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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 28,1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14130
MSC INDUSTRIAL DIRECT CO., INC.
-------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 11-3289165
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
75 Maxess Road, Melville, New York 11747
----------------------------------------
(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 The New York Stock Exchange
value $.001
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 3, 1999, 33,914,048 shares of Class A Common Stock and
34,138,778 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 $271,175,894.
The registrant's Proxy Statement for its 2000 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 28, 1999
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......................18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................................37
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................38
Item 11. EXECUTIVE COMPENSATION..........................................................38
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................38
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................38
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................39
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 400,000 stock-keeping units ("SKUs") through our 4,211 page master
catalog and weekly, monthly and quarterly specialty and promotional catalogs,
newspapers and brochures and service our customers from approximately 100 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 $248.5
million in fiscal 1995 to $651.5 million in fiscal 1999. During this same
period, income from operations increased at a compound annual rate of
approximately 25% from $33.8 million to $81.8 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 $175. We have in excess of 193,000 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 or direct computer link.
We operate primarily in the United States, with customers in all 50
states, through a network of three regional distribution centers and
approximately 100 branch offices. MSC's distribution centers are located in
Harrisburg, Pennsylvania, Atlanta, Georgia, and Elkhart, Indiana. The strategic
locations of MSC's distribution centers allow for next day delivery via low cost
ground carriers in 33 states located primarily in the eastern United
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States. Our experience has been that areas accessible by next day delivery
generate significantly greater sales than areas where next day delivery is 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. A new distribution facility located near Reno, Nevada was constructed
during fiscal 1999 and became fully operational in November 1999.
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. Awareness of these high costs and the
purchasing inefficiencies discussed above 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;
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o significant reduction in stocking decisions;
o elimination or reduction of purchases for inventory; and
o elimination of paper orders and invoices through our electronic
ordering system.
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.
As a result of this strategy, we believe we are able to lower our
customers' overall MRO supplies costs by reducing administrative inefficiencies,
purchasing and shipping costs, internal distribution costs and inventory
investment and carrying costs.
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 400,000
products, approximately 99% of which 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 33 states located
primarily in the eastern United 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, 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 4,211 pages and
over 400,000 items. In fiscal 1999, our master catalog was supplemented by
approximately 90 specialty and promotional catalogs, brochures and newspapers,
covering such specialty areas as welding, cutting tools, measuring instruments,
abrasives, industrial supply, and hose and tubing.
3
We use our database of approximately 745,000 companies and 1.5 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 6.6 million
in fiscal 1995 to approximately 22.8 million in fiscal 1999. We intend to
continue to increase direct marketing efforts to take advantage of the
additional products offered and our expanded distribution capabilities.
Commitment to Technological Innovation. We take advantage of technological
innovations to 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 400,000 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 electronic
data interchange system allows a customer to order products directly, set
purchase limits for particular buyers, run customized reports of purchasing
history and select from a variety of billing options. Our information systems
have been designed to enhance inventory management and turnover, customer
service and cost reduction for both MSC and our customers. In addition to
internal and customer information systems, we continually upgrade our
distribution methods and systems to improve productivity and efficiency. We also
have developed a website in anticipation of increased commerce on the internet.
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;
o acquiring smaller local distributors to gain access to customers and
consolidating the acquired operations into our existing distribution
facilities; and
o developing 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. During
fiscal 1999, we constructed a new distribution facility located near Reno,
Nevada, which became fully operational in November 1999 and which we believe
will enhance our ability to service the Western United States. In addition, we
have accumulated a buyer database of approximately 1.5 million individual
customers and 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
176,000 SKUs over the past four years while simultaneously increasing our
inventory turns. 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.
4
Selected Acquisitions. We seek to grow through acquisitions in both
current and new markets. In pursuing acquisitions, we seek to gain immediate
access to the acquired company's customer base while consolidating the acquired
company's operations into MSC's existing distribution system, thus achieving
increased revenue while incurring limited incremental operating costs. We
believe that local market acquisitions of small and medium-sized suppliers of
industrial products provide an attractive opportunity for expanding our customer
base in existing markets. All three acquisitions completed during fiscal 1999
operate in markets where we already had in place the corporate and
administrative infrastructures necessary to support such acquisitions
immediately.
Developing e-commerce capabilities. We believe strongly that the internet
will have a profound effect on our business by enhancing the experience we
provide to our customers and by making our internal operations more efficient.
Our development efforts are well under way to produce a searchable on-line
catalog and electronic ordering capabilities.
Products
We currently offer in excess of 400,000 SKUs, representing a greater than
239% increase since 1994. 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.
The following is a list of product categories currently offered by MSC and
the number of SKUs available in each product category:
Category Number of SKUs
-------- --------------
Cutting Tools 122,618
Measuring Instruments 47,140
Tooling Components 32,234
Fasteners 27,946
Flat Stock & Raw Materials 18,964
Abrasives 17,927
Material Handling 16,989
Machinery 16,776
Hand and Power Tools 15,049
Electrical Supplies 14,776
Power Transmission 14,271
Plumbing Supplies 9,224
Hose Tube and Fittings 8,893
Safety Products 8,732
Process Instrumentation 7,506
Marking & Labeling 4,931
Welding 4,381
Hardware 3,815
Pneumatics & Hydraulics 3,704
5
Janitorial/Maintenance 2,736
Lubricants 2,641
Miscellaneous 1,781
HVAC 1,618
Pumps 935
Packing & Shipping 818
Office Equipment 676
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Total 407,081
=======
We purchase substantially all of our products directly from approximately
2,400 manufacturers located in the United States. We are not materially
dependent on any one supplier or group of suppliers. No single supplier
accounted for more than 5% of our total purchases in fiscal 1999. 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 90% 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 three distribution centers for
product shipment located in Harrisburg, Pennsylvania; Atlanta, Georgia and
Elkhart, Indiana. In fiscal 1998, we began construction of a new distribution
center located near Reno, Nevada, which will move us toward our goal of next day
delivery throughout the continental United States. A new distribution facility
located near Reno, Nevada was constructed during fiscal 1999 and 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 $175. 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 $500,000 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. Our strategy with respect to the large
corporate segment 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 for the budget-oriented customer.
We have in excess of 193,000 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.
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
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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 approximately 370 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, 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 270 sales
representatives. These sales representatives are responsible for increasing
sales per customer and servicing existing customers.
