SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 26, 2001 Commission File No.: 1-14130 MSC INDUSTRIAL DIRECT CO., INC. (Exact name of registrant as specified in its charter) NEW YORK 11-3289165 (State of incorporation) (IRS Employer Identification No.) 75 MAXESS ROAD MELVILLE, NY 11747 (Address of principal executive offices, including zip code) (516) 812-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of July 2, 2001, 35,878,657 shares of Class A Common Stock and 33,478,778 shares of Class B Common Stock of the registrant were outstanding.
MSC INDUSTRIAL DIRECT CO., INC. INDEX PART I. FINANCIAL INFORMATION PAGE ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets May 26, 2001 and August 26, 2000 3 Consolidated Statements of Income Thirteen and thirty-nine weeks ended May 26, 2001 and May 27, 2000 4 Consolidated Statement of Shareholders' Equity Thirty-nine weeks ended May 26, 2001 5 Consolidated Statements of Cash Flows Thirty-nine weeks ended May 26, 2001 and May 27, 2000 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14 SIGNATURES 15
PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS MSC INDUSTRIAL DIRECT CO., INC. Consolidated Balance Sheets <TABLE> <CAPTION> (In thousands, except share data) May 26, August 26, 2001 2000 ---- ---- (Unaudited) (Audited) ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 29,804 $ 3,209 Accounts receivable, net of allowance for doubtful accounts of $4,625 and $3,779, respectively 95,455 98,837 Inventories 247,826 264,494 Prepaid expenses and other current assets 3,752 4,190 Current deferred income taxes 5,343 4,484 ---------- --------- Total current assets 382,180 375,214 ---------- --------- Investments, at cost (Note 2) 550 8,982 Property, Plant and Equipment, net 121,340 116,378 Other Assets: Goodwill 63,794 65,115 Other assets 9,825 15,285 ---------- --------- 73,619 80,400 ---------- --------- Total Assets $ 577,689 $ 580,974 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 25,805 $ 30,245 Accrued liabilities 34,269 48,032 Current portion of long-term notes payable 214 244 ---------- --------- Total current liabilities 60,288 78,521 Long-term notes payable 45,289 68,398 Deferred income tax liabilities 14,968 12,386 ---------- --------- Total liabilities 120,545 159,305 ---------- --------- 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; 35,890,324 and 35,290,231 shares issued, and 34,879,324 and 34,217,231 shares outstanding, respectively 36 35 Class B common stock; $0.001 par value; 50,000,000 shares authorized; 33,478,778 and 33,738,778 shares issued and outstanding, respectively 34 34 Additional paid-in capital 233,399 229,297 Retained earnings 243,536 213,591 Treasury stock, at cost, 1,011,000 and 1,073,000 shares, respectively (19,861) (21,079) Deferred stock compensation - (209) ---------- --------- Total shareholders' equity 457,144 421,669 ---------- --------- Total Liabilities and Shareholders' Equity $ 577,689 $ 580,974 ========== ========= </TABLE> The accompanying notes are an integral part of these consolidated balance sheets. Page 3
MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended Thirty-Nine Weeks Ended ----------------------------- ------------------------------ (In thousands, except per share May 26, May 27, May 26, May 27, and share data) 2001 2000 2001 2000 ------------- ------------ ----------- ------------- <S> <C> <C> <C> <C> Net sales $ 204,834 $ 212,845 $ 627,477 $ 593,839 Cost of goods sold 122,786 131,043 378,699 364,644 --------- --------- --------- --------- Gross profit 82,048 81,802 248,778 229,195 Operating expenses 60,657 53,189 178,677 157,697 --------- --------- --------- --------- Income from operations 21,391 28,613 70,101 71,498 --------- --------- --------- --------- Other (Expense) Income: Interest income 145 112 253 128 Interest expense (923) (1,534) (3,380) (4,021) Equity in loss of unconsolidated - - - (465) affiliate Provision for impairment in carrying value of investments (Note 2) (10,284) - (10,284) - Other income, net 36 85 99 212 --------- --------- --------- --------- Total other (expense) income (11,026) (1,337) (13,312) (4,146) --------- --------- --------- --------- Income before provision for income taxes 10,365 27,276 56,789 67,352 Provision for income taxes 7,883 10,910 26,453 26,882 --------- --------- --------- --------- Net income $ 2,482 $ 16,366 $ 30,336 $ 40,470 ========= ========= ========= ========= Per Share Information (Note 3): Net income per common share: Basic $ 0.04 $ 0.24 $ 0.45 $ 0.60 ========= ========= ========= ========= Diluted $ 0.04 $ 0.24 $ 0.44 $ 0.60 ========= ========= ========= ========= Common shares used in computing per share amounts (Note 3): Basic 68,264 67,129 68,099 67,044 ========= ========= ========= ========= Diluted 69,615 68,700 69,288 67,893 ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated statements. Page 4
MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statement of Shareholders' Equity (Unaudited) <TABLE> <CAPTION> Class A Class B (In thousands) Common Stock Common Stock Additional ---------------- ---------------- Paid-In Retained Shares Amount Shares Amount Capital Earnings ------ ------ ------ ------ ------- -------- Thirty-nine weeks ended May 26, 2001: <S> <C> <C> <C> <C> <C> <C> Balance, August 26, 2000 35,290 $35 33,739 $34 $229,297 $213,591 Exchange of Class B common stock for Class A 260 - (260) - - - common stock Common stock issued under associate stock - - - - - (391) purchase plan Amortization of deferred stock compensation - - - - - - Exercise of common stock options, including 340 1 - - 4,102 - income tax benefits Net income - - - - - 30,336 ------ ---- ------ ---- -------- -------- Balance, May 26, 2001 35,890 $36 33,479 $34 $233,399 $243,536 ====== ==== ====== ==== ======== ======== <CAPTION> Treasury Stock (In thousands) ---------------------- Deferred Amount at Stock Shares Cost Compensation Total -------- --------- ------------ ----- Thirty-nine weeks ended May 26, 2001: <S> <C> <C> <C> <C> Balance, August 26, 2000 1,073 $(21,079) $ (209) $421,669 Exchange of Class B common stock for Class A - - - - common stock Common stock issued under associate stock (62) 1,218 - 827 purchase plan Amortization of deferred stock compensation - - 209 209 Exercise of common stock options, including - - - 4,103 income tax benefits Net income - - - 30,336 ------ -------- ------ -------- Balance, May 26, 2001 1,011 $(19,861) - $457,144 ====== ======== ====== ======== </TABLE> The accompanying notes are an integral part of these consolidated statements. Page 5
MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> (In thousands) Thirty-Nine Weeks Ended ----------------------------- May 26, May 27, 2001 2000 -------- -------- Cash Flows from Operating Activities: <S> <C> <C> Net income $ 30,336 $ 40,470 --------- --------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity loss of unconsolidated affiliate - 465 Provision for impairment in carrying value of investments 10,284 - Depreciation and amortization 12,626 10,038 Amortization of deferred stock compensation 209 321 Provision for doubtful accounts 1,526 2,016 Deferred income taxes 1,723 795 Changes in operating assets and liabilities: Accounts receivable 1,856 (13,407) Inventories 16,668 (32,534) Prepaid expenses and other current assets 438 (478) Other assets 5,460 5,181 Accounts payable and accrued liabilities (17,606) (2,610) --------- --------- 33,184 (30,213) --------- --------- Net cash provided by operating activities 63,520 10,257 --------- --------- Cash Flows from Investing Activities: Expenditures for property, plant and equipment (16,267) (16,899) Cash paid for investment in affiliates (1,852) (9,422) --------- --------- Net cash used in investing activities (18,119) (26,321) --------- --------- Cash Flows from Financing Activities: Purchase of treasury stock - (748) Net proceeds from associate stock purchase plan 827 981 Net proceeds from exercise of common stock options 3,506 1,461 Net proceeds from (repayments of) notes payable (23,139) 17,290 --------- --------- Net cash (used in) provided by financing activities (18,806) 18,984 --------- --------- Net increase in cash and cash equivalents 26,595 2,920 Cash and cash equivalents - beginning of period 3,209 2,725 --------- --------- Cash and cash equivalents - end of period $ 29,804 $ 5,645 ========= ======== Supplemental Disclosure: Cash paid for interest 2,564 2,500 Cash paid for income taxes 19,727 18,894 </TABLE> The accompanying notes are an integral part of these consolidated statements. Page 6
