MSC INDUSTRIAL DIRECT CO INC, 424B4, 1997-08-01

MSC INDUSTRIAL DIRECT CO INC
424B4, 1997-08-01
INDUSTRIAL MACHINERY & EQUIPMENT

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<PAGE>

Pursuant to Rule 424(b)(4)
Registration No. 333-31837
PROSPECTUS
JULY 30, 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 30, 1997, the last reported sales price for the Class A
Common Stock on the New York Stock Exchange was $42.9375.

SEE 'RISK FACTORS' BEGINNING ON PAGE 6 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.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE SELLING
PUBLIC COMMISSIONS(1) SHAREHOLDERS(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $42.9375 $2.04 $40.8975
Total..................................... $66,553,125 $3,162,000 $63,391,125
- --------------------------------------------------------------------------------
</TABLE>

(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 payable 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
$76,536,094, $3,636,300 and $72,899,794, 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 August 5, 1997.

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.

<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,

3
<PAGE>
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.

THIS OFFERING

<TABLE>
<S> <C>
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'
</TABLE>

- ------------------
(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.'

4
<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>

<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1996 1997
------------ ------------
<S> <C> <C>
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
</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.'

5
<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 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

6
<PAGE>
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.'

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.

7
<PAGE>
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.

8
<PAGE>
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.

<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
---------- ---------- ---------- ------------ ---------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<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

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>

(Footnotes on next page)

9
<PAGE>
- ------------------

(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

11
<PAGE>
marketing campaign strategy to continue to add new product categories and new
products within existing categories and increased efficiencies in order
processing have been significant contributing factors to the Company's increase
in orders and, 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, SEPTEMBER 2, AUGUST 31, JUNE 1, MAY 31,
1994 1995 1996 1996 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.

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 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.

13
<PAGE>
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 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%

14
<PAGE>
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 YEAR ENDED AUGUST 31, 1996
------------------------------------------ ----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------- -------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................... $54,118 $ 61,187 $ 66,719 $66,459 $69,681 $74,631 $80,215 $80,767
Income from operations...... 6,520 8,353 10,128 8,755 8,766 10,305 4,378 11,060
Net income.................. 6,210 7,880 9,311 8,297 7,988 10,950 2,758(2) 6,807
Pro forma net income(1)..... 3,845 4,900 5,782 5,113 4,969 6,305 -- --

YEAR ENDED AUGUST 30, 1997
-------------------------------

FIRST SECOND THIRD
QUARTER QUARTER QUARTER
------- -------- --------
<S> <C> <C> <C> <C> <C> <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.

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

15
<PAGE>
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

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.

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 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

19
<PAGE>
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.

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

20
<PAGE>
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 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.

21
<PAGE>
The following table itemizes the product categories currently offered by
MSC and the number of SKUs available in each product category:

<TABLE>
<CAPTION>
NUMBER OF
CATEGORY SKUS
- ------------------------------------------------------------------------------ ---------
<S> <C>
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
---------
---------
</TABLE>

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
distribution centers in the West and Southwest in order to achieve the Company's
goal of next day delivery throughout the continental United States.

22
<PAGE>
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 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.

23
<PAGE>
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) (52 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>

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

24
<PAGE>
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.

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.

25
<PAGE>
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 'Risk

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:

<TABLE>
<CAPTION>
APPROX. OPERATIONAL
LOCATION SQ. FT. DATE
- ------------------------------------------------------------------ ------- ------------
<S> <C> <C>
Atlanta, Georgia(1)............................................... 340,000 October 1990
Elkhart, Indiana(2)............................................... 270,000 March 1996
Harrisburg, Pennsylvania(2)....................................... 270,000 January 1997
</TABLE>

- ------------------
(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.

26
<PAGE>
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.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
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
</TABLE>

Sidney Jacobson is a co-founder of MSC and has been its Chairman since June
1982. Prior to 1982, Mr. Jacobson served as President and Chief Executive
Officer of MSC since 1941.

Mitchell Jacobson was appointed President and Chief Executive Officer of
MSC in June 1982. Prior to that time, Mr. Jacobson had been an Executive Vice
President since joining the Company in 1976. Mitchell Jacobson is the son of
Sidney Jacobson.

James Schroeder was appointed Vice President and Chief Operating Officer of
MSC in 1986. Mr. Schroeder has served as Group Vice President of National
Service Industries, a manufacturing company, from 1984 to 1986, as President of

Avanti Motor Corp., an automobile dealership company, from 1983 to 1984, and as
President of the MSC Division of Wheelabrator-Frye, Inc., a manufacturing
company, from 1980 to 1983.