Branch Offices
We currently operate approximately 100 branch offices located in 37
states. These branch offices receive approximately 54% 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. In addition to opening new branch offices
in support of our distribution centers, we have acquired local distributors and
converted them to branch offices in new geographic locations to obtain an
immediate established local market presence through use of the acquired customer
base and integration of their operations. We believe that branch office
acquisitions will result in more rapid growth at a lower cost.
Publications
Our primary reference tool is our annual 4,211 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 38 in fiscal 1995 to approximately 90 in fiscal 1999. The number
of pieces mailed has increased from approximately 6.6 million in
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fiscal 1995 to approximately 22.8 million in fiscal 1999 and is expected to
reach approximately 28.5 million in fiscal 2000.
Fiscal Year Ended
-------------------------------------------------------------------------
September 2, August 31, August 30, August 29, August 28,
1995 1996 1997 1998 1999
(53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
Number of publication titles 38 70 80 80 90
Number of publications
mailed 6,604,000 6,300,000 11,318,000 15,900,000 22,800,000
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 three operating distribution centers. Calls are received by
telemarketing representatives who utilize on-line terminals to enter customer
orders into computerized order processing systems. Our branch offices field
approximately 54% of all telephone orders. Our telephone ordering system is
flexible and, in the event of a local or regional breakdown, can be re-routed to
alternative locations. When an order is entered into the system, a credit check
is performed, and, if the credit is approved, the order is electronically
transmitted to the distribution center closest to the customer and a packing
slip is printed for order fulfillment. 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 also 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. In fiscal 1998, we
developed and implemented an electronic data interchange purchasing program with
our customers with the objective of allowing them 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,
8
and cross-referencing capability to a customer's own product stock numbers. In
addition, we have developed a Windows(R)-based CD-ROM electronic catalog package
and have commenced 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.
Acquisitions
We have completed several acquisitions and consider acquisitions as part
of our growth strategy. We believe that the ongoing consolidation within the
industrial supply industry is spurring smaller competitors to seek partners to
increase their productivity and reduce costs. We believe that we are well
positioned to play a significant role in this industry consolidation.
We believe that the most beneficial acquisitions are those which can be
integrated into our existing operations. Accordingly, we expect to focus on
branch office acquisition prospects that can be integrated into our distribution
facilities. We will also consider new market acquisitions if they are of
sufficient size that we can establish a meaningful presence in those markets in
accordance with our geographic growth plans.
Upon completing an acquisition within an existing market, we strive to
move rapidly to integrate the acquired entity into our existing operations. We
believe that such integration offers a number of opportunities to improve
productivity and customer service. These benefits include:
o elimination of redundant facilities and services;
o reduction of administrative overhead;
o consolidation of purchasing power;
o expanded customer services; and
o and increased merchandise selection.
From time to time, we have engaged in, and continue to engage in,
preliminary discussions with respect to potential acquisitions. We are not
currently a party to any oral or written acquisition agreement or engaged in any
negotiations with respect to any material acquisition candidate. We can give no
assurance that any acquisitions, when and if made, will be successfully
integrated into our existing operations, or that we will be able to implement
this phase of our growth strategy.
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.
Employees
As of November 3, 1999, we employed approximately 2,525 employees,
including approximately 2,410 full-time and approximately 115 part-time
employees. No employee is represented by a labor union. We consider our
relationships with employees 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) 270,000 March 1996
Harrisburg, Pennsylvania (2) 270,000 January 1997
Reno, Nevada (3) 270,000 (3)
- ----------
(1) The related party lease for this facility expires on July 31, 2010.
(2) This facility is owned by MSC.
(3) Constructed during fiscal 1999 and became fully operational in November
1999.
We maintain approximately 100 branch offices located in 37 states, ranging
in size from 670 to 16,000 square feet. The leases for these branch offices will
expire at various periods between November 1999 and July 2010. The aggregate
annual lease payments on these properties in fiscal 1999 was approximately
$4,616,000.
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 31, 1997 to August 28,
1999.
Fiscal Year Ended August 28, 1999 Price of Class A
Common Stock *
--------------------
High Low
--------- ---------
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
Fiscal Year Ended August 29, 1998
First Quarter......................................... $23 $18-1/2
Second Quarter........................................ 24-3/4 19-1/2
Third Quarter......................................... 27-7/8 23-3/8
Fourth Quarter........................................ 33-1/8 27-7/8
- ----------
* On April 6, 1998, MSC declared a two-for-one stock split in the form
of a stock dividend, distributed May 22, 1998. The Class A Common
Stock price per share information included above has been restated
to reflect this stock split.
On November 3, 1999, the last reported sales price for MSC's Class A
Common Stock on the NYSE was $11.00 per share.
The approximate number of holders of record of MSC's Class A Common Stock
as of November 3, 1999 was 498. The number of holders of record of MSC's Class B
Common Stock as of November 3, 1999 was 10.
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 30, 1997,
August 29, 1998 and August 28, 1999 and the selected balance sheet data as of
August 29, 1998 and August 28, 1999 are derived from MSC's audited consolidated
financial statements which are included elsewhere herein. The selected income
statement data for the fiscal years ended September 2, 1995 and August 31, 1996
and the selected balance sheet data as of September 2, 1995, August 31, 1996 and
August 30, 1997 are derived from MSC's audited consolidated financial statements
not included herein.
Fiscal Year Ended
-------------------------------------------------------------------
September 2, August 31, August 30, August 29, August 28,
1995 1996 1997 1998 1999
(53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
-------------------------------------------------------------------
(in thousands, except per share data)
Income Statement Data:
Net sales $248,483 $305,294 $438,003 $583,043 $651,503
Gross profit 103,288 126,775 179,255 238,074 261,729
Operating expenses 69,532 83,666 120,498 161,899 179,958
Restructuring charge -- 8,600 -- -- --
Income from operations 33,756 34,509 58,757 76,175 81,771
Income taxes 765 5,531 23,518 30,904 31,897
Net income 31,698 28,503 36,017 47,335 48,853
Net income per share:
Basic -- -- .53 .70 .73
Diluted -- -- .53 .69 .72
Weighted number of shares outstanding:
Basic -- -- 67,381 67,756 67,056
Diluted -- -- 68,218 68,964 68,317
Pro forma net income(1) 19,640 20,591 -- -- --
Pro forma net income per share: (2)
Basic .41 .35 -- -- --
Diluted .41 .35 -- -- --
Pro forma weighted number of shares outstanding: (2)
Basic 48,000 58,910 -- -- --
Diluted 48,000 59,246 -- -- --
Selected Operating Data(3):
Active customers 120 127 146 178 193
Number of SKUs 231 302 332 372 407
Orders entered 1,833 2,155 2,425 3,222 3,429
Number of publication titles (not in thousands) 38 70 80 80 90
Number of publications mailed 6,604 6,300 11,318 15,900 22,800
Revenue per employee $ 249 $ 266 $ 280 $ 282 $ 285
12
September 2, August 31, August 30, August 29, August 28,
1995 1996 1997 1998 1999
-------------------------------------------------------------------
Balance Sheet Data (at period end):
Working capital $ 81,228 $163,785 $190,344 $183,750 $247,248
Total assets 139,032 265,484 334,834 401,702 514,384
Short-term debt 9,208 2,486 213 800 306
Long-term debt, net of current portion 30,969 42,191 2,744 2,430 69,468
Shareholders' equity $ 72,088 $172,571 $274,995 $321,779 $355,627
(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."
