Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 2002
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to
----------
Commission file number 1-14130
-------
MSC INDUSTRIAL DIRECT CO., INC.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-3289165
-------- ----------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
75 MAXESS ROAD, MELVILLE, NEW YORK 11747
----------------------------------------
(Address of Principal Executive Offices)
(516) 812-2000
--------------
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
- ------------------- ------------------------------------
CLASS A COMMON STOCK, PAR VALUE $.001 THE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 22, 2002, 34,282,545 shares of Class A Common Stock and
32,137,294 shares of Class B Common Stock of the registrant were outstanding and
the aggregate market value of Class A Common Stock held by non-affiliates of the
registrant was approximately $555,034,404.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Proxy Statement for its 2003 annual meeting of
stockholders is hereby incorporated by reference into Part III of this Form
10-K.
MSC INDUSTRIAL DIRECT CO., INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED AUGUST 31, 2002
ITEMS IN FORM 10-K
------------------
Page
----
ITEM 1. BUSINESS...........................................................1
ITEM 2. PROPERTIES.........................................................9
ITEM 3. LEGAL PROCEEDINGS.................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS...................................10
ITEM 6. SELECTED FINANCIAL DATA...........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................46
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................47
ITEM 11. EXECUTIVE COMPENSATION............................................47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................47
ITEM 14. CONTROLS AND PROCEDURES...........................................47
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K...........................................48
PART I.
Item 1. BUSINESS.
This Annual Report on Form 10-K (including Item 1("Business") and Item
7("Management's Discussion and Analysis of Financial Condition and Results of
Operations")) contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. Such forward-looking
statements involve known and unknown risks and uncertainties and include, but
are not limited to, statements regarding future events and our plans, goals and
objectives. Such statements are generally accompanied by words such as
"believe," "anticipate," "think," "intend," "estimate," "expect," or similar
terms. Our actual results may differ materially from such statements. Factors
that could cause or contribute to such differences include, without limitation,
changing market conditions, competitive and regulatory matters, the risks of
war, terrorism, and similar hostilities, general economic conditions in the
markets in which the Company operates and availability of acquisition
opportunities. Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, the Company cannot make any assurances that the
results contemplated in such forward-looking statements will be realized. The
inclusion of such forward-looking information should not be regarded as a
representation by the Company or any other person that the future events, plans
or expectations contemplated by the Company will be achieved. Furthermore, past
performance is not necessarily an indicator of future performance.
GENERAL
MSC Industrial Direct Co., Inc. (together with its consolidated
subsidiaries, "MSC" or the "Company" or "we") is one of the largest direct
marketers of a broad range of industrial products to industrial customers
throughout the United States. We distribute a full line of industrial products
intended to satisfy our customers' maintenance, repair and operations ("MRO")
supplies requirements. We offer approximately 500,000 stock-keeping units
("SKUs") through our 4,475 page master catalog, weekly, monthly and quarterly
specialty and promotional catalogs, newspapers and brochures and service our
customers from approximately 90 branch offices and four distribution centers.
Most of our products are carried in stock, and orders for these in-stock
products are typically fulfilled the day on which the order is received.
Our business strategy is to provide an integrated, low cost solution to
the purchasing, management and administration of our customers' MRO needs. We
believe we add value to our customers' purchases by reducing their total MRO
supplies costs, taking into account both the direct cost of products and the
administrative, personnel and financial cost of obtaining and maintaining MRO
supplies. We try to achieve this reduction in MRO supplies costs in the
following manner:
o Our extensive product offerings allow customers to reduce the
administrative burden of dealing with many suppliers for their MRO
needs.
o We guarantee same-day shipping of our core business products,
which enables our customers to reduce their inventory investment
and carrying costs.
o We consolidate multiple purchases into a single order, provide a
single invoice relating to multiple purchases over varying periods
of time and offer direct shipments to specific departments and
personnel within a single facility or multiple facilities,
allowing our customers to reduce administrative paperwork, costs
of shipping and personnel costs related to internal distribution
and purchase order management.
Our customers include a wide range of purchasers of industrial supply
products, from one-person machine shops to Fortune 500 companies. Our core
business focuses on selling relatively higher margin, lower volume products and
had an average order size of approximately $220 in fiscal 2002. We have in
excess of 329,000 combined active customers (companies that have purchased at
least one item during the past 12 months). Our customers select desired products
from MSC's various publications and place their orders by telephone, facsimile,
the Internet or direct computer link.
1
We operate primarily in the United States, with customers in all 50
states, through a network of four regional distribution centers and
approximately 90 branch offices. MSC's distribution centers are located near
Harrisburg, Pennsylvania; Atlanta, Georgia; Elkhart, Indiana and Reno, Nevada.
The strategic locations of MSC's distribution centers allow for next day ground
delivery via low cost ground carriers in 36 states. Our experience has been that
areas accessible by next day ground delivery generate significantly greater
sales than areas where next day ground delivery is not available. Accordingly,
our long-term strategy is to eventually establish additional distribution
centers, supported by local branch offices, to expand our geographic coverage of
next day ground delivery throughout the continental United States.
INDUSTRY OVERVIEW
MSC operates in a large, fragmented industry characterized by multiple
channels of distribution. We believe that there are numerous small retailers,
dealerships and distributors, most of which have annual sales of less than $10
million, that supply a majority of the market. The distribution channels in the
industrial products market include retail outlets, small distributorships,
national, regional and local distributors, direct mail suppliers, large
warehouse stores and manufacturers' own sales forces.
Almost every industrial, manufacturing and service business has an
ongoing need for MRO supplies. We believe that, except in the largest industrial
plants, MRO supplies inventories generally are not effectively managed or
monitored, resulting in higher purchasing costs and increased administrative
burdens. In addition, within larger facilities, such items are frequently stored
in multiple locations, resulting in excess inventories and duplicate purchase
orders. MRO items are also frequently purchased by multiple personnel in
uneconomic quantities and a substantial portion of most facilities' MRO supplies
are "one-time purchases," resulting in higher purchasing costs and time-
consuming administrative efforts by multiple plant personnel.
We believe that the administrative costs associated with placing a
purchase order can be in excess of $100 per order (based on industry estimates).
Awareness of these high costs and purchasing inefficiencies has been driving
large companies to streamline the purchasing process by utilizing a limited
number of suppliers which can provide adequate selection, prompt delivery and
superior customer service. Customized billing practices and report generation
capabilities tailored to customer objectives are also becoming increasingly
important to customers seeking to reduce costs, allowing such customers to
significantly reduce the need for purchasing agents and administrative
personnel. We believe that industry trends and economic pressures have caused
customers to reduce their supplier base and move toward more efficient cost
saving models, such as those offered by premier companies such as MSC.
Despite the inefficiencies of the traditional MRO purchasing process,
long-standing relationships with local retailers and distributors have generally
perpetuated the status quo. Due to limited capital availability, high operating
cost structures and relatively small sales volumes, suppliers to the industrial
market are experiencing increasing pressure to consolidate and curtail services
and certain product lines in order to remain competitive. Even large suppliers
with extensive field sales forces are finding it increasingly difficult to visit
all buyers cost-effectively and provide the support necessary to satisfy
customer demands for control of costs and improved efficiency. We believe that
the relative inability of traditional distribution channels to respond to these
changing industry dynamics has created a continuing opportunity for the growth
of direct marketing organizations such as MSC. As a result of these dynamics, we
have captured an increasing share of sales by providing lower total purchasing
costs, broader product selection and a higher level of service.
We believe that we provide a low cost solution to the purchasing
inefficiencies and high costs described above. Customers that purchase products
from us will generally find that their total purchasing and shipping costs,
inventory investment and carrying costs, internal distribution costs and
administrative inefficiencies are reduced. We try to achieve this through:
o consolidation of multiple sources of supply into fewer suppliers;
o consolidation of multiple purchase orders into a single purchase
order;
o consolidation of multiple invoices into a single invoice;
2
o significant reduction in tracking of invoices;
o significant reduction in stocking decisions;
o reduction of purchases for inventory;
o reduction of paper orders and invoices through our electronic
ordering system; and
o e-commerce capabilities.
BUSINESS STRATEGY
Our business strategy is to provide our customers with a low cost means
for obtaining and maintaining MRO supplies. The strategy includes the following
key elements:
o a broad selection of in-stock products;
o offering both name brand and generic products;
o prompt response and same-day shipping;
o superior, value-added customer service;
o competitive pricing;
o targeted direct mail marketing; and
o a commitment to technological innovation.
BROAD SELECTION OF PRODUCTS. We believe that our ability to offer
customers a broad spectrum of brand name and generic MRO products and a
"good-better-best" product selection alternative has been critical to our
success. We offer similar products with varying degrees of name recognition,
quality and price, thus permitting the customer to choose the appropriate
product based on cost, quality and the customer's specific needs. Our customers
are increasingly purchasing from fewer suppliers to reduce the administrative
burden of ordering from multiple suppliers. By offering for sale approximately
500,000 products, most of which generally are in stock and available for
immediate shipment, we aim to provide a broad range of merchandise in order to
become our customers' preferred supplier of MRO products.
SAME-DAY SHIPPING. Our guaranteed same-day shipping of products results
in delivery the next day or second day for customers in most of the continental
United States. This prompt delivery allows customers to reduce the
administrative burden of dealing with many suppliers and reduces their inventory
investment and carrying costs. We fulfill our same-day shipment guarantee more
than 99.9% of the time. Our experience has been that areas accessible by next
day ground delivery will generate significantly greater sales than areas where
next day ground delivery is not available. The strategic locations of our
distribution centers allow next day ground delivery via low cost ground carriers
in 36 states.
In April of 2002, we established contingency plans for routing our
supply shipments from Pacific Rim countries to the East Coast of the United
States, rather than the West Coast, in order to avoid possible delivery delays
of items imported from these countries. To supplement these measures, delivery
lead times have been modified and are periodically reviewed by our Product and
Logistics teams to coordinate our supply chain and lead times.
SUPERIOR CUSTOMER SERVICE. Customer service is a key element in
becoming a customer's preferred provider of MRO supplies. Our commitment to
customer service is demonstrated by our investment in sophisticated information
systems and extensive training of our associates. Utilizing our proprietary
customer support software,
3
our in-bound telemarketing representatives implement the "one call does it all"
philosophy. Telemarketing representatives are able to inform customers on a real
time basis of the availability of a product, recommend substitute products,
verify credit information, receive special, custom or manufacturer direct
orders, cross-check inventory items using customer product codes previously
entered into our information systems and arrange technical assistance. We
believe that our simple, one-call method of fulfilling all purchasing needs of a
customer through highly-trained customer service representatives, supported by
our proprietary information systems, results in greater efficiency for customers
and increased customer satisfaction. To complement our customer service, we seek
to ease the administrative burdens on our customers by offering customized
billing services, customer savings reports and other customized report features,
electronic data interchange ordering, e-commerce capabilities, bulk discounts
and stocking of specialty items specifically requested by customers.
TARGETED DIRECT MAIL MARKETING STRATEGY. Our primary tool for marketing
and product reference is the annual master catalog containing 4,475 pages and
approximately 500,000 items. In fiscal 2002, our master catalog was supplemented
by approximately 98 specialty and promotional catalogs, brochures and
newspapers, covering such specialty areas as cutting tools, measuring
instruments, tooling components and maintenance and repair, industrial supply,
and hose and tubing. We use our database of approximately 1.3 million companies
with 1.7 million individual contacts, and also purchase mailing lists of
prospective customers, to target the distribution of these various publications
to specific individuals within an organization whose purchasing history or other
criteria suggest receptiveness to mailings of specific publication titles. The
use of specialty and promotional publications, which are produced in-house, has
resulted in increased productivity through lower costs, increased response rates
and more efficient use of advertising space. MSC's publications mailings
increased from 28.8 million in fiscal 2000 to approximately 36.0 million in
fiscal 2002. We intend to continue to improve productivity in our direct
marketing efforts to take advantage of the additional products offered and our
expanded distribution capabilities.
COMMITMENT TO TECHNOLOGICAL INNOVATION. We take advantage of
technological innovations to support growth, improve customer service and to
reduce our operating costs through more effective buying practices, automated
inventory replenishment and efficient order fulfillment operations. MSC's
proprietary software tracks all of the approximately 500,000 SKUs and enables
the customer and the telemarketing representatives to determine the availability
of products in stock on a real-time basis and to evaluate alternative products
and pricing. Our Customer Direct Access Plus System allows a customer to order
products directly, set purchase limits for particular buyers, run customized
reports of purchasing history and select from a variety of billing options. Our
information systems have been designed to enhance inventory management and
turnover, customer service and cost reduction for both MSC and our customers. In
addition to internal and customer information systems, we continually upgrade
our distribution methods and systems to improve productivity and efficiency. We
also provide a comprehensive EDI ordering system to support our customer based
purchase order processing. Since July 2000, MSC has supported MSCDirect.com, a
searchable on-line catalog with electronic ordering capabilities designed to
take advantage of the opportunities created by Internet commerce. The
MSCDirect.com site offers a broad array of products, services, work flow
management tools and related information to meet the needs of customers seeking
to reduce process costs through Internet e-commerce-enabled solutions.
GROWTH STRATEGY
Our objective is to become the preferred supplier of industrial
products for companies throughout the United States. We intend to increase sales
to existing and new customers by:
o increasing the size and diversity of our customer base by
expanding next day ground delivery into new markets, increasing
the circulation of the master catalog and expanding our targeted
mail campaign;
o increasing the number of product lines and SKUs offered;
o continually developing and utilizing extensive e-commerce
capabilities, making it even easier and more appealing to do
business with MSC; and
o increasing the size and improving the productivity of our direct
sales force.
4
INCREASING THE SIZE AND DIVERSITY OF OUR CUSTOMER BASE. One of our
growth strategies is to increase the size and diversity of our customer base.
