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 September 1, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-14130
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MSC INDUSTRIAL DIRECT CO., INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 11-3289165
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
75 MAXESS ROAD, MELVILLE, NEW YORK 11747
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(Address of Principal Executive Offices)
(516) 812-2000
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
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CLASS A COMMON STOCK, PAR VALUE $.001 THE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of November 2, 2001, 36,075,438 shares of Class A Common Stock and
33,478,778 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 $581,856,820.
The registrant's Proxy Statement for its 2002 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 SEPTEMBER 1, 2001
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..............................................13
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................18
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...............................................19
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................20
Item 11. EXECUTIVE COMPENSATION.............................................20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....20
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................20
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....21
PART I.
Item 1. BUSINESS.
This Annual Report on Form 10-K (including Item 1("Business") and Item
7("Management's Discussion and Analysis of Financial Condition and Results of
Operations") contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. Such forward-looking
statements involve known and unknown risks and uncertainties and include, but
are not limited to, statements regarding future events and our plans, goals and
objectives. Such statements are generally accompanied by words such as
"believe," "anticipate," "think," "intend," "estimate," "expect," or similar
terms. Our actual results may differ materially from such statements. Factors
that could cause or contribute to such differences include, without limitation,
changing market conditions, competitive and regulatory matters, the risks of
war, terrorism, and similar hostilities, general economic conditions in the
markets in which the Company operates and availability of acquisition
opportunities. Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, the Company cannot make any assurances that the
results contemplated in such forward-looking statements will be realized. The
inclusion of such forward-looking information should not be regarded as a
representation by the Company or any other person that the future events, plans
or expectations contemplated by the Company will be achieved. Furthermore, past
performance is not necessarily an indicator of future performance.
GENERAL
MSC 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 intended to
satisfy our customers' maintenance, repair and operations ("MRO") supplies
requirements. We offer over 500,000 stock-keeping units ("SKUs") through our
4,736 page master catalog and weekly, monthly and quarterly specialty and
promotional catalogs, newspapers and brochures and service our customers from
approximately 90 branch offices and four distribution centers. Most of our
products are carried in stock, and orders for these in-stock products are
typically fulfilled the day on which the order is received.
Our business strategy is to provide an integrated, low cost solution to
the purchasing, management and administration of our customers' MRO needs. We
believe we add value to our customers' purchases by reducing their total MRO
supplies costs, taking into account both the direct cost of products and the
administrative, personnel and financial cost of obtaining and maintaining MRO
supplies. We try to achieve this reduction in MRO supplies costs in the
following manner:
o Our extensive product offerings allow customers to reduce the
administrative burden of dealing with many suppliers for their MRO
needs.
o We guarantee same-day shipping of our core business products,
which enables our customers to reduce their inventory investment
and carrying costs.
o We consolidate multiple purchases into a single 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 1000 companies. Our core
business focuses on selling relatively higher margin, lower volume products and
had an average order size of approximately $218 in fiscal 2001. We have in
excess of 315,000 combined active customers (companies that have purchased at
least one item during the past 12 months), which are typically small and
mid-sized companies. Our customers select desired products from MSC's various
publications and place their orders by telephone, facsimile, the Internet or
direct computer link.
We operate primarily in the United States, with customers in all 50
states, through a network of four regional distribution centers and
approximately 90 branch offices. MSC's distribution centers are located near
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Harrisburg, Pennsylvania; Atlanta, Georgia; Elkhart, Indiana and Reno, Nevada.
The strategic locations of MSC's distribution centers allow for next day
delivery via low cost ground carriers in 36 states. Our experience has been that
areas accessible by next day delivery generate significantly greater sales than
areas where next day delivery is not available. Accordingly, our long-term
strategy is to eventually establish additional distribution centers, supported
by local branch offices, to expand our geographic coverage of next day delivery
throughout the continental United States.
INDUSTRY OVERVIEW
MSC operates in a large, fragmented industry characterized by multiple
channels of distribution. We believe that there are numerous small retailers,
dealerships and distributors, most of which have annual sales of less than $10
million, that supply a majority of the market. The distribution channels in the
industrial products market include retail outlets, small distributorships,
national, regional and local distributors, direct mail suppliers, large
warehouse stores and manufacturers' own sales forces.
Almost every industrial, manufacturing and service business has an
ongoing need for MRO supplies. We believe that, except in the largest industrial
plants, MRO supplies inventories generally are not effectively managed or
monitored, resulting in higher purchasing costs and increased administrative
burdens. In addition, within larger facilities, such items are frequently stored
in multiple locations, resulting in excess inventories and duplicate purchase
orders. MRO items are also frequently purchased by multiple personnel in
uneconomic quantities and a substantial portion of most facilities' MRO supplies
are "one-time purchases," resulting in higher purchasing costs and
time-consuming administrative efforts by multiple plant personnel.
We believe that the administrative costs associated with placing an MRO
purchase order can be in excess of $100 per order. Awareness of these high costs
and purchasing inefficiencies has been driving large companies to streamline the
purchasing process by utilizing a limited number of suppliers which can provide
adequate selection, prompt delivery and superior customer service. Customized
billing practices and report generation capabilities tailored to customer
objectives are also becoming increasingly important to customers seeking to
reduce costs, allowing such customers to significantly reduce the need for
purchasing agents and administrative personnel. We believe that industry trends
and economic pressures have caused the mid-sized customer, as well as the small
shop customer to a lesser extent, to move toward the more efficient, cost
saving, single supply source offered by companies such as MSC.
Despite the inefficiencies of the traditional MRO purchasing process,
long-standing relationships with local retailers and distributors have generally
perpetuated the status quo. Due to limited capital availability, high operating
cost structures and relatively small sales volumes, suppliers to the industrial
market are experiencing increasing pressure to consolidate and curtail services
and certain product lines in order to remain competitive. Even large suppliers
with extensive field sales forces are finding it increasingly difficult to visit
all buyers cost-effectively and provide the support necessary to satisfy
customer demands for control of costs and improved efficiency. We believe that
the relative inability of traditional distribution channels to respond to these
changing industry dynamics has created a continuing opportunity for the growth
of direct marketing organizations such as MSC. As a result of these dynamics,
large warehouse stores and direct mail marketers have captured an increasing
share of sales by providing lower total purchasing costs, broader product
selection and a higher level of service.
We believe that we provide a low cost solution to the purchasing
inefficiencies and high costs described above. Customers that purchase products
from us will generally find that their total purchasing and shipping costs,
inventory investment and carrying costs, internal distribution costs and
administrative inefficiencies are reduced. We try to achieve this through:
o consolidation of multiple sources of supply into a single
supplier;
o consolidation of multiple purchase orders into a single purchase
order;
o consolidation of multiple invoices into a single invoice;
o significant reduction in tracking of invoices;
o significant reduction in stocking decisions;
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o elimination or reduction of purchases for inventory;
o elimination of paper orders and invoices through our electronic
ordering system; and
o e-commerce capabilities.
BUSINESS STRATEGY
Our business strategy is to provide our customers with a low cost means
for obtaining and maintaining MRO supplies. The strategy includes the following
key elements:
o a broad selection of in-stock products;
o prompt response and same-day shipping;
o superior, value-added customer service;
o targeted direct mail marketing; and
o a commitment to technological innovation.
BROAD SELECTION OF PRODUCTS. We believe that our ability to offer
customers a broad spectrum of brand name and generic MRO products and a
"good-better-best" product selection alternative has been critical to our
success. We offer similar products with varying degrees of name recognition,
quality and price, thus permitting the customer to choose the appropriate
product based on cost, quality and the customer's specific needs. Our customers
are increasingly purchasing from fewer suppliers to reduce the administrative
burden of ordering from multiple suppliers. By offering for sale over 500,000
products, most of which generally are in stock and available for immediate
shipment, we aim to provide a broad range of merchandise in order to become our
customers' preferred supplier of MRO products.
SAME-DAY SHIPPING. Our guaranteed same-day shipping of products results
in delivery the next day or second day for customers in most of the continental
United States. This prompt delivery allows customers to reduce the
administrative burden of dealing with many suppliers and reduces their inventory
investment and carrying costs. We fulfill our same-day shipment guarantee more
than 99.9% of the time. Our experience has been that areas accessible by next
day delivery will generate significantly greater sales than areas where next day
delivery is not available. The strategic locations of our distribution centers
allow next day delivery via low cost ground carriers in 36 states.
SUPERIOR CUSTOMER SERVICE. Customer service is a key element in
becoming a customer's preferred provider of MRO supplies. Our commitment to
customer service is demonstrated by our investment in sophisticated information
systems and extensive training of our employees. Utilizing our proprietary
customer support software, our in-bound telemarketing representatives implement
the "one call does it all" philosophy. Telemarketing representatives are able to
inform customers on a real time basis of the availability of a product,
recommend substitute products, verify credit information, receive special,
custom or manufacturer direct orders, cross-check inventory items using customer
product codes previously entered into our information systems and provide
technical product information. We believe that our simple, one-call method of
fulfilling all purchasing needs of a customer through highly-trained
telemarketing representatives, supported by our proprietary information systems,
results in greater efficiency for customers and increased customer satisfaction.
To complement our customer service, we seek to ease the administrative burdens
on our customers by offering customized billing services, customer savings
reports and other customized report features, electronic data interchange
ordering, e-commerce capabilities, bulk discounts and stocking of specialty
items specifically requested by customers.