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; however, we are unable to quantify precisely
the impact of such increase. 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 6.6 million pieces in fiscal 1995 to 15.9 million pieces in fiscal
1998. In fiscal 1998 and fiscal 1999, we refocused our marketing program in an
effort to enhance our investments in recently acquired entities and new
distribution centers. Accordingly, in fiscal 1999, mailings increased to 22.8
million pieces. 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 employee increased from approximately $249,000 in fiscal 1995
to approximately $285,000 during fiscal 1999. We believe that this increase in
revenue per employee is indicative of our efforts to achieve higher levels of
efficiency and cost savings at the employee level.
The number of annual orders entered and processed has increased from
approximately 1.8 million in fiscal 1995 to approximately 3.4 million during
fiscal 1999. The average order size for our core business has increased from
approximately $136 in fiscal 1995 to approximately $175 during fiscal 1999. 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 we have received and sales, 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 30, 1997 August 29, 1998 August 28, 1999
--------------- --------------- ---------------
Net sales (dollars in thousands)................. $438,003 $583,043 $651,503
======== ======== ========
Net sales........................................ 100.0% 100.0% 100.0%
Gross profit..................................... 40.9 40.8 40.2
Operating expenses............................... 27.5 27.8 27.6
Income from operations........................... 13.4 13.1 12.6
Net Income....................................... 8.2 8.1 7.5
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. The increase in sales to existing customers
was principally derived from 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.
Fiscal Year Ended August 29, 1998 Compared to Fiscal Year Ended August 30, 1997
Net sales increased by $145.0 million, or 33.1%, to $583.0 million in
fiscal 1998 from $438.0 million in fiscal 1997. This increase was primarily
attributable to an increase in sales to our existing customers, an increase in
the number of active customers and the effect of acquisitions made in fiscal
1997 and fiscal 1998. The increase in sales to existing customers was derived
primarily from an increase of 11.4% in the number of SKUs offered, as well as
from more focused marketing efforts. Average annual sales per customer increased
9.3%, and the number of
15
active customers increased 21.9% in fiscal 1998, as compared to fiscal 1997.
Sales from the companies acquired in 1998 accounted for approximately 3.0% of
consolidated net sales.
Gross profit increased by $58.8 million, or 32.8%, to $238.1 million in
fiscal 1998 from $179.3 million in fiscal 1997. The increase in gross profit was
attributable to increased sales. As a percentage of sales, gross profit
decreased slightly from 40.9% in fiscal 1997 to 40.8% in fiscal 1998. Our gross
profit as a percentage of sales from our core business remained constant.
Operating expenses increased by $41.4 million, or 34.4%, to $161.9 million
in fiscal 1998 from $120.5 million in fiscal 1997. The increase was primarily
attributable to increased sales volume, which required additional staffing and
support. As a percentage of sales, operating expenses increased from 27.5% to
27.8%. The increase was primarily the result of continuous investment in new
branches and other growth programs, offset in part by operating efficiencies and
the distribution of fixed expenses over a larger revenue base.
Income from operations increased by $17.4 million, or 29.6%, to $76.2
million in fiscal 1998 from $58.8 million in fiscal 1997. This increase was
primarily attributable to increased sales and gross profit offset in part by an
increase in operating expenses.
Net income increased by $11.3 million, or 31.4%, to $47.3 million in
fiscal 1998, from $36.0 million in fiscal 1997. The increase in net income is
primarily attributable to increased sales and gross profit, offset by higher
operating expenses.
Quarterly Results and Seasonality
The following table sets forth unaudited financial data for each of MSC's
last eight fiscal quarters.
Year Ended August 29, 1998 Year Ended August 28, 1999
------------------------------------------------ ---------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
Income Statement Data:
Net Sales................. $135,609 $142,520 $155,098 $149,816 $155,451 $160,518 $170,492 $165,042
Gross Profit.............. 55,339 58,185 63,590 60,960 63,761 66,157 68,760 63,051
Income from operations.... 15,256 18,843 22,913 19,163 19,841 25,476 20,964 15,490
Net income................ 9,500 11,662 14,237 11,936 12,060 15,161 12,320 9,312
Net income per share:
Basic................. .14 .17 .21 .18 .18 .23 .18 .14
Diluted............... .14 .17 .21 .17 .18 .22 .18 .14
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, acquisitions and facilities
expansions. Our primary sources of financing have been cash from operations,
supplemented by bank borrowings under our revolving credit facility, and a
portion of the proceeds from our public offering completed at the end of fiscal
1997. We anticipate that the proceeds from these offerings, our 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, we have available unsecured
borrowings of up to $80.0 million. Interest on amounts borrowed may be paid at a
rate per annum equal to the bank's base rate (8.25% at August 28,
16
1999) or, alternatively, at the bankers' acceptance rate or LIBOR rate plus
margins, which vary from 0.45% to 0.75% per annum. Our credit facility contains
certain covenants limiting mergers, use of proceeds, indebtedness, liens,
investments, sale of assets and acquisitions. Our credit facility also contains
certain financial covenants which require MSC to maintain a minimum net worth,
ratio of current assets to current liabilities, ratio of liabilities to
effective net worth, minimum interest coverage ratio and positive net income, to
refrain from capital expenditures in excess of certain amounts and to limit the
issuance of dividends. As of August 28, 1999, the Company was not in compliance
with certain financial covenants, but has received a waiver from the respective
banks. As of August 28, 1999, the Company had approximately $67.5 million in
outstanding borrowings under the credit facility.
