Mail Stop 3-8
March 17, 2005
By Facsimile and U.S. Mail
Mr. D. Gary McRae
McRae Industries, Inc.
President, Treasurer and Director
400 North Main Street
Mount Gilead, NC 27306
Re: Form 10-K for the year ended July 31, 2004
Form 10-K/A for the year ended July 31, 2004
File No. 1-08578
Dear Mr. McRae:
We have completed a limited review of the above referenced
filings and have the following comments. Where indicated, we
think
you should revise your document in response to these comments. If
you disagree, we will consider your explanation as to why our
comment
is inapplicable or a revision is unnecessary. Please be as
detailed
as necessary in your explanation. In some of our comments, we may
ask you to provide us with supplemental information so we may
better
understand your disclosure. Where a comment below requests
additional disclosures or other revisions to be made, please show
us
in your supplemental response what the revisions will look like.
Include these revisions in your future filings, including those
for
interim periods. After reviewing this information, we may or may
not
raise additional comments.
Form 10-K for the Year Ended July 31, 2004 as amended
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations, page 9
Critical Accounting Policies, page 9
1. Please supplement the critical accounting policies already
disclosed by addressing specifically why your estimates or
assumptions for contract contingencies, inventories, goodwill and
intangible assets impairments, revenue recognition and income
taxes
bear the risk of change. State whether there are uncertainties
attached to the estimates or assumptions or whether the estimates
are
difficult to measure or value. Further, provide an analysis, to
the
extent material, of the factors you consider in arriving at the
estimates or assumptions, how accurate the estimates or
assumptions
have been in the past and whether the estimates are reasonably
likely
to change in the future. Also include a discussion of the impact
a
percentage point change in estimates would have on earnings.
Please
refer to paragraph V. of SEC Release No. 33-8350.
Military Boot Unit Results of Operations, Fiscal 2004 Compared to
Fiscal 2003, page 13
2. You identify the intermediate causes of change in your
decreasing
military boot segment gross profits. Please tell us and disclose
if
there is any known trend that will cause the relationship between
costs and revenues to continue this trend of increasing sales and
decreasing gross profits. Additionally, to the extent that the
financial statements disclose material changes in net sales,
please
include a discussion why such changes are attributable to changes
in
price, volume and new products or services. See Item
303(a)(3)(ii)
of Regulation S-K as well as SEC Release No. 33-8350.
Contractual Obligations, page 18
3. Please advise or revise your disclosure in future filings to
include the amount of interest payments you expect on debt for the
periods presented as required by Item 303 (a)(5)(ii)(A) of
Regulation
S-K. Please include disclosure of the assumptions used to
calculate
amounts included in the table where you have used variable
interest
rates as of the most recent balance sheet date to compute the
estimated contractual interest rates.
4. Please revise future filings to include the disclosures
required
by Item 10(e) of Regulation S-K if you choose to continue to
present
the non-GAAP measure of adjusted net earnings.
Consolidated Balance Sheets, page 22
5. Please tell us if the cash surrender value of life insurance is
the amount that could be realized under the insurance contract as
of
the balance sheet date and if the change in cash surrender value
during the period is an adjustment of premiums paid in determining
the expense or income to be recognized under the contract for the
period. Reference is made to FASB Technical Bulletin No. 85-4.
Clarify your disclosures in future filings accordingly.
6. Tell us how you determined that you do not have any significant
continuing involvement in the operations of McRae Office
Solutions,
Inc. after your disposal transaction. Include in your explanation
a
description of the sublease arrangement of your corporate
headquarters to Connected Office Products, Inc. and any other
existing arrangements between you and the purchaser. See
paragraph
42 of SFAS No. 144.
Consolidated Statement of Operations, page 24
7. Paragraph 61 of SFAS No. 128 requires the use of the two-class
method of computing earnings per share for enterprises with
multiple
classes of common stock according to dividends declared and
participation rights in undistributed earnings. Please tell us
why
the if-converted method rather than the two-class method is
appropriate considering your participation rights in dividends for
Series A and B common shares disclosed on page 8 of your amended
10-
K. If you determine that the if-converted method is not
applicable,
please amend your financial statements to present earnings per
share
employing the two-class method in your consolidated statement of
operations and elsewhere in Form 10-K See paragraphs 36 and 37 of
APB
No. 20.
Consolidated Statements of Cash Flows, page 26
8. In future interim and annual filings please present gross
changes
in both accounts receivable and valuation allowance cash flow
amounts
separately as this information does not qualify for net cash flow
reporting as prescribed by paragraphs 11 through 13 of SFAS No.
95.
9. In future filings please revise your statements of cash flows
by
adjusting net earnings instead of net earnings from continuing
operations to calculate net cash provided by operating activities.
