Item 1. BUSINESS
(a) General Description of Business
IMTEC, Inc. (the "Company" or "IMTEC") designs, assembles, markets and sells high performance barcode labels, and label application and label lamination equipment.
The Company's Hot Stamp printer business was discontinued in August 1994. Reference is made to the Company's current report on Form 8-K, dated August 19, 1994, the contents of which are incorporated herein by reference for further information in these regards.
The Company was incorporated in Vermont on March 17, 1982 under the name Imaging Technologies, Inc., and was reincorporated in Delaware under its present name on September 22, 1983. The Company's executive offices are located at One Imtec Lane, Bellows Falls, Vermont 05101, and its telephone number is (802) 463-9502.
(b) Financial Information About Industry Segments
Not Applicable.
(c) Narrative Description of Business
Products and Services
The Company markets high-performance labels, label material, ribbons and laminates, and produces preprinted bar code labels for customers who prefer outsourcing of label printing. Although the Company sells a broad variety of label materials, the Company focuses on high performance label materials, designed to perform in demanding environments. Sales of such labeling supplies accounted for 56.5%, 50.7%, and 59.9% of the Company's revenues during fiscal years 1996, 1995 and 1994, respectively.
The Company also markets bar code label printer/applicators and bar code label printer/laminators. The printer/applicators print bar codes and variable alpha numeric information onto pressure sensitive labels and automatically applies the label in a single integrated process to a product or package. These devices are typically used to automate information transfer and labeling processes in a real time production or distribution environment. The printer/laminators enable rapid automated printing of bar code and variable information on labels with a laminated surface. These labels are often used in environments where resistance to temperatures, chemicals and weather are valued.
These labeling systems are micro-processor driven and involve proprietary software, label applicator elements and transport, cutting and laminating devices. The systems often include scanners, detectors and printers supplied by unaffiliated manufactures. Equipment sales accounted for 43.5%, 49.3% and 40.1% of the Company's revenue during fiscal years 1996, 1995 and 1994, respectively.
Marketing and Sales
The Company's marketing efforts are directed to those industries and businesses which have need of in-house bar coding equipment. The Company conducts its marketing and sales efforts primarily through an in-house sales staff of 12 full-time employees and its executive officers; 3 sales management offices in the Metropolitan areas of Chicago, IL, Philadelphia, PA, and Santa Rosa, CA, respectively, each of which employs one full- time sales employee; and approximately 12 independent reseller organizations throughout the United States who market other bar code products in addition to the Company's.
The Company also conducts marketing efforts and sales throughout Canada, Latin America, Europe, and the Far East through resellers and distributors.
The Company supplements these efforts by advertising, publishing articles in trade and business journals, and participation at trade shows.
Manufacturing and Sources of Supply
The Company purchases substantially all of the printers that it incorporates into its bar code printers from non-affiliated manufacturers. As there are numerous manufacturers and distributors of printers, the Company does not anticipate experiencing any curtailment in the availability of printers.
The Company is not materially dependent on any one supplier for its computer software, bar code printing supplies or components used in assembling its present or proposed products. It currently uses a number of outside contractors to fabricate machine parts and sub-assemblies for its products but is not currently materially dependent on any one such contractor.
Patents and Trademarks
During the current fiscal year the Company received no new patents. As of June 30, 1996, the Company owned eight patents, expiring at various dates ranging from 2001 to 2009, and eleven trademarks, respectively. Applications for registration of trademarks in seven foreign countries were then pending. Applications for four patents were also pending at June 30, 1996. The Company does not believe the proprietary protection afforded by such patents and trademarks is of material importance to its current or future operations or prospects.
Warranty
The Company's personnel install its products and, if necessary, train customers' personnel in their operation and service. The Company's personnel also service such products when a customer's own staff is unable to diagnose or correct a problem. The Company currently warrants its enhanced printers for a one year period for parts and in-house labor. The Company also offers service and warranty contracts directly to its customers as well as through third party service groups.
Customers
The Company's primary customers are those businesses in industries that utilize in-house bar coding equipment. The Company's customers include, but are not limited to, the fields of electronics, automotive, distribution and consumer's goods manufacturers. During fiscal year 1996, sales pursuant to a single customer (United Parcel Service) accounted for approximately 13.2% of the Company's revenues. This customer, which also accounted for 31% of the Company's revenues during fiscal 1995, is not presently anticipated to account for greater than 10% of the Company's revenues for its fiscal year ending June 30, 1997. No other customer accounted for more than 10% of the Company's revenues during fiscal year 1996, 1995 and 1994. Export sales aggregated approximately $1,435,000 in 1996, $1,704,000 in 1995, and $1,373,000 in 1994.
Backlog
The aggregate backlog of firm orders for the Company's products as of June 30, 1996 was approximately $2,228,000 as compared with $2,803,000 at June 30, 1995. Approximately $1,320,000 of the current backlog is for media supplies with scheduled shipping dates over the next 12 months. The balance of the current backlog ($908,000) is for equipment, including several orders for multiple units, with scheduled delivery over several months. The Company anticipates that substantially all of its backlog will be filled during the current fiscal year.
Competition
The Company competes with several other companies in the sale of its bar code accessories, supplies and services, many of which are larger and have greater financial resources. The Company recognizes approximately 10 direct competitors in its field; however, the Company believes that no one competitor is a dominant factor therein.
The Company may face potential competition with respect to its specialized bar code labeling systems from other companies engaged in various areas of the bar code industry which have both the technical knowledge to develop competing systems and financial resources substantially greater than those of the Company.
The Company believes that it presently competes based on performance, simplicity of operation, reliability of products, and price. It expects to compete with respect to specialized bar code labeling systems presently under development, based upon its chemical and systems engineering capabilities.
Research and Development
The Company conducts on-going research and development to refine, improve and enhance its product lines. Research and development expenses were $625,149, $643,081 and $516,990 in the fiscal years ended June 30, 1996, 1995 and 1994, respectively. The research and development expenses were primarily attributable to the Company's efforts with respect to its specialized bar code labeling systems and proprietary materials.
Employees
As of August 30, 1996, the Company employed 69 persons on a full time basis, including 6 employees in administration, 16 in marketing and sales, 10 in research and development and 37 in service and manufacturing. .
None of the Company's employees are represented by a labor union, and the Company has experienced no work stoppages. The Company believes that its employee relations are good.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
Export sales aggregated approximately $1,435,000 in fiscal 1996, $1,704,000 in fiscal 1995 and $1,373,000 in fiscal 1994, representing 15.7%, 16.6% and 21.0%, respectively, of the Company's sales in such fiscal years. The Company has no significant assets outside of the United States and all export sales in such years were made to persons or entities that had no affiliation to the Company.
Fiscal Years Ended June 30, 1996 1995 1994 Pacific Rim 57% 49% 46% Europe 18% 24% 20% Canada 12% 19% 30% Others 13% 8% 4%
Item 2.

Item 2. PROPERTIES
The Company occupies approximately 15,000 square feet in leased facilities and a plot of land measuring 11.59 acres on which the Company's facilities are situated in the Rockingham Industrial Park, Bellows Falls, Vermont, which house the Company's executive and administrative offices, and its bar code manufacturing and shipping facilities under a lease which expires on December 31, 1999. The Company has the right to extend the lease for an additional five-year term and to purchase the building at any time at a purchase price equal to the then outstanding principal balance and accrued interest of a $525,000 Vermont Industrial Development Authority Industrial Development Revenue Bond, issued in May, 1985. Annual rent is $54,000. The lease provides that the Company shall pay property taxes and utility charges. Sufficient land is available to allow for future expansion.
