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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended August 2, 2003

Commission file number: 1-8578

McRAE INDUSTRIES, INC.

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  [X]  No  [  ]

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.  [X]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).      Yes  [  ]  No  [X]

The aggregate market value of shares of the Registrant’s $1 par value Class A and Class B Common Stock held by non-affiliates as of February 1, 2003 was approximately $10,971,096 and $1,978,002, respectively. On October 24, 2003, 1,918,972 Class A shares and 847,027 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 18, 2003 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 14 to the financial statements.

Bar Code Operations

Our bar code unit manufactures and sells bar code reading and printing devices and other items related to optical data collection, including licensing and selling computer software through Compsee, Inc. (Compsee), a 99% owned subsidiary. Compsee markets, sells, and services its products directly through sales centers located throughout the United States.

Compsee designs and manufactures QuickReader, QuickLink, Turbowedge stationary bar code readers, and APEX portable bar code scanners. Principal materials used in Compsee’s assembly operations consist of various electrical and electronic components that are readily available from a number of sources. Compsee’s portable bar code scanner equipment includes the APEX II, which was introduced in fiscal 1996, and the APEX III, which was introduced in fiscal 2001. The APEX III provides batch and wireless data collection capability. The APEX IV is a more rugged, pistol grip version of the APEX III product. The APEX products are generally well received in the market and provided 15%, 19%, and 13% of Compsee sales for fiscal 2003, 2002, and 2001, respectively. Compsee also purchases and sells bar code products to compliment their manufactured product lines. The markets in which this business unit operates are generally highly competitive. We are not aware of any reliable statistics that would enable us to determine the relative position of Compsee or its products within the industry. Competition in the industry is principally based on product features, customer service, and price. Our major competitors for our manufactured products in the industry, some of which are larger companies that have greater financial, development, marketing, and distribution resources than we do, include PSC, Intermec, Handheld Products, and Symbol Technologies.

Net revenues derived from this unit in fiscal 2003, 2002, and 2001 were 13%, 15%, and 22% of the Company’s consolidated net revenues, respectively. QuickReader, QuickLink, and Turbowedge bar code readers developed and marketed by Compsee accounted for 6%, 9%, and 11% of Compsee’s net revenues for fiscal 2003, 2002, and 2001, respectively, and for 1%, 1%, and 3% of the Company’s consolidated net revenues during fiscal 2003, 2002, and 2001, respectively. Purchased bar code products for resale accounted for 73%, 71%, and 72% of Compsee’s net revenues for fiscal 2003, 2002, and 2001, respectively.

Office Products

McRae Office Solutions, Inc. (Office Solutions), a wholly owned subsidiary, is a non-exclusive distributor of Toshiba photocopier and facsimile machines throughout 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 printing equipment. 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 2003 are generally available only from Toshiba, RISO, and OKI.

Office Solutions has three primary channels of distribution for its products. The first channel provides equipment to North Carolina state agencies as a preferred vendor for the State of North Carolina. The state contract business accounted for 10%, 6.1%, and 6.1% of Office Solutions net revenues for fiscal 2003, 2002, and 2001, respectively.

The second channel is the Special Markets Group, which focuses on school systems throughout the

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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 54.9%, 60.1%, and 50.0% of Office Solutions net revenues for fiscal 2003, 2002, and 2001, 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 35.1%, 33.8%, and 43.9% of Office Solutions net revenues for fiscal 2003, 2002, and 2001, 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. In fiscal 2003 sales of this product were minimal. We are continuing to develop this product and the related marketing strategies. We expect this product to have a greater contribution to the overall sales mix in fiscal 2004.

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 2003, 2002, and 2001 were 29%, 33%, and 33%, respectively, of the Company’s consolidated net revenues.

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.

For fiscal 2003, we operated under several extensions of our contract with the Government dated April 15, 1997. The Government issued two solicitations for future boot requirements to replace the original contract that was set to expire on April 15, 2002. One solicitation covered the three current direct molded sole (DMS) styles of military combat boots, including the standard issue all-leather combat boot that has historically accounted for the majority of the Government’s orders under the Contract. The second solicitation covered the newly adopted infantry combat boot, which incorporates a waterproof membrane construction. This boot has replaced the previous all-leather boot as the Army’s standard issue combat boot. We submitted bids for both solicitations.

On March 11, 2003, we were advised that we did not win a contract to produce the new infantry combat boot. On September 30, 2003, the Government notified us that we had been awarded a new contract (the Contract) to produce direct molded sole military combat boots. The Contract covers a base year and two one-year option periods. The Contract base year provides for a minimum boot requirement of 135,102 pair and a maximum boot requirement of 544,778 pair with a minimum and maximum dollar value of approximately $7.4 million and $30.1 million, respectively. The first year option provides for a minimum and a maximum boot requirement of 276,460 pair and 1,077,552 pair, respectively. The second year option ranges from a minimum of 236,460 pair to a maximum of 852,552 pair.

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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 $15.7 million, $14.3 million, and $11.7 million, for fiscal 2003, 2002, and 2001, respectively. Such sales constituted 20%, 19%, and 20% of consolidated net revenues in fiscal 2003, 2002, and 2001, respectively. Sales of military boots to foreign countries were $5.3 million, $4.9 million, and $4.6 million for the past three fiscal years, respectively. For fiscal 2003, all of our foreign country sales were to Israel.