Net cash used in operating activities for the fiscal year ended August 28,
1999 was $5.4 million and net cash provided by operating activities for the
fiscal year ended August 29, 1998 was $46.8 million. The decrease in net cash
provided by operations resulted from increases in inventory commensurate with
the Company's sales growth, the introduction of new products and inventory for
the Company's new distribution center, offset in part by an increase in accounts
payable.
Net cash used in investing activities for the fiscal years ended August
28, 1999 and August 29, 1998 was $48.3 million and $51.9 million, respectively.
The net usage of cash in fiscal 1999 was primarily attributable to cash paid for
construction at the Company's new headquarters, expenditures related to the
construction of a new distribution center and cash paid for acquisitions. The
net usage of cash in fiscal 1998 was primarily attributable to cash paid for
acquisitions and to the purchase of a building in Long Island, New York, which
began serving as the new corporate headquarters in fiscal 1999.
Net cash provided by financing activities during the fiscal years ended
August 28, 1999 and August 29, 1998 was $47.7 million and $0.4 million,
respectively. The increase of approximately $47.3 million is primarily
attributable to proceeds received from notes payable, offset in part by the
purchase in the open market of approximately 966,000 shares of Class A common
stock.
During fiscal 1999, we repurchased approximately 966,000 shares of MSC's
Class A common stock at an average price of $19.41 per share for an aggregate
purchase price of approximately $18.8 million. All shares of Class A common
stock acquired are being retained in MSC's treasury and reserved for issuance
upon the exercise of options granted under MSC's 1995 Stock Option Plan and 1998
Stock Option Plan.
Year 2000 Compliance Plan
Year 2000 Problem. The Year 2000 problem arises from the historic use of
only two digits (rather than four) for the designation of a year in date
information within computer programs. If not corrected, any of our equipment or
software programs that perform time sensitive calculations may incorrectly
identify the year `00' as 1900 instead of 2000, or not recognize it at all. This
could result in miscalculations or a major failure of certain systems. We may
also be vulnerable to the Year 2000 problems of our customers, suppliers and
service vendors and of other companies with which we conduct business (e.g.,
utility companies, shippers and telecommunications companies).
State of Readiness. During calendar years 1997 and 1998, we developed and
began to implement a Year 2000 compliance plan using internal and external
resources in an effort to ensure that our business is not interrupted by the
Year 2000 problem. MSC's Year 2000 compliance plan is broken into four
components:
1. Renovating internal systems and applications. Our internal systems
and applications include Order Entry, Purchasing and Warehouse
Management. The applications used in the Order Entry system have
been re-written and were phased into MSC's call center and branch
locations. This process was completed by May 1999. The applications
for the Purchasing and Warehouse Management systems have been
modified and our Year 2000 compliance work was completed in August
1999. Many of our applications are already Year 2000 compliant as
they were written using a compliant code generator.
2. Ensuring compliance of peripheral third party systems. We use a
number of third party package systems to supplement our internally
developed programs. Major systems in this area are our Financial and
Inventory Replenishment systems. Our Financial systems have been
replaced with a new package and are running on this software. The
Inventory Replenishment system has been tested
17
and appears to be Year 2000 compliant. All of our material hardware,
including our AS/400 computers, telephone systems, networks, PCs,
security systems and time clocks at all MSC locations have been
tested as Year 2000 compliant.
3. Ensuring Year 2000 compliance by external companies that conduct
business with MSC. We have contacted all of our major customers,
suppliers and vendors to inquire about Year 2000 compliance. We have
not received responses from all those contacted, but those who have
responded do not indicate any problems at this time. In addition, we
have conducted tests to determine whether those business partners
with which we currently conduct business electronically are year
2000 compliant. Our tests reveal no problems at this time.
4. Implementing standards and conducting testing in an effort to ensure
that MSC's existing and future systems are Year 2000 compliant. All
new systems, whether hardware or software, are tested before
implementation in an effort to ensure Year 2000 compliance.
Cost of Compliance. We believe that the total cost of our Year 2000
compliance plan will be $1.1 million not including the replacement of the
Financial system. These costs are expensed as incurred and, to date, we have
incurred approximately $1.0 million of such expenses. The Financial systems
replacement is a separate project which is estimated to cost approximately $6.0
million and will be capitalized.
Risks. Although we believe we will have our own systems compliant prior to
January 1, 2000, there can be no assurance that we will be able to do so nor can
there be any assurance that, even if we complete timely our Year 2000 compliance
plan, the systems, when actually implemented in full, will work properly
independently or in conjunction with the systems of any business partner. In
addition, we would continue to bear the risk of a material adverse affect if any
of our business partners does not appropriately address its own Year 2000
compliance issues. Although we believe that our major customers are Year 2000
compliant, we are still in the process of reviewing the compliance programs of
suppliers and service vendors. Our current estimates of the impact of the Year
2000 problem on our operations and financial results do not include costs and
time that may be incurred as a result of other companies' failure to become Year
2000 compliant on a timely basis, which costs could be material. There can be no
assurance that such other companies will achieve Year 2000 compliance or that
any conversions by such companies to become Year 2000 compliant will be
compatible with our computer systems. The inability of MSC or any of our
principal suppliers, service vendors or customers to become Year 2000 compliant
in a timely manner could have a material adverse effect on our financial
condition or results of operation.
Contingency Plans. We have arranged for alternative methods of placing
purchase orders and for the stockpiling of certain inventory items in the event
that our suppliers are not Year 2000 compliant. We do not have any other
contingency plans with respect to other problems that could arise in our
business as a result of the Year 2000 problem. Any of these could have a
material adverse effect on our financial condition or results of operation.
