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

FORM 10-K

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)

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:

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.

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Part I

ITEM 1. BUSINESS

McRae Industries, Inc., (the “Company”, which may be referred to as “we”, “us” or “our”), is a Delaware corporation organized in 1983 and is the successor to a North Carolina corporation organized in 1959. Our principal lines of business are: manufacturing and selling bar code reading and related printing devices; 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.

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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

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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

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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.

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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.

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ITEM 2. PROPERTIES

The following table describes the location, principal use, and approximate size of the principal facilities used in our business. Except for the Tennessee warehouse, which we lease, we own all of these facilities.

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.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Each of our classes of Common Stock is traded on the American Stock Exchange (ticker symbols MRI.A and MRI.B). As of October 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:

CLASS B COMMON STOCK:

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.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following Selected Consolidated Financial Data of the Company presented below for each of the five years in the period indicated has been derived from our audited and consolidated financial statements. 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.

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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

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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.

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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.