Notes to Consolidated Financial Statements (In thousands, except per share data) (Unaudited) 1. MSC Industrial Direct Co., Inc. ("MSC") was incorporated in the State of New York on October 24, 1995. MSC and its subsidiaries, including its principal operating subsidiary, Sid Tool Co., Inc., are hereinafter referred to collectively as the "Company." Reference is made to the Notes to Consolidated Financial Statements contained within the Company's audited financial statements included in the Company's annual report on Form 10-K for the year ended August 26, 2000. 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 in accordance with generally accepted accounting principles. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. The Company's fiscal year ends on a Saturday close to August 31 of each year. 2. During the third quarter of fiscal 2001, the Company determined that its ability to ultimately recover the value of its investments in four privately held Internet startup companies was significantly impaired. The Company's determination was based upon certain economic indicators and specific events and circumstances, including these entities' difficulty in raising additional capital, and the inability of these entities to achieve business plan objectives and planned financial results. Pursuant to the Company's evaluation of the respective carrying amounts of each investment, either the entire cost of the investment or a significant portion thereof was charged against earnings during the third quarter of fiscal 2001. The aggregate amount of the non-cash charge recorded in the statement of income was $10.3 million ($9.9 million, net of tax benefits, or $.14 per diluted share). The provision for income taxes in the third quarter and for the nine months ended May 26, 2001 was substantially affected by the non-deductibility of a significant portion of the Company's write down of its Internet investments. Accordingly, the Company's effective tax rate is significantly higher than in prior periods. 3. The Company follows the provisions of the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS No. 128 requires the Company to present basic and diluted earnings per share ("EPS") on the face of the income statement. Basic earnings per common share were computed based on the weighted average number of common shares issued and outstanding during the relevant periods. Diluted earnings per common share were computed based on the weighted average number of common shares issued and outstanding plus additional shares assumed to be outstanding to reflect the dilutive effect of common stock equivalents using the treasury stock method. Page 7
A reconciliation between the numerator and denominator of the basic and diluted EPS calculation is as follows: Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- May 26, May 27, May 26, May 27, 2001 2000 2001 2000 ---- ---- ---- ---- Net income for EPS Computation $2,482 $16,366 $30,336 $40,470 ====== ======= ======= ======= Basic EPS: Weighted average Common shares 68,264 67,129 68,099 67,044 ====== ======= ======= ======= Basic EPS $0.04 $0.24 $0.45 $0.60 ====== ======= ======= ======= Diluted EPS: Weighted average Common shares 68,264 67,129 68,099 67,044 Shares issuable from Assumed conversion of Common stock equivalents 1,351 1,571 1,189 849 ------ ------ ------- ------- Weighted average common and common equivalent shares 69,615 68,700 69,288 67,893 ====== ======= ======= ======= Diluted EPS $0.04 $0.24 $0.44 $0.60 ====== ======= ======= ======= 4. Certain prior year balances have been reclassified to conform with current year presentation. 5. In September 2000, the EITF reached a consensus with respect to EITF Issue No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The purpose of this issue discussion was to clarify the classification of shipping and handling revenues and costs. The consensus reached was that all shipping and handling billed to customers is revenue. Further, a consensus was reached that the classification of shipping and handling costs is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, "Disclosures of Accounting Policies." The Company may adopt a policy of including shipping and handling costs in cost of sales. If shipping costs are significant and are not included in cost of sales, a company should disclose both the amount(s) of such costs and the line item(s) on the income statement that included them. This standard will require a restatement of prior periods for changes in classification. The Company currently nets its shipping and handling revenue with the related costs and includes the residual amount as selling expense. This consensus is effective for the Company beginning with the fourth quarter of fiscal 2001. The Company is in the process of quantifying the impact of its adoption, which will not change reported income from operations or net income. Page 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is intended to update the information contained in the Company's Annual Report on Form 10-K for the fiscal year ended August 26, 2000 and presumes that readers have access to, and will have read, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in such Form 10-K. This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks and uncertainties and include, but are not limited to, statements regarding future events and our plans, goals and objectives. Such statements are generally accompanied by words such as "believe," "anticipate," "think," "intend," "estimate," "expect," or similar terms. Our actual results may differ materially from such statements. Factors that could cause or contribute to such differences include, without limitation, changing market conditions, competitive and regulatory matters, general economic conditions in the markets in which the Company operates and availability of acquisition opportunities. Although the Company believes that the assumptions underlying its forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, the Company cannot make any assurances that the results contemplated in such forward-looking statements will be realized. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved. Furthermore, past performance is not necessarily an indicator of future performance. OVERVIEW MSC Industrial Direct Co., Inc. ("MSC") was formed in October 1995 and has conducted business since 1941. MSC and its subsidiaries, including Sid Tool Co., Inc. (the "Operating Subsidiary"), are hereinafter referred to collectively as the "Company." The Company is one of the largest direct marketers of a broad range of industrial products to small and mid-sized industrial customers throughout the United States. We distribute a full line of industrial products, such as cutting tools, abrasives, measuring instruments, material handling products, 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's 4,480 page master catalog offers over 450,000 stock keeping units ("SKUs") and is supplemented by weekly, monthly and quarterly specialty and promotional catalogs and brochures. The products are distributed through the Company's four distribution centers and approximately 90 branch offices. Most of the products are carried in stock, and orders for these products are typically fulfilled on the day the order is received. Page 9
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED MAY 26, 2001 AND MAY 27, 2000 NET SALES decreased by $8.0 million, or 3.8%, to $204.8 million in the third quarter of fiscal 2001 from $212.8 million in the third quarter of fiscal 2000. This decrease was primarily the result of the progressively slowing industrial sector. A significant portion of the Company's customer base is in this sector; accordingly, sales to these customers have declined slightly during the third quarter of fiscal 2001. GROSS PROFIT increased by $.2 million, or .3%, to $82.0 million in the third quarter of fiscal 2001 from $81.8 million in the third quarter of fiscal 2000. As a percentage of net sales, gross profit increased from 38.4% to 40.1%. The increase in gross profit as a percentage of net sales resulted from the success of the Company's efforts to increase margins with new and existing customers and a favorable change in product mix. OPERATING EXPENSES increased by $7.5 million, or 14.0%, to $60.7 million in the third quarter of fiscal 2001 from $53.2 million in the third quarter of fiscal 2000. As a percentage of net sales, operating expenses increased from 25.0% to 29.6%. The increases in operating expenses in dollars and as a percentage of net sales were primarily attributable to the costs associated with a significant increase in the Company's sales force, increased advertising costs, and higher depreciation expense. These increases were partially offset by cost control initiatives implemented during the third quarter of fiscal 2001. INCOME FROM OPERATIONS decreased by $7.2 million, or 25.2%, to $21.4 million in the third quarter of fiscal 2001 from $28.6 million in the third quarter of fiscal 2000. The decrease was primarily attributable to a decrease in net sales and an increase in operating expenses, partially offset by an increase in gross profit percentage. INTEREST EXPENSE decreased by $0.6 million to $.9 million in the third quarter of fiscal 2001 from $1.5 million in the third quarter of fiscal 2000. The decrease was primarily attributable to lower interest rates and lower borrowings as the Company has used its free cash flow to pay down notes payable borrowings. PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS of approximately $10.3 million relates to the write-down of the Company's Internet investments. The remaining net book value of these investments is approximately $.6 million. PROVISION FOR INCOME TAXES: The effective tax rate was approximately 76.1% and 40.0% for the third quarter of fiscal 2001 and fiscal 2000, respectively. The