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, and sells, western and work boots for men, women, and children. Dan Post utilizes seasoned and highly respected independent sales representatives to market and sell its boots nationwide to major retail discount stores, regional specialty chain stores, major western boot distributors, and direct mail catalogs. The boots are marketed primarily under the retailer’s private label and under the “Dan Post”, “Dingo”, and “American West Trading” brands.

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 either fiscal 2003 or fiscal 2002 as compared to $520,000 for fiscal 2001.

During fiscal 2000, we expanded our western boot product line with imported children’s boots we purchase from India and China. In addition, we currently import western boots for adults from Brazil, Mexico, and China. During fiscal 2004, we plan to expand importation from China to include Dingo and American West Trading branded products with higher margins. All of our imported boots are produced by contract manufacturers based on specifications that we provide.

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

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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.

The western and work boot markets are highly competitive. We are not aware of any reliable statistics that would enable us to determine Dan Post’s or its products relative positions within the industry; however, we believe we have established a solid position in the market for all price ranges.

Dan Post manages its manufacturing and inventory according to the seasonality of its business, which tends to have higher sales occurring generally in the fall and winter months. Dan Post contributed $22.6 million, $19.4 million, and $9.4 million of consolidated net revenues for fiscal 2003, 2002, and 2001, respectively.

The Company’s backlog of firm orders for military combat boots at August 2, 2003 and August 3, 2002 totaled approximately $6.8 million and $5.5 million, respectively. We expect to fill all of the backlog as of August 2, 2003 during the current fiscal year. The backlog of firm orders for western and work boots at August 2, 2003 and August 3, 2002 totaled approximately $1.2 million and $2.6 million, respectively. We expect to fill all of the backlog as of August 2, 2003 during the current fiscal year.

Net revenues derived from the military combat boot segment in fiscal 2003, 2002, and 2001 were 29%, 27%, and 29%, respectively, of the Company’s consolidated net revenues.

Net revenues derived from the western and work boot segment in fiscal 2003, 2002, and 2001 were 29%, 25%, and 16%, 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 $5.3 million (23.8% of total military boot sales), $4.9 million (24.4%), and $4.6 million (27.4%) during fiscal 2003, 2002, and 2001, respectively. In fiscal 2003 and fiscal 2002, all of our foreign country sales were to Israel as compared to 89% in fiscal 2001.

Other Investment Interests

We own land in North and South Carolina that is being held for investment purposes.

Regulation

We are subject to various laws and regulations concerning environmental matters and employee safety and health. We believe we are operating in substantial compliance with these laws and regulations.

Employment

As of August 2, 2003, 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 relations with our employees to be good.

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Financial Information about Operating Segments

Financial information for the past three fiscal years with respect to our operating segments are incorporated herein by reference to Note 14 to the consolidated financial statements included in this Report.

Research and Development

Research and development costs related to development of future bar code and imaging software products amounted to $1,010,000, $1,045,000, and $561,000 for fiscal 2003, 2002, and 2001, 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.

In addition to these principal locations, we lease other sales offices throughout the United States.

Our Waverly, Tennessee manufacturing facility is encumbered by a deed of trust in favor of The Fidelity Bank to secure a loan in the amount of approximately $3.7 million.

We believe that our current facilities are adequate for current and future operations. However, if the U.S. Government significantly increases their military boots requirements under the new contract, it is possible that additional footwear manufacturing and storage facilities may be necessary.

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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 24, 2003, there were approximately 400 record holders of Class A Common Stock and approximately 376 record holders of Class B Common Stock. High and low stock prices and dividends declared per share for the last two fiscal years were:

     CLASS A COMMON STOCK:

     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. Dividends paid on Class A Common Stock, if any, are not also required to be paid on Class B Common Stock. We did not pay any dividends on Class B Common Stock during the prior three fiscal years. There can be no assurance as to future dividends on either class of Common Stock, as the payment of any dividends is dependent on future actions of the Board of Directors, earnings, capital requirements, and financial condition of the Company.

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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.

(a)		Includes both Class A and Class B Common Stock
(b)		Dividends were paid only on Class A Common Stock

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CRITICAL ACCOUNTING ESTIMATES

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

Contract Contingencies

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

Intangible Assets

We determine the utility of goodwill and trademarks based on estimated future cash flows and test for impairment in accordance with applicable accounting pronouncements. We estimate future cash flows based on historical performance and our knowledge of known factors likely to impact future cash flows.

Inventories

Inventories are recorded at the lower of cost or market value. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast and demand requirements for the next twelve months. Actual demand and market conditions may be different from those projected by our management.

Revenue Recognition

We recognize revenue under our current boot contract when the boots are inspected and accepted by the Government’s Quality Assurance Representative (QAR), thereby transferring ownership to the Government. Pursuant to the contract, the boots become “Government-owned property” after inspection and acceptance by the QAR. The boots are transferred and stored in our warehouse, which is a designated storage facility approved by the Government, and accounted for as “bill and hold” sales in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.”

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Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current exposure together with assessing temporary differences resulting from differing treatment of items, such as leasing activity, allowances, and depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

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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 (loss) of our major business units for fiscal years 2001 through 2003 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.