The Company also leases approximately 19,100 square feet in facilities at 33 Bridge Street, Bellows Falls, Vermont, which house additional manufacturing and storage facilities. This lease expires December 31, 2000 and the Company has the right to extend the lease for two terms of five years each. Annual rent through December 31, 1996 is $67,680. Rent thereafter can be adjusted for inflation.
The Company believes that these facilities are adequate for its present and currently contemplated future operations.
Item 3.

Item 3. LEGAL PROCEEDINGS
In January, 1994, the Windham County Superior Court rendered a settlement of $175,000 plus interest to a former employee in settlement of a wrongful discharge lawsuit based on a termination dating back to 1991. This case was appealed to the Vermont Supreme Court. On November 22, 1995, the Vermont Supreme Court reversed the lower court settlement. The Supreme Court's decision resulted in the Company's reversal of a $215,000 reserve, the majority of which was originally expensed in June, 1994. The effect of the reversal represents $.08 per share in earnings.
There is no material litigation currently pending, or, to the Company's knowledge, threatened against the Company.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1996.
PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Stock is quoted on Nasdaq-SmallCap Market tier of The Nasdaq Stock Market under the symbol IMTC. The following table sets forth, for the periods indicated, the bid price range of the Common Stock as reported by National Quotation Bureau Incorporated. These quotations represent prices between dealers, do not include retail markups, markdowns or commissions and do not necessarily represent actual transactions:
1995 HIGH TRADE LOW TRADE
First Quarter $ 5 $ 3-3/4 Second Quarter 5 4-3/4 Third Quarter 11 5 Fourth Quarter 9-1/2 8-1/2
First Quarter $ 14 $ 9 Second Quarter 13 10 Third Quarter 10-3/4 7-1/2 Fourth Quarter 8-3/4 6-1/4
(b) Holders
At August 30, 1996, there were approximately 256 holders of record of the Company's Common Stock.
(c) Dividends
The Company has not paid any cash dividends since its inception and the Board of Directors does not contemplate doing so in the near future. Any decision as to future payment of dividends will depend on the earnings and financial position of the Company and such other factors as the Board of Directors deem relevant.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal year ended June 30, 1996, as compared to fiscal year ended June 30, 1995.
Revenues for the fiscal year ended June 30 1996, decreased approximately 11.3% over the fiscal year ended June 30, 1995.
Revenues from Bar Code labels and printing supplies were $5,146,749 for the fiscal year ended June 30, 1996, as compared to $5,187,457 for the year ended June 30, 1995, a decrease of 0.8%. The sale of Bar Code labels and printing supplies represented approximately 56.5% of total revenues for fiscal year 1996 as compared to 50.7% of total revenues for fiscal year 1995. There was a backlog of $1,319,601 as of June 30, 1996 for Bar Code labels and printing supplies, as compared to $956,402 for June 30, 1995.
Revenues from the sales and service of Industrial Bar Code Equipment were $3,967,656 for the year ended June 30, 1996, down 21.5% when compared to $5,051,666 for the year ended June 30, 1995. Industrial Bar Code Equipment revenues represented 43.5% of total revenues in fiscal year 1996 compared to 49.3% of total revenues in fiscal year 1995. The decrease in bar code equipment sales in fiscal year 1996, when contrasted with fiscal year 1995, is primarily attributable to the completion, in October, 1995, of a contract with a single customer. When this contract is removed from the revenues, the core equipment business increased 49.3% from $1,854,071 in fiscal year 1995, to $2,768,240 in fiscal year 1996. The increase in the core equipment business is a direct result of increased sales and marketing activities and efforts to expand the Company's distribution network. Backlog as of June 30, 1996, was $908,175 for Industrial Bar Code Equipment as contrasted with $1,846,535 (of which $1,115,752 represented orders from the above mentioned single customer) for June 30, 1995. This represents a net increase of 24.3% in backlog for the core equipment when the single customer is excluded.
Cost of sales remained steady, at 55.1% of revenues, not withstanding the Company's inability to secure volume discounts on purchased parts in fiscal 1996 as it had in fiscal 1995.
Selling, general and administrative expenses represented 26.0% of sales in fiscal year 1996 and 27.1% of sales in fiscal year 1995. These expenses for fiscal 1996 decreased by about $411,000 over fiscal 1995 levels. However, the majority of the decrease is attributable to the Vermont Supreme Court's ruling in favor of the Company in a wrongful termination suit, reversing a lower court's earlier ruling in favor of the plaintiff, in the amount of $175,000 plus interest. The Supreme Court's decision resulted in the Company's reversal of a $215,000 reserve, the majority of which was originally expensed in June, 1994. The effect of the reversal represents approximately $.08 per share in earnings.
Research and Development expenses represented 6.9% of sales in fiscal year 1996 and 6.3% of sales in fiscal year 1995, though the actual costs decreased by about $18,000.
There was no Interest Expense for fiscal year 1996 compared to $39,603 for the previous fiscal year. This decrease is the result of efforts to reduce debt. At June 30, 1995, all of the Company's long-term and short-term debt had been paid in full, with funds generated through operations.
Interest Income generated during fiscal year 1996 was $48,578, compared to $11,925 during fiscal year 1995. This interest is earned on the balance of cash and cash equivalents and marketable investment securities.
Income before taxes was $1,176,569 in fiscal year 1996 compared to $1,196,532 in fiscal year 1995, reflecting an 1.7% decrease, compared to the 11.3% decrease in revenues.
Income tax expense was $457,246 for fiscal year ended June 30, 1996, compared to $345,437 in fiscal year 1995. The difference is due primarily to an increase in the effective tax rate from 28.9% for fiscal year 1995 to 38.9% of income for fiscal year 1996. Fiscal year 1995 income tax expense was favorably impacted by the utilization of a loss carryforward.
At June 30, 1996 and 1995, the Company had accrued $119,954 and $289,906, respectively, against future product warranty claims based on experience with customer claims. Warranty expense charged to operations amounted to a benefit of $9,546 and an expense of $215,171 for the years ended June 30, 1996 and 1995, respectively. The 1995 warranty accrual included approximately $140,000 of additional reserve due to estimated warranty costs related to shipments of a new product during fiscal year 1995, and fiscal year 1996 reflects a reversal of that reserve of $127,000 during fiscal year 1996 as those units came out of warranty.
Accounts receivable at June 30, 1996 decreased 21.9% when compared to June 30, 1995, while revenues during the 4th quarter decreased 13.9% when compared to the 4th quarter in the prior year . The decrease in shipments in the fourth quarter contributed to a corresponding decrease in accounts receivable. Account receivable days (the number of days to collect the receivable) decreased from 58 days during fiscal year 1995 to 51 days during fiscal year 1996, reflecting a better efficiency in collections. The Company considers all of these amounts to be collectible.
Fiscal year ended June 30, 1995, as compared to fiscal year ended June 30, 1994.
Revenues for the fiscal year ended June 30 1995, increased approximately 57.3% over the fiscal year ended June 30, 1994.
