year ended August 3, 1996)









10.7		Award/Contract between Defense Personnel Support Center and McRae Industries, Inc. dated April 15, 1997 (Incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K for the fiscal year ended August 2, 1997)









10.8		McRae Industries, Inc. Incentive Equity Plan (Incorporated by reference to Exhibit 4 to the Registrant’s Form S-8 dated January 6, 1999). *









10.9		Modification of Award/Contract between Defense Personnel Support Center and McRae Industries, Inc. dated May 1, 2001. (Incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-K for the fiscal year ended July 28, 2001)









10.10		Split Dollar Life Insurance Arrangement (Filed herein). Pages 51-54.









21		Subsidiaries of the Registrant (Filed herein). Page 55.









23		Consent of Independent Auditors (Filed herein). Page 56.






99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for D. Gary McRae, President and CEO (Filed herein). Page 57.









99.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 58.

Denotes a management contract or compensatory plan or arrangement.

	(b)		Reports on Form 8-K:

			We did not file any reports on Form 8-K during the last quarter of fiscal 2002.

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: October 31, 2002	By:	/s/ D. Gary McRae

		D. Gary McRae President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:


SIGNATURE		DATE

/s/ D. Gary McRae D. Gary McRae President, Treasurer, and Director (Principal Executive Officer)		October 31, 2002

/s/ William H. Swan William H. Swan Director		October 31, 2002

/s/ Hilton J. Cochran Hilton J. Cochran Director		October 31, 2002

/s/ Brady W. Dickson Brady W. Dickson Director		October 31, 2002

/s/ Victor A. Karam Victor A. Karam President – McRae Footwear and Director		October 31, 2002

/s/ James W. McRae James W. McRae Vice President, Secretary, and Director		October 31, 2002

/s/ Harold W. Smith Harold W. Smith Vice President – McRae Office Solutions and Director		October 31, 2002

/s/ Marvin G, Kiser, Sr. Marvin G. Kiser, Sr. Vice President of Finance (Principal Financial and Accounting Officer)		October 31, 2002

CERTIFICATIONS

I, D. Gary McRae, certify that:

1.		I have reviewed this annual report on Form 10-K of McRae Industries, Inc.;

2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

		Date: October 31, 2002


		/s/ D. Gary McRae

		D. Gary McRae President and CEO

I, Marvin G. Kiser, Sr., certify that:

1.		I have reviewed this annual report on Form 10-K of McRae Industries, Inc.;

2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and

3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

		Date: October 31, 2002


		/s/ Marvin G. Kiser, Sr.

		Marvin G. Kiser, Sr. Vice President of Finance

EXHIBIT INDEX


3.1		Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant’s Form S-14, Registration N. 2-85908).









3.2		Amendment to the Certificate of Incorporation (Incorporated by reference to Exhibit 3 to the Registrant’s Form 10-K for the year ended August 1, 1987).









3.3		Restated Bylaws of the Registrant effective May 29, 2001 (Incorporated by reference to Exhibit 3.3 to the Registrant’s Form 10-K for the fiscal year ended July 28, 2001).









10.1		1985 McRae Industries, Inc. Non-Qualified Stock Option Plan (Incorporated by reference to 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 (Incorporated by reference to 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., was filed as Exhibit 2 to the Registrant’s current report on Form 8-K filed May 11, 1996 and is incorporated herein by reference.









10.4		Promissory Note, Security Agreement and Guaranty Agreement dated July 25, 1996 among American West Trading Company, as borrower, The Fidelity Bank, as lender, and the Registrant, as Guarantor (Incorporated by reference to Exhibit 10.5 to the Registrant’s Form 10-K for the fiscal year ended August 3, 1996).









10.5		Deed of Trust between American West Trading Company and The Fidelity Bank dated July 25, 1996 (Incorporated by reference to Exhibit 10.6 to the Registrant’s Form 10-K for the fiscal year ended August 3, 1996).









10.6		Security Agreement pertaining to inventory, accounts receivable and equipment between American West Trading Company and The Fidelity Bank, dated July 25, 1996 (Incorporated by reference to Exhibit 10.7 to the Registrant’s Form 10-K for the fiscal year ended August 3, 1996).









10.7		Award/Contract between Defense Personnel Support Center and McRae Industries, Inc. dated April 15, 1997 (Incorporated by reference to Exhibit 10.8 to the Registrant’s Form 10-K for the fiscal year ended August 2, 1997).









10.8		McRae Industries, Inc. Incentive Equity Plan (Incorporated by reference to Exhibit 4 to the Registrant’s Form S-8 dated January 6, 1999).*









10.9		Modification of Award/Contract between Defense Personnel Support Center and McRae Industries, Inc. dated May 1, 2001. (Incorporated by reference to Exhibit 10.9 to the Registrant’s Form 10-K for the fiscal year ended July 28, 2001).









10.10		Split Dollar Life Insurance Arrangement (Filed herein). Pages 51-54.









21		Subsidiaries of the Registrant (Filed herein). Page 55.









23		Consent of Independent Auditors (Filed herein). Page 56.






99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for D. Gary McRae, President and CEO (Filed herein). Page 57.









99.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for Marvin G. Kiser, Sr., Vice President of Finance (Filed herein). Page 58.