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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 26, 2000
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.
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(Exact Name of Registrant as Specified in Its Charter)
New York 11-3289165
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
75 Maxess Road, Melville, New York 11747
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(Address of Principal Executive Offices)
(516) 812-2000
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(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. |_|
As of November 7, 2000, 35,294,159 shares of Class A Common Stock and
33,738,778 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 was
approximately $500,773,100.
The registrant's Proxy Statement for its 2001 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 26, 2000
ITEMS IN FORM 10-K
Page
----
PART I.
Item 1. BUSINESS...........................................................1
Item 2. PROPERTIES........................................................10
Item 3. LEGAL PROCEEDINGS.................................................10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............10
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................11
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........17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................19
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................20
Item 11. EXECUTIVE COMPENSATION............................................20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....20
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................20
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...21
PART I.
ITEM 1. BUSINESS.
Some of the statements contained in this report discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. In light of the significant risks and uncertainties inherent in the
forward-looking statements included in this report, the inclusion of such
statements should not be regarded as a representation by us or any other person
that our objectives and plans will be achieved.
General
MSC is one of the largest direct marketers of a broad range of industrial
products to small and mid-sized industrial customers throughout the United
States. We distribute a full line of industrial products, such as cutting tools,
abrasives, measuring instruments, machine tool accessories, safety equipment,
fasteners, welding supplies and electrical supplies, intended to satisfy our
customers' maintenance, repair and operations ("MRO") supplies requirements. We
offer over 450,000 stock-keeping units ("SKUs") through our 4,480 page master
catalog and weekly, monthly and quarterly specialty and promotional catalogs,
newspapers and brochures and service our customers from approximately 90 branch
offices. Most of our products are carried in stock, and orders for these
products are typically fulfilled the day on which the order is received.
MSC has grown rapidly due to expanded product offerings, increased catalog
distribution and supplemental mailings and geographic expansion. MSC's net sales
have increased at a compound annual rate of approximately 27% from $305.3
million in fiscal 1996 to $792.9 million in fiscal 2000. During this same
period, income from operations increased at a compound annual rate of
approximately 28% from $34.5 million to $93.3 million.
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,
approximately 99% of which are generally kept in stock, enabling our
customers to reduce their inventory investment and carrying costs.
o We consolidate multiple purchases into a single shipment, 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-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 $202. We have in excess of 292,000 combined
active customers (companies that have purchased at least one item during the
past 12 months), which are typically small and mid-sized companies. Our
customers select desired products from MSC's various publications and place
their orders by telephone, facsimile, the internet or direct computer link.
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
delivery via low cost ground carriers in 36 states. Our experience has been that
areas accessible by next day delivery generate significantly greater sales than
areas where next day delivery is
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not available. Accordingly, our long-term strategy is to establish additional
distribution centers, supported by local branch offices, to expand our
geographic coverage of next day 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 an MRO
purchase order can be in excess of $100 per order. 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 the mid-sized customer, as well as the small
shop customer to a lesser extent, to move toward the more efficient, cost
saving, single supply source offered by 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,
large warehouse stores and direct mail marketers 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 a single supplier;
o consolidation of multiple purchase orders into a single purchase
order;
o consolidation of multiple invoices into a single invoice;
o significant reduction in tracking of invoices;
o significant reduction in stocking decisions;
o elimination or reduction of purchases for inventory;
o elimination of paper orders and invoices through our electronic
ordering system; and
o e-commerce capabilities.
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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 prompt response and same-day shipping;
o superior, value-added customer service;
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 over 450,000
products, approximately 99% 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 delivery will generate significantly greater sales than areas where next day
delivery is not available. The strategic locations of our distribution centers
allow next day delivery via low cost ground carriers in 36 states.
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 employees. Utilizing our proprietary customer
support software, 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 provide technical
product information. We believe that our simple, one-call method of fulfilling
all purchasing needs of a customer through highly-trained telemarketing
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 4,480 pages and
over 450,000 items. In fiscal 2000, our master catalog was supplemented by
approximately 100 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 864,000 companies and 1.6 million
individuals, 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 6.3 million
in fiscal 1996 to approximately 28.8 million in fiscal 2000. We intend to
continue to increase direct marketing efforts to take advantage of the
additional products offered and our expanded distribution capabilities.
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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 450,000 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.
Launched in July 2000, MSCdirect.com is 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 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 small and mid-sized 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
same-day shipping 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; and
o continually developing and utilizing extensive e-commerce
capabilities, making it even easier and more appealing to do
business with MSC.
Increasing the Size and Diversity of our Customer Base. Since fiscal 1997,
we have shifted our principal growth strategy from increasing our offering of
SKUs to increasing the size and diversity of our customer base. Our experience
has been that sales in areas accessible by next day delivery are significantly
greater than in areas with second day delivery. Our goal is to open additional
distribution centers, supported locally by branch offices, which will expand our
geographic coverage of next day delivery throughout the United States. In
November, 1999, a new 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
864,000 companies and 1.6 million individual customers. 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. Accordingly, we have added approximately
226,000 SKUs over the past five years. By expanding the product lines and SKUs
offered, we seek to satisfy an increasing percentage of the MRO supplies
purchases of our customers and to attract new customers.
Fiscal Year Ended
----------------------------------------------------------------------------
August 31, August 30, August 29, August 28, August 26,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Number of SKUs 302 332 372 407 450
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E-commerce capabilities. In July 2000, we launched MSCdirect.com, a
proprietary business-to-business horizontal marketplace serving the MRO market.
MSCdirect.com offers customers full access to our catalog, which offers in
excess of 450,000 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. Every order
moves directly from the customer's desktop to the distribution center floor,
removing human error, reducing handling costs and speeding up the transaction
flow. In fiscal 2001, we plan to launch a marketing effort for general customer
awareness of MSCdirect.com including direct mailings explaining how to use the
website.
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 Ariba, Commerce-One, Oracle and I-Procure B2B e-commerce
portals.
Products
We currently offer in excess of 450,000 SKUs, representing a greater than
269% increase since 1995. We attribute a portion of our sales growth to the
total number of SKUs offered. In this regard, we intend to continue to add new
product categories and increase the number of products offered in existing
product categories in an effort to gain new customers and increase sales from
existing customers. Our core products include cutting tools, measuring
instruments, machine tool accessories and fasteners. As part of our strategy of
supplying an increasing portion of our customers' MRO needs, we have expanded
our product mix to include plumbing supplies, process instrumentation, hardware,
marking products, pumps and pneumatics equipment and have significantly
increased our offering of flat stock and raw materials and cutting tools. 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 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 of name recognition, quality and price, thus permitting the
customer to choose the appropriate product for a specific task on the most
cost-effective basis. 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' MRO
supplies costs.
MSC's product offering is comprised primarily of the following categories:
cutting tools; measuring instruments; tooling components; fasteners; flat stock
and raw materials; abrasives; machinery and electrical supplies as well as other
categories.
We purchase substantially all of our products directly from approximately
2,800 manufacturers located in the United States. 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 2000.
Generic products, primarily machine tools, are manufactured by third parties to
our specifications.
