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 27, 2000 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 June 27, 2000, 34,447,516 shares of Class A Common Stock and 34,138,778 shares of Class B Common Stock of the registrant were outstanding.
MSC INDUSTRIAL DIRECT CO., INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets May 27, 2000 and August 28, 1999 3 Consolidated Statements of Income Thirteen and thirty-nine weeks ended May 27, 2000 and May 29, 1999 4 Consolidated Statement of Shareholders' Equity Thirty-nine weeks ended May 27, 2000 5 Consolidated Statements of Cash Flows Thirty-nine weeks ended May 27, 2000 and May 29, 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 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 27, August 28, 2000 1999 ---- ---- (unaudited) (audited) ASSETS <S> <C> <C> Current Assets: Cash and cash equivalents $ 5,645 $ 2,725 Accounts receivable, net of allowance for doubtful accounts of $5,411 and $5,799, respectively 101,398 90,007 Inventories 258,076 225,542 Due from officers, employees and affiliated companies 169 499 Other receivable (Note 6) 4,704 -- Prepaid expenses and other current assets 4,369 3,891 Current deferred income taxes 4,490 5,379 --------- --------- Total current assets 378,851 328,043 --------- --------- Investments, at cost (Notes 7 & 8) 8,957 -- Property, plant and equipment, net 115,136 106,750 Goodwill 65,555 67,080 Other assets 7,330 12,511 --------- --------- $ 575,829 $ 514,384 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 12,463 $ 23,510 Accrued liabilities 64,554 56,979 Current portion of notes payable 277 306 --------- --------- Total current liabilities 77,294 80,795 Long-term notes payable 86,790 69,468 Other long-term liabilities 43 43 Deferred income tax liabilities 8,357 8,451 --------- --------- Total liabilities 172,484 158,757 --------- --------- 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; 34,323,255 and 33,902,048 shares issued, 33,230,255 and 32,761,048 shares outstanding, respectively 34 34 Class B common stock; $0.001 par value; 50,000,000 shares authorized; 34,138,778 shares issued and outstanding 34 34 Additional paid-in capital 223,674 216,977 Retained earnings 201,406 161,687 Treasury stock, at cost, 1,093,000 and 1,141,000 of Class A Common stock held, respectively (21,471) (22,452) Deferred stock compensation (332) (653) --------- --------- Total shareholders' equity 403,345 355,627 --------- --------- $ 575,829 $ 514,384 ========= ========= </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 data) May 27, May 29, May 27, May 29, 2000 1999 1999 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Net sales $ 212,845 $ 170,492 $ 593,839 $ 486,461 Cost of goods sold 131,043 101,732 364,644 287,783 --------- --------- --------- --------- Gross profit 81,802 68,760 229,195 198,678 Operating expenses 53,189 47,796 157,697 132,397 --------- --------- --------- --------- Income from operations 28,613 20,964 71,498 66,281 --------- --------- --------- --------- Other Income (Expense): Interest income 112 13 128 71 Interest expense (1,534) (717) (4,021) (1,419) Equity in loss of unconsolidated affiliate (Note 7) -- -- (465) -- Other income, net 85 104 212 426 --------- --------- --------- --------- (1,337) (600) (4,146) (922) --------- --------- --------- --------- Income before provision for income taxes 27,276 20,364 67,352 65,359 Provision for income taxes 10,910 8,044 26,882 25,818 --------- --------- --------- --------- Net income $ 16,366 $ 12,320 $ 40,470 $ 39,541 ========= ========= ========= ========= Per Share Information (Note 2): Net income per common share: Basic $ 0.24 $ 0.18 $ 0.60 $ 0.59 ========= ========= ========= ========= Diluted $ 0.24 $ 0.18 $ 0.60 $ 0.58 ========= ========= ========= ========= Common shares used in computing per share amounts (Note 2): Basic 67,129 66,853 67,044 66,905 ========= ========= ========= ========= Diluted 68,700 68,151 67,893 68,627 ========= ========= ========= ========= </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 Treasury Stock (in thousands) Common Stock Common Stock Additional ------------------ --------------- --------------- Paid-In Retained Amount at Shares Amount Shares Amount Capital Earnings Shares Cost ------ ------ ------ ------ ---------- -------- ------ --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Thirty-nine weeks ended May 27, 2000: Balance, August 28, 1999 33,902 $ 34 34,139 $ 34 $ 216,977 $ 161,687 1,141 $ (22,452) Exercise of common stock options, including related tax benefits 421 -- -- -- 6,697 -- -- -- Common stock issued under stock purchase plan -- -- -- -- -- (751) (88) 1,729 Purchase of treasury stock -- -- -- -- -- -- 40 (748) Net income -- -- -- -- -- 40,470 -- -- Amortization