TARGETED DIRECT MAIL MARKETING STRATEGY. Our primary tool for marketing
and product reference is the annual master catalog containing 4,736 pages and
over 500,000 items. In fiscal 2001, our master catalog was supplemented by
approximately 105 specialty and promotional catalogs, brochures and newspapers,
covering such specialty areas as cutting tools, measuring instruments, tooling
components and maintenance and repair, industrial supply, and hose and tubing.
We use our database of approximately 1.1 million companies and 1.4 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
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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
22.8 million in fiscal 1999 to approximately 37.7 million in fiscal 2001. 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 support growth, improve customer service and to
reduce our operating costs through more effective buying practices, automated
inventory replenishment and efficient order fulfillment operations. MSC's
proprietary software tracks all of the approximately 500,000 SKUs and enables
the customer and the telemarketing representatives to determine the availability
of products in stock on a real-time basis and to evaluate alternative products
and pricing. Our Customer Direct Access Plus System allows a customer to order
products directly, set purchase limits for particular buyers, run customized
reports of purchasing history and select from a variety of billing options. Our
information systems have been designed to enhance inventory management and
turnover, customer service and cost reduction for both MSC and our customers. In
addition to internal and customer information systems, we continually upgrade
our distribution methods and systems to improve productivity and efficiency. We
also provide a comprehensive EDI ordering system to support our customer based
purchase order processing. In July 2000, we launched MSCdirect.com, a searchable
on-line catalog with electronic ordering capabilities designed to take advantage
of the opportunities created by Internet commerce. The MSCdirect.com site offers
a broad array of products, services, work flow management tools and related
information to meet the needs of customers seeking to reduce process costs
through Internet e-commerce-enabled solutions.
GROWTH STRATEGY
Our objective is to become the preferred supplier of industrial
products for 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 continually developing and utilizing extensive e-commerce
capabilities, making it even easier and more appealing to do
business with MSC; and
o increasing the size of our direct sales force.
INCREASING THE SIZE AND DIVERSITY OF OUR CUSTOMER BASE. Our principal
growth strategy is to increase 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
eventually open additional distribution centers, supported locally by branch
offices, which will expand our geographic coverage of next day delivery
throughout the United States. In November 1999, a new distribution facility
located near Reno, Nevada became fully operational and has enhanced our ability
to service the Western United States. In addition, we have accumulated a buyer
database of approximately 1.1 million companies and 1.4 million individual
customers. We utilize empirical information from this database to prospect for
new customers, thereby increasing the circulation of our master catalog. We
supplement our master catalog with direct mailings of specialty and promotional
publications to further increase customer response and product purchases.
INCREASING THE NUMBER OF PRODUCT LINES AND SKUS. We believe that
continuing to increase the breadth of our product line and providing high levels
of customer service are effective methods of increasing sales to current
customers and attracting new customers. 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.
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Fiscal Year Ended
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August 28, August 26, September 1,
1999 2000 2001
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Number of SKUs (000's) 407 450 500
E-COMMERCE CAPABILITIES. In July 2000, we launched MSCdirect.com, a
proprietary business-to-business horizontal marketplace serving the industrial
market. MSCdirect.com offers customers full access to our catalog, which offers
in excess of 500,000 SKUs, and all online orders are backed by our same-day
shipping guarantee. MSCdirect.com utilizes the same highly trained sales force
and support services as MSC's traditional business, emphasizing MSC's values of
placing customers needs first. It is available 24 hours a day, seven days a week
providing real-time inventory availability, superior search capabilities,
on-line bill payment, delivery tracking status and a number of other
enhancements including work flow management tools. The user-friendly search
engine allows customers to order by description, vendor or brand. We believe
MSCdirect.com is a key component of our strategy to reduce customers' MRO
transaction costs and internal requisition time. The site also allows customers
to control which of their staff are entitled to purchase products online, how
much they are entitled to spend and which staff require secondary approval. The
process is fully automated and integrated into our back-end systems. Every order
moves directly from the customers' desktop to the distribution center floor,
removing human error, reducing handling costs and speeding up the transaction
flow. In fiscal 2001, we launched a marketing effort for general customer
awareness of MSCdirect.com including direct mailings explaining how to use the
website.
E-commerce portals sell a suite of e-commerce products designed to meet
the needs of businesses seeking reduced costs and increased effectiveness of
their MRO/direct materials process by using Internet-enabled solutions. We have
associations with many of these portals including, among others, Ariba,
Commerce-One, Oracle and I-Procure.
INCREASE IN THE SIZE OF THE DIRECT SALES FORCE. We increased our direct
sales force to provide value added services to more of our customers which we
anticipate will increase our sales per customer.
PRODUCTS
We currently offer in excess of 500,000 SKUs, representing a greater
than 23% increase since fiscal 1999. 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.
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MSC's product offering is comprised primarily of the following
categories: cutting tools; measuring instruments; tooling components; fasteners;
flat stock and raw materials; abrasives; machinery and electrical supplies as
well as other categories.
We purchase substantially all of our products directly from
approximately 2,600 manufacturers located in the United States. We are not
materially dependent on any one supplier or small group of suppliers. No one
single supplier accounted for more than 5% of our total purchases in fiscal
2001. 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 93% of orders are fulfilled from the distribution centers or
branch offices. Certain products, such as specialty or custom items and some
very large orders, are shipped directly from the manufacturer. Our distribution
centers are managed via computer-based SKU tracking systems and radio frequency
devices that facilitate the location of specific stock items to make the picking
process more efficient. We have invested significant resources in technology and
automation to increase efficiency and reduce costs, and continually monitor our
order fulfillment process. We currently utilize four distribution centers for
product shipment located near Harrisburg, Pennsylvania; Atlanta, Georgia;
Elkhart, Indiana and Reno, Nevada.
SALES AND MARKETING
Our customers include a broad range of purchasers of industrial supply
products, from one-man machine shops to Fortune 1000 companies. Our core
business focuses on selling relatively higher margin, lower volume products and
has an average order size of approximately $218 in fiscal 2001. We focus our
marketing efforts on the small shop segment, consisting of job shops and other
small industrial entities with fewer than 100 employees and usually less than
$50,000 of annual industrial supplies purchases, and the mid-size corporate
segment, consisting of industrial entities with 100 to 999 employees and annual
MRO purchases of between $500,000 and $1,000,000. We have recently established a
national account program to address the needs of Fortune 1000 customers. Our
strategy with respect to that portion of the large corporate segment that
utilizes integrated suppliers is to develop relationships with, and supply MRO
products directly to, the integrated supply providers that are hired by large
corporations to manage their MRO purchasing and administrative operations.
We also offer wholesalers and other distributors the ability to create
their own customized mail order catalog by offering to MSC customers turn-key
marketing programs, including promotional mailers. Any resulting orders are
serviced directly by MSC, which stocks and ships the products under the
customer's program. Another division of MSC offers a line of lower priced
products to the budget-oriented customer.
We have in excess of 315,000 combined active customers (companies which
have purchased at least once 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 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.
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We rely on in excess of 500 in-bound telemarketing representatives at
our call centers, distribution centers and branch offices, who are responsible
for substantially all customer contacts and order entries. These telemarketing
representatives are highly trained individuals who build relationships with
customers, assist customers in reducing costs, provide technical support,
coordinate special orders and shipments with vendors and update customer account
profiles in our information systems databases. Our "one call does it all"
philosophy is predicated on the ability of the telemarketing representative,
utilizing our information systems' comprehensive databases as a resource, to
respond effectively to the customer's needs. When a customer places a call to
MSC, the telemarketing representative taking the call has immediate access to
that customer's company and specific buyer profile, as well as inventory levels
by distribution center on all of SKUs offered by MSC. The customer's profile
includes historical and current billing information, historical purchasing
information and plant and industry information.
MSC's telemarketing representatives undergo an intensive two week
training course, are required to attend regular on-site training seminars and
workshops, and are monitored and evaluated at regular intervals. Additionally,
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 460 sales
representatives. These sales representatives are responsible for increasing
sales per customer and servicing existing customers.
BRANCH OFFICES
We currently operate approximately 90 branch offices located in 37
states. These branch offices receive approximately 60% of all telephone orders
and are staffed with highly trained telemarketing representatives that receive
the same training, are monitored in the same fashion and have access to the same
information systems as the telemarketing representatives mentioned above. We
have experienced higher sales growth and market penetration in areas where we
have established a branch office and believe our branch offices are critical to
the success of our business strategy.
PUBLICATIONS
Our primary reference tool is our annual 4,736 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 90 in fiscal 1999 to approximately 105 in fiscal 2001. The
number of pieces mailed has increased from approximately 22.8 million in fiscal
1999 to approximately 37.7 million in fiscal 2001 and is expected to be
approximately the same in fiscal 2002.
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Fiscal Year Ended
--------------------------------------------
August 28, August 26, September 1,
1999 2000 2001
(52 weeks) (52 weeks) (53 weeks)
---------- ---------- ----------
Number of publication titles 90 100 105
Number of publications mailed 22,800,000 28,800,000 37,700,000
CUSTOMER SERVICE
One of our goals is to make purchasing our products as convenient as
possible. Since a majority of customer orders are placed by telephone, the
efficient handling of calls is an extremely important aspect of our business.