Distribution Centers
A significant number of our products are carried in stock, and
approximately 87% of orders 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
5
distribution centers for product shipment located near Harrisburg, Pennsylvania;
Atlanta, Georgia; Elkhart, Indiana and Reno, Nevada. Our facility near Reno,
Nevada became fully operational in November 1999.
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 $202. We focus our marketing efforts on the
small shop segment, consisting of job shops and other small industrial entities
with fewer than 100 employees and usually less than $50,000 of annual industrial
supplies purchases, and the mid-size corporate segment, consisting of industrial
entities with 100 to 999 employees and annual MRO purchases of between $500,000
and $1,000,000. We have recently established a national account program to
address the needs of Fortune 1000 customers. Our strategy with respect to that
portion of the large corporate segment that utilizes integrated suppliers is to
develop relationships with, and supply MRO products directly to, the integrated
supply providers that are hired by large corporations to manage their MRO
purchasing and administrative operations.
We also offer wholesalers and other distributors the ability to create
their own customized mail order catalog by offering to MSC customers turn-key
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 292,000 combined active customers (companies which
have purchased at least one item during the past 12 months). Typically, a
customer's MRO 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 or direct
computer link.
Fiscal Year Ended
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August 31, August 30, August 29, August 28, August 26,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Number of combined active
customers 127 146 178 254 292
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.
We rely on in excess of 500 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 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,
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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 325 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 38 states.
These branch offices receive approximately 60% of all telephone orders and are
staffed with highly trained telemarketing representatives that receive the same
training, are monitored in the same fashion 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 4,480 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
increased from 70 in fiscal 1996 to approximately 100 in fiscal 2000. The number
of pieces mailed has increased from approximately 6.3 million in fiscal 1996 to
approximately 28.8 million in fiscal 2000 and is expected to reach approximately
35.0 million in fiscal 2001.
Fiscal Year Ended
----------------------------------------------------------------------------
August 31, August 30, August 29, August 28, August 26,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Number of publication titles 70 80 80 90 100
Number of publications mailed 6,300,000 11,318,000 15,900,000 22,800,000 28,800,000
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
7
distribution center closest to the customer and a packing slip is printed for
order fulfillment. Most of the orders placed with MSC are shipped by United
Parcel Service, and, to a limited extent, by various other freight lines and
local carriers. Air freight is also used when appropriate. We have no written
agreement with UPS but have been able to negotiate favorable shipping rates due
to our volume of shipments. We are not dependent on any one carrier and believe
that alternative shipping arrangements can be made with minimal disruption to
operations in the event of the loss of UPS as our primary carrier. We believe
that our relationships with all our carriers are satisfactory. We guarantee
same-day shipping of our core business products if the order is received prior
to 4:30 p.m. eastern time 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.
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 have begun providing product information
and ordering capabilities on the Internet.
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.
8
Associates (Employees)
As of October 25, 2000, we employed approximately 2,828 associates,
including approximately 2,651 full-time and approximately 177 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.
9
ITEM 2. PROPERTIES.
We have distribution centers in the following locations:
Approx. Operational
Location Sq. Ft. Date
---------------------------- ------- --------------
Atlanta, Georgia (1) 340,000 October 1990
Elkhart, Indiana (2) 360,000 March 1996
Harrisburg, Pennsylvania (2) 370,000 January 1997
Reno, Nevada (2) 270,000 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 38 states, ranging in
size from 670 to 16,000 square feet. The leases for these branch offices will
expire at various periods between November 2000 and July 2010. The aggregate
annual lease payments on these properties in fiscal 2000 was approximately
$4,461,000.
We maintain our headquarters at a 170,000 square foot facility in
Melville, New York.
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.
There are no material legal proceedings pending against MSC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
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 30, 1998 to August 26,
2000.
Price of Class A
Fiscal Year Ended August 26, 2000 Common Stock
- --------------------------------- -----------------------------
High Low
-------- ----------
First Quarter................................................................... $11 $7-3/4
Second Quarter.................................................................. 18-5/8 8-15/16
Third Quarter................................................................... 22-1/16 13-11/16
Fourth Quarter.................................................................. 23-1/16 15-13/16
Fiscal Year Ended August 28, 1999
- ---------------------------------
First Quarter................................................................... $23-1/8 $14
Second Quarter.................................................................. 26-1/4 16-7/8
Third Quarter................................................................... 21-1/2 13-3/4
Fourth Quarter.................................................................. 20 9-3/8
- ----------
On November 7, 2000, the last reported sales price for MSC's Class A
Common Stock on the NYSE was $14.6875 per share.
The approximate number of holders of record of MSC's Class A Common Stock
as of November 7, 2000 was 562. The number of holders of record of MSC's Class B
Common Stock as of November 7, 2000 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.
11
Item 6. SELECTED 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 income statement data for the fiscal years ended August 29, 1998,
August 28, 1999 and August 26, 2000 and the selected balance sheet data as of
August 28, 1999 and August 26, 2000 are derived from MSC's audited consolidated
financial statements which are included elsewhere herein. The selected income
statement data for the fiscal years ended August 31, 1996 and August 30, 1997
and the selected balance sheet data as of August 31, 1996, August 30, 1997 and
August 29, 1998 are derived from MSC's audited consolidated financial statements
not included herein.
Fiscal Year Ended
--------------------------------------------------------------------------
August 31, August 30, August 29, August 28, August 26,
1996 1997 1998 1999 2000
--------------------------------------------------------------------------
(In thousands, except per share data)
Income Statement Data:
Net sales $305,294 $438,003 $583,043 $651,503 $792,874
Gross profit 126,775 179,255 238,074 261,729 306,392
Operating Expenses 83,666 120,498 161,899 179,958 213,094
Restructuring charge 8,600 -- -- -- --
Income from operations 34,509 58,757 76,175 81,771 93,298
Income taxes 5,531 23,518 30,904 31,897 35,191
Net income 28,503 36,017 47,335 48,853 52,926
Net income per share:
Basic -- .53 .70 .73 .79
Diluted -- .53 .69 .72 .78
Weighted number of shares outstanding:
Basic -- 67,381 67,756 67,056 67,215
Diluted -- 68,218 68,964 68,317 68,203
Pro forma net income(1) 20,591 -- -- -- --
Pro forma net income per share: (2)
Basic .35 -- -- -- --
Diluted .35 -- -- -- --
Pro forma weighted number of shares
outstanding: (2)
Basic 58,910 -- -- -- --
Diluted 59,246 -- -- -- --
Selected Operating Data:(3)
Combined active customers (4) 127 146 178 254 292
Number of SKUs 302 332 372 407 450
Orders entered 2,155 2,425 3,222 3,429 3,703
Number of publication titles (not in
thousands) 70 80 80 90 100
Number of publications mailed 6,300 11,318 15,900 22,800 28,800
Revenue per associate (employee) $ 266 $ 280 $ 282 $ 285 $ 298
12
--------------------------------------------------------------------------
August 31, August 30, August 29, August 28, August 26,
1996 1997 1998 1999 2000
--------------------------------------------------------------------------
Balance Sheet Data (at period end):
Working capital $163,785 $190,344 $183,750 $247,205 $296,693
Total assets 265,484 334,834 401,702 514,384 580,974
Short-term debt 2,486 213 800 306 244
Long-term debt, net of current portion 42,191 2,744 2,430 69,468 68,398
Shareholders' equity $172,571 $274,995 $321,779 $355,627 $421,669
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%.
(2) Pro forma net income per common share for the year ended August 31, 1996
includes the pro forma effect of a "C" corporation income tax provision
for the entire year. Pro forma weighted average common shares outstanding
include the weighted average shares of Class A and Class B Common Stock
and common stock equivalents outstanding during the year, after giving pro
forma effect to the recapitalization in the initial public offering.
(3) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General."
(4) Effective August 28, 1999 includes Enco Manufacturing Co., Inc. active
customers.
13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
In recent years, we made the strategic decision to leverage MSC's strength
as a low-cost, value-added MRO provider by adding new products and categories of
MRO supplies, such as welding and electrical supplies, which has increased, and
is anticipated to further increase, sales to existing customers and access to
new customers. We believe that revenue has increased, in part, as a result of
the increase in the number of SKUs. We generally add SKUs in response to the
feedback we receive from our existing customers. There can be no assurance that
we will be able to increase the number of SKUs offered or that the correlation
between the number of SKUs offered and revenue will continue.
We significantly expanded our direct mail marketing program from
approximately 6.3 million pieces in fiscal 1996 to 28.8 million pieces in fiscal
2000. Targeted mailings to customers or potential customers are designed to
maximize our return in relation to our marketing expenditures. We utilize our
customer databases to match specific customer profiles with an expanding
selection of catalog titles which emphasize specific product categories. We
believe that increasing mailings to more targeted customer segments has resulted
in increased marketing productivity.
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.
Revenue per associate increased from approximately $266 in fiscal 1996 to
approximately $298 during fiscal 2000. We believe that this increase in revenue
per associate is indicative of our efforts to achieve higher levels of
efficiency and cost savings at the associate level.
The number of annual orders entered and processed has increased from
approximately 2.2 million in fiscal 1996 to approximately 3.7 million during
fiscal 2000. The average order size for our core business has increased from
approximately $130 fiscal 1996 to approximately $202 during fiscal 2000. We
believe that our targeted marketing campaign strategy, our strategy of
continuing to add new product categories and new products within existing
categories, and increased efficiencies in order processing have been significant
contributing factors to the increase in orders and sales we have received, both
from existing customers and from new customers. There can be no assurance,
however, that we will be able to continue to grow at rates recently experienced
or at all.
14
Results Of Operations
The following table summarizes MSC's historical results of operations as a
percentage of sales for the three most recent fiscal years.
August 29, 1998 August 28, 1999 August 26, 2000
--------------- --------------- ---------------
Net sales (dollars in thousands).......... $583,043 $651,503 $792,874
======== ======== ========
Net sales................................. 100.0% 100.0% 100.0%
Gross profit.............................. 40.8 40.2 38.6
Operating expenses........................ 27.8 27.6 26.9
Income from operations.................... 13.1 12.6 11.8
Net income................................ 8.1 7.5 6.7
Fiscal Year Ended August 26, 2000 Compared to Fiscal Year Ended August 28, 1999
Net sales increased by $141.4 million, or 21.7%, to $792.9 million during
fiscal 2000 from $651.5 million in fiscal 1999. This increase was primarily
attributable to an increase in sales to the Company's existing customers and an
increase in the number of active customers. The increase in sales to existing
customers was in part attributable to an increase of 10.6% in the number of SKUs
offered, as well as from more focused marketing efforts. Average annual sales
per customer increased 5.9%, and the number of combined active customers
increased 15.0% in fiscal 2000, as compared to fiscal 1999.
Gross profit increased by $44.7 million, or 17.1%, to $306.4 million
during fiscal 2000 from $261.7 million in fiscal 1999, primarily attributable to
increased sales. As a percentage of sales, gross profit decreased from 40.2% to
38.6%. The decrease in gross profit as a percentage of net sales resulted
primarily from the mix of products being sold, the introduction of new products
which have lower margins than certain products which the Company has sold in the
past, increased promotional selling, lower selling prices on selected items, and
lower margins realized from customers and product lines gained through the
Company's acquisitions.
Operating expenses increased by $33.1 million, or 18.4%, to $213.1 million
during fiscal 2000 from $180.0 million in fiscal 1999. As a percentage of sales,
operating expenses decreased from 27.6% to 26.9%. The decline in operating
expenses as a percentage of sales was primarily attributable to leveraging fixed
costs over a larger revenue base. The dollar increase was primarily attributable
to increased sales volume which required additional staffing and support, new
distribution center opening and operating costs, increased depreciation costs
resulting from the previous year's large capital expenditures, and expenditures
for future growth initiatives, including increased expenses related to internal
Internet initiatives.
Income from operations increased by $11.5 million, or 14.1%, to $93.3
million during fiscal 2000 from $81.8 million in fiscal 1999. The increase was
primarily attributable to increased sales and the dollar amount increase in
gross profit offset in part by an increase in operating expenses.
Interest expense increased by $3.6 million to $5.2 million during fiscal
2000 from $1.6 million in fiscal 1999. The increase was primarily attributable
to higher long-term notes payable borrowings and higher interest rates under the
Company's revolving credit agreement. The funds were used primarily for
inventory purchases for the Company's new distribution center, increasing
inventory to support higher sales volume, expenditures for property, plant, and
equipment and investments in internal Internet initiatives.
Equity in loss of unconsolidated affiliate of approximately $0.5 million
relates to the Company's non-controlling investment made in the second quarter
of fiscal 2000 in an Internet joint venture accounted for under the
15
equity method which has been accounted for under the cost method since the
Company's ownership and control were reduced in the third quarter of fiscal
2000.
Provision for income taxes and net income: The effective income tax rate
was approximately 40.0 percent for fiscal 2000 as compared to 39.5 percent in
the prior year. Net income increased by $4.0 million, or 8.2%, to $52.9 million
in fiscal 2000 from $48.9 million in fiscal 1999. This increase was primarily
the result of previously mentioned increased sales and the dollar amount
increase in gross profit offset in part by an increase in operating expenses
necessary in order to support the increase in volume and to invest in future
growth.
Fiscal Year Ended August 28, 1999 Compared to Fiscal Year Ended August 29, 1998
Net sales increased by $68.5 million, or 11.8%, to $651.5 million during
fiscal 1999 from $583.0 million in fiscal 1998. This increase was primarily
attributable to an increase in sales to the Company's existing customers, an
increase in the number of active customers and the effect of acquisitions made
during fiscal 1998 and fiscal 1999. We believe the increase in sales to existing
customers was in part attributable to an increase of 9.4% in the number of SKUs
offered, as well as from more focused marketing efforts. Average annual sales
per customer increased 3.1%, and the number of active customers increased 8.4%
in fiscal 1999, as compared to fiscal 1998. Sales from the companies acquired in
1999 accounted for approximately 3.5% of consolidated net sales.
Gross profit increased by $23.6 million, or 9.9%, to $261.7 million during
fiscal 1999 from $238.1 million in fiscal 1998, primarily attributable to
increased sales. As a percentage of sales, gross profit decreased from 40.8% to
40.2%. The decrease resulted primarily from the mix of products being sold and
as a result of lower margins realized from customers and product lines gained
through the Company's acquisitions.
Operating expenses increased by $18.1 million, or 11.2%, to $180.0 million
during fiscal 1999 from $161.9 million in fiscal 1998. As a percentage of sales,
operating expenses decreased slightly from 27.8% to 27.6%. The decline in
operating expenses as a percentage of sales was primarily attributable to
leveraging fixed costs over a larger revenue base, offset in part by expenses
required to prepare the Company's new distribution center for operations,
additional costs of the new headquarters and expenditures for future growth
initiatives.
Income from operations increased by $5.6 million, or 7.4%, to $81.8
million during fiscal 1999 from $76.2 million in fiscal 1998. The increase was
primarily attributable to increased sales and the dollar amount increase in
gross profit offset in part by an increase in operating expenses.
Net income increased by $1.6 million, or 3.4%, to $48.9 million during
fiscal 1999 from $47.3 million in fiscal 1998. This increase was primarily the
result of previously mentioned increases in sales and gross profit, offset in
part by the increase in operating expenses necessary in order to support the
increase in volume and to invest in future growth.
Quarterly Results and Seasonality
The following table sets forth unaudited financial data for each of MSC's
last eight fiscal quarters.
Year Ended August 28, 1999 Year Ended August 26, 2000
---------------------------------------- ---------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
Income Statement Data:
Net Sales.............. $155,451 $160,518 $170,492 $165,042 $182,761 $198,233 $212,845 $199,035
Gross Profit........... 63,761 66,157 68,760 63,051 71,220 76,173 81,802 77,197
Income from operations. 19,841 25,476 20,964 15,490 18,439 24,446 28,613 21,800
Net income............. 12,060 15,161 12,320 9,312 10,491 13,613 16,366 12,456
Net income per share:
Basic............... .18 .23 .18 .14 .16 .20 .24 .18(a)
Diluted............. .18 .22 .18 .14 .16 .20 .24 .18
(a) Basic earnings per share for fiscal 2000 in total exceeds by $ 0.01
the sum of the applicable amount for each of the quarters of fiscal 2000 due to
the impact of stock issuances on the weighted average number of shares
outstanding.
16
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. Our quarterly results of operations may
also fluctuate as a result of a variety of other factors, including the timing
of commencement of operations at new distribution centers.
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 and available lines of credit will be
adequate to support our operations for the immediate future and for at least the
next 24 months.
Under the terms of the credit facility, the maximum permitted borrowings
are $160.0 million ($110.0 million under an unsecured revolving credit agreement
and $50.0 million as a term loan). Interest on amounts borrowed may be paid at a
rate per annum equal to the bank's base rate (9.5% at August 26, 2000) 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. This credit facility contains certain
covenants limiting mergers, use of proceeds, indebtedness, liens, investments,
sales of assets, acquisitions, and issuance of dividends. This credit facility
also contains certain standard financial covenants. As of August 26, 2000, the
Company was in compliance with all financial covenants. As of August 26, 2000,
the Company had approximately $66.6 million in outstanding borrowings under the
credit facility. Available borrowings at August 26, 2000 are $93.4 million, all
of which were available under the revolving credit agreement.
Net cash provided by operating activities for the fiscal year ended August
26, 2000 was $20.4 million and net cash used in operating activities for the
fiscal year ended August 28, 1999 was $5.4 million. The change of approximately
$25.8 million in net cash provided from operations to net cash used in
operations resulted from improved net working capital requirements, due to
management's initiatives to reduce working capital, higher non-cash items and
higher net income.
Net cash used in investing activities for the fiscal years ended August
26, 2000 and August 28, 1999 was $31.0 million and $48.3 million, respectively.
The net usage of cash in fiscal 2000 was primarily attributable to expenditures
for property, plant and equipment and cash paid for investments in internet
initiatives. The net usage of cash in fiscal 1999 was primarily attributable to
cash paid for construction of the Company's new headquarters, expenditures
related to the construction of a new distribution center and cash paid for
acquisitions.
Net cash provided by financing activities during the fiscal years ended
August 26, 2000 and August 28, 1999 was $11.2 million and $47.7 million,
respectively. The net cash provided by financing activities for fiscal 2000 was
primarily attributable to proceeds from the exercise of common stock options.
The net cash provided by financing activities for fiscal 1999 was primarily
attributable to proceeds received from notes payable, offset by the purchase in
the open market of approximately 997,000 shares of Class A common stock.
Year 2000
Management believes that the Company mitigated its exposure relative to
Year 2000 issues for both information and non-information technology systems.
The Company's non-compliant systems were either replaced or modified to become
Year 2000 compliant prior to December 31, 1999. The transition into the Year
2000 resulted in no significant impact to the financial position or operations
of the Company. To date, the Company's suppliers continue to provide the Company
with sufficient goods and services in the Year 2000.
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 $160.0 million, of which $110.0 million is a
revolving credit agreement and the remaining $50.0 million is a term loan. At
August 26, 2000,
17
approximately $66.6 million was outstanding under the credit agreement. The
agreement bears interest at the bank's base rate (9.5% at August 26, 2000), 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. If the principal amounts under the
Company's credit agreement remained at this year-end level for an entire year
and the prime rate increased or decreased, respectively, by 1%, then the Company
would pay or save, respectively, an additional $0.7 million in interest that
year. The Company does not make material use of derivative financial instruments
to hedge against changes in interest rates or for any other purpose.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of August 26, 2000 and August 28, 1999 F-2
Consolidated Statements of Income for the three fiscal years
ended August 26, 2000 F-3
Consolidated Statements of Shareholders' Equity for the three
fiscal years ended August 26, 2000 F-4
Consolidated Statements of Cash Flows for the three fiscal years
ended August 26, 2000 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants on Schedule II S-1
Schedule of Valuation and Qualifying Accounts S-2
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
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 2001 (the "2000
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 2000 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 2000 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 2000 Proxy
Statement, which is incorporated herein by this reference.
20
PART IV.
ITEM 14. 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 26, 2000.
Financial statements filed as a part of this report are listed on the
"Index to Consolidated Financial Statements" at page 19 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).
Employment Agreement, dated as of January 2, 1994, between
Registrant and Sidney Jacobson, *10.03 as amended on October
31, 1995.
*10.04 Employment Agreement, dated as of August 1, 1994, between
Registrant and Mitchell Jacobson.
10.05 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)
10.06 Employment Agreement, dated as of June 19, 2000, between
Registrant and Charles Boehlke
10.07 Agreement, dated as of January 8, 1999, between the 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).
10.08 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 Arthur Andersen LLP
27.01 Financial Data Schedule
- --------------------------------------------------------------------------------
*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 26, 2000
Page
----
Report of Independent Public Accountants 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 Financial Statements or Notes
thereto.