Shelley Boxer was appointed Vice President and Chief Financial Officer of
MSC in 1993. Mr. Boxer was formerly the Vice President and Chief Financial
Officer at Joyce International, Inc., a distribution and manufacturing company,
from 1992 to 1993. From 1987 to 1992, he was the Executive Vice President and
Chief Financial Officer at Kinney Systems, Inc., an automobile parking and real
estate company. From 1982 to 1987, Mr. Boxer was Vice President and Treasurer of
Meyers Parking System, Inc., an automobile parking and real estate company.

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.

27
<PAGE>
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 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.

28
<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 B COMMON STOCK(1)
----------------------------------------------
CLASS A COMMON STOCK
---------------------------------- BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING(4)
BENEFICIAL OWNERSHIP 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 group
(8 persons)................... 66,671 * -- 12,334,685(15) 36.3 11,584,685 34.2
</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.

(Footnotes continued on next page)

29
<PAGE>
(Footnotes continued from previous 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.

30
<PAGE>
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.

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.

31
<PAGE>
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:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- -------------------------------------------------------------------------------------- ----------------
<S> <C>

Donaldson, Lufkin & Jenrette Securities Corporation................................... 775,000
Prudential Securities Incorporated.................................................... 775,000
----------------
Total....................................................................... 1,550,000
----------------
----------------
</TABLE>

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
$1.10 per share. The Underwriters may allow, and such dealers may re-allow,
discounts not in excess of $0.10 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.

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.

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.

33
<PAGE>
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 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.

<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----

<S> <C>
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-18
Consolidated Statements of Income for the nine month periods ended May 31, 1997 and
June 1, 1996............................................................................................. F-19
Consolidated Statement of Shareholders' Equity for the nine month period ended May 31, 1997................ F-20
Consolidated Statements of Cash Flows for the nine month periods ended May 31, 1997 and
June 1, 1996............................................................................................. F-21
Notes to Consolidated Financial Statements................................................................. F-22
</TABLE>

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
------ ------ ------ ------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, August 28, 1993........................ -- $ -- 24,000 $ 24 $ 8,034 $ 41,650 $ --
Net income.................................... -- -- -- -- -- 22,573 --
Distributions to shareholders................. -- -- -- -- -- (16,531) --
------ ------ ------ ------ ---------- -------- ------------
BALANCE, August 27, 1994........................ -- -- 24,000 24 8,034 47,692 --
Net income.................................... -- -- -- -- -- 31,698 --
Distributions to shareholders................. -- -- -- -- -- (15,360) --
------ ------ ------ ------ ---------- -------- ------------
BALANCE, September 2, 1995 (Note 2)............. -- -- 24,000 24 8,034 64,030 --
Initial public offering of Common Stock, net
of costs of offering of $10,352 (Note 1)... 7,525 8 -- -- 132,623 -- --
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
Issuance of Common Stock for acquisition of
subsidiary (Note 4)........................ 105 -- -- -- 2,000 -- --
Net income.................................... -- -- -- -- -- 28,503 --
Distributions to shareholders (Note 1)........ -- -- -- -- -- (63,051) --
------ ------ ------ ------ ---------- -------- ------------
BALANCE, August 31, 1996........................ 8,311 $ 8 23,475 $ 24 $ 145,628 $ 29,482 $ (2,571)
------ ------ ------ ------ ---------- -------- ------------
------ ------ ------ ------ ---------- -------- ------------

TOTAL
--------
<S> <C>
BALANCE, August 28, 1993........................ $ 49,708
Net income.................................... 22,573
Distributions to shareholders................. (16,531)
--------
BALANCE, August 27, 1994........................ 55,750
Net income.................................... 31,698
Distributions to shareholders................. (15,360)
--------
BALANCE, September 2, 1995 (Note 2)............. 72,088
Initial public offering of Common Stock, net

of costs of offering of $10,352 (Note 1)... 132,631
Exchange of Class B Common Stock for Class A
Common Stock............................... --
Issuance of restricted Common Stock
(Note 12).................................. --
Cancellation of restricted Common Stock....... --
Amortization of deferred stock compensation... 400
Issuance of Common Stock for acquisition of
subsidiary (Note 4)........................ 2,000
Net income.................................... 28,503
Distributions to shareholders (Note 1)........ (63,051)
--------
BALANCE, August 31, 1996........................ $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 31,
SEPTEMBER 2, 1996
1995 ----------
------------
AUGUST 27 (NOTE 2)
1994
----------
(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 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.

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.

F-7
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)

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.

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.

F-8
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
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 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

F-9
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
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.

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.

