-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ncea1q9mjAhJaZVYbmC7PR+V+2Wu8vpH8sQr5D55DPKDQhns05p9AGg8G7XummIZ j5UdIa6jYOXCnP3aOcXaug== 0001005477-99-003070.txt : 19990709 0001005477-99-003070.hdr.sgml : 19990709 ACCESSION NUMBER: 0001005477-99-003070 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990529 FILED AS OF DATE: 19990708 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MSC INDUSTRIAL DIRECT CO INC CENTRAL INDEX KEY: 0001003078 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-INDUSTRIAL MACHINERY & EQUIPMENT [5084] IRS NUMBER: 113289165 STATE OF INCORPORATION: NY FISCAL YEAR END: 0902 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14130 FILM NUMBER: 99660337 BUSINESS ADDRESS: STREET 1: 151 SUNNYSIDE BLVD CITY: PLAINVIEW STATE: NY ZIP: 11803 BUSINESS PHONE: 5163497100 MAIL ADDRESS: STREET 1: 151 SUNNYSIDE BLVD CITY: PLAINVIEW STATE: NY ZIP: 11803 10-Q 1 FORM 10-Q 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 29, 1999 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 6, 1999, the registrant had 33,911,402 shares of Class A common stock, par value $0.001 per share, and 34,138,778 shares of Class B common stock, par value $0.001 per share, outstanding. MSC INDUSTRIAL DIRECT CO., INC. INDEX PART I. FINANCIAL INFORMATION Page Item 1. Consolidated Financial Statements Consolidated Balance Sheets May 29, 1999 and August 29, 1998 3 Consolidated Statements of Income Thirteen and thirty-nine weeks ended May 29, 1999 and May 30, 1998 4 Consolidated Statement of Shareholders' Equity Thirty-nine weeks ended May 29, 1999 5 Consolidated Statements of Cash Flows Thirty-nine weeks ended May 29, 1999 and May 30, 1998 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 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements MSC INDUSTRIAL DIRECT CO., INC. Consolidated Balance Sheets
May 29, August 29, 1999 1998 ---- ---- (in thousands, except share data) (unaudited) (audited) ASSETS Current Assets: Cash and cash equivalents $ 4,743 $ 8,630 Accounts receivable, net of allowance for doubtful accounts of $6,149 and $3,717, respectively 82,863 72,940 Inventories 207,339 158,050 Due from officers, employees and affiliated companies 426 659 Prepaid expenses and other current assets 2,754 2,865 Current deferred income tax assets 8,760 11,251 -------- -------- Total current assets 306,885 254,395 -------- -------- Property, plant and equipment, net 104,222 77,493 -------- -------- Other Assets: Goodwill 65,758 58,574 Other 5,980 11,240 -------- -------- 71,738 69,814 -------- -------- $482,845 $401,702 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 18,223 $ 14,670 Accrued liabilities 49,103 55,175 Current portion of long-term notes payable 186 800 -------- -------- Total current liabilities 67,512 70,645 Long-term notes payable 63,449 2,430 Other long-term liabilities 42 46 Deferred income tax liabilities 6,420 6,802 -------- -------- Total liabilities 137,423 79,923 -------- -------- 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; 33,884,287 and 33,683,407 shares issued, 32,731,287 and 33,508,407 shares outstanding, respectively 34 33 Class B common stock; $0.001 par value; 50,000,000 shares authorized; 34,138,778 and 34,142,028 shares, respectively, issued and outstanding 34 34 Additional paid-in capital 216,548 213,783 Retained earnings 152,375 112,834 Treasury stock, at cost; 1,153,000 and 175,000 shares of Class A common stock held (22,678) (3,699) Deferred stock compensation (891) (1,206) -------- -------- Total shareholders' equity 345,422 321,779 -------- -------- $482,845 $401,702 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. Page 3 MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Income (unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended -------------------- ----------------------- May 29, May 30, May 29, May 30, (in thousands, except per share data) 1999 1998 1999 1998 -------- -------- -------- -------- Net sales $170,492 $155,098 $486,461 $433,227 Cost of goods sold 101,732 91,508 287,783 256,113 -------- -------- -------- -------- Gross profit 68,760 63,590 198,678 177,114 Operating expenses 47,796 40,677 132,397 120,102 -------- -------- -------- -------- Income from operations 20,964 22,913 66,281 57,012 -------- -------- -------- -------- Other Income (Expense): Interest income 13 315 71 816 Interest expense (717) (6) (1,419) (49) Other income, net 104 311 426 730 -------- -------- -------- -------- (600) 620 (922) 1,497 -------- -------- -------- -------- Income before provision for income taxes 20,364 23,533 65,359 58,509 Provision for income taxes 8,044 9,296 25,818 23,110 -------- -------- -------- -------- Net income $ 12,320 $ 14,237 $ 39,541 $ 35,399 ======== ======== ======== ======== Per Share Information (Note 2): Net income per common share: Basic $ 0.18 $ 0.21 $ 0.59 $ 0.52 ======== ======== ======== ======== Diluted $ 0.18 $ 0.21 $ 0.58 $ 0.51 ======== ======== ======== ======== Common shares used in computing per share amounts (Note 2): Basic 66,853 67,770 66,905 67,739 ======== ======== ======== ======== Diluted 68,151 69,215 68,627 68,924 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. Page 4 MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statement of Shareholders' Equity (unaudited)
