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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14130
MSC INDUSTRIAL DIRECT CO., INC.
(Exact name of the registrant as specified in its charter)
New York 11-3289165
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) identification No.)
151 Sunnyside Boulevard, Plainview, New York 11803-1592
(Address of principal executive offices)
(516) 349-7100
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.001
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 22, 1996, 14,844,405 shares of Class A Common Stock of
the registrant were outstanding and the aggregate market value of Class A
Common Stock held by non-affiliates was approximately $551,100,000.
The registrant's Proxy Statement for its 1997 annual meeting of
stockholders is hereby incorporated by reference into Part III of this Form
10-K.
MSC INDUSTRIAL DIRECT CO., INC.
INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION
YEAR ENDED AUGUST 31, 1996
ITEMS IN FORM 10-K
Page
PART I
Item 1. BUSINESS...................................................................................... 1
Item 2. PROPERTIES.................................................................................... 11
Item 3. LEGAL PROCEEDINGS............................................................................. 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................................... 13
Item 6. SELECTED FINANCIAL DATA....................................................................... 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................................... 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................... 22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................................... 43
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................ 44
Item 11. EXECUTIVE COMPENSATION........................................................................ 44
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................................................... 44
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................ 44
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K........................................................................................... 45
Signatures............................................................................................. 46
PART I
Item 1. BUSINESS.
Certain information set forth herein contains forward-looking
statements, as such term is defined in Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such statements
are subject to certain risks and uncertainties discussed herein which could
cause actual results to differ materially from those in the forward-looking
statements.
General
MSC Industrial Direct Co., Inc. ("MSC" or the "Company") 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. The Company
distributes a full line of industrial products, such as cutting tools,
abrasives, measuring instruments, machine tool accessories, safety equipment,
fasteners, welding supplies and electrical supplies, intended to satisfy its
customers' maintenance, repair and operations ("MRO") supplies requirements.
The Company offers over 300,000 stock-keeping units ("SKUs") through its 3,560
page master catalog and weekly, monthly and quarterly specialty and promotional
catalogs, newspapers and brochures, which are supported by 33 customer service
locations. Most of the Company's products are carried in stock, and orders for
these products are typically fulfilled the day on which the order is received.
MSC has grown rapidly due to expanded product offerings, increased
catalog distribution and supplemental mailings and geographic expansion. The
Company's net sales have increased at a compound annual rate of 24.9% from
$125.5 million in fiscal 1992 to $305.3 million in fiscal 1996. During this
same period, income from operations increased at a compound annual rate of
28.6% from $12.6 million to $34.5 million.
MSC's business strategy is to provide an integrated, low cost solution
to the purchasing, management and administration of its customers' MRO needs.
MSC has positioned itself to add value to its 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. MSC's extensive product offerings allow customers to
reduce the administrative burden of dealing with many suppliers for their MRO
needs. The Company guarantees same-day shipping of products, approximately 95%
of which are generally kept in stock, thereby enabling customers to reduce
their inventory investment and carrying costs. The Company reduces its
customers' administrative paperwork, costs of shipping and personnel costs
related to internal distribution and purchase order management by consolidating
multiple purchases into a single shipment, providing a single invoice relating
to multiple purchases over varying periods of time and offering the ability to
direct shipments to specific departments and personnel within a single facility
or multiple facilities.
The Company's customers include a wide range of purchasers of
industrial supply products, from one-man machine shops to Fortune 500
companies. The Company focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $130. MSC has in
excess of 127,000 active customers (companies that have purchased at least one
item during the past 12 months), which are typically small and mid-size
companies. MSC's customers select desired products from the Company's various
publications and place their orders by telephone, facsimile or direct computer
link.
The Company operates primarily in the United States, with customers in
all 50 states, through a network of three regional distribution centers and 33
branch offices. The Company's existing distribution centers are located in Long
Island, New York, Atlanta, Georgia and Elkhart, Indiana. The Company has
commenced plans to relocate its Long Island distribution center to Harrisburg,
Pennsylvania. The Harrisburg, Pennsylvania distribution center commenced
shipping in September 1996, and is expected to be fully operational in the
first half of fiscal 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The strategic locations of the Company's current distribution
centers allow for next day delivery via low cost ground carriers in 28 states
located primarily in the eastern United States. The Company's experience has
been that areas accessible by next day delivery generate significantly greater
sales than areas where next day delivery is not available. Accordingly, the
Company's long-term strategy is to establish additional distribution centers in
the
West and Southwest, supported by local branch offices, to expand the Company's
geographic coverage of next day delivery throughout the continental United
States.
The Company was formed in October 1995 as a holding company to hold
all of the outstanding capital stock of Sid Tool Co., Inc. (the "Operating
Subsidiary"), which has been in business since 1941. Immediately prior to the
Company's initial public offering in December 1995 (the "Initial Public
Offering"), a total of 24,000,000 shares of the Company's Class B Common Stock
were issued to the then existing shareholders of the Operating Subsidiary in
exchange for all of the capital stock of the Operating Subsidiary (the
"Reorganization"). The Company's principal executive offices are located at 151
Sunnyside Boulevard, Plainview, New York 11803-1592.
Industry Overview
The Company operates in a large, fragmented industry characterized by
multiple channels of distribution. The total United States market for MRO
supplies of the categories of industrial products sold by MSC is estimated to
be in excess of $140 billion annually, with the top 50 industrial distributors
accounting for approximately 12% of the market. The Company believes that
approximately 135,000 small retailers, dealerships and distributors,
substantially all of which have annual sales of less than $10 million, supply
over 65% 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. The Company believes that because most
businesses focus primarily on their manufacturing processes or services
provided, relatively little attention is given to MRO purchasing. Except in the
largest industrial plants, MRO supplies inventories may not be effectively
managed or monitored, resulting in higher purchasing costs and increased
administrative burdens. MRO items are generally purchased by personnel whose
primary functions involve areas other than the acquisition of MRO supplies.
Within larger facilities, such items are frequently stored in multiple
locations, resulting in excess inventories and duplicative purchase orders. MRO
items are 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.
The Company believes that the administrative costs associated with
placing a MRO purchase order can be in excess of $100. Awareness of these high
costs and purchasing inefficiencies as referenced above has been driving large
companies to streamline the purchasing process by utilizing a limited number of
suppliers which can provide adequate selection, prompt delivery and superior
customer service. Customized billing practices and report generation
capabilities tailored to customer objectives are also becoming an increasingly
important feature of the total cost reduction model to customers and have
significantly reduced the need for purchasing agents and administrative
personnel. The Company believes that the mid-size customer has begun to respond
to industry and economic pressures and is moving more rapidly toward the more
efficient, cost saving, single supply source offered by the Company. The
Company also believes that the small shop customer is just beginning to realize
the value of suppliers such as MSC in reducing overall costs through reductions
in paperwork, multiple sources of supply, inventory stocks and delivery times.
Despite the apparent 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. The Company believes 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, better product selection and a higher
level of service.
2
MSC has developed a low cost solution to the purchasing inefficiencies
and high costs described above. Customers that purchase products from MSC will
generally find that their total purchasing costs are reduced through
consolidation of multiple sources of supply into a single supplier,
consolidation of multiple purchase orders into a single purchase order,
consolidation of multiple invoices into a single invoice, significant reduction
in tracking of invoices, significant reduction in stocking decisions and
elimination of purchases for inventory and, through the Company's electronic
ordering system, the elimination of paper orders and invoices. The Company's
customers will generally notice a reduction in purchasing costs, inventory
carrying costs and administrative inefficiency.
Business Strategy
The Company's business strategy is to provide its customers with a low
cost means for obtaining and maintaining MRO supplies, which strategy includes
the following key elements: (i) a broad selection of in-stock products; (ii)
prompt response and same-day shipping; (iii) superior, value-added customer
services; (iv) targeted direct mail marketing; and (v) a commitment to
technological innovation. As a result of this strategy, the Company is able to
lower its customers' overall MRO supplies costs by reducing administrative
paperwork, shipping costs, internal distribution costs and inventory investment
and carrying costs.
o Breadth of Products. The Company believes that its ability
to offer its customers a broad spectrum of brand name and
generic MRO products and a "good-better-best" product
selection alternative (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 at the lowest cost) has been critical to its
success. The Company's customers are increasingly
consolidating their purchasing into fewer suppliers to reduce
the administrative burden of ordering from multiple
suppliers. By offering for sale over 300,000 products,
approximately 95% of which are in stock and available for
immediate shipment, the Company aims to provide a broad range
of merchandise in order to become its customers' preferred
supplier of MRO products.
o Same-Day Shipping. The Company's 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 inventory investment and carrying costs. The Company
fulfills its same-day shipment of orders guarantee more than
99.9% of the time. The Company's 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 the
Company's distribution centers allow next day delivery via
low cost ground carriers in 28 states located primarily in
the eastern United States.
o Superior Customer Service. Customer service is a key element
in becoming a customer's preferred provider of MRO supplies.