Item 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's principal financial instrument is long-term notes payable
under an unsecured revolving 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
Company has an $80.0 million revolving credit line of which approximately $67.5
million was outstanding at August 28, 1999. The agreement bears interest at the
bank's base rate (8.25% at August 28, 1999), or, alternatively, at the bankers
acceptance rate or LIBOR rate plus margins, which vary from 0.45% to 0.75% 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 utilize derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MSC INDUSTRIAL DIRECT CO., INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants 20
Consolidated Balance Sheets as of August 28, 1999 and August 29, 1998 21
Consolidated Statements of Income for the three fiscal years
ended August 28, 1999 22
Consolidated Statements of Shareholders' Equity for the three fiscal
years ended August 28, 1999 23
Consolidated Statements of Cash Flows for the three fiscal years
ended August 28, 1999 24
Notes to Consolidated Financial Statements 25
19
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 28, 1999
and August 29, 1998, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended August 28, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MSC Industrial Direct Co., Inc.
and Subsidiaries as of August 28, 1999 and August 29, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended August 28, 1999 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Melville, New York
October 29, 1999
20
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
August 28, August 29,
ASSETS 1999 1998
--------- ---------
Current Assets:
Cash and cash equivalents $ 2,725 $ 8,630
Accounts receivable, net of allowance for doubtful accounts of $5,799 and $3,717,
respectively 90,007 72,940
Inventories 225,542 158,050
Prepaid expenses and other current assets 4,390 3,524
Current deferred income taxes 5,379 11,251
--------- ---------
Total current assets 328,043 254,395
--------- ---------
Property, Plant and Equipment, net 106,750 77,493
--------- ---------
Other Assets:
Goodwill 67,080 58,574
Other 12,511 11,240
--------- ---------
79,591 69,814
--------- ---------
$ 514,384 $ 401,702
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 23,510 $ 14,670
Accrued liabilities 56,979 55,175
Current portion of long-term notes payable 306 800
--------- ---------
Total current liabilities 80,795 70,645
Long-term notes payable 69,468 2,430
Other 43 46
Deferred income tax liabilities 8,451 6,802
--------- ---------
Total liabilities 158,757 79,923
--------- ---------
Commitments and Contingencies (Note 11)
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;
33,902,048 and 33,683,407 shares issued, 32,761,048 and 33,508,419 shares outstanding,
respectively 34 33
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
34,138,778 and 34,142,028 shares, respectively, issued and outstanding 34 34
Additional paid-in capital 216,977 213,783
Retained earnings 161,687 112,834
Treasury stock, at cost, 1,141,000 and 174,988 shares, respectively (22,452) (3,699)
Deferred stock compensation (653) (1,206)
--------- ---------
Total shareholders' equity 355,627 321,779
--------- ---------
$ 514,384 $ 401,702
========= =========
The accompanying notes are an integral part of these
consolidated balance sheets.
21
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 28, August 29, August 30,
1999 1998 1997
--------- --------- ---------
Net sales $ 651,503 $ 583,043 $ 438,003
Cost of goods sold 389,774 344,969 258,748
--------- --------- ---------
Gross profit 261,729 238,074 179,255
Operating expenses 179,958 161,899 120,498
--------- --------- ---------
Income from operations 81,771 76,175 58,757
--------- --------- ---------
Other income (expense):
Interest expense (1,576) (52) (490)
Interest income 62 1,126 723
Other income, net 493 990 545
--------- --------- ---------
(1,021) 2,064 778
--------- --------- ---------
Income before provision for income taxes 80,750 78,239 59,535
Provision for income taxes 31,897 30,904 23,518
--------- --------- ---------
Net income $ 48,853 $ 47,335 $ 36,017
========= ========= =========
Per share information (Note 3):
Net income per share:
Basic $ .73 $ .70 $ .53
========= ========= =========
Diluted $ .72 $ .69 $ .53
========= ========= =========
Shares used in computing net income per share:
Basic 67,056 67,756 67,381
========= ========= =========
Diluted 68,317 68,964 68,218
========= ========= =========
The accompanying notes are an integral part of
these consolidated statements.
22
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED AUGUST 28, 1999
(In thousands)
Class A Class B
Common Stock Common Stock Additional
------------ ------------ Paid-In Retained
Shares Amount Shares Amount Capital Earnings
--------- --------- --------- --------- --------- ---------
BALANCE, August 31, 1996 16,622 $ 16 46,950 $ 47 $ 145,597 $ 29,482
Secondary public offering of common stock, net of
costs of offering of $3,304 (Note 9) 4,000 4 -- -- 64,442 --
Exchange of Class B Common Stock for Class A
Common Stock 12,586 13 (12,586) (13) -- --
Purchase of treasury stock -- -- -- -- -- --
Cancellation of restricted common stock (24) -- -- -- (228) --
Amortization of deferred stock compensation -- -- -- -- -- --
Exercise of common stock options, including
income tax benefits of $380 148 -- -- -- 1,860 --
Net income -- -- -- -- -- 36,017
--------- --------- --------- --------- --------- ---------
BALANCE, August 30, 1997 33,332 33 34,364 34 211,671 65,499
Exchange of Class B Common Stock for Class A
Common Stock (Note 9) 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 -- -- -- -- -- 47,335
--------- --------- --------- --------- --------- ---------
BALANCE, August 29, 1998 33,683 33 34,142 34 213,783 112,834
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 -- -- -- -- -- 48,853
--------- --------- --------- --------- --------- ---------
BALANCE, August 28, 1999 33,902 $ 34 34,139 $ 34 $ 216,977 $ 161,687
========= ========= ========= ========= ========= =========
Treasury Stock
-------------- Deferred
Amount Stock
Shares at cost Compensation Total
--------- --------- --------- ---------
BALANCE, August 31, 1996 -- $ -- $ (2,571) $ 172,571
Secondary public offering of common stock, net of
costs of offering of $3,304 (Note 9) -- -- -- 64,446
Exchange of Class B Common Stock for Class A
Common Stock -- -- -- --
Purchase of treasury stock 28 (499) -- (499)
Cancellation of restricted common stock -- -- 228 --
Amortization of deferred stock compensation -- -- 600 600
Exercise of common stock options, including
income tax benefits of $380 -- -- -- 1,860
Net income -- -- -- 36,017
--------- --------- --------- ---------
BALANCE, August 30, 1997 28 (499) (1,743) 274,995
Exchange of Class B Common Stock for Class A
Common Stock (Note 9) -- -- -- --
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
--------- --------- --------- ---------
BALANCE, August 29, 1998 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
--------- --------- --------- ---------
BALANCE, August 28, 1999 1,141 $ (22,452) $ (653) $ 355,627
========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated statements.