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 29, 1999: Balance, August 29, 1998 33,683 $ 33 34,142 $ 34 $ 213,783 $ 112,834 Exchange of Class B common stock for Class A common stock 3 1 (3) -- -- -- Purchase of treasury stock -- -- -- -- -- -- Exercise of common stock options, including related tax benefits 198 -- -- -- 2,765 -- Net income -- -- -- -- -- 39,541 Amortization of deferred stock compensation -- -- -- -- -- -- ------ --------- ------ --------- --------- --------- Balance, May 29, 1999 33,884 $ 34 34,139 $ 34 $ 216,548 $ 152,375 ====== ========= ====== ========= ========= ========= Treasury Stock (in thousands) ------------------ Deferred Amount at Stock Shares Cost Compensation Total ------ --------- ------------ --------- Thirty-nine weeks ended May 29, 1999: Balance, August 29, 1998 175 $ (3,699) $ (1,206) $ 321,779 Exchange of Class B common stock for Class A common stock -- -- -- 1 Purchase of treasury stock 978 (18,979) -- (18,979) Exercise of common stock options, including related tax benefits -- -- -- 2,765 Net income -- -- -- 39,541 Amortization of deferred stock compensation -- -- 315 315 ----- --------- --------- --------- Balance, May 29, 1999 1,153 $ (22,678) $ (891) $ 345,422 ===== ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. Page 5 MSC INDUSTRIAL DIRECT CO., INC. Consolidated Statements of Cash Flows (unaudited)
(in thousands) Thirty-Nine Weeks Ended ----------------------- May 29, May 30, 1999 1998 -------- -------- Cash Flows from Operating Activities: Net income $ 39,541 $ 35,399 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,640 5,234 Amortization of deferred stock compensation 315 375 Provision for doubtful accounts 1,988 1,525 Deferred income taxes 2,109 (1,521) Changes in operating assets and liabilities, net of effect from acquisitions: Accounts receivable (8,233) (13,237) Inventories (45,126) 9,666 Prepaid expenses and other current assets 353 328 Other assets 5,260 1,866 Accounts payable and accrued liabilities (3,422) 7,091 Other long-term liabilities (4) (3) -------- -------- (40,120) 11,324 -------- -------- Net cash provided by (used in) operating activities (579) 46,723 -------- -------- Cash Flows from Investing Activities: Expenditures for property, plant and equipment (31,327) (23,290) Cash paid for acquisitions, net of cash acquired (13,003) (18,741) -------- -------- Net cash used in investing activities (44,330) (42,031) -------- -------- Cash Flows from Financing Activities: Purchase of treasury stock (21,790) (388) Net proceeds from exercise of common stock options 2,174 761 Net proceeds from (repayments of) notes payable 60,405 (424) Net repayments from (advances to) affiliates 233 78 -------- -------- Net cash provided by financing activities 41,022 27 -------- -------- Net increase (decrease) in cash and cash equivalents (3,887) 4,719 Cash and cash equivalents - beginning of period 8,630 13,418 -------- -------- Cash and cash equivalents - end of period $ 4,743 $ 18,137 ======== ========
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 29, 1998. 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. Effective December 1997, the Company adopted 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 29, May 30, May 29, May 30, 1999 1998 1999 1998 ------- ------- ------- ------- Net income for EPS computation $12,320 $14,237 $39,541 $35,399 ======= ======= ======= ======= Basic EPS: Weighted average common shares 66,853 67,770 66,905 67,739 ======= ======= ======= ======= Basic EPS $0.18 $0.21 $0.59 $0.52 ===== ===== ===== ===== Diluted EPS: Weighted average common shares 66,853 67,770 66,905 67,739 Shares issuable from assumed conversion of common stock equivalents 1,298 1,445 1,722 1,185 ------- ------- ------- ------- Weighted average common and common equivalent shares 68,151 69,215 68,627 68,924 ======= ======= ======= ======= Diluted EPS $0.18 $0.21 $0.58 $0.51 ===== ===== ===== ===== 3. In the first quarter of fiscal 1999, the Company early-adopted the American Institute of Certified Public Accountants' SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. The effect of adopting this standard was not material to the results of operations or the Company's consolidated financial statements. 