Order entry and fulfillment occurs at each of our branches and main call centers
located at our four operating distribution centers. Calls are received by
telemarketing representatives who utilize on-line terminals to enter customer
orders into computerized order processing systems. Our telephone ordering system
is flexible and, in the event of a local or regional breakdown, can be re-routed
to alternative locations. When an order is entered into the system, a credit
check is performed, and, if the credit is approved, the order is electronically
transmitted to the distribution center closest to the customer and a packing
slip is printed for order fulfillment. 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
are not dependent on any one carrier and believe that alternative shipping
arrangements can be made with minimal disruption to operations in the event of
the loss of UPS as our primary carrier. We believe that our relationships with
all our carriers are satisfactory. We guarantee same-day shipping of our core
business products if the order is received prior to 4:30 p.m. eastern time and
most customers receive their orders (other than custom items and large
industrial items shipped directly by the manufacturer) within one or two
business days of the order date. Customers are invoiced for merchandise,
shipping and handling promptly after shipment. Back order levels are, and
historically have been, immaterial.
INFORMATION SYSTEMS
Our proprietary information systems allow centralized management of key
functions, including communication links between distribution centers, inventory
and accounts receivable management, purchasing, pricing, sales and distribution,
and the preparation of daily operating control reports that provide concise and
timely information regarding key aspects of our business. These proprietary
information systems enable us to ship to customers on a same-day basis, respond
quickly to order changes, provide a high level of customer service, achieve cost
savings, deliver superior customer service and manage our operations centrally.
Certain of our information systems operate over a wide area network and
are real-time information systems that allow each distribution center and branch
office to share information and monitor daily progress relating to sales
activity, credit approval, inventory levels, stock balancing, vendor returns,
order fulfillment and other measures of performance. We maintain a sophisticated
buying and inventory management system that monitors substantially all of our
SKUs and automatically purchases inventory from vendors for replenishment based
on projected customer ordering models. We also maintain an electronic data
interchange (EDI) purchasing program with our vendors with the objective of
allowing us to place orders more efficiently, reduce order cycle processing
time, and increase the accuracy of orders placed.
In addition to developing the proprietary computer software programs
for use in the telemarketing and distribution operations, we have also developed
a proprietary MRO management system, the Customer Direct Access Plus System or
"CDA." CDA is designed to automate, simplify and control the administration and
management of MRO purchasing by giving the customer direct access to our
computers for automatic product selection, customization of purchasing
parameters, a variety of report generation and product tracking capabilities,
and cross-referencing capability to a customer's own product stock numbers. We
also provide a comprehensive EDI ordering system to support our customer based
purchase order processing. In addition, we have developed a Windows(R)-based
CD-ROM electronic catalog package and have begun providing product information
and ordering capabilities on the Internet.
8
We run our systems on an AS400 platform and utilize disaster recovery
techniques and procedures which we believe are adequate to fulfill our needs and
are consistent with this type of equipment. We believe that planned enhancements
and upgrades to the next generation of our existing operating platforms will be
sufficient to sustain our present operations and our anticipated growth for the
foreseeable future.
COMPETITION
The MRO supply industry is a large, fragmented industry that is highly
competitive. We face competition from traditional channels of distribution such
as retail outlets, small dealerships, regional or national distributors
utilizing direct sales forces, and manufacturers of MRO supplies and large
warehouse stores and larger direct mail distributors. We believe that sales of
MRO supplies will become more concentrated over the next few years, which may
make the industry more competitive. Certain of our competitors offer a greater
variety of products and have substantially greater financial resources than us.
In the industrial products market, customer purchasing decisions are primarily
based on one or more of the following criteria: price, product selection,
product availability, level of service and convenience. We believe we compete
effectively on all such criteria.
ASSOCIATES
As of November 1, 2001, we employed approximately 2,900 associates,
including approximately 2,800 full-time and approximately 100 part-time
associates. No associate is represented by a labor union. We consider our
relationships with associates to be good and have experienced no work stoppages.
9
Item 2. PROPERTIES.
We have distribution centers in the following locations:
Approx. Operational
Location Sq. Ft. Date
-------- ------- ----
Atlanta, Georgia (1) 380,000 October 1990
Elkhart, Indiana (2) 360,000 March 1996
Harrisburg, Pennsylvania (2) 565,000 January 1997
Reno, Nevada (2) 315,000 November 1999
(1) The related party lease for this facility expires on July 31, 2010.
(2) This facility is owned by MSC.
We maintain approximately 90 branch offices located in 37 states, ranging in
size from 670 to 16,000 square feet. The leases for these branch offices will
expire at various periods between December 2001 and July 2010. The aggregate
annual lease payments on these properties in fiscal 2001 was approximately
$5,230,000.
We maintain our headquarters at a 170,000 square foot facility that we own 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 28, 1999 to
September 1, 2001.
Fiscal Year Ended September 1, 2001 Price of Class A
----------------------------------- Common Stock
-----------------------
High Low
---- ---
First Quarter............................... $17.50 $12.13
Second Quarter.............................. 18.75 15.00
Third Quarter............................... 17.80 14.36
Fourth Quarter.............................. 18.99 15.20
Fiscal Year Ended August 26, 2000
---------------------------------
First Quarter............................... $11 $7-3/4
Second Quarter.............................. 18-5/8 8-15/16
Third Quarter............................... 22-1/16 13-11/16
Fourth Quarter.............................. 23-1/16 15-13/16
On November 2, 2001, the last reported sales price for MSC's Class A
Common Stock on the NYSE was $16.64 per share.
The approximate number of holders of record of MSC's Class A Common
Stock as of November 2, 2001 was 550. The number of holders of record of MSC's
Class B Common Stock as of November 2, 2001 was 11.
MSC has not declared cash dividends on the Class A Common Stock or the Class B
Common Stock and does not have any plans to pay any cash dividends on either
such class of stock in the foreseeable future. The Board of Directors of MSC
anticipates that any earnings that might be available to pay dividends on the
Class A Common Stock and the Class B Common Stock will be retained to finance
the business of MSC and its subsidiaries. The ability of the Company to pay cash
dividends is subject to certain restrictions contained in its revolving credit
agreement.
11
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 28, 1999,
August 26, 2000 and September 1, 2001 and the selected balance sheet data as of
August 26, 2000 and September 1, 2001 are derived from MSC's audited
consolidated financial statements which are included elsewhere herein. The
selected income statement data for the fiscal years ended August 30, 1997 and
August 29, 1998 and the selected balance sheet data as of August 30, 1997 and
August 29, 1998 and August 28, 1999 are derived from MSC's audited consolidated
financial statements not included herein.
Fiscal Year Ended
-------------------------------------------------------------------------------
August 30, August 29, August 28, August 26, September 1,
1997 1998 1999 2000 2001
(52 weeks) (52 weeks) (52 weeks) (52 weeks) (53 weeks)
--------------- -------------- --------------- -------------- -----------------
(In thousands, except per share data)
INCOME STATEMENT DATA:
Net sales (3) $ 462,110 $614,501 $683,420 $831,294 $869,231
Gross profit 203,362 269,532 293,646 344,812 372,799
Operating Expenses(3) 144,605 193,357 211,875 251,514 285,336
Income from operations 58,757 76,175 81,771 93,298 87,463
Income taxes 23,518 30,904 31,897 35,191 33,260
Net income 36,017 47,335 48,853 52,926 40,546
Net income per share:
Basic .53 .70 .73 .79 .59
Diluted .53 .69 .72 .78 .58
Weighted number of shares outstanding:
Basic 67,381 67,756 67,056 67,215 68,198
Diluted 68,218 68,964 68,317 68,203 69,449
SELECTED OPERATING DATA:(1)
Active customers(2) 146 178 254 292 315
Number of SKUs 332 372 407 450 500
Orders entered 2,425 3,222 3,429 3,703 3,985
Number of publication titles (not in
thousands) 80 80 90 100 105
Number of publications mailed 11,318 15,900 22,800 28,800 37,700
BALANCE SHEET DATA (AT PERIOD END):
Working capital $ 190,344 $183,750 $247,205 $296,693 $ 288,107
Total assets 334,834 401,702 514,384 580,974 553,908
Short-term debt 213 800 306 244 214
Long-term debt, net of current portion 2,744 2,430 69,468 68,398 1,517
Shareholders' equity $ 274,995 $321,779 $355,627 $421,669 $ 472,577
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General."
(2) Effective August 28, 1999 includes active customers of Enco
Manufacturing Co, Inc. a wholly owned subsidiary of the Company.
(3) Reflects reclassification of Shipping and Handling fees and costs to
conform with current year presentation.
12
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, which has increased, and is anticipated to further
increase, sales to existing customers and access to new customers. We believe
that revenue has increased, in part, as a result of the increase in the number
of SKUs. We generally add SKUs in response to the feedback we receive from our
existing customers. There can be no assurance that we will be able to increase
the number of SKUs offered or that the correlation between the number of SKUs
offered and revenue will continue.
We significantly expanded our direct mail marketing program from
approximately 22.8 million pieces in fiscal 1999 to 37.7 million pieces in
fiscal 2001. 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.
We anticipate that our direct sales force expansion initiative will
provide value added services to more of our customers, which we believe will
increase sales per customer.
The number of annual orders entered and processed has increased from
approximately 3,429 in fiscal 1999 to approximately 3,985 during fiscal 2001.