Our experience has been that sales in areas accessible by next day ground
delivery are significantly greater than in areas with second day delivery.
Long-term, our goal is to eventually open additional distribution centers,
supported locally by branch offices, which will expand our geographic coverage
of next day ground delivery throughout the United States. In November 1999, our
distribution facility located near Reno, Nevada became fully operational and has
enhanced our ability to service the Western United States. In addition, we have
accumulated a buyer database of approximately 1.3 million companies with 1.7
million individual contacts. We utilize empirical information from this database
to prospect for new customers, thereby increasing the circulation of our master
catalog. We supplement our master catalog with direct mailings of specialty and
promotional publications to further increase customer response and product
purchases.
INCREASING THE NUMBER OF PRODUCT LINES AND SKUs. We believe that
continuing to increase the breadth of our product line and providing high levels
of customer service are effective methods of increasing sales to current
customers and attracting new customers. By expanding the product lines and SKUs
offered within existing product categories, we seek to satisfy an increasing
percentage of the supplies purchases of our customers and to attract new
customers. In fiscal 2002, we added approximately 40,000 SKUs and currently have
approximately 500,000 SKUs in total. We generally add SKUs in response to the
feedback we receive from our existing customers.
E-COMMERCE CAPABILITIES. In July 2000, we launched MSCDirect.com, a
proprietary business-to-business horizontal marketplace serving the industrial
market. MSCDirect.com offers its customers full access to our catalog, which
offers approximately 500,000 SKUs, and all online orders are backed by our
same-day shipping guarantee. MSCDirect.com utilizes the same highly trained
sales force and support services as MSC's traditional business, emphasizing
MSC's values of placing customers needs first. It is available 24 hours a day,
seven days a week providing real-time inventory availability, superior search
capabilities, on-line bill payment, delivery tracking status and a number of
other enhancements including work flow management tools. The user-friendly
search engine allows customers to order by description, vendor or brand. We
believe MSCDirect.com is a key component of our strategy to reduce customers'
MRO transaction costs and internal requisition time. The site also allows
customers to control which of their staff are entitled to purchase products
online, how much they are entitled to spend and which staff require secondary
approval. The process is fully automated and integrated into our back-end
systems. Most orders move directly from the customers' desktop to the
distribution center floor, removing human error, reducing handling costs and
speeding up the transaction flow. MSC continues to evaluate our site and solicit
customer feedback, making on-going improvements targeted at allowing
MSCDirect.com to remain one of the premier sites in its marketplace. Our
MSCDirect.com marketing campaign continued in fiscal year 2002 to raise
awareness and drive volume to the website. MSCDirect.com generated revenue of
more than $60 million in fiscal year 2002, a 70% increase over the prior year.
E-commerce portals sell a suite of e-commerce products designed to meet
the needs of businesses seeking reduced costs and increased effectiveness of
their MRO/direct materials process by using Internet-enabled solutions. We have
associations with many of these portals including, among others, Ariba,
Commerce-One, Oracle and I-Procure. We continue to evaluate and expand our
capabilities in these areas, when they can provide value for our customers.
INCREASING THE SIZE AND IMPROVING THE PRODUCTIVITY OF OUR DIRECT SALES
FORCE. We believe that increasing our direct sales force and improving their
productivity will provide value-added services to more of our customers which we
anticipate will increase our sales per customer.
PRODUCTS
We currently offer approximately 500,000 SKUs, representing a broad
range of metal working and MRO product lines that include: cutting tools;
measuring instruments; tooling components; fasteners; flat stock, raw materials;
abrasives; machinery hand and power tools, safety, janitorial, plumbing,
material handling, power transmission, electrical supplies as well as other
categories. We attribute a portion of our sales growth to the total number of
SKUs offered, which helps our customers reduce the number of suppliers they use
to meet their MRO needs. In this regard, we intend to continue to add new
products to our existing product categories. Our offering of specific products
from multiple manufacturers at different prices and quality levels permits us to
offer a "good-better-best" product selection alternative. This alternative
provides similar product offerings with varying degrees
5
of name recognition, quality and price enabling the customer to choose the
appropriate product for a specific task on the most cost-effective basis. MSC
seeks to distinguish itself from its competition through offering both name
brand and generic products and significant depth in its core product lines while
maintaining competitive pricing.
Our telemarketing representatives and technical support personnel are
trained to assist customers in making intelligent cost-saving purchases. We
believe this approach results in significant amounts of repeat business and is
an integral part of our strategy to reduce our customers' industrial supply
costs.
We purchase substantially all of our products directly from
approximately 2,600 suppliers. We are not materially dependent on any one
supplier or small group of suppliers. No one single supplier accounted for more
than 5% of our total purchases in fiscal 2002. Generic products are manufactured
by third parties to our specifications.
DISTRIBUTION CENTERS
A significant number of our products are carried in stock, and
approximately 85% of sales are fulfilled from the distribution centers or branch
offices. Certain products, such as specialty or custom items and some very large
orders, are shipped directly from the manufacturer. Our distribution centers are
managed via computer-based SKU tracking systems and radio frequency devices that
facilitate the location of specific stock items to make the picking process more
efficient. We have invested significant resources in technology and automation
to increase efficiency and reduce costs, and continually monitor our order
fulfillment process. We currently utilize four distribution centers for product
shipment located near Harrisburg, Pennsylvania; Atlanta, Georgia; Elkhart,
Indiana and Reno, Nevada.
SALES AND MARKETING
Our customers include a broad range of purchasers of industrial supply
products, from one-man machine shops to Fortune 500 companies. Our core business
focuses on selling relatively higher margin, lower volume products and has an
average order size of approximately $220 in fiscal 2002. We market to small,
medium and large companies in a wide range of sectors, including but not limited
to durable goods manufacturing (which accounted for 75% of the Company's revenue
in fiscal 2002), education, government and health care. We also have a national
account program designed to address the needs of Fortune 500 customers.
One of our subsidiaries also offers wholesalers and other distributors
the ability to create their own customized mail order catalog by offering to MSC
customers turnkey marketing programs, including promotional mailers. Any
resulting orders are serviced directly by MSC, which stocks and ships the
products under the customer's program. Another division of MSC offers a line of
lower priced products to the budget-oriented customer.
We have in excess of 329,000 combined active customers (companies which
have purchased at least once during the past 12 months). Typically, a customer's
industrial supply purchases are managed by several buyers responsible for
different categories of products. We target these individual buyers within an
organization and distribute publications corresponding to the product categories
for which such buyers are responsible. We are able to implement this directed
marketing strategy because of the depth of customer information contained in our
information systems databases. Our customers select desired products from our
various publications and place their orders by telephone, facsimile, internet or
direct computer link.
We have invested significant resources in developing an extensive
customer and prospect database. This database is a key component of our growth
strategy. The customer and prospect database includes detailed information,
including company size, number of employees, industry, various demographic and
geographic characteristics and personal purchase histories (catalog preference,
product preference, order value). We believe that the variety and depth of
information on our customers and prospects offers us a significant competitive
advantage in increasing sales to existing customers and attracting new
customers.
6
We rely on approximately 580 in-bound telemarketing representatives at
our call centers, distribution centers and branch offices, who are responsible
for substantially all customer contacts and order entries. These telemarketing
representatives are highly trained individuals who build relationships with
customers, assist customers in reducing costs, provide technical support,
coordinate special orders and shipments with vendors and update customer account
profiles in our information systems databases. Our "one call does it all"
philosophy is predicated on the ability of the telemarketing representative,
utilizing our information systems' comprehensive databases as a resource, to
respond effectively to the customer's needs. When a customer places a call to
MSC, the telemarketing representative taking the call has immediate access to
that customer's company and specific buyer profile, as well as inventory levels
by distribution center on all of SKUs offered by MSC. The customer's profile
includes historical and current billing information, historical purchasing
information and plant and industry information.
MSC's telemarketing representatives at our call centers undergo an
intensive two-week training course, are required to attend regular on-site
training seminars and workshops, and are monitored and evaluated at regular
intervals. Additionally, the telemarketing representatives are divided into
teams that are evaluated monthly and monitored on a daily basis by team
supervisors. Telemarketing representatives receive technical training regarding
various products from vendors and in-house training specialists. We also
maintain a separate technical support group dedicated to answering specific
customer inquiries and assisting customers with the operation of products and
finding low cost solutions to manufacturing problems.
We also employ a direct sales force of approximately 450 sales
representatives. These sales representatives are responsible for increasing
sales per customer and servicing existing customers.
BRANCH OFFICES
We currently operate approximately 90 branch offices located in 36
states. These branch offices are staffed with highly trained associates and have
access to the same information systems as the telemarketing representatives
mentioned above. We have experienced higher sales growth and market penetration
in areas where we have established a branch office and believe our branch
offices are critical to the success of our business strategy.
PUBLICATIONS
Our primary reference tool is our annual 4,475 page master catalog,
which is supported by specialty and promotional catalogs, brochures and
newspapers. We use specialty and promotional publications to target customers in
specific areas, such as welding, electrical supply and hose and tubing. We
distribute specialty and promotional catalogs, brochures and newspapers based on
information in our databases and purchased mailing lists to customers whose
purchasing history or profile suggests that they are most likely to purchase
according to specific product categories or product promotions. Consequently,
specialty catalogs offer a more focused selection of products at a lower catalog
production cost due to increased response rates and more efficient use of
advertising space.
MSC's in-house marketing staff designs and produces all of our
catalogs, brochures and newspapers. Each publication is printed with
photographs, contains detailed product descriptions and includes a toll-free
telephone number to be used by customers to place a product order. In-house
production helps reduce overall expense and shortens production time, allowing
us the flexibility to alter our product offerings and pricing and refine our
catalog, brochure and newspaper formats more quickly.
As reflected in the following table, the number of publication titles
has remained approximately 100 in the last three fiscal years. The number of
pieces mailed has increased from approximately 28.8 million in fiscal 2000 to
approximately 36.0 million in fiscal 2002.
7
Fiscal Year Ended
August 26, September 1, August 31,
------------------------------------------
2000 2001 2002
(52 weeks) (53 weeks) (52 weeks)
-------- -------- --------
Number of publication titles 100 105 98
Number of publications mailed 28,800,000 37,700,000 36,000,000
CUSTOMER SERVICE
One of our goals is to make purchasing our products as convenient as
possible. Since a majority of customer orders are placed by telephone, the
efficient handling of calls is an extremely important aspect of our business.
Order entry and fulfillment occurs at each of our branches and main call centers
located at our four operating distribution centers. Calls are received by
telemarketing representatives who utilize on-line terminals to enter customer
orders into computerized order processing systems. Our telephone ordering system
is flexible and, in the event of a local or regional breakdown, can be re-routed
to alternative locations. When an order is entered into the system, a credit
check is performed, and, if the credit is approved, the order is electronically
transmitted to the distribution center closest to the customer and a packing
slip is printed for order fulfillment. We believe that our relationships with
all our carriers are satisfactory. We guarantee same-day shipping of in-stock
products if the order is received prior to regional cut-off times and most
customers receive their orders (other than custom items and large industrial
items shipped directly by the manufacturer) within one or two business days of
the order date. Customers are invoiced for merchandise, shipping and handling
promptly after shipment. Back order levels are, and historically have been,
immaterial.
INFORMATION SYSTEMS
Our proprietary information systems allow centralized management of key
functions, including communication links between distribution centers, inventory
and accounts receivable management, purchasing, pricing, sales and distribution,
and the preparation of daily operating control reports that provide concise and
timely information regarding key aspects of our business. These proprietary
information systems enable us to ship to customers on a same-day basis, respond
quickly to order changes, provide a high level of customer service, achieve cost
savings, deliver superior customer service and manage our operations centrally.
Our proprietary information systems are also a key component of our e-commerce
capabilities. See "E-commerce capabilities" above.
Certain of our information systems operate over a wide area network and
are real-time information systems that allow each distribution center and branch
office to share information and monitor daily progress relating to sales
activity, credit approval, inventory levels, stock balancing, vendor returns,
order fulfillment and other measures of performance. We maintain a sophisticated
buying and inventory management system that monitors substantially all of our
SKUs and automatically purchases inventory from vendors for replenishment based
on projected customer ordering models. We also maintain an electronic data
interchange (EDI) purchasing program with our vendors with the objective of
allowing us to place orders more efficiently, reduce order cycle processing
time, and increase the accuracy of orders placed.
In addition to developing the proprietary computer software programs
for use in the telemarketing and distribution operations, we have also developed
a proprietary MRO management system, the Customer Direct Access Plus System or
"CDA." CDA is designed to automate, simplify and control the administration and
management of MRO purchasing by giving the customer direct access to our
computers for automatic product selection, customization of purchasing
parameters, a variety of report generation and product tracking capabilities,
and cross-referencing capability to a customer's own product stock numbers. We
also provide a comprehensive EDI ordering system to support our customer based
purchase order processing. In addition, we have developed a Windows(R)-based
CD-ROM electronic catalog package and we provide product information and
ordering capabilities on the Internet.
8
We run our systems on an AS400 platform and utilize disaster recovery
techniques and procedures, which we believe are adequate to fulfill our needs
and are consistent with this type of equipment. We believe that planned
enhancements and upgrades to the next generation of our existing operating
platforms will be sufficient to sustain our present operations and our
anticipated growth for the foreseeable future.
COMPETITION
The MRO supply industry is a large, fragmented industry that is highly
competitive. We face competition from traditional channels of distribution such
as retail outlets, small dealerships, regional or national distributors
utilizing direct sales forces, and manufacturers of MRO supplies and large
warehouse stores and larger direct mail distributors. We believe that sales of
MRO supplies will become more concentrated over the next few years, which may
make the industry more competitive. Certain of our competitors offer a greater
variety of products and have substantially greater financial resources than us.