4. In the first quarter of fiscal 1999, the Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The effect of adopting this standard was not material to the Company's consolidated financial statements, as the Company's net income is the same as comprehensive net income. 5. In June 1998, the Financial Accounting Standards Board ("FASB") 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 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and will not require retroactive restatement of prior period financial statements. Furthermore, the Page 8 FASB has issued an exposure draft which proposes to delay the effective date of this new standard by one year. 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 hedged item 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. While the Company periodically engages in certain international transactions, it does not presently make material use of derivative instruments. 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 4,459 page master catalog offers approximately 372,000 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 three distribution centers and 105 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. Results of Operations - Thirteen weeks ended May 29, 1999 and May 30, 1998 Net sales increased by $15.4 million, or 9.9%, to $170.5 million in the third quarter of fiscal 1999 from $155.1 million in the third quarter of fiscal 1998. This increase was primarily attributable to an increase in sales to the Company's existing customers, an increase in the number of active customers and the effect of acquisitions made in fiscal 1998 and fiscal 1999. 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 $5.2 million, or 8.2%, to $68.8 million in the third quarter of fiscal 1999 from $63.6 million in the third quarter of fiscal 1998. The increase in gross profit was primarily attributable to increased sales. As a percentage of sales, gross profit decreased from 41.0% to 40.3%. The decrease resulted primarily from the mix of products being sold and as a Page 10 result of lower margins realized from customers and product lines gained through the Company's acquisitions. Operating expenses increased by $7.1 million, or 17.5%, to $47.8 million in the third quarter of fiscal 1999 from $40.7 million in the third quarter of fiscal 1998. As a percentage of sales, operating expenses increased from 26.2% to 28.0%. This increase was primarily the result of personnel costs needed to support higher sales volumes, expenses required to prepare the Company's new distribution center for operations, additional costs of the Company's new headquarters, and expenditures for future growth initiatives. Income from operations decreased by $1.9 million, or 8.3%, to $21.0 million in the third quarter of fiscal 1999 from $22.9 million in the third quarter of fiscal 1998. The decrease was primarily attributable to an increase in operating expenses, offset in part by an increase in sales and gross profit. Net income decreased by $1.9 million or 13.4%, to $12.3 million in the third quarter of fiscal 1999 from $14.2 million in the third quarter of fiscal 1998. This decrease was primarily the result of previously mentioned increases in sales and gross profit, offset by the increase in operating expenses necessary in order to support the increase in volume and to invest in future growth. Results of Operations - Thirty-nine weeks ended May 29, 1999 and May 30, 1998 Net sales increased by $53.3 million, or 12.3%, to $486.5 million during the first nine months of fiscal 1999 from $433.2 million in the first nine months of fiscal 1998. This increase was primarily attributable to an increase in sales to the Company's existing customers, an increase in the number of active customers and the effect of acquisitions made during fiscal 1998 and fiscal 1999. 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 $21.6 million, or 12.2%, to $198.7 million during the first nine months of fiscal 1999 from $177.1 million in the first nine months of fiscal 1998, primarily attributable to increased sales. As a percentage of sales, gross profit decreased slightly from 40.9% to 40.8%. Operating expenses increased by $12.3 million, or 10.3%, to $132.4 million during the first nine months of fiscal 1999 from $120.1 million in the first nine months of fiscal 1998. As a percentage of sales, operating expenses decreased from 27.7% to 27.2%. The decline in operating expenses as a percentage of sales was primarily attributable to leveraging fixed costs over a larger revenue base, offset in part by the costs of future growth initiatives. Income from operations increased by $9.3 million, or 16.3%, to $66.3 million during the first nine months of fiscal 1999 from $57.0 million in the first nine months of fiscal 1998. The increase was primarily attributable to increased sales