of deferred stock compensation -- -- -- -- -- -- -- -- ------- ------ ------ ------ --------- --------- ----- --------- Balance, May 27, 2000 34,323 $ 34 34,139 $ 34 $ 223,674 $ 201,406 1,093 $ (21,471) ======= ====== ====== ====== ========= ========= ===== ========= <CAPTION> (in thousands) Deferred Stock Compensation Total ------------ ----- <S> <C> <C> Thirty-nine weeks ended May 27, 2000: Balance, August 28, 1999 $ (653) $ 355,627 Exercise of common stock options, including related tax benefits -- 6,697 Common stock issued under stock purchase plan -- 978 Purchase of treasury stock -- (748) Net income -- 40,470 Amortization of deferred stock compensation 321 321 ------- --------- Balance, May 27, 2000 $ (332) $ 403,345 ======= ========= </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 27, May 29, 2000 1999 -------- -------- <S> <C> <C> Cash Flows from Operating Activities: Net income $ 40,470 $ 39,541 -------- -------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in loss of unconsolidated affiliate 465 -- Depreciation and amortization 10,038 6,640 Amortization of deferred stock compensation 321 315 Provision for doubtful accounts 2,016 1,988 Deferred income taxes 795 2,109 Changes in operating assets and liabilities, net of effect from acquisitions: Accounts receivable (13,407) (8,233) Inventories (32,534) (45,126) Prepaid expenses and other current assets (478) 353 Other assets 5,181 5,260 Accounts payable and accrued liabilities (2,940) (3,422) Other long-term liabilities -- (4) -------- -------- (30,543) (40,120) -------- -------- Net cash provided by (used in) operating activities 9,927 (579) -------- -------- Cash Flows from Investing Activities: Expenditures for property, plant and equipment (16,899) (31,327) Cash paid for investments (9,422) (13,003) -------- -------- Net cash used in investing activities (26,321) (44,330) -------- -------- Cash Flows from Financing Activities: Purchase of treasury stock (748) (21,790) Net proceeds from associate purchase plan 978 -- Net proceeds from exercise of common stock options 1,461 2,174 Net proceeds from notes payable 17,293 60,405 Net advances to affiliates 330 233 -------- -------- Net cash provided by financing activities 19,314 41,022 -------- -------- Net increase (decrease) in cash and cash equivalents 2,920 (3,887) Cash and cash equivalents - beginning of period 2,725 8,630 -------- -------- Cash and cash equivalents - end of period $ 5,645 $ 4,743 ======== ======== Supplemental Disclosure: Cash paid for interest 2,500 700 Cash paid for income taxes 18,894 19,200 </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 28, 1999. 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 the Saturday nearest August 31 of each year. 2. 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 diluted effect of common stock equivalents using the treasury stock method. A reconciliation between the numerator and denominator of the basic and diluted EPS calculation is as follows: Page 7
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- May 27, May 29, May 27, May 29, 2000 1999 2000 1999 ------- ------- ------- ------- Net income for EPS computation $16,366 $12,320 $40,470 $39,541 ======= ======= ======= ======= Basic EPS: Weighted average common shares 67,129 66,853 67,044 66,905 ======= ======= ======= ======= Basic EPS $ 0.24 $ 0.18 $ 0.60 $ 0.59 ======= ======= ======= ======= Diluted EPS: Weighted average common shares 67,129 66,853 67,044 66,905 Shares issuable from assumed conversion of common stock equivalents 1,571 1,298 849 1,722 ------- ------- ------- ------- Weighted average common and common equivalent shares 68,700 68,151 67,893 68,627 ======= ======= ======= ======= Diluted EPS $ 0.24 $ 0.18 $ 0.60 $ 0.58 ======= ======= ======= ======= 3. The Company follows the provisions of SFAS No. 130 "Reporting Comprehensive Income," which establishes new rules for the reporting of comprehensive income and its components. The adoption of this statement had no impact on the Company's net income or shareholders' equity. For the first nine months of fiscal 1999 and fiscal 2000, the Company's operations did not give rise to items includable in comprehensive income which were not already included in net income. Therefore, the Company's comprehensive income is the same as its net income for all periods presented. 4. The Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Pursuant to this pronouncement, the reportable operating segments are determined based on the Company's management approach. The management approach, as defined by SFAS No. 131, is based on the way that the chief operating decision maker organizes the segments within an enterprise for making operating decisions and assessing performance. The Company's results of operations are reviewed by the chief operating decision maker on a consolidated basis and the Company operates in only one segment. Page 8
5. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years beginning after June 15, 2000 and will not require retroactive restatement of prior period financial statements. This statement requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet measured at fair value. Derivative instruments will be recognized as gains or losses in the period of change. If certain conditions are met where the derivative instrument has been designated as a fair value hedge, the hedge items may also be marked to market through earnings, thus creating an offset. If the derivative is designed and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument may be recorded in comprehensive income. The Company does not presently make use of derivative instruments. 6. At May 27, 2000 the Company recorded as a receivable approximately $4.7 million related to the Company's portion of the proceeds from employee stock options exercised in late May 2000. This amount was received in June 2000. 7. During the first nine months of fiscal 2000, the Company made an investment of $2.4 million in an internet joint venture in the form of a non-controlling combination of voting and non-voting equity securities. The Company accounted for this investment under the equity method for the first half of fiscal 2000, whereby the company recognized its allocable share of the earnings or losses of this venture in its statement of income as "equity in loss of unconsolidated affiliate." The Company's share of net loss of unconsolidated affiliate was $0.5 million for the thirty-nine weeks ended May 27, 2000. During the third quarter of fiscal 2000, the Company reduced its interest to 19% and since the Company does not exercise significant influence, the investment is now accounted for using the cost method. At May 27, 2000 the Company's carrying value of this investment approximates fair value. 8. During the first nine months of fiscal 2000, the Company invested $2.0 million, $3.0 million and $2.0 million in three internet commerce companies. The Company's interest in each company is less than 5% and, accordingly, is accounted for under the cost method. The Company's carrying value of these investments approximates fair value at May 27, 2000. Page 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 as a holding company to hold all of the outstanding capital stock of Sid Tool Co., Inc. (the "Operating Subsidiary"), which has conducted business since 1941. MSC and its subsidiaries, including 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. 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's 4,211 page master catalog offers over 400,000 stock keeping units ("SKUs") and is supplemented by weekly, monthly and quarterly specialty and promotional catalogs, newspapers and brochures. The products are distributed through the Company's four distribution centers and approximately 100 customer service locations. Most of the products are carried in stock, and orders for these products are typically fulfilled on the day the order is received. More recently, the Company began to explore ways to offer its products for sale over the internet, both through internal initiatives, and through participation in joint ventures and investments in or associations with third party e-commerce companies. Results of Operations - Thirteen weeks ended May 27, 2000 and May 29, 1999 Net sales increased by $42.3 million, or 24.8%, to $212.8 million in the third quarter of fiscal 2000 from $170.5 million in the third quarter of fiscal 1999. This increase was primarily attributable to an increase in sales to the Company's existing customers, and an increase in the number of active customers. The increase in sales to existing customers was principally derived from an increase in the number of SKUs offered, as well as from more focused marketing efforts. Gross profit increased by $13.0 million, or 18.9%, to $81.8 million in the third quarter of fiscal 2000 from $68.8 million in the third quarter of fiscal 1999. As a percentage of sales, gross profit decreased from 40.3% to 38.4%. The dollar increase in gross profit was primarily attributable to increased sales. The decrease in gross profit as a percentage of net sales resulted primarily from Page 10