21
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 9, 2000 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 9, 2000
- ------------------------------------ Chief Executive Officer and Director
Mitchell Jacobson
/s/ Sidney Jacobson Vice-Chairman of the Board of Directors November 9, 2000
- ------------------------------------
Sidney Jacobson
/s/ Charles Boehlke Senior Vice President and Chief Financial Officer November 9, 2000
- ------------------------------------
Charles Boehlke
/s/ Shelley Boxer Vice President of Finance and Director November 9, 2000
- ------------------------------------
Shelley Boxer
/s/ David Sandler Executive Vice President and Director November 9, 2000
- ------------------------------------
David Sandler
/s/ James Schroeder Senior Vice President-Logistics and Director November 9, 2000
- ------------------------------------
James Schroeder
/s/ Denis Kelly Director November 9, 2000
- ------------------------------------
Denis Kelly
/s/ Raymond Langton Director November 9, 2000
- ------------------------------------
Raymond Langton
/s/ Roger Fradin Director November 9, 2000
- ------------------------------------
Roger Fradin
/s/ Philip Peller Director November 9, 2000
- ------------------------------------
Philip Peller
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MSC Industrial Direct Co., Inc.:
We have audited the accompanying consolidated balance sheets of MSC Industrial
Direct Co., Inc. (a New York corporation) and Subsidiaries as of August 26, 2000
and August 28, 1999, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended August 26, 2000. 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 financial position of MSC Industrial Direct Co., Inc.
and Subsidiaries as of August 26, 2000 and August 28, 1999, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended August 26, 2000 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Melville, New York
October 26, 2000
F-1
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS August 26, 2000 August 28, 1999
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,209 $ 2,725
Accounts receivable, net of allowance for doubtful accounts of $3,779 and
$5,799, respectively 98,837 90,007
Inventories 264,494 225,542
Prepaid expenses and other current assets 4,190 4,390
Current deferred income taxes 4,484 5,379
--------- ---------
Total current assets 375,214 328,043
--------- ---------
INVESTMENTS, at cost (Note 5) 8,982 --
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 116,378 106,750
--------- ---------
OTHER ASSETS:
Goodwill 65,115 67,080
Other 15,285 12,511
--------- ---------
80,400 79,591
--------- ---------
$ 580,974 $ 514,384
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 30,245 $ 38,474
Accrued liabilities 48,032 42,058
Current portion of long-term notes payable 244 306
--------- ---------
Total current liabilities 78,521 80,838
LONG-TERM NOTES PAYABLE 68,398 69,468
DEFERRED INCOME TAX LIABILITIES 12,386 8,451
--------- ---------
Total liabilities 159,305 158,757
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock; $0.001 par value; 5,000,000 shares authorized; none outstanding -- --
Class A common stock; $0.001 par value; 100,000,000 shares authorized;
35,290,231 and 33,902,048 shares issued, 34,217,231 and 32,761,048 shares
outstanding, respectively 35 34
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
33,738,778 and 34,138,778 shares, respectively, issued and outstanding 34 34
Additional paid-in capital 229,297 216,977
Retained earnings 213,591 161,687
Treasury stock, at cost, 1,073,000 and 1,141,000 shares, respectively (21,079) (22,452)
Deferred stock compensation (209) (653)
--------- ---------
Total shareholders' equity 421,669 355,627
--------- ---------
$ 580,974 $ 514,384
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
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 26, 2000 August 28, 1999 August 29, 1998
--------------- --------------- ---------------
NET SALES $ 792,874 $ 651,503 $ 583,043
COST OF GOODS SOLD 486,482 389,774 344,969
--------- --------- ---------
Gross profit 306,392 261,729 238,074
OPERATING EXPENSES 213,094 179,958 161,899
--------- --------- ---------
Income from operations 93,298 81,771 76,175
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (5,207) (1,576) (52)
Interest income 212 62 1,126
Equity in loss of unconsolidated affiliate (Note 5) (465) -- --
Other income, net 279 493 990
--------- --------- ---------
(5,181) (1,021) 2,064
--------- --------- ---------
Income before provision for income taxes 88,117 80,750 78,239
Provision for income taxes 35,191 31,897 30,904
--------- --------- ---------
Net income $ 52,926 $ 48,853 $ 47,335
========= ========= =========
PER SHARE INFORMATION (Note 3):
Net income per share:
Basic $ .79 $ .73 $ .70
========= ========= =========
Diluted $ .78 $ .72 $ .69
========= ========= =========
Shares used in computing net income per share:
Basic 67,215 67,056 67,756
========= ========= =========
Diluted 68,203 68,317 68,964
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-3
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED AUGUST 26, 2000
(In thousands)
Class A Class B
Common Stock Common Stock Additional
------------------------- ------------------------- Paid-In
Shares Amount Shares Amount Capital
--------- --------- --------- --------- -----------
BALANCE, August 30, 1997 33,332 $ 33 34,364 $ 34 $ 211,671
Exchange of Class B Common Stock for Class A
Common Stock 222 -- (222) -- --
Purchase of treasury stock -- -- -- -- --
Cancellation of restricted common stock (6) -- -- -- (57)
Amortization of deferred stock compensation -- -- --
Exercise of common stock options, including
income tax benefits of $648 135 -- -- -- 2,169
Net income -- -- -- -- --
--------- --------- --------- --------- ---------
BALANCE, August 29, 1998 33,683 33 34,142 34 213,783
Exchange of Class B Common Stock for Class A
Common Stock 3 1 (3) -- --
Purchase of treasury stock -- -- -- -- --
Cancellation of restricted common stock (14) -- -- -- (133)
Amortization of deferred stock compensation -- -- -- -- --
Exercise of common stock options, including
income tax benefits of $856 230 -- -- -- 3,327
Net income -- -- -- -- --
--------- --------- --------- --------- ---------
BALANCE, August 28, 1999 33,902 34 34,139 34 216,977
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 -- -- -- -- --
Amortization of deferred stock compensation -- -- -- -- --
Exercise of common stock options, including
income tax benefits of $384 988 1 -- -- 12,320
Net income -- -- -- -- --
--------- --------- --------- --------- ---------
BALANCE, August 26, 2000 35,290 $ 35 33,739 $ 34 $ 229,297
========= ========= ========= ========= =========
Treasury Stock
------------------------- Deferred
Retained Amount Stock
Earnings Shares at cost Compensation Total
--------- --------- --------- ------------ ---------
BALANCE, August 30, 1997 $ 65,499 28 $ (499) $ (1,743) $ 274,995
Exchange of Class B Common Stock for Class A
Common Stock -- -- -- -- --
Purchase of treasury stock -- 147 (3,200) -- (3,200)
Cancellation of restricted common stock -- -- -- 57 --
Amortization of deferred stock compensation -- -- 480 480
Exercise of common stock options, including
income tax benefits of $648 -- -- -- -- 2,169
Net income 47,335 -- -- -- 47,335
--------- --------- --------- --------- ---------
BALANCE, August 29, 1998 112,834 175 (3,699) (1,206) 321,779
Exchange of Class B Common Stock for Class A
Common Stock -- -- -- -- 1
Purchase of treasury stock -- 966 (18,753) -- (18,753)
Cancellation of restricted common stock -- -- -- 133 --
Amortization of deferred stock compensation -- -- -- 420 420
Exercise of common stock options, including
income tax benefits of $856 -- -- -- -- 3,327
Net income 48,853 -- -- -- 48,853
--------- --------- --------- --------- ---------
BALANCE, August 28, 1999 161,687 1,141 (22,452) (653) 355,627
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 (1,022) (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 52,926 -- -- -- 52,926
--------- --------- --------- --------- ---------
BALANCE, August 26, 2000 $ 213,591 1,073 $ (21,079) $ (209) $ 421,669
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-4
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED AUGUST 26, 2000
(In thousands)
For The Fiscal Years Ended
------------------------------------------------------
August 26, 2000 August 28, 1999 August 29, 1998
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,926 $ 48,853 $ 47,335
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in loss of unconsolidated affiliate 465 -- --
Depreciation and amortization 13,963 8,730 7,302
Amortization of deferred stock compensation 444 420 480
Gain on disposal of property, plant and equipment (36) (17) (19)
Provision for doubtful accounts 1,526 1,933 1,523
Deferred income taxes 4,830 7,521 1,442
Changes in operating assets and liabilities, net of effect
from acquisitions:
Accounts receivable (10,356) (15,512) (11,148)
Inventories (38,952) (64,011) 9,203
Prepaid expenses and other current assets 200 (871) (150)
Other assets (2,774) (1,270) (4,279)
Accounts payable and accrued liabilities (1,869) 8,875 (4,842)
Other -- (3) (92)
-------- -------- --------
Total adjustments (32,559) (54,205) (580)
-------- -------- --------
Net cash provided by (used in) operating activities 20,367 (5,352) 46,755
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (21,626) (35,481) (32,456)
Proceeds from sale of property, plant and equipment 36 17 19
Cash paid for acquisitions, net of cash acquired -- (12,834) (19,459)
Cash paid for investments (9,447) -- --
-------- -------- --------
Net cash used in investing activities (31,037) (48,298) (51,896)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (749) (21,431) (389)
Net proceeds from associate stock purchase plan 1,100 -- --
Net proceeds from exercise of common stock options 11,936 2,471 1,521
Net proceeds from (repayments of) notes payable (1,133) 66,544 (885)
Repayments from affiliates -- 161 106
-------- -------- --------
Net cash provided by financing activities 11,154 47,745 353
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 484 (5,905) (4,788)
CASH AND CASH EQUIVALENTS, beginning of year 2,725 8,630 13,418
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 3,209 $ 2,725 $ 8,630
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,402 $ 2,614 $ 110
======== ======== ========
Income taxes $ 29,940 $ 21,436 $ 31,279
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
1. BUSINESS
The Company is a distributor of industrial equipment and supplies with
headquarters in Melville, New York. The Company serves both domestic and
international markets through its distribution network, which includes
approximately 90 local MSC branches in 38 states, as well as certain other
locations related to acquired entities, concentrated in the Eastern and Southern
United States, 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
Industrial Direct Co., Inc. 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 fifty-two or fifty-three week basis, ending on
a Saturday close to August 31. The financial statements for fiscal 2000, 1999
and 1998 each contain activity for fifty-two weeks.
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.
Concentration of Credit Risk
The Company's mix of receivables is diverse, with approximately 292,000 combined
active customer accounts. The Company sells its products primarily to end-users.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at the lower
of average cost or market.
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment are computed for
financial reporting purposes on both the straight-line and accelerated methods
based on the estimated useful lives of the assets.
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.
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.
F-6
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Goodwill
Goodwill shown in the consolidated balance sheets at August 26, 2000 and August
28, 1999 relates to multiple acquisitions completed during the last five fiscal
years (Note 4). Goodwill is being amortized on a straight-line basis over
40-year periods. Accumulated amortization was $5,525 and $3,560 as of August 26,
2000 and August 28, 1999, respectively. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company periodically reviews long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used for impairment whenever events or changes in circumstances indicate that
the carrying amount of those assets may not be recoverable. The amount of
goodwill impairment, if any, is measured based on projected future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
Management believes that there is no impairment to recorded goodwill as of
August 26, 2000.
Deferred Catalog Costs
The costs of producing and distributing the Company's principal catalogs are
deferred and included in other assets in the Company's consolidated balance
sheets in accordance with SOP 93-7, "Reporting on Advertising Costs" ($12,943
and $10,413 at August 26, 2000 and August 28, 1999, respectively). 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
incurred.
Revenue Recognition
The Company recognizes revenue upon shipment of products to its customers. The
Company reports its sales levels on a net sales basis, with net sales being
computed by deducting from gross sales the amount of actual sales returns and
the amount of reserves established for anticipated sales returns.
Reclassifications
Certain prior year balances have been reclassified to conform with current year
presentation.
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.
Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method specified by
SFAS No. 109, the deferred income tax amounts included in the balance sheet 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.
F-7
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Affiliates
The Company is affiliated with MSC International Korea, Inc. and various real
estate entities (together, the "affiliates"). The affiliates are owned primarily
by the Company's principal shareholders. See Note 12 for discussion of certain
related party transactions.
Investments
The Company's investments in internet commerce companies are recorded on the
cost method of accounting, due to respective ownership interests and the
Company's inability to exercise significant influence.
Fair Value of Financial Instruments
The Company follows the provisions of SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." To meet the reporting requirements of SFAS No.
107, the Company calculates the fair value of financial instruments and includes
this additional information in the notes to financial statements when the fair
value is different than book value of those financial instruments. When the fair
value is equal to the book value, no additional disclosure is made. The Company
uses quoted market prices whenever available to calculate the fair value. When
quoted market prices are not available, the Company uses standard pricing models
for various types of financial instruments which take into account the present
value of estimated future cash flows. At August 26, 2000, the carrying value of
all financial instruments approximated fair value.
Comprehensive Income
In fiscal 1999, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income," which establishes new rules for the reporting of comprehensive income
and its components. The adoption of this statement had no impact on the
Company's net income or shareholders' equity. For the fiscal years 2000, 1999
and 1998, 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 No. 00-2, "Accounting for Web Site Development Costs," which requires
companies to properly account for costs incurred to develop a web site. 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.
Recently Issued Accounting Pronouncements
Derivative Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal years beginning after June 15, 2000 and will not require retroactive
restatement of prior period financial statements. This statement requires the
recognition of all derivative instruments as either assets or liabilities in the
balance sheet measured at fair value. Derivative instruments will be recognized
as gains or losses in the period of change. If certain conditions are met where
the derivative instrument has been designated as a fair value hedge, the hedge
items may also be marked to market through earnings, thus creating an offset. If
the derivative is designed and qualifies as a cash flow hedge, the changes in
fair value of the derivative instrument may be recorded in comprehensive income.
The Company does not presently make material use of derivative instruments. The
Company adopted this statement in fiscal 2001, and the impact of adoption was
not material.
F-8
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Shipping and Handling Costs
In September 2000, the EITF reached a consensus with respect to EITF Issue No.
00-10, "Accounting for Shipping and Handling Revenues and Costs." The purpose of
this issue discussion was to clarify the classification of shipping and handling
revenues and costs. The consensus reached was that all shipping and handling
billed to customers is revenue.
Further, a consensus was reached that the classification of shipping and
handling costs is an accounting policy decision that should be disclosed
pursuant to Accounting Principles Board Opinion No. 22, "Disclosures of
Accounting Policies." The Company may adopt a policy of including shipping and
handling costs in cost of sales. If shipping costs are significant and are not
included in cost of sales, a company should disclose both the amount(s) of such
costs and the line item(s) on the income statement that included them.