The average order size for our core business has increased from approximately
$199 in fiscal 1999 to approximately $218 during fiscal 2001.
During 2001, the industrial sector serviced by the Company experienced
slowing sales to its customers, reflecting general weakness in the economy, and
accordingly reduced purchases from its vendors, including the Company. The
recent events of September 11 further exacerbated these trends, which the
Company believes have continued and will continue into fiscal 2002.
We believe that our targeted marketing campaign strategy, our strategy
of continuing to add new product categories and new products within existing
categories, and increased efficiencies in order processing have been significant
contributing factors to the increase in orders and sales we have received.
However, there can be no assurance that we will be able to continue to grow at
rates recently experienced or at all.
In fiscal 2001, we used approximately $67 million out of a total of $91
million of cash generated from operations to repay the full amount of
approximately $67 million of outstanding borrowings owed to a group of banks
under our term loan and credit facilities. We believe that our business
strategies, our cash resources and the reduction of our debt obligations
position us to address the opportunities and challenges presented by the current
economic climate and trends in the industrial sector.
13
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. The prior years
reflect reclassification of Shipping and Handling fees and costs to conform with
current year presentation.
August 28, 1999 August 26, 2000 September 1, 2001*
--------------- --------------- ------------------
Net sales (dollars in thousands).......... $683,420 $831,294 $869,231
======== ======== ========
Net sales................................. 100.0% 100.0% 100.0%
Gross profit.............................. 43.0 41.5 42.9
Operating expenses........................ 31.0 30.3 32.8
Income from operations.................... 12.0 11.2 10.1
Net Income................................ 7.1 6.4 4.7
* 53 weeks
FISCAL YEAR ENDED SEPTEMBER 1, 2001 COMPARED TO FISCAL YEAR ENDED
AUGUST 26, 2000
NET SALES increased by $37.9 million, or 4.6%, to $869.2 million during
fiscal 2001 from $831.3 million in fiscal 2000. This increase was primarily
attributable to an increase in the number of combined active customers
(increased approximately 8.0% in fiscal 2001, as compared to fiscal 2000) and
the inclusion of an extra week in fiscal 2001, (the Company's fiscal years
contain either 52 or 53 weeks). The increase in sales to new and certain
existing customers offset the fiscal 2001 sales decrease from certain other
existing customers, which resulted from the progressively slowing industrial
sector. This progressive slowdown has continued into fiscal 2002, and although
the Company intends to continue to pursue opportunities to increase sales to new
customers, there can be no assurance that net sales will continue to increase at
rates recently experienced or at all.
GROSS PROFIT increased by $28.0 million, or 8.1%, to $372.8 million
during fiscal 2001 from $344.8 million in fiscal 2000. As a percentage of net
sales, gross profit increased from 41.5% to 42.9%. The increase in gross profit
as a percentage of net sales resulted from a favorable change of product mix and
the success of the Company's efforts to increase margins with new and existing
customers.
OPERATING EXPENSES increased by $33.8 million, or 13.4%, to $285.3
million during fiscal 2001 from $251.5 million in fiscal 2000. As a percentage
of net sales, operating expenses increased from 30.3% to 32.8%. The increases in
operating expenses in dollars and as a percentage of net sales were primarily
attributable to the costs associated with a significant increase in the
Company's sales force, increased advertising costs, higher depreciation expense
and the inclusion of an extra week in fiscal 2001.
INCOME FROM OPERATIONS decreased by $5.8 million, or 6.2%, to $87.5
million during fiscal 2001 from $93.3 million in fiscal 2000. The decrease was
primarily attributable to an increase in operating expenses, offset in part by
an increase in net sales and gross profit margin.
INTEREST EXPENSE decreased by $1.3 million to $3.9 million in fiscal
2001 from $5.2 million in fiscal 2000. The decrease was primarily attributable
to lower long-term notes payable borrowings, resulting from increased cash flows
from operations, which was used to pay down debt.
PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS of
approximately $10.3 million relates to the write-down of the Company's
unconsolidated affiliate Internet investments. The remaining net book value of
these investments is approximately $.6 million.
14
PROVISION FOR INCOME TAXES: The effective tax rate was approximately
45.0% and 40.0% for fiscal 2001 and fiscal 2000, respectively. The increase in
the effective tax rate is a direct result of limited tax benefits available from
the Internet investment write-downs, as discussed above. Accordingly, the
Company's effective tax rate is significantly higher than in prior periods.
Excluding the effect of this write-down, the effective tax rate is approximately
40.0% for both periods which is representative of the Company's expected tax
rate for fiscal year 2002.
NET INCOME decreased by $12.4 million, or 23.4%, to $40.5 million in
fiscal 2001 from $52.9 million in fiscal 2000. This decrease is primarily the
result of the write-down of the Company's Internet investments and a slight
decrease in income from operations explained above. Without taking into account
the investment write-down, net income would have decreased by approximately $2.4
million, or 4.5%, to $50.5 million.
FISCAL YEAR ENDED AUGUST 26, 2000 COMPARED TO FISCAL YEAR ENDED AUGUST 28, 1999
NET SALES increased by $147.9 million, or 21.6%, to $831.3 million
during fiscal 2000 from $683.4 million in fiscal 1999. This increase was
primarily attributable to an increase in sales to the Company's existing
customers and an increase in the number of active customers. The increase in
sales to existing customers was in part attributable to an increase of 10.6% in
the number of SKUs offered, as well as from more focused marketing efforts.
Average annual sales per customer increased 5.9%, and the number of combined
active customers increased 15.0% in fiscal 2000, as compared to fiscal 1999.
GROSS PROFIT increased by $51.2 million, or 17.4%, to $344.8 million
during fiscal 2000 from $293.6 million in fiscal 1999, primarily attributable to
increased sales. As a percentage of sales, gross profit decreased from 43.0% to
41.5%. The decrease in gross profit as a percentage of net sales resulted
primarily from the mix of products being sold, the introduction of new products
which have lower margins than certain products which the Company has sold in the
past, increased promotional selling, lower selling prices on selected items, and
lower margins realized from customers and product lines gained through the
Company's acquisitions.
OPERATING EXPENSES increased by $39.6 million, or 18.7%, to $251.5
million during fiscal 2000 from $211.9 million in fiscal 1999. As a percentage
of sales, operating expenses decreased from 31.0% to 30.3%. The decline in
operating expenses as a percentage of sales was primarily attributable to
leveraging fixed costs over a larger revenue base. The dollar increase was
primarily attributable to increased sales volume which required additional
staffing and support, new distribution center opening and operating costs,
increased depreciation costs resulting from the previous year's large capital
expenditures, and expenditures for future growth initiatives, including
increased expenses related to internal Internet initiatives.
INCOME FROM OPERATIONS increased by $11.5 million, or 14.1%, to $93.3
million during fiscal 2000 from $81.8 million in fiscal 1999. The increase was
primarily attributable to increased sales and the dollar amount increase in
gross profit offset in part by an increase in operating expenses.
INTEREST EXPENSE increased by $3.6 million to $5.2 million during
fiscal 2000 from $1.6 million in fiscal 1999. The increase was primarily
attributable to higher long-term notes payable borrowings and higher interest
rates under the Company's revolving credit agreement. The funds were used
primarily for inventory purchases for the Company's new distribution center,
increasing inventory to support higher sales volume, expenditures for property,
plant, and equipment and investments in internal Internet initiatives.
EQUITY IN LOSS OF UNCONSOLIDATED AFFILIATE of approximately $0.5
million relates to the Company's non-controlling investment made in the second
quarter of fiscal 2000 in an Internet joint venture accounted for under the
equity method which has been accounted for under the cost method since the
Company's ownership and significant influence were reduced in the third quarter
of fiscal 2000.
PROVISION FOR INCOME TAXES AND NET INCOME: The effective income tax
rate was approximately 40.0 percent for fiscal 2000 as compared to 39.5 percent
in the prior year. Net income increased by $4.0 million, or 8.2%, to $52.9
million in fiscal 2000 from $48.9 million in fiscal 1999. This increase was
primarily the result of previously mentioned increased sales and the dollar
amount increase in gross profit offset in part by an increase in operating
expenses necessary in order to support the increase in volume and to invest in
future growth.
15
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth unaudited financial data for each of
MSC's last eight fiscal quarters.
Year Ended August 26, 2000 Year Ended September 1, 2001*
---------------------------------------- ---------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
INCOME STATEMENT DATA:
Net Sales.............. $191,018 $207,671 $223,255 $209,350 $221,884 $223,089 $216,335 $207,923
Gross Profit........... 79,477 85,611 92,212 87,512 93,286 95,774 93,549 90,190
Income from operations. 18,439 24,446 28,613 21,800 23,730 24,980 21,391 17,362
Net income............. 10,491 13,613 16,366 12,456 13,505 14,349 2,482 (c) 10,210
Net income per share:
Basic............... .16 .20 .24 .18 (a) .20 .21 .04 (c) .15(b)
Diluted............. .16 .20 .24 .18 .20 .21 .04 (c) .15(b)
(a) Basic earnings per share for fiscal 2000 in total exceeds by $ 0.01 the
sum of the applicable amount for each of the quarters of fiscal 2000 due
to the impact of stock issuances on the weighted average number of
shares outstanding.