In the industrial products market, customer purchasing decisions are primarily
based on one or more of the following criteria: price, product selection,
product availability, level of service and convenience. We believe we compete
effectively on all such criteria.
ASSOCIATES
As of October 16, 2002, we employed approximately 2,940 associates,
including approximately 2,830 full-time and approximately 110 part-time
associates. No associate is represented by a labor union. We consider our
relationships with associates to be good and have experienced no work stoppages.
RESTATEMENT
The accompanying financial statements have been restated to adjust for
the effects of incorrect accounting for inventory purchases, reserves, and to
adjust for accruals between periods primarily related to estimates for bonuses.
Accordingly, the previously reported consolidated financial statements for the
first three quarters of fiscal 2002 and for the fiscal years 2001, 2000, 1999
and 1998 have been restated. See Item 6: Selected Financial Data, Note 12 to
Consolidated Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Item 2. PROPERTIES.
We have distribution centers in the following locations:
Approx. Operational
Location Sq. Ft. Date
-------------------- ------- ---------------
Atlanta, Georgia (1) 378,000 October 1990
Elkhart, Indiana (2) 392,000 March 1996
Harrisburg, Pennsylvania (2) 637,000 January 1997
Reno, Nevada (2) 307,000 November 1999
(1) The related party lease for this facility expires on July 31, 2010.
(2) This facility is owned by MSC.
We maintain approximately 90 branch offices located in 36 states, ranging in
size from 670 to 20,500 square feet. The leases for these branch offices will
expire at various periods between October 2002 and July 2012. The aggregate
annual lease payments on these properties in fiscal 2002 was approximately
$5,055,000.
We maintain our headquarters at a 170,000 square foot facility that we own in
Melville, New York.
9
We believe that our facilities will be adequate for our current needs and that
for the foreseeable future, suitable additional space will be available as
needed.
Item 3. LEGAL PROCEEDINGS.
On August 8, 2002, the Company, its directors and certain of its
officers were sued in the United States District Court for the Eastern District
of New York in an action entitled Thomas Nunziata vs. MSC Industrial Direct Co.,
Inc. et. al (CV No. 02 4422). Plaintiff, on behalf of a class of the Company's
stockholders, seeks unspecified damages based on his allegations arising from
the Company's announcement that it would restate its consolidated financial
statements for fiscal years 1999 through 2001 and the first three quarters of
fiscal 2002. Plaintiff alleges that during the periods affected by the
restatement, the Company, its directors and certain of its officers violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder, by materially misleading the investing public by making
false statements in order to inflate the price of the Company's common stock. On
August 14, 2002, the Company and certain of its officers and directors were sued
in the United States District Court for the Eastern District of New York in an
action entitled Sandra Joan Malin Revocable Trust vs. MSC Industrial Direct Co.,
Inc. et al. (CV No. 02 4503). The allegations in these matters were
substantially similar to those made in the Nunziata action. On September 11,
2002, these actions were consolidated under the caption In re MSC Industrial
Direct Co., Inc. Securities Litigation, (CV No. 02 4422). A lead plaintiff,
International Association of Machinists National Pension Fund, was named on Nov.
6, 2002, and such lead plaintiff is scheduled to file a consolidated amended
complaint on December 6, 2002. Any other actions now pending or later filed in
the Eastern District of New York which arise out of or are related to the same
facts as alleged in the above-identified cases shall also be consolidated. The
Company intends to defend this action vigorously. See Note 13 of the Notes to
the Consolidated Financial Statements.
There are no other material legal proceedings pending against MSC.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MSC's Class A Common Stock is traded on the New York Stock Exchange
(the "NYSE") under the symbol "MSM." MSC's Class B Common Stock is not traded
over any public market.
The following table sets forth the range of the high and low closing
sales prices as reported by the NYSE for the period from August 26, 2000 to
August 31, 2002.
Price of Class A
Fiscal Year Ended August 31, 2002 Common Stock
- --------------------------------- -------------------------
High Low
------------ ----------
First Quarter........................................ $19.07 $14.50
Second Quarter....................................... 21.55 18.23
Third Quarter........................................ 23.90 17.80
Fourth Quarter....................................... 20.00 10.51
Fiscal Year Ended September 1, 2001
- -----------------------------------
First Quarter........................................ $17.50 $12.13
Second Quarter....................................... 18.75 15.00
10
Third Quarter........................................ 17.80 14.36
Fourth Quarter....................................... 18.99 15.20
On November 22, 2002, the last reported sales price for MSC's Class A
Common Stock on the NYSE was $16.19 per share.
The approximate number of holders of record of MSC's Class A Common
Stock as of November 22, 2002 was 660. The number of holders of record of MSC's
Class B Common Stock as of November 22, 2002 was 11.
MSC has not declared cash dividends on the Class A Common Stock or the Class B
Common Stock and does not have any plans to pay any cash dividends on either
such class of stock in the foreseeable future. The Board of Directors of MSC
anticipates that any earnings that might be available to pay dividends on the
Class A Common Stock and the Class B Common Stock will be retained to finance
the business of MSC and its subsidiaries. The ability of the Company to pay cash
dividends is subject to certain restrictions contained in its revolving credit
agreement.
11
EQUITY COMPENSATION PLAN INFORMATION
Information for our equity compensation plans in effect as of August
31, 2002 is as follows (amounts in thousands, except per share amounts)
====================================================================================================================
(a) (b) (c)
====================================================================================================================
Number of securities
to be issued upon Weighted-average Number of securities remaining available
Plan category exercise of exercise price of for future issuance under equity
outstanding options, outstanding options, compensation plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
====================================================================================================================
Equity compensation
plans approved by 7,347,000 $14.00 4,390,000
security holders
====================================================================================================================
Equity compensation
plans not approved by - - -
security holders
====================================================================================================================
Total 7,347,000 $14.00 4,390,000
====================================================================================================================
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected financial information is qualified by reference
to, and should be read in conjunction with, the Company's consolidated financial
statements and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein. The
selected consolidated income statement data for the fiscal years ended August
26, 2000, September 1, 2001, and August 31, 2002 and the selected consolidated
balance sheet data as of September 1, 2001 and August 31, 2002 are derived from
MSC's audited consolidated financial statements which are included elsewhere
herein which in the case of fiscal years 2000 and 2001 have been restated. See
Note 12 to consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The selected
consolidated income statement data for the fiscal years ended August 29, 1998
and August 28, 1999 and the selected consolidated balance sheet data as of
August 29, 1998 and August 28, 1999 are derived from MSC's unaudited
consolidated financial statements not included herein and which in the case of
fiscal years 1998 and 1999 have been restated based on the Company's best
estimates of the effect on fiscal years 1998 and 1999 of certain adjustments
arising in connection with the unaudited restatement of fiscal 1999 and the
re-audit and restatement of fiscal 2000 and subsequent years. In May 2002, the
Company dismissed Arthur Andersen LLP and retained Ernst & Young LLP as the
Company's independent public accountants. As a result of the Company's
restatement of consolidated financial statements for fiscal years 1999, 2000 and
2001, Arthur Andersen has stated that its previously issued audit reports with
respect to those periods should not be relied upon. In addition, the Company's
Forms 10-Q previously filed during such fiscal years should not be relied upon.
See Item 9, "Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure." See also Note 12 to the Company's consolidated financial
statements. All information presented herein reflects the restatement.
12
Fiscal Year Ended
-------------------------------------------------------------------------------
August 29, August 28, August 26, September 1, August 31,
1998 1999 2000 2001 2002
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
(As restated) (As restated) (As restated) (As restated)
(Unaudited) (Unaudited)
--------------- -------------- --------------- -------------- -----------------
(In thousands, except per share data)
CONSOLIDATED INCOME STATEMENT DATA:
Net sales $614,501 $683,420 $831,294 $869,231 $793,976
Gross profit 269,463 288,936 333,692 375,140 346,160
Operating expenses 190,657 211,875 251,665 288,744 286,185
Income from operations 78,806 77,061 82,027 86,396 59,975
Income taxes 31,943 30,037 30,680 32,834 23,773
Net income 48,927 46,003 46,166 39,905 36,415
Net income per common share:
Basic .72 .69 .69 .59 .53
Diluted .71 .67 .68 .57 .51
Weighted average common shares outstanding:
Basic 67,756 67,056 67,215 68,198 68,918
Diluted 68,964 68,317 68,203 69,449 70,783
SELECTED OPERATING DATA:(1)
Active customers(2) 178 254 292 315 329
Number of SKUs 372 407 450 500 500
Orders entered 3,222 3,429 3,703 3,985 3,721
Number of publication titles (not in thousands) 80 90 100 105 98
Number of publications mailed 15,900 22,800 28,800 37,700 36,000
CONSOLIDATED BALANCE SHEET DATA (AT
PERIOD END):
Working capital $187,465 $248,070 $290,829 $281,673 $299,260
Total assets 401,702 514,384 576,609 553,317 562,948
Short-term debt 800 306 244 214 213
Long-term debt, net of current portion 2,430 69,468 68,398 1,517 1,308
Shareholders' equity 325,494 356,492 415,805 466,143 474,679
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General."
(2) Effective August 28, 1999 includes active customers of Enco
Manufacturing Co, Inc. a wholly owned subsidiary of the Company.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESTATEMENT
The accompanying financial statements have been restated to adjust for
the effects of incorrect accounting for inventory purchases, reserves, and to
adjust for accruals between periods primarily related to estimates for bonuses.
Accordingly, the previously reported consolidated financial statements for the
first three quarters of fiscal 2002 and for the fiscal years 2001, 2000, 1999
and 1998 have been restated (the "Restatement"). The annual impact of the
Restatement applies to prior periods as follows:
For the first three quarters of fiscal 2002, gross profit decreased to
$258.1 million from $258.7 million, operating expenses increased to $213.4
million from $213.1 million, net income decreased to $27.5 million from $28.0
million and diluted net income per share decreased to $.39 per share from $.40
per share, each as compared to the amounts previously reported by the Company.
For fiscal 2001, gross profit increased to $375.1 million from $372.8
million, operating expenses increased to $288.7 million from $285.3 million, net
income decreased to $39.9 million from $40.5 million and diluted net income per
share decreased to $.57 per share from $.58 per share, each as compared to the
amounts previously reported by the Company.
For fiscal 2000, gross profit decreased to $333.7 million from $344.8
million, operating expenses increased to $251.7 million from $251.5 million, net
income decreased to $46.2 million from $52.9 million and diluted net income per
share decreased to $.68 per share from $.78 per share, each as compared to the
amounts previously reported by the Company.
For fiscal 1999, gross profit decreased to $288.9 million from $293.6
million, net income decreased to $46.0 million from $48.9 million and diluted
net income per share decreased to $.67 per share from $.72 per share, each as
compared to the amounts previously reported by the Company.
For fiscal 1998, operating expenses decreased to $190.7 million from
$193.4 million, net income increased to $48.9 million from $47.3 million and
diluted net income per share increased to $.71 per share from $.69 per share,
each as compared to the amounts previously reported by the Company.
As a result of revisions to years prior to our fiscal 1998 financial
statements, the Company has increased its retained earnings and shareholders'
equity as of the beginning of fiscal 1998 by approximately $2.1 million.
We have restated the results for fiscal years 1998 and 1999, on an
unaudited basis, for comparative purposes only. See "Item 6: Selected Financial
Data".
14
FISCAL 2002
(DOLLARS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Income
Statement Data Quarter ended June 1, 2002 Quarter ended March 2, 2002 Quarter ended December 1, 2001
- --------------------------------------------------------------------------------------------------------------------------
(As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported)
- --------------------------------------------------------------------------------------------------------------------------
Net Sales $208,592 $208,592 $194,791 $194,791 $188,852 $188,852
- --------------------------------------------------------------------------------------------------------------------------
Cost of Goods Sold 117,888 117,731 109,674 109,461 106,584 106,373
- --------------------------------------------------------------------------------------------------------------------------
Gross Profit 90,704 90,861 85,117 85,330 82,268 82,479
- --------------------------------------------------------------------------------------------------------------------------
Operating Expenses 72,713 72,589 71,387 71,264 69,340 69,217
- --------------------------------------------------------------------------------------------------------------------------
Income from
Operations 17,991 18,272 13,730 14,066 12,928 13,262
- --------------------------------------------------------------------------------------------------------------------------
Other Income 280 277 281 281 182 182
- --------------------------------------------------------------------------------------------------------------------------
Income before
Provision for
Income Taxes 18,271 18,549 14,011 14,347 13,110 13,444
- --------------------------------------------------------------------------------------------------------------------------
Provision for
Income Taxes 7,217 7,326 5,534 5,667 5,178 5,310
- --------------------------------------------------------------------------------------------------------------------------
Net Income 11,054 11,223 8,477 8,680 7,932 8,134
- --------------------------------------------------------------------------------------------------------------------------
Basic EPS .16 .16 .12 .13 .12 .12
- --------------------------------------------------------------------------------------------------------------------------
Diluted EPS .15 .16 .12 .12 .11 .12
- --------------------------------------------------------------------------------------------------------------------------
FISCAL 2001
(DOLLARS IN THOUSANDS)
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated Income Quarter ended Quarter ended Quarter ended Quarter ended
Statement Data September 1, 2001 May 26, 2001 February 24, 2001 November 25, 2000
- ----------------------------------------------------------------------------------------------------------------------------------
(As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Sales $207,923 $207,923 $216,335 $216,335 $223,089 $223,089 $221,884 $221,884
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of Goods
Sold 117,221 117,733 122,204 122,786 126,825 127,315 127,841 128,598
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 90,702 90,190 94,131 93,549 96,264 95,774 94,043 93,286
- -----------------------------------------------------------------------------------------------------------------------------------
Operating
Expenses 73,680 72,828 73,010 72,158 71,646 70,794 70,408 69,556
- -----------------------------------------------------------------------------------------------------------------------------------
Income from
Operations 17,022 17,362 21,121 21,391 24,618 24,980 23,635 23,730
- -----------------------------------------------------------------------------------------------------------------------------------
Other Expense (345) (345) (11,026) (11,026) (1,064) (1,064) (1,222) (1,222)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before
Provision for
Income Taxes 16,677 17,017 10,095 10,365 23,554 23,916 22,413 22,508
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for
Income Taxes 6,672 6,807 7,775 7,883 9,422 9,567 8,965 9,003
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income 10,005 10,210 2,320 2,482 14,132 14,349 13,448 13,505
- -----------------------------------------------------------------------------------------------------------------------------------
Basic EPS .15 .15 .03 .04 .21 .21 .20 .20
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted EPS .14 .15 .03 .04 .20 .21 .20 .20
- -----------------------------------------------------------------------------------------------------------------------------------
The effects of these adjustments on the accompanying consolidated
financial statements are presented in Note 12 to the Consolidated Financial
Statements.