This standard will require a restatement of prior periods for changes in
classification. The Company currently nets its shipping and handling revenue
with the related costs and includes the residual amount as selling expense. This
consensus is effective for the Company beginning with the fourth quarter of
fiscal 2001. The Company is in the process of quantifying the impact of its
adoption, which will not change reported income from operations or net income.
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 26, 2000, August 28, 1999
and August 29, 1998, respectively:
Net Income Shares Net Income Per Share
--------------------------------- -------------------------------- --------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------ ---- ---- ----
BASIC EPS
Net income $52,926 $48,853 $47,335 67,215 67,056 67,756 $.79 $.73 $.70
Effect of dilutive
associate stock
options -- -- -- 988 1,261 1,208 (.01) (.01) (.01)
------- ------- ------- ------- ------- ------- ---- ---- ----
DILUTED EPS
Net income $52,926 $48,853 $47,335 68,203 68,317 68,964 $.78 $.72 $.69
======= ======= ======= ======= ======= ======= ==== ==== ====
4. ACQUISITION OF BUSINESSES
There were no acquisitions during fiscal 2000. All prior acquisitions have been
accounted for under the purchase method of accounting. The excess of the
purchase price over the fair values of the net assets acquired for the
acquisitions was approximately $70,640 and was allocated to goodwill at August
26, 2000 and August 28, 1999, respectively. In determining the value of assets,
principally inventory, accounts receivable and fixed assets, management uses its
judgement on fair values, which is primarily based on management's experience in
collecting receivables, selling inventory and realizing value from such fixed
assets.
F-9
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Business Acquired Date Acquired Acquisition Cost
----------------- ------------- ----------------
Fiscal 1999
Industrial Specialty Company, Inc. October 1, 1998 $ 6,226
Direct Line, Inc. January 1, 1999 428
Corbin Corporation February 1, 1999 6,224
5. INVESTMENTS
During fiscal 2000, the Company invested approximately $2.0 million, $3.0
million and $2.0 million respectively in three internet commerce companies. The
Company's interest in each company is less than 5% and, accordingly, is
accounted for under the cost method of accounting. The Company's carrying value
in these investments approximates fair value at August 26, 2000.
During fiscal 2000, the Company made an investment of approximately $2.4 million
in an internet joint venture in the form of a non-controlling combination of
voting and non-voting equity securities. The Company accounted for this
investment under the equity method for the first half of fiscal 2000, whereby
the Company recognized its allocable share of the earnings or losses of this
venture in its statement of income as "equity in loss of unconsolidated
affiliate." The Company's share of net loss of unconsolidated affiliate was $0.5
million for fiscal 2000. During the third quarter of fiscal 2000, the Company
reduced its interest to 19% and otherwise restructured its ownership such that
the Company does not exercise significant influence. In October 2000, this
internet joint venture was merged with another unrelated entity and MSC's
interest was then reduced to approximately 10% of this new entity. Accordingly,
the investment continues to be accounted for using the cost method. At August
26, 2000 the Company's carrying value of this investment approximates fair
value.
6. 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 26, 2000 August 28, 1999
--------------- --------------- ---------------
Land -- $ 11,429 $ 11,429
Building 40 38,883 35,788
Building and leasehold improvements The lesser of the
life of the lease
or 31.5 20,811 19,409
Furniture, fixtures and equipment 3-10 58,471 52,264
Automobiles 5 873 863
Computer systems 3-5 26,902 16,697
----------- -----------
157,369 136,450
Less: Accumulated depreciation and amortization 40,991 29,700
----------- -----------
$ 116,378 $ 106,750
=========== ===========
The amount of capitalized interest, net of accumulated amortization, included in
property, plant and equipment is $1,686 and $1,534 at August 26, 2000 and August
28, 1999, respectively.
7. INCOME TAXES
The provision for income taxes is comprised of the following:
F-10
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
For the Fiscal Years Ended
------------------------------------------------------------
August 26, 2000 August 28, 1999 August 29, 1998
--------------- --------------- ---------------
Current:
Federal $ 25,057 $ 20,116 $ 23,994
State and local 5,306 4,260 5,081
------------ ------------ ------------
30,363 24,376 29,075
------------ ------------ ------------
Deferred:
Federal 3,984 6,204 1,510
State and local 844 1,317 319
------------ ------------ ------------
4,828 7,521 1,829
------------ ------------ ------------
Total $ 35,191 $ 31,897 $ 30,904
============ ============ ============
Significant components of deferred tax assets and liabilities are as follows:
August 26, 2000 August 28, 1999
--------------- ---------------
Current and non-current deferred tax liabilities:
Depreciation $ (19,813) $ (8,516)
Prepaid advertising (5,271) (4,327)
Goodwill (341) (248)
----------- -----------
(25,425) (13,091)
----------- -----------
Current and non-current deferred tax assets:
Accounts receivable 1,370 1,662
Inventory 8,259 1,804
Deferred compensation 2,623 4,393
Other 5,271 2,160
----------- -----------
17,523 10,019
----------- -----------
Net Deferred Tax Liabilities $ (7,902) $ (3,072)
=========== ===========
The Company believes that, based upon its consistent history of profitable
operations, it is more likely than not that the net deferred tax assets
generated through August 26, 2000 will be realized, primarily from the
generation of future taxable income.
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
For the Fiscal Years Ended
---------------------------------------------------------
August 26, 2000 August 28, 1999 August 29, 1998
--------------- --------------- ---------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit 5.0 4.5 4.5
----- ----- -----
Effective income tax rate 40.0% 39.5% 39.5%
==== ==== ====
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
August 26, 2000 August 28, 1999
--------------- ---------------
Accrued payroll and bonus $ 19,159 $ 16,489
Accrued fringe benefits 7,011 4,784
Accrued restructuring and relocation charges 2,158 4,913
Accrued catalog costs 5,375 3,708
Accrued other 14,329 12,164
----------- -----------
Total accrued liabilities $ 48,032 $ 42,058
=========== ===========
F-11
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
9. LONG-TERM NOTES PAYABLE
Long-term notes payable consist of the following:
August 26, 2000 August 28,1999
--------------- --------------
Revolving credit agreement (a) $ 16,600 $ 67,450
Term loan (a) 50,000 --
Term notes payable (b) 2,042 2,324
----------- -----------
68,642 69,774
Less: Current portion 244 306
----------- -----------
$ 68,398 $ 69,468
=========== ===========
Maturities of notes payable are as follows:
Fiscal Year
2001 $ 244
2002 252
2003 244
2004 162
2005 66,747
Thereafter 993
-----------
$ 68,642
===========
(b) In February, 2000, the Company entered into a new credit agreement
with a bank, as agent for a group of banks. Under the terms of the
credit agreement, the maximum permitted borrowings have increased
from $80.0 million of unsecured revolving credit to maximum
permitted borrowings of $160.0 million ($110.0 million under an
unsecured revolving credit agreement and $50.0 million as a term
loan). Interest on amounts borrowed may be paid at a rate per annum
equal to the bank's base rate (9.5% at August 26, 2000) 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 issuance of dividends. This credit facility also
contains certain standard financial covenants. As of August 26,
2000, the Company was in compliance with all financial covenants. As
of August 26, 2000, the Company had approximately $66.6 million in
outstanding borrowings under the credit facility. Available
borrowings at August 26, 2000 are $93.4 million, all of which were
available under the revolving credit agreement.