increase in the effective tax rate is a direct result of limited tax benefits from the Internet investment write-downs. Accordingly, the company's effective tax rate is significantly higher than in prior periods. Excluding the effect of this write-down, the effective tax rate is 40.0% for both periods. NET INCOME decreased by $13.9 million, or 84.8%, to $2.5 million in the third quarter of fiscal 2001 from $16.4 million in the third quarter of fiscal 2000. This decrease is primarily the result of the write-down of the Company's Internet investments and the decrease in income from operations explained above. Without taking into account the investment write-down, net income would have decreased by $4.0 million or 24.4%, to $12.4 million. Page 10
RESULTS OF OPERATIONS - THIRTY-NINE WEEKS ENDED MAY 26, 2001 AND MAY 27, 2000 NET SALES increased by $33.6 million, or 5.7%, to $627.5 million during the first nine months of fiscal 2001 from $593.8 million in the first nine months of fiscal 2000. This increase was primarily attributable to an increase in sales to the Company's existing customers, and an increase in the number of active customers in the first quarter of fiscal 2001. During the second and third quarters of fiscal 2001 the Company experienced a decrease in sales to existing customers primarily as a result of the progressively slowing industrial sector. GROSS PROFIT increased by $19.6 million, or 8.5%, to $248.8 million during the first nine months of fiscal 2001 from $229.2 million in the first nine months of fiscal 2000. As a percentage of net sales, gross profit increased from 38.6% to 39.6%. The increase in gross profit as a percentage of net sales resulted from a favorable change of product mix and the success of the Company's efforts to increase margins with new and existing customers. OPERATING EXPENSES increased by $21.0 million, or 13.3%, to $178.7 million during the first nine months of fiscal 2001 from $157.7 million in the first nine months of fiscal 2000. As a percentage of net sales, operating expenses increased from 26.6% to 28.5%. The increases in operating expenses in dollars and as a percentage of net sales were primarily attributable to the costs associated with a significant increase in the Company's sales force, increased advertising costs, and higher depreciation expense. INCOME FROM OPERATIONS decreased by $1.4 million, or 2.0%, to $70.1 million during the first nine months of fiscal 2001 from $71.5 million in the first nine months of fiscal 2000. The decrease was primarily attributable to an increase in operating expenses, offset in part by an increase in net sales and gross profit margin. INTEREST EXPENSE decreased by $.6 million to $3.4 million in the nine months of fiscal 2001 from $4.0 million in the first nine months of fiscal 2000. The decrease was primarily attributable to lower long-term notes payable borrowings. PROVISION FOR IMPAIRMENT IN CARRYING VALUE OF INVESTMENTS of approximately $10.3 million relates to the write-down of the Company's Internet investments. The remaining net book value of these investments is approximately $.6 million. PROVISION FOR INCOME TAXES: The effective tax rate was approximately 46.6% and 40.0% for the first nine months of fiscal 2001 and fiscal 2000, respectively. The increase in the effective tax rate is a direct result of limited tax benefits from the Internet investment write-downs. Accordingly, the Company's effective tax rate is significantly higher than in prior periods. Excluding the effect of this write-down, the effective tax rate is approximately 40.0% for both periods. NET INCOME: Net income decreased by $10.1 million, or 25.0%, to $30.3 million in the first nine months of fiscal 2001 from $40.5 million in the first nine months of fiscal 2000. This decrease is primarily the result of the write-down of the Company's Internet investments and a slight decrease in income from operations explained above. Without taking into account the investment write-down, net income would have decreased by $0.2 million or 0.5%, to $40.2 million. Page 11