15
GENERAL
Our objective is to become the preferred supplier of industrial
products for companies throughout the United States. We intend to increase sales
to existing and new customers by:
o increasing the size and diversity of our customer base by
expanding next day ground delivery into new markets, increasing
the circulation of the master catalog and expanding our targeted
mail campaign;
o increasing the number of product lines and SKUs offered;
o continually developing and utilizing extensive e-commerce
capabilities, making it even easier and more appealing to do
business with MSC; and
o increasing the size and improving the productivity of our direct
sales force.
In the future, we intend to take advantage of the additional products
offered and our expanded distribution capabilities by further increasing our
direct marketing efforts; however, the costs associated with our direct
marketing program will be incurred substantially in advance of increased sales
and may negatively impact operating margins in the short term. Such costs are
expected to be offset, in part, by increases in vendor funded co-op payments
which will offset a portion of the catalog and mailing expenses. There can be no
assurance that continued expansion of our direct mail marketing program will
result in new customers or an increase in sales from existing customers.
RESULTS OF OPERATIONS
The following table summarizes MSC's historical consolidated results of
operations as a percentage of net sales for the three most recent fiscal years.
The discussion below of the Company's Results of Operations also gives effect to
the Restatement. See Note 12 to the Consolidated Financial Statements.
Fiscal Year Ended
-----------------
August 26, 2000 September 1, 2001* August 31, 2002
--------------- ------------------ ---------------
(As Restated) (As Restated)
------------- -------------
Net sales (dollars in thousands).......... $831,294 $869,231 $793,976
======== ======== ========
Net sales................................. 100.0% 100.0% 100.0%
Gross profit.............................. 40.1 43.2 43.6
Operating expenses........................ 30.3 33.2 36.0
Income from operations.................... 9.9 9.9 7.6
Net income................................ 5.6 4.6 4.6
* 53 weeks
FISCAL YEAR ENDED AUGUST 31, 2002 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 1, 2001
NET SALES decreased by $75.2 million, or 8.7%, to $794.0 million during
fiscal 2002 from $869.2 million in fiscal 2001. This decrease was primarily
attributable to a decline in sales to existing customers who were negatively
affected by weakness in the industrial sector, the events of September 11th and
the inclusion of an extra week in fiscal 2001, (the Company's fiscal years
contain either 52 or 53 weeks). Average daily sales declined slightly in fiscal
2002 as compared to fiscal 2001.
16
GROSS PROFIT decreased by $28.9 million, or 7.7%, to $346.2 million
during fiscal 2002 from $375.1 million in fiscal 2001. The dollar decrease in
gross profit was due to the aforementioned net sales reduction. As a percentage
of net sales, gross profit increased from 43.2% to 43.6%, primarily as a result
of a favorable change in selling price product mix and the success of the
Company's efforts to increase gross profit margins with new and existing
customers.
OPERATING EXPENSES decreased by $2.5 million, or 0.9%, to $286.2
million during fiscal 2002 from $288.7 million in fiscal 2001. The decrease in
operating expenses in dollars was a result of decreased amortization of goodwill
expense, cost reduction programs initiated in fiscal 2002 and a decline in
volume related variable expenses. These expenses were partially offset by the
increase in payroll and benefit related costs as compared to fiscal 2001. In
addition fiscal 2001 had contained 53 weeks of operating expenses, as discussed
above. As a percentage of net sales, operating expenses increased from 33.2% to
36.0%, primarily the result of the distribution of fixed expenses over a
relatively lower net sales base. Effective at the beginning of fiscal 2002, the
Company adopted SFAS No. 142. In accordance with this standard, amortization
expense on goodwill in the amount of approximately $1.8 million was not required
to be recorded and is not included in operating expenses in fiscal 2002 as
compared to the amount recorded in fiscal 2001.
INCOME FROM OPERATIONS decreased by $26.4 million, or 30.6%, to $60.0
million during fiscal 2002 from $86.4 million in fiscal 2001. The decrease was
primarily attributable to the decrease in net sales described above, although
results were favorably impacted by the increased gross profit margins described
above.
INTEREST INCOME (EXPENSE), NET. Net interest income was $1.0 million in
fiscal 2002 compared to net interest expense of $3.5 million in fiscal 2001. The
change from net interest expense to net interest income reflects the Company's
repayment of almost all of its outstanding debt during fiscal 2001. As a result,
the Company now has net interest income in fiscal 2002, resulting from invested
cash and cash equivalents.
PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS. In fiscal
years 2002 and 2001, the Company recorded an impairment charge of $0.7 million
and $10.3 million, respectively, related to the impairment of the Company's
minority investments in several online MRO businesses. There is no remaining net
carrying value of these investments as of August 31, 2002.
PROVISION FOR INCOME TAXES. The effective tax rate was approximately
39.5% and 45.1% for fiscal 2002 and fiscal 2001, respectively. The decrease in
the effective tax rate is a direct result of limited tax benefits from the
Internet investment impairment charge recorded in fiscal 2001. Excluding the
effect of this impairment charge, the effective tax rate is approximately 39.5%
and 40.0% for fiscal 2002 and fiscal 2001, respectively.
NET INCOME. Net income decreased by $3.5 million, or 8.8%, to $36.4
million in fiscal 2002 from $39.9 million in fiscal 2001. Diluted earning per
share were $.51 and $.57 for fiscal 2002 and fiscal 2001, respectively. Without
taking into account the impairment charge recorded on the Company's minority
investment in several online MRO businesses net income would have been $36.8
million or $.52 per diluted share in fiscal 2002 as compared to $49.8 million or
$.72 per diluted share in fiscal 2001. The factors which affected net income and
diluted earnings per share have been discussed above.
FISCAL YEAR ENDED SEPTEMBER 1, 2001 COMPARED TO FISCAL YEAR ENDED
AUGUST 26, 2000
NET SALES increased by $37.9 million, or 4.6%, to $869.2 million during
fiscal 2001 from $831.3 million in fiscal 2000. This increase was primarily
attributable to an increase in the number of combined active customers
(increased approximately 4.4% in fiscal 2001, as compared to fiscal 2000) and
the inclusion of an extra week in fiscal 2001, (the Company's fiscal years
contain either 52 or 53 weeks). The increase in sales to new and certain
existing customers offset the fiscal 2001 sales decrease from certain other
existing customers, which resulted from the progressively slowing industrial
sector.
GROSS PROFIT increased by $41.4 million, or 12.4%, to $375.1 million
during fiscal 2001 from $333.7 million in fiscal 2000. The dollar increase in
gross profit was due to the aforementioned increase in net sales. As a
17
percentage of net sales, gross profit increased from 40.1% to 43.2%. The
increase in gross profit as a percentage of net sales resulted from a favorable
change of product mix and the success of the Company's efforts to increase
margins with new and existing customers.
OPERATING EXPENSES increased by $37.0 million, or 14.7%, to $288.7
million during fiscal 2001 from $251.7 million in fiscal 2000. As a percentage
of net sales, operating expenses increased from 30.3% to 33.2%. The increases in
operating expenses in dollars and as a percentage of net sales were primarily
attributable to the costs associated with a significant increase in the
Company's sales force, increased advertising costs, higher depreciation expense
and the inclusion of an extra week in fiscal 2001.
INCOME FROM OPERATIONS increased by $4.4 million, or 5.4%, to $86.4
million during fiscal 2001 from $82.0 million in fiscal 2000. The increase was
primarily attributable to an increase in gross profit margin, offset in part by
an increase in operating expenses.
INTEREST EXPENSE decreased by $1.3 million to $3.9 million in fiscal
2001 from $5.2 million in fiscal 2000. The decrease was primarily attributable
to lower long-term notes payable borrowings, resulting from increased cash flows
from operations, which was used to pay down debt.
PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS of
approximately $10.3 million relates to the impairment charge recorded on the
Company's unconsolidated minority investments in several online MRO businesses.
The remaining net book value of these investments as of September 1, 2001 is
approximately $0.7 million.
PROVISION FOR INCOME TAXES. The effective tax rate was approximately
45.1% and 40.0% for fiscal 2001 and fiscal 2000, respectively. The increase in
the effective tax rate is a direct result of limited tax benefits available from
the impairment charge recorded on the Company's Internet investments, as
discussed above. Accordingly, the Company's effective tax rate is significantly
higher than in prior periods. Excluding the effect of this impairment charge,
the effective tax rate is approximately 40.0% for both periods.
NET INCOME decreased by $6.3 million, or 13.6%, to $39.9 million in
fiscal 2001 from $46.2 million in fiscal 2000. This decrease is primarily the
result of the impairment charge recorded on the Company's Internet investments,
partially offset by an increase in income from operations explained above.
Without taking into account the impairment charge recorded on investments
described above, net income would have increased by approximately $3.6 million,
or 7.8%, to $49.8 million.
18
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth unaudited financial data for each of
MSC's last eight fiscal quarters. See Note 12 to the Consolidated Financial
Statements.
Year Ended August 31, 2002 (as restated
Year Ended September 1, 2001(as restated)* for the first three quarters)
------------------------------------------ ---------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
(Unaudited)
CONSOLIDATED INCOME STATEMENT
DATA:
Net sales.............. $221,884 $223,089 $216,335 $207,923 $188,852 $194,791 $208,592 $201,741
Gross profit........... 94,043 96,264 94,131 90,702 82,268 85,117 90,704 88,071
Income from operations. 23,635 24,618 21,121 17,022 12,928 13,730 17,991 15,326
Net income............. 13,448 14,132 2,320 (a) 10,005 7,932 8,477 11,054 8,952
Net income per share:
Basic............... .20 .21 .03 (a) .15 .12 .12 .16 .13
Diluted............. .20 .20 .03 (a) .14 .11 .12 .15 .13
(a) During fiscal 2001, the Company determined that its ability to
ultimately recover the value of its investments in four privately held
Internet startup companies was significantly impaired. Pursuant to the
Company's evaluation of the respective carrying amounts of each
investment, either the entire cost of the investment or a significant
portion thereof was charged against earnings during the third quarter
of fiscal 2001.
* 53 weeks
We have generally experienced slightly lower sales volumes during the
summer months, and we expect this trend to continue in the foreseeable future.
As a result, net income in the fourth fiscal quarter is historically somewhat
lower than in the third fiscal quarter, due largely to the continuation of our
fixed costs during slower sales periods.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund the working capital
requirements necessitated by our sales growth, adding new products, and
facilities expansions. Our primary sources of financing have been cash from
operations, supplemented by bank borrowings under our credit facility. We
anticipate cash flows from operations, available cash resources and available
lines of credit will be adequate to support our operations for the next 12
months.
Under the terms of the credit facility, the maximum permitted
borrowings are $110.0 million under an unsecured revolving credit agreement.
Interest on amounts borrowed may be paid at a rate per annum equal to the bank's
base rate (4.75% at August 31, 2002) or, alternatively, at the bankers'
acceptance rate or LIBOR rate plus margins, which vary from per annum based on
the ratio of total liabilities to effective net worth, or bid note rate. This
credit facility contains certain covenants limiting mergers, use of proceeds,
indebtedness, liens, investments, sales of assets, acquisitions, and payment of
dividends. This credit facility also contains certain standard financial
covenants. As of August 31, 2002 the Company had no outstanding borrowings under
this agreement and was in compliance with all financial covenants.
Net cash provided by operating activities for the fiscal years ended
August 31, 2002 and September 1, 2001 were $84.9 million and $90.9 million
respectively. The decrease of approximately $6.0 million in net cash provided
from operations resulted from lower net income, net of non-cash impairment
charges, offset in part by improved net working capital requirements (primarily
a reduction in accounts payable and accrued expenses).
19
Net cash used in investing activities for the fiscal years ended
August 31, 2002 and September 1, 2001 were $7.8 million and $22.0 million,
respectively. The net usage of cash in fiscal 2002 and fiscal 2001 were
primarily attributable to expenditures for property, plant and equipment.
Net cash used in financing activities for the fiscal years ended August
31, 2002 and September 1, 2001 were $29.5 million and $59.6 million,
respectively. The net cash used in financing activities for fiscal 2002 was
attributable to the purchase of treasury stock, partially offset by the proceeds
from the exercise of common stock options. The net cash used in financing
activities for fiscal 2001 was primarily attributable to repayments of notes
payable, partially offset by the proceeds from the exercise of common stock
options.
During fiscal 2001, the Board of Directors of the Company approved a
stock repurchase plan (the "Plan") that would allow for the repurchase of up to
5 million shares of the Company's Class A common stock. The Plan allows the
Company to repurchase shares at any time and in any increments it deems
appropriate. No shares were repurchased during the first nine months of fiscal
2002. In the fourth quarter of fiscal 2002, the Company has repurchased
approximately 3.1 million shares in the open market at a total cost of
approximately $44.1 million pursuant to the Plan. On September 26, 2002, the
Board of Directors approved the repurchase of an additional 3.1 million shares,
in order for the Plan to again permit the future repurchase of up to 5 million
shares of Class A common stock on the open market. In fiscal 2003, through
November 15, 2002, the Company has repurchased a total of 0.3 million shares in
the open market at a total cost of approximately $3.0 million. The Company
currently anticipates that it may make further repurchases based upon market
conditions.