and gross profit offset by an increase in operating expenses. Net income increased by $4.1 million, or 11.6%, to $39.5 million during the first nine months of fiscal 1999 from $35.4 million in the first nine months of fiscal 1998. This increase was primarily the result of previously mentioned increases in sales and gross profit, offset by the increase in operating expenses necessary in order to support the increase in volume and to invest in future growth. Page 11 Liquidity and Capital Resources The Company's primary use of capital has been to fund the working capital requirements necessitated by its sales growth, acquisitions and facilities expansions. The Company's sources of financing have primarily been from operations, supplemented by bank borrowings under its revolving credit facility, and a portion of the proceeds from a fiscal 1997 public offering of Class A common stock. Net cash used in operating activities was $579,000 for the 39 week period ended May 29, 1999 and net cash provided by operating activities for the 39 week period ended May 30, 1998 was $46.7 million. The decrease in net cash provided by operations resulted from increases in inventory commensurate with the Company's sales growth, the introduction of new products, and inventory for the Company's new distribution center, offset in part by higher net income. Net cash used in investing activities for the 39 week periods ended May 29, 1999 and May 30, 1998 was $44.3 million and $42.0 million, respectively. The net usage of cash in the first nine months of fiscal 1999 was primarily attributable to cash paid for construction at the Company's new headquarters, expenditures related to the construction of a new distribution center and cash paid for acquisitions. The net usage of cash in the first nine months of fiscal 1998 was primarily attributable to cash paid for acquisitions and to the purchase of a building in Long Island, New York, which began serving as the new corporate headquarters in fiscal 1999. Net cash provided by financing activities for the 39 week periods ended May 29, 1999 and May 30, 1998 was $41.0 million and $27,000, respectively. The increase of approximately $41.0 million is primarily attributable to proceeds received from notes payable, offset by the purchase in the open market of approximately 978,000 shares of Class A common stock. During the 39 week period ended May 29, 1999, the Company purchased in the open market approximately 978,000 shares of its Class A common stock at an average price of $19.41 per share for an aggregate purchase price of approximately $18,979,000. The Company has an aggressive growth strategy that has involved, and is expected to continue to involve, the acquisition of companies in similar lines of business. The Company anticipates that its cash flow from operations and revolving credit facility will be adequate to support its strategic acquisition plan in the near future. Year 2000 Compliance Plan Year 2000 Problem. The Year 2000 problem arises from the historic use of only two digits (rather than four) for the designation of a year in date information within computer programs. If not corrected, any of the Company's equipment or software programs that perform time sensitive calculations may incorrectly identify the year `00' as 1900 instead of 2000 or not recognize it at all. This could result in miscalculations or a major failure of certain systems. MSC may also be vulnerable to the Year 2000 problems of its customers, suppliers and service vendors and of other companies with which MSC conducts business (e.g., utility companies, shippers and telecommunications companies). State of Readiness. During calendar year 1997 and 1998, MSC developed and began to implement a Year 2000 compliance plan using internal and external resources in an effort to Page 12 ensure that its business is not interrupted by the Year 2000 problem. MSC's Year 2000 compliance plan is broken into four components: 1. Renovating internal systems and applications. The Company's internal systems and applications include Order Entry, Purchasing and Warehouse Management. The applications used in the Order Entry system have been re-written and implemented in the Company's call center and branch locations. The applications for the Purchasing and Warehouse Management systems are in the process of being modified and completion of Year 2000 compliance work is scheduled for the fourth quarter of fiscal 1999. Many of the Company's applications are already Year 2000 compliant as they were written using a compliant code generator. 