The Company emphasizes customer service and supports this
superior service with sophisticated information systems and
extensive training. Utilizing its proprietary customer
support software, the Company's in-bound telemarketing
representatives implement the Company's "one call does it
all" philosophy. Telemarketing representatives are able to
inform customers on a real time basis of the Company's
in-stock inventory availability, recommend substitute
products, verify credit information, receive special, custom
or manufacturer direct orders, cross-check inventory items
using customer product codes previously entered into the
Company's information systems and provide technical product
information. The Company believes that its simple, one-call
method of fulfilling all purchasing needs of a customer
through a single highly trained telemarketing representative
supported by the Company's proprietary information systems
results in greater efficiency for customers and increased
customer satisfaction. To complement its customer service,
the Company seeks to ease the administrative burdens on its
customers by offering electronic data interchange ("EDI")
ordering, customized billing services, customer savings
reports, bulk discounts, stocking of specialty items
specifically requested by customers and other customized
report features.
3
o Targeted Direct Mail Marketing Strategy. MSC's primary tool
for marketing and product reference is a master catalog
containing 3,560 pages and over 300,000 items, which is
distributed twice per year (once per year prior to fiscal
1996). The Company's catalog was supplemented by
approximately 70 specialty and promotional catalog, brochure
and newspaper titles in fiscal 1996, covering such specialty
areas as welding, cutting tools, measuring instruments,
abrasives, industrial supply, and hose and tubing. The
Company uses its database of approximately 180,000 companies
and 685,000 individuals, and also purchases mailing lists of
prospective customers, to target the distribution of these
various publications to specific individuals within an
organization whose purchasing history or other criteria
suggest receptiveness to mailings of specific publication
titles. The use of specialty and promotional publications,
which are produced in-house, increases productivity through
lower costs, increased response rates and more efficient use
of advertising space. MSC's publications mailings increased
from 2.4 million in fiscal 1992 to approximately 6.6 million
in fiscal 1995. The number of targeted marketing pieces
mailed in fiscal 1996 decreased to 6.3 million as the Company
adopted a more focused strategy for distributing targeted
marketing pieces. In fiscal 1997, the Company intends to
increase its direct marketing efforts to take advantage of
the additional products offered and its expanded distribution
capabilities. The Company's expenditures on direct mail
increased from $3.8 million in fiscal 1992 to approximately
$10 million in fiscal 1996, and are budgeted to grow to $11
million in fiscal 1997.
o Commitment to Technological Innovation. The Company utilizes
technological innovation to improve customer service and to
reduce its operating costs through more effective buying
practices, automated inventory replenishment and efficient
order fulfillment operations. MSC's proprietary software
tracks all 300,000 SKUs and enables the customer and the
telemarketing representative to determine the availability of
products in stock on a real time basis and to evaluate
alternative products and pricing. The Company's EDI 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. The information systems developed by the Company
enhance inventory management and turnover, customer service
and cost reduction for both MSC and its customers. In
addition to internal and customer information systems, the
Company continually upgrades its distribution methods and
systems to improve productivity and efficiency. The Company
has also developed a World Wide Web information site in
anticipation of increased commerce on the Internet.
The Company believes that direct mail is one of the most effective,
low cost methods of reaching customers. The Company continually seeks to reduce
its own costs in order to continue to be the integrated low cost solution for
its customers. MSC's call centers are a lower cost and more effective
alternative to maintaining a large direct sales force. The Company produces its
various product and promotional publications in-house, thereby significantly
reducing marketing costs. MSC's increasing volume purchasing power has resulted
in lower prices from vendors on many of the products it sells and dispersion of
central costs over a wider revenue base.
Growth Strategy
The Company's objective is to become the preferred supplier of
industrial products for small and mid-size companies throughout the United
States. The Company intends to increase sales to existing and new customers in
existing geographic markets served by next day delivery by (i) increasing the
number of product lines and SKUs offered; (ii) increasing the circulation of
the master catalog and expanding its targeted direct mail campaign; and (iii)
acquiring smaller local distributors to gain access to customers while
consolidating the acquired operations into existing Company distribution
facilities. The Company also intends to increase sales to customers in regions
not currently served by next day delivery by increasing the geographic
availability of next day delivery.
4
o Increased Penetration of Existing Markets. The Company
believes that its most significant current opportunity to
increase profits lies in the incremental revenue which can be
realized from existing customers and new customers in
existing geographic areas. MSC believes that continuing to
increase the breadth of its product line and providing high
levels of customer service are the two primary methods for
increasing sales to existing customers and attracting new
customers. Accordingly, MSC has added in excess of 130,000
SKUs over the past two years while simultaneously increasing
the Company's inventory turns. By expanding the product
lines offered, the Company seeks to satisfy an increasing
percentage of the MRO supplies purchases of its customers.
Additionally, the Company's ability to deliver such expanding
product lines on a next day basis is an important service
advantage that results in lower costs to customers. The
Company's commitment to superior customer service and a broad
product base adds to the convenience and effectiveness of
doing business with MSC.
In fiscal 1997, the Company intends to shift its growth
emphasis from increasing its offering of SKUs to increasing
the size and diversity of its customer base. This shift will
take advantage of the Company's ability to service the
industrial midwestern United States through its Elkhart,
Indiana facility. The Company has accumulated a buyer
database of approximately 685,000 individuals, and utilizes
empirical information from this database to prospect for new
customers and supplement its master catalog with directed
mailings of specialty and promotional publications intended
to increase customer response and product purchases. MSC has
increased the number of publication titles distributed over
the past several years from 12 in fiscal 1992 to
approximately 70 in fiscal 1996.
o Expansion into New Markets. The Company operates primarily
in the continental United States through a network of three
regional distribution centers and 33 branch offices. The
strategic locations of the Company's distribution centers
allow next day delivery via low cost ground carriers in 28
states located primarily in the eastern United States and
second day delivery throughout the rest of the continental
United States. The Company's experience has been that sales
in areas accessible by next day delivery are significantly
greater than in areas with second day delivery. The
Company's long-term goal is to open distribution centers in
the West and Southwest, supported locally by branch offices,
which will expand the Company's geographic coverage of next
day delivery throughout the United States.
o Selected Acquisitions. The Company believes that local market
acquisitions of small suppliers of industrial products
provide a very attractive opportunity for expanding its
customer base in existing markets. Two of the Company's
acquisitions completed during fiscal 1996 operate in markets
where the Company already was present. In pursuing such
acquisitions, the Company seeks to gain immediate access to
the acquired company's customer base while consolidating its
operations into existing distribution facilities, thus
achieving incremental revenue while incurring limited
incremental operating costs.
The Company will consider expansion into new markets through the
acquisition of industrial supply companies with existing distribution
facilities. One of the Company's acquisitions completed during fiscal 1996
operates in a market where the Company previously was not present. The
completion of such acquisitions allows the Company to accelerate its growth
plans and immediately penetrate new markets in a more efficient manner without
the need for lengthy construction periods or significant capital expenditures
that will not yield a return on investment for several months or years.
Additionally, corporate and administrative infrastructures necessary to support
such acquisitions are already in place. No assurance can be given that any such
acquisitions, when and if made, will be successfully integrated into the
Company's existing operations, nor can there be any assurance that the
Company will be able to implement this phase of its growth strategy.
5
Products
The Company currently offers in excess of 300,000 SKUs, which number
represents a 100% increase since 1991. The Company attributes a portion of its
sales growth to the total number of SKUs offered. In this regard, the Company
intends to continue to add new product categories and increase the number of
products offered in existing product categories in its efforts to gain new
customers and increase sales from existing customers. The Company's core
products include cutting tools, abrasives, measuring instruments, machine tool
accessories, machinery and safety products. As part of its strategy of
supplying an increasing portion of its customers' MRO needs, the Company has
recently expanded its product mix to include plumbing supplies, process
instrumentation, hardware, marking products, pumps and pneumatics and has
significantly increased its offering of flat stock 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.
