Daisytek International Corporation

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Daisytek International Corporation

500 N. Central Expwy.
Piano, Texas 75074-6763
U.S.A.
(972) 881-4700
Fax: (972) 881-7111
Web site: http://www.daisytek.com

Public Company
Incorporated: 1978
Employees: 348 full-time, 172 part-time
Sales: $464.17 million (fiscal year ending March 31, 1996)
Stock Exchanges: NASDAQ
SICs: 5045 Computers, Peripherals, and Software; 5112 Stationery and Office Supplies; 6719 Holding Companies, Not Elsewhere Classified

Daisytek International Corporation is the largest wholesale distributor of non-paper computer and office automation supplies and accessories in the United States. The company sells primarily nationally known, name-brand products manufactured by over 145 original equipment manufacturers. It distributes more than 6,000 products to approximately 20,000 customer locations from one superhub in Memphis, Tennessee, two regional centers in Canada, and one center in Mexico. Through a contractual arrangement with FedEx Corporation, approximately 85 percent of all shipments to U.S. customers are sent via FedEx. Daisytek’s Memphis distribution center is located only a few miles from the main FedEx facility.

Daisytek was originally founded in 1978 in Texas primarily as a manufacturer of paper handling products for daisywheel printers. It also distributed non-paper computer and office automation supplies and accessories on a smaller scale. After four years the company was acquired by a young British entrepreneur, David A. Heap, who was primarily interested in the company’s distribution operations. Heap came to Texas from the U.K., where he was chairman of ISA International pic, a company he founded in the United Kingdom in 1970. ISA distributed computer supplies in Western Europe. Upon purchasing Daisytek in 1982, Heap became its chairman of the board, chief executive officer, and president.

Heap sought to reshape the company by focusing on the distribution of “consumable” supplies for computers. With the help of Mark C. Layton, a management consultant with Arthur Andersen & Co., Heap succeeded in divesting Daisytek of its manufacturing operations over the next few years. By 1988 the company had sold or discontinued all of its manufacturing operations to concentrate on its core business, distributing consumable computer supplies and related products. Layton was named vice-president of operations and became a member of the board of directors in 1988.

Company Focused on Distribution by 1990

Daisytek posted net sales of $112.9 million for the fiscal year ending March 31, 1990, the first full year that operations were devoted exclusively to distribution. Operating income was $2.2 million. Michael D. Scannell, one of Heap’s associates from ISA and an employee of the company since 1984, was named president in 1990. Layton was promoted to executive vice-president, and Heap remained as chairman and CEO.

Once Daisytek was focused on distributing nonpaper consumable computer and office supplies, it enjoyed steady growth in sales. The company’s consistent growth was buttressed by the growing U.S. supplies industry, which was estimated to be growing at a compound annual rate of approximately 10 percent. Other outside factors contributing to a growing demand for office automation consumables included the increasing automation of the workplace, the rapid evolution and acceptance of laser and inkjet printing technologies, and later in the decade the increasing penetration of color printing technology into corporate and home office environments.

Daisytek distributed primarily nationally known, name-brand products manufactured by more than 100 original equipment manufacturers, including Hewlett-Packard, Canon, Digital Equipment Corporation, Epson, Lexmark (IBM), Xerox, Okidata, 3M, Panasonic, Kodak, and Sony. Among the nonpaper consumable supplies distributed by the company were laser toner, copier toner, ink jet cartridges, printer ribbons, diskettes, computer tape cartridges and accessories, cleaning kits, and media storage files. By pursuing a strategy of “selling the razors rather than the blades,” Daisytek was able to capitalize on the boom in office technology without exposing itself to the risks of rapidly changing technologies.

From fiscal year 1990 through fiscal year 1996, the company recorded a steady and substantial increase in net sales and gross profit. Sales for 1991 rose to $150.8 million, an increase of 33.6 percent. They increased by 21 percent in 1992 to $182.8 million, then surpassed the $200 million mark to reach $233.5 million in 1993. For 1994 they climbed to $276.7 million, an increase of 18.5 percent. Sales for 1995 jumped to $353.0 million and continued to exceed industry growth rates in 1996 when they reached $464.2 million.

Started Laying Foundation for Future Growth in 1991

Once the company had successfully focused itself on distribution and recorded profits in its first full year as a distributor, it began to implement a strategy that would lay the foundations for future growth. In 1991 it reincorporated in Delaware with an eye to eventually raising capital through a public stock offering. In November 1991 the company announced it was moving its national order center from Garland to Piano, Texas, another suburb of Dallas. By May 1992 plans were in place for an initial public offering (IPO) to gross $24.7 million.

In April 1991 the company initiated a $5 million technology strategy designed to create a paperless order fulfillment environment, by utilizing the powerful combination of computers and telephones, and at the same time implement an advanced management information system. It purchased state-of-the-art hardware in the form of an IBM AS/400, which it called EDDIE, and a RISC-based client server, which it called MOE. Soon the company’s EDI network would be able to communicate electronically, automatically sending and receiving purchase orders, invoices, and acknowledgements in a paperless environment. In terms of management information, the EDI system provided Daisytek’s management with information concerning sales, inventory levels, customer profiles, and other operations that helped the company operate as a low-cost, highly efficient wholesale distributor.