(b) Basic and Diluted earnings per share for fiscal year 2001 in total is
less than the sum of the applicable amount for each of the quarters of
fiscal 2001 due to the impact of stock issuances on the weighted average
number of shares outstanding.
(c) During fiscal 2001, the Company determined that its ability to
ultimately recover the value of its investments in four privately held
Internet startup companies was significantly impaired. Pursuant to the
Company's evaluation of the respective carrying amounts of each
investment, either the entire cost of the investment or a significant
portion thereof was charged against earnings during the third quarter of
fiscal 2001.
* 53 weeks
We have generally experienced slightly lower sales volumes during the
summer months, and we expect this trend to continue in the foreseeable future.
As a result, net income in the fourth fiscal quarter is historically somewhat
lower than in the third fiscal quarter, due largely to the continuation of our
fixed costs during slower sales periods. Our quarterly results of operations may
also fluctuate as a result of a variety of other factors, including the timing
of commencement of operations at new distribution centers.
LIQUIDITY AND CAPITAL RESOURCES
Our primary capital needs have been to fund the working capital
requirements necessitated by our sales growth, adding new products, and
facilities expansions. Our primary sources of financing have been cash from
operations, supplemented by bank borrowings under our credit facility. We
anticipate cash flows from operations and available lines of credit will be
adequate to support our operations for the immediate future and for at least the
next 24 months.
Under the terms of the credit facility, the maximum permitted
borrowings are $110.0 million under an unsecured revolving credit agreement.
Interest on amounts borrowed may be paid at a rate per annum equal to the bank's
base rate (6.5% at September 1, 2001) or, alternatively, at the bankers'
acceptance rate or LIBOR rate plus margins, which vary from per annum based on
the ratio of total liabilities to effective net worth, or bid note rate. This
credit facility contains certain covenants limiting mergers, use of proceeds,
indebtedness, liens, investments, sales of assets, acquisitions, and payment of
dividends. This credit facility also contains certain standard financial
covenants.
In fiscal 2001, we used approximately $67 million out of a total of $91
million of cash generated from operations to repay the full amount of
approximately $67 million of outstanding borrowings owed to a group of banks
under our term loan and credit facilities. As of September 1, 2001, the Company
had no outstanding borrowings and was in compliance with all financial
covenants.
16
Net cash provided by operating activities for the fiscal years ended
September 1, 2001 and August 26, 2000 were $90.9 million and $20.4 million
respectively. The favorable change of approximately $70.5 million in net cash
provided from operations resulted from improved inventory control policies and a
decrease in accounts receivable.
Net cash used in investing activities for the fiscal years ended
September 1, 2001 and August 26, 2000 was $22.0 million and $31.0 million,
respectively. The net usage of cash in fiscal 2001 was primarily attributable to
expenditures for property, plant and equipment. The net usage of cash in fiscal
2000 was primarily attributable to expenditures for property, plant and
equipment and cash paid for investments in Internet technology companies.
Net cash used in financing activities for the fiscal year ended
September 1, 2001 was $59.6 million and net cash provided by financing
activities during the fiscal year ended and August 26, 2000 was $11.2 million.
The net cash used in financing activities for fiscal 2001 was primarily
attributable to repayments of notes payable, partially offset by the proceeds
from the exercise of common stock options. The net cash provided by financing
activities for fiscal 2000 was primarily attributable to proceeds from the
exercise of common stock options.
The Board of Directors of the Company has approved a plan that would
allow for the repurchase of up to 5 million 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's principal financial instrument is long-term notes payable
under a credit agreement. The Company is affected by market risk exposure
primarily through the effect of changes in interest rates on amounts payable by
the Company under this credit agreement. Changes in these factors cause
fluctuations in the Company's net income and cash flows. The agreement allows
the company maximum borrowings of $110.0 million under a revolving credit
agreement. At September 1, 2001, the Company had no outstanding borrowings and
was in compliance with all financial covenants. The agreement bears interest at
the bank's base rate (6.5% at September 1, 2001), or, alternatively, at the
bankers acceptance rate or LIBOR rate plus margins, which vary from 0.65% to
1.25% per annum based on the ratio of total liabilities to effective net worth,
or bid note rate. The Company does not make material use of derivative financial
instruments to hedge against changes in interest rates or for any other purpose.
17
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of September 1, 2001 and August 26, 2000 F-2
Consolidated Statements of Income for the three fiscal years ended
September 1, 2001 F-3
Consolidated Statements of Shareholders' Equity for the three fiscal years
ended September 1, 2001 F-4
Consolidated Statements of Cash Flows for the three fiscal years ended
September 1, 2001 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants on Schedule II S-1
Schedule of Valuation and Qualifying Accounts S-2
18
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information called for by Item 10 is set forth under the heading
"Election of Directors" in the Company's Proxy Statement for the annual
meeting of stockholders to be held in January 2002 (the "2001 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 2001 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
2001 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 2001 Proxy
Statement, which is incorporated herein by this reference.
20
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the fourth
quarter of the fiscal year ended September 1, 2001.
Financial statements filed as a part of this report are listed on the
"Index to Consolidated Financial Statements" at page 18 herein.
a. Exhibits
Exhibit No. Description
----------- -----------
*3.01 Certificate of Incorporation of Registrant.
*3.02 By-laws of Registrant.
*4.01 Specimen Class A Common Stock Certificate.
*10.01 Registrant's 1995 Stock Option Plan.
10.02 Registrant's 1998 Stock Option Plan (incorporated by reference
to Exhibit A to the Registrant's Proxy Statement for the
Annual Meeting of Shareholders held on January 1, 1998, filed
with the Commission on December 5, 1997).
*10.03 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 Credit Agreement, dated as of February 1, 2000, between the
Registrant and the banks named therein (incorporated by
reference to Exhibit 10 to the Registrant's Quarterly Report
on Form 10-Q filed with the Commission on April 11, 2000
(File No. 1-14130)
10.06 Employment Agreement, dated as of June 19, 2000, between the
Registrant and Charles Boehlke (incorporated by reference to
exhibit 10.06 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended August 26, 2000, filed on November
14, 2000 (File No. 1-14130)
10.07 Employment Agreement, dated as of January 8, 1999, between
Registrant and David Sandler (incorporated by reference to
Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
filed with the Commission on November 19, 1999).
10.08 Employment Agreement, dated as of January 8, 1999, between the
Registrant and James Schroeder (incorporated by reference to
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K
filed with the Commission on November 19, 1999).
21.01 List of Subsidiaries
23.01 Consent of Arthur Andersen LLP
--------------------------------------------------------------------------------
* 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 September 1, 2001
Page
----
Report of Independent Public Accountants on Schedule II ...S-1
Schedule II - Valuation and Qualifying Accounts ...........S-2
All other schedules have been omitted because the information
is not applicable or is presented in the Financial Statements
or Notes thereto.
21
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MSC INDUSTRIAL DIRECT CO., INC.
Dated: November 6, 2001 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 November 6, 2001
------------------------ Directors, President, Chief
Mitchell Jacobson Executive Officer and Director
/s/ Sidney Jacobson Vice-Chairman of the Board of November 6, 2001
------------------------ Directors
Sidney Jacobson
/s/ Charles Boehlke Senior Vice President, Chief November 6, 2001
------------------------ Financial Officer and Director
Charles Boehlke
/s/ Shelley Boxer Vice President of Finance and November 6, 2001
------------------------ Director
Shelley Boxer
/s/ David Sandler Executive Vice President and November 6, 2001
------------------------ Director
David Sandler
/s/ James Schroeder Senior Vice President-Logistics November 6, 2001
------------------------ and Director
James Schroeder
/s/ Roger Fradin Director November 6, 2001
------------------------
Roger Fradin
/s/ Denis Kelly Director November 6, 2001
------------------------
Denis Kelly
/s/ Raymond Langton Director November 6, 2001
------------------------
Raymond Langton
/s/ Philip Peller Director November 6, 2001
------------------------
Philip Peller
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MSC Industrial Direct Co., Inc.:
We have audited the accompanying consolidated balance sheets of MSC Industrial
Direct Co., Inc. (a New York corporation) and Subsidiaries as of September 1,
2001 and August 26, 2000, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended September 1, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MSC Industrial Direct Co., Inc.
and Subsidiaries as of September 1, 2001 and August 26, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended September 1, 2001 in conformity with accounting principles
generally accepted in the United States.
Melville, New York
October 25, 2001
F-1
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS September 1, 2001 August 26, 2000
------ ----------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 12,466 $ 3,209
Accounts receivable, net of allowance for doubtful accounts
of $4,927 and $3,779, respectively 95,263 98,837
Inventories 233,131 264,494
Prepaid expenses and other current assets 5,728 4,190
Deferred income taxes 5,264 4,484
------------- -------------
Total current assets 351,852 375,214
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net 121,149 116,378
------------- -------------
OTHER ASSETS:
Goodwill 63,354 65,115
Other 17,553 24,267
------------- -------------
80,907 89,382
------------- -------------
Total Assets $ 553,908 $ 580,974
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 25,776 $ 30,245
Accrued liabilities 37,755 48,032
Current portion of long-term notes payable 214 244
------------- -------------
Total current liabilities 63,745 78,521
LONG-TERM NOTES PAYABLE 1,517 68,398
DEFERRED INCOME TAX LIABILITIES 16,069 12,386
------------- -------------
Total liabilities 81,331 159,305
------------- -------------
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;
36,133,385 and 35,290,231 shares issued, 35,139,385 and 34,217,231 shares
outstanding, respectively 36 35
Class B common stock; $0.001 par value; 50,000,000 shares authorized;
33,478,778 and 33,738,778 shares, respectively, issued and outstanding
34 34
Additional paid-in capital 238,314 229,297
Retained earnings 253,704 213,591
Treasury stock, at cost, 994,000 and 1,073,000 shares, respectively (19,511) (21,079)
Deferred stock compensation - (209)
------------- -------------
Total shareholders' equity 472,577 421,669
------------- -------------
Total Liabilities and Shareholders' Equity $ 553,908 $ 580,974
============= =============
The accompanying notes are an integral part of these consolidated balance sheets.