23
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For The Fiscal Years Ended
------------------------------------------
August 28, August 29, August 30,
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income $ 48,853 $ 47,335 $ 36,017
-------- -------- --------
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 8,730 7,302 5,314
Amortization of deferred stock compensation 420 480 600
(Gain) loss on disposal of property, plant and equipment (17) (19) 218
Provision for doubtful accounts 1,933 1,523 1,127
Deferred income taxes 7,521 1,442 2,221
Changes in operating assets and liabilities, net of effect from
acquisitions:
Accounts receivable (15,512) (11,148) (9,410)
Inventories (64,011) 9,203 5,977
Prepaid expenses and other current assets (871) (150) (172)
Prepaid federal income tax payments -- -- 4,512
Other assets (1,270) (4,279) (1,298)
Accounts payable and accrued liabilities 8,875 (4,842) 673
Other (3) (92) (2)
-------- -------- --------
Total adjustments (54,205) (580) 9,760
-------- -------- --------
Net cash (used in) provided by operating activities (5,352) 46,755 45,777
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (35,481) (32,456) (13,528)
Proceeds from sale of property, plant and equipment 17 19 34
Cash paid for acquisitions, net of cash acquired (12,834) (19,459) (33,928)
-------- -------- --------
Net cash used in investing activities (48,298) (51,896) (47,422)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from public offerings of common stock -- -- 64,446
Purchase of treasury stock (21,431) (389) (499)
Net proceeds from exercise of common stock options 2,471 1,521 1,480
Net proceeds from (repayments of) notes payable 66,544 (885) (52,330)
Repayments from affiliates 161 106 287
-------- -------- --------
Net cash provided by financing activities 47,745 353 13,384
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (5,905) (4,788) 11,739
Cash and cash equivalents, beginning of year 8,630 13,418 1,679
-------- -------- --------
Cash and cash equivalents, end of year $ 2,725 $ 8,630 $ 13,418
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,614 $ 110 $ 443
======== ======== ========
Income taxes $ 21,436 $ 31,279 $ 20,669
======== ======== ========
The accompanying notes are an integral part of
these consolidated statements.
24
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 100 local MSC branches in 37 states, as well as certain other
locations related to acquired entities, concentrated in the Eastern and Southern
United States, and regional distribution centers in Harrisburg, Pennsylvania;
Elkhart, Indiana and Atlanta, Georgia.
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 wholly-owned subsidiaries.
All intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to August 31.
The financial statements for fiscal 1999, 1998 and 1997 all 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
193,000 active customer accounts. The Company sells its products directly to end
users and, in some cases, to other wholesalers and distributors in its market
areas.
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.
25
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
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 is capitalized as
part of the cost of the related buildings during the period prior to which such
facilities are available and ready for use.
Goodwill
Goodwill shown in the consolidated balance sheets at August 28, 1999
and August 29, 1998 relates to multiple acquisitions completed during the last
four fiscal years (Note 4). Goodwill is being amortized on a straight-line basis
over 40-year periods. Accumulated amortization was $3,560 and $1,852 as of
August 28, 1999 and August 29, 1998, 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. Management
believes that there is no impairment to goodwill as of August 28, 1999.
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"
($10,413 and $9,511 at August 28, 1999 and August 29, 1998, 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.
Sales Returns
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.
26
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
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. In connection with the
IPO during fiscal 1996, the Company acquired two affiliated companies, Primeline
International, Inc. and Kaja Productions, Inc. See Note 11 for discussion of
certain related party transactions.
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 28,
1999, the carrying value of all financial instruments approximated fair value.
Recently Issued Accounting Pronouncements
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
ended 1999, 1998 and 1997, the Company's operations did not give rise to items
includable in comprehensive income which were not already included in net
income. Therefore, the Company's comprehensive income is the same as its net
income for all periods presented.
27
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
Segment Reporting
In fiscal 1999 the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Pursuant to this
pronouncement, the reportable operating segments are determined based on the
Company's management approach. The management approach, as defined by SFAS No.
131, is based on the way that the chief operating decision maker organizes the
segments within an enterprise for making operating decisions and assessing
performance. The Company's results of operations are reviewed by the chief
operating decision maker on a consolidated basis and the Company operates in
only one segment.
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 use of
derivative instruments.
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 28, 1999,
August 29, 1998 and August 30, 1997, respectively:
Net Income Shares Net Income Per Share
----------------------------- ---------------------------- -------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
------- ------- ------- ------ ------ ------ ------ ------ ------
Basic EPS
Net income $48,853 $47,335 $36,017 67,056 67,756 67,381 $ .73 $ .70 $ .53
Effect of dilutive employee
stock options
-- -- -- 1,261 1,208 837 (.01) (.01) --
------- ------- ------- ------ ------ ------ ------ ------ ------
Diluted EPS
Net income $48,853 $47,335 $36,017 68,317 68,964 68,218 $ .72 $ .69 $ .53
======= ======= ======= ====== ====== ====== ====== ====== ======
28
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
4. ACQUISITION OF BUSINESSES:
During fiscal 1999 and 1998, the Company acquired the following
businesses:
Business Acquired Date Acquired
----------------- -------------
Fiscal 1999
Industrial Specialty Company, Inc. October 1, 1998
Direct Line, Inc. January 1, 1999
Corbin Corporation February 1, 1999
Fiscal 1998
Holloway Bros. Tools, Inc. March 24, 1998
RMG Corporation April 10, 1998
Drake - Atwood Tool & Supply Company, Inc. April 30, 1998
The acquisitions described above were accounted for as purchases and
were valued based on management's estimate of the fair value of the assets
acquired and liabilities assumed with respect to each acquisition at the dates
of acquisition. These estimates of fair value are preliminary and subject to
adjustment for a period of up to one year from the date of the respective
acquisition, and any such adjustments are not expected to be material. Costs in
excess of net assets acquired of $70,640 and $60,426 were allocated to goodwill
at August 28, 1999 and August 29, 1998, respectively, net of applicable
amortization.
Summarized below are the unaudited pro forma results of operations as
though each of these acquisitions had occurred at the beginning of fiscal 1998.
Pro forma adjustments have been made for pro forma income taxes and amortization
of goodwill related to these transactions.
1999 1998
--------- ---------
Pro Forma:
Net sales $ 672,955 $ 639,661
========= =========
Net income $ 49,195 $ 48,243
========= =========
Net income per share:
Basic $ .73 $ .71
========= =========
Diluted $ .72 $ .70
========= =========
29
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT:
The following is a summary of property, plant and equipment and the
estimated useful lives used in the computation of depreciation and amortization:
Number of Years August 28, 1999 August 29, 1998
--------------- --------------- ---------------
Land -- $ 11,429 $ 11,515
Construction-in-progress (a) -- -- 5,338
Building 40 35,788 26,772
Building and leasehold improvements The lesser of the life
of the lease or 31.5 19,409 2,878
Furniture, fixtures and equipment 3-10 52,264 41,222
Automobiles 5 863 1,051
Computer systems 3-5 16,697 11,589
----------- -----------
136,450 100,365
Less: Accumulated depreciation and amortization 29,700 22,872
----------- -----------
$ 106,750 $ 77,493
=========== ===========
The amount of capitalized interest, net of accumulated amortization,
included in property, plant and equipment is $1,534 and $931 at August 28, 1999
and August 29, 1998, respectively.