<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
----------------------------
SEPTEMBER 2, AUGUST 31,
1995 1996
------------ ----------
<S> <C> <C>
Pro Forma:
Net sales...................................................... $278,300 $ 329,100
------------ ----------
------------ ----------
Net income..................................................... $ 20,000 $ 20,100
------------ ----------
------------ ----------
Net income per common share.................................... $ 0.65
----------
----------
</TABLE>

F-10
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

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:

<TABLE>
<CAPTION>
NUMBER OF SEPTEMBER 2, AUGUST 31,
YEARS 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Land........................................................... $ 637 $ 2,949
Building....................................................... 40 5,799 14,569
The lesser
of the life
of the lease
Building and leasehold improvements............................ 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
------------ ----------
------------ ----------
</TABLE>

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 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.

F-11
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

8. INCOME TAXES:--(CONTINUED)

The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
----------------------------------------
AUGUST 27, SEPTEMBER 2, AUGUST 31,
1994 1995 1996

---------- ------------ ----------
<S> <C> <C> <C>
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
---------- ------ ----------
---------- ------ ----------
</TABLE>

Significant components of deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
AUGUST 31,
1996
----------
<S> <C>
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
----------
----------
</TABLE>

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.

Reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate is as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
AUGUST 31, 1996
------------------
<S> <C>
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%
--------
--------
</TABLE>

F-12
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

9. ACCRUED LIABILITIES:

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 2, AUGUST 31,
1995 1996
------------ ----------
<S> <C> <C>
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
------------ ----------
------------ ----------
</TABLE>

10. LONG-TERM NOTES PAYABLE:

Long-term notes payable consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 2, 1995 AUGUST 31, 1996
----------------- ---------------

<S> <C> <C>
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
----------------- ---------------
----------------- ---------------
</TABLE>

Maturities of long-term notes payable are as follows:

<TABLE>
<S> <C>
FISCAL
- ---------------------------------------------------------------
1997........................................................... $ 2,486
1998........................................................... 222
1999........................................................... 40,568
2000........................................................... 126
2001........................................................... 130
Thereafter..................................................... 1,145
-------
$44,677
-------
-------
</TABLE>

(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

F-13
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

10. LONG-TERM NOTES PAYABLE--(CONTINUED)
which vary from 0.45% to 0.75% per annum, and is payable in monthly
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:

<TABLE>
<CAPTION>
SEPTEMBER 2, 1995
-----------------
<S> <C>
Subordinated debt to shareholders.......................................... $11,778
Less: Current portion...................................................... 9,157
-----------------
$ 2,621
-----------------
-----------------
</TABLE>

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.

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.

F-14
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

12. EMPLOYEE BENEFIT PLANS:--(CONTINUED)

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:

<TABLE>
<CAPTION>
1996
1994 1995 ----
------ ------ (a)
<S> <C> <C> <C>
Sales to affiliate........................................................... $1,732 $1,744 $492
Purchases from affiliate..................................................... 1,416 967 210
</TABLE>

(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).

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:

<TABLE>
<CAPTION>
TOTAL
(INCLUDING
RELATED RELATED
PARTY PARTY
FISCAL YEAR COMMITMENTS) COMMITMENTS
- -------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
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
</TABLE>

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.

F-15
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

14. COMMITMENTS AND CONTINGENCIES:--(CONTINUED)

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:

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------------------------------------------------------------
<S> <C>
1997............................................................. $1,341
1998............................................................. 978
1999............................................................. 583
2000............................................................. 73
2001............................................................. 3
</TABLE>

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-16
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA, ESTIMATED LIVES AND CUSTOMER AMOUNTS)

14. COMMITMENTS AND CONTINGENCIES:--(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:

<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF ANNUAL
INDIVIDUALS TERM AMOUNT
- ------------ ---------------------- ---------
<S> <C> <C>
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
</TABLE>

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.

<TABLE>
<CAPTION>
1996
-------
<S> <C>
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
-------
-------
</TABLE>

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-17

<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 shares authorized; 14,851,858 and
8,311,394 shares, respectively, issued and outstanding.............................. 15 8
Class B common stock; $0.001 par value; 50,000,000 shares authorized; 18,975,000 shares

and 23,475,000 shares, respectively, issued and outstanding......................... 19 24
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-18

<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
----------------------------
MAY 31, 1997 JUNE 1, 1996
------------ ------------
(NOTE 1)
<S> <C> <C>
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
------------
------------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-19

<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
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 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
Class A common stock................ 4,500 5 (4,500) (5) -- -- -- --
Secondary public offering of common
stock, net of costs of offering of
$3,306.............................. 2,000 2 -- -- 64,442 -- -- 64,444
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-20

<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-21

<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:

<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>

F-22
<PAGE>
MSC INDUSTRIAL DIRECT CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)

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
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-23

<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

------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 8
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............. 29
Description of Capital Stock................... 31
Underwriting................................... 33
Legal Matters.................................. 33
Experts........................................ 34
Additional Information......................... 34
Index to Financial Statements.................. F-1

</TABLE>

================================================================================

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

JULY 30, 1997

================================================================================