F-2
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share data)
For The Fiscal Years Ended
---------------------------------------------------------------
September 1, 2001 August 26, 2000 August 28, 1999
----------------- --------------- ---------------
NET SALES (Note 2) $ 869,231 $ 831,294 $ 683,420
COST OF GOODS SOLD 496,432 486,482 389,774
------------- ------------- -------------
Gross profit 372,799 344,812 293,646
OPERATING EXPENSES (Note 2) 285,336 251,514 211,875
------------- ------------- -------------
Income from operations 87,463 93,298 81,771
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (3,947) (5,207) (1,576)
Interest income 420 212 62
Provision for impairment in carrying value of
investments (Note 4) (10,284) - -
Equity in loss of unconsolidated affiliate - (465) -
Other income, net 154 279 493
------------- ------------- -------------
(13,657) (5,181) (1,021)
------------- ------------- -------------
Income before provision for income taxes 73,806 88,117 80,750
Provision for income taxes 33,260 35,191 31,897
------------- ------------- -------------
Net income $ 40,546 $ 52,926 $ 48,853
============= ============= =============
PER SHARE INFORMATION (Note 3):
Net income per share:
Basic $ .59 $ .79 $ .73
============= ============= =============
Diluted $ .58 $ .78 $ .72
============= ============= =============
Shares used in computing net income per share:
Basic 68,198 67,215 67,056
============= ============= =============
Diluted 69,449 68,203 68,317
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
F-3
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 1, 2001
(In thousands)
Class A Class B
Common Stock Common Stock Additional
--------------------- --------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
------ ------ ------ ------ ------- --------
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
Exchange of Class B Common Stock for Class A
Common Stock 400 - (400) - - -
Purchase of treasury stock - - - - - -
Common stock issued under associate stock
purchase plan - - - - - (1,022)
Amortization of deferred stock compensation - - - - - -
Exercise of common stock options, including
income tax benefits of $384 988 1 - - 12,320 -
Net income - - - - - 52,926
---------- --------- --------- --------- --------- ----------
BALANCE, August 26, 2000 35,290 $ 35 33,739 $ 34 $ 229,297 $ 213,591
Exchange of Class B Common Stock for Class A
Common Stock 260 - (260) - - -
Common stock issued under associate stock
purchase plan - - - - (433)
Amortization of deferred stock compensation - - - - - -
Exercise of common stock options, including
income tax benefits of $2,852 583 1 - 9,017
Net income - - - - 40,546
---------- --------- --------- --------- --------- ----------
BALANCE, September 1, 2001 36,133 $ 36 33,479 $ 34 $ 238,314 $ 253,704
========== ========= ========= ========= ========= ==========
Treasury Stock
--------------------- Deferred
Amount Stock
Shares at cost Compensation Total
------ ------- ------------ -----
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
Exchange of Class B Common Stock for Class A
Common Stock - - - -
Purchase of treasury stock 40 (749) - (749)
Common stock issued under associate stock
purchase plan (108) 2,122 - 1,100
Amortization of deferred stock compensation - - 444 444
Exercise of common stock options, including
income tax benefits of $384 - - - 12,321
Net income - - - 52,926
-------- ---------- --------- ---------
BALANCE, August 26, 2000 1,073 $ (21,079) $ (209) $ 421,669
Exchange of Class B Common Stock for Class A
Common Stock - - - -
Common stock issued under associate stock
purchase plan (79) 1,568 - 1,135
Amortization of deferred stock compensation - - 209 209
Exercise of common stock options, including
income tax benefits of $2,852 - - - 9,018
Net income - - - 40,546
-------- ---------- --------- ---------
BALANCE, September 1, 2001 994 $ (19,511) $ - $ 472,577
======== ========== ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-4
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 1, 2001
(In thousands)
For The Fiscal Years Ended
--------------------------------------------------------------
September 1, 2001 August 26, 2000 August 28, 1999
----------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,546 $ 52,926 $ 48,853
------------ ------------ ------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in loss of unconsolidated affiliate - 465 -
Provision for impairment in carrying value of investments 10,284 - -
Depreciation and amortization 16,671 13,963 8,730
Amortization of deferred stock compensation 209 444 420
Loss (gain) on disposal of property, plant and equipment 505 (36) (17)
Provision for doubtful accounts 2,358 1,526 1,933
Deferred income taxes 2,903 4,830 7,521
Changes in operating assets and liabilities, net of effect
from acquisitions:
Accounts receivable 1,216 (10,356) (15,512)
Inventories 31,363 (38,952) (64,011)
Prepaid expenses and other current assets (1,538) 200 (871)
Other assets (1,718) (2,774) (1,270)
Accounts payable and accrued liabilities (11,894) (1,869) 8,872
------------ ------------ ------------
Total adjustments 50,359 (32,559) (54,205)
------------ ------------ ------------
Net cash provided by (used in) operating activities 90,905 20,367 (5,352)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (20,228) (21,626) (35,481)
Proceeds from sale of property, plant and equipment 43 36 17
Cash paid for acquisitions, net of cash acquired - - (12,834)
Cash paid for investments (1,852) (9,447) -
------------ ------------ ------------
Net cash used in investing activities (22,037) (31,037) (48,298)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock - (749) (21,431)
Net proceeds from associate stock purchase plan 1,135 1,100 -
Net proceeds from exercise of common stock options 6,165 11,936 2,471
Net proceeds from (repayments of) notes payable (66,911) (1,133) 66,544
Repayments from affiliates - - 161
------------ ------------ ------------
Net cash (used in) provided by financing activities (59,611) 11,154 47,745
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 9,257 484 (5,905)
CASH AND CASH EQUIVALENTS, beginning of year 3,209 2,725 8,630
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 12,466 $ 3,209 $ 2,725
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,019 $ 5,402 $ 2,614
============ ============ ============
Income taxes $ 27,554 $ 29,940 $ 21,436
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-5
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
1. BUSINESS
The Company is a distributor of industrial equipment and supplies with
headquarters in Melville, New York. The Company serves both domestic and
international markets through its distribution network, which includes
approximately 90 local MSC branches in 37 states, as well as certain other
locations related to acquired entities, and regional distribution centers near
Harrisburg, Pennsylvania; Elkhart, Indiana; Atlanta, Georgia and Reno, Nevada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MSC
Industrial Direct Co., Inc. and its subsidiaries, all of which are wholly-owned.
All intercompany balances and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year is on a 52 or 53 week basis, ending on a Saturday
close to August 31. The financial statements for fiscal 2001, 2000 and 1999
contain activity for 53 weeks, 52 weeks, and 52 weeks, respectively.
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 315,000 combined
active customer accounts. The Company sells its products primarily to end-users.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at the lower
of average cost (using the first-in, first-out method) or market.
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment are computed for
financial reporting purposes on the straight-line method based on the estimated
useful lives of the assets.
Property, plant and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to expense as incurred; costs of major renewals and
improvements are capitalized. At the time property and equipment are retired or
otherwise disposed of, the cost and accumulated depreciation are eliminated from
the asset and accumulated depreciation accounts and the profit or loss on such
disposition is reflected in income.
The Company capitalizes certain payroll costs associated with the development of
internal computer systems in accordance with Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." These costs are included within property, plant and equipment in
the accompanying consolidated balance sheets. These costs are amortized on a
straight-line basis over the estimated useful lives of the related computer
systems, not to exceed five years.
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 34, "Capitalization of Interest Cost," interest attributable to
construction of distribution centers and computer systems are capitalized as
part of the cost of the related asset during the period prior to which such
assets are available and ready for use.
F-6
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Goodwill
Goodwill shown in the consolidated balance sheets at September 1, 2001 and
August 26, 2000 relates to multiple acquisitions completed during the last five
fiscal years (Note 4). Through fiscal 2001, goodwill has been amortized on a
straight-line basis over 40-year periods. Accumulated amortization was $7,286
and $5,525 as of September 1, 2001 and August 26, 2000, respectively. In
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", the Company periodically reviews
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable. The amount of goodwill impairment, if any, is measured based on
projected future operating cash flows using a discount rate reflecting the
Company's average cost of funds. Management believes that there is no impairment
to recorded goodwill as of September 1, 2001.
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" ($14,894
and $12,943 at September 1, 2001 and August 26, 2000, respectively). These costs
are charged to expense over the period that the catalogs remain the most current
source of sales, which period is typically one year or less. The costs
associated with brochures and catalog supplements are charged to expense as
incurred.