the mix of products being sold, the introduction of new products which have lower margins than certain products which the Company has sold in the past, increased promotional selling and lower selling prices on selected items. Operating expenses increased by $5.4 million, or 11.3%, to $53.2 million in the third quarter of fiscal 2000 from $47.8 million in the third quarter of fiscal 1999. As a percentage of net sales, operating expenses decreased from 28.0% to 25.0%. The decline in operating expenses as a percentage of net sales was primarily attributable to leveraging fixed costs over a larger revenue base. The dollar increase was primarily attributable to increased sales volume which required additional staffing and support, new distribution center operating costs, increased depreciation costs resulting from the previous year's large capital expenditures, and expenditures for future growth initiatives, including increased expenses related to internal internet initiatives. Income from operations increased by $7.6 million, or 36.2%, to $28.6 million in the third quarter of fiscal 2000 from $21.0 million in the third quarter of fiscal 1999. The increase was primarily attributable to increased sales and the dollar amount increase in gross profit, offset in part by an increase in operating expenses. Interest expense increased by $0.8 million to $1.5 million in the third quarter of fiscal 2000 from $0.7 million in the third quarter of fiscal 1999. The increase was primarily attributable to higher long-term notes payable borrowings and higher interest rates under the Company's revolving credit agreement. The funds were used primarily for inventory purchases for the Company's new distribution center, increasing inventory to support higher sales volume and expenditures for property, plant, and equipment. Provision for income taxes and net income: The effective income tax rate was approximately 40.0 percent for the third quarter of fiscal 2000 as compared to 39.5 percent in the prior year. Net income increased by $4.1 million, or 33.3%, to $16.4 million in the third quarter of fiscal 2000 from $12.3 million in the third quarter of fiscal 1999. This increase was primarily the result of previously mentioned increased sales and the dollar amount increase in gross profit offset in part by an increase in operating expenses. Results of Operations - Thirty-nine weeks ended May 27, 2000 and May 29, 1999 Net sales increased by $107.3 million, or 22.1%, to $593.8 million during the first nine months of fiscal 2000 from $486.5 million in the first nine months of fiscal 1999. This increase was primarily attributable to an increase in sales to the Company's existing customers, and an increase in the number of active customers. The increase in sales to existing customers was principally derived from an increase in the number of SKUs offered, as well as from more focused marketing efforts. Gross profit increased by $30.5 million, or 15.3%, to $229.2 million during the first nine months of fiscal 2000 from $198.7 million in the first nine months of fiscal 1999. As a percentage of sales, gross profit decreased from 40.8% to 38.6%. The dollar increase in gross profit was primarily attributable to increased sales. The decrease in gross profit as a percentage of net sales resulted primarily from the mix of products being sold, the introduction of new products which have lower margins than certain products which the Company has sold in the past, increased promotional selling, lower selling prices on selected items, and lower margins realized from customers and product lines gained through the Company's acquisitions. Operating expenses increased by $25.3 million, or 19.1%, to $157.7 million during the first nine months of fiscal 2000 from $132.4 million in the first nine months of fiscal 1999. As a percentage of sales, operating expenses decreased from 27.2% to 26.6%. The decline in Page 11
operating expenses as a percentage of sales was primarily attributable to leveraging fixed costs over a larger revenue base. The dollar increase was primarily attributable to increased sales volume which required additional staffing and support, new distribution center opening and operating costs, increased depreciation costs resulting from the previous year's large capital expenditures, and expenditures for future growth initiatives, including increased expenses related to internal internet initiatives. Income from operations increased by $5.2 million, or 7.8%, to $71.5 million during the first nine months of fiscal 2000 from $66.3 million in the first nine months of fiscal 1999. The increase was primarily attributable to increased sales and the dollar amount increase in gross profit, offset in part by an increase in operating expenses. Interest expense increased by $2.6 million to $4.0 million during the first nine months of fiscal 2000 from $1.4 million in the first nine months of fiscal 1999. The increase was primarily attributable to higher long-term notes payable borrowings and higher interest rates under the Company's revolving credit agreement. The funds were used primarily for inventory purchases for the Company's