(a) In October 1997, the Company executed an agreement for the purchase of
a building in Long Island, New York, which is serving as the new Corporate
headquarters. The Company relocated to this new facility during the first
quarter of fiscal 1999.
6. INCOME TAXES:
The provision for income taxes is comprised of the following:
For the Fiscal Years Ended
------------------------------------------------------------
August 28, 1999 August 29, 1998 August 30, 1997
--------------- --------------- ---------------
Current:
Federal $ 20,116 $ 23,994 $ 17,575
State and local 4,260 5,081 3,722
------------ ------------ ------------
24,376 29,075 21,297
------------ ------------ ------------
Deferred:
Federal 6,204 1,510 1,833
State and local 1,317 319 388
------------ ------------ ------------
7,521 1,829 2,221
------------ ------------ ------------
Total $ 31,897 $ 30,904 $ 23,518
============ ============ ============
30
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
Significant components of deferred tax assets and liabilities are as
follows:
August 28, 1999 August 29, 1998
--------------- ---------------
Current and non-current deferred tax liabilities:
Depreciation $ (8,516) $ (4,655)
Prepaid advertising (4,327) (3,757)
Goodwill (248) (126)
-------- --------
(13,091) (8,538)
-------- --------
Current and non-current deferred tax assets:
Accounts receivable 1,662 974
Inventory 1,804 6,087
Deferred compensation 4,393 2,955
Other 2,160 2,971
-------- --------
10,019 12,987
-------- --------
Net Deferred Tax (Liabilities) Assets $ (3,072) $ 4,449
======== ========
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 28, 1999 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 28, 1999 August 29, 1998 August 30, 1997
--------------- --------------- ---------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit 4.5 4.5 4.5
---- ---- ----
Effective income tax rate 39.5% 39.5% 39.5%
==== ==== ====
7. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
August 28, 1999 August 29, 1998
--------------- ---------------
Accrued purchases $ 14,964 $ 7,051
Accrued payroll and bonus 16,489 17,354
Accrued fringe benefits 4,784 4,205
Accrued restructuring and relocation charges 4,913 12,527
Accrued catalog 3,708 3,374
Accrued other 12,121 10,664
----------- -----------
Total accrued liabilities $ 56,979 $ 55,175
=========== ===========
31
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
8. LONG-TERM NOTES PAYABLE:
Long-term notes payable consist of the following:
August 28,1999 August 29, 1998
-------------- ---------------
Revolving credit agreement (a) $ 67,450 $ --
Term notes payable (b) 2,324 3,230
----------- -----------
69,774 3,230
Less: Current portion 306 800
----------- -----------
$ 69,468 $ 2,430
=========== ===========
Maturities of notes payable are as follows:
Fiscal Year
2000 $ 306
2001 67,693
2002 239
2003 236
2004 162
Thereafter 1,138
-----------
$ 69,774
(a) As of August 28, 1999, the Company had an unsecured revolving credit
agreement with a bank, as agent for a group of banks, which provides for maximum
borrowings of $80,000 expiring on May 31, 2001. During the term of the
agreement, the Company can borrow at the bank's base rate (8.25% at August 28,
1999), bankers acceptance ("BA") rate or LIBOR rate plus margins, which vary
from 0.45% to 0.75% per annum based on the ratio of total liabilities to
effective net worth, or bid note rate. A facility fee of one-eighth of one
percent (0.125%) per annum is payable on the unused portion of the credit. The
agreement contains certain covenants including, but not limited to, restrictions
related to indebtedness, net worth, capital expenditures and the payment of
dividends. As of August 28, 1999, the Company was not in compliance with all
covenants and accordingly received a waiver from the respective banks.
(b) The term notes payable consist primarily of a note payable to the
Pennsylvania Industrial Development Authority which is secured by the land on
which the Harrisburg, Pennsylvania distribution center is located and which
bears interest at 3% per annum and is payable in monthly installments of
approximately $20 through September 2011.
9. CAPITAL STOCK TRANSACTIONS:
Common Stock Offerings
In September 1996, the Company completed a common stock offering of
13,000 shares of Class A Common Stock, of which 4,000 shares were sold by the
Company and 9,000 shares were converted from Class B to Class A Common Stock and
sold by existing shareholders. This offering generated net proceeds to the
Company of approximately $64,446, which were used primarily to repay certain
debt and to finance acquisitions. The supplemental effect of the repayment of
debt was not material to the Company's fiscal 1997 results of operations.
32
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
In July 1997, the Company completed a secondary offering of 3,566
shares of Class A Common Stock, of which 116 shares were sold by existing
shareholders from Class A Common Stock already held by those shareholders and
3,450 shares were converted from Class B to Class A Common Stock and sold by
existing shareholders. The Company did not receive any of the proceeds from this
offering.
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 and 1998, the Company repurchased 966 and 147
shares of its Class A Common Stock for $18,753 and $3,200, respectively, which
is reflected at cost as treasury stock in the accompanying consolidated
financial statements.
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. As of August 28, 1999, the Company had
repurchased 1,141 shares for an aggregate cash purchase price of $22,452
(including the 966 shares of treasury stock described above).
10. EMPLOYEE BENEFIT PLANS:
Savings Plan
The Company maintains a defined contribution plan with both a profit
sharing feature and a 401(k) feature which covers all employees who have
completed at least one month of service with the Company. For fiscal 1999, 1998
and 1997, the Company contributed $497, $1,172 and $1,233, 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 6,000 shares of
Class A common stock may be granted. Options may be granted to key employees,
directors and consultants over terms not to exceed ten years and they generally
vest ratably over 5 years. Vesting requirements other than the aforementioned
are set forth by the Board of Directors when the award is granted.
