HA LO INDUSTRIES INC, 8-K/A, 1996-08-20

HA LO INDUSTRIES INC
8-K/A, 1996-08-20
MISC DURABLE GOODS

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K/A

C U R R E N T R E P O R T

PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

December 29, 1995
-------------------------------------------------------------
Date of Report (Date of earliest event reported)

HA-LO Industries, Inc.
-------------------------------------------------------------
(Exact Name of Registrant as specified in its Charter)

Illinois
-------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)

0-20758 36-3573412
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)

5980 Touhy Avenue, Niles, Illinois 60714
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)

(847) 647-2300
-------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)

N/A
-------------------------------------------------------------
(Former Name or Former Address, if Changed since Last Report)

<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

Set forth on the following pages are the financial statements and
related pro forma financial information required by this Item 7 pertaining to
the purchase by Ha-Lo Industries, Inc. of certain assets used in connection
with the business of Fletcher-Barnhardt & White, Inc.

<PAGE>

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 hereunto to duly authorized.

HA-LO INDUSTRIES, INC.

BY: /s/ Gregory J. Kilrea
-----------------------------
Gregory J. Kilrea
Dated: August 20, 1996 Chief Financial Officer

<PAGE>

[Logo]
FLETCHER-BARNHARDT & WHITE, INC.

FINANCIAL STATEMENTS AND SUPPLEMENTAL
SCHEDULES FOR THE YEARS ENDED
DECEMBER 31, 1994 AND 1993 (RESTATED)
AND INDEPENDENT AUDITORS' REPORT

<PAGE>

[Greer & Walker, L.L.P. Letterhead]

INDEPENDENT AUDITORS' REPORT

Fletcher-Barnhardt & White, Inc.:

We have audited the accompanying balance sheets of Fletcher-Barnhardt & White,
Inc. as of December 31, 1994 and 1993 and the related statements of income and
retained earnings, and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fletcher-Barnhardt & White,
Inc. as of December 31, 1994 and 1993, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of selling,
general and administrative expenses for the years ended December 31, 1994 and
1993 are presented for purposes of additional analysis and are not a required
part of the basic financial statements. Such supplemental schedules have been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, are fairly stated in all material respects when
considered in relation to the basic financial statements taken as a whole.

As discussed in Note 11 to the financial statements, the accompanying financial
statements and supplemental schedules have been restated to reflect certain
conformity adjustments related to a pooling of interests transaction which the
Company entered into in December 1995.

/s/ Greer & Walker, LLP

May 30, 1995, except for Note 11 as to
which the date is February 16, 1996

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

BALANCE SHEETS, DECEMBER 31, 1994 AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>

(Restated) (Restated)
ASSETS 1994 1993
- ------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,243 $ 11,746
Accounts receivable:
Trade (net of allowance of $100,000 in
1994 and 1993) 5,517,864 6,633,828
Stockholders 9,025
Employees 19,593 25,981
Inventory (net of reserve of $139,000 in 1994
and 1993) 1,658,930 835,905
Deposits with vendors 405,581 470,937
Prepaid expenses 1,005
----------- -----------
Total current assets 7,616,216 7,987,422
----------- -----------

PROPERTY:
Office furniture and equipment 888,861 797,369
Leasehold improvements 140,786 109,515
----------- -----------
Total 1,029,647 906,884
Less accumulated depreciation and amortization 653,324 548,217
----------- -----------
Property, net 376,323 358,667
----------- -----------

OTHER ASSETS:
Notes receivable from employees, net 42,000 135,135
Cash value of life insurance policies
(Net of policy loans of $480,747 in 1994) 80,384 454,600
Intangible asset relating to acquired business, net 31,030 48,030
Other deposits 69,400 7,200
Total other assets 222,814 644,965
----------- -----------
TOTAL $ 8,215,353 $ 8,991,054
----------- -----------
----------- -----------

</TABLE>

See notes to financial statements.