new distribution center, increasing inventory to support higher sales volume and expenditures for property, plant, and equipment. Equity in loss of unconsolidated affiliate of approximately $0.5 million relates to the Company's non-controlling investment made in the second quarter of fiscal 2000 in an internet joint venture accounted for under the equity method and which has been accounted for under the cost method since the third quarter of fiscal 2000. Provision for income taxes and net income: The effective income tax rate was approximately 39.9 percent for the first half of fiscal 2000 as compared to 39.5 percent in the prior year. Net income increased by $1.0 million, or 2.5%, to $40.5 million in the first nine months of fiscal 2000 from $39.5 million in the first nine months of fiscal 1999. This increase was primarily the result of previously mentioned increased sales and the dollar amount increase in gross profit offset in part by an increase in operating expenses. Liquidity and Capital Resources The Company's primary use of capital has been to fund its working capital requirements, necessitated by its sales growth, adding new products, and acquisitions and facilities expansions. The Company's sources of financing have primarily been from operations, supplemented by bank borrowings under its revolving credit facility. During the second quarter of fiscal 2000, the Company entered into a new credit agreement with its lenders. Under the terms of the credit agreement, the maximum permitted borrowings have increased from $80.0 million of unsecured revolving credit to maximum permitted borrowings of $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 (9.5% at May 27, 2000) or, alternatively, at the bankers' acceptance rate or LIBOR rate plus margins, which vary from 0.65% to 1.25% per annum. Our credit facility contains certain covenants limiting mergers, use of proceeds, indebtedness, liens, investments, sales of assets, acquisitions, and issuance of dividends. Our credit facility also contains certain standard financial covenants. As of May 27, 2000, the Company was in compliance with all financial covenants. As of May 27, 2000, the Company had approximately $85.0 million in outstanding borrowings under the credit facility. Available borrowings at May 27, 2000 are $75.0 million, all of which were available under the revolving credit agreement. Net cash provided by operating activities was $9.9 million for the 39 week period ended May 27, 2000 and net cash used in operating activities was $0.6 million for the 39 week period ended May 29, 1999. The change of approximately $10.5 million in net cash provided from operations to net cash used in operations Page 12
resulted from higher net income and lower net working capital requirements. Net cash used in investing activities for the 39 week periods ended May 27, 2000 and May 29, 1999 was $26.3 million and $44.3 million, respectively. The net usage of cash 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 initiatives. The net usage of cash in the first nine months of fiscal 1999 was primarily attributable to cash paid for construction of the Company's new headquarters, expenditures related to the construction of a new distribution center and cash paid for acquisitions. Net cash provided by financing activities for the 39 week periods ended May 27, 2000 and May 29, 1999 was $19.3 million and 41.0 million, respectively. 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 net cash provided by financing activities for the first nine months of fiscal 1999 was primarily attributable to proceeds received from notes payable, offset by the purchase in the open market of approximately 997,000 shares of Class A common stock. The Company believes that cash flow from operations and the revolving credit agreement will be sufficient to fund future growth initiatives and meet planned capital expenditure needs in the near future. 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 27, 2000, approximately $85.0 million was outstanding under the revolving credit agreement. The agreement bears interest at the bank's base rate (9.5% at May 27, 2000), 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 quarter-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 $0.9 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 (a) Exhibits 27 Financial data schedule for the quarter ended May 27, 2000. (b) 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: June 28, 2000 By: /s/ Mitchell Jacobson ------------------------ -------------------------------------- President and Chief Executive Officer Dated: June 28, 2000 By: /s/ Shelley M. Boxer ------------------------ -------------------------------------- Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 15