2. Ensuring compliance of peripheral third party systems. MSC uses a number of third party package systems to supplement its internally developed programs. Major systems in this area are its Financial and Inventory Replenishment systems. The Company's Financial systems are being replaced with a new package, with a scheduled implementation date of July 1999. Two of MSC's subsidiaries, Enco and Primeline, are already running on this software. The Inventory Replenishment system has been tested and appears to be Year 2000 compliant. All of the Company's material hardware, including its AS/400 computers, telephone systems, networks, PCs, security systems and time clocks at all MSC locations have been tested as Year 2000 compliant. 3. Ensuring Year 2000 compliance by external companies that conduct business with the Company. The Company has contacted all of its major customers, suppliers and vendors to inquire about Year 2000 compliance. The Company has not received responses from all those contacted, but those who have responded do not indicate any problems at this time. For those business partners with which the Company currently conducts business electronically, the Company will be conducting tests in fiscal 1999 to determine Year 2000 compliance. 4. Implementing standards and conducting testing in an effort to ensure that the Company's existing and future systems are Year 2000 compliant. All new systems, whether hardware or software, are tested before implementation in an effort to ensure Year 2000 compliance. Cost of Compliance. MSC believes that the total cost of its Year 2000 compliance plan will be approximately $900,000, not including the replacement of the Financial systems. These costs are expensed as incurred and, to date, the Company has incurred $740,000 of such expenses. The Financial systems replacement is a separate project which is estimated to cost approximately $4,000,000 and will be capitalized pursuant to SOP 98-1. Risks. Although MSC believes it will have its own systems compliant prior to January 1, 2000, there can be no assurance that it will be able to do so nor can there be any assurance that, even if the Company completes timely its Year 2000 compliance plan, the systems, when actually implemented in full, will work properly independently or in conjunction with the systems of any business partner. In addition, the Company would continue to bear the risk of a material adverse affect if any of its business partners does not appropriately address its own Year 2000 compliance issues. Although MSC believes that its major customers are Year 2000 compliant, the Company is still in the process of reviewing the compliance programs of suppliers and service vendors. MSC's current estimates of the impact of the Year 2000 problem on its Page 13 operations and financial results do not include costs and time that may be incurred as a result of other companies' failure to become Year 2000 compliant on a timely basis, which costs could be material. There can be no assurance that such other companies will achieve Year 2000 compliance or that any conversions by such companies to become Year 2000 compliant will be compatible with MSC's computer systems. The inability of MSC or any of its principal suppliers, service vendors or customers to become Year 2000 compliant in a timely manner could have a material adverse effect on MSC's financial condition or results of operation. Contingency Plans. If MSC's suppliers are not Year 2000 compliant, MSC may have to arrange for alternative sources of supply and the stockpiling of inventory in the fall of 1999 in preparation for the Year 2000. The Company cannot estimate at this time the cost or effect on the Company's financial condition of any stockpiling of inventory. The Company does not have any other contingency plans with respect to other problems that could arise in its business as a result of the Year 2000 problem. Any of these could have a material adverse effect on MSC's financial condition or results of operation. Item 3. Quantitative and Qualitative Disclosure about Market Risk. The Company's market risk sensitive instruments do not subject the Company to material market risk exposures. Page 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial data schedule for the quarter ended May 29, 1999. (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 15 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 7, 1999 By: /s/ Mitchell Jacobson ------------------------ ------------------------------------------- President and Chief Executive Officer Dated: July 7, 1999 By: /s/ Shelley M. Boxer ------------------------ ------------------------------------------- Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-28-1999 FEB-28-1998 MAY-29-1999 4,743 0 89,012 6,149 207,339 306,885 132,315 28,093 482,845 67,512 0 0 0 68 345,354 482,845 170,492 170,492 101,732 47,796 117 653 717 20,364 8,044 12,320 0 0 0 12,320 .18 .18
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