Refer to paragraphs 28 through 30 of SFAS 95.
10. If you choose to present cash flows relating to discontinued
operations, the individual cash flows within each category are not
generally combined or netted. See also footnote 10 to paragraph
26
of SFAS 95. Please advise and revise your statements of cash
flows
in future filings as appropriate.
Notes to Consolidated Financial Statements, page 27
1. Summary of Significant Accounting Policies, page 27
11. Please tell us where you classify buying, postage, external
distribution and warehousing costs in your consolidated statements
of
operations. If you currently exclude a portion of these costs
from
cost of sales, in future filings please disclose the amounts and
the
line item(s) that these excluded costs are classified for each
period
presented. Otherwise, state in your accounting policies that they
are included in your cost of sales.
12. Please supplement your significant accounting policies already
disclosed in your financial statements with disclosures for your
policies on cash surrender value of life insurance policies, real
estate held for investment, related party transactions and assets
subject to liens. See Rule 4-08 of Regulation S-X.
Principles of Consolidation, page 27
13. Please expand to describe the principles followed in
determining
whether to include or exclude the subsidiaries from the
consolidated
financial statements. See Rule 3A-03 of Regulation S-X.
Revenue Recognition, page 28
14. Please include your accounting policy for estimating
allowances
where rights to return exist and your policy for recognizing
revenues
related to equipment leasing, financing of receivables, software
licensing and other services provided by Compsee and your other
business segment. Please reference the applicable accounting
literature as it relates to your policies. Also, please tell us
the
amounts of revenue recognized from equipment leasing, financing of
receivables, software licensing and other service or non-tangible
product sources for the three years ended July 31, 2004.
15. You disclose that your contract with the government is based
on
actual and estimated allowable costs plus a reasonable profit
margin
and that the contract is accounted for in accordance with SAB No.
104. Please tell us if you also apply the provisions of ARB No.
43
as it applies to cost plus fixed fee contracts. Specifically tell
us:
a. If there are instances where you accrue fees for partial
performance, i.e. partial deliveries, percentage of completion or
otherwise, or if you recognize revenue only after QAR inspection,
acceptance and your subsequent invoicing of the government; and
b. If you received any advances from the government and, if
applicable, whether the advance is offset against a receivable
from
the government.
Please tell us and clarify the disclosure in future filings to
describe how you determine the amount to bill, including profit to
recognize, and the amount of any unbilled receivables or advances.
7. Commitments and Contingencies, page 33
16. We note that in conjunction with the sale of McRae Office
Solutions you now sublease a portion of your corporate
headquarters.
In accordance with paragraph 16 of SFAS No. 13, in future filings
please include the total minimum rentals to be received in the
future
under noncancelable subleases as of your balance sheet date and a
general description of the leasing arrangement including but not
limited to the criteria in paragraph 16.d. of the Statement.
Item 9A. Disclosure Controls and Procedures, page 42
17. We reviewed your statement that the chief executive officer
and
chief financial officer have concluded that the company`s
disclosure
controls and procedures are effective "except as discussed below."
Given the material weaknesses noted, it is unclear why your chief
executive officer and chief financial officer have concluded that
your disclosure controls and procedures are effective. Please
revise
your disclosure to state in clear, unqualified language, the
conclusions reached by your chief executive officer and chief
financial officer on the effectiveness of your disclosure controls
and procedures. If true, you can state that your disclosure
controls
and procedures are effective including your consideration of the
identified matters, so long as you provide the appropriate
disclosure
explaining how the disclosure controls and procedures were
effective
in light of the material weaknesses. Or, if true, you can state
that
given the identified material weaknesses, your disclosure controls
and procedures are not effective. The current conclusion that your
disclosure controls and procedures are effective except to the
extent
that they are not effective is not clear. Please amend your
annual
and first quarter interim filings to include a revised statement
on
the effectiveness of disclosure controls and procedures.
18. Please expand your discussion to also indicate when the
material
weakness began.
Please respond to these comments within 10 business
days,
or tell us when you will provide us with a response. Please
provide
us with a supplemental response letter that keys your responses to
our comments and provides any requested supplemental information.
Detailed letters greatly facilitate our review. File your
supplemental response on EDGAR as a correspondence file. Please
understand that we may have additional comments after reviewing
your
responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
If you have any questions regarding our comments, please
direct them to Brian V. McAllister at (202) 824-5664 or, Donna Di
Silvio at (202) 942-1852, or in their absence, to the undersigned
at
(202) 942-2823.
Sincerely,
Michael Moran
Branch Chief
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Mr. McRae
McRae Industries, Inc.
March 17, 2005
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