LIQUIDITY AND CAPITAL RESOURCES Our primary capital needs have been to fund the working capital requirements necessitated by our sales growth, adding new products, and facilities expansions. Our primary sources of financing have been cash from operations, supplemented by bank borrowings under our credit facility. We anticipate cash flows from operations and available lines of credit will be adequate to support our operations for the immediate future and for at least the next 24 months. Under the terms of the credit facility, the maximum permitted borrowings are $160.0 million ($110.0 million under an unsecured revolving credit agreement and $50.0 million as a term loan). Interest on amounts borrowed may be paid at a rate per annum equal to the bank's base rate (7.0% at May 26, 2001) or, alternatively, at the bankers' acceptance rate or LIBOR rate plus margins, which vary from 0.65% to 1.25% per annum based on the ratio of total liabilities to effective net worth, or bid note rate. This credit facility contains certain covenants limiting mergers, use of proceeds, indebtedness, liens, investments, sales of assets, acquisitions, and payment of dividends. This credit facility also contains certain standard financial covenants. As of May 26, 2001, the Company was in compliance with all financial covenants. As of May 26, 2001, the Company had approximately $43.8 million in outstanding borrowings under the credit facility. Available borrowings at May 26, 2001 are $116.2 million, all of which were available under the revolving credit agreement. Net cash provided by operating activities for the 39 week periods May 26, 2001 and May 27, 2000 was $63.5 million and $10.3 million, respectively. The change of approximately $53.2 million is primarily attributable to lower inventory levels, reflecting improved inventory control policies, a decrease in accounts receivable, and improved net working capital requirements. Net cash used in investing activities for the 39 week periods ended May 26, 2001 and May 27, 2000 was $18.1 million and $26.3 million, respectively. The net usage of cash in the first nine months of fiscal 2001 was primarily attributable to expenditures for property, plant and equipment. The net usage of cash in investing activities in the first nine months of fiscal 2000 was primarily attributable to expenditures for property, plant and equipment and cash paid for investments in Internet technology companies. Net cash used in financing activities for the 39 week period ended May 26, 2001 was $18.8 million and net cash provided by financing activities for the 39 week period ended May 27, 2000 was 19.0 million. The net cash used in financing activities for the first nine months of fiscal 2001 was primarily attributable to repayments of notes payable partially offset by the proceeds from the exercise of common stock options. The net cash provided by financing activities for the first nine months of fiscal 2000 was primarily attributable to proceeds received from notes payable. The Company believes that cash flow from operations and its revolving credit agreement will be sufficient to fund future growth initiatives and meet planned capital expenditure needs in the near future. Page 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal financial instrument is long-term notes payable under an unsecured revolving credit agreement. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under this credit agreement. Changes in these factors cause fluctuations in the Company's net income and cash flows. The agreement allows the company maximum borrowings of $160.0 million, of which $110.0 million is a revolving credit agreement and the remaining $50.0 million is a term loan. At May 26, 2001 approximately $43.8 million was outstanding under the credit agreement. Available borrowings at May 26, 2001 are $116.2 million, all of which were available under the revolving credit agreement. The agreement bears interest at the bank's base rate (7.0% at May 26, 2001), or, alternatively, at the bankers acceptance rate or LIBOR rate plus margins, which vary from 0.65% to 1.25% per annum based on the ratio of total liabilities to effective net worth, or bid note rate. If the principal amounts under the Company's credit agreement remained at this year-end level for an entire year and the prime rate increased or decreased, respectively, by 1%, then the Company would pay or save, respectively, an additional $0.4 million in interest that year. The Company does not utilize derivative financial instruments to hedge against changes in interest rates or for any other purpose. Page 13
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits: None. Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. Page 14
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MSC INDUSTRIAL DIRECT CO., INC. (Registrant) Dated: July 3, 2001 By: /s/ Mitchell Jacobson ----------------- ------------------------------------- President and Chief Executive Officer Dated: July 3, 2001 By: /s/ Charles Boehlke ----------------- ------------------------------------- Senior Vice President and Chief Financial Officer Page 15