Related Party Transactions
The Company is affiliated with various real estate entities (together,
the "Affiliates"). The Affiliates are owned primarily by the Company's principal
shareholders. The Company paid rent under operating leases to Affiliates for
fiscal 2002, 2001 and 2000 of approximately $1.7 million, $1.7 million and $1.4
million, respectively. In the opinion of the Company's management, based on its
market research, the leases with Affiliates are on terms which approximate fair
market value. See Note 11 to the Consolidated Financial Statements and
"Contractual Obligations" below for discussion of related-party transactions
with the various real estate entities.
Contractual Obligations
Certain of the operations of the Company are conducted on leased
premises, some of which are leased from Affiliates. The leases (most of which
provide for the payment of real estate taxes, insurance and other operating
costs) are for varying periods, the longest extending to the year 2012. In
addition, the Company is obligated under certain equipment and automobile
operating leases, which expire on varying dates through 2003. At August 31,
2002, approximate minimum annual rentals on such leases are as follows (in
thousands):
20
Total (Including Related Party
Fiscal Year Related Party Commitments
Commitments)
----------- ------------- -----------
2003 5,880 1,620
2004 4,750 1,440
2005 3,509 1,312
2006 2,067 1,352
2007 1,694 1,352
Thereafter 4,165 3,825
---------- -------------- ------------
$22,065 $10,901
============== ============
The Company believes that existing cash balances together with cash
generated from operations and amounts available under the Company's $110 million
credit facility will be sufficient to meet the Company's projected working
capital and other cash flow requirements for the next five years. As of August
31, 2002, the Company was in compliance with the covenants set forth in the
Company's credit facility.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CRITICAL ACCOUNTING POLICIES AND
ESTIMATES.
The Company's significant accounting policies are more fully described
in the notes to the consolidated financial statements. On an on-going basis, the
Company evaluates its estimates, including those related to bad debts,
inventories, goodwill, contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates.
Concentrations of Credit Risk
The Company's mix of receivables is diverse, with approximately 329,000 combined
active customer accounts. The Company sells its products primarily to end-users.
The Company performs periodic credit evaluations of its customers' financial
condition and collateral is not required. Receivables are generally due within
30 days. The Company evaluates the collectibility of accounts receivable based
on numerous factors, including past transaction history with customers and their
credit worthiness. Initially, the Company estimates an allowance for doubtful
accounts as a percentage of net sales based on historical bad debt experience.
This estimate is periodically adjusted when the Company becomes aware of a
specific customer's inability to meet its financial obligations (e.g.
bankruptcy, etc.), or as a result of changes in the overall aging of accounts
receivable.
The Company maintains the majority of its cash and cash equivalents with a high
quality financial institution.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at the lower
of weighted average cost (using the first-in, first-out method) or market.
Deferred Catalog Costs
The costs of producing and distributing the Company's principal catalogs are
deferred ($14.0 million and $14.9 million at August 31, 2002 and September 1,
2001, respectively) and included in other assets in the Company's consolidated
balance sheets in accordance with SOP 93-7, "Reporting on Advertising Costs."
These costs are charged to expense over the period that the catalogs remain the
most current source of sales, which period
21
is typically one year or less. The costs associated with brochures and catalog
supplements are charged to expense as distributed.
Revenue Recognition
The Company recognizes revenue upon shipment of products to its customers. The
Company reports its sales net of the amount of actual sales returns and the
amount of reserves established for anticipated sales returns based upon
historical return rates.
Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting Results of Operations" for a disposal of a segment of
a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. SFAS No. 144
is effective fiscal years beginning after December 15, 2001, with early adoption
encouraged. The Company has adopted SFAS No. 144 as of September 1, 2002, the
impact of the adoption was not material to its consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," under which a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company does not believe that the adoption of this statement will
have a material impact on its consolidated financial statements.
22
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's principal financial instrument is long-term notes payable
under a credit agreement. The Company is affected by market risk exposure
primarily through the effect of changes in interest rates on amounts payable by
the Company under this credit agreement. Changes in these factors cause
fluctuations in the Company's net income and cash flows. The agreement allows
the company maximum borrowings of $110.0 million under a revolving credit
agreement. At August 31, 2002, the Company had no outstanding borrowings and was
in compliance with all financial covenants. The agreement bears interest at the
bank's base rate (4.75% at August 31, 2002), or, alternatively, at the bankers
acceptance rate or LIBOR rate plus margins, which vary from 0.65% to 1.25% per
annum based on the ratio of total liabilities to effective net worth, or bid
note rate. The Company does not make material use of derivative financial
instruments to hedge against changes in interest rates or for any other purpose.
In addition, the Company's interest income is most sensitive to changes
in the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents.
We have investments in equity securities of privately held Internet
companies for the promotion of business and strategic objectives that have no
net carrying value at August 31, 2002. These investments have a net carrying
value of $0.7 million and $9.0 million at September 1, 2001 and August 26, 2000,
respectively. These investments are included in other assets and are accounted
for using the cost method. For investments in which no public market exists, our
policy is to regularly review the operating performance, recent financing
transactions and cash flow forecasts for such companies in assessing the net
realizable values of the securities of these companies. Impairment losses on
equity investments are recorded when events and circumstances indicate that such
assets are impaired and the decline in value is other than temporary. We
recorded $0.7 million and $10.3 million in impairment losses during 2002 and
2001, respectively.
23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
REPORT PAGE
- ------ ----
REPORT OF INDEPENDENT AUDITORS 25
CONSOLIDATED BALANCE SHEETS
AT AUGUST 31, 2002 AND SEPTEMBER 1, 2001 26
CONSOLIDATED STATEMENTS OF INCOME FOR THE
FISCAL YEARS ENDED AUGUST 31, 2002, SEPTEMBER 1, 2001
AND AUGUST 26, 2000 27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED AUGUST 31, 2002, SEPTEMBER 1, 2001
AND AUGUST 26, 2000 28
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
FISCAL YEARS ENDED AUGUST 31, 2002, SEPTEMBER 1, 2001
AND AUGUST 26, 2000 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30
24
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors
MSC Industrial Direct Co., Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of MSC
Industrial Direct Co., Inc. and Subsidiaries as of August 31, 2002 and September
1, 2001, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended August
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the 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 consolidated financial position of MSC
Industrial Direct Co., Inc. and Subsidiaries at August 31, 2002 and September 1,
2001, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended August 31, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 12 to the accompanying consolidated financial
statements, the Company has restated its consolidated financial statements for
the fiscal years ended September 1, 2001 and August 26, 2000, which consolidated
financial statements were previously audited by other independent auditors.
As discussed in Note 2 to the accompanying consolidated financial
statements, effective September 2, 2001, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.
/s/ ERNST & YOUNG LLP
October 31, 2002
Melville, NY
25
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS August 31, 2002 September 1, 2001
------ --------------- -----------------
(As Restated)
(Note 12)
CURRENT ASSETS:
Cash and cash equivalents $ 59,978 $ 12,466
Accounts receivable, net of allowance for doubtful accounts
of $3,114 and $4,927, respectively 94,322 95,263
Inventories 205,563 233,131
Prepaid expenses and other current assets 6,690 5,728
Deferred income taxes 4,339 4,673
------------- -------------
Total current assets 370,892 351,261
PROPERTY, PLANT AND EQUIPMENT, net 112,721 121,149
OTHER ASSETS:
Goodwill 63,202 63,354
Other 16,133 17,553
------------- -------------
79,335 80,907
------------- -------------
Total Assets $ 562,948 $ 553,317
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 31,561 $ 38,794
Accrued liabilities 39,858 30,580
Current portion of long-term notes payable 213 214
------------- -------------
Total current liabilities 71,632 69,588
LONG-TERM NOTES PAYABLE 1,308 1,517
DEFERRED INCOME TAX LIABILITIES 15,329 16,069
------------- -------------
Total liabilities 88,269 87,174
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none issued
and outstanding - -
Class A common stock; $0.001 par value; 100,000,000 shares authorized;
38,571,254 and 36,133,385 shares issued, 34,589,254 and 35,139,385 shares
outstanding, respectively 38 36
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
32,137,294 and 33,478,778 shares, respectively, issued and outstanding 32 34
Additional paid-in capital 253,564 238,385
Retained earnings 283,348 247,199
Treasury stock, at cost, 3,982,000 and 994,000 shares, respectively (62,303) (19,511)
-------------- --------------
Total shareholders' equity 474,679 466,143
------------- -------------
Total Liabilities and Shareholders' Equity $ 562,948 $ 553,317
============= =============
See accompanying notes.
26
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share data)
For The Fiscal Years Ended
------------------------ ----------------------- ---------------------
August 31, 2002 September 1, 2001 August 26, 2000
--------------- ----------------- ---------------
(As Restated) (As Restated)
(Note 12) (Note 12)
NET SALES (Note 2) $ 793,976 $ 869,231 $ 831,294
COST OF GOODS SOLD 447,816 494,091 497,602
------------- ------------- -------------
Gross profit 346,160 375,140 333,692
OPERATING EXPENSES 286,185 288,744 251,665
------------- ------------- -------------
Income from operations 59,975 86,396 82,027
OTHER INCOME (EXPENSE):
Interest expense (61) (3,947) (5,207)
Interest income 1,057 420 212
Provision for impairment in carrying value of (700)
investments) (700) (10,284) -
Equity in loss of unconsolidated affiliate - - (465)
Other (expense) income, net (83) 154 279
-------------- ------------- -------------
213 (13,657) (5,181)
------------- -------------- --------------
Income before provision for 60,188 72,739 76,846
income
taxes
Provision for income taxes 23,773 32,834 30,680
------------- ------------- -------------
Net income $ 36,415 $ 39,905 $ 46,166
============= ============= =============
PER SHARE INFORMATION:
Net income per common share:
Basic $ 0.53 $ 0.59 $ 0.69
============= ============= =============
Diluted $ 0.51 $ 0.57 $ 0.68
============= ============= =============
Weighted average shares used in computing
net income per common share:
Basic 68,918 68,198 67,215
================= ================= =================
Diluted 70,783 69,449 68,203
================= ================= =================
See accompanying notes.
27
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED AUGUST 31, 2002, SEPTEMBER 1, 2001 AND
AUGUST 26, 2000
(In thousands)
Class A Class B
Common Stock Common Stock Additional
------------------- ------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
------ ------ ------ ------ ------- --------
BALANCE, August 28, 1999 (As Restated) 33,902 34 34,139 34 216,977 162,583
Exchange of Class B Common Stock for Class A
Common Stock 400 - (400) - - -
------ ------ ------ ------ ------- --------
Purchase of treasury stock - - - - - -
Common stock issued under associate stock
purchase plan - - - - - (1,022)
Amortization of deferred stock compensation - - - - - -
Exercise of common stock options, including
income tax benefits of $384 988 1 - - 12,320 -
Net income - - - - - 46,166
------ ------ ------ ------ ------- --------
BALANCE, August 26, 2000 (As Restated) 35,290 $ 35 33,739 $ 34 $ 229,297 $ 207,727
Exchange of Class B Common Stock for Class A
Common Stock 260 - (260) - - -
Common stock issued under associate stock -
purchase plan - - - - (433)
Amortization of deferred stock compensation - - - - - -
Exercise of common stock options, including -
income tax benefits of $2,852 583 1 - 9,088
Net income - - - - - 39,905
------ ------ ------ ------- ------- --------
BALANCE, September 1, 2001 (As Restated) 36,133 $ 36 33,479 $ 34 $ 238,385 $ 247,199
====== ====== ====== ======= ======= ========
Exchange of Class B Common Stock for Class A
Common Stock 1,342 2 (1,342) (2) - -
Common stock issued under associate stock -
purchase plan - - - - (266)
Purchase of treasury stock - - - - - -
Exercise of common stock options, including
income tax benefits of $1,421 1,096 - - - 15,179 -
Net income - - - - - 36,415
------ ------ ------ ------ ------- --------
BALANCE, August 31, 2002 38,571 $ 38 32,137 $ 32 $ 253,564 $ 283,348
====== ====== ====== ====== ======== ========
Treasury Stock
------------------- Deferred
Amount Stock
Shares at cost Compensation Total
------ ------- ------------ -----
BALANCE, August 28, 1999 (As Restated) 1,141 (22,452) (653) 356,523
Exchange of Class B Common Stock for Class A
Common Stock - - - -
Purchase of treasury stock 40 (749) - (749)
Common stock issued under associate stock
purchase plan (108) 2,122 - 1,100
Amortization of deferred stock compensation - - 444 444
Exercise of common stock options, including
income tax benefits of $384 - - - 12,321
Net income - - - 46,166
------ ------- ------------ -----
BALANCE, August 26, 2000 (As Restated) 1,073 $(21,079) $ (209) $ 415,805
Exchange of Class B Common Stock for Class A
Common Stock - - - -
Common stock issued under associate stock
purchase plan (79) 1,568 - 1,135
Amortization of deferred stock compensation - - 209 209
Exercise of common stock options, including
income tax benefits of $2,852 - - - 9,089
Net income - - - 39,905
------ ------- ------------ -----
BALANCE, September 1, 2001 (As Restated) 994 $(19,511) $ - $ 466,143
Exchange of Class B Common Stock for Class A
Common Stock - - - -
Common stock issued under associate stock
purchase plan (69) 1,354 - 1,088
Purchase of treasury stock 3,057 (44,146) - (44,146)
Exercise of common stock options, including
income tax benefits of $1,421 - - - 15,179
Net income - - - 36,415
------ ------- ------------ -----
BALANCE, August 31, 2002 3,982 $(62,303) $ - $ 474,679
======= ======== ============ =======
See accompanying notes.