Revenue Recognition
The Company recognizes revenue upon shipment of products to its customers. The
Company reports its sales levels on a net sales basis, with net sales being
computed by deducting from gross sales the amount of actual sales returns and
the amount of reserves established for anticipated sales returns.
Shipping and Handling Costs
In July 2000, the Emerging Issue Task Force ("EITF") reached a consensus with
respect to EITF issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." The purpose of this issue discussion was to clarify the classification
of shipping and handling fees and costs. The consensus reached was that all
shipping and handling billed to customers is revenue and the cost associated
with these revenues should be classified as either cost of sales or, if not cost
of sales, as selling, general, and administrative costs, with footnote
disclosure as to the classification and amount of these costs. This standard
requires a reclassification of prior periods as discussed below. Beginning in
fiscal 2001, the Company recorded the amounts billed to customers for shipping
and handling in net revenues and classified the costs associated with these
revenues in operating expenses. Prior to this standard, the Company had recorded
net freight as a component of total operating expenses. The Company has
reclassified financial information for all periods presented to give effect to
the adoption of this new standard. Shipping and handling costs included in
operating expenses for fiscal years 2001, 2000 and 1999 was $40.8 million, $39.7
million, and $32.8 million, respectively.
F-7
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Affiliates
The Company is affiliated with MSC International Korea, Inc. and various real
estate entities (together, the "affiliates"). The affiliates are owned primarily
by the Company's principal shareholders. See Note 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 September 1, 2001, the carrying value
of all financial instruments approximated fair value.
Comprehensive Income
The Company complies with the provisions of SFAS No. 130 "Reporting
Comprehensive Income," which establishes standards for the reporting of
comprehensive income and its components. For the fiscal years 2001, 2000 and
1999, the Company's operations did not give rise to items includable in
comprehensive income which were not already included in net income. Accordingly,
the Company's comprehensive income is the same as its net income for all periods
presented.
Web site development costs
The Company complies with the provisions of Emerging Issues Task Force ("EITF")
Issue 00-02, "Accounting for Web Site Development Costs," which requires
companies to properly account for costs incurred to develop a web site. This
standard categorizes certain costs as an internal use of software, which would
be subject to the requirements of SOP 98-1, while other costs would be subject
to capitalization or expense pursuant to SOP 93-7.
Derivative Instruments
In June 1998, the Financial Accounting Standards Board ("FASB") 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
and SFAS No. 138, is effective for all fiscal years beginning after June 15,
2000 and will not require retroactive restatement of prior period financial
statements. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the balance sheet measured at
fair value. Derivative instruments will be recognized as gains or losses in the
period of change. If certain conditions are met where the derivative instrument
has been designated as a fair value hedge, the hedge items may also be marked to
market through earnings, thus creating an offset. If the derivative is designed
and qualifies as a cash flow hedge, the changes in fair value of the derivative
instrument may be recorded in comprehensive income. The Company does not
presently make material use of derivative instruments. The Company adopted this
statement at the beginning of fiscal 2001, and the impact of adoption was not
material.
Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method specified by
SFAS No. 109, the deferred income tax amounts included in the balance sheet are
determined based on the differences between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates that will
be in effect when these differences reverse. Differences between assets and
liabilities for financial statement and tax return purposes are principally
related to inventories and depreciable lives of assets.
F-8
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Segment Reporting
The Company follows the provisions of 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.
Use of Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform with current year
presentation.
Recently Issued Accounting Pronouncements:
Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statements of Financial Accounting Standards No.
141, "Business Combinations" and No. 142, "Goodwill and other Intangible
Assets". SFAS No. 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Under SFAS No. 142,
goodwill and intangible assets with indefinite lives are no longer amortized but
are reviewed annually (or more frequently, if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have indefinite
lives will continue to be amortized over their useful lives (but with no maximum
life).
The Company has adopted this standard effective September 2, 2001 and,
accordingly, those intangible assets that will continue to be classified as
goodwill or as other intangibles with indefinite lives will no longer be
amortized. This will result in the exclusion of approximately $1.8 million in
amortization expense for the fiscal year ending August 31, 2002. In accordance
with the SFAS No. 142, intangible assets, including purchased goodwill, will be
evaluated periodically for impairment.
Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and Accounting Principles Board Opinion No. 30 "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". The Statement retains the fundamental provisions of SFAS No. 121
for recognition and measurement of impairment, but amends the accounting and
reporting standards for segments of a business to be disposed of. The provisions
of this statement are required to be adopted no later than fiscal years
beginning after December 31, 2001, with early adoption encouraged. The Company
is currently evaluating the impact of the adoption of SFAS No. 144, which the
Company expects will not be material.
F-9
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
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 September 1, 2001, August 26, 2000
and August 28, 1999, respectively:
Net Income Shares Net Income Per Share
------------------------------- ------------------------------- -------------------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ----
Basic EPS:
Net income $40,546 $ 52,926 $ 48,853 68,198 67,215 67,056 $.59 $.79 $ .73
Effect of dilutive
associate stock
options - - - 1,251 988 1,261 (.01) (.01) (.01)
------- ------- -------- ------ ------ ------ ---- ---- -----
Diluted EPS:
Net income $40,546 $52,926 $ 48,853 69,449 68,203 68,317 $.58 $.78 $ .72
======= ======= ======== ======== ======= ======== ==== ==== =====
Options to purchase 999, 1,811 and 1,024 shares of Class A common stock in
fiscal 2001, 2000 and 1999, respectively, were not included in the computation
of Diluted EPS because the exercise price exceeded the average market price of
common shares for the period. These options were still outstanding at the end of
the related periods.
4. INVESTMENTS
During fiscal 2001, the Company determined that its ability to ultimately
recover the value of its investments in four privately held Internet startup
companies was significantly impaired. The Company's determination was based upon
certain economic indicators and specific events and circumstances, including
these entities' difficulty in raising additional capital, and the inability of
these entities to achieve business plan objectives and planned financial
results. Pursuant to the Company's evaluation of the respective carrying amounts
of each investment, either the entire cost of the investment or a significant
portion thereof was charged against earnings during the third quarter of fiscal
2001. The aggregate amount of the non-cash charge recorded in the statement of
income was $10.3 million ($9.9 million, net of tax benefits, or $.14 per diluted
share). These investments were made in fiscal years 2001 and 2000 and one of
these investments was accounted for using the equity method of accounting, until
the Company reduced its interest and restructured its ownership such that the
Company did not exercise significant influence. At September 1, 2001, the
Company no longer exercised significant influence and, accordingly the
investments continue to be accounted for using the cost method.
The provision for income taxes in fiscal 2001 was substantially affected by the
present non-deductibility of a significant portion of the Company's write down
of its Internet investments. Accordingly, the Company's effective tax rate is
significantly higher than in prior periods (Note 6).
F-10
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
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 September 1, 2001 August 26, 2000
--------------- ----------------- ---------------
Land - $ 11,429 $ 11,429
Building 40 47,383 38,883
Building and leasehold improvements The lesser of the
life of the lease or
31.5 20,786 20,811
Furniture, fixtures and equipment 3-10 62,804 58,471
Automobiles 5 890 873
Computer systems 3-5 33,108 26,902
------------- -------------
176,400 157,369
Less: Accumulated depreciation and amortization 55,251 40,991
------------- -------------
$ 121,149 $ 116,378
============= =============
The amount of capitalized interest, net of accumulated amortization, included in
property, plant and equipment is $1,582 and $1,686 at September 1, 2001 and
August 26, 2000, respectively.
6. INCOME TAXES
The provision for income taxes is comprised of the following:
For the Fiscal Years Ended
------------------------------------------------------------------
September 1, 2001 August 26, 2000 August 28, 1999
----------------- --------------- ---------------
Current:
Federal $ 25,051 $ 25,057 $ 20,116
State and local 5,305 5,306 4,260
------------ ------------ ------------
30,356 30,363 24,376
------------ ------------ ------------
Deferred:
Federal (535) 3,984 6,204
State and local (113) 844 1,317
Valuation Allowance 3,552 - -
------------ ------------ ------------
2,904 4,828 7,521
------------ ------------ ------------
Total $ 33,260 $ 35,191 $ 31,897
============ ============ ============
Significant components of deferred tax assets and liabilities are as follows:
September 1, 2001 August 26, 2000
----------------- ---------------
Current and non-current deferred tax liabilities:
Depreciation $ (22,049) $ (19,813)
Prepaid advertising (6,222) (5,271)
Goodwill (448) (341)
------------ -----------
(28,719) (25,425)
------------ -----------
Current and non-current deferred tax assets:
Accounts receivable 1,818 1,370
Inventory 7,771 8,259
Deferred compensation 2,480 2,623
Internet investments 3,552 -
Other 5,845 5,271
Valuation allowance (3,552) -
------------ -----------
17,914 17,523
------------ -----------
Net Deferred Tax Liabilities $ (10,805) $ (7,902)
============ ===========
In fiscal 2001, the Company recorded a valuation allowance in the amount of
$3,552 to reflect the estimated amount of deferred tax assets that most likely
will not be realized due to the capital loss generated by the write down of its
Internet investments (Note 4).