1
<PAGE>

- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>

(Restated) (Restated)
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Revolving line of credit $ 2,759,211 $ 2,071,454
Accounts payable - Trade 2,613,451 3,939,985
Due to stockholders 17,653
Employee taxes withheld 15,783 794
Customer advances 347,393 43,220
Deferred payments relating to acquired business 238,402 413,933
Accrued liabilities:
Sales commissions 668,492 370,579
Dividends to stockholders 23,787 159,518
Retirement plan contributions 197,472
Income taxes 8,846
Sales and payroll taxes 112,909 98,488
Interest 7,740
Royalties 92,813 7,090
Other 72,777 27,253
---------- ----------
Total current liabilities 6,962,671 7,346,372
---------- ----------

STOCKHOLDERS' EQUITY:
Class A voting common - $1 par (10,000 shares
authorized; 1,000 shares outstanding) 1,000 1,000
Class B nonvoting common - $1 par (90,000 shares
authorized; 9,000 shares outstanding) 9,000 9,000
Retained earnings 1,242,682 1,634,682
---------- ----------
Total stockholders' equity 1,252,682 1,644,682
---------- ----------

TOTAL $ 8,215,353 $ 8,991,054
---------- ----------
---------- ----------
</TABLE>

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Restated) (Restated)
1994 1993
---- ----
<S> <C> <C>
SALES $ 41,793,870 $ 44,746,755

COST OF SALES 32,774,117 35,960,649
------------- -------------

GROSS PROFIT 9,019,753 8,786,106

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 8,654,728 8,169,920
------------- -------------

INCOME FROM OPERATIONS 365,025 616,186
------------- -------------

OTHER INCOME (EXPENSE):
Interest income 11,556 17,348
Interest expense (152,400) (57,266)
Loss on sale of property (6,140)
Other income (expense) (5,894) 2,261
------------- -------------
Total (146,738) (43,797)
------------- -------------

INCOME BEFORE INCOME TAXES 218,287 572,389

INCOME TAXES 49,280
------------- -------------

NET INCOME 218,287 523,109

DIVIDEND DISTRIBUTIONS (610,287) (299,346)

RETAINED EARNINGS, BEGINNING OF YEAR 1,634,682 1,410,919
------------- -------------

RETAINED EARNINGS, END OF YEAR $ 1,242,682 $ 1,634,682
------------- -------------
------------- -------------
</TABLE>

See notes to financial statements.

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Restated) (Restated)
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 218,287 $ 523,109
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 122,107 141,960
Increase in cash surrender value (106,531) (57,687)
Loss on sale of property 6,140
Changes in operating assets and liabilities:
Accounts receivable 1,122,352 3,201,495
Inventory (823,025) (552,238)
Deposits with vendors 65,356 (3,860)
Other assets (63,205) 21,065
Accounts payable (1,326,534) (1,803,668)
Employee taxes withheld 14,989 (2,493)
Customer advances 304,173 9,552
Accrued liabilities 229,523 14,694
------------ ------------
Net cash provided by (applied to) operating activities (242,508) 1,498,069
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred payments on acquisition (175,531) (104,288)
Purchases of property (122,763) (136,624)
Proceeds from sale of property 351
Decrease in notes receivable 93,135 542
------------ ------------
Net cash applied to investing activities (205,159) (240,019)
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividend distributions (746,018) (1,294,647)
Increase in line of credit, net 687,757 58,167
Policy loan proceeds (borrowings), net 480,747 (125,658)
Due to/from stockholders, net 26,678 (25,614)
------------ ------------
Net cash provided by (applied to) financing activities 449,164 (1,387,752)
------------ ------------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,497 (129,702)

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 11,746 141,448
------------ ------------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,243 $ 11,746
------------ ------------
------------ ------------
</TABLE>

See notes to financial statements.

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
- -------------------------------------------------------------------------------

1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS - The Company is a designer and distributor of promotional
advertising products and other specialty goods.

USE OF ACCOUNTING ESTIMATES - The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosures.
Accordingly, the actual amounts could differ from those estimates.
Any adjustments applied to estimated amounts are recognized in the
year in which such adjustments are determined.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be "cash equivalents". As of December 31, 1994 and 1993, checks
outstanding in excