<PAGE>
As filed with the Securities and Exchange Commission on July 23, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
MSC INDUSTRIAL DIRECT CO., INC.
(Exact Name of Registrant as Specified in its Charter)
New York 5084 11-3289165
(State of Incorporation) (Primary Standard Industrial (I.R.S.Employer
Classification Code Number) Identification Number)
151 Sunnyside Blvd.
Plainview, New York 11803-1592
(516) 349-7100
(Address and telephone number of
registrant's principal executive offices)
--------------
Mitchell Jacobson
MSC Industrial Direct Co., Inc.
151 Sunnyside Blvd.
Plainview, New York 11803-1592
(516) 349-7100
(Name, address and telephone number of agent for service)
--------------
Copies to:
Joseph L. Getraer, Esq. Philip E. Coviello, Esq.
Rosenman & Colin LLP Latham & Watkins
575 Madison Avenue 885 Third Avenue, Suite 1000
New York, New York 10022 New York, New York 10022
(212) 940-8800 (212) 906-1200
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
--------------
<PAGE>
CALCULATION OF REGISTRATION FEE
===============================================================================
Number of Proposed Proposed
Title of Each Class Shares Maximum Maximum Amount of
of Securities to to be Offering Price Aggregate Registration
be Registered Registered(1) Per Share(2) Offering Price Fee
- --------------------------------------------------------------------------------
Class A Common Stock 1,782,500 $40.91 $72,915,390.63 $22,098
===============================================================================
(1) Includes 232,500 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457 under the Securities Act of 1933, as
amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 23, 1997
PROSPECTUS
_______, 1997
1,550,000 Shares
[LOGO]
Class A Common Stock
All of the 1,550,000 shares of Class A Common Stock offered hereby are
being sold by the Selling Shareholders. The Company will not receive any of the
proceeds from the sale of shares of Class A Common Stock by the Selling
Shareholders. See "Principal and Selling Shareholders."
The Company has two classes of common stock. Holders of the Class A Common
Stock, which is offered hereby, are entitled to one vote per share, and holders
of the Class B Common Stock are entitled to ten votes per share. See
"Description of Capital Stock." Upon completion of this Offering, the principal
shareholders of the Company will own approximately 51.7% of the outstanding
shares of capital stock of the Company and will control approximately 91.5% of
the combined voting power of all outstanding shares of capital stock of the
Company. Consequently, such shareholders will be in a position to elect all of
the directors of the Company and to determine the outcome of any matter
submitted to a vote of the Company's shareholders for approval. See "Principal
and Selling Shareholders".
The Class A Common Stock is listed on the New York Stock Exchange under the
symbol "MSM." On July 21, 1997, the last reported sales price for the Class A
Common Stock on the New York Stock Exchange was $41.1875.
See "Risk Factors" beginning on page 7 for certain information that should
be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Price Underwriting Proceeds to
to the Discounts and the Selling
Public Commissions(1) Shareholders (2)
- -------------------------------------------------------------------------------
Per Share....... $ $ $
Total........... $ $ $
- -------------------------------------------------------------------------------
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $500,000, of which approximately
$30,000 and $470,000 will be paid by the Company and the Selling
Shareholders, respectively.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to an aggregate of 232,500 additional shares of Class A
Common Stock solely to cover over-allotments, if any. The Company will not
receive any of the proceeds upon exercise of such over-allotment option. If
such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Selling
Shareholders will be $ , $ and $ ,
respectively. See "Underwriting."
The shares are being offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to various prior conditions, including their right to reject orders in whole or
in part. It is expected that delivery of the shares will be made against payment
in New York, New York on or about .
Donaldson, Lufkin & Jenrette Prudential Securities Incorporated
Securities Corporation
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE CLASS A COMMON STOCK IN THE
OPEN MARKET. FOR A DESCRIPTION OF THOSE ACTIVITIES, SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports, proxy statements
and other information with the Securities and Exchange Commission. Reports,
proxy statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices at Northwestern Atrium Center, 400 West Madison Street, Suite
140, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can be obtained from the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, and the address of such site is
http://www.sec.gov. Such reports, proxy statements and other information are
also available for inspection at the New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information (including the financial statements and the notes thereto) included
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, (i) all information in
this Prospectus, including all adjusted and pro forma financial information, has
been adjusted to give effect to the "Reorganization" (as such term is
hereinafter defined), (ii) all references to the "Company" or "MSC" are to MSC
Industrial Direct Co., Inc. and, unless the context otherwise requires, its
subsidiaries and (iii) unless otherwise indicated, the information in this
Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. See "The Company" and "Underwriting." All references to a fiscal year
are to the Company's fiscal year which ends on the Saturday nearest August 31 of
such year. References to "this Offering" are to the offering of Class A Common
Stock made by this Prospectus. References to the "Initial Public Offering" are
to the Company's initial public offering of Class A Common Stock in December
1995. References to the "1996 Offering" are to the Company's second public
offering of Class A Common Stock in September 1996. References to the "Public
Offerings" are to both the Initial Public Offering and the 1996 Offering. The
Company was formed in October 1995 as a holding company to own 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, 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.
THE COMPANY
MSC is one of the largest direct marketers of a broad range of industrial
products to small and mid-sized industrial customers throughout the United
States. 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 approximately 50 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. These strong growth trends have continued during fiscal 1997.
For the nine months ended May 31, 1997, net sales increased by $96.3 million, or
42.9%, to $320.8 million from $224.5 million for the nine months ended June 1,
1996, and income from operations, before taking into account the relocation
costs associated with the move of the Company's Long Island distribution center
to Harrisburg, Pennsylvania in fiscal 1996, increased by $11.8 million, or
36.6%, to $43.8 million from $32.0 million for the nine months ended June 1,
1996. The Company also expects to realize modest future growth from four
acquisitions effected during fiscal 1997.
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
3
<PAGE>
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's core business focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $150. MSC has in
excess of 141,000 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
approximately 50 branch offices. The Company's distribution centers are located
in Harrisburg, Pennsylvania, Atlanta, Georgia and Elkhart, Indiana. 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, which states account for 81% of the Company's sales. 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.
4
<PAGE>
THIS OFFERING
Class A Common Stock Offered..........................1,550,000 shares
Capital Stock to be Outstanding After this Offering
Class A Common Stock................................16,429,119 shares(1)
Class B Common Stock................................17,413,700 shares(2)
Total...........................................33,842,819 shares
Voting Rights.........................................The Class A Common Stock,
par value $.001 per share
(the "Class A Common
Stock"), is entitled to
one vote per share and the
Class B Common Stock, par
value $.001 per share (the
"Class B Common Stock"),
is entitled to ten votes
per share on all matters
requiring a shareholder
vote. See "Risk Factors--
Control of the Company"
and "Description of
Capital Stock."
Use of Proceeds.......................................The Company will not
receive any of the
proceeds from the sale of
the shares of Class A
Common Stock offered by
the Selling Shareholders.
Risk Factors..........................................Certain factors should be
considered in connection
with an investment in the
Class A Common Stock. See
"Risk Factors."
NYSE Symbol..........................................."MSM"
- -----------
(1) Excludes 1,950,111 shares of Class A Common Stock reserved for issuance
under the Company's 1995 Stock Option Plan, of which options to purchase
1,138,007 shares of Class A Common Stock are outstanding.
(2) The Class B Common Stock is convertible into Class A Common Stock on a
one-for-one basis at the option of the holder and upon transfer of such
shares to persons other than existing shareholders or certain of their
family members. See "Principal and Selling Shareholders."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
------------------------------------------------------------------- ----------------------
August 29, August 28, August 27, September 2, August 31,
1992 1993 1994 1995 1996 June 1, May 31,
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks) 1996 1997
------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales....................... $125,454 $142,287 $174,682 $248,483 $305,294 $224,527 $320,794
Gross profit.................... 55,385 61,796 74,852 103,288 126,775 93,263 131,420
Operating expenses.............. 42,454 44,951 50,811 69,532 83,666 61,214 87,626
Restructuring charge............ -- -- -- -- 8,600 8,600 --
Income from operations.......... 12,630 16,845 24,041 33,756 34,509 23,449 43,794
Income taxes.................... 323 418 813 765 5,531 1,947 17,418
Net income...................... 10,458 15,682 22,573 31,698 28,503 21,246 26,702
Net income per share............ $0.79
=====
Weighted average number of
shares outstanding.......... 33,930
======
Pro forma net income(1)......... 6,523 9,740 14,149 19,640 20,591 14,033(3)
Pro forma net income
per share(2)................ $0.67 $0.45
===== =====
Pro forma weighted average
number of shares
outstanding(2).............. 30,696 30,205
====== ======
Selected Operating Data(4):
Active customers................ 75 78 98 120 127 125 141
Number of SKUs.................. 140 150 170 231 302 250 302
Orders entered.................. 967 1,103 1,348 1,833 2,155 1,560 1,906
Number of publication titles
(not in thousands).......... 12 13 20 38 70 61 39
Number of publications mailed... 2,447 2,688 4,794 6,604 6,300 5,167 6,723
Revenues per employee........... $ 189 $ 201 $ 214 $ 249 $ 266 $ 262 $ 280
</TABLE>
August 31, 1996 May 31, 1997
--------------- ------------
Balance Sheet Data:
Working capital............................ $163,785 $190,703
Total assets............................... 265,484 316,912
Short-term debt............................ 2,486 59
Long-term debt, net of current portion..... 42,191 2,590
Shareholders' equity....................... 172,571 264,971
- ------------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate
of 39.5%.
(2) Pro forma net income per share is calculated by dividing pro forma net
income by pro forma shares outstanding, which gives effect to (i) the
weighted average shares of Class A and Class B Common Stock outstanding
during the year, (ii) the impact of approximately 262,000 shares issued for
the acquisition of an affiliated corporation and the Company's 1995
Restricted Stock Plan assumed to be outstanding for the entire year, (iii)
the impact of 3,318,000 shares issued in the Initial Public Offering, the
proceeds of which were used to pay the final "S" corporation distribution,
assumed to be outstanding for the entire year, and (iv) the common stock
equivalent impact of 756,000 outstanding options issued under the Company's
1995 Stock Option Plan, based upon the grant date of the options.
(3) Excluding the tax-effected impact of the restructuring charge of $8,600,000
in the nine month period ended June 1, 1996, pro forma net income for that
period would have been $19,233,000 or $0.61 per share.
(4) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--General."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered in evaluating the Company and its business
before purchasing the shares of Class A Common Stock offered hereby
Certain information set forth in this Prospectus contains
forward-looking statements, as such term is defined in Section 27A of
the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Certain factors discussed herein could cause actual
results to differ materially from those in the forward-looking
statements.
Changing Industry Environment
The industrial supply industry is undergoing significant change driven by
pressure from industry participants and by customer objectives. Traditional
industrial suppliers are consolidating operations and acquiring or merging with
other industrial suppliers to achieve economies of scale and increase
efficiency. This consolidation trend could cause the industry to become more
competitive and make it more difficult for the Company to maintain its operating
margins.
Customers are increasingly aware of the total costs of fulfilling their
purchasing requirements and are seeking low cost alternatives to traditional
methods of purchasing and sources of supply. MSC believes that the current trend
is to reduce the number of suppliers and rely more on lower cost alternatives
such as direct mail and/or integrated supply arrangements. Although the Company
believes it provides a competitive solution to customers' MRO purchasing needs
and it is well positioned to take advantage of this trend, there can be no
assurance that it will be able to do so effectively or that it will be able to
establish relationships with integrated supply providers. See
"Business--Industry Overview."
Management of Rapid Growth
MSC's sales have grown from $125.5 million in fiscal 1992 to $305.3 million
in fiscal 1996. This growth trend has continued during fiscal 1997. For the nine
months ended May 31, 1997, net sales increased by $96.3 million, or 42.9%, to
$320.8 million from $224.5 million for the nine months ended June 1, 1996. This
growth has placed increasing demands on the Company's management resources and
facilities. While there can be no assurance that the Company's historical growth
rates will continue in the future, the Company's success will, in part, be
dependent upon the ability of the Company to continue to manage internal growth
effectively.
Dependence on Systems
The Company believes that its proprietary computer software programs are an
integral part of its business and growth strategies. MSC depends upon its
information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis, to maintain cost-effective operations and to provide
superior service to its customers. While the Company has taken precautions
against certain events that could disrupt the operation of its information
systems, there can be no assurance that such a disruption will not occur. Any
such disruption could have a material adverse effect on MSC's business and
results of operations. See "Business--Information Systems."
Distribution Center Expansion/Move
During the current fiscal year, the Company commenced shipping from its new
Harrisburg, Pennsylvania distribution center. In addition, MSC expects to open
new distribution centers to improve the Company's efficiency, geographic
distribution and market penetration. Moving or opening distribution centers
requires a substantial capital investment, including expenditures for real
estate and construction, and a substantial investment in inventory. In
7
<PAGE>
addition, new distribution centers will have an adverse impact on distribution
expenses as a percentage of sales, inventory turnover and return on investment
in the periods prior to and for some time following the commencement of
operations of each new distribution center. Additionally, until sales volumes
mature at new distribution centers, expenses as a percentage of sales may be
adversely impacted. Further, substantial or unanticipated delays in the
commencement of operations at new distribution centers, as a result of
inadequate financing, construction difficulties or otherwise, will have a
material adverse effect on the Company's planned geographic expansion and may
impact results of operations. See "Business--Distribution Centers."
Integration of Prospective Acquisitions
Acquisitions have played a limited role in the growth of MSC to date. An
element of the Company's future growth strategy is to pursue selected
acquisitions that either expand or complement its business in new or existing
markets. In furtherance of this strategy, the Company made four acquisitions
during fiscal 1997. However, there can be no assurance that in the future the
Company will be able to identify and to acquire acceptable acquisition
candidates on terms favorable to the Company and in a timely manner to the
extent necessary to fulfill the Company's growth strategy. The failure to
complete or successfully integrate prospective acquisitions may have an adverse
impact on the Company's growth strategy. 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. See "Business--Growth Strategy"
and "--Acquisitions."
Competition
The MRO supply industry is a large, fragmented industry that is highly
competitive. The Company faces competition from traditional channels of
distribution such as retail outlets, small dealerships and regional or national
distributors utilizing direct sales forces, from manufacturers of MRO supplies,
from large warehouse stores and from larger direct mail distributors. The
Company believes that sales of MRO supplies will become more concentrated over
the next few years, which may increase the competitiveness of the industry.
Certain of the Company's competitors offer a greater variety of products and
have substantially greater financial and other resources than the Company. See
"Business--Competition."
Dependence on Key Personnel
The Company's success depends largely on the efforts and abilities of
certain key management employees, in particular the Company's three senior
executive officers, Mitchell Jacobson, James Schroeder and Shelley Boxer. The
loss of the services of one or more of such key personnel could have a material
adverse effect on the Company's business and financial results. The Company does
not maintain any key-man insurance policies with respect to any of its executive
officers. See "Management."
Control of the Company
The Company's President and Chief Executive Officer, his sister,
certain of their family members and trusts established for their benefit
(hereinafter collectively referred to as the "Jacobson and Gershwind families")
collectively own 100% of the outstanding shares of Class B Common Stock and will
control approximately 91.5% of the combined voting power of the Company's
capital stock upon the closing of this Offering. Consequently, such shareholders
will be in a position to elect all of the directors of the Company and to
determine the outcome of any matter submitted to a vote of the Company's
shareholders for approval. See "Principal and Selling Shareholders" and
"Description of Capital Stock."
8
<PAGE>
Possible Volatility of Stock Price
The Company believes certain factors, such as sales of Class A Common Stock
into the market by existing shareholders, fluctuations in operating results of
the Company or its competitors and market conditions generally could cause the
market price of the Class A Common Stock to fluctuate substantially. Such market
volatility may adversely affect the market price of the Class A Common Stock.
Shares Eligible for Future Sale
Sales of a substantial number of shares of Class A Common Stock in the
public market, whether by purchasers in this Offering or other shareholders of
the Company, could adversely affect the prevailing market price of the Class A
Common Stock and could impair the Company's future ability to raise capital
through an offering of its equity securities. There will be 16,429,119 shares of
Class A Common Stock outstanding immediately after completion of this Offering,
substantially all of which are freely tradeable. All of the shares of Class B
Common Stock (and the shares of Class A Common Stock into which such shares are
convertible) are "restricted securities" for purposes of the Securities Act.
Subject to the volume and other limitations set forth in Rule 144 promulgated
under the Securities Act, all of such restricted securities are eligible for
public sale. See "Principal and Selling Shareholders" and "Underwriting."
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
shares of Class A Common Stock offered by the Selling Shareholders.
SELECTED FINANCIAL AND OPERATING 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 in this Prospectus. 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 income
statement data and balance sheet data for the nine month periods ended June 1,
1996 and May 31, 1997 have been derived from, and are qualified by reference to,
the Company's unaudited interim financial statements included elsewhere herein
and include all adjustments, consisting only of normal recurring adjustments,
which management considers necessary for a fair presentation of the results of
the Company for such periods. Results for interim periods are not necessarily
indicative of results that may be achieved for the full fiscal year. The
selected balance sheet data as of August 29, 1992, August 28, 1993 and August
27, 1994 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.
9
<PAGE>
<TABLE>
<CAPTION>
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)
-----------------------------------------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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
Net income per share...........................
Weighted average number of shares outstanding..
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 average number of shares
outstanding(2)............................... 30,696
======
Selected Operating Data(4):
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
Revenues per employee.......................... $ 189 $ 201 $ 214 $ 249 $ 266
<CAPTION>
Nine Months Ended
---------------------------------------------
June 1, May 31,
1996 1997
---------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C>
Income Statement Data:
Net sales...................................... $224,527 $320,794
Gross profit................................... 93,263 131,420
Operating expenses............................. 61,214 87,626
Restructuring charge........................... 8,600 --
Income from operations......................... 23,449 43,794
Income taxes................................... 1,947 17,418
Net income..................................... 21,246 26,702
Net income per share........................... $0.79
========
Weighted average number of shares
outstanding.................................. 33,930
========
Pro forma net income(1) ....................... 14,033(3)
Pro forma net income per share(2).............. $0.45
========
Pro forma weighted average number of shares
outstanding(2)............................... 30,205
========
Selected Operating Data(4):
Active customers............................... 125 141
Number of SKUs................................. 250 302
Orders entered................................. 1,560 1,906
Number of publication titles (not in thousands) 61 39
Number of publications mailed.................. 5,167 6,723
Revenues per employee.......................... $ 262 $ 280
</TABLE>
<TABLE>
<CAPTION>
August 29, August 28, August 27, September 2, August 31, May 31,
1992 1993 1994 1995 1996 1997
---------- ---------- ---------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data (at period end):
Working capital........................ $54,158 $57,335 $48,726 $81,228 $163,785 $190,703
Total assets........................... 75,745 80,853 91,307 139,032 265,484 316,912
Short-term debt........................ 498 665 12,728 9,208 2,486 59
Long-term debt, net of current portion. 23,762 18,374 3,220 30,969 42,191 2,590
Shareholders' equity................... 40,187 49,708 55,750 72,088 172,571 264,971
</TABLE>
- --------------------------------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual
rate of 39.5%.
(2) Pro forma net income per share is calculated by dividing pro forma net
income by pro forma shares outstanding, which gives effect to (i) the
weighted average shares of Class A and Class B Common Stock outstanding
during the year, (ii) the impact of approximately 262,000 shares issued
for the acquisition of an affiliated corporation and the Company's 1995
Restricted Stock Plan assumed to be outstanding for the entire year,
(iii) the impact of 3,318,000 shares issued in the Initial Public
Offering, the proceeds of which were used to pay the final "S"
corporation distribution, assumed to be outstanding for the entire
year, and (iv) the common stock equivalent impact of 756,000
outstanding options issued under the Company's 1995 Stock Option Plan,
based upon the grant date of the options.
(3) Excluding the tax-effected impact of the restructuring charge of
$8,600,000 in the nine month period ended June 1, 1996, pro forma net
income for that period would have been $19,233,000 or $0.61 per share.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General."
10
<PAGE>
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 revenues have increased, in part, as a result of the
increase in the number of 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
revenues 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. In fiscal 1997, the number of targeted
marketing pieces mailed will increase to approximately 11.3 million as the
Company increases its direct marketing efforts to take advantage of additional
products offered and its expanded distribution capabilities. 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 took advantage of the additional products
offered and its expanded distribution capabilities by further increasing its
direct marketing efforts. These direct marketing expenditures 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 an annualized rate of approximately $280,000 during the first nine months
of fiscal 1997. 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. However, commencement of shipping operations at
the Elkhart, Indiana and Harrisburg, Pennsylvania distribution centers has had
a negative impact on revenue per employee. 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 number of orders entered and processed is approximately
1.9 million for the first nine months of fiscal 1997, an increase from
approximately 1.6 million for the comparable period in fiscal 1996. The average
order size of approximately $150 for the Company's core business 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
11
<PAGE>
order processing have been significant contributing factors to the Company's
increase in orders and, 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 156,131
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 and its new distribution center in
Harrisburg, Pennsylvania during fiscal 1997 in order to improve the Company's
efficiency, geographic distribution and market penetration. The opening of these
new distribution centers required a substantial capital investment, including
expenditures for real estate and construction, and substantial investment for
inventory. The openings have 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 these new distribution centers, expenses as a percentage of
sales may be adversely impacted.
Results of Operations
The following table represents the Company's net sales and statement of
income data expressed as a percentage of net sales for the three most recent
fiscal years and the nine months ended June 1, 1996 and May 31, 1997:
<TABLE>
<CAPTION>
Fiscal Year Ended Nine Months Ended
------------------------------------------------------ -------------------------------
August 27, 1994 September 2, 1995 August 31, 1996 June 1, 1996 May 31, 1997
--------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales (dollars in thousands)... $174,682 $248,483 $305,294 $224,527 $320,794
======== ======== ======== ======== ========
Net sales.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit....................... 42.9 41.6 41.5 41.5 41.0
Operating expenses................. 29.1 28.0 27.4 27.3 27.3
Restructuring charge............... -- -- 2.8 3.8 --
Net income......................... 12.9 12.8 9.3 9.5 8.3
Pro forma net income............... 8.1 7.9 6.7 6.3 --
</TABLE>
Thirty-Nine Weeks Ended May 31, 1997 Compared to
Thirty-Nine Weeks Ended June 1, 1996
Net sales increased by $96.3 million, or 42.9%, to $320.8 million during
the first nine months of 1997 from $224.5 million in the first nine months of
1996. This increase was attributable to an increase in sales to the Company's
existing customers, an increase in the number of active customers and the
effect of the acquisitions made subsequent to June 1, 1996. The increase in
sales to existing customers was derived primarily from an increase in the number
of SKUs offered.
Gross profit increased by $38.2 million, or 40.9%, to $131.4 million in
the first nine months of 1997, from $93.3 million in the first nine months of
1996, primarily attributable to increased sales. As a percentage of sales,
gross profit decreased from 41.5% to 41.0%, resulting primarily from slightly
lower margins realized from customers and product lines gained through the
Company's acquisitions.
Operating expenses increased by $26.4 million, or 43.1%, to $87.6 million
in the first nine months of 1997, from $61.2 million in the first nine months
of 1996. As a percentage of sales, operating expenses remained constant at
27.3%. This results from both operating efficiencies and the distribution of
fixed expenses over a larger revenue base offset by the expenses related to the
investment in new branches, which will enhance future growth.
12
<PAGE>
Restructuring charge of $8.6 million, recorded during the third quarter
of 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 $0.16 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.
Net income increased by $5.5 million, to $26.7 million in the first nine
months of 1997 from $21.2 million in the first nine months of 1996, but
increased by $12.7 million as compared with pro forma 1996 net income of $14.0
million, which gives pro forma effect to "C" corporation taxation for the
entire period. The increase in net income is primarily attributable to increased
sales and gross margins offset by the increase in operating expenses necessary
in order to service increased volume and invest in future growth.
Fiscal Year Ended August 31, 1996 Compared to
Fiscal 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 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.
Gross profit increased by $23.5 million, or 22.7%, to $126.8 million in
fiscal 1996 from $103.3 million 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 $0.8 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.
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
13
<PAGE>
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.
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 35.8% increase in the number of SKUs offered by MSC, a 19% increase in
revenues 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 revenues 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% 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 $33.8
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 interest expense increased by $1.1 million, or 160.8%, to $1.8
million in fiscal 1995 from $0.7 million in fiscal 1994. This increase was
primarily attributable to additional borrowings necessary to fund increased
investments in inventory. Additionally, the Company experienced a small increase
in its average interest rates paid during fiscal 1995.
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
14
<PAGE>
interest expense as a percentage of sales, offset by a 1.1% improvement in
operating expenses as a percentage of sales.
Pro forma net income increased by $5.5 million, or 38.8%, 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 eleven fiscal quarters.
<TABLE>
<CAPTION>
Year Ended September 2, 1995
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales............................. $54,118 $61,187 $66,719 $66,459
Income from operations................ 6,520 8,353 10,128 8,755
Net income............................ 6,210 7,880 9,311 8,297
Pro forma net income(1)............... 3,845 4,900 5,782 5,113
<CAPTION>
Year Ended August 31, 1996
------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales............................. $69,681 $74,631 $80,215 $80,767
Income from operations................ 8,766 10,305 4,378 11,060
Net income............................ 7,988 10,950 2,758(2) 6,807
Pro forma net income(1)............... 4,969 6,305 -- --
<CAPTION>
Year Ended August 30, 1997
---------------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C>
Income Statement Data:
Net sales............................. $92,214 $104,685 $123,895
Income from operations................ 11,364 14,675 17,755
Net income............................ 6,950 8,831 10,921
Pro forma net income(1)............... -- -- --
</TABLE>
- -------------------
(1) Gives pro forma effect to "C" corporation taxation at an assumed annual rate
of 39.5%.
(2) Net of restructuring charge of $5,200,000 (after income tax effect of
$3,400,000).
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, 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 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 (see Note 1 to the annual consolidated financial statements),
distributions to its then existing shareholders, primarily to satisfy their tax
liabilities resulting from the previous "S" corporation status of the Operating
Subsidiary. The Company's sources of financing have historically been from
operations, bank borrowings under its $80 million credit facility (the "Credit
Facility "), subordinated loans from shareholders, and a portion of the proceeds
from the Initial Public Offering and the 1996 Public Offering. The Company
completed the Initial Public Offering on December 20, 1995, and outstanding
subordinated debt to shareholders and credit facility debt as of that date were
repaid out of the net proceeds. Subsequent bank borrowings were repaid out of
the proceeds from the 1996 Public Offering. The Company anticipates that its
cash flows from operations and available lines of credit will be adequate to
support its operations and its growth 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. As a result of the opening of this facility, the Company
significantly increased its inventories to provide for future orders from the
distribution center.
15
<PAGE>
Net cash provided by (used in) operating activities increased $60.8
million to $33.6 million from a net cash usage of $27.3 million for the
thirty-nine week periods ended May 31, 1997 and June 1, 1996, respectively. The
net usage of cash in 1996 was primarily due to purchases of inventory in
connection with the initial stocking of the Elkhart distribution center and
introduction of new products. In 1997, inventory excluding inventory of acquired
companies declined, reflecting improved inventory control policies and
procedures. Net cash provided by (used in) operating activities was $21.0
million, $(1.2) million and $(30.9) million in fiscal 1994, 1995 and 1996,
respectively. 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. The
decrease from fiscal 1995 to fiscal 1996 results principally from purchases
of inventory in connection with the stocking of the Elkhart distribution
center and the introduction of new products.
Net cash used in investing activities for the thirty-nine week periods
ended May 31, 1997 and June 1, 1996 was approximately $39.1 million and $15.4
million, respectively. The increase is primarily attributable to cash paid for
acquisitions during 1997. The balance reflects continued investment in existing
distribution centers and new branches. Net cash used in investing activities for
fiscal 1996 was approximately $37.4 million, substantially representing 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 thirty-nine week
periods ended May 31, 1997 and June 1, 1996 was approximately $13.1 million and
$43.7 million, respectively. The change of $30.7 million is primarily
attributable to the difference between the proceeds received from the completion
of the Company's Public Offerings, net of the repayment of existing long-term
debt and shareholder distributions from such proceeds. Net cash provided by
(used in) financing activities was $(15.0) million, $7.9 million and $69.3
million in fiscal 1994, 1995 and 1996, respectively, primarily reflecting
proceeds from the Company's Public Offerings, the Company's borrowings in
connection with the Credit Facility and additional bank borrowings in fiscal
1995 principally to fund the growth in inventory.
16
<PAGE>
BUSINESS
General
MSC is one of the largest direct marketers of a broad range of
industrial products to small and mid-sized industrial customers throughout the
United States. 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' MRO supplies requirements. The Company offers over
300,000 SKUs through its 3,560 page master catalog and weekly, monthly and
quarterly specialty and promotional catalogs, newspapers and brochures, which
are supported by approximately 50 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. These growth trends have
continued during fiscal 1997. For the nine months ended May 31, 1997, net sales
increased by $96.3 million, or 42.9%, to $320.8 million from $224.5 million for
the nine months ended June 1, 1996, and income from operations, before taking
into account the relocation costs associated with the move of the Company's Long
Island distribution center to Harrisburg, Pennsylvania in fiscal 1996, increased
by $11.8 million, or 36.6%, to $43.8 million from $32.0 million for the nine
months ended June 1, 1996. The Company also expects to realize modest future
growth from four acquisitions effected during fiscal 1997.
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's core business focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $150. MSC has in
excess of 141,000 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 approximately 50 branch offices. The Company's distribution centers
are located in Harrisburg, Pennsylvania, Atlanta, Georgia and Elkhart, Indiana.
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, which states account for 81% of the Company's sales.
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.
17
<PAGE>
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 16% 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.
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.
18
<PAGE>
Business Strategy
The Company's business strategy is to provide its customers with
a low cost means for obtaining and maintaining MRO supplies. The 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.
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 currently distributed once
per year. The Company's catalog was supplemented by
approximately 50 specialty and promotional catalog,
brochure and newspaper titles in fiscal 1997,
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
19
<PAGE>
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 number of targeted marketing pieces
mailed will increase to approximately 11.3 million
as the Company increases its direct marketing
efforts to take advantage of 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 is expected to grow
to approximately $12.5 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.
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.
20
<PAGE>
In fiscal 1997, the Company shifted its growth
emphasis from increasing its offering of SKUs to
increasing the size and diversity of its customer
base. This shift took 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 50 in fiscal 1997.
o Expansion into New Markets. The Company operates
primarily in the continental United States through
a network of three regional distribution centers
and approximately 50 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. Three of the Company's
acquisitions completed during fiscal 1997 operate
in markets where the Company already was present.
The Company believes that the integration of
acquired entities 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.
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 1997
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, 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.
Products
The Company currently offers in excess of 300,000 SKUs, which
number represents a greater than 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
21
<PAGE>
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 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 1997. 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 Harrisburg, Pennsylvania, 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 1997, the Company commenced shipping from the Harrisburg,
Pennsylvania distribution center which became fully operational during the first
half of fiscal 1997. Over the next several years, the Company intends to open
additional
22
<PAGE>
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's core business focuses on selling relatively higher margin, lower
volume products and has an average order size of approximately $150. 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 141,000 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 1997, such lists will result in over 1,000,000
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 Company a significant competitive advantage in increasing
sales to existing customers and attracting new customers.
The Company relies on its approximately 300 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
23
<PAGE>
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 130 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 approximately 50 branch offices
located in 33 states. The Company estimates 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 50 of which were published in fiscal 1997.
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.
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 million in
fiscal 1993 to approximately $10 million in fiscal 1996. The Company anticipates
spending approximately $12.5 million in fiscal 1997. As reflected in the
following table, the number of publication titles has increased from 13 in
fiscal 1993 to approximately 50 in fiscal 1997. The number of pieces mailed has
increased from 2.7 million in fiscal 1993 to 6.3 million in fiscal 1996, and is
expected to reach approximately 11.3 million in fiscal 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------
August 28, August 27, September 2, August 31, August 30,
1993 1994 1995 1996 1997
(52 weeks) (52 weeks) (53 weeks) (52 weeks) (52 weeks)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Number of publication titles....... 13 20 38 70 50
Number of publications mailed...... 2,688,000 4,794,000 6,604,000 6,300,000 11,300,000
</TABLE>
24
<PAGE>
Customer Service
One of the Company's goals is to make purchasing its products as
convenient as possible for its customers. 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 approximately 50 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 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 has offered this 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.
25
<PAGE>
Acquisitions
The Company has completed 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. See "Risks
Factors--Integration of Prospective Acquisitions."
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
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 July 18, 1997, the Company employed approximately 1,710
employees, including approximately 1,665 full-time and approximately 45
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.
Properties
The Company's distribution centers are as follows:
Approx. Operational
Location Sq. Ft. Date
-------- --------- ------------
Atlanta, Georgia(1) 340,000 October 1990
Elkhart, Indiana(2) 270,000 March 1996
Harrisburg, Pennsylvania(2) 270,000 January 1997
- -------------------
26
<PAGE>
(1) The lease for this facility expires on July 31, 2010.
(2) This facility is owned by the Company.
The Company maintains its headquarters at an 83,000 square foot
facility in Plainview, Long Island, and sublets to a third party approximately
60,000 square feet of another facility also located in Plainview, Long Island.
The Company maintains approximately 50 branch offices located in
33 states, ranging in size from 850 to 16,000 square feet. The leases for
these branch offices will expire at various periods between October 1997 and
June 2003. The aggregate annual lease payments on these properties in fiscal
1997 was approximately $1,645,000.
The Company believes that its facilities are adequate for its
current needs and that suitable additional space will be available as needed.
Regulatory and Legal Matters
The direct response business conducted by the Company is subject
to the Mail or Telephone Order Merchandise Rule and related regulations
promulgated by the Federal Trade Commission. While the Company believes it is in
compliance with such regulations, no assurance can be given that new laws or
regulations will not be enacted or adopted that might adversely affect the
Company's operations. There are no material legal proceedings pending against
the Company.
MANAGEMENT
Directors and Executive Officers
The following table sets forth information with respect to the
directors and executive officers of the Company. Other than Messrs. Kelly,
Redman and Langton, the directors and executive officers of the Company were
elected to the positions listed in October 1995. Accordingly, the descriptions
of their positions held with MSC or the Company prior to October 1995 refer to
the Operating Subsidiary.
Name Age Position
- ---- --- --------
Sidney Jacobson...... 79 Chairman of the Board of Directors
Mitchell Jacobson.... 46 President, Chief Executive Officer and Director
James Schroeder...... 57 Vice President, Chief Operating Officer and Director
Shelley Boxer........ 49 Vice President, Chief Financial Officer and Director
Thomas Eccleston..... 49 Vice President - Plant and Equipment and Secretary
Barbara Schwartz..... 64 Vice President - Human Resources
Denis Kelly.......... 48 Director
Melvin Redman........ 46 Director
Raymond Langton...... 52 Director
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.
27
<PAGE>
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.
Tom 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.
Denis Kelly has been a director of the Company since April 1996.
Mr. Kelly is a Managing Director of Prudential Securities Incorporated, a
position he has held since July 1993. Before July 1993, Mr. Kelly was President
of Denbrook Capital Corporation. Mr. Kelly is also a director of Kenneth Cole
Productions, Inc.
Melvin Redman has been a director of the Company since April
1996. Mr. Redman is a principal of Redman & Associates, a management consulting
firm in Arkansas. From 1992 to June 30, 1995, Mr. Redman was Senior Vice
President of Operations for Walmart Stores, Inc. Prior to 1992, Mr. Redman was
Senior Vice President of Store Planning for Walmart.
Raymond Langton has been a director of the Company since July
1997. Mr. Langton is currently an investor for his own account. Mr. Langton was
the President and Chief Executive Officer of Chicago Rawhide Worldwide from 1995
to February 1997. From 1991 to 1995, Mr. Langton was President and Chief
Executive Officer of SKF North America. Mr. Langton is also a director of SKF
USA, Inc.
Committees of the Board
The Board of Directors established an Audit Committee of the
Board, comprised of Messrs. Kelly, Redman and Langton. The Audit Committee is
charged with reviewing the Company's annual audit and meeting with the Company's
independent accountants to review the Company's internal controls and financial
management practices.
The Board of Directors also established a Compensation Committee
of the Board, comprised of Messrs. Kelly, Redman and Langton. The Compensation
Committee is responsible for establishing salaries, bonuses and other
compensation for the Company's executive officers and for administering the
Company's 1995 Stock Option Plan, including granting options and setting the
terms thereof pursuant to such plan, and the 1995 Restricted Stock Plan.
Directors' Compensation
The Company's policy is not to pay compensation to directors who
are also employees of the Company. The Company will grant options to purchase
2,500 shares of Class A Common Stock to non-employee directors upon their
election and reelection to the Board of Directors. Directors elected other than
at an annual meeting of
28
<PAGE>
shareholders will receive a pro rata number of options. The Company also pays
each non-employee director compensation of $10,000 per annum and $1,500 per
board meeting.
29
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides certain information regarding the beneficial
ownership of the Company's capital stock and as adjusted to give effect to this
Offering by (i) each shareholder known by the Company to beneficially own more
than 5% of any class of the Company's outstanding voting securities, (ii) each
director of the Company, (iii) the Chief Executive Officer and each other
executive officer listed in the Summary Compensation Table and (iv) all
directors and executive officers as a group. Except as otherwise noted below,
each of the persons identified in the table has sole voting and investment power
over the shares beneficially owned by such person.
<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock(1)
-------------------- ----------------------
Beneficial Ownership Beneficial Ownership
Beneficial Ownership Prior to Offering After Offering(4)
-------------------- -------------------- --------------------
Number of
Shares Percent Percent
Beneficial Owner(3) Number Percent(2) Offered Number Before Number After
- ---------------- ------ ------- --------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Mitchell Jacobson(5) 40,526 * 750,000(16) 9,660,014 28.7% 8,910,014 26.3%
Marjorie Gershwind(6) 33,158 * 750,000(16) 5,389,686 16.0 4,639,686 13.7
Sidney Jacobson(7) 100 * -- 2,608,000 7.7 2,608,000 7.7
Erik Gershwind(8) -- -- -- 1,424,000 4.2 1,424,000 4.2
Stacey Gershwind(9) -- -- -- 1,424,000 4.2 1,424,000 4.2
Joshua Jacobson Trust(10) -- -- -- 1,256,000 3.7 1,256,000 3.7
Jacobson Family Foundation(11) 57,500 * 50,000 -- -- -- --
Joseph Getraer(12) 2,500 * -- 1,256,000 3.7 1,256,000 3.7
Denis Kelly 15,000 * -- -- -- -- --
Melvin Redman 625 * -- -- -- -- --
James Schroeder -- -- -- -- -- -- --
Shelley Boxer 2,000 * -- -- -- -- --
Thomas Eccleston 5,263 * -- -- -- -- --
Barbara Schwartz 3,157 * -- -- -- -- --
T. Rowe Price Associates, Inc.(13) 808,250 5.6% -- -- -- -- --
100 E. Pratt Street
Baltimore, Maryland 21202
William Blair & Company, L.L.C.(14) 1,327,180 9.3 -- -- -- -- --
222 West Adams Street
Chicago, Illinois 60606-5312
All directors and executive officers as a 66,671 * -- 12,334,685(15) 36.3 11,584,685 34.2
group (8 persons)
</TABLE>
- ----------------------
* Less than 1%.
(1) The Class B Common Stock has ten votes per share and is convertible into
Class A Common Stock on a one-to-one basis at the option of the holder upon
transfer to persons who are not members of the Jacobson or Gershwind
families. See "Description of Capital Stock."
(2) Excludes 1,950,111 shares of Class A Common Stock reserved for issuance
under the Company's 1995 Stock Option Plan.
(3) The address of each person is c/o the Company, 151 Sunnyside Boulevard,
Plainview, New York 11803-1592 unless otherwise indicated.
30
<PAGE>
(4) Includes 17,413,700 shares of Class B Common Stock and 16,429,119 shares
of Class A Common Stock to be outstanding after this Offering.
(5) Includes an aggregate of 240,000 shares of Class B Common Stock that are
beneficially held by Mitchell Jacobson as Trustee for the issue of Marjorie
Gershwind pursuant to the Marjorie Diane Gershwind 1995 Qualified 3 Year
Annuity Trust Agreement, dated October 31, 1995. If the Underwriters'
over-allotment option is exercised in full, 112,500 additional shares of
Class B Common Stock held by Mitchell Jacobson will be converted and sold
to the Underwriters. See "Underwriting." In such event, the total shares
beneficially owned by Mitchell Jacobson after the Offering will be 26.0%.
(6) Marjorie Gershwind is the sister of Mitchell Jacobson. If the
Underwriters' over-allotment option is exercised in full, 112,500
additional shares of Class B Common Stock held by Marjorie Gershwind will
be converted and sold to the Underwriters. See "Underwriting." In such
event, the total shares benefically owned by Marjorie Gershwind after the
Offering will be 13.4%.
(7) Includes an aggregate of 1,648,000 shares of Class B Common Stock which are
beneficially owned by Sidney Jacobson as Co-Trustee for both Stacey
Gershwind and Erik Gershwind pursuant to the Stacey Gershwind 1995 Trust
Agreement dated November 28, 1995 and the Erik Gershwind 1995 Trust
Agreement dated November 28, 1995, and an aggregate of 960,000 shares of
Class B Common Stock which are beneficially owned by Sidney Jacobson as
Trustee for both Stacey Gershwind and Erik Gershwind pursuant to two
separate Marjorie Gershwind 1994 15 year and 7 year Annuity Trust
Agreements, dated September 26, 1994. Sidney Jacobson is the father of
Mitchell Jacobson and Marjorie Gershwind.
(8) Includes 1,424,000 shares of Class B Common Stock held in trust pursuant to
various trust agreements. Erik Gershwind is the son of Marjorie Gershwind.
(9) Includes 1,424,000 shares of Class B Common Stock held in trust pursuant to
various trust agreements. Stacey Gershwind is the daughter of Marjorie
Gershwind.
(10) Joshua Jacobson is the son of Mitchell Jacobson.
(11) If the Underwriters' over-allotment option is exercised in full, 7,500
additional shares of Class A Common Stock will be sold to the Underwriters.
(12) Includes 240,000 shares of Class B Common Stock beneficially held by Joseph
Getraer as Trustee for the Joshua Jacobson 1994 Trust pursuant to the
Mitchell Jacobson 1995 Qualified 3 year Annuity Trust Agreement dated
October 31, 1995 and 1,016,000 shares of Class B Common Stock beneficially
held by Joseph Getraer as Trustee for Joshua Jacobson pursuant to The
Joshua Jacobson 1994 Trust Agreement, dated January 31, 1994.
(13) Based on Schedule 13G dated February 11, 1997.
(14) Based on Schedule 13G dated February 18, 1997.
(15) Includes an aggregate of 12,268,685 shares of Class B Common Stock and
66,671 shares of Class A Common Stock.
(16) Represents shares of Class B Common Stock that will be converted
simultaneously with the Offering.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation (the "Certificate") and
the By-Laws is a summary and is qualified in its entirety by reference to the
provisions of the Certificate and the By-Laws, copies of which have been filed
with the Securities and Exchange Commission (the "Commission") as exhibits to
the Company's Registration Statement of which this Prospectus is a part.
The authorized capital stock of the Company consists of (i) 100,000,000
shares of Class A Common Stock, $.001 par value, (ii) 50,000,000 shares of Class
B Common Stock, $.001 par value and (iii) 5,000,000 shares of preferred stock,
$.001 par value ("Preferred Stock").
Class A and B Common Stock
At July 18, 1997, there were approximately 485 holders of record of Class A
Common Stock and 14,929,119 shares of Class A Common Stock were issued and
outstanding. At July 18, 1997, there were 9 holders of record of Class B Common
Stock and 18,913,700 shares of Class B Common Stock issued and outstanding.
Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of Class A Common Stock and Class B Common Stock on the
applicable record date is entitled to receive such dividends as may be declared
by the Board of Directors out of funds legally available therefor, and, in the
event of liquidation, to share pro rata in any distribution of the Company's
assets after payment or providing for the payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Each holder of Class
A Common Stock is entitled to one vote for each share held of record on the
applicable record date on all matters presented to a vote of shareholders,
including the election of directors. The holders of Class B Common Stock are
entitled to ten votes per share on the applicable record date and are entitled
to vote, together with the holders of the Class A Common Stock, on all matters
which are subject to shareholder approval. Holders of Class A Common Stock and
Class B Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities and there are no
conversion rights or redemption or sinking fund provisions with respect to such
stock.
31
<PAGE>
The holders of the Class B Common Stock have the right to convert their
shares of Class B Common Stock into shares of Class A Common Stock at their
election and on a one-to-one basis, and all shares of Class B Common Stock
convert into shares of Class A Common Stock on a one-to-one basis upon the sale
or transfer of such shares of Class B Common Stock to any person who is not a
member of the Jacobson or Gershwind families.
The shares of Class A Common Stock offered hereby, when issued, will be
fully paid and nonassessable.
The Class A Common Stock is listed on the NYSE under the symbol "MSM."
The transfer agent for the Class A Common Stock is American Stock Transfer &
Trust Company.
Preferred Stock
The Company's Certificate authorizes 5,000,000 shares of Preferred Stock.
The Company's Board of Directors has the authority to issue shares of Preferred
Stock in one or more series and to fix, by resolution, the voting powers, full
or limited or no voting powers, and such designations, preferences and relative,
participating, optional or other rights, if any, and the qualifications,
limitations or restrictions thereof, if any, including the number of shares in
such series (which the Board may increase or decrease as permitted by New York
law), liquidation preferences, dividend rates, conversion rights and redemption
provisions of the shares constituting any series, without any further vote or
action by the shareholders. Any shares of Preferred Stock so issued would have
priority over the Class A Common Stock and Class B Common Stock with respect to
dividend or liquidation rights or both. There are currently no shares of
Preferred Stock outstanding and the Company has no current intention to issue
any shares of Preferred Stock.
Certain Provisions of By-laws Affecting Shareholders
Special meetings of the shareholders may be called by resolution of the
Board of Directors or by the president and shall be called by the president or
secretary upon the written request (stating the purpose or purposes of the
meeting) of a majority of the Board of Directors or of the holders of a majority
of the outstanding shares entitled to vote. Only business related to the
purposes set forth in the notice of the meeting may be transacted at a special
meeting.
Business Combination Statute
The Company, as a New York resident domestic corporation, is subject to the
provisions of Section 912 of the New York Business Corporation Law. Section 912
provides, with certain exceptions, that a New York resident domestic corporation
may not engage in a "business combination" (e.g., merger, consolidation,
recapitalization or disposition of stock) with any "interested shareholder" for
a period of five years from the date that such person became an interested
shareholder unless: (a) the transaction resulting in a person becoming an
interested shareholder, or the business combination was approved by the board of
directors of the corporation prior to that person becoming an interested
shareholder; (b) the business combination is approved by the holders of a
majority of the outstanding voting stock not beneficially owned by such
interested shareholder; or (c) a business combination that meets certain
valuation requirements for the stock of the New York resident domestic
corporation. An "interested shareholder" is defined as any person that (a) is
the beneficial owner of 20% or more of the outstanding voting stock of the New
York resident domestic corporation or (b) is an affiliate or associate of the
corporation that at any time during the five years prior was the beneficial
owner, directly or indirectly, of 20% or more of the then outstanding voting
stock. These provisions are likely to impose greater restrictions on an
unaffiliated shareholder than on the existing shareholders who will continue to
own all of the Class B Common Stock after this Offering.
32
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters") for whom Donaldson, Lufkin & Jenrette Securities Corporation and
Prudential Securities Incorporated are acting as representatives (the
"Representatives") have severally agreed to purchase from the Selling
Shareholders the number of shares of Class A Common Stock that each Underwriter
has agreed to purchase as set forth opposite its name below:
Underwriters Number of Shares
------------ ----------------
Donaldson, Lufkin & Jenrette Securities Corporation........
Prudential Securities Incorporated.........................
----------------
Total....................................... 1,550,000
================
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval of certain legal matters by counsel
and to certain other conditions. If any shares of Class A Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
shares (other than shares covered by the over-allotment option described below)
must be purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Class A Common Stock to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to exceed
$____ per share. The Underwriters may allow, and such dealers may re-allow,
discounts not in excess of $____ per share to any other Underwriter and certain
other dealers.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A Common
Stock. Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. Underwriters may bid for and purchase shares of Class
A Common Stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of Class A Common
Stock in the open market to stabilize the price of the Class A Common Stock.
These activities may stabilize or maintain the market price of the Class A
Common Stock above independent market levels. The Underwriters are not required
to engage in these activities, and may end these activities at any time.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
33
<PAGE>
The Company, the Selling Shareholders and certain members of the Gershwind
and Jacobson families have agreed not to sell any Class A Common Stock (or Class
A Common Stock issuable upon conversion of Class B Common Stock, except pursuant
to this Offering) prior to the expiration of 180 days from the date of this
Prospectus without the prior written consent of the Underwriters.
34
<PAGE>
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby and
certain other legal matters in connection with this Offering will be passed upon
for the Company by Rosenman & Colin LLP, New York, New York. Certain legal
matters in connection with the shares of Class A Common Stock offered hereby
will be passed upon for the Underwriters by Latham & Watkins, New York, New
York.
Certain members and associates of the firm of Rosenman & Colin LLP own an
aggregate of approximately 4,800 shares of Class A Common Stock. An additional
1,256,000 shares of Class B Common Stock are beneficially held by Joseph
Getraer, a partner of Rosenman & Colin LLP, as Trustee for the Joshua Jacobson
1994 Trust pursuant to the Mitchell Jacobson 1995 Qualified 3 year Annuity Trust
Agreement dated October 31, 1995 and as Trustee for the Joshua Jacobson 1994
Trust.
EXPERTS
The annual financial statements of MSC Industrial Direct Co., Inc. and
Subsidiaries included in this Prospectus and elsewhere in the Registration
Statement, of which this Prospectus is a part, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Class A Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Class A Common Stock, reference
is hereby made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document summarize the terms of any such contract or other
document that are material to such discussion but are not necessarily complete
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. Copies of the Registration
Statement, including all exhibits thereto, may be obtained from the Commission's
principal office at 450 5th St., N.W., Washington, D.C. 20549, upon payment of
the fees prescribed by the Commission, or may be examined without charge at the
offices of the Commission.
The Company furnishes to its shareholders annual reports containing
financial statements of the Company audited by its independent auditors and
quarterly reports containing unaudited condensed financial statements for each
of the first three quarters of each fiscal year.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1996; and
(ii) The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended November 30, 1996, March 1, 1997 and May 31, 1997.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Common Stock hereunder
35
<PAGE>
shall be deemed to be incorporated by reference herein and such documents shall
be deemed to be a part hereof from the date of filing of such reports and
documents.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of any such person, a copy of any
or all of the documents incorporated herein by reference (exclusive of exhibits
to such documents unless such exhibits are specifically incorporated by
reference herein). Requests for such copies should be directed to Shelley Boxer,
Vice President, MSC Industrial Direct Co., Inc., 151 Sunnyside Boulevard,
Plainview, New York, 11803-1592, telephone (516) 349-7100.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Annual Financial Statements
- ---------------------------
Report of Independent Public Accountants....................................F-2
Consolidated Balance Sheets as of September 2, 1995 and
August 31, 1996...........................................................F-3
Consolidated Statements of Income for the three fiscal years ended
August 31, 1996...........................................................F-4
Consolidated Statements of Shareholders' Equity for the three fiscal
years ended August 31, 1996...............................................F-5
Consolidated Statements of Cash Flows for the three fiscal years ended
August 31, 1996...........................................................F-6
Notes to Consolidated Financial Statements .................................F-7
Unaudited Interim Financial Statements
- --------------------------------------
Consolidated Balance Sheets as of May 31, 1997 and
August 31, 1996 (Audited).................................................F-22
Consolidated Statements of Income for the nine month periods ended
May 31, 1997 and June 1, 1996 ............................................F-23
Consolidated Statement of Shareholders' Equity for the nine month
period ended May 31, 1997.................................................F-24
Consolidated Statements of Cash Flows for the nine month periods ended
May 31, 1997 and June 1, 1996.............................................F-25
Notes to Consolidated Financial Statements..................................F-26
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MSC Industrial Direct Co., Inc. and Subsidiaries:
We have audited the accompanying 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 years in
the period then ended August 31, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Melville, New York
November 6, 1996
F-2
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 2, August 31,
1995 1996
------------ ----------
(Note 2)
<S> <C> <C>
ASSETS
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
======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
------------------------------------------
August 27, September 2, August 31,
1994 1995 1996
---------- ------------ ----------
(Note 2) (Note 2)
<S> <C> <C> <C>
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
=========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-4
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED AUGUST 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional Deferred
--------------- --------------- Paid-In Retained Stock
Shares Amount Shares Amount Capital Earnings Compensation Total
------ ------ ------ ------ ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
===== == ====== === ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-5
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
---------------------------------------
August 27, September 2, August 31,
1994 1995 1996
---------- ------------ ----------
(Note 2) (Note 2)
<S> <C> <C> <C>
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
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
F-6
<PAGE>
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
The accompanying consolidated financial statements include the accounts of
MSC Industrial Direct Co., Inc. and its wholly-owned subsidiaries Sid Tool Co.,
Inc.; Swiss Precision Instruments, Inc.; Cut-Rite Tool Corp.; D.T.C. Tool Corp.;
Primeline International, Inc.; Kaja Productions, Inc. and MSC Services, Inc.
All intercompany accounts and transactions have been eliminated in
consolidation.
The 1994 and 1995 financial statements included herein are those of
the Operating Subsidiary and have been retroactively restated to give effect to
the recapitalization of the Company related to the IPO (Note 1). The 1996
consolidated financial statements are those of the Company and its subsidiaries
which, prior to December 20, 1995, reflect only the activity of the Operating
Subsidiary.
F-7
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Fiscal Year
The Company's fiscal year ends on the Saturday closest to August 31.
The financial statements for fiscal 1994, 1995 and 1996 contain activity for
fifty-two weeks, fifty-three weeks and fifty-two weeks, respectively.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, as well as
certain highly liquid investments with original maturities of three months or
less.
Concentration of Credit Risk
The Company's mix of receivables is diverse, with approximately
127,000 active customer accounts. The Company sells its products directly to end
users and, in some cases, to other wholesalers and distributors in its market
areas.
Inventory Valuation
Inventories consist of merchandise held for resale and are stated at
the lower of average cost or market.
Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment are
computed for financial reporting purposes on both the straight-line and
accelerated methods based on the estimated useful lives of the assets.
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred; costs of major
renewals and improvements are capitalized. At the time property and equipment
are retired or otherwise disposed of, the cost and accumulated depreciation are
eliminated from the asset and accumulated depreciation accounts and the profit
or loss on such disposition is reflected in income.
In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 34, "Capitalization of Interest Cost",
interest attributable to construction of distribution centers is capitalized as
part of the cost of related buildings during the period prior to which such
facilities are available and ready for use. The amount of interest included in
property, plant and equipment at September 2, 1995 and August 31, 1996 is $231
and $719, respectively.
The Company capitalizes certain payroll costs associated with the
development of internal computer systems. These costs are included within
property, plant and equipment in the accompanying consolidated balance sheets.
These costs are amortized on a straight-line basis over the estimated useful
lives of the related computer systems, not to exceed five years.
F-8
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Goodwill
Goodwill shown in the consolidated balance sheet at August 31, 1996
relates to several acquisitions completed during fiscal 1996 (Note 4). Goodwill
is being amortized on a straight-line basis over a 40-year period. Accumulated
amortization was $44 at August 31, 1996. There was no goodwill at September 2,
1995.
Deferred Catalog Costs
The costs of producing and distributing the Company's principal
catalogs ($3,546 and $4,488 at September 2, 1995 and August 31, 1996,
respectively) are deferred and included in other assets in the Company's
consolidated balance sheet in accordance with Statement of Position ("SOP")
93-7, "Reporting on Advertising Costs". These costs are charged to expense over
the period that the catalogs remain the most current source of sales, which
period is typically one year or less. The costs associated with brochures and
catalog supplements are charged to expense as incurred.
Sales Returns
The Company reports its sales levels on a net sales basis, with net
sales being computed by deducting from gross sales the amount of actual sales
returns and the amount of reserve established for anticipated sales returns.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Taxes
The Company provides for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes". Under the asset and liability method
specified by SFAS No. 109, the deferred income tax amounts included in the
balance sheet are determined based on the differences between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates that will be in effect when these differences reverse.
Differences between assets and liabilities for financial statement
and tax return purposes are principally related to inventories and certain
accrued liabilities related to the restructuring charge described in Note 5.
Deferred tax assets and liabilities, which were established in the second
quarter of fiscal 1996 due to the Company's taxation as a subchapter "C"
corporation since the closing date of the IPO in December 1995, resulted in a
credit to the provision for income taxes of $3,966 for the year ended August 31,
1996.
Affiliates
The Company is affiliated with MSC International Korea, Inc. and various
real estate entities (together, the "affiliates"). The affiliates are owned
primarily by the Company's principal shareholders. In connection with the
F-9
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
IPO during fiscal 1996, the Company acquired two affiliated companies, Primeline
International, Inc. and Kaja Productions, Inc. See Notes 4, 6 and 13 for
discussion of certain related party transactions.
New Accounting Pronouncements
During March 1995, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to be Disposed Of", was issued by
the Financial Accounting Standards Board ("FASB"). This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of. This statement is effective for financial
statements for fiscal years beginning after December 15, 1995.
During October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. The provisions
of SFAS No. 123 encourage entities to adopt a fair value based method of
accounting for stock compensation plans; however, these provisions also permit
the Company to continue to measure compensation costs under pre-existing
accounting pronouncements. If the fair value based method of accounting is not
adopted, SFAS No. 123 requires pro forma disclosures of net income and net
income per share in the notes to the financial statements. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which SFAS No. 123 is
initially adopted for recognizing compensation cost.
The Company will be required to comply with the accounting and disclosure
provisions of SFAS No. 121 and SFAS No. 123 during fiscal 1997. The effect, if
any, on the consolidated financial statements of the implementation of SFAS No.
121 is not expected to be material. The Company will adopt the provisions of
SFAS No. 123 by providing the pro forma disclosures.
Reclassifications
Certain reclassifications have been made to the prior years'
financial statements to conform with the classifications used in the current
year.
3. PRO FORMA NET INCOME PER COMMON SHARE:
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 (Notes 1 and 2). 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. (Note 4) and
the Restricted Stock Plan (Note 12) 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 (Note
1), 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.
F-10
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
4. ACQUISITION OF BUSINESSES:
On August 15, 1994, the Company acquired various assets and assumed
various liabilities, principally the accounts receivable, inventory and accounts
payable, of Cast Industrial Products Co. for a net cash purchase price of $629.
There was no goodwill as a result of this transaction.
During fiscal 1996 the Company acquired five businesses, two of which
were from related parties. The acquisitions were accounted for based on the
purchase method and were valued based on management's estimate of the fair value
of the assets acquired and liabilities assumed with respect to each acquisition
at the dates of acquisition. The results of operations of the acquired entities
from the respective dates of acquisition through fiscal year end are included in
the accompanying consolidated statement of income for the fiscal year ended
August 31, 1996. The Company acquired Primeline International, Inc. for a
purchase price of approximately $2,000 payable in shares of Class A common
stock, which resulted in the issuance of 105 shares of Class A common stock.
Costs in excess of net assets acquired in these acquisitions of $8,268 were
allocated to goodwill.
Summarized below are the unaudited pro forma results of operations as
though these fiscal 1996 acquisitions had occurred at the beginning of fiscal
1995. Adjustments have been made for pro forma income taxes and amortization of
goodwill related to these transactions.
For the Fiscal
Years Ended
--------------------------------
September 2, August 31,
1995 1996
-------------- --------------
Pro Forma:
Net sales $278,300 $329,100
======== ========
Net income $ 20,000 $20,100
======== ========
Net income per common share $0.65
========
F-11
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
5. DISTRIBUTION CENTER RESTRUCTURING CHARGE:
On May 9, 1996, the Company announced that it would be relocating its
multi-location Long Island, New York warehouse and distribution center operation
to a new, single-location, Company-owned facility near Harrisburg, Pennsylvania.
The Pennsylvania distribution center commenced shipping in September 1996, and
is expected to be fully operational in the first half of fiscal 1997. The
estimated cost associated with the relocation of the Company's existing Long
Island facilities is approximately $8,600, which is primarily comprised of
personnel relocation and severance costs, lease abandonment costs, moving costs
and disposal costs, and this amount has been reflected as a charge to income
from operations for the year ended August 31, 1996. Costs of approximately $644,
primarily relating to labor and travel associated with the move were charged
against the liability as of August 31, 1996, and the remaining liability of
$7,956 is included in accrued liabilities in the accompanying consolidated
balance sheet as of August 31, 1996 (Note 9).
6. DUE FROM AFFILIATED COMPANIES:
The amounts due from affiliated companies bear interest at the prime
rate (8.25% at August 31, 1996).
7. PROPERTY, PLANT AND EQUIPMENT:
The following is a summary of property, plant and equipment and the
estimated useful lives used in the computation of depreciation and amortization:
Number of September 2, August 31,
Years 1995 1996
--------- ------------ ----------
Land $ 637 $ 2,949
Building 40 5,799 14,569
Building and leasehold
improvements The lesser
of the life
of the lease
or 31.5 2,532 2,563
Furniture, fixtures and
equipment 3-10 16,526 29,034
Automobiles 5 364 321
Computer systems-related 3-15 - 3,704
------- -------
25,858 53,140
Less: Accumulated
depreciation and
amortization 11,210 14,151
------- -------
$14,648 $38,989
======= =======
8. INCOME TAXES:
The Company was required to make certain Federal income tax
depository payments in order to maintain its fiscal year end as a subchapter "S"
corporation. Concurrent with the consummation of the IPO during fiscal 1996, the
Company no longer qualified as a subchapter "S" corporation and became a
subchapter "C" corporation. The balance in prepaid Federal income tax payments
as of August 31, 1996 represents the prepayments made prior to the Company's
subchapter "C" corporation status which will be
F-12
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
returned to the Company prior to the end of fiscal 1997. As of September 2,
1995 and August 31, 1996, these Federal tax deposits amounted to $3,115 and
$4,512, respectively.
The provision for income taxes is comprised of the following:
For the Fiscal Year Ended
---------------------------------------------------
August 27, 1994 September 2, 1995 August 31, 1996
--------------- ----------------- ---------------
Current:
Federal $ - $ - $10,744
State and local 813 765 2,598
---- ---- -------
813 765 13,342
---- ---- -------
Deferred:
Federal - - (3,128)
State and local - - (717)
---- ---- -------
- - (3,845)
---- ---- -------
Subchapter "C" impact
of SFAS No. 109 - - (3,966)
---- ---- -------
Total $813 $765 $ 5,531
==== ==== =======
Significant components of deferred tax assets and liabilities are as
follows:
August 31, 1996
---------------
Current and non-current deferred tax liabilities:
Depreciation $ (183)
Prepaid advertising (1,773)
-------
(1,956)
Current and non-current deferred tax assets:
Accounts receivable 679
Inventory 4,382
Restructuring charge accrual 3,143
Bonus accrual 944
Deferred stock compensation 158
Other 790
-------
10,096
-------
Net Deferred Tax Assets $ 8,140
=======
The Company believes that, based upon its lengthy and consistent history
of profitable operations, it is probable that the net deferred tax assets of
$8,140 will be realized, primarily from the generation of future taxable income.
F-13
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:
Fiscal Year Ended
August 31, 1996
-----------------
U.S. Federal statutory rate 35.0%
State income taxes, net of Federal benefit 4.5
Income from "S" corporation period taxable to shareholders (11.9)
Subchapter "C" impact of SFAS No. 109 (11.7)
All other, net 0.4
------
Effective income tax rate 16.3%
======
9. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
September 2, August 31,
1995 1996
------------ -----------
Accrued purchases $ 6,755 $10,349
Accrued payroll and bonus 3,618 4,408
Accrued restructuring charge - 7,956
Accrued other 8,438 10,363
------- -------
Total accrued liabilities $18,811 $33,076
======= =======
F-14
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
10. LONG-TERM NOTES PAYABLE:
Long-term notes payable consist of the following:
September 2, 1995 August 31, 1996
----------------- ---------------
Revolving credit agreement (a) $27,800 $40,000
Term notes payable (b) 599 2,307
Credit agreement of subsidiary (c) - 2,300
Other - 70
------- --------
28,399 44,677
Less: Current portion 51 2,486
------- --------
$28,348 $42,191
======= =======
Maturities of long-term notes payable are as follows:
Fiscal
------
1997 $ 2,486
1998 222
1999 40,568
2000 126
2001 130
Thereafter 1,145
-------
$44,677
=======
(a) As of August 31, 1996, the Company had an unsecured revolving credit
agreement with a bank, as agent for a group of banks, with borrowings of
$40,000. The credit agreement provides for maximum borrowings of $80,000
expiring on April 30, 1999. During the term of the agreement, the Company can
borrow at the bank's base rate (8.25% at August 31, 1996), bankers acceptance
rate or LIBOR rate plus margins, which vary from 0.45% to 0.75% per annum based
on the ratio of total liabilities to effective net worth, or bid note rate. A
facility fee of one-eighth of one percent (0.125%) per annum is payable on the
unused portion of the credit. The agreement contains certain covenants
including, but not limited to, restrictions related to indebtedness, net worth,
capital expenditures and the payment of dividends. As of August 31, 1996, the
Company was not in compliance with the maximum capital expenditure covenant,
however, the Company received a waiver from the bank.
(b) The term notes payable consist of three separate notes. The first
note represents the Company's share of a loan payable under a credit agreement
with a bank, as agent for a group of banks. The Company is obligated for 50% of
the total debt, as these borrowings are secured by real property which is owned
50% by the Company and 50% by a real estate affiliate (Note 2). This note bears
interest at the LIBOR rate plus margins which vary from 0.45% to 0.75% per
annum, and is payable in monthly
F-15
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
principal installments of $4, plus interest, through April 1999, at which time
the balance of the unpaid principal and any accrued interest is due. The
balance as of August 31, 1996 is $548.
The second note is payable to the Pennsylvania Industrial Development
Authority and is secured by the land on which the Harrisburg, Pennsylvania
distribution center is located. The loan bears interest at 3% per annum and is
payable in monthly installments of $14 through September 2011. The Company
received 80% of the approved loan amount and will receive the remaining 20% upon
approval of the final construction cost of the Pennsylvania distribution center.
The outstanding balance under this note is $1,600 as of August 31, 1996.
The third note is payable to the Pennsylvania Department of Community
and Economic Development and is unsecured. The loan bears interest at 3% per
annum and is payable in monthly installments of $1 through August 2011. The
balance as of August 31, 1996 is $159.
(c) The Company assumed obligations of $2,300 under a $3,750 line of
credit in connection with the acquisition of Swiss Precision Instruments, Inc.
(Note 4). Borrowings under the line bear interest at the bank's reference rate
(8.25% at August 31, 1996) plus 1%. The line of credit is available through
November 30, 1996. Subsequent to August 31, 1996, this amount was repaid by the
Company.
11. SUBORDINATED DEBT TO SHAREHOLDERS:
During fiscal 1992, the Company entered into subordinated debt
agreements with its shareholders. Borrowings under these agreements were
subordinated to the long-term notes payable described in Note 10. Subordinated
debt to shareholders was comprised of the following:
September 2, 1995
-----------------
Subordinated debt to shareholders $11,778
Less: Current portion 9,157
-------
$ 2,621
=======
During fiscal 1996, subordinated debt was repaid with the proceeds from the IPO.
12. EMPLOYEE BENEFIT PLANS:
Sid Tool Savings Plan
The Company maintains a defined contribution plan with both a profit
sharing feature and a 401(k) feature, which covers all employees who have
completed at least one month of service with the Company. For the fiscal years
ended August 27, 1994, September 2, 1995 and August 31, 1996, the Company
contributed $623, $1,350 and $216, respectively, to the Sid Tool Savings Plan.
Company contributions are discretionary.
F-16
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Option and Restricted Stock Plans
In connection with the IPO, MSC adopted the MSC Industrial Direct
Co., Inc. 1995 Stock Option Plan, pursuant to which options to purchase 2,000
shares of Class A common stock may be granted.
MSC also adopted the Restricted Stock Plan, whereby MSC awarded 157
shares of Class A common stock to various employees. Employees vest in their
ownership of these shares at the end of five years, prior to which such shares
would be forfeited upon the departure of the employees. The value of these
shares at the grant date ($2,981) is included as a separate component of
shareholders' equity, and the related compensation charge is being recorded
ratably over the five year vesting period.
Information regarding the Company's option and restricted stock plans
is summarized below:
<TABLE>
<CAPTION>
1995 Stock Restricted
Option Plan Stock Plan
-------------------------- ------------------------
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at September 2, 1995 - - - -
Granted 853 $19.00 - $30.75 157 19.00
Exercised - - - -
Cancelled (97) 19.00 - 28.38 (1) 19.00
--- ---
Outstanding at August 31, 1996 756 $19.00 - $30.75 156 19.00
=== ===
</TABLE>
13. RELATED PARTY TRANSACTIONS:
For the fiscal years ended August 27, 1994, September 2, 1995 and
August 31, 1996, respectively, sales to and purchases from Primeline
International, Inc. were as follows:
1994 1995 1996
-------- --------- ----------
(a)
Sales to affiliate $1,732 $1,744 $492
Purchases from affiliate 1,416 967 210
(a) On December 13, 1995, the Company purchased Primeline International,
Inc. (Note 4). All intercompany transactions subsequent to that date have been
eliminated and are not included in the table above (Note 2).
F-17
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
14. COMMITMENTS AND CONTINGENCIES:
Leases
The operations of the Company are conducted, in part, on leased premises,
some of which are leased from affiliates. The leases (most of which provide for
the payment of real estate taxes, insurance and other operating costs) are for
varying periods, the longest extending to the year 2010. At August 31, 1996,
approximate minimum annual rentals on such leases are as follows:
Total
(Including Related
Related Party Party
Fiscal Year Commitments) Commitments
----------- ------------- -----------
1997 $2,896 $1,845
1998 2,073 1,392
1999 1,825 1,190
2000 1,415 1,097
2001 1,235 1,050
Thereafter 8,632 8,482
Total rental expense (exclusive of real estate taxes, insurance and
other operating costs) for all operating leases for the fiscal years ended
August 27, 1994, September 2, 1995 and August 31, 1996 was $3,100, $2,964 and
$3,290, respectively, including $2,800, $2,511 and $2,519, respectively, paid to
affiliates. In the opinion of the Company's management, the leases with
affiliates are on terms which approximate fair market value.
The Company is obligated under certain equipment and automobile
operating leases, which expire on varying dates through fiscal 2001. At August
31, 1996, approximate minimum annual rentals on such leases are as follows:
Fiscal Year
-----------
1997 $1,341
1998 978
1999 583
2000 73
2001 3
F-18
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
Guarantees
As of August 31, 1996, the Company was a guarantor on loans made to
affiliated real estate companies aggregating approximately $1,700.
Self-Insurance
The Company has a self-insured group health insurance plan. The
Company is responsible for all covered claims to a maximum liability of $100 per
participant during a September 1 plan year. Benefits paid in excess of $100 are
reimbursed to the plan under the Company's stop loss policy. Group health
insurance expense for the fiscal years ended August 27, 1994, September 2, 1995
and August 31, 1996 was approximately $2,400, $3,200 and $4,100, respectively.
Letters of Credit
As of August 31, 1996, the Company had outstanding letters of credit
aggregating approximately $3,600.
Employment Agreements
The Chairman of the Board of Directors of the Company is employed
pursuant to an employment agreement with a term expiring in January, 2004. Under
this agreement, the Chairman receives an annual base salary of $250 and is
entitled to participate in benefits available to Company employees. The Chairman
has agreed that upon termination of his employment, he will not compete with the
Company for a period of three years. The agreement also provides for certain
payments in the event of his disability or death. Finally, the agreement
provides that the Chairman may, at his option, elect to become a consultant and
advisor to the Company at an annual fee of $300 for the remainder of the term of
the agreement.
The President and Chief Executive Officer of the Company is employed
pursuant to an employment agreement with a term expiring either on August 1,
2004 or 90 days after the President's written election to terminate employment.
Under this agreement, the President receives an annual base salary of $400,
subject to increases in the cost of living, and is entitled to participate in
benefits available to Company employees. The agreement also provides for certain
payments in the event of his disability or death.
The Company has an agreement with another officer which provides for
annual benefit payments to the employee for seven years upon his retirement or,
in the event of his death, to his designated beneficiary. The benefit is based
upon a percentage of the growth in shareholders' equity over a certain base
amount. The expense associated with this agreement was $300 in 1996.
F-19
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
In connection with the various acquisitions during fiscal 1996 (Note 4),
the Company entered into employment and consulting agreements with the selling
shareholders of the acquired businesses. The future minimum commitments under
these agreements are as follows:
Aggregate
Number of Annual
Individuals Term Amount
----------- ---- ---------
2 June 1996 - June 1998 $125
2 June 1996 - June 1999 180
1 May 1996 - December 1998 62
1 July 1996 - July 2004 100
1 July 1996 - July 2004 25
Litigation
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
15. SUBSEQUENT EVENTS:
Secondary Offering
In September 1996, the Company completed a secondary offering of 6,500
shares of Class A Common Stock, of which 2,000 shares were sold by the Company
and 4,500 shares were converted from Class B to Class A Common Stock and sold by
existing shareholders. This offering generated net proceeds to the Company of
approximately $64,390.
Supplemental pro forma net income for the fiscal year ended August
31, 1996 reflects the tax-effected impact of the reduction of interest expense
of $1,450 attributable to debt outstanding at August 31, 1996 which was repaid
from the proceeds of the secondary offering as though this debt was repaid at
the beginning of the year. Supplemental weighted average common shares
outstanding includes the pro forma weighted average common shares outstanding
(Note 3), as well as the supplemental effect of the issuance of 1,181 shares of
Class A common stock, which is the number of incremental shares that would have
been needed to be issued at the secondary offering price to provide proceeds
sufficient to pay the outstanding amounts of such debt at August 31, 1996. These
incremental shares were not issued and outstanding for any other purpose and are
included in this calculation solely to illustrate their effect on a supplemental
basis.
F-20
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, estimated lives and customer amounts)
(CONTINUED)
1996
----
Supplemental pro forma information:
Supplemental pro forma net income $21,468
=======
Supplemental pro forma net income per common share $ 0.67
=======
Supplemental pro forma weighted average number of common shares
outstanding 31,877
=======
Acquisition
In November 1996, the Company completed the acquisition of a company.
The pro forma effects of this transaction have not been presented, as the
results are immaterial to the Company's financial statements taken as a whole.
F-21
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
May 31, August 31,
1997 1996
----------- ---------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,187 $ 1,679
Accounts receivable, net of allowance for doubtful
accounts of $1,785 and $1,319, respectively 54,909 41,042
Inventories 163,829 152,620
Due from officers, employees and affiliated companies 611 1,052
Prepaid expenses and other current assets 1,514 1,792
Deferred income tax assets 8,135 9,920
Prepaid Federal income tax payments 568 4,512
--------- ---------
Total current assets 238,753 212,617
--------- ---------
Property, Plant and Equipment, net 49,100 38,989
--------- ---------
Other Assets:
Goodwill 25,557 8,224
Other 3,502 5,654
--------- ---------
29,059 13,878
--------- ---------
$ 316,912 $ 265,484
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,988 $ 13,270
Accrued liabilities 36,003 31,568
Income taxes payable - 1,508
Current portion of long-term debt 59 2,486
--------- ---------
Total current liabilities 48,050 48,832
Long-Term Notes Payable 2,590 42,191
Other Long-Term Liabilities 84 110
Deferred Income Tax Liabilities 1,217 1,780
--------- ---------
Total liabilities 51,941 92,913
--------- ---------
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 15 8
shares authorized; 14,851,858 and 8,311,394 shares,
respectively, issued and outstanding
Class B common stock; $0.001 par value; 50,000,000 shares 19 24
authorized; 18,975,000 shares and 23,475,000 shares,
respectively, issued and outstanding
Additional paid-in capital 210,884 145,628
Retained earnings 56,184 29,482
--------- ---------
267,102 175,142
Deferred stock compensation (2,131) (2,571)
--------- ---------
Total shareholders' equity 264,971 172,571
--------- ---------
$ 316,912 $ 265,484
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-22
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
(in thousands, except per share data)
Thirty-nine Weeks Ended
-----------------------
May 31, June 1,
1997 1996
--------- ---------
(Note 1)
Net Sales $ 320,794 $ 224,527
Cost of Goods Sold 189,374 131,264
--------- ---------
Gross Profit 131,420 93,263
Operating Expenses 87,626 61,214
Distribution center Restructuring Charge (Note 5) - 8,600
--------- ---------
Income from Operations 43,794 23,449
Other Income (Expense):
Interest income 806 748
Interest expense (658) (1,293)
Other income (expense), net 178 289
--------- ---------
326 (256)
--------- ---------
Income before Provision for Income Taxes 44,120 23,193
Provision for Income Taxes (Note 3) 17,418 1,947
--------- ---------
Net Income $ 26,702 $ 21,246
========= =========
Net Income per Common Share (Note 5) $ 0.79
=========
Weighted Average Number of Common Shares Outstanding 33,930
=========
The accompanying notes are an integral part of
these consolidated statements.
F-23
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Statement of Shareholders' Equity
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine weeks ended May 31, 1997:
Class A Class B Deferred
Common Stock Common Stock Additional Stock
-------------- ---------------- Paid-In Retained Compen-
Shares Amount Shares Amount Capital Earnings sation Total
------ ------ ------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 31, 1996 (Note 1) 8,311 $ 8 23,475 $24 $145,628 $29,482 $(2,571) $172,571
Exchange of Class B common stock for 4,500 5 (4,500) (5) - - - -
Class A common stock
Secondary public offering of common stock, 2,000 2 - - 64,442 - - 64,444
net of costs of offering of $3,306
Exercise of common stock options 41 - - - 814 - - 814
Net income - - - - - 26,702 - 26,702
Amortization of deferred stock compensation - - - - - - 440 440
------ --- ------- --- -------- ------- ------- --------
Balance, May 31, 1997 14,852 $15 18,975 $19 $210,884 $56,184 $(2,131) $264,971
====== === ======= === ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of
this consolidated statement.
F-24
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-----------------------
May 31, June 1,
1997 1996
-------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 26,702 $ 21,246
-------- ---------
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Deferred income taxes 3,944 (7,542)
Depreciation and amortization 3,974 2,282
Provision for doubtful accounts 566 618
Gain on disposal of property and equipment - (33)
Changes in operating assets and liabilities, net of
effect from acquisitions:
Accounts receivable (9,106) (9,043)
Inventories 8,594 (45,637)
Prepaid expenses and other current assets 2,341 (700)
Other assets 2,181 (1,056)
Accounts payable and other current liabilities (5,038) 12,611
Other long-term liabilities (589) (21)
-------- ---------
6,867 (48,521)
-------- ---------
Net cash provided by (used in)
operating activities 33,569 (27,275)
-------- ---------
Cash Flows from Investing Activities:
Expenditures for property, plant and equipment (11,351) (15,359)
Cash paid for acquisitions, net of cash acquired (27,771) -
-------- ---------
Net cash used in investing activities (39,122) (15,359)
-------- ---------
Cash Flows from Financing Activities:
Net proceeds from public offering of common stock 64,444 131,466
Net proceeds from exercise of common stock options 814 -
Long-term borrowings 10,672 67,614
Repayments of long-term debt (63,310) (82,386)
Repayments of subordinated debt to shareholders - (11,778)
Repayments from officers, employees and affiliates 441 791
Distributions to shareholders - (61,963)
-------- ---------
Net cash provided by financing activities 13,061 43,744
-------- ---------
Net Increase in Cash and Cash Equivalents 7,508 1,110
Cash and Cash Equivalents - beginning of period 1,679 681
-------- ---------
Cash and Cash Equivalents - end of period $ 9,187 $ 1,791
======== =========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
F-25
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(in thousands except per share data)
(unaudited)
1. MSC Industrial Direct Co., Inc. ("MSC" or the "Company") was incorporated
in the State of New York on October 25, 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.
MSC did not have any significant operating activity from its inception
until December 20, 1995, the closing date of the IPO.
The consolidated financial statements for the thirty-nine weeks ended
June 1, 1996 include the results of operations of the operating
subsidiary only, through the date of the IPO, and MSC's consolidated
results of operations thereafter. All references to a year are to the
Company's fiscal year, which ends on the Saturday nearest August 31 of
such year.
2. Reference is made to the Notes to Consolidated Financial Statements contained
within the Company's audited financial statements for the year ended August
31, 1996 included elsewhere in this Prospectus and in the Company's annual
report on Form 10- K. In the opinion of management, the interim unaudited
financial statements included herein reflect all adjustments necessary,
consisting of normal recurring adjustments, for a fair presentation of such
data on a basis consistent with that of the audited data presented therein.
The results of operations for interim periods are not necessarily indicative
of the results to be expected for a full year.
3. As a result of the IPO, the Operating Subsidiary no longer qualified as a
Subchapter "S" corporation, and became subject to "C" corporation taxation.
The provision for income taxes for the thirty-nine weeks ended June 1, 1996
reflects "S" corporation rates through the date of the IPO, and "C"
corporation rates thereafter.
On September 25, 1996, the Company completed a secondary offering of 6,500
shares of Class A Common Stock, of which 2,000 shares were sold by the
Company and 4,500 shares were converted from Class B to Class A Common Stock
and sold by existing shareholders. Net proceeds received by the Company as a
result of this offering were approximately $64,444.
4. During the third quarter of 1996, the Company announced that it would be
relocating its multi-location Long Island, New York warehouse and
distribution center operation to a new, single- location, Company-owned
facility near Harrisburg, Pennsylvania. The Pennsylvania distribution
center commenced shipping in September 1996, and became fully operational
during the second quarter of fiscal 1997. The estimated cost associated
with the relocation of the Company's existing Long Island facilities is
approximately $8,600, which is primarily comprised of personnel relocation
and severance costs, lease abandonment costs, and moving and disposal costs,
and this amount was reflected as a charge to income from operations in the
3rd quarter of fiscal 1996. Expenditures of approximately $5,719 have been
charged against the liability as of May 31, 1997, and the remaining $2,881
is included in accrued liabilities in the accompanying consolidated balance
sheet as of May 31, 1997.
5. Had the initial public offering occurred on the first day of fiscal 1995,
the weighted average number of common shares used in the computation of
earnings per share would have resulted in pro forma net income and
earnings per share as follows:
F-26
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
June 1, June 1,
1996 1996
---- ----
<S> <C> <C>
Including Restructuring (Note 4)
Pro forma net income $2,758 $14,033
Pro forma earnings per share $0.09 $0.45
Excluding Restructuring (Note 4)
Pro forma net income $7,958 $19,233
Pro forma earnings per share $0.25 $0.61
</TABLE>
6. The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". Under the asset and liability method specified by SFAS No. 109, the
deferred tax amounts included in the balance sheet are determined based on
the differences between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates that will be in effect when
these differences reverse. Differences between assets and liabilities for
financial statement and tax return purposes are principally related to
inventories and certain accrued liabilities. Deferred income tax assets and
liabilities were initially established during 1996 due to the Company's
taxation as a "C" Corporation since the closing date of its IPO in December
1995.
7. During March 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of", was issued by the Financial Accounting Standards
Board ("FASB"). This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and
for long-lived assets and certain identifiable intangibles to be disposed
of. This statement is effective for financial statements for fiscal years
beginning after December 15, 1995 (fiscal 1997 for the Company).
During October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting
and reporting standards for stock-based employee compensation plans. The
provisions of SFAS No. 123 encourage entities to adopt a fair value based
method of accounting for stock compensation plans; however, these provisions
also permit the Company to continue to measure compensation costs under
pre-existing accounting pronouncements. If the fair value based method of
accounting is not adopted, SFAS No. 123 requires pro forma disclosures of
net income and net income per share in the notes to the financial
statements. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15,
1995. The disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning after December 15, 1995
(fiscal 1997 for the Company).
The effect, if any, on the consolidated financial statements, of
implementation of SFAS No. 121 is not expected to be material. The Company
will adopt the provisions of SFAS No. 123 by providing the pro forma
disclosures in its annual report on Form 10-K for fiscal 1997.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("EPS").
This statement establishes standards for computing and presenting EPS,
replacing the presentation of currently required primary EPS with a
presentation of Basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both Basic EPS and Diluted EPS
on the face of the consolidated statements of operations. Under this new
standard, Basic EPS is computed based on weighted average shares outstanding
and excludes any potential dilution; Diluted EPS reflects potential dilution
from the exercise or conversion of securities into
F-27
<PAGE>
common stock or from other contracts to issue common stock and is similar to
the currently required fully diluted EPS. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 (the
second quarter of fiscal 1998 for the Company), including interim periods,
and earlier application is not permitted. When adopted, the Company will be
required to restate its EPS data for all periods presented. The Company does
not expect the impact of the adoption of this statement to be material to
previously reported EPS amounts.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering made hereby, and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company,
the Underwriters or any other person. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to any person to
whom it is unlawful to make such offer or solicitation.
--------------------
TABLE OF CONTENTS
--------------------
Prospectus Summary.......................................................... 3
Risk Factors................................................................ 7
Use of Proceeds ............................................................ 9
Selected Financial and Operating Data....................................... 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................. 11
Business.................................................................... 17
Management.................................................................. 27
Principal and Selling Shareholders.......................................... 30
Description of Capital Stock................................................ 31
Underwriting................................................................ 33
Legal Matters............................................................... 35
Experts..................................................................... 35
Additional Information...................................................... 35
Index to Financial Statements............................................... F-1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,550,000 Shares
[LOGO]
Class A Common Stock
-------------------
P R O S P E C T U S
-------------------
Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The Registrant's expenses in connection with the issuance of the securities
being registered, other than underwriting discounts and commissions, are
estimated as follows:
Securities and Exchange Commission Registration Fee........... $0
NASD Filing Fee............................................... 0
Printing and Engraving........................................ 0
Counsel Fees and Expenses..................................... 0
Accountants' Fees and Expenses................................ 0
Blue Sky Qualification Fees and Expenses...................... *
Transfer Agent and Registrar Fees and Expenses................ *
New York Stock Exchange Listing Fee........................... *
Miscellaneous................................................. 0
----
Total......................................................... $ *
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
The Certificate of Incorporation of the Registrant provides that any
person may be indemnified against all expenses and liabilities to the fullest
extent permitted by the Business Corporation Law of the State of New York.
Section 722 of the New York Business Corporation Law, as amended, the law
of the state in which the Registrant is incorporated, empowers a corporation,
within certain limitations, to indemnify any person who served in any capacity
at the request of the corporation, by reason of the fact that he, his testator
or intestate, was a director or officer of the corporation, or served such other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, against judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees actually and necessarily
incurred as a result of such action or proceeding, or any appeal therein, if
such director or officer acted, in good faith, for a purpose which he reasonably
believed to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation and, in criminal actions
or proceedings, in addition, had no reasonable cause to believe that his conduct
was unlawful.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
The Registrant was formed in October 1995 as a holding company to hold all
of the outstanding capital stock of Sid Tool Co., Inc. Pursuant to the Exchange
Agreement dated October 30, 1995, the shareholders of Sid Tool Co., Inc.
contributed all of their shares of stock of Sid Tool Co., Inc. in exchange for
24,000,000 shares of Class B Common Stock of the Registrant.
In October 1995, the Registrant entered into an agreement to acquire all of
the capital stock of Primeline International, Inc. ("Primeline") for a purchase
price of $2 million payable in shares of Class A Common Stock of the Registrant
upon consummation of the Initial Public Offering. The Registrant's President and
his sister owned 70% of the outstanding stock of Primeline.
The foregoing transactions were accomplished pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"Act"), pursuant to Section 4(2) of the Act.
Item 16. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Registration Statement:
a. Exhibits
Exhibit
No. Description
- ------- -----------
+1.01 Form of Underwriting Agreement.
*1.02 Master Agreement Among Underwriters dated March 1, 1993.
*1.03 Master Dealer Agreement dated December 1, 1987
*3.01 Certificate of Incorporation of Registrant.
*3.02 By-laws of Registrant.
*4.01 Specimen Class A Common Stock Certificate.
+5.01 Opinion of Rosenman & Colin LLP.
*10.01 Registrant's 1995 Stock Option Plan.
*10.02 Employment Agreement, dated as of January 2, 1994, between
Registrant and Sidney Jacobson, as amended on October 31, 1995.
*10.03 Employment Agreement, dated as of August 1, 1994, between
Registrant and Mitchell Jacobson.
*10.04 Exchange Agreement dated October 30, 1995 between the Registrant
and the Shareholders named therein.
+10.05 Credit Agreement, dated as of June 12, 1997, between the
Registrant and the banks named therein.
21.01 List of Subsidiaries
23.01 Consent of Arthur Andersen LLP
+23.02 Consent of Rosenman & Colin LLP (included in Exhibit 5.01).
24.01 Power of Attorney (included on signature page at page II-4).
- ------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-98832.
+ To be filed by amendment.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
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<PAGE>
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
Registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Additionally, the undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, County of New York, State of New York on
July 18, 1997.
MSC INDUSTRIAL DIRECT CO., INC.
By: /s/ Mitchell Jacobson
---------------------
Mitchell Jacobson
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Mitchell Jacobson and Shelley Boxer his
true and lawful attorneys-in-fact and agents, each acting alone, with full power
of substitution and resubstitution, for him and in his name, place, and stead,
in any and all capacities, to sign any or all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all the exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises
as fully, to all intents and purposes, as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each acting
alone, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Sidney Jacobson Chairman of the Board
- --------------------- of Directors July 18, 1997
Sidney Jacobson
/s/ Mitchell Jacobson President, Chief
- --------------------- Executive Officer
Mitchell Jacobson and Director July 18, 1997
/s/ James Schroeder Vice President,
- --------------------- Chief Operating Officer,
James Schroeder and Director July 18, 1997
/s/ Shelley M. Boxer Vice President, Chief
- --------------------- Financial Officer,
Shelley M. Boxer Principal Accounting
Officer and Director July 18, 1997
/s/ Denis Kelly Director July 18, 1997
- ---------------------
Denis Kelly
/s/ Melvin Redman Director July 18, 1997
- ---------------------
Melvin Redman
/s/ Raymond Langton Director July 18, 1997
- ---------------------
Raymond Langton
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EXHIBIT INDEX
Exhibit Description Page
- ------- ----------- ----
+1.01 Form of Underwriting Agreement...............................
*1.02 Master Agreement Among Underwriters dated March 1, 1993......
*1.03 Master Dealer Agreement dated December 1, 1987...............
*3.01 Certificate of Incorporation of Registrant...................
*3.02 By-laws of Registrant........................................
*4.01 Specimen Class A Common Stock Certificate....................
+5.01 Opinion of Rosenman & Colin LLP..............................
*10.01 Registrant's 1995 Stock Option Plan..........................
*10.02 Employment Agreement, dated as of January 2, 1994, between
Registrant and Sidney Jacobson, as amended on October 31,
1995.........................................................
*10.03 Employment Agreement, dated as of August 1, 1994, between
Registrant and Mitchell Jacobson.............................
*10.04 Exchange Agreement dated October 30, 1995 between the
Registrant and the Shareholders named therein................
+10.05 Credit Agreement, dated as of June 12, 1997 between the
Registrant and the banks named therein.......................
21.01 List of Subsidiaries.........................................
23.01 Consent of Arthur Andersen LLP...............................
+23.02 Consent of Rosenman & Colin LLP (included in Exhibit 5.01)...
24.01 Power of Attorney (included on signature page at page II-4)..
- ------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-1,
Registration Statement No. 33-98832.
+ To be filed by amendment.
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EXHIBIT 21.01
SUBSIDIARIES OF MSC INDUSTRIAL DIRECT CO., INC.
Corporation State of Incorporation
- ----------- ----------------------
Sid Tool Co., Inc. New York
Primeline International, Inc. New York
Kaja Productions, Inc. New York
Cut-Rite Tool Corp. Florida
D.T.C. Tool Corp. Florida
Swiss Precision Instruments, Inc. California
MSC Services Corp. New York
Dolin Supply Co., Inc. New York
Enco Manufactoring Co., Inc. New York
Brooks Precision Supply, Inc. Massachusetts
Anderson Industrial Supply, Inc. Florida
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in
this registration statement of our report dated November 6, 1996, and to the
incorporation by reference in this registration statement of our reports dated
November 6, 1996 included in the Form 10-K of MSC Industrial Direct Co., Inc.
for the year ended August 31, 1996 and to all references to our Firm included in
this registration statement.
ARTHUR ANDERSEN LLP
Melville, New York
July 22, 1997