F-11
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
For the Fiscal Years Ended
-----------------------------------------------------------------
September 1, 2001 August 26, 2000 August 28, 1999
----------------- --------------- ---------------
U.S. Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of Federal benefit 5.0 5.0 4.5
Valuation allowance 5.0 - -
---- ---- ----
Effective income tax rate 45.0% 40.0% 39.5%
===== ==== ====
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
September 1, 2001 August 26, 2000
----------------- ---------------
Accrued compensation costs $ 12,851 $ 26,170
Accrued restructuring and relocation charges 1,770 2,158
Accrued catalog costs 6,605 5,375
Accrued sales tax 4,744 3,994
Accrued other 11,785 10,335
------------- -------------
Total accrued liabilities $ 37,755 $ 48,032
============= =============
8. LONG-TERM NOTES PAYABLE
Long-term notes payable consist of the following:
September 1, 2001 August 26, 2000
----------------- ---------------
Revolving credit agreement (a) $ - $ 16,600
Term loan (a) - 50,000
Term notes payable (b) 1,731 2,042
----------- -----------
1,731 68,642
Less: Current portion 214 244
----------- -----------
$ 1,517 $ 68,398
=========== ===========
Maturities of notes payable are as follows:
Fiscal Year
2002 $ 214
2003 215
2004 162
2005 147
2006 152
Thereafter 841
-----------
$ 1,731
===========
(a) As of September 1, 2001, the Company had a revolving credit ($110.0
million) and term loan ($50.0 million) agreement with a group of banks.
There were no outstanding borrowings at September 1, 2001 and the term loan
was repaid in full during fiscal 2001. Loans under this credit agreement
are unsecured. Interest on amounts borrowed may be paid at a rate per annum
equal to the bank's base rate (6.5% at September 1, 2001) or,
alternatively, at the bankers' acceptance rate or LIBOR rate plus margins,
which vary from 0.65% to 1.25% per annum. This credit facility contains
certain covenants limiting mergers, use of proceeds, indebtedness, liens,
investments, sales of assets, acquisitions, and payment of dividends. This
credit facility
F-12
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
also contains certain standard financial covenants. As of September 1,
2001, the Company was in compliance with all financial covenants
(b) The term notes payable consist primarily of a note payable to the
Pennsylvania Industrial Development Authority which is secured by the land
on which the Harrisburg, Pennsylvania distribution center is located and
which bears interest at 3% per annum and is payable in monthly installments
of approximately $20 through September 2011.
9. CAPITAL STOCK TRANSACTIONS
Treasury Stock Purchases
The Board of Directors of the Company has approved a plan that would allow for
the repurchase of up to 5,000 shares of the Company's common stock. The plan
allows the Company to repurchase shares at any time and in any increments it
deems appropriate. During fiscal 2000, the Company repurchased 40 shares of its
Class A Common Stock for $749, which is reflected at cost as treasury stock in
the accompanying consolidated financial statements. The Company reissued
approximately 79 and 108 shares of treasury stock during fiscal 2001 and 2000 to
fund the associate stock purchase plan (Note 10).
10. ASSOCIATE BENEFIT PLANS
Stock Purchase Plan
The Company has established a qualified Stock Purchase Plan, the terms of which
allow for qualified associates (as defined) to participate in the purchase of
designated shares of the Company's Class A common stock at a price equal to 85%
of the closing price at the beginning of each stock purchase period. The
associates purchased approximately 79 and 108 shares of common stock during
fiscal 2001 and 2000 pursuant to this plan at an average per share price of
$14.37 and $10.19, respectively.
Savings Plan
The Company maintains a defined contribution plan with both a profit sharing
feature and a 401(k) feature which covers all associates who have completed at
least one month of service with the Company. For fiscal 2001, 2000 and 1999, the
Company contributed $663, $561 and $497, respectively, to the plan. Company
contributions are discretionary.
Stock Option Plan
The Company maintains the MSC Industrial Direct Co., Inc. 1995 and 1998 Stock
Option Plans, pursuant to which options to purchase approximately 10,000 shares
of Class A common stock may be granted. Options may be granted to key
associates, directors and consultants over terms not to exceed ten years and
they generally vest ratably over five years. Vesting requirements other than the
aforementioned are set forth by the Board of Directors when the award is
granted.
F-13
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
A summary of the status of the Company's stock option plans at September 1,
2001, August 26, 2000 and August 28, 1999 and changes during the years then
ended is presented in the table and narrative below:
2001 2000 1999
---------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - beginning of year 6,268 14.48 5,817 $14.69 3,030 $15.20
Granted 1,323 14.07 1,756 8.81 3,043 14.28
Exercised (527) 14.31 (930) 12.84 (197) 10.76
Cancelled/forfeited (448) 13.61 (375) 14.38 (59) 15.67
---------- --------- ----------
Outstanding - end of year 6,616 13.61 6,268 13.40 5,817 14.69
========= ========= ==========
Exercisable - end of year 2,785 14.36 2,205 14.48 1,143 13.68
========= ========= ==========
Weighted average fair value of options
granted $ 9.21 $ 8.81 $ 14.28
========= ========= ==========
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:
2001 2000 1999
---- ---- ----
Expected life (years) 7.5 7.5 7.5
Risk-free interest rate 6.0% 6.5% 4.7%
Volatility 56.4% 58.4% 53.1%
Dividend yield 0.0% 0.0% 0.0%
The following table summarizes information about stock options outstanding at
September 1, 2001:
Number of Options Weighted Average Weighted Number of Options Weighted
Outstanding at Remaining Average Exercisable at Average
Range of Exercise Prices September 1, 2001 Contractual Life Exercise Price September 1, 2001 Exercise Price
------------------------ ----------------- ---------------- -------------- ----------------- --------------
$ 7.75 - $ 11.63 1,658 7.0 $ 8.25 607 $ 9.03
11.64 - 17.46 3,924 7.3 14.31 1,628 14.54
17.47 - 26.21 1,000 6.3 19.30 530 19.46
26.22 - 28.06 34 6.6 26.72 20 26.86
----- --------- ----- --------
6,616 $ 13.61 2,785 $ 14.36
===== ========= ===== ========
F-14
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
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:
2001 2000 1999
---- ---- ----
Net income: As reported $ 40,546 $ 52,926 $ 48,853
Pro forma 27,853 41,970 38,439
Net income per share - basic As reported $ .59 $ .79 $ .73
Pro forma .41 .62 .57
Net income per share - diluted As reported $ .58 $ .78 $ .72
Pro forma .40 .62 .56
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
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 2003. At September 1, 2001, approximate
minimum annual rentals on such leases are as follows:
Total (Including
Related Party Related Party
Fiscal Year Commitments) Commitments
----------- ------------ -----------
2002 $ 5,740,583 $ 1,596,498
2003 5,122,991 1,438,937
2004 4,256,841 1,358,888
2005 1,989,277 1,263,002
2006 1,479,117 1,263,002
Thereafter 5,120,202 5,105,160
Total rental expense (exclusive of real estate taxes, insurance and other
operating costs) for all operating leases for fiscal 2001, 2000 and 1999 was
approximately $5,230, $4,461 and $4,616, respectively, including approximately
$1,723 $1,434 and $1,554, respectively, paid to affiliates. In the opinion of
the Company's management, the leases with affiliates are on terms which
approximate fair market value.
Self-Insurance
The Company has a self-insured group health plan. The Company is responsible for
all covered claims to a maximum liability of $200 per participant during a
September 1 plan year. Benefits paid in excess of $200 are reimbursed to the
plan under the Company's stop loss policy. Group health plan expense for fiscal
2001, 2000 and 1999 was approximately $14,476, $12,951 and $9,881, respectively.
F-15
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share, estimated lives and customer amounts)
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. The future minimum commitments under these agreements are as
follows:
Number of Aggregate
Fiscal Year Individuals Annual Amount
----------- ----------- -------------
2002 5 $ 908
2003 4 775
2004 4 575
Litigation
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
F-16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To MSC Industrial Direct Co., Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the financial statements of MSC Industrial Direct Co., Inc. and
Subsidiaries included in this Form 10-K and have issued our report thereon dated
October 25, 2001. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. This schedule (Schedule II -
Schedule of Valuation and Qualifying Accounts) is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Melville, New York
October 25, 2001
S-1
SCHEDULE II
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Year Expenses Accounts Deductions End of Year
----------- ------- -------- -------- ---------- -----------
For the fiscal year ended August 28, 1999
Allowance for doubtful accounts (a) $ 3,717 $ 1,933 $ 1,332 (c) $ 1,183 (d) $ 5,799
=========== =========== ========== ========== ============
Restructuring and relocation charges (b) $ 12,527 $ - $ - $ 7,614 $ 4,913
=========== ========== ========== =========== ============
For the fiscal year ended August 26, 2000
Allowance for doubtful accounts (a) $ 5,799 $ 1,526 $ - $ 3,546 (d) $ 3,779
=========== =========== ========== =========== ============
Restructuring and relocation charges (b) $ 4,913 $ - $ - $ 2,755 $ 2,158
=========== ========== ========== =========== ============
For the fiscal year ended September 1, 2001
Allowance for doubtful accounts (a) $ 3,779 $ 2,358 $ - $ 1,210 (d) $ 4,927
=========== =========== ========== =========== ============
Restructuring and relocation charges (b) $ 2,158 $ - $ - $ 388 $ 1,770
=========== ========== ========== =========== ============
(a) Included in accounts receivable.
(b) Included in accrued liabilities.
(c) Comprised of valuation accounts of acquired entities.
(d) Comprised of uncollected accounts charged against the allowance.
S-2