Established Memphis “Superhub” in 1992

Another part of the company’s strategy was to consolidate its five U.S. regional distribution centers into a single “superhub” distribution center located in Memphis, Tennessee.

Established in 1992, this 176,000-square-foot facility contained automated conveyors, in-line scales for accuracy checking, computerized sorting equipment, powered material handling equipment, and scanning and bar-coding systems. Perhaps more importantly, it was located approximately four miles from the Federal Express hub facility. Through a contractual agreement, virtually all of Daisytek’s U.S. package orders were shipped via Federal Express, with the exception of certain “heavyweight” packages or as otherwise requested by the customer. By establishing a close working relationship with Federal Express, Daisytek was able to offer its U.S. customers next-business-day delivery to most geographic areas and only charge them local ground delivery rates for the service.

In the meantime, the IPO announced in 1992 resurfaced in 1994, only to be put on hold again until more favorable market conditions prevailed. Some changes were made in upper management, as Mark Layton replaced Michael Scannell as president and also assumed the duties of chief operating officer (COO) and chief financial officer (CFO) in 1993. Scannell subsequently resigned from Daisytek in 1994 and returned to the United Kingdom to become president of ISA.

Daisytek Went Public in 1995

In January 1995 Daisytek completed its IPO, issuing 1.38 million shares of common stock and realizing net proceeds of $18.6 million, which was used to reduce outstanding debt. According to the prospectus distributed for the IPO, Daisytek was distributing over 4,800 products to approximately 20,000 customer locations, including value-added resellers, computer supplies dealers, office product dealers, computer and office product superstores, and other retailers. Based on industry sources, the company believed it was one of the two largest wholesale distributors of non-paper computer and office automation supplies and accessories in the United States.

At the time of the IPO the company was in the middle of a $2.2 million upgrade of its Memphis superhub. Completed by July 1995, the upgrade included several high technology enhancements to the facility, including an automated package routing system and a paperless order picking system. Among the benefits from the upgrade were increased package movement capacity, improved shipping accuracy, and an enhanced ability to perform value-added services for customers. Personnel productivity was expected to improve as a result of the upgrade, and shipping costs would be reduced.

Daisytek also invested in other technologies to improve service and marketing capabilities. At its sales center in Piano, inbound and outbound telemarketing was improved through the use of the latest in voice-response equipment, automated fax technology, and automated inventory management. The latest AT&T telecommunications technology, which provided automatic caller recognition and customer profiles, helped Daisytek sales representatives field more than 9,000 calls daily in 1995.

Company Perspectives:

Daisytek will be a low-cost, high-growth distributor. We will dominate our chosen markets by embracing change, maximizing profitability and efficiency, and having fun doing it!

The telemarketing department, consisting of 100 to 150 fulltime and part-time sales reps, was evenly split between inbound and outbound calls. Half of the sales reps focused on building strong customer relationships through outbound calls, while the other half fielded inbound traffic. In addition, the sales reps were divided into teams to handle critical business functions. One team, for example, was devoted to retail accounts such as large computer retailers and office product superstores. Their goal was to convince potential customers that Daisytek could more efficiently distribute a wide variety of small shipments to a larger number of store locations than product manufacturers could.

In addition to making extensive use of telemarketing, Daisytek marketed its services through a quarterly catalog known as the “Book of Deals.” In 1995 it mailed approximately 35,000 catalog and contract price books to its active U.S. customers every quarter. In addition, it also distributed a Canadian Book of Deals and a Mexican Book of Deals. An electronic version, known as the Disk of Deals, was also utilized. An end-user catalog, published with a variety of cover options, could be purchased in bulk by resellers and printed with their name on it. The company also produced more than 100,000 direct marketing pieces each month in multiple languages. Its customer and prospect database numbered more than 150,000 companies.

With sales offices and distribution centers located in the United States, Canada, and Mexico, the company began to pursue an expansion strategy on a global level in 1995. It leased distribution space in Miami, Florida, to serve as an inventory gateway to the high-growth South American consumables market. In October 1996 Daisytek signed an agreement to acquire substantially all of the assets of Lasercharge Pty Ltd, a privately held company based in Sydney, Australia. Management hoped the acquisition would serve as a launching pad into the promising Australasia region and rapidly growing Pacific Rim market. Lasercharge was the largest wholesaler of computer and printer supplies in Australia, with annual revenues of approximately $20 million in U.S. dollars, and the two companies’ vision and focus appeared to be nearly identical. At the time of the announcement, Mark Layton stated, “This move is another step in one of the company’s strategic objectives of international expansion of its core business operations.”

During 1996 Daisytek completed another $2.5 million upgrade of its material handling system at the Memphis superhub. In September, as it signed a four-year lease agreement, the company announced plans to expand the superhub from 176,000 square feet to 372,000 square feet. After seven years of above-average sales and earnings growth, Daisytek continued to pursue growth opportunities internationally. At the same time, it continued to keep tight rein on its costs to remain competitive in the U.S. market.