The Company's offering of specific products from multiple
manufacturers at different prices and quality levels permits MSC to offer a
good-better-best product selection alternative. This alternative provides the
customer a choice among 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 at the lowest cost. For example, if a
customer requires a drill bit to drill 100 holes, it would not be
cost-effective to purchase the top-of-the-line name brand which is capable of
drilling 10,000 holes. MSC's telemarketing representatives and technical
support personnel are trained specifically to assist customers in making
intelligent cost-saving purchases. The Company believes that its product
alternative offerings and knowledgeable customer service and technical support
personnel result in significant amounts of repeat business and are an integral
part of MSC's overall customer cost reduction strategy.
The following table itemizes the product categories currently offered
by MSC and the number of SKUs available in each product category:
Number of
Category SKUs
-------- ---------
Cutting Tools 119,000
Machinery 27,500
Fasteners 24,500
Tooling 20,100
Measuring Instruments 15,700
Flat Stock Raw Materials 14,300
Electrical Supplies 10,900
Power Transmission 10,900
Plumbing Supplies 10,900
Material Handling 10,800
Hand and Power Tools 10,200
Abrasives 9,200
Hose Tube and Fittings 6,700
Safety Products 5,800
Process Instrumentation 5,000
Hardware 4,600
Welding 4,600
Marking Products 2,800
Janitorial/Maintenance 2,700
Lubricants 1,700
Pneumatics 1,100
Pumps 800
Miscellaneous 3,200
---------
Total 323,000
---------
---------
The Company purchases substantially all of its products directly from
approximately 1,700 manufacturers
6
located in the United States. Approximately 10% of products are purchased from
manufacturers located overseas. The Company is not materially dependent on any
one supplier or small group of suppliers. No single supplier accounted for more
than 5% of the Company's total purchases in fiscal 1996. Generic products,
primarily machine tools, are manufactured by third parties to the Company's
specifications.
Distribution Centers
A significant number of the Company's products are carried in stock,
and approximately 95% 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. The operations
of the Company's 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. The Company
has invested significant resources in technology and automation to increase
efficiency and reduce costs, and continuously monitors its order fulfillment
process and endeavors to maintain its commitment to technological efficiencies
and cost reduction. The Company currently utilizes three distribution centers
for product shipment located in Long Island, New York, Atlanta, Georgia and
Elkhart, Indiana. The Company commenced shipping from the Elkhart, Indiana
distribution center during fiscal 1996, and the center is now fully
operational. During fiscal 1996, the Company announced plans to relocate its
Long Island distribution center to Harrisburg, Pennsylvania. That distribution
center commenced shipping in September 1996, and is expected to be fully
operational during the first half of fiscal 1997. Over the next several years,
the Company intends to open additional distribution centers in the West and
Southwest in order to achieve the Company's goal of next day delivery
throughout the continental United States.
Sales and Marketing
The Company's customers include a broad range of purchasers of
industrial supply products, from one-man machine shops to Fortune 500
companies. The Company focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $130. The
Company focuses its marketing efforts on the small shop segment, consisting of
job shops and other small industrial entities with fewer than 100 employees and
usually less than $500,000 of annual industrial supplies purchases, and the
mid-size corporate segment, consisting of industrial entities with 100-999
employees and annual MRO purchases of between $500,000 and $1,000,000. The
Company's strategy to pursue the large corporate segment is to develop
relationships with, and supply MRO products directly to, integrated supply
providers that are hired by large corporations to manage their MRO purchasing
and administrative operations.
The Company believes that its expanded product offerings, rapid
delivery capabilities and total cost reduction strategy are critical to
expanding its market share. MSC has in excess of 127,000 active customers
(companies which have purchased at least one item during the past 12 months).
Typically, a customer's MRO purchases are managed by several buyers responsible
for different categories of products. The Company targets these individual
buyers within an organization and distributes publication titles corresponding
to the product categories for which such buyers are responsible. The Company is
able to accomplish this directed marketing strategy as a consequence of the
depth of customer information contained in its information systems databases.
The Company's customers select desired products from the Company's various
publications and place their orders by telephone, facsimile or direct computer
link.
The Company has invested significant resources in developing an
extensive customer and prospect database. This database, which includes more
than 685,000 buyers' names, is a key component of the Company's growth
strategy. The customer and prospect database includes detailed information,
including company size, number of employees, industry of operation, various
demographic and geographic characteristics and personal purchase histories
(catalog preference, product preference, order value). The Company supplements
this database with third party mailing lists which are screened to the
Company's specifications. In fiscal 1996, such lists resulted in over 793,000
mailings to potential buyers who had not previously purchased from MSC. The
Company has recently hired a database management professional to utilize more
effectively the information contained in the Company's database and purchased
lists. The Company believes that this variety and depth of information on its
customers offers the
7
Company a significant competitive advantage in increasing sales to existing
customers and attracting new customers.
The Company relies on its approximately 270 in-bound telemarketing
representatives, who are responsible for a substantial majority of 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 the Company's
information systems databases. The Company's "one call does it all" philosophy
is predicated on the ability of the telemarketing representative, with the
assistance of the Company's information systems databases, to respond
effectively to the customer's needs. When a customer places a call to the
Company, the telemarketing representative taking the call has immediate access,
through the Company's proprietary information systems databases, to that
customer's company and specific buyer profile, as well as inventory levels by
distribution center on all of the over 300,000 SKUs offered by MSC. The
telemarketing representative is able to access historical and current billing
information, purchasing profiles, plant and industry information and is
prompted to update the information contained in the databases, including
employee and buyer personnel information. The Company believes that its
information systems databases are an important factor in achieving customer
satisfaction and the success of the Company's business strategy.
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. The Company also maintains 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.
Additionally, the Company employs a direct sales force of
approximately 110 sales representatives. These commission-based sales
representatives are responsible for presenting the Company's total cost
reduction program to existing customers and increasing sales per customer.
Branch Offices
The Company currently operates 33 branch offices located in 20 states.
These branch offices receive approximately 35% of all orders and are staffed
with highly trained telemarketing representatives that utilize the same
information systems as in the distribution centers. The Company has experienced
higher sales growth and market penetration in areas where it has established a
branch office and believes its branch offices are critical to the success of
the Company's business strategy. In addition to opening new branch offices in
support of its distribution centers, the Company has acquired local
distributors and converted them to branch offices in new geographic locations
to obtain an immediate established local market presence through use of the
acquired customer base and integration of its operations with MSC. The Company
believes that branch office acquisitions will result in more rapid expansion at
a lower cost. See "--Acquisitions."
Publications
The Company's primary reference tool is its 3,560 page master catalog,
which is supported by specialty and promotional catalog, brochure and newspaper
titles, approximately 70 of which were published in fiscal 1996. Specialty and
promotional publications permit multiple targeted mailings to customers within
various specialty process areas, such as welding, electrical supply and hose
and tubing. The Company intends to distribute specialty and promotional
catalogs, brochures and newspapers through utilization of the Company's
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.
8
MSC's in-house staff designs and produces all of MSC's 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 the Company
the flexibility to alter its product offerings and pricing and refine its
catalog, brochure and newspaper formats more quickly.
The success of the Company's targeted marketing program in enhancing
revenue has justified an increase in the Company's direct mail budget
(excluding cooperative advertising revenue) from approximately $3.8 million in
fiscal 1992 to approximately $10 million in fiscal 1996. The budget for fiscal
1997 is approximately $11 million. As reflected in the following table, the
number of publication titles has increased from 12 in fiscal 1992 to
approximately 70 in fiscal 1996. The number of pieces mailed has increased from
2.4 million in fiscal 1992 to 6.3 million in fiscal 1996, and is expected to
reach approximately 9.0 million in fiscal 1997.