Revenues from the sales of Industrial Bar Code Equipment were $5,051,666 for the year ended June 30, 1995, up 99.9% when compared to $2,526,915 for the year ended June 30, 1994. Industrial Bar Code Equipment revenues represented 49.3% of total revenues in fiscal year 1995 compared to 40.1% of total revenues in fiscal year 1994. The increase in bar code equipment sales in fiscal year 1995, when contrasted with fiscal year 1994, is primarily attributable to an increase in shipments of approximately $1,472,000 of the Company's recently introduced high performance label applicator line to a single customer. Other product lines showed increases of approximately 60% to 70% over the previous year's shipments. These increases are a direct result of increased sales and marketing activities and efforts to expand the Company's distribution network. Backlog as of June 30, 1995, was $1,846,535 ($1,115,752 represents orders to a single customer) for Industrial Bar Code Equipment as contrasted with $3,540,107 ($3,390,400 represents orders to a single customer) for June 30, 1994. The decline in backlog is the result of an increase in shipping levels.
Revenues from Bar Code labels and printing supplies were $5,187,457 for the fiscal year ended June 30, 1995, as compared to $3,873,469 for the year ended June 30, 1994, an increase of 33.9%. The Company believes that increased marketing efforts, proprietary materials, and the increasing cumulative quantity of machines in the field consuming these goods has resulted in the growth of this product line. The sale of Bar Code labels and printing supplies represented approximately 50.7% of total revenues for fiscal year 1995 as compared to 59.9% of total revenues for fiscal year 1994. There was a backlog of $956,402 as of June 30, 1995 for Bar Code labels and printing supplies, as compared to $486,000 for June 30, 1994.
The Company discontinued its Hot Stamp printer business in August, 1994, resulting in a one time charge of $385,386, recorded in June, 1994. Revenues from Hot Stamp equipment and supplies were $125,252 for the fiscal year ended June 30, 1994. These revenues are included in the prior years numbers discussed in the above paragraphs. (See Notes 13 and 14 to the financial statements [for fiscal year 1995] of the Company).
Cost of sales as a percentage of revenues decreased from 61.9% for fiscal year 1994 to 55.1% for fiscal year 1995. This decrease is attributable to a decrease in the cost of materials due to volume purchasing of parts and the out-sourcing of certain assemblies. While direct labor and overhead costs increased in actual dollars (up 13.8% and 19.5% respectively), the ratio of these costs as a percentage of sales decreased to 4.9% and 7.5% from 6.9% and 9.9% in the prior year, respectively.
Selling, general and administrative expenses represented 27% of sales in fiscal year 1995 and 40% of sales in fiscal year 1994, though the actual costs for fiscal 1995 increased by about $141,000 over fiscal 1994 levels. The majority of the increase is attributed to sales commission expenses, increasing about $90,000, the result of increased shipments, and trade show expenses, increasing approximately $85,000 as the Company introduced several new products and attended twice as many trade shows compared to fiscal 1994. General and Administrative expenses include approximately $23,000 in additional accrued settlement costs occasioned by a judgment in the amount of $175,000 (plus interest) rendered against the Company following a jury trial in a wrongful discharge case instituted against the Company in 1991 by a former employee. The unfavorable verdict against the Company has been appealed to the Vermont Supreme Court. [See the Management's Discussion and Analysis for fiscal year 1996.]
Research and Development expenses represented 6.3% of sales in fiscal year 1995 and 7.9% of sales in fiscal year 1994, though the actual costs increased by about $126,000. The additional expenses are related to new product development, including, but not limited to, the Company's recently announced ApplyPro series of printer/applicators.
Fiscal year 1995 Interest Expense was $39,603 compared to $50,732 for the previous fiscal year. This decrease is the result of efforts to reduce debt. At June 30, 1995, all of the Company's long-term and short-term debt had been paid in full, with funds generated through operations.
Income before taxes was $1,196,532 in fiscal year 1995 compared to a loss of $1,099,956 in fiscal year 1994. Income tax expense was $345,437 for fiscal year ended June 30, 1995, compared to a benefit of $228,598 in fiscal year 1994. The difference is due primarily to an increase in revenues, resulting in a corresponding increase in pre-tax earnings for fiscal year 1995. (See Note 7 to the financial statements.)
At June 30, 1995 and 1994, the Company had accrued $289,906 and $87,107, respectively, against future product warranty claims based on experience with customer claims. Warranty expense charged to income amounted to $215,171 and $81,003 for the years ended June 30, 1995 and 1994, respectively. This increase includes approximately $140,000 of additional reserve due to increased shipments of new product with no warranty history. Warranty expense represented 2.1% of sales for fiscal year 1995 compared to 1.2% of sales for fiscal year 1994.
CAPITAL RESOURCES AND LIQUIDITY:
During fiscal year 1996, the Company's principal source of liquidity was cash flow from operations. The Company had no bank borrowings as of June 30, 1996. The Company believes that the cash generated from operations and bank borrowings, including borrowings available under its line of credit, will be sufficient to meet its cash needs on both a short-term (i.e., 12 months) and long-term ( i.e., at least 24 months) basis.
The Company has secured a line of credit agreement in the amount of $700,000, all of which was available at June 30, 1996. The line of credit is secured by the Company's accounts receivable, inventory and property and equipment. The interest rate varies from time to time with changes in the prime interest rate.
Long-term and short-term debt, including current installments, had been paid in full as of June 30, 1995. This debt was paid entirely with funds generated from operations.
During fiscal year 1996, the Company spent $427,461 on property and equipment, computer software and other intangible assets, which is a small decrease over the previous year's $494,297. The cash for these expenditures was generated from the Company's operating activities.
The Company believes that its capital expenditures for fiscal year 1997 will increase by approximately 50% over the capital expenditures for fiscal 1996.
NEW ACCOUNTING STANDARDS:
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which the Company will be required to adopt during fiscal year 1997. The Company does not expect that the adoption of SFAS No. 121 will have a material affect on the Company's financial statements.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") which is effective for the Company in fiscal 1997. As permitted under SFAS No. 123, the Company has elected not to adopt the fair valued based method of accounting for its stock-based compensation plans, but will continue to account for such compensation under the provisions of APB Opinion No. 25. The Company will comply with the disclosure requirements of SFAS No. 123 in 1997.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Report
The Stockholders and Board of Directors IMTEC, Inc.:
We have audited the financial statements of IMTEC, Inc. as listed in the index included herein in Part IV, Item 14. In connection with our audits of the financial statements, we also have audited the financial statement schedule listed in the index included herein in Part IV, Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IMTEC, Inc. as of June 30, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
Albany, New York August 2, 1996
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
See accompanying notes to financial statements.
IMTEC, INC.
Notes to Financial Statements
June 30, 1996, 1995 and 1994
(1) Description of the Company's Business and Summary of Significant Accounting Policies
Description of the Company's Business IMTEC, Inc. (the "Company") designs, manufactures and sells labeling systems. These systems include label printer laminators, label printer applicators, pre-printed labels and labeling supplies. IMTEC products are designed for automated identification (bar coding) applications in the electronics, pharmaceutical, transportation, textile, automotive and warehousing industries. The Company conducts its marketing and sales efforts primarily through its in-house sales staff, 3 sales offices in different metropolitan areas in the United States and throughout Canada, Latin America, Europe and the Far East through resellers and distributors.