33
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
A summary of the status of the Company's stock option plan at August
28, 1999, August 29, 1998 and August 30, 1997 and changes during the years then
ended is presented in the table and narrative below:
1999 1998 1997
------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - beginning of year 3,030 $15.20 2,178 $12.25 1,512 $10.18
Granted 3,043 14.28 1,149 19.41 852 15.45
Exercised (197) 10.76 (135) 11.26 (148) 10.15
Cancelled/forfeited (59) 15.67 (162) 13.86 (38) 9.97
-------- -------- --------
Outstanding - end of year 5,817 14.69 3,030 15.20 2,178 12.25
======== ======== ========
Exercisable - end of year 1,143 13.68 588 12.34 186 10.77
======== ======== ========
Weighted average fair value of options
granted $ 14.28 $ 19.70 $ 16.39
======== ======== ========
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:
1999 1998 1997
---- ---- ----
Expected life (years) 7.5 7.5 7.5
Risk-free interest rate 4.7% 4.4% 6.86%
Volatility 53.1% 38.0% 35.0%
Dividend yield 0.0% 0.0% 0.0%
The following table summarizes information about stock options
outstanding at August 28, 1999:
Number of Options Weighted Average Weighted Number of Options Weighted
Outstanding at Remaining Average Exercisable at Average
Range of Exercise Prices August 28, 1999 Contractual Life Exercise Price August 28, 1999 Exercise Price
- ------------------------ --------------- ---------------- -------------- --------------- --------------
$ 9.50 - $ 14.25 3,848 8.4 $ 13.07 560 $ 9.83
14.26 - 21.39 1,919 8.0 17.62 574 17.23
21.40 - 28.06 50 8.7 26.59 9 26.92
----- --- ------- ----- -------
5,817 8.2 $ 14.69 1,143 $ 13.68
===== === ======= ===== =======
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:
1999 1998 1997
---- ---- ----
Net income: As reported $ 48,853 $ 47,335 $ 36,017
Pro forma 38,439 41,924 33,805
Net income per share - basic As reported $ .73 $ .70 $ .53
Pro forma .57 .62 .50
Net income per share - diluted As reported $ .72 $ .69 $ .53
Pro forma .56 .61 .50
34
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
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
employees. Employees 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
employees. 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 1999,
33 shares vested and 14 additional shares were cancelled or forfeited. At August
28, 1999, 115 and 58 restricted shares were outstanding and exercisable,
respectively.
11. COMMITMENTS AND CONTINGENCIES:
Leases
Certain of the operations of the Company are conducted on leased
premises, some of which are leased from affiliates. The leases (most of which
provide for the payment of real estate taxes, insurance and other operating
costs) are for varying periods, the longest extending to the year 2010. In
addition, the Company is obligated under certain equipment and automobile
operating leases, which expire on varying dates through 2005. At August 28,
1999, approximate minimum annual rentals on such leases are as follows:
Total (Including
Related Party Related Party
Fiscal Year Commitments) Commitments
----------- ------------ -----------
2000 $ 3,882 $ 1,446
2001 3,216 1,399
2002 2,301 1,391
2003 1,965 1,354
2004 1,632 1,265
Thereafter 7,387 7,220
Total rental expense (exclusive of real estate taxes, insurance and
other operating costs) for all operating leases for fiscal 1999, 1998 and 1997
was approximately $4,616, $4,795 and $4,672, respectively, including
approximately $1,554, $1,702 and $2,053, respectively, paid to affiliates. In
the opinion of the Company's management, the leases with affiliates are on
terms, which approximate fair market value.
35
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
(CONTINUED)
Self-Insurance
The Company has a self-insured group health insurance 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 individual stop loss policy. Group
health insurance expense for fiscal 1999, 1998 and 1997 was approximately
$9,881, $7,003 and $5,200, 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:
Number of Aggregate
Fiscal Year Individuals Annual Amount
----------- ----------- -------------
2000 24 $1,875
2001 7 1,147
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.
36
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
37
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 2000 (the
"1999 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 1999 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 1999 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 1999 Proxy
Statement, which is incorporated herein by this reference.
38
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 28, 1999.
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 Description
No.
------
*3.01 Certificate of Incorporation of Registrant.
*3.02 By-laws of Registrant.
*4.01 Specimen Class A Common Stock Certificate.
*10.01 Registrant's 1995 Stock Option Plan.
10.02 Registrant's 1998 Stock Option Plan (incorporated by reference
to Exhibit A to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders held on January 1, 1998, filed
with the Commission on December 5, 1997).
*10.03 Employment Agreement, dated as of January 2, 1994, between
Registrant and Sidney Jacobson, as amended on October 31,
1995.
*10.04 Employment Agreement, dated as of August 1, 1994, between
Registrant and Mitchell Jacobson.
*10.05 Amended and Restated Credit Agreement, dated as of April 27,
1995, between the Registrant and the banks named therein, as
amended as of August 25, 1995.
10.06 Severance and Release Agreement, dated as of March 1, 1999,
between Registrant and Steven Tudor.
10.07 Agreement, dated as of January 8, 1999, between the Registrant
and David Sandler.
10.08 Agreement, dated as of January 8, 1999, between the Registrant
and James Schroeder.
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 28, 1999
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.
39
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 8, 1999 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 8, 1999
- ----------------------------- Chief Executive Officer and Director
Mitchell Jacobson
/s/ Sidney Jacobson Vice-Chairman of the Board of Directors November 8, 1999
- -----------------------------
Sidney Jacobson
/s/ Shelley Boxer Vice President, Chief Financial Officer and November 8, 1999
- ----------------------------- Director (Principal Accounting Officer)
Shelley Boxer
/s/ David Sandler Executive Vice President and Director November 8, 1999
- -----------------------------
David Sandler
/s/ James Schroeder Senior Vice President-Logistics and Director November 8, 1999
- -----------------------------
James Schroeder
/s/ Denis Kelly Director November 8, 1999
- -----------------------------
Denis Kelly
/s/ Raymond Langton Director November 8, 1999
- -----------------------------
Raymond Langton
/s/ Roger Fradin Director November 8, 1999
- -----------------------------
Roger Fradin
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE II
To MSC Industrial Direct Co., Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of MSC Industrial Direct Co., Inc. and
Subsidiaries included in this Form 10-K and have issued our report thereon dated
October 29, 1999. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. This Schedule II 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.
Arthur Andersen LLP
Melville, New York
October 29, 1999
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
of Year Expenses Accounts Deductions End of Year
------- -------- -------- ---------- -----------
For the fiscal year ended August 30, 1997
Allowance for doubtful accounts $1,319 $1,127 $542 (a) $958 $2,030
====== ====== ====== ====== ======
For the fiscal year ended August 29, 1998
Allowance for doubtful accounts $2,030 $1,523 $926 (a) $762 $3,717
====== ====== ====== ====== ======
For the Fiscal year ended August 28, 1999
Allowance for doubtful accounts $3,717 $1,933 $1,332 (a) $1,183 $5,799
====== ====== ====== ====== ======
(a) Comprised of valuation accounts of acquired entities
S-2