Fiscal Year Ended
--------------------------------------------------------------------------------
August 29, August 28, August 27, September 2, August 31,
1992 1993 1994 1995 1996
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
Number of publication titles................. 12 13 20 38 70
Number of publications mailed................ 2,447,000 2,688,000 4,794,000 6,604,000 6,300,000
Customer Service
One of the Company's goals is to make purchasing its 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
the Company's business. Order entry and fulfillment occurs at each of the
Company's 33 branches and main call centers located at the Company's three
operating distribution centers . Calls are received by highly trained in-bound
telemarketing representatives who utilize on-line terminals to enter customer
orders into computerized order processing systems. The Company's branch offices
field approximately 35% of all telephone orders. The Company's telephone
ordering system is flexible and, in the event of local or regional breakdown,
can be rerouted 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 warehouse closest to the customer and a
packing slip is printed for order fulfillment. Most of the orders placed with
the Company are shipped by United Parcel Service ("UPS"), and, to a limited
extent, by various other freight lines and local carriers. Air freight is also
used when appropriate. The Company has no written agreement with UPS but has
been able to negotiate favorable shipping rates due to the volume of shipments
from the Company. The Company is not dependent on any one carrier and believes
that alternative shipping arrangements can be made with minimal disruption to
operations in the event of the loss of UPS as the Company's primary carrier.
The Company believes that its relationships with all its carriers are
satisfactory. The Company guarantees same-day shipping 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
The Company's 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 its
business. These proprietary information systems enable the Company to ship to
customers on a same-day basis, respond quickly to order changes and provide a
high level of customer service. The proprietary information systems enable the
Company to achieve cost savings, deliver superior customer service and manage
its operations centrally. Certain of the Company's information systems operate
over a wide
9
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. The
Company also maintains a sophisticated buying and inventory management system
that monitors substantially all of its SKUs and automatically purchases
inventory from vendors for replenishment based on projected customer ordering
models. The Company has completed the testing of an EDI purchasing program with
its vendors and customers for the purpose of reducing inventory levels and
increasing inventory turnover and expects to offer such program to many of the
Company's vendors during fiscal 1997.
In addition to the proprietary computer software programs for use in
the telemarketing and distribution operations, the Company has also developed a
proprietary MRO management system, the Customer Direct Access Plus System
("CDA"), which is designed to automate, simplify and control the administration
and management of MRO purchasing by giving the customer direct access to the
Company's 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. In addition, the Company is developing a Windows(R)-based CDA and a
CD-ROM package and has recently commenced providing product information on the
Internet.
The Company runs its systems on an AS400 platform and utilizes
disaster recovery techniques and procedures which the Company believes are
adequate to fulfill its needs and are consistent with this type of equipment.
The Company believes that planned enhancements and upgrades to the next
generation of its existing operating platforms will be sufficient to sustain
its present operations and its anticipated growth for the foreseeable future.
Acquisitions
The Company has completed only a limited number of acquisitions to
date. The Company, however, may actively consider acquisitions as part of its
future growth strategy if opportunities arise. The Company believes that the
ongoing consolidation within the industrial supply industry is spurring smaller
competitors to seek partners to increase their productivity and reduce costs.
The Company believes that it is well positioned to play a significant role in
this industry consolidation.
The Company believes that the most beneficial acquisitions are those
which can be integrated into its existing operations. Accordingly, the Company
expects to focus on branch office acquisition prospects that can be integrated
into its distribution facilities. The Company will also consider new market
acquisitions if they are of sufficient size that the Company can establish a
meaningful presence in such markets in accordance with its geographic growth
plans.
Upon completing an acquisition within an existing market, the Company
intends to move rapidly to integrate the acquired entity into its existing
operations. The Company believes that such integration offers a number of
opportunities to improve productivity and customer service. These benefits
include: (i) elimination of redundant facilities and services, (ii) reduction
of administrative overhead, (iii) consolidation of purchasing power, (iv)
expanded customer services, and (v) increased merchandise selection. From time
to time, the Company has engaged in and continues to engage in preliminary
discussions with respect to potential acquisitions. The Company is not
currently a party to any oral or written acquisition agreement or engaged in
any negotiations with respect to any material acquisition candidate. No
assurance can be given that any such acquisitions, when and if made, will be
successfully integrated into the Company's existing operations, nor can there
be any assurance that the Company will be able to implement this phase of its
growth strategy.
Competition
The MRO supply industry is a large, fragmented industry that is highly
competitive. The Company faces competition from (i) traditional channels of
distribution such as retail outlets, small dealerships, regional or national
10
distributors utilizing direct sales forces, and manufacturers of MRO supplies
and (ii) large warehouse stores and larger direct mail distributors. The
Company believes that sales of MRO supplies will become more concentrated over
the next few years, which may make the industry more competitive. Certain of
the Company's competitors offer a greater variety of products and have
substantially greater financial and other resources than the Company. 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. The Company believes it
competes effectively on all such criteria.
Employees
As of November 2, 1996, the Company employed approximately 1,420
employees, including approximately 1,360 full-time and approximately 60
part-time employees. None of the Company's employees is represented by a labor
union. The Company considers its relationships with employees to be good and
has experienced no work stoppages.
Item 2. PROPERTIES.
The Company's distribution centers are as follows:
Approx.
Location Sq. Ft.
-------- --------------
Atlanta, Georgia(1) 340,000
Long Island, New York(2) 243,000
Elkhart, Indiana(3) 270,000
Harrisburg, Pennsylvania 270,000
(expected to be fully operational
in February 1997)(3)
- ----------
(1) The lease for this facility expires on July 31, 2010.
(2) The Long Island distribution center consists of 3 separate
facilities--an 83,000 square foot headquarters and small parts shipping
facility located in Plainview, New York, a 100,000 square foot item
shipping and receiving facility located in Central Islip, New York and a
60,000 square foot small parts receiving facility located in Plainview,
New York. The leases for these facilities expire on December 13, 1997,
December 31, 1997, and August 1, 2000, respectively.
(3) This facility is owned by the Company.
The Company maintains 33 branch offices located in 20 states, ranging
in size from 3,000 to 16,000 square feet. The leases for these branch offices
will expire at various periods between August 1996 and December 2003. The
aggregate annual lease payments on these properties in fiscal 1996 was
approximately $915,000.
The Company believes that its facilities are adequate for its current
needs and that suitable additional space will be available as needed.
Item 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending against the Company.
11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to the
executive officers of the Company. The executive officers of the Company were
elected in October 1995 to the positions listed. Accordingly, all descriptions
of positions held with MSC or the Company prior to October 1995 refer to the
Operating Subsidiary.
Name Age Position
- ---- --- --------
Sidney Jacobson........................ 78 Chairman of the Board of Directors
Mitchell Jacobson...................... 45 President, Chief Executive Officer and Director
James Schroeder........................ 56 Vice President, Chief Operating Officer and Director
Shelley Boxer.......................... 49 Vice President, Chief Financial Officer and Director
Thomas Eccleston....................... 48 Vice President - Plant and Equipment
and Secretary
Barbara Schwartz....................... 64 Vice President - Human Resources
Sidney Jacobson is a co-founder of MSC and has been its Chairman since
June 1982. Prior to 1982, Mr. Jacobson served as President and Chief Executive
Officer of MSC since 1941.
Mitchell Jacobson was appointed President and Chief Executive Officer
of MSC in June 1982. Prior to that time, Mr. Jacobson had been an Executive
Vice President since joining the Company in 1976. Mitchell Jacobson is the son
of Sidney Jacobson.
James Schroeder was appointed Vice President and Chief Operating
Officer of MSC in 1986. Mr. Schroeder has served as Group Vice President of
National Service Industries, a manufacturing company, from 1984 to 1986, as
President of Avanti Motor Corp., an automobile dealership company, from 1983 to
1984, and as President of the MSC Division of Wheelabrator-Frye, Inc., a
manufacturing company, from 1980 to 1983.
Shelley Boxer was appointed Vice President and Chief Financial Officer
of MSC in 1993. Mr. Boxer was formerly the Vice President and Chief Financial
Officer at Joyce International, Inc., a distribution and manufacturing company,
from 1992 to 1993. From 1987 to 1992, he was the Executive Vice President and
Chief Financial Officer at Kinney Systems, Inc., an automobile parking and real
estate company. From 1982 to 1987, Mr. Boxer was Vice President and Treasurer
of Meyers Parking System, Inc., an automobile parking and real estate company.
Thomas Eccleston joined MSC in 1985 and was appointed Vice President
of Plant and Equipment of MSC in 1986. Prior to joining MSC, Mr. Eccleston was
the Director of Marine Operations at Prudential Lines, Inc., a shipping
company, from 1979 to 1983 and Operations Manager at Norton, Lilly & Co., an
international steamship agency, from 1973 to 1979.
Barbara Schwartz joined MSC in 1974 and was appointed Vice President
of Human Resources in 1986. From 1983 to 1985, Ms. Schwartz held the position
of Director of Operations and from 1976 to 1983 was the Controller at MSC.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A common stock is traded on the New York Stock
Exchange (the "NYSE") under the symbol "MSM." The following table sets forth
the range of the high and low closing sales prices as reported by the NYSE for
the period from December 1995 (when the Company listed the Class A common
stock on the NYSE) to August 31, 1996:
Quarter
-------
High Low
---- ---
Second Quarter (beginning December 15, 1995)............................................ $28-3/8 $22-1/4
Third Quarter........................................................................... 37 27-5/8
Fourth Quarter.......................................................................... 37-1/8 27-7/8
On November 22, 1996, the last reported sales price for the Class A
common stock on the NYSE was $37-1/8 per share.
The approximate number of holders of record of the Class A common
stock as of November 22, 1996 was 500. The number of holders of record of the
Company's Class B common stock as of November 22, 1996 was 9.
The Company has not declared cash dividends on the Class A common
stock and does not have any plans to pay any cash dividends on the Class A
common stock in the foreseeable future. The Board of Directors of the Company
anticipates that any earnings that might be available to pay dividends on the
Class A common stock will be retained to finance the business of the Company
and its subsidiaries.
13
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 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 27, 1994, September 2,
1995 and August 31, 1996 and the selected balance sheet data as of September 2,
1995 and August 31, 1996 are derived from the Company's audited financial
statements which are included elsewhere herein. The selected balance sheet data
as of August 29, 1992, August 28, 1993 and August 27, 1994 and the selected
income statement data for the fiscal years ended August 29, 1992 and August 28,
1993 are derived from audited financial statements of the Company not included
herein.
-------------------------------------------------------------
August 29, August 28, August 27, September 2, August 31,
1992 1993 1994 1995 1996
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
-------------------------------------------------------------
(in thousands)
Income Statement Data:
Net sales..................... $125,454 $142,287 $174,682 $248,483 $305,294
Gross profit.................. 55,385 61,796 74,852 103,288 126,775
Operating expenses............ 42,454 44,951 50,811 69,532 83,666
Restructuring charge.......... -- -- -- -- 8,600
Income from operations........ 12,630 16,845 24,041 33,756 34,509
Income taxes.................. 323 418 813 765 5,531
Net income.................... 10,458 15,682 22,573 31,698 28,503
Pro forma net income(1) ...... 6,523 9,740 14,149 19,640 20,591
Pro forma Net income per share(2) $0.67
Pro forma weighted Number of
shares outstanding(2)....... 30,696
Selected Operating Data(3):
Active customers.............. 75 78 98 120 127
Number of SKUs................ 140 150 170 231 302
Orders entered................ 967 1,103 1,348 1,833 2,155
Number of publication titles
(not in thousands)............ 12 13 20 38 70
Number of publications
mailed........................ 2,447 2,688 4,794 6,604 6,300
Revenue per employee.......... $ 189 $ 201 $ 214 $ 249 $ 266
14
August 29, August 28, August 27, September 2, August 31,
1992 1993 1994 1995 1996
-------------- -------------- --------------- --------------- ---------------
Balance Sheet Data (at period end):
Working capital........... $54,158 $57,335 $48,726 $81,228 $163,785
Total assets.............. 75,745 80,853 91,307 139,032 265,484
Short-term debt........... 498 665 12,728 9,208 2,486
Long-term debt, net of
current portion........... 23,762 18,374 3,220 30,969 42,191
Shareholders' equity...... 40,187 49,708 55,750 72,088 172,571
- ---------------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%.
(2) Pro forma net income per common share for the year ended August 31, 1996
includes the pro forma effect of a "C" corporation income tax provision
for the entire fiscal year. Pro forma weighted average common shares
outstanding include (i) the weighted average shares of Class A and Class B
common stock outstanding during the year, (ii) the impact of approximately
262 shares issued for the acquisition of Primeline International, Inc. and
the Restricted Stock Plan assumed outstanding for the entire year, (iii)
the impact of 3,318 shares issued in the initial public offering, the
proceeds of which were used to pay the final "S" corporation distribution,
assumed outstanding for the entire year, and (iv) the common stock
equivalent impact of 756 outstanding options issued under the Company's
1995 Stock Option Plan based upon the grant date of the options.
(3) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General
In recent years, the Company made the strategic decision to leverage
its strength as a low-cost value-added MRO provider by adding new categories of
MRO supplies, such as welding and electrical supplies, which has increased
sales to existing customers and allowed the Company access to new customers.
The Company believes that revenue has increased, in part, as a result of the
increase in the number of stock keeping units ("SKUs"); however, the Company is
unable to quantify precisely the impact of such increase. The Company intends
to continue to add new product categories and increase the number of products
offered in existing product categories in its efforts to gain new customers and
increase sales from existing customers. During fiscal 1996, the Company added
over 70,000 SKUs and expects to add approximately 25,000 SKUs during each of
the next two fiscal years. The Company generally adds SKUs in response to the
feedback it receives from its existing customers. In this way, the Company
seeks to increase purchases from existing customers through increased product
offerings that it knows are desired by its customers. While adding new product
categories is important to increasing volume and profits, this expansion will
result in increases in the Company's inventory purchases. The Company also
seeks to expand its customer base by offering its increased product lines and
product offerings to customers who have not previously purchased merchandise
from the Company. There can be no assurance that the Company will be able to
increase the number of SKUs offered or that the correlation between the number
of SKUs offered and revenue will continue.
The Company significantly expanded its direct mail marketing program
from approximately 4.8 million pieces in fiscal 1994 to 6.6 million pieces in
fiscal 1995. In fiscal 1996, the Company adopted a more focused strategy for
targeting mailing pieces and increased its level of investment in new products
and distribution capabilities. Accordingly, in fiscal 1996, mailings remained
relatively flat at 6.3 million pieces. Targeted mailings to customers or
potential customers are designed to maximize the Company's return in relation
to its marketing expenditures. The Company utilizes its customer databases to
match specific customer profiles with an expanding selection of catalog titles
which emphasize specific product categories. The Company believes that
increasing mailings to more targeted customer segments has resulted in
increased marketing productivity.
In fiscal 1997, the Company intends to take advantage of the
additional products offered and its expanded distribution capabilities by
further increasing its direct marketing efforts. These direct marketing
efforts are expected to enhance the expanded products offerings
and improved distribution capabilities; however, the costs associated with
this 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 the Company's direct mail marketing
program will result in new customers or an increase in sales from existing
customers.
Revenue per employee increased from approximately $214,000 in fiscal
1994 to approximately $266,000 during fiscal 1996. The Company believes that
this increase in revenue per employee is indicative of its efforts to achieve
higher levels of efficiency and cost savings at the employee level.
Commencement of shipping operations at the Elkhart, Indiana distribution center
has had a negative impact on revenue per employee. Further, commencement of
shipping operations at the Harrisburg, Pennsylvania distribution center may
have a negative impact on revenue per employee until such time as this facility
is fully operational. The Company intends to continue to improve the efficiency
and performance of its employees, although there can be no assurance that this
can be accomplished.
The number of annual orders entered and processed has increased from
approximately 1.3 million in fiscal 1994 to approximately 2.2 million
during fiscal 1996. The average order size of approximately $130 has
remained relatively constant throughout this period. The Company believes that
its targeted marketing campaign strategy to continue to add new product
categories and new products within existing categories and increased
efficiencies in order processing have been significant contributing factors to
the Company's increase in orders and,
16
accordingly, sales, both from existing customers and from new customers;
however, there can be no assurance that the Company will be able to continue to
grow at rates recently experienced or at all.
In fiscal 1996, the Company recorded and, through the first half of
fiscal 2001 the Company will record, a non-cash deferred compensation charge
at a rate of approximately $600,000 per year as a result of the issuance of
approximately 156,000 shares of Class A Common Stock to certain of the
Company's employees pursuant to the Company's 1995 Restricted Stock Plan.
MSC commenced shipping operations at its new distribution center in
Elkhart, Indiana during fiscal 1996 in order to improve the Company's
efficiency, geographic distribution and market penetration. The opening of this
new distribution center required a substantial capital investment, including
expenditures for real estate and construction, and substantial investment for
inventory. The opening has also adversely impacted distribution expenses as a
percentage of sales, inventory turnover and return on investment in the periods
prior to and since the commencement of operations. Additionally, until sales
volumes mature at this new distribution center, expenses as a percentage of
sales may be adversely impacted. During fiscal 1996, the Company also incurred
substantial capital investment in commencing the relocation of its Long Island
distribution center to Harrisburg, Pennsylvania. The relocation is likely to
have adverse effects similar to those arising from the opening of the Elkhart,
Indiana distribution center on distribution expenses as a percentage of sales,
inventory turnover and return on investment over the next two fiscal years.
Results Of Operations
The following table summarizes the Company's historical results of
operations as a percentage of sales for fiscal 1994, 1995 and 1996:
August 27, 1994 September 2, 1995 August 31, 1996
--------------- ----------------- ---------------
Net sales (dollars in thousands)........... $174,682 $248,483 $305,294
======== ======== ========
Net sales.................................. 100.0% 100.0% 100.0%
Gross profit............................... 42.9 41.6 41.5
Operating expenses......................... 29.1 28.0 27.4
Restructuring charge....................... -- -- 2.8
Income from operations..................... 13.8 13.6 11.3
Net income................................. 12.9 12.8 9.3
Pro forma net income....................... 8.1 7.9 6.7
Year Ended August 31, 1996 Compared to Year Ended September 2, 1995
Net sales increased by $56.8 million, or 22.9%, to $305.3 million in
fiscal 1996 from $248.5 million in the fiscal 1995, which included one extra
week (the Company's fiscal years contain either 52 or 53 weeks). This increase
was primarily attributable to an increase in sales to the Company's existing
customers and, to a lesser extent, to an increase in the number of new
customers. The increase in sales to existing customers was derived primarily
from an increase of 31% in the number of SKUs offered as well as from more
focused marketing efforts. Average annual sales per customer increased 16%, and
the number of active customers increased 6% in fiscal 1996, as compared to
fiscal 1995.
Pro forma net income increased by $1.0 million or 4.8%, to
$20.6 million in fiscal 1996 from $19.6 million in fiscal 1995. This
change in pro forma net income reflects primarily the cumulative effects
of the changes in net income. As a percentage of sales, pro forma net
income in fiscal 1996 decreased to 6.7% from 7.9% in fiscal 1995. This
decline in pro forma net income as a percentage of sales reflects
primarily the restructuring charge in 1996, offset, in part, by the
percentage decline in other operating expenses and the decline in pro
forma income taxes, both as a percentage of sales.
Gross profit increased by $23.5 million, or 22.7%, to $126.8 million
in fiscal 1996 from $103.3 million
17
in fiscal 1995. The increase in gross profit was attributable to increased
sales. As a percentage of sales, gross profit remained constant at
approximately 41.5% and 41.6% for the respective periods.
Operating expenses, exclusive of the restructuring charge, increased
by $14.1 million, or 20.3%, to $83.7 million in fiscal 1996 from $69.5 million
in fiscal 1995. This increase was attributable to increased sales volume which
required added staffing and support. As a percentage of sales, operating
expenses declined from 28.0% to 27.4%.
Restructuring charge of $8.6 million, recorded during the third
quarter of fiscal 1996, is the estimated cost of the relocation of the Company's
Long Island distribution center and warehouses. This is the equivalent of $5.2
million after taxes, or $0.17 per share. The restructuring charge includes the
cost of relocating or replacing the Company's Long Island workforce, the cost to
physically move the inventory from Long Island to Harrisburg, Pennsylvania, and
the cost of leases and assets associated with abandoned facilities. The
Harrisburg, Pennsylvania distribution center commenced shipping in September
1996, and is expected to be fully operational in the first half of fiscal 1997.
Income from operations increased by $0.7 million, or 2.2%, to $34.5
million in fiscal 1996 from $33.8 million in fiscal 1995. This increase was
attributable to increased sales and gross profit offset in part by the
aforementioned restructuring charge and increases in operating expenses. Before
taking into account the restructuring charge, income from operations would have
increased by $9.4 million, or 27.7%, to $43.1 million.
Net income decreased by $3.2 million, or 10.1%, to $28.5 million in
fiscal 1996, from $31.7 million in fiscal 1995. The decrease in net income is
primarily attributable to the restructuring charge and taxation at "C"
corporation rates for a portion of fiscal 1996, partially offset by increased
sales and gross profit. Before taking into account the restructuring charge,
net income would have increased by $2.0 million, or 6.3%, to $33.7 million.
Fiscal Year Ended September 2, 1995 Compared to Fiscal Year Ended August 27,
1994
Net sales increased by $73.8 million, or 42.2%, to $248.5 million in
fiscal 1995 from $174.7 million in fiscal 1994. This increase was attributable
to a 20% increase in the number of SKUs offered by MSC, a 19% increase in
revenue per SKU and the inclusion of an extra week in fiscal 1995 (the
Company's fiscal years contain either 52 or 53 weeks). These increases also
reflect a 24% increase in the average number of active customers and a 15%
increase in average annual sales per customer. The Company believes that the
new customers were attracted as a result of direct marketing expenditures of
$6.5 million in fiscal 1995 compared to expenditures of $3.9 million in fiscal
1994 (net of cooperative advertising revenue of approximately $1.1 million in
fiscal 1995 and approximately $0.5 million in fiscal 1994), as well as the
addition of 24 new sales representatives and the opening of 4 new branch
offices. The Company believes that average sales per customer increased
primarily as a result of the increased selection of merchandise available as
reflected by the increased SKU count, as well as increased direct marketing
efforts.
Gross profit increased by $28.4 million, or 38.0%, to $103.3 million
in fiscal 1995 from $74.9 million in fiscal 1994. As a percentage of sales,
gross profit margins in fiscal 1995 declined to 41.6% from 42.9% in fiscal
1994. The absolute increase in gross profit was attributable to increased sales
and the inclusion of an extra week in fiscal 1995, offset in part by decreasing
margins. Gross profit margins declined, in part, due to the introduction of
approximately 61,000 new SKUs in fiscal 1995. New SKUs are typically introduced
at slightly reduced prices in order to establish such products in the
marketplace. The Company believes that new product introductions will
ultimately result in increased gross margins when new product volumes reach
levels that are customary for mature products. Operating software improvements
allowing better control over buying and pricing decisions were implemented
during fiscal 1995 and are expected to have a positive impact on margins for
fiscal 1996 and beyond.
Operating expenses increased by $18.7 million, or 36.8%, to $69.5
million in fiscal 1995 from $50.8 million in fiscal 1994. As a percentage of
sales, operating expenses in fiscal 1995 declined to 28.0% from 29.1%
18
in fiscal 1994. The absolute increase in operating expenses was attributable to
increased sales volumes which required added staffing and support, and the
inclusion of an extra week in fiscal 1995. The decline in operating expenses as
a percentage of sales was attributable to leveraging of fixed costs over a
larger revenue base, the realization of economies of scale and installed
technological improvements such as increased automation of order processing and
improvements in fulfillment processes. The improvements were offset, in part,
by increased direct marketing expenditures necessary to expand the Company's
customer base and product development, marketing and stocking costs necessary
to support the increased SKU count. The Company expects to incur approximately
$3.5 million of additional operating, personnel and depreciation expenses
during fiscal 1996 with respect to its new Elkhart, Indiana distribution
facility. This facility will continue to incur similar expenses until
commencement of full scale operations in fiscal 1997.
Income from operations increased by $9.7 million, or 40.4%, to $33.7
million in fiscal 1995 from $24.0 million in fiscal 1994. As a percentage of
sales, income from operations in fiscal 1995 decreased to 13.6% from 13.8% in
fiscal 1994. This decrease reflects the cumulative effects of a 1.3% decline in
gross profit margins offset by a 1.1% improvement in operating expenses as a
percentage of sales.
Net income increased by $9.1 million, or 40.4%, to $31.7 million in
fiscal 1995 from $22.6 million in fiscal 1994. As a percentage of sales, net
income in fiscal 1995 decreased to 12.8% from 12.9% in fiscal 1994. This
decrease reflects the cumulative effects of a 1.3% decline in gross profit
margins and a 0.3% increase in net interest expense as a percentage of sales,
offset primarily by a 1.1% improvement in operating expenses as a percentage of
sales.
Pro forma net income increased by $5.5 million, or 38.9%, to $19.6
million in fiscal 1995 from $14.1 million in fiscal 1994. As a percentage of
sales, pro forma net income in fiscal 1995 decreased to 7.9% from 8.1% in
fiscal 1994. This change in pro forma net income reflects the cumulative
effects of the changes in net income.
Quarterly Results and Seasonality
The following table sets forth unaudited financial data for each of
the Company's last twelve fiscal quarters.
Year Ended September 2, 1995 Year Ended August 31,1996
----------------------------------- -----------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
(dollars in thousands)
Income Statement Data:
Net sales.............. $54,118 $61,187 $66,719 $66,459 $69,681 $74,631 $80,215 $80,767
Income from operations. 6,520 8,353 10,128 8,755 8,766 10,305 4,378 11,060
Net income............. 6,210 7,880 9,311 8,297 7,988 10,950 2,758(2) 6,807
Pro forma net income(1) 3,845 4,900 5,782 5,113 4,969 6,305
-------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%.
(2) Net of restructuring charge of $5,200 (after income tax effect of $3,400).
The Company has generally experienced slightly lower sales volumes
during the summer months and the Company expects this trend to continue in the
foreseeable future. As a result, net income in its fourth fiscal quarter is
somewhat lower than in the third fiscal quarter, excluding the effect of the
Restructuring Charge in fiscal 1996, due largely to the continuation of the
Company's fixed costs during slower sales periods. The Company's quarterly
results of operations may also fluctuate as a result of a variety of other
factors, including the timing of
19
commencement of operations at new distribution centers.
Liquidity and Capital Resources
The Company's primary capital needs have been to fund (i) the working
capital requirements necessitated by its sales growth and (ii) prior to the
Reorganization, distributions to its existing shareholders, primarily to
satisfy their tax liabilities resulting from the S corporation status of the
Operating Subsidiary. The Company's primary sources of financing have been cash
from operations, bank borrowings under the Company's revolving credit facility
(the "Credit Facility"), subordinated loans from shareholders, a portion of
the proceeds from the Initial Public Offering, and a portion of the proceeds
of the Company's public offering in fiscal 1997 (the "Second Offering"). The
Company anticipates that the proceeds from these offerings, its cash flows
from operations and available lines of credit will be adequate to support its
operations for the immediate future and for at least the next 24 months.
In March 1996, the Company commenced shipments from its Elkhart,
Indiana distribution center, which provides next day service to most of the
midwestern United States. The increases in inventory reflected in the August
31, 1996 balance sheet are substantially the result of the opening of this
facility.
Under the terms of the Credit Facility, the Company has available
unsecured borrowings of up to $80 million. Interest on amounts borrowed may be
paid at the option of the Company at a rate per annum equal to the lead bank's
prime or reference rate (8.25% at August 31, 1996) or, alternatively, at the
bankers' acceptance rate or LIBOR rate plus margins, which vary from 0.45% to
0.75% per annum. The Credit Facility contains certain covenants limiting
mergers, use of proceeds, indebtedness, liens, investments, sale of assets and
acquisitions. The Credit Facility also contains certain financial covenants
which require the Company to maintain a minimum net worth, ratio of current
assets to current liabilities, ratio of liabilities to effective net worth,
minimum interest coverage ratio and positive net income, to refrain from
capital expenditures in excess of certain amounts and to limit the issuance of
dividends. As of August 31, 1996, the Company was not in compliance with the
maximum capital expenditure covenant, however, the Company received a waiver
from the bank. As of November 22, 1996, the Company had no outstanding
borrowings under the Credit Facility.
Net cash used in operating activities increased $29.7 million to $30.9
million from $1.2 million for the fiscal years ended August 31, 1996 and
September 2, 1995, respectively, primarily due to purchases of inventory in
connection with the stocking of the Elkhart distribution center and
introduction of new products. Net cash provided by operating activities was
$21.0 million in fiscal 1994. The decrease from fiscal 1994 to fiscal 1995
resulted principally from an increase in inventory due to investments in the
new Elkhart, Indiana distribution center and a build-up of inventory for the
introduction of approximately 70,000 new SKUs in September 1995. Net cash used
in investing activities for the fiscal years ended August 31, 1996 and
September 2, 1995 was approximately $37.4 million and $9.5 million,
respectively. The increase substantially represents costs associated with the
construction of the distribution centers in Elkhart, Indiana and Harrisburg,
Pennsylvania. Net cash used in investing activities in fiscal 1995 of $9.5
million was primarily as a result of purchases of property, plant and
equipment. Net cash used in investing activities in fiscal 1994 of $2.8 million
was primarily attributable to purchases of property, plant and equipment, as
well as the acquisition of a business for $629,000. Net cash provided by
financing activities during the fiscal years ended August 31, 1996, respectively
and September 2, 1995 was approximately $69.0 million and $7.9 million. The
increase is primarily attributable to proceeds received from the Initial Public
Offering, net of repayments of borrowings and distributions to "S" corporation
shareholders. Net cash used in financing activities of $15.0 million in fiscal
1994 reflects primarily the Company's borrowings in connection with the Credit
Facility and additional bank borrowings principally to fund the growth in
inventory.
Prior to the Reorganization, the Operating Subsidiary was treated as
an S corporation under subchapter S of the Internal Revenue Code of 1986 and
applicable state tax laws. Upon the consummation of the Reorganization, the
status of the Operating Subsidiary as an S corporation was terminated and the
Operating Subsidiary and the Company are now subject to federal and state
income taxes at applicable corporate tax rates. Prior to the Initial Public
Offering, the Operating Subsidiary paid the S corporation Dividend to the then
existing shareholders in the
20
aggregate amount of approximately $63 million, which amount was equal to
substantially all previously taxed, undistributed S corporation earnings.
21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MSC INDUSTRIAL DIRECT CO., INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants 23
Consolidated Balance Sheets as of September 2, 1995 and August 31, 1996 24
Consolidated Statements of Income for the three fiscal years
ended August 31, 1996 25
Consolidated Statements of Shareholders' Equity for the three fiscal years
ended August 31, 1996 26
Consolidated Statements of Cash Flows for the three fiscal years ended
August 31, 1996 27
Notes to Consolidated Financial Statements 28
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MSC Industrial Direct Co., Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of MSC
Industrial Direct Co., Inc. (a New York corporation) and Subsidiaries as of
September 2, 1995 (Note 2) and August 31, 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
fiscal years in the period ended August 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MSC Industrial
Direct Co., Inc. and Subsidiaries as of September 2, 1995 and August 31, 1996,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended August 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
November 6, 1996
23
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 2, August 31,
1995 1996
--------- ---------
ASSETS (Note 2)
Current Assets:
Cash and cash equivalents $ 681 $ 1,679
Accounts receivable, net of allowance for
doubtful accounts of $877 and $1,319, respectively 31,078 41,042
Inventories 83,448 152,620
Due from officers, employees and affiliated companies 791 1,052
Prepaid expenses and other current assets 1,070 1,792
Current deferred income tax assets -- 9,920
Prepaid Federal income tax payments -- 4,512
--------- ---------
Total current assets 117,068 212,617
--------- ---------
Property, Plant and Equipment, net 14,648 38,989
--------- ---------
Other Assets:
Goodwill -- 8,224
Prepaid Federal income tax payments 3,115 --
Other 4,201 5,654
--------- ---------
7,316 13,878
--------- ---------
$ 139,032 $ 265,484
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,821 $ 13,270
Accrued liabilities 18,811 33,076
Current portion of long-term notes payable 51 2,486
Current portion of subordinated debt to
shareholders 9,157 --
--------- ---------
Total current liabilities 35,840 48,832
Long-term Notes Payable 28,348 42,191
Subordinated Debt to Shareholders 2,621 --
Other Long-Term Liabilities 135 110
Deferred Income Tax Liabilities -- 1,780
--------- ---------
Total liabilities 66,944 92,913
--------- ---------
Commitments and Contingencies (Note 14)
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; 0 and 8,311,394 shares,
respectively, issued and outstanding -- 8
Class B common stock; $0.001 par value; 50,000,000
shares authorized; 24,000,000 and 23,475,000 shares,
respectively, issued and outstanding 24 24
Additional paid-in capital 8,034 145,628
Retained earnings 64,030 29,482
--------- ---------
72,088 175,142
Deferred stock compensation -- (2,571)
--------- ---------
Total shareholders' equity 72,088 172,571
--------- ---------
$ 139,032 $ 265,484
========= =========
The accompanying notes are an integral part of
these consolidated balance sheets.
