School Specialty, Inc.

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School Specialty, Inc.

W6316 Design Drive
Greenville, Wisconsin 54942
U.S.A.
Telephone: (920) 734-5712
Toll Free: (888) 388-3244
Fax: (920) 882-5863
Web site: http://www.schoolspecialty.com

Public Company
Incorporated: 1950 as Universal Paper and School Supply
Employees: 2,800
Sales: $907.5 million
Stock Exchanges: NASDAQ
Ticker Symbol: SCHS
NAIC: 424120 Stationery and Office Supplies Merchant

School Specialty, Inc., is a publicly traded, direct marketing education company based in Greenville, Wisconsin. It offers more than 80,000 products, essentially anything other than textbooks, serving the pre-kindergarten through high school market through catalogs and the Internet. Product offerings are split between general school supplies and specialty products. Offerings include art supplies, classroom supplies, school furniture, instructional materials, educational games and software, academic calendars, audiovisual equipment, physical education equipment, and indoor and outdoor equipment. School Specialty sells to schools as well as individuals. It mails more than 40 million catalogs each year, and its online operation offers both an educational portal and an e-commerce web site.

1950s Origins

School Specialty was established in 1950 by Ed Schrede as Universal Paper and School Supply. The company changed hands in 1968 and the new owners changed the name to Valley School Supply. Because selling school supplies was a seasonal business—with virtually all net income earned from May to October—Valley over the course of the next 20 years attempted to diversify by opening retail stores and selling to churches. Unfortunately, the noncore businesses all lost money, so that by 1988 the company was losing a million dollars a year and its debts exceeded assets. In essence Valley was bankrupt, although it did not yet need protection from creditors. It was at this point that Dan Spalding, the man instrumental in the growth of School Specialty, entered the picture.

Spalding's father was one of Valley's owners and he convinced the other investors to hire his son to attempt a turnaround. It was hardly an act of nepotism, his son having already demonstrated great skill as an executive. While just a high school student, Spalding in 1975 bought an apparel company called Downers—the name referring to the business's basement location in an Appleton, Wisconsin theater. Here, Spalding and partner Kim Vanderhyden produced T-shirts with school logos that they sold to college bookstores and sporting goods stores. The small company built its own sales force and began mailing a catalog, so that within five years sales grew from less than $200,000 to $20 million. Spalding now took a pivotal step, paying $5 million in 1980 to acquire Jansport, which produced outdoor equipment like tents, sleeping bags, and backpacks. It was the backpacks that interested Spalding, because they were popular with high school and college students who used them as book bags. He dropped the other lines, turned the sales focus from sporting goods stores to mass merchants, and hired a new advertising agency to target a younger market. The improvement in business was dramatic, as Jansport's sales grew to $20 million by 1985. The company attracted the eye of V.F. Corporation, known for Wrangler and Lee jeans, which offered to buy the business for more than Spalding and Vanderhyden thought it was worth. They accepted and Spalding stayed on as chief executive officer until 1988 when he received the call from his father at Valley School Supply.

In a move reminiscent of what he had done at Jansport, Spalding upon taking over at Valley began to cast off the money-losing parts of the business. Over the course of the next two years he sold or closed down seven businesses, resulting in employment being trimmed from 180 to 80 and revenues dropping from $35 million to $22 million. Although smaller, the company was focused on the education market and once again a profitable concern. Spalding was now ready to grow the company through acquisitions. His first deal came in 1991 with the purchase of Western School Supply, followed by two more acquisitions that year and another three in 1993. Annual sales reached the $100 million mark by 1994.

A New Name and an Acquisition Spree in the 1990s

In 1995 Valley acquired a Salina, Kansas-based company called School Specialty, and Spalding elected to adopt that name for his rapidly growing business. It was also in that year that the company made an important change in strategy. For years it had sold its product lines to school districts, but now there was a trend developing in education called site-based management, which allowed teachers to begin making some purchasing decisions. To tap into this movement, School Specialty established an initiative called Classroom Direct to sell directly to teachers through a catalog. At the same time, Spalding sold the company's string of 40 Valley School Supply stores, which no longer fit into the new business model. To enter the pre-kindergarten market the company bought Childcraft from Disney Co. in 1997, and to add art supplies it acquired Sax Arts and Crafts in the same year. School Specialty also gained a presence in the British market in 1997 through the acquisition of Don Gresswell, Ltd. As a result of these transactions, revenues increased to $120 million. Spalding and his team sensed that they could achieve even more, however, and established a sales goal of $300 million. Reaching that target required an infusion of new capital, but just as Spalding began scouting private equity firms he was approached by U.S. Office Products (USOP) with a buyout offer, which was accepted.