28
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED AUGUST 31, 2002, SEPTEMBER 1, 2001 AND
AUGUST 26, 2000
(In thousands)
For The Fiscal Years Ended
------------------ --------------------- --------------------
August 31, 2002 September 1, 2001 August 26, 2000
--------------- ----------------- ---------------
(As Restated) (As Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,415 $ 39,905 $ 46,166
--------------- ---------------- ---------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15,989 14,909 11,998
Amortization of intangible assets - 1,761 1,965
Provision for impairment in carrying value of investments 700 10,284 -
Impairment loss on the writedown of goodwill 152 - -
Loss (gain) on disposal of property, plant and equipment 287 505 (36)
Provision for doubtful accounts 1,317 2,358 1,526
Stock option income tax benefit 1,421 2,852 384
Amortization of deferred stock compensation - 209 444
Deferred income taxes (406) 3,128 2,966
Compensation component of stock options - 72 -
Equity in loss of unconsolidated affiliate - - 465
Changes in operating assets and liabilities:
Accounts receivable (376) 1,216 (10,356)
Inventories 27,568 27,363 (34,952)
Prepaid expenses and other current assets (1,662) (1,538) 200
Other assets 1,420 (1,718) (2,774)
Accounts payable and accrued liabilities 2,045 (10,401) 2,370
--------------- ---------------- ---------------
Total adjustments 48,455 51,000 (25,800)
--------------- ---------------- ---------------
Net cash provided by operating activities 84,870 90,905 20,366
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (7,848) (20,228) (21,626)
Proceeds from sale of property, plant and equipment - 43 36
Cash paid for investments - (1,852) (9,447)
--------------- ---------------- ---------------
Net cash used in investing activities (7,848) (22,037) (31,037)
--------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (44,146) - (749)
Proceeds from associate stock purchase plan 1,088 1,135 1,100
Proceeds from exercise of common stock options 13,758 6,165 11,937
Net repayments of notes payable (210) (66,911) (1,133)
--------------- ---------------- ---------------
Net cash (used in) provided by financing activities (29,510) (59,611) 11,155
--------------- ---------------- ---------------
Net increase in cash and cash equivalents 47,512 9,257 484
CASH AND CASH EQUIVALENTS, beginning of year 12,466 3,209 2,725
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS, end of year $ 59,978 $ 12,466 $ 3,209
=============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 61 $ 4,019 $ 5,402
=============== ================ ===============
Income taxes $ 18,053 $ 27,554 $ 29,940
=============== ================ ===============
See accompanying notes.
29
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
1. BUSINESS
MSC Industrial Direct Co., Inc. (together with its consolidated subsidiaries,
the "Company" or "MSC") is a distributor of industrial equipment and supplies
with headquarters in Melville, New York. The Company serves primarily domestic
markets through its distribution network, which includes approximately 90 local
MSC branches in 36 states, as well as certain other locations related to
acquired entities, and regional distribution centers near Harrisburg,
Pennsylvania; Elkhart, Indiana; Atlanta, Georgia and Reno, Nevada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MSC
and its subsidiaries, all of which are wholly owned. All intercompany balances
and transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year is on a 52 or 53 week basis, ending on a Saturday
close to August 31. The financial statements for fiscal 2002, 2001 and 2000
contain activity for 52 weeks, 53 weeks, and 52 weeks, respectively.
Use of Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, as well as certain highly
liquid investments with original maturities of three months or less.
Concentrations of Credit Risk
The Company's mix of receivables is diverse, with approximately 329,000 combined
active customer accounts. The Company sells its products primarily to end-users.
The Company performs periodic credit evaluations of its customers' financial
condition and collateral is not required. Receivables are generally due within
30 days. The Company evaluates the collectibility of accounts receivable based
on numerous factors, including past transaction history with customers and their
credit worthiness. Initially, the Company estimates an allowance for doubtful
accounts as a percentage of net sales based on historical bad debt experience.
This estimate is periodically adjusted when the Company becomes aware of a
specific customer's inability to meet its financial obligations (e.g.
bankruptcy, etc.), or as a result of changes in the overall aging of accounts
receivable.
The Company maintains the majority of its cash and cash equivalents with a high
quality financial institution.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at the lower
of weighted average cost (using the first-in, first-out method) or market.
30
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to expense as incurred; costs of major renewals and
improvements are capitalized. At the time property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are eliminated from
the asset and accumulated depreciation accounts and the profit or loss on such
disposition is reflected in income.
Depreciation and amortization of property, plant and equipment are computed for
financial reporting purposes on the straight-line method based on the estimated
useful lives of the assets.
The Company capitalizes certain payroll costs associated with the development of
internal computer systems in accordance with Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." These costs are included within property, plant and equipment in
the accompanying consolidated balance sheets. These costs are amortized on a
straight-line basis over the estimated useful lives of the related computer
systems, not to exceed five years.
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 34, "Capitalization of Interest Cost," interest attributable to
construction of distribution centers and computer systems are capitalized as
part of the cost of the related asset during the period prior to which such
assets are available and ready for use. The amounts capitalized during fiscal
years 2002, 2001 and 2000 are not material to the consolidated financial
statements.
Goodwill
Goodwill represents the excess of the purchase price paid over the fair value of
the net assets acquired in connection with business acquisitions. Through fiscal
2001, goodwill was amortized on a straight-line basis over 40-year periods.
Accumulated amortization was $7,286 as of September 1, 2001.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but are reviewed annually
(or more frequently, if impairment indicators arise) for impairment. Separable
intangible assets that are not deemed to have indefinite lives will continue to
be amortized over their useful lives (but with no maximum life). The Company has
adopted this standard effective September 2, 2001 and has evaluated its
intangible assets to identify goodwill separately from other identifiable
intangibles. The Company has classified its intangible assets as goodwill with
an indefinite life as no other separately identifiable intangibles exist. The
Company's goodwill will no longer be amortized, which resulted in an increase in
net income of approximately $1,100 for the fiscal year ended August 31, 2002.
Net income for the fiscal years 2001 and 2000 includes approximately $1,100 and
$1,300 of goodwill amortization expense, respectively. Excluding this amount
would have resulted in basic net income per common share of $0.60 and $0.70,
respectively and diluted net income per common share of $0.59 and $0.69,
respectively for fiscal years 2001 and 2000.
The Company has tested goodwill for impairment using the two-step process
proscribed in SFAS No. 142. The Company performed the first of the required
impairment tests of goodwill as of September 2, 2001, which indicated no
impairment existed. The Company performed the required annual test during the
fourth quarter of fiscal 2002. In connection with the annual impairment test,
the Company recorded a non-cash charge to earnings of $152 related to the
impairment of goodwill recorded in connection with the fiscal 1995 acquisition
of J&S Tool Company, Inc. This impairment loss is included in operating expenses
in the accompanying consolidated statement of income for the fiscal year ended
August 31, 2002.
31
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Impairment of Long-Lived Assets
The Company periodically evaluates the net realizable value of long-lived
assets, including property and equipment, and deferred catalog costs, relying on
a number of factors, including operating results, business plans, economic
projections and anticipated future cash flows. Impairment is assessed by
evaluating the estimated undiscounted cash flows over the asset's remaining
life. If estimated cash flows are insufficient to recover the investment, an
impairment loss is recognized.
Deferred Catalog Costs
The costs of producing and distributing the Company's principal catalogs are
deferred ($13,964 and $14,894 at August 31, 2002 and September 1, 2001,
respectively) and included in other assets in the Company's consolidated balance
sheets in accordance with SOP 93-7, "Reporting on Advertising Costs." These
costs are charged to expense over the period that the catalogs remain the most
current source of sales, which period is typically one year or less. The costs
associated with brochures and catalog supplements are charged to expense as
distributed.
Revenue Recognition
The Company recognizes revenue upon shipment of products to its customers. The
Company reports its sales net of the amount of actual sales returns and the
amount of reserves established for anticipated sales returns based upon
historical return rates.
Shipping and Handling Costs
In accordance with the Emerging Issue Task Force ("EITF") issue 00-10,
"Accounting for Shipping and Handling Fees and Costs", the Company includes
shipping and handling fees billed to customers in net sales and shipping and
handling costs associated with outbound freight in operating expenses in the
accompanying consolidated statements of income. The shipping and handling costs
in operating expenses were approximately $37,300, $40,800 and $39,700 for the
fiscal years ended August 31, 2002, September 1, 2001 and August 26, 2000,
respectively.
Stock Based Compensation
The Company accounts for its stock based compensation plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", ("APB 25") and related Interpretations. Under APB 25, because the
exercise price of the Company's associate stock options is set equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Affiliates
The Company is affiliated with various real estate entities (together, the
"Affiliates"). The Affiliates are owned primarily by the Company's principal
shareholders. See Note 11 for discussion of related-party transactions with the
various real estate entities.
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the short maturity of these instruments. The
fair value of the Company's debt, including current maturities are estimated
based on quoted market prices for the same or similar issues or on current rates
offered to the Company for debt of the same
32
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
remaining maturities. The carrying amounts of the Company's debt at August 31,
2002 and September 1, 2001 approximates its fair value.
Comprehensive Income
The Company complies with the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting of
comprehensive income and its components. For fiscal years 2002, 2001 and 2000,
the Company's operations did not give rise to items includable in comprehensive
income which were not already included in net income. Accordingly, the Company's
comprehensive income is the same as its net income for all periods presented.
Web site development costs
The Company complies with the provisions of Emerging Issues Task Force ("EITF")
Issue 00-02, "Accounting for Web Site Development Costs." This standard
categorizes certain costs as an internal use of software, which would be subject
to the requirements of SOP 98-1, while other costs would be subject to
capitalization or expense pursuant to SOP 93-7.
Income Taxes
The Company provides for income taxes in accordance with the asset and liability
method specified by SFAS No. 109, "Accounting for Income Taxes." The deferred
income tax amounts included in the consolidated balance sheets are determined
based on the differences between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates that will be in effect when
these differences reverse. Differences between assets and liabilities for
financial statement and tax return purposes are principally related to
inventories and depreciable lives of assets.
Segment Reporting
The Company's results of operations are reviewed by the Chief Operating Officer
on a consolidated basis and the Company operates in only one segment.
Preferred Stock
The Company has authorized 5 million shares of preferred stock. The Company's
Board of Directors has the authority to issue shares of preferred stock. Shares
of preferred stock have priority over the Company's Class A Common Stock and
Class B Common stock with respect to dividend or liquidation rights, or both. As
of August 31, 2002, there were no shares of preferred stock issued or
outstanding.
33
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting Results of Operations" for a disposal of a segment of
a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for
recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. SFAS No. 144
is effective fiscal years beginning after December 15, 2001, with early adoption
encouraged. The Company has adopted SFAS No. 144 as of September 1, 2002, the
impact of the adoption was not material to its consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," under which a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The Company does not believe that the adoption of this statement will
have a material impact on its consolidated financial statements.
3. NET INCOME PER SHARE
The Company follows the provisions of SFAS No. 128, "Earnings Per Share." Basic
net income per common share ("Basic EPS") is computed by dividing net income by
the weighted average number of common shares outstanding. Diluted net income per
common share ("Diluted EPS") is computed by dividing net income by the weighted
average number of common shares and dilutive common share equivalents and
convertible securities then outstanding. SFAS No. 128 requires the presentation
of both Basic EPS and Diluted EPS on the face of the consolidated statements of
income.
The following provides a reconciliation of information used in calculating the
per share amounts for the fiscal years ended August 31, 2002, September 1, 2001
and August 26, 2000, respectively:
Net Income Shares Net Income Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
Basic EPS: (As (As (As (As
Restated) Restated) Restated) Restated)
Net income $36,415 $39,905 $ 46,166 68,918 68,198 67,215 $0.53 $0.59 $0.69
Effect of dilutive
associate stock
options - - - 1,865 1,251 988 (.02) (.02) (.01)
-------- -------- -------- -------- ------- -------- ------ ------ ------
Diluted EPS:
Net income $36,415 $39,905 $46,166 70,783 69,449 68,203 $0.51 $0.57 $0.68
======== ======== ======== ========= ======= ======== ====== ====== ======
Options to purchase approximately 845,000, 999,000 and 1,811,000 shares of Class
A common stock in fiscal 2002, 2001 and 2000, respectively, were not included in
the computation of Diluted EPS because the exercise price exceeded the average
market price of common shares for the period. These options were still
outstanding at the end of the related periods.
34
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
4. INVESTMENTS
During the fourth quarter of fiscal 2002, the Company determined that its
ability to ultimately recover the remaining carrying value of its investments in
certain Internet companies, which were made in fiscal 2001 and 2000, were
significantly impaired. The Company's determination was based upon certain
economic indicators and specific events and circumstances, including these
entities' difficulty in raising additional capital, and the inability of these
entities to achieve business plan objectives and planned financial results.
Pursuant to the Company's evaluation of the respective carrying amounts of each
investment, the remaining carrying cost of the investment was charged against
earnings during the fourth quarter of fiscal 2002. The aggregate amount of the
non-cash charge recorded in the consolidated statement of income was $700 ($424,
net of tax benefits, or $0.01 per diluted share).
During the third quarter of fiscal 2001, the Company determined that its ability
to ultimately recover the value of its investments in four privately held
Internet startup companies was significantly impaired. The Company's
determination was based upon certain economic indicators and specific events and
circumstances, including these entities' difficulty in raising additional
capital, and the inability of these entities to achieve business plan objectives
and planned financial results. Pursuant to the Company's evaluation of the
respective carrying amounts of each investment, either the entire cost of the
investment or a significant portion thereof was charged against earnings during
the third quarter of fiscal 2001. The aggregate amount of the non-cash charge
recorded in the consolidated statement of income was $10,284 ($9,900, net of tax
benefits, or $.14 per diluted share). These investments were made in fiscal
years 2001 and 2000 and one of these investments was accounted for using the
equity method of accounting, until the Company reduced its interest and
restructured its ownership such that the Company did not exercise significant
influence. At September 1, 2001, the Company no longer exercised significant
influence and, accordingly the investments continue to be accounted for using
the cost method.
The provision for income taxes in fiscal 2001 was substantially affected by the
present non-deductibility of a significant portion of the Company's impairment
charge on its Internet investments. Accordingly, the Company's effective tax
rate is significantly higher than in other periods (Note 6).
5. PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment and the estimated
useful lives used in the computation of depreciation and amortization:
Number of Years August 31, 2002 September 1, 2001
--------------- --------------- -----------------
Land - $ 11,552 $ 11,429
Building 40 47,996 47,383
Building and leasehold improvements The lesser of the life
of the lease or 31.5 20,871 20,786
Furniture, fixtures and equipment 3-10 65,421 62,804
Automobiles 5 479 890
Computer systems 3-5 36,026 33,108
-------------- -------------
182,345 176,400
Less: accumulated depreciation and amortization 69,624 55,251
-------------- -------------
$ 112,721 $ 121,149
============== =============
The amount of capitalized interest, net of accumulated amortization, included in
property, plant and equipment is $1,464 and $1,568 at August 31, 2002 and
September 1, 2001, respectively.
35
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
6. INCOME TAXES
The provision for income taxes is comprised of the following:
For the Fiscal Years Ended
--------------------- ------------------------ -------------------
August 31, 2002 September 1, 2001 August 26, 2000
--------------- ----------------- ---------------
(As Restated) (As Restated)
Current:
Federal $ 19,675 $ 24,515 $ 22,869
State and local 4,504 5,191 4,845
------------- ----------------- ---------------
24,179 29,706 27,714
------------ ----------------- ---------------
Deferred:
Federal (166) (350) 2,447
State and local (76) (74) 519
Valuation Allowance (164) 3,552 -
------------- ----------------- ---------------
(406) 3,128 2,966
------------- ----------------- ---------------
Total $ 23,773 $ 32,834 $ 30,680
============ ================= ===============
Significant components of deferred tax assets and liabilities are as follows:
August 31, 2002 September 1, 2001
--------------- -----------------
(As Restated)
Current and non-current deferred tax liabilities:
Depreciation $ (21,731) $ (22,049)
Deferred catalog costs (5,523) (6,222)
Goodwill (473) (448)
------------- -------------
(27,727) (28,719)
------------- -------------
Current and non-current deferred tax assets:
Accounts receivable 1,891 2,608
Inventory 9,215 7,771
Deferred compensation 620 548
Internet investments 3,388 3,552
Other 5,011 6,396
Valuation allowance (3,388) (3,552)
------------- -------------
16,737 17,323
------------ ------------
Net Deferred Tax Liabilities $ (10,990) $ (11,396)
============= =============
In fiscal 2002, the Company reduced its valuation allowance from $3,552 to
$3,388 to properly reflect the estimated amount of deferred tax assets that most
likely will not be realized due to the capital loss generated in fiscal 2001 by
the impairment charge on its Internet investments (Note 4). The decrease is due
to an estimated net capital gain recognized during the current fiscal year.
In fiscal 2001, the Company recorded a valuation allowance in the amount of
$3,552 to reflect the estimated amount of deferred tax assets that may not be
realized due to the capital loss generated by the impairment charge recorded on
its Internet investments (Note 4).
36
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
For the Fiscal Years Ended
----------------------------------------------------------------
August 31, 2002 September 1, 2001 August 26, 2000
--------------- ----------------- ---------------
(As Restated) (As Restated)
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit 4.8 5.2 5.0
Valuation allowance (0.3) 4.9 -
-------------- ----------------- ---------------
Effective income tax rate 39.5% 45.1% 40.0%
============== ================= ===============
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
August 31, 2002 September 1, 2001
--------------- -----------------
(As Restated)
Accrued compensation costs $ 14,356 $ 12,851
Accrued restructuring and relocation charges 883 1,770
Accrued catalog costs 5,483 6,605
Accrued sales tax 3,469 4,744
Accrued other 15,667 4,610
------------- -------------
Total accrued liabilities $ 39,858 $ 30,580
============= =============
37
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
8. LONG-TERM NOTES PAYABLE
Long-term notes payable consist of the following:
August 31, 2002 September 1, 2001
--------------- -----------------
Revolving credit agreement (a) $ - $ -
Term notes payable (b) 1,521 1,731
------------- -------------
1,521 1,731
Less: current portion 213 214
------------- -------------
$ 1,308 $ 1,517
============= =============
Maturities of notes payable are as follows:
Fiscal Year
2003 213
2004 169
2005 147
2006 151
2007 156
Thereafter 685
-----------
$ 1,521
===========
(a) As of August 31, 2002, the Company had an available $110 million
revolving credit agreement with a group of banks. There were no
outstanding borrowings at August 31, 2002 or September 1, 2001.
Interest on amounts borrowed may be paid at a rate per annum equal
to the bank's base rate (4.75% at August 31, 2002) or,
alternatively, at the bankers' acceptance rate or LIBOR rate plus
margins, which vary from 0.65% to 1.25% per annum. This credit
facility contains certain covenants limiting mergers, use of
proceeds, indebtedness, liens, investments, sales of assets,
acquisitions, and payment of dividends. This credit facility also
contains certain standard financial covenants. As of August 31,
2002, the Company was in compliance with all financial covenants.
(b) The term notes payable consist primarily of a note payable to the
Pennsylvania Industrial Development Authority which is secured by
the land on which the Harrisburg, Pennsylvania distribution center
is located and which bears interest at 3% per annum and is payable
in monthly installments of approximately $20 through September 2011.
9. CAPITAL STOCK TRANSACTIONS
Treasury Stock Purchases
The Board of Directors of the Company approved a stock repurchase plan (the
"Plan") that allows for the repurchase of up to 5 million shares of the
Company's Class A common stock. The Plan allows the Company to repurchase shares
at any time and in any increments it deems appropriate. During fiscal 2002 and
fiscal 2000, the Company repurchased 3,057,000 shares and 40,000 shares of its
Class A Common Stock for $44,146 and $749, respectively, which is reflected at
cost as treasury stock in the accompanying consolidated financial statements.
The Company reissued approximately 69,000 and 79,000 shares of treasury stock
during fiscal 2002 and 2001, respectively, to fund the associate stock purchase
plan (Note 10).
On September 26, 2002, the Board of Directors approved the replenishment of the
Company's share buyback program which authorized the repurchase of up to 5
million shares of Class A common stock on the open market.
38
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
The Board of Directors has approved the repurchase of an additional 3,057,000
shares, so that the total number of publicly traded shares of Class A common
stock authorized for future repurchase after September 20, 2002 is restored to 5
million.
In fiscal 2003, the Company has repurchased a total of 300,000 shares of the
Company's Class A common stock in the open market at a total cost of
approximately $3,000 pursuant to the stock repurchase plan enumerated above.
10. ASSOCIATE BENEFIT PLANS
Stock Purchase Plan
The Company has established a qualified Stock Purchase Plan, the terms of which
allow for qualified associates (as defined) to participate in the purchase of up
to a maximum of 500,000 shares of the Company's Class A common stock at a price
equal to 85% of the closing price at the beginning of each stock purchase
period. The associates purchased approximately 69,000 and 79,000 shares of
common stock during fiscal 2002 and 2001 pursuant to this plan at an average per
share price of $15.82 and $14.37, respectively. As of August 31, 2002,
approximately 233,000 shares remain reserved for issuance under this plan.
Savings Plan
The Company maintains a defined contribution plan with both a profit sharing
feature and a 401(k) feature which covers all associates who have completed at
least one month of service with the Company. For fiscal 2002, 2001 and 2000, the
Company contributed $1,478, $1,222 and $564, respectively, to the plan. Company
contributions are discretionary.
Stock Option Plan
The Company maintains the MSC Industrial Direct Co., Inc. 1995, 1998 and 2001
Stock Option Plans, pursuant to which options to purchase 15 million shares of
the Company's Class A common stock may be granted. Options may be granted to key
associates, directors and consultants over terms not to exceed ten years and
they generally vest ratably over five years. Vesting requirements other than the
aforementioned are set forth by the Board of Directors when the award is
granted. As of August 31, 2002, 4,390,323 shares remain reserved for issuance
under this plan.
39
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
A summary of the status of the Company's stock option plans at August 31, 2002,
September 1, 2001 and August 26, 2000 and changes during the years then ended is
presented in the table and narrative below:
2002 2001 2000
------------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(in Exercise (in Exercise (in Exercise
thousands) Price thousands) Price thousands) Price
---------- -------- ---------- -------- ---------- ---------
Outstanding - beginning of year 6,616 $13.61 6,268 $13.40 5,817 $13.61
Granted 2,043 14.28 1,323 14.07 1,756 8.81
Exercised (1,096) 12.54 (527) 14.31 (930) 12.84
Cancelled/forfeited (216) 14.12 (448) 13.61 (375) 14.38
---------- ---------- ---------
Outstanding - end of year 7,347 14.00 6,616 13.61 6,268 13.40
========= ========= =========
Exercisable - end of year 2,895 14.69 2,785 14.36 2,205 14.48
========= ========= =========
Weighted average fair value of options
granted $ 9.25 $ 9.21 $ 8.81
========= ========= =========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
2002 2001 2000
---- ---- ----
Expected life (years) 7.5 7.5 7.5
Risk-free interest rate 4.7% 6.0% 6.5%
Volatility 57.1% 56.4% 58.4%
Dividend yield 0.0% 0.0% 0.0%
The following table summarizes information about stock options outstanding at
August 31, 2002:
Number of Options Weighted Average Weighted Number of Options Weighted
Range of Exercise Prices Outstanding at Remaining Average Exercisable at Average
- ------------------------ August 31, 2002 Contractual Life Exercise Price August 31, 2002 Exercise Price
--------------- ---------------- -------------- --------------- --------------
$ 7.75 - $ 11.63 1,225 6.3 $ 8.18 485 $ 8.78
11.64 - 17.46 5,194 7.5 14.37 1,765 14.49
17.47 - 26.21 899 5.8 19.36 622 19.46
26.22 - 28.06 29 5.6 26.72 23 26.72
--------------- ------------ ------- ------------
7,347 $ 14.00 2,895 $ 14.69
=============== ============ ======= ============
40
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
The Company has adopted the pro forma disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the Company's stock option plans. Had compensation cost for
the Company's stock option plans been determined under SFAS No. 123, the
Company's net income and net income per share would approximate the following
pro forma amounts:
2002 2001 2000
---------- ------------- -------------
(As restated) (As restated)
Net income: As reported $ 36,415 $ 39,905 $ 46,166
Pro forma 23,821 27,212 35,210
Net income per share - basic As reported $ .53 $ .59 $ .69
Pro forma .35 .40 .52
Net income per share - diluted As reported $ .51 $ .57 $ .68
Pro forma .34 .39 .52
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
41
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
11. COMMITMENTS AND CONTINGENCIES
Leases
Certain of the operations of the Company are conducted on leased premises, some
of which are leased from affiliates. The leases (most of which provide for the
payment of real estate taxes, insurance and other operating costs) are for
varying periods, the longest extending to the year 2012. In addition, the
Company is obligated under certain equipment and automobile operating leases,
which expire on varying dates through 2003. At August 31, 2002, approximate
minimum annual rentals on such leases are as follows:
Total (Including Related Party
Fiscal Year Related Party Commitments
Commitments)
----------- ------------- -----------
2003 $ 5,880 $ 1,620
2004 4,750 1,440
2005 3,509 1,312
2006 2,067 1,352
2007 1,694 1,352
Thereafter 4,165 3,825
---------- ------------ --------
Total $ 22,065 $ 10,901
============ ========
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for fiscal 2002, 2001 and 2000 was
approximately $5,055, $5,230 and $4,461, respectively, including approximately
$1,699 $1,723 and $1,434, respectively, paid to affiliates. In the opinion of
the Company's management, the leases with affiliates are on terms which
approximate fair market value.
Self-Insurance
The Company has a self-insured group health plan. The Company is responsible for
all covered claims to a maximum liability of $200 per participant during a
September 1 plan year. Benefits paid in excess of $200 are reimbursed to the
plan under the Company's stop loss policy. Group health plan expense for fiscal
2002, 2001 and 2000 was approximately $18,564, $14,476 and $12,951,
respectively.
Employment Agreements
The Company has entered into employment and consulting agreements with various
of the Company's officers and with certain selling shareholders of acquired
businesses. The future minimum commitments under these agreements are as
follows:
Aggregate
Fiscal Year Number of Individuals Annual Amount
----------- --------------------- -------------
2003 4 $ 775
2004 4 575
42
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
12. RESTATEMENT
The accompanying financial statements have been restated to adjust for
the effects of incorrect accounting for inventory purchases, reserves, and to
adjust for accruals between periods primarily related to estimates for bonuses.
Accordingly, the previously reported consolidated financial statements for the
first three quarters of fiscal 2002 and for the fiscal years 2001 and 2000 and
opening retained earnings as of August 28, 1999 have been restated (the
"Restatement"). The annual impact of the Restatement applies to prior periods as
follows:
For the first three quarters of fiscal 2002, gross profit decreased to
$258,100 from $258,700, operating expenses increased to $213,400 from $213,100,
net income decreased to $27,500 from $28,000 and diluted net income per share
decreased to $.39 per share from $.40 per share, each as compared to the amounts
previously reported by the Company.
For fiscal 2001, gross profit increased to $375,100 from $372,800,
operating expenses increased to $288,700 from $285,300, net income decreased to
$39,900 from $40,500 and diluted net income per share decreased to $.57 per
share from $.58 per share, each as compared to the amounts previously reported
by the Company.