(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.
10. CAPITAL STOCK TRANSACTIONS
STOCK SPLIT
On April 6, 1998, the Company's Board of Directors authorized a two-for-one
stock split, effected in the form of a 100% stock dividend, that was distributed
on May 22, 1998 to shareholders of record on April 24, 1998. All share and per
share data included in the accompanying financial statements have been restated
to reflect this stock split for all periods presented.
Treasury Stock Purchases
During fiscal 1999, the Board of Directors of the Company approved a plan that
would allow for the repurchase of up to 5,000 shares of the Company's common
stock. The plan allows the Company to repurchase shares at any time and in any
increments it deems appropriate. During fiscal 2000 and 1999, the
F-12
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Company repurchased 40 and 966 shares of its Class A Common Stock for $749 and
$18,753, respectively, which is reflected at cost as treasury stock in the
accompanying consolidated financial statements.
11. 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
designated 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 108 and 11 shares of common stock during
fiscal 2000 and 1999 pursuant to this plan at an average per share price of
$10.19 and $9.09 respectively.
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 2000, 1999 and 1998, the
Company contributed $561, $497 and $1,172, respectively, to the plan. Company
contributions are discretionary.
Stock Option Plan
The Company maintains the MSC Industrial Direct Co., Inc. 1995 and 1998 Stock
Option Plans, pursuant to which options to purchase approximately 10,000 shares
of 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.
A summary of the status of the Company's stock option plans at August 26, 2000,
August 28, 1999 and August 29, 1998 and changes during the years then ended is
presented in the table and narrative below:
2000 1999 1998
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding - beginning of year 5,817 $14.69 3,030 $15.20 2,178 $12.25
Granted 1,756 8.81 3,043 14.28 1,149 19.41
Exercised (930) 12.84 (197) 10.76 (135) 11.26
Cancelled/forfeited (375) 14.38 (59) 15.67 (162) 13.86
------ ------ ------
Outstanding - end of year 6,268 13.40 5,817 14.69 3,030 15.20
====== ====== ======
Exercisable - end of year 2,205 14.48 1,143 13.68 588 12.34
====== ====== ======
Weighted average fair value of
options granted $ 8.81 $14.28 $19.70
====== ====== ======
F-13
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
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:
2000 1999 1998
---- ---- ----
Expected life (years) 7.5 7.5 7.5
Risk-free interest rate 6.5% 4.7% 4.4%
Volatility 58.4% 53.1% 38.0%
Dividend yield 0.0% 0.0% 0.0%
The following table summarizes information about stock options outstanding at
August 26, 2000:
Number of Options Weighted Average Weighted Number of Options Weighted
Outstanding at Remaining Average Exercisable at Average
Range of Exercise Prices August 26, 2000 Contractual Life Exercise Price August 26, 2000 Exercise Price
- ------------------------ ----------------- ---------------- -------------- ----------------- --------------
$ 7.75 - $ 11.63 2,030 7.6 $ 8.31 411 $ 9.48
11.64 - 17.46 3,085 7.1 14.47 1,415 14.52
17.47 - 26.21 1,114 6.4 19.31 365 19.48
26.22 - 28.06 39 7.3 26.92 14 26.92
------------ --- --------- -- --------
6,268 7.1 $ 13.40 2,205 $ 14.48
============ === ========= ===== ========
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 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:
2000 1999 1998
---------- ---------- ----------
Net income: As reported $ 52,926 $ 48,853 $ 47,335
Pro forma 41,970 38,439 41,924
Net income per share - basic As reported $ .79 $ .73 $ .70
Pro forma .62 .57 .62
Net income per share - diluted As reported $ .78 $ .72 $ .69
Pro forma .62 .56 .61
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
Restricted Stock Plan
The Company also adopted the Restricted Stock Plan in fiscal 1996, whereby the
Company awarded 314 shares of Class A common stock to various associates.
Associates vest in their ownership of these shares at the end of five years,
prior to which such shares are forfeited upon the departure of the associates.
The value of these shares at the grant date ($2,981) is included as a separate
component of shareholders' equity, and the related compensation charge is being
recorded ratably over the five year vesting period. During fiscal 2000, 58
shares vested and no additional shares were cancelled or forfeited. At August
26, 2000, 56 and 1 restricted shares were outstanding and exercisable,
respectively.
F-14
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
12. 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 2010. In addition, the
Company is obligated under certain equipment and automobile operating leases,
which expire on varying dates through 2003. At August 26, 2000, approximate
minimum annual rentals on such leases are as follows:
Total (Including
Related Party Related Party
Fiscal Year Commitments) Commitments
- ----------- ---------------- -------------
2001 $4,967,881 $1,703,611
2002 3,949,621 1,679,362
2003 3,230,539 1,576,338
2004 2,253,366 1,521,937
2005 1,571,570 1,432,987
Thereafter 7,970,931 7,953,297
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for fiscal 2000, 1999 and 1998 was
approximately $4,461, $4,616 and $4,795, respectively, including approximately
$1,434, $1,554 and $1,702, 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
2000, 1999 and 1998 was approximately $12,951, $9,881 and $7,003, respectively.
Employment Agreements
The Company has entered into employment and consulting agreements with various
of the Company's officers and with the selling shareholders of acquired
businesses (Note 4). The future minimum commitments under these agreements are
as follows:
Aggregate
Fiscal Year Number of Individuals Annual Amount
- ----------- --------------------- -------------
2001 8 $ 1,429
2002 5 908
2003 4 775
2004 4 575
Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To MSC Industrial Direct Co., Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of MSC Industrial Direct Co., Inc. and
Subsidiaries included in this Form 10-K and have issued our report thereon dated
October 26, 2000. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. This schedule (Schedule II -
Schedule of Valuation and Qualifying Accounts) is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Melville, New York
October 26, 2000
S-1
SCHEDULE II
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
SCHEDULE OF 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
----------- ---------- ---------- ---------- ---------- -----------
For the fiscal year ended August 29, 1998
Allowance for doubtful accounts (a) $ 2,030 $ 1,523 $ 926(c) $ 762 $ 3,717
======= ======= ======= ======= =======
Restructuring and relocation charges (b) $ 4,949 $ -- $ 7,578(d) $ -- $12,527
======= ======= ======= ======= =======
For the fiscal year ended August 28, 1999
Allowance for doubtful accounts (a) $ 3,717 $ 1,933 $ 1,332(c) $ 1,183 $ 5,799
======= ======= ======= ======= =======
Restructuring and relocation charges (b) $12,527 $ -- $ -- $ 7,614 $ 4,913
======= ======= ======= ======= =======
For the fiscal year ended August 26, 2000
Allowance for doubtful accounts (a) $ 5,799 $ 1,526 $ -- $ 3,546(e) $ 3,779
======= ======= ======= ======= =======
Restructuring and relocation charges (b) $ 4,913 $ -- $ -- $ 2,755 $ 2,158
======= ======= ======= ======= =======
(a) Included in accounts receivable.
(b) Included in accrued liabilities.
(c) Comprised of valuation accounts of acquired entities.
(d) Restructuring charges related to, and included in the cost of, acquired
entities.
(e) Comprised of uncollected accounts charged against the allowance.
S-2