USOP was a new company, founded in 1994 to create a national office products supplier. It went public in February 1995, and within two years completed 35 acquisitions. USOP took a hands-off approach to School Specialty, allow Spalding to grow the business as he saw fit. As it turned out, School Specialty would be part of the USOP fold for only two years. During that time, it used USOP's resources to make 15 acquisitions worth $200 million. Then, in January 1998, USOP decided to change course. It had expanded in any number of directions, owning such diverse interests as a print management company, a computer networking company, and a business travel agency. Management now decided to focus on its core office products business and as part of a restructuring effort elected to spin off four of its divisions as separate public companies: Aztec Technology Partners Inc., Navigant International Inc., Workflow Management Inc., and School Specialty Inc. As its share of a June 1998 public stock offering, School Specialty emerged with $34.2 million, earmarked to help the company expand its geographic reach, especially into California, Texas, and Florida, the biggest states in education expenditures.

Although it now lacked the deep pockets of USOP, School Specialty did not let up in its drive to achieve growth through acquisitions. To run the business on a day-to-basis, Spalding brought in David VanderZanden, former president of Ariens Company, an outdoor lawn and garden equipment manufacturer, to serve as president and chief operating officer. Shortly before the spin-off, School Specialty bought the catalog division of Education Access, Inc., and afterward completed two significant acquisitions. The first was the $16.5 million purchase of Hammond & Stephens, Co., a 100-year-old company that made educational forms, including school gradebooks, teacher plan books, student assignment books, school year calendars, and award certificates. The second deal added a much younger company, two-year-old Teacher DeskTop, which offered planning software for teachers in formats such as calendars, scheduling forms, grade books, teacher lesson plans, student communications, and parent communications. The most significant acquisition of the year, however, took place later in the summer when School Specialty bought its largest competitor, cataloger Beckley-Cardy Group, for $78.1 million in cash and the assumption of $56.6 million in debt. Duluth, Minnesota-based Beckley-Cardy was generating annual sales in the $175 range, compared with School Specialty's sales of $310 million. Aside from the significant boost to the balance sheet, the addition of Beckley-Cardy got School Specialty involved in science materials though the pickup of Frey Scientific and fulfilled a goal of increasing market penetration in two key regions, the South and Southwest. Moreover, School Specialty grew its customer base, resulting in greater buying power and other efficiencies.

In 1999 School Specialty continued its aggressive pursuit of external growth while launching important initiatives from within. The company paid $23 million to add Sportime, LLC, which offered four catalogs: Sportime, targeting elementary and middle school students; Chime Time, for the pre-school and early childhood market; Abilitations, devoted to products for physically challenged children; and Active Minds, which offered a range of creative movement-oriented products for pre-school and grade school children. Next, School Specialty acquired SmartStuff Development Company, a developer of security software limiting children's computer access, followed by the addition of a pair of California-based school supply companies: Holsinger Inc., which had been selling school furnishings in northern California for 50 years, and Audio/Graphics Systems, seller of school furnishings and audiovisual equipment in southern California. To support its growth, School Specialty also paid $2.6 million in 1999 to acquire a combined warehouse and distribution facility in Appleton, Wisconsin.

Turning to the Internet in the Late 1990s

School Specialty also launched a pair of Internet-based operations in 1999. the first, Classroom Direct.com, was launched in January to sell school supplies to school districts, as well as targeting teachers and parents. Management hoped the online approach would cut the cost of processing orders by 20 percent. It set a goal of doing a third of its business online, which if met would greatly lower the company's costs. In June 1999 School Specialty launched an online purchasing portal called JuneBox.com devoted to teachers and school districts, but after 11 months in operation it was expanded into a business-to-business portal, linking school supplies vendors to the United States' 16,000 school districts. The site allowed the parties to place bids and grant approval electronically.

Company Perspectives:

School Specialty is forging an exciting era in the educational resources market as a family of brands focused on helping educators to help students succeed.

In fiscal 1999 School Specialty recorded sales of $521.7 million and net income of $8.9 million. Fiscal 2000 would bring a continuation of the company's robust growth, fueled by further acquisitions. School Specialty paid $34.3 million in cash to add Global Video, LLC. An even larger deal was completed later in 2000 with the $82.5 million acquisition of a major stake in wholesaler J.L. Hammett Company, a company producing $100 million in annual revenues. Revenues in fiscal 2000, which ended in April 2000, grew to $639.3 million and net income more than doubled over the previous year to $18.5 million, all without the benefit of the J.L. Hammett deal, which was completed after the close of the fiscal year. To support its rapid growth and build a national distribution system, the company began construction on a 330,000-square-foot warehouse and distribution center in Appleton that also would house the company's headquarters. Earlier in the year the company opened a 167,000-square-foot distribution center in Fresno, California, and expanded facilities located in Massachusetts and Texas.

School Specialty remained active on the acquisition front in 2001. For $6.7 million in cash and stock it acquired Envision, Inc. It paid $1.2 million for Premier Science, and another $156 million to add Premier Agendas, the largest provider of academic agendas in the United States and Canada. The company also sold off a pair of businesses that no longer fit its mix: U.K. subsidiary Don Gresswell, Ltd., and SmartStuff Software. In fiscal 2001 School Specialty posted revenues of $692.7 million and net income of nearly $12 million. But a recession was taking hold, the effects of which would lead to cutbacks in state spending on education. The company continued to expand but was unable to match its recent pattern of growth. Despite School Specialty's ability to prosper in difficult times—it would increase revenues to $767.4 million in fiscal 2002 and report net income of $21.8 million—Wall Street lost faith in the company's stock at the first hint of a setback. All along, Spalding had been disappointed in a languishing stock price, as the company was upstaged by high-tech ventures.

Although the 47-year-old Spalding had no apparent health concerns, he did report chest pains in 2001. Then in March 2002, on a skiing vacation to Colorado with his wife and VanderZanden and his wife, he collapsed in his condominium, stricken by a heart attack. He was rushed to a hospital but was soon pronounced dead. School Specialty's management team was shocked and distraught, but there was no disruption in the running of the business. Spalding had left behind a strong team and a sound corporate structure. VanderZanden took over as CEO on an interim basis as a search for Spalding's replacement was launched. The job was offered to VanderZanden, but he quickly turned it down, maintaining that he was comfortable with his current role in the company. Several months later, however, VanderZanden was finally persuaded to change his mind and he took the CEO position on a permanent basis. At the same time, interim chairman Leo C. McKenna assumed his post permanently. A New Hampshire-based financial consultant, McKenna became the first outside director to become chairman of the company, a move that was made with corporate governance issues in mind.

Little changed with VanderZanden in charge. The company continued to grow through acquisition. In 2002 School Specialty added ABC School Supply, which made products for the kindergarten to eighth grade market. School Specialty also bought the rest of J.L. Hammett in 2002. In February 2003 the company acquired Sunburst Video, a division of Sunburst Technology Corp., which made DVDs and videos on health, guidance, and other topics for the kindergarten through high school market. In May 2003 School Specialty acquired Select Agendas, a Canadian producer of student agendas. Early in 2004 the company added Calfone International, Inc., maker of multimedia and audiovisual systems.

Although School Specialty still declined to enter the textbook market, in which purchasing decisions were made at a state level and did not fit in with the company's sales approach, it did decide to become involved in educational book publishing. In early 2004 School Specialty bought the children's publishing unit of McGraw-Hill Cos., thereby adding supplementary materials such as literature books, workbooks, and manipulatives. The unit published as many as 700 books each year and possessed a backlist of some 5,000 titles. Not only did the acquisition of the unit add another niche to the School Specialty portfolio, it brought a new customer base the company could approach with its many other product offerings.

Revenues topped $870 million in fiscal 2003 and net profits soared to $39.6 million. Those numbers would show only modest improvement the following year, to $907.5 million in sales and $40.8 million in profits, but School Specialty remained on track to become a $1 billion company and enjoy even greater success in the coming years.