For fiscal 2000, gross profit decreased to $333,700 from $344,800,
operating expenses increased to $251,700 from $251,500, net income decreased to
$46,200 from $52,900 and diluted net income per share decreased to $.68 per
share from $.78 per share, each as compared to the amounts previously reported
by the Company.
As a result of revisions to years prior to our fiscal 2000 financial
statements, the Company has increased its retained earnings and shareholders'
equity as of the beginning of fiscal 2000 by $866.
FISCAL 2002 (UNAUDITED)
- --------------------- ---------------------------- --------------------------- --------------------------------
Consolidated Income
Statement Data Quarter ended June 1, 2002 Quarter ended March 2, 2002 Quarter ended December 1, 2001
- --------------------- ---------------------------- --------------------------- --------------------------------
(As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported)
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Net Sales $208,592 $208,592 $194,791 $194,791 $188,852 $188,852
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Cost of Goods Sold 117,888 117,731 109,674 109,461 106,584 106,373
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Gross Profit 90,704 90,861 85,117 85,330 82,268 82,479
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Operating Expenses 72,713 72,589 71,387 71,264 69,340 69,217
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Income from
Operations 17,991 18,272 13,730 14,066 12,928 13,262
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Other Income 280 277 281 281 182 182
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Income before
Provision for
Income Taxes 18,271 18,549 14,011 14,347 13,110 13,444
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Provision for
Income Taxes 7,217 7,326 5,534 5,667 5,178 5,310
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Net Income 11,054 11,223 8,477 8,680 7,932 8,134
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Basic EPS .16 .16 .12 .13 .12 .12
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
Diluted EPS .15 .16 .12 .12 .11 .12
- --------------------- -------------- ------------- ------------- ------------- ------------ -------------------
43
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
FISCAL 2001(UNAUDITED)
- ------------------ --------------------------- ---------------------------- ---------------------------- --------------------------
Consolidated Income Quarter ended Quarter ended Quarter ended Quarter ended
Statement Data September 1, 2001 May 26, 2001 February 24, 2001 November 25, 2000
- ------------------ --------------------------- ---------------------------- ---------------------------- --------------------------
(As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported) (As Restated) (As Reported)
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Net Sales $207,923 $207,923 $216,335 $216,335 $223,089 $223,089 $221,884 $221,884
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Cost of Goods
Sold 117,221 117,733 122,204 122,786 126,825 127,315 127,841 128,598
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Gross Profit 90,702 90,190 94,131 93,549 96,264 95,774 94,043 93,286
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Operating
Expenses 73,680 72,828 73,010 72,158 71,646 70,794 70,408 69,556
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Income from
Operations 17,022 17,362 21,121 21,391 24,618 24,980 23,635 23,730
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Other Expense (345) (345) (11,026) (11,026) (1,064) (1,064) (1,222) (1,222)
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Income before
Provision for
Income Taxes 16,677 17,017 10,095 10,365 23,554 23,916 22,413 22,508
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Provision for
Income Taxes 6,672 6,807 7,775 7,883 9,422 9,567 8,965 9,003
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Net Income 10,005 10,210 2,320 2,482 14,132 14,349 13,448 13,505
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Basic EPS .15 .15 .03 .04 .21 .21 .20 .20
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
Diluted EPS .14 .15 .03 .04 .20 .21 .20 .20
- ------------------ ------------- ------------- -------------- ------------- ------------- -------------- ------------ -------------
44
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollar amounts in thousands, except per share data)
13. LEGAL PROCEEDINGS
On August 8, 2002, the Company, its directors and certain of its
officers were sued in the United States District Court for the Eastern District
of New York in an action entitled Thomas Nunziata vs. MSC Industrial Direct Co.,
Inc. et. al (CV No. 02 4422). Plaintiff, on behalf of a class of the Company's
stockholders, seeks unspecified damages based on his allegations arising from
the Company's announcement that it would restate its consolidated financial
statements for fiscal years 1999 through 2001 and the first three quarters of
fiscal 2002. Plaintiff alleges that during the periods affected by the
restatement, the Company, its directors and certain of its officers violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder, by materially misleading the investing public by making
false statements in order to inflate the price of the Company's common stock. On
August 14, 2002, the Company and certain of its officers and directors were sued
in the United States District Court for the Eastern District of New York in an
action entitled Sandra Joan Malin Revocable Trust vs. MSC Industrial Direct Co.,
Inc. et al. (CV No. 02 4503). The allegations in these matters were
substantially similar to those made in the Nunziata action. On September 11,
2002, these actions were consolidated under the caption In re MSC Industrial
Direct Co., Inc. Securities Litigation, (CV No. 02 4422). A lead plaintiff,
International Association of Machinists National Pension Fund, was named on Nov.
6, 2002, and such lead plaintiff is scheduled to file a consolidated amended
complaint on December 6, 2002. Any other actions now pending or later filed in
the Eastern District of New York which arise out of or are related to the same
facts as alleged in the above-identified cases shall also be consolidated. The
Company intends to defend this action vigorously.
There are no other material legal proceedings pending against MSC.
45
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
As previously reported in the Company's Current Report on Form 8-K,
filed May 16, 2002, which is incorporated herein by reference, Arthur Andersen
LLP have been dismissed as the Company's independent accountants and Ernst &
Young LLP have been engaged as the Company's independent accountants.
46
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information called for by Item 10 is set forth under the heading
"Election of Directors" in the Company's Proxy Statement for the
annual meeting of stockholders to be held in January 2003 (the
"2002 Proxy Statement"), which is incorporated herein by this
reference.
Item 11. EXECUTIVE COMPENSATION.
Information called for by Item 11 is set forth under the heading
"Executive Compensation" in the 2002 Proxy Statement, which is
incorporated herein by this reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information called for by Item 12 is set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management"
in the 2002 Proxy Statement, which is incorporated herein by this
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information called for by Item 13 is set forth under the heading
"Certain Relationships and Related Transactions" in the 2002 Proxy
Statement, which is incorporated herein by this reference.
Item 14. CONTROLS AND PROCEDURES.
The Company's senior management is responsible for establishing and
maintaining a system of disclosure controls and procedures (as defined in Rule
13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the "Exchange
Act")) designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and communicated to the
issuer's management, including its principal executive officer or officers and
principal financial officer or officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.
The Company has implemented certain disclosure controls and procedures,
including (1) establishing a Disclosure Committee, consisting of members of
senior management and executive staff; (2) establishing a Finance Department
Corporate Governance Committee consisting of our Chief Financial Officer, Vice
President, Finance, Director of Internal Audit, Corporate Controller, Director
of Financial Reporting and Manager of Financial Reporting; and (3) creating the
position of Corporate Governance Compliance Officer (who is also the Director of
Internal Audit).
The Company has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures under the supervision of and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, within 90 days prior to the filing date of this report. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
Securities and Exchange Commission filings.
Subsequent to that evaluation there have been no significant changes in
our internal controls or other factors that could significantly affect these
controls after such evaluation.
The Company has adopted a Code of Ethics for its senior financial
executives in anticipation of the effectiveness of Section 406 of the
Sarbanes-Oxley Act of 2002.
47
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the fourth
quarter of the fiscal year ended August 31, 2002.
Financial statements filed as a part of this report are listed on the
"Index to Consolidated Financial Statements" at page 24 herein.
a. Exhibits
Exhibit
No. Description
-------- -----------
*3.01 Certificate of Incorporation of Registrant.
*3.02 By-laws of Registrant.
*4.01 Specimen Class A Common Stock Certificate.
*10.01 Registrant's 1995 Stock Option Plan.
10.02 Registrant's 1998 Stock Option Plan (incorporated by reference
to Exhibit A to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders held on January 1, 1998, filed
with the Commission on December 5, 1997).
10.03 Registrant's 2001 Stock Option Plan (incorporated by reference
to Exhibit A to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders held on January 4, 2002, filed
with the Commission on December 5, 2001).
*10.04 Employment Agreement dated as of January 2, 1994, between
Registrant and Sidney Jacobson, as amended on October 31,
1995.
*10.05 Employment Agreement, dated as of August 1, 1994, between
Registrant and Mitchell Jacobson.
10.06 Credit Agreement, dated as of February 1, 2000, between the
Registrant and the banks named therein (incorporated by
reference to Exhibit 10 to the Registrant's Quarterly Report
on Form 10-Q filed with the Commission on April 11, 2000
(File No. 1-14130)
10.07 Employment Agreement, dated as of June 19, 2000, between the
Registrant and Charles Boehlke (incorporated by reference to
exhibit 10.06 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended August 26, 2000, filed on November
14, 2000 (File No. 1-14130)
10.08 Employment Agreement, dated as of January 8, 1999, between
Registrant and David Sandler (incorporated by reference to
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
filed with the Commission on November 19, 1999).
10.09 Employment Agreement, dated as of January 8, 1999, between the
Registrant and James Schroeder (incorporated by reference to
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K
filed with the Commission on November 19, 1999).
21.01 List of Subsidiaries
23.01 Consent of Ernst & Young LLP
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-98832, as amended.
b. Financial Statement Schedules
For the three fiscal years ended August 31, 2002
48
Page
----
Report of Independent Auditors on Schedule II ............S-1
Schedule II - Valuation and Qualifying Accounts ..........S-2
All other schedules have been omitted because the information
is not applicable or is presented in the Consolidated
Financial Statements or Notes thereto.
49
SIGNATURES
Pursuant to the requirements of the 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.
MSC INDUSTRIAL DIRECT CO., INC.
Dated: November 25, 2002 By: /s/ Mitchell Jacobson
--------------------------------
Mitchell Jacobson
Chairman, President and Chief
Executive Officer
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 Title Date
--------- ----- ----
/s/ Mitchell Jacobson Chairman of the Board of Directors, President, November 25, 2002
- ------------------------------------ Chief Executive Officer and Director
Mitchell Jacobson
/s/ Sidney Jacobson Vice-Chairman of the Board of Directors November 25, 2002
- ------------------------------------
Sidney Jacobson
/s/ Charles Boehlke Senior Vice President, Chief Financial Officer November 25, 2002
- ------------------------------------ and Director
Charles Boehlke
/s/ Shelley Boxer Vice President of Finance and Director November 25, 2002
- ------------------------------------
Shelley Boxer
/s/ David Sandler Executive Vice President, Chief Operating November 25, 2002
- ------------------------------------ Officer and Director
David Sandler
/s/ James Schroeder Senior Vice President-Logistics and Director November 25, 2002
- ------------------------------------
James Schroeder
/s/ Roger Fradin Director November 25, 2002
- -----------------------------------
Roger Fradin
/s/ Denis Kelly Director November 25, 2002
- -----------------------------------
Denis Kelly
/s/ Raymond Langton Director November 25, 2002
- -----------------------------------
Raymond Langton
/s/ Philip Peller Director November 25, 2002
- -----------------------------------
Philip Peller
50
CERTIFICATIONS
I, Mitchell Jacobson, certify that:
1. I have reviewed this annual report on Form 10-K of MSC Industrial Direct
Co., Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 22, 2002.
/s/ Mitchell Jacobson
---------------------------
Chairman, President
and Chief Executive Officer
51
CERTIFICATIONS
I, Charles Boehlke, certify that:
1. I have reviewed this annual report on Form 10-K of MSC Industrial Direct
Co., Inc.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 22, 2002
/s/ Charles Boehlke
---------------------------
Senior Vice President
and Chief Financial Officer
52
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors
MSC Industrial Direct Co., Inc. and Subsidiaries
We have audited the consolidated financial statements of MSC Industrial Direct
Co., Inc. and Subsidiaries as of August 31, 2002 and September 1, 2001, and for
each of the three years in the period ended August 31, 2002, and have issued our
report thereon dated October 31, 2002 (included elsewhere in this Annual Report
on Form 10-K). Our audits also included the financial statement schedule listed
in Item 15(b) of this Annual Report on Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, 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/ Ernst & Young LLP
October 31, 2002
Melville, NY
53
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Year Expenses Accounts Deductions End of Year
- -------------------------------------------- ------------ ----------- -------------- ------------ --------------
Deducted from asset accounts:
For the fiscal year ended August 26, 2000
Allowance for doubtful accounts (a) $ 5,799 $ 1,526 $ - $ 3,546 (c) $ 3,779
=========== =========== ========= =========== ============
Restructuring and relocation charges (b) $ 4,913 $ - $ - $ 2,755 $ 2,158
=========== =========== ========= =========== ============
Valuation allowance on deferred tax assets $ - $ - $ - $ - $ -
- --------------------------------------------- =========== =========== ========= =========== ============
Deducted from asset accounts:
For the fiscal year ended September 1, 2001
Allowance for doubtful accounts (a) $ 3,779 $ 2,358 $ $ 1,210 (c) $ 4,927
=========== =========== ========== =========== ============
Restructuring and relocation charges (b) $ 2,158 $ - $ - $ 388 $ 1,770
=========== =========== ========== =========== ============
Valuation allowance on deferred tax assets $ - $ - $ 3,552 $ - $ 3,552
- --------------------------------------------- =========== =========== ========== =========== ============
Deducted from asset accounts:
For the fiscal year ended August 31, 2002
Allowance for doubtful accounts (a) $ 4,927 $ 1,317 $ - $ 3,130 (c) $ 3,114
=========== =========== ========== =============== ============
Restructuring and relocation charges (b) $ 1,770 $ - $ - $ 887 $ 883
=========== =========== ========== =========== ============
Valuation allowance on deferred tax assets $ 3,552 $ - $ - $ 164 $ 3,388
------------------------------------------ =========== =========== ========== =========== ============
(a) Included in accounts receivable.
(b) Included in accrued liabilities.
(c) Comprised of uncollected accounts charged against the allowance.
54