Summary of Significant Accounting Policies
(a) Basis of Presentation The accompanying financial statements have been prepared on an accrual basis. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(b) Revenue Recognition Product sales, including sales under contract, are recorded when the products are shipped or in accordance with customer agreements.
(c) Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers as cash equivalents all highly liquid investments purchased with a maturity of three months or less and which are readily convertible to known amounts of cash.
(d) Marketable Investment Securities Marketable investment securities at June 30, 1996 consist of state bonds which the Company considers as trading securities. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" during 1995. Under SFAS No. 115, the Company classifies its debt and marketable equity securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value.
(e) Inventories Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
(Continued)
IMTEC, Inc.
Notes to Financial Statements, Continued
(f) Property and Equipment Property and equipment are carried at cost. Depreciation, including amortization of leasehold improvements and capital lease assets, is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterment's are capitalized. Deduction is made for retirements resulting from renewals or betterment's.
(g) Computer Software The cost of computer software to be included in the Company's products is expensed until the technological feasibility of the software is established. Subsequent costs are capitalized. Capitalized computer software costs are amortized over the greater of the ratio of current product revenue to estimated future revenues or the straight-line method using estimated lives of two to five years.
(h) Other Intangibles The cost of product documentation, organization, patents and trademark applications and license agreements is amortized over the estimated useful lives of the assets, which range from three to seventeen years, using the straight-line method.
(i) Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(j) Product Warranties Estimated costs related to product warranties are recorded at the time of the sale of the product.
(k) Fair Value of Financial Instruments The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short maturity of these instruments.
(2) Inventories Inventories consist of:
(Continued)
IMTEC, Inc.
Notes to Financial Statements, Continued
(3) Marketable Investment Securities Marketable investment securities at June 30, 1996 consist of state bonds due October 1, 1998 which are classified as trading securities. Their amortized cost of $54,671 approximates fair value at June 30, 1996; therefore, there are no unrealized gains or losses included in income.
Marketable investment securities at June 30, 1995 consist of trading securities at fair value of $400,000. As the fair value of the trading securities at June 30, 1995 approximates cost, there are no unrealized gains or losses included in income.
(4) Property and Equipment Property and equipment consists of the following:
Depreciation and amortization expense amounted to $532,744, $528,069 and $520,973 in 1996, 1995 and 1994, respectively. Included in depreciation and amortization expense is amortization of computer software cost of $72,511, $73,950 and $67,877, and amortization of other intangibles of $84,441, $85,736, and $120,034, in 1996, 1995 and 1994, respectively.
(5) Other Accrued Liabilities Other accrued liabilities consist of: June 30 ----------------------- 1996 1995 ---- ----
Accrued warranty $ 119,954 289,906 Accrued medical 120,441 69,327 Accrued settlement costs - 207,063 Other 176,635 235,576 ------------ ---------- Total $ 417,030 801,872 ============ ==========
(6) Short-term and Long-term Debt TheCompany has a secured line of credit agreement in the amount of $700,000, all of which is available at June 30, 1996. The line of credit is secured by the Company's accounts receivable, inventories, and property and equipment. The interest rate varies from time to time with changes in the prime interest rate.
TheCompany paid $0, $39,603, and $50,732, for interest on notes payable, long-term debt, and capital lease obligations in the years ended June 30, 1996, 1995 and 1994, respectively.
(Continued)
IMTEC, Inc.
Notes to Financial Statements, Continued
(7) Income Taxes Income tax expense (benefit) consists of the following:
Total income tax expense (benefit) differs from the amount computed by applying the statutory Federal income tax rate of 34% to pretax income (loss). The computed amount and the items which make total income tax expense (benefit) vary from it, are as follows:
The Company paid $422,720, $181,081, and $2,409 for income taxes during 1996, 1995 and 1994, respectively.
(Continued)
IMTEC, Inc.
Notes to Financial Statements, Continued
For the year ended June 30, 1996, the deferred income tax expense of $52,159 results from the changes in temporary differences for the year. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30, 1996 and 1995 are presented below:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.
(8) Leases (a) Capital Leases The Company leased certain computer equipment under a long-term lease agreement which expired in 1995. Machinery, equipment and tooling of $153,114 had been fully depreciated as of June 30, 1995. There were no new capital leases entered into during 1996.
(b) Operating Leases The Company leases its facilities under lease agreements expiring in 2000 which are classified as operating leases. The lease for the main building is noncancellable by the Company except through the exercise of an option to purchase the property for the remaining principal and interest balance on the Vermont Industrial Revenue Bond held by the lessor. The lease for the Bridge Street plant is noncancellable. The Company also leases office equipment under short-term, cancelable operating leases.
(Continued)
IMTEC, Inc.
Notes to Financial Statements, Continued
Future minimum rental payments under the noncancellable operating leases for each of the years subsequent to June 30, 1996 are as follows:
1997 $ 121,680 1998 121,680 1999 121,680 2000 94,680 2001 33,840 ----------- $ 493,560
Rental expense under cancelable and noncancellable operating leases amounted to $104,272, $107,241, and $117,938 during 1996, 1995 and 1994, respectively.
(9) Employee Benefit Plan During 1993, the Company established a 401(k) savings plan. The plan covers all employees meeting certain eligibility requirements. The Company contributed $52,225 and $14,360 to the plan during 1996 and 1995, respectively. No contributions were made during 1994.
(10) Stock Options and Warrants (a) Stock Option Plans The Company has three plans, the 1983 Incentive Stock Option Plan which was adopted in August 1983, the 1985 Incentive Stock Option Plan which was adopted in November 1984 and the 1993 Stock Option Plan which was adopted on August 19, 1993. These plans provide for granting of options on common stock to directors, officers and key employees. The options granted are exercisable in four annual installments beginning one year after the date of the grant and expire five to ten years after the date of the grant, depending on stock ownership on the grant date.
The following is a summary of outstanding options under the 1983, 1985 and 1993 Incentive Stock Option Plans at June 30, 1996, 1995 and 1994:
Price per share of shares under option was $1.375 to $8.50 at June 30, 1996 and $1.336 to $8.50 at June 30, 1995 and 1994. Price per share of options exercised was $1.375 to $3.25 in 1996, $1.336 to $3.25 in 1995, and $1.375 to $2.50 in 1994.
(Continued)
IMTEC, Inc.
Notes to Financial Statements, Continued
Also, the Company granted an option on 25,000 shares of its common stock to a Director on November 15, 1990. The option was exercisable on November 19, 1990 and annually thereafter in 5,000 share increments through January 31, 1995 at $3.00 per share, which was the approximate market value of the shares when the Director agreed to join the Board. During 1995, all of these options were exercised.
Also, the Company granted an option on 25,000 shares of its common stock to a Director on November 1, 1993. The option is exercisable on November 18, 1993 and annually thereafter in 5,000 share increments through January 31, 1998 at $2.75 per share, which was the market value of the shares when the Director agreed to join the Board. As of June 30, 1996, none of these options have been exercised.
(b) Stock Warrants On August 12, 1985, the Company sold warrants to purchase 123,750 shares of common stock for a total of $750 to three of its directors. These warrants were originally exercisable at $4.00 per share and expired July 14, 1990. On September 28, 1988, the Directors approved modification of the terms of the warrants to be exercisable at $1.375 per share. During 1989, 22,500 shares of common stock were purchased under these warrants for $30,938. During 1990, the Directors extended the expiration date to July 14, 1991. During 1991, the Directors extended the expiration date to July 14, 1995. No shares were purchased under these warrants during 1994. During 1995, 61,875 shares were purchased under these warrants at $1.375 per share.
(11) Concentration of Sales During 1996, 1995 and 1994, there were sales to one customer which accounted for 10% or more of total sales.
Export sales aggregated approximately $1,435,000, $1,704,000, and $1,373,000 in 1996, 1995 and 1994, respectively.
(12) Earnings Per Common Share Primary earnings per share were computed by dividing net earnings by the weighted average number of shares of common stock and common stock equivalents outstanding during the year, if dilutive. Common stock equivalents (stock options and warrants) are assumed to be exercised when they are issued and the proceeds used to repurchase outstanding shares of the Company's common stock at the average market price during the period.
Thefully-diluted computation is performed using the same method as for the primary computation, except that proceeds from exercise of stock options and warrants are assumed to be used to repurchase outstanding shares of the Company's common stock at the higher of the average or the June 30 market price.
(Continued)
IMTEC, Inc.
Notes to Financial Statements, Continued
Theaverage number of common shares and common share equivalents entering into the calculation of primary and fully-diluted earnings per share are as follows:
(13) Hot Stamp Assets On March 7, 1990, the Company acquired certain assets, liabilities, and a ten-year exclusive worldwide license to manufacture, market and sell the products of Nevis Imaging Systems, Inc. in a transaction accounted for as a purchase. The assets and license agreement were acquired at a cost of $860,245; representing cash paid of $40,000, liabilities assumed of $360,245 and the issuance of 92,000 shares of IMTEC, Inc. common stock valued at $5.00 per share. As a result of this transaction, the Company had recorded intangible assets of $592,500 representing the license agreement acquired and $98,598 representing goodwill. These intangible assets were being amortized over a ten-year period. At June 30, 1993, the Company determined that the goodwill no longer retained any value to the Company and, therefore, wrote off the unamortized balance of $66,589. At June 30, 1994, the Company determined that the license agreement, inventory, and equipment no longer retained any value to the Company and, therefore, wrote off the remaining unamortized balance of $385,386.
(14) Commitments At June 30, 1996, the Company had an outstanding capital expenditure purchase commitment of approximately $310,000. A deposit of approximately $95,000 has been made on the purchase and has been recorded in deposits at June 30, 1996.
(Continued)
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in accountants nor have there been any disagreements on accounting and financial disclosures during the twenty-four months prior to June 30, 1996.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for hereunder has been omitted pursuant to Paragraph G(3) of the General Instructions (the "Instructions") inasmuch as the Company shall file definitive proxy materials containing such information with the Securities and Exchange Commission prior to the expiration of 120 days following the close of the Company's fiscal year which is the subject of this Annual Report.
Item 11.

Item 11. EXECUTIVE COMPENSATION
The information called for hereunder has been omitted pursuant to the Instructions inasmuch as the Company shall file definitive proxy materials containing such information with the Securities and Exchange Commission prior to the expiration of 120 days following the close of the Company's fiscal year which is the subject of this Annual Report.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for hereunder has been omitted pursuant to the Instructions inasmuch as the Registrant shall file definitive proxy materials containing such information with the Securities and Exchange Commission prior to the expiration of 120 days following the close of the Company's fiscal year which is the subject of this Annual Report.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for hereunder has been omitted pursuant to the Instructions inasmuch as the Registrant shall file definitive proxy materials containing such information with the Securities and Exchange Commission prior to the expiration of 120 days following the close of the Company's fiscal year which is the subject of this Annual Report.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements :
Included in Part II, Item 8, of this report:
(a) Report of Independent Auditors
(b) Balance Sheets, June 30, 1996 and 1995.
(c) Statements of Operations for the years ended June 30, 1996, 1995 and 1994.
(d) Statements of Stockholders' Equity for the years ended June 30, 1996, 1995 and 1994.
(e) Statements of Cash Flows for the years ended June 30, 1996, 1995 and 1994.
(f) Notes to Financial Statements.
2. Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts and Reserves, years ended June 30, 1996, 1995 and 1994.
All other schedules have been omitted because of the absence of conditions requiring them or because the required information is shown in financial statements or the notes thereto.
3. Exhibits
(a) Certificate of Incorporation as amended (1).
(b) By-Laws, as amended (1).
(c) Consent of KPMG Peat Marwick LLP
(d) The Exhibits required by 601 of Regulation S-K are set forth in (3) (a) above.
(e) The financial statement schedule required by Regulation S-K, which is excluded from the Annual Report to Shareholders is set forth in (2) above.
(b) Reports on Form 8-K
None - ------------------------------ (1) Denotes document filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 2-86978) and incorporated herein by reference.
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.
IMTEC, INC.
By: /s/ Richard L. Kalich ------------------------------- Richard L. Kalich, President
By: /s/ George S. Norfleet III ------------------------------- George S. Norfleet III, Secretary - Treasurer
Dated: September 26 , 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following person in the capacities and on the dates indicated:
Signatures Title Date
/s/ Ralph E. Crump Chairman, Director September 16, 1996 --------------------------- Ralph E. Crump
/s/ Robert W. Ham Director September 16, 1996 --------------------------- Robert W. Ham
/s/ David C. Sturdevant Director September 16, 1996 --------------------------- David C. Sturdevant
EXHIBIT 23
The Board of Directors IMTEC, Inc.
We consent the incorporation by reference in the registration statements (Nos. 33-62361 and 33-00666) on Form S-8 of IMTEC, Inc. of our report dated August 2,1996, relating to the balance sheets of IMTEC, Inc. as of June 30, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended June 30, 1996, and the schedule of valuation and qualifying accounts, which report appears in the June 30, 1996 annual report on Form 10-K of IMTEC, Inc.
/s/KPMG Peat Marwick LLP
Albany, New York September 26, 1996


ITEM 2. PROPERTIES
The following table describes the location, principal use and approximate size of all the principal facilities of the Registrant and its subsidiaries, all of which are owned by the Registrant and/or its subsidiaries.
In addition to these principal locations, the Registrant and its subsidiaries lease other offices throughout the United States. The Registrant also owned approximately 500 acres of undeveloped land at August 3, 1996 that is being held for investment purposes.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Registrant, a subsidiary and certain affiliates of the Registrant, including AMIC, are parties to certain litigation incidental to their businesses. See Note 13 to the Consolidated Financial Statements. Management does not believe that the resolution of such litigation is likely to have a material adverse effect on the Registrant's consolidated financial position or operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Each of the Registrant's classes of Common Stock are traded on the American Stock Exchange (ticker symbol MRI-A and MRI-B). As of October 25, 1996, there were approximately 510 record holders of the Registrant's Class A Common Stock and approximately 430 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:
The Registrant has no policy with respect to payment of dividends, but expects to continue paying regular cash dividends on its Class A Common Stock. Any dividends paid on Class B Common Stock, if any, must also be paid on Class A Common Stock in an equal amount. No dividends were paid on Class B Common Stock during the prior two fiscal years. There is 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.

ITEM 6. SELECTED 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 the Company's audited consolidated financial statements. The Company acquired American West Trading Company (American West) on April 30, 1996 from its shareholders. The results of the
Company include the results of American West since April 30, 1996, the day of its acquisition by the Company. 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.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company reported revenues of $48.7 million for the 1996 fiscal year compared to $40.6 million for the same period in 1995 and $39.5 million in 1994. Consolidated revenues reached record levels for the fourth consecutive year. The footwear unit's revenue increased 94%, approximately 47% or $4.2 million of the increase, resulted from the acquisition of American West Trading Company (American West) on April 30, 1996 in a transaction accounted for as a purchase. The operating results of American West, which manufactures and sells western and work boots, are included in the Company's results of operations since the date of its acquisition. The Registrant expects that the inclusion of the operating results of American West, for a complete-fiscal year in 1997, to increase its revenues from the footwear segment. Increased U.S. Government requirements and sales of military combat boots to foreign governments contributed to the remaining $4.3 million increase in revenues in the footwear division in fiscal 1996. The bar code and office products unit sales declined from a combined 73% of consolidated revenues in fiscal 1995 to a combined 59% of consolidated revenues in fiscal 1996. Consolidated operating profits declined slightly from the fiscal 1995 level as a result of a 4% reduction in the gross profit percent.
The following chart sets forth the net revenues, gross profits, selling, general and administrative expenses, and operating profits of the major business units for the fiscal years 1994 through 1996.
The results reported in the chart reveal several different trends in the Company's revenue mix. The office products unit posted another year of record revenues with an increase of 7% over fiscal 1995. At the same time, the bar code unit experienced a 7% decline in revenues from the prior year. The major contributor to the Company's record consolidated revenue level was the footwear unit which increased revenue by 94% as a result of increased U.S. Government requirements, sales of combat boots to foreign governments and the acquisition of American West.
Gross profit margins fell 4% on a consolidated basis for fiscal 1996 compared to fiscal 1995 and were flat from fiscal 1995 to 1994. The bar code and office products units continued to experience downward trends in gross margins, and the footwear unit posted a 3% increase to 21% over fiscal 1995 and nearly matched the 22% level recorded in fiscal 1994. The bar code unit continued to yield margin to competitive pricing pressure in 1996 as several major product lines experienced reductions in selling price levels. The office products' margins have continued to decrease as a result of increased service costs and higher costs associated with sales-type leases and cost per copy rental programs. Gross margins for the footwear unit increased as a result of fixed overhead being spread over a larger production of military combat boots which was slightly offset by lower margins on the western and work boot product line.
Consolidated selling, general and administrative (SG&A)expenses as a percentage of sales decreased 2% in fiscal 1996 from fiscal 1995 levels and matched the 1994 level. The bar code unit experienced a sizable increase in SG & A as a percentage of sales as a result of increased health insurance costs, research and development expenditures and professional fees. The footwear unit experienced a 144% increase in SG&A over fiscal 1995 caused primarily by the acquisition of the western boot product line.
Total operating profit for fiscal 1996 as a percentage of total revenue dropped to 7% from 8% in fiscal 1995 and 10% in fiscal 1994. The decline in bar code revenue and the reduction in gross margins on a consolidated unit basis were the major causal factors of the decrease in consolidated operating profit in fiscal 1996.
BUSINESS SEGMENTS
The Company has three primary business units: the bar code unit operates under the name of Compsee, the office products unit operates under the name of McRae Graphics, and the footwear manufacturing unit operates under the names of McRae Footwear and American West Trading Company. The Company also operates several other smaller businesses that are included in the other category in the above chart.
BAR CODE OPERATIONS
Compsee manufactures and distributes bar code reading and printing devices and other items related to optical data collection. Compsee continues to concentrate its efforts to expand into new markets throughout the United States and other parts of the world, and currently has sales agents in the United States, Central and South America, Europe, Australia, the Middle East, and some Pacific Rim countries.
Total revenues for fiscal 1996 were 7% lower than those reported in fiscal 1995 which were 31% higher than 1994 revenues. Several product lines were affected by significant competitive pressures on pricing during the year which
resulted in lower revenues and gross margins for the business unit. In addition, selling, general and administrative expenses increased 4% over fiscal 1995 from higher health insurance costs, research and development expenditures and professional fees. All of these factors were responsible for the 6% decline in operating profits from fiscal 1995.
OFFICE PRODUCTS
McRae Graphics sells and services certain office equipment of two major lines of photocopier, facsimile, and digital printing equipment through nine offices in North Carolina.
Total revenues for fiscal 1996 were 7% higher than in fiscal 1995 which was 21% higher than the fiscal 1994 revenues. Revenues have continued to grow for five consecutive years. McRae Graphics sells various equipment and supplies and services the equipment it sells. Gross margins decreased approximately two percentage points during fiscal 1996. This was primarily attributed to a decline in service margins. Selling, general and administrative expenses increased to 36% of revenues for fiscal 1996 because of higher administrative salaries, health care costs and depreciation expense on rental machines. The higher cost of sales and selling and general and administrative expenses out paced the increase in revenues and resulted in a net operating loss for fiscal 1996.
FOOTWEAR
McRae Footwear manufactures military combat, western and work boots. Military combat boots are manufactured primarily for the United States Government (Government). In an effort to offset losses of production caused by the Defense Department's overall reduction of combat boot orders in recent years, the Company began producing boots for other markets in fiscal 1995. This segment is currently operating under the third and final year of a three year contract with the Government. A new contract covering a five year period is currently being negotiated. The Company believes that it is well positioned to successfully negotiate a new contract with the Government; however, there can be no assurances that the terms of any such contract will be favorable to the Company or that any such contract will be awarded.
In addition to producing combat boots for other markets, the Company purchased American West Trading Company (American West), a high quality, low cost producer of men's, women's and children's western and work boots, in April 1996. Total revenues for the footwear segment increased to $17.5 million, up 94% over fiscal 1995 which had declined 35% from fiscal 1994. Combat boots accounted for 76% of the revenues for the footwear segment while the western and work boot product line contributed 24% in fiscal 1996. Higher production levels of military combat boots, slightly offset by lower gross margins in the western and work boot product line, resulted in a positive 3% increase in gross margin as a percentage of sales as fixed overhead was spread over an increased production level of military combat boots. Selling, general and administrative expenses increased 144% over fiscal 1995 which was flat compared to fiscal 1994. The increase was largely attributable to the acquisition of the western and work boot operation.
OTHER OPERATIONS AND INFLATION
The printing unit's performance in fiscal 1996 was adversely affected by rising paper prices and scrap costs. The primary cause of the large change in operating profit in the other category during fiscal 1995 was the recovery of a bad debt of approximately $85,000 in our financing and leasing unit.
Inflation, in the opinion of management, has not been a significant factor in the Company's operations for the last three fiscal years.
FINANCIAL CONDITION
The Company continues to have a strong balance sheet with a current ratio of over 3:1. Total assets grew approximately 34% during fiscal 1996, while stockholders' equity grew over 7% during the same period.
The expansion in operations for the footwear unit as a result of increased sales activity and the acquisition of American West contributed to the substantial increase in accounts receivable and inventory levels as compared to fiscal 1995. The 81% increase in receivables is directly related to higher military combat boot sales coupled with a delay in collection of Government receivables and timing of purchases by customers of the western and work boot product line. The 74% increase in inventory over last year is largely attributed to the buildup of western and work boot inventory to fill greater seasonal demands occurring during the fall and winter months of the year. Higher sales activity also prompted a slight upward adjustment in the allowance for bad debts. Accrued employee benefits used cash of $455,000 as a result of higher payments during fiscal 1996.
Investing activities resulted in net cash provided of $583,000 including $614,000 to purchase the western boot manufacturing company. Short term investments were liquidated resulting in a source of cash amounting to almost $3.4 million. The Company used these funds to restructure acquisition debt assumed and to finance operations. Fixed assets increased by capital expenditures of approximately $1.5 million as the Company continued to add to and update its manufacturing machinery and equipment as well as its computer and support programs.
Net cash provided by financing activities amounted to $337,000. New bank loans approximating $6 million were negotiated to replace the debt assumed by the Company in the purchase of American West. The Company paid dividends during the fiscal year which totaled $624,000.
At August 3, 1996, the Company had lines of credit with several banks totalling $3.75 million, of which $3.35 million was available to the Company. The Company will continue to have cash requirements to support working and capital needs as well as debt payment and servicing. To meet these cash requirements, the Company intends to use internally generated funds and to borrow under its lines of credit, if necessary. Management believes that the cash generated from these sources will be adequate to meet the Company's cash requirements during the next fiscal year.
ENVIRONMENTAL MATTERS
The Company is subject to various laws and regulations concerning environmental matters and employee safety and health in the United States. The Company has been able to comply with such laws and regulations without any material adverse effect on its business. In the opinion of management, the Company is not in violation of any environmental laws or regulations that would have a material adverse effect on the financial condition of the Company.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this report:
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.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE
None.
PART III
Items 10 through 13 are incorporated herein by reference to the sections captioned Principal Shareholder and Holdings of Management, Election of Directors, Director Compensation, Executive Officers, Audit and Incentive Stock Option Committee Interlocks and Insider Participation, Certain Relationships and Related Transactions, Executive Compensation, Pension Plan and Section 16(a) Beneficial Ownership Reporting Compliance in the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held December 19, 1996.
GLEIBERMAN SPEARS SHEPHERD & MENAKER, P.A.
Independent Auditors' Report
To the Board of Directors and Shareholders of McRae Industries, Inc. Mount Gilead, North Carolina
We have audited the accompanying consolidated balance sheets of McRae Industries, Inc. and subsidiaries as of August 3, 1996 and July 29, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended August 3, 1996 and the financial statement schedule listed under Item 8. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit 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, 1996, and July 29, 1995, and the results of their operations and their cash flows for each of the three years in the period ended August 3, 1996, in conformity with generally accepted accounting principles. 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/ Gleiberman Spears Shepherd & Menaker, P.A.
October 11, 1996
NationsBank Suite 3500 Charlotte, North Carolina 28280 Telephone 704-377-0220 Telefax 704--377-7612 Certified Public Accountants and Business Advisors
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS McRae Industries, Inc. and Subsidiaries
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS McRae Industries, Inc. and Subsidiaries
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY McRae Industries, Inc. and Subsidiaries
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS McRae Industries, Inc. and Subsidiaries For the Years Ended August 3, 1996, July 29, 1995 and July 30, 1994
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 is accounted for on the equity method. Significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates The timely preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
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.
Marketable Securities Marketable Securities consist of certificates of deposit with an original maturity date of more than three months and debt and equity securities. Certificates of deposit are stated at cost and the securities are stated at approximate fair values based on quoted market prices.
Investments in marketable equity and debt securities have been classified as available for sale and as a result are stated at fair value based on quoted market prices. Unrealized holding gains and losses, if applicable, are included as a separate component of shareholders' equity until realized. The effect of this change in accounting principle was not material to the financial statements.
Inventories Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method for the military boots and photocopier inventories and using the first-in, first-out (FIFO) method for all other inventories.
Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation and amortization are provided on a straight-line method for financial reporting purposes and by accelerated methods for income tax purposes.
Service Revenue Recognition Service maintenance agreements are sold for certain products. When such revenues are recorded prior to providing repair and maintenance service, the revenues are deferred and recognized over the term of the related agreements.
Government Contract Revenue Recognition Sales under long-term government contracts are recognized as revenues when the deliveries are made. In addition, the Company has recorded receivables of $370,000 at August 3, 1996, under the government contract's economic price adjustment clause for increases in leather prices.
Goodwill Goodwill is 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.
Income Taxes The Company records provision for income taxes using the liability method of accounting for income taxes under SFAS No. 109 Accounting for 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.
Reclassifications Certain reclassifications have been made to the prior years' financial statements and notes thereto to conform with the current year presentation.
2. ACQUISITIONS
All acquisitions have been accounted for as purchases; operations of the companies acquired have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The excesses of the purchase prices over fair value of the net assets acquired are included in goodwill. Supplemental information, combining the acquired companies on a pro forma basis as though they were acquired at the beginning of the fiscal years, has not been presented for the DataScan Corporation and Systems Integrators, Inc. acquisitions because it would have an immaterial effect on the net revenues and income for the periods presented.
In September 1994, the Company acquired DataScan Corporation, a reseller of bar code products located in South Carolina, for approximately $523,000. The excess of the purchase price over the fair value of the net assets acquired of approximately $600,000 was recorded as goodwill and is being amortized by the straight-line method over twenty years.
In June 1995, the Company acquired Systems Integrators, Inc., a consulting firm primarily engaged in programming bar code related products, for approximately $315,000. The excess of the purchase price over the fair value of the net assets acquired of approximately $138,000 was recorded as goodwill and is being amortized by the straight-line method over fifteen years.
On April 30, 1996, the Company purchased all of the outstanding common stock of American West Trading Company (American West) from its shareholders. American West is a manufacturer and distributor of western and work boots with manufacturing facilities located in Dresden and Waverly, Tennessee. American West sells it's boots nationwide to major retail and speciality chain stores.
The Company purchased 4,000,000 shares of American West Common Stock for $490,000 in cash and notes and $60,000 of the Company's Class A Common Stock. The purchase price approximated the fair values of the net assets acquired. In addition, a deferred earn-out amount will be paid subject to certain conditions being met over a sixty month period.
The unaudited proforma financial information which follows assumes the acquisition of American West occurred at the beginning of the respective year presented after giving effect to certain adjustments. The proforma financial information does not purport to be indicative of the results of operations that would have occurred had the transaction taken place at the beginning of the period presented or of future results of operations.
3. MARKETABLE SECURITIES
The following is a summary of the estimated fair market value of available for sale securities:
At July 29, 1995 all certificates of deposit had contractual maturities of one year or less. Expected maturities may differ from contractual maturities of the municipal bonds because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Unrealized gains and losses were not material at August 3, 1996 or July 29, 1995.
4. INVENTORIES
Current costs exceed the LIFO value of inventories by approximately $877,000 and $847,000 at August 3, 1996 and July 29, 1995, respectively. Year-end inventories valued under the LIFO method were approximately $5,150,000 at August 3, 1996 and approximately $4,500,000 at July 29, 1995. The components of inventory at each year end are as follows:
5. LEASES
The Company leases certain photocopier products under sales-type leases. The Company's net investment in these leases is as follows:
The scheduled maturities for the above minimum lease payments receivable at August 3, 1996 are as follows:
6. PROPERTY, PLANT AND EQUIPMENT
7. NOTES PAYABLE:
Annual maturities of long-term debt are as follows:
Interest expense payments during fiscal years 1996, 1995 and 1994 were approximately $133,000, $48,000 and $82,000, respectively.
8. EMPLOYEE BENEFIT PLANS
The Company's employee benefit program consists of a defined benefit pension plan, an employee stock ownership 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 Company's noncontributory defined benefit pension plan and employee stock ownership plan cover substantially all employees. On September 30, 1992 the Board of Directors decided to terminate the defined benefit pension plan. The plan's actuary determined the amount owed to the pension plan as a result of the plan's termination was $173,000. This amount has been recorded as a liability in accrued employee benefits as of August 3, 1996. The defined benefit pension plan provided for benefits based on length of service from date of employment and the employee's average compensation. Plan assets are invested principally in collective funds consisting of short-term cash, fixed-income and equity investments.
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8% for 1992. The expected long-term rate of return on assets is 8%.
The following table sets forth the defined benefit pension plan's funding status at the end of each year indicated.
The employee stock ownership plan's (ESOP) 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.
Employee benefit program expense amounted to $525,000, $725,000 and $850,000 in 1996, 1995 and 1994, respectively. To the extent the amount of these benefits are not disbursed, the Board may, at its sole discretion, reduce any remaining accruals.
9.INCOME TAXES
Significant components of the provision for income taxes are as follows:
The components of the provision for deferred income taxes are as follows:
Deferred tax liabilities and assets at each year end are as follows:
The reconciliation of income tax computed at the U. S. federal statutory tax rate to actual income tax expense are (in thousands):
Total income tax payments during fiscal years 1996, 1995 and 1994 were approximately $958,000, $1,647,000 and $1,100,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
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 in November 1994 and each year thereafter, at the defined book value of such shares, provided the minority shareholder remains employed by the subsidiary.
Credit Facilities The Company has loan agreements with several banks pursuant to which the banks have agreed to provide lines of credit up to $3,750,000 subject to certain restrictions at the banks' prime interest rate.
Concentrations Of Credit Risk 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 which are in excess of the Federally insured limits. Management of the Company 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 account receivables.
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.
11. 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.
The Company has a nonqualified stock option plan. Under the terms of the stock option plan, stock options to purchase Common Stock may be granted to selected key employees. The Company has reserved 120,000 shares of Class A and 120,000 shares of Class B Common Stock for the nonqualified stock option plan. Transactions involving the plan are summarized as follows:
At August 3, 1996, 143,000 shares of Class A and 143,000 shares of Class B common stock were available for future grants under the nonqualified stock option plan.
12. RELATED PARTY TRANSACTIONS
Notes and accounts receivable from related entities that are included in the balance sheet are as follows:
As of August 3, 1996, and July 29, 1995, there were approximately $674,000 and $695,000, respectively, of receivables due from employees included in notes and accounts receivable.
13. INVESTMENT IN INVESTEE
The Company has an investment in a real estate development company. The investee 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 Company adjusts its investment in and advances to the investee by the equity method. Summarized financial data of the investee is as follows:
The following table summarizes the activity of the Company's investment in investee:
The Company, a subsidiary and investee have been named co-defendants in a civil lawsuit involving one residential real estate lot in a subdivision partially developed by the investee. The investee has been named a defendant in a second lawsuit also involving a residential real estate lot in the same subdivision. The lawsuits allege various torts related to quiet title, adverse possession, tortious interference and others. The first suit seeks unspecified compensatory and punitive damages. The second suit seeks compensatory damages of $15,000 and unspecified punitive damages. The Company's counsel in connection with these lawsuits has represented that it is unable to evaluate the probability of a favorable or unfavorable outcome nor to estimate the range of loss, if any, in these cases. Accordingly, no provision for any liability that may result has been made in the accompanying consolidated financial statements.
14. 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.
Marketable Securities: The fair values of marketable debt and equity securities are based on quoted market prices.
Notes Receivable: For notes receivable, fair value is estimated by discounting future cash flow using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Other Assets: Other assets primarily represent officer's life insurance policies recorded at its cash surrender value which approximates its fair value.
Deferred revenues: The carrying value approximates fair value because of the short maturity of the deferred maintenance contracts.
Long and short term debt: The carrying amounts of the borrowings under short-term revolving credit agreements approximates 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.
a) It is not practicable to estimate the fair value of the Notes due from related parties to the corporation because of the inability to estimate fair value without incurring excessive costs. See Note 11-Related Party Transactions.
15. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
The following table sets forth unaudited quarterly financial information for the years ended August 3, 1996 and July 29, 1995:
The fourth quarter of 1996 includes an adjustment to decrease the Company's LIFO Reserve which increased net earnings by $222,000 or $.08 per common share.
16. INDUSTRY SEGMENT INFORMATION
The Company's principal operations have been classified into three business segments: bar code operations, office products and printing and footwear manufacturing. The bar code segment manufactures and sells bar code reading and printing devices and other items related to optical data collection. The office products and printing segment sells, provides maintenance and leases photocopiers, facsimile and digital duplicators and operates a commercial printing company. The footwear segment manufactures combat boots, principally for the U.S. Government, and western and work boots. Total consolidated revenues related to sales to the U.S. Government were 26% in 1996, 22% in 1995, and 35% in 1994. There were no significant intersegment sales or transfers during 1996, 1995 and 1994. 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.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 8-K
(a) (1) Independent auditor's report McRae Industries, Inc. and Subsidiaries consolidated financial statements:
Consolidated Balance Sheets as of August 3, 1996 and July 29,
Consolidated Statements of Operations for the Years Ended August 3, 1996, July 29, 1995, and July 30, 1994.
Consolidated Statements of Cash Flow for the Years Ended August 3, 1996, July 29, 1995 and July 30, 1994
Consolidated Statements of Shareholders' Equity for the Years Ended August 3, 1996, July 29, 1995 and July 30, 1994
(2) Financial Statement Schedules:
Schedule II
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated May 10, 1996 and a Form 8-K/A dated June 29, 1996 in connection with its acquisition of American West Trading Company. The Form 8-K/A dated June 29, 1996 includes financial statements of American West Trading Company for the years ended December 31, 1995 and 1994 and pro forma financial information for the nine months ended April 27, 1996 and the twelve months ended July 29, 1995.
(c) Exhibits
---------------------------------------- *Denotes a management contract or compensatory plan or arrangement.
SCHEDULE II.. VALUATION AND QUALIFYING ACCOUNTS McRae Industries, Inc. and Subsidiaries.
(1) Uncollectible accounts written off (2) Payments and/or expenses charged to operations
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, 1996 By: /s/ B. J. McRae --------------------- B.J 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/ B. J. McRae October 31, 1996 - --------------- President and Director (Principal Executive Officer)
/s/ George M. Bruton - -------------------- George M. Bruton October 31, 1996 Director
/s/ Hilton Cochran - ----------------- Hilton Cochran October 31, 1996 Director
/s/ James W. McRae - ------------------ James W. McRae October 31, 1996 Vice President, Secretary and Director
/s/ Victor A. Karam - ------------------ Victor A. Karam October 31, 1996 Vice President of Footwear and Director
/s/ D. Gary McRae - ----------------- D. Gary McRae October 31, 1996 First Vice President, Treasurer and Director
/s/ Harold W. Smith - ------------------- Harold Smith October 31, 1996 Vice President of McRae Graphics and Director
/s/ Marvin G. Kiser, Sr. - ------------------------ Marvin G. Kiser October 31, 1996 Controller (Principal Financial and Accounting Officer)
Exhibit Index