24
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the Fiscal Years Ended
------------------------------------
August 27, September 2, August 31,
1994 1995 1996
--------- --------- ---------
(Note 2) (Note 2)
Net Sales $ 174,682 $ 248,483 $ 305,294
Cost of goods sold 99,830 145,195 178,519
--------- --------- ---------
Gross profit 74,852 103,288 126,775
Operating expenses 50,811 69,532 83,666
Distribution Center Restructuring Charge (Note 5) -- -- 8,600
--------- --------- ---------
Income from operations 24,041 33,756 34,509
--------- --------- ---------
Other income (expense):
Income on rental property 113 118 123
Interest expense (870) (1,870) (1,534)
Interest income 164 29 647
Other income (expense), net (62) 430 289
--------- --------- ---------
(655) (1,293) (475)
--------- --------- ---------
Income before provision for income taxes 23,386 32,463 34,034
Provision for income taxes 813 765 5,531
--------- --------- ---------
Net income $ 22,573 $ 31,698 $ 28,503
========= ========= =========
Pro forma information (Note 3):
Income before provision for income taxes $ 34,034
Pro forma provision for income taxes 13,443
---------
Pro forma net income $ 20,591
=========
Pro forma net income per common share $ 0.67
=========
Pro forma weighted average number of common shares
outstanding 30,696
=========
The accompanying notes are an integral part of
these consolidated statements.
25
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED AUGUST 31, 1996
(In thousands)
Class A Class B
Common Stock Common Stock Additional Deferred
--------------------- --------------------- Paid-In Retained Stock
Shares Amount Shares Amount Capital Earnings Compensation Total
--------- --------- --------- --------- --------- --------- ------------ ---------
BALANCE, August 28, 1993 -- $ -- 24,000 $ 24 $ 8,034 $ 41,650 $ -- $ 49,708
Net income -- -- -- -- -- 22,573 -- 22,573
Distributions to
shareholders -- -- -- -- -- (16,531) -- (16,531)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, August 27, 1994 -- -- 24,000 24 8,034 47,692 -- 55,750
Net income -- -- -- -- -- 31,698 -- 31,698
Distributions to
shareholders -- -- -- -- -- (15,360) -- (15,360)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, September 2, 1995
(Note 2) -- -- 24,000 24 8,034 64,030 -- 72,088
Initial public offering
of common stock, net
of costs of offering of
$10,352 (Note 1) 7,525 8 -- -- 132,623 -- -- 132,631
Exchange of Class B Common
stock for Class A common
stock 525 -- (525) -- -- -- -- --
Issuance of restricted
common stock (Note 12) 157 -- -- -- 2,981 -- (2,981) --
Cancellation of restricted
common stock (1) -- -- -- (10) -- 10 --
Amortization of deferred
stock compensation -- -- -- -- -- -- 400 400
Issuance of common stock for
acquisition of subsidiary
(Note 4) 105 -- -- -- 2,000 -- -- 2,000
Net income -- -- -- -- -- 28,503 -- 28,503
Distributions to shareholders
(Note 1) -- -- -- -- -- (63,051) -- (63,051)
--------- --------- --------- --------- --------- --------- --------- ---------
BALANCE, August 31, 1996 8,311 $ 8 23,475 $ 24 $ 145,628 $ 29,482 $ (2,571) $ 172,571
========= ========= ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of
these consolidated statements.
26
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Years Ended
----------------------------------
August 27, September 2, August 31,
1994 1995 1996
--------- --------- ---------
(Note 2) (Note 2)
--------- --------- ---------
Cash flows from operating activities:
Net income $ 22,573 $ 31,698 $ 28,503
--------- --------- ---------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,501 1,932 3,087
Amortization of deferred stock compensation -- -- 400
Loss (gain) on disposal of property, plant
and equipment 96 (2) 29
Provision for doubtful accounts 489 694 1,019
Deferred income taxes -- -- (7,811)
Changes in operating assets and liabilities,
net of effect from acquisitions:
Accounts receivable (5,626) (8,578) (7,758)
Inventories (4,089) (30,561) (59,866)
Prepaid expenses and other current assets 1,845 26 510
Prepaid federal income tax payments (695) (1,036) (1,397)
Other assets (2,366) (1,435) (1,334)
Accounts payable and accrued liabilities 7,222 6,081 14,523
Other long-term liabilities 10 (3) (781)
--------- --------- ---------
Total adjustments (1,613) (32,882) (59,379)
--------- --------- ---------
Net cash provided by (used in)
operating activities 20,960 (1,184) (30,876)
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (2,163) (9,495) (26,886)
Proceeds from sale of property, plant and equipment 40 11 10
Cash paid for acquisitions, net of cash acquired (629) -- (10,530)
--------- --------- ---------
Net cash used in investing activities (2,752) (9,484) (37,406)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from initial public offering
of common stock -- -- 132,631
Net (borrowings) proceeds under notes payable (10,900) 21,349 11,616
Payments under capital leases (84) (478) --
Proceeds from subordinated debt to shareholders 17,232 20,144 --
Repayment of subordinated debt to shareholders (9,423) (17,263) (11,778)
Repayments from (advances to) affiliates 4,715 (539) (138)
Distributions to shareholders (16,531) (15,360) (63,051)
--------- --------- ---------
Net cash provided by (used in)
financing activities (14,991) 7,853 69,280
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,217 (2,815) 998
Cash and cash equivalents, beginning of year 279 3,496 681
--------- --------- ---------
Cash and cash equivalents, end of year $ 3,496 $ 681 $ 1,679
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 866 $ 1,883 $ 2,022
========= ========= =========
Income taxes $ 624 $ 561 $ 12,376
========= ========= =========
Supplemental schedule of noncash investing and
financing activities:
Issuance of stock for purchase of subsidiary (Note 4) -- -- $ 2,000
=========
Issuance of stock for restricted stock plan (Note 12) -- -- $ 2,981
=========
The accompanying notes are an integral part of
these consolidated statements.
27
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
1. BUSINESS AND ORGANIZATION:
Organization
MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was
incorporated in the State of New York on October 24, 1995 as a holding company
for the purpose of (i) issuing 8,050 shares of Class A Common Stock in an
initial public offering ("IPO") and (ii) issuing 24,000 shares of Class B
Common Stock to the shareholders of Sid Tool Co., Inc. (the "Operating
Subsidiary") in exchange for their then outstanding 30 shares of common stock
of the Operating Subsidiary immediately prior to the effective date of MSC's
IPO.
On December 20, 1995, the Company consummated the IPO relating to
the offer and sale of 8,050 shares of Class A Common Stock, 7,525 of which
shares were offered by the Company and 525 of which shares were offered by a
principal shareholder of the Company, at a price of $19.00 per share. The 525
shares offered and sold by a principal shareholder were converted to Class A
Common Stock from previously issued Class B Common Stock. Net proceeds received
by the Company were approximately $132,600. As a result of the IPO, the
Operating Subsidiary no longer qualified as a subchapter "S" corporation, and
became subject to subchapter "C" corporation taxation. Prior to the offering,
the Operating Subsidiary declared an "S" corporation dividend to the then
existing shareholders in the aggregate amount of approximately $63,000, which
amount was equal to substantially all previously taxed, undistributed "S"
corporation earnings. The Operating Subsidiary paid the "S" corporation
dividend by delivery to the then existing shareholders of promissory notes in
the principal amount of such dividends, which notes have been repaid with a
portion of the net proceeds from the offering. The provision for income taxes
for the year ended August 31, 1996 reflects "S" corporation taxation through
the date of the public offering, and "C" corporation taxation thereafter (Note
2).
Business
The Company is a distributor of industrial equipment and supplies
with headquarters in Plainview, New York. The Company serves both domestic and
international markets through its distribution network, which includes
thirty-three local branches in twenty states, concentrated in the Eastern and
Southern United States, regional distribution centers in Plainview/Central
Islip, New York; Elkhart, Indiana and Atlanta, Georgia and a planned
distribution center near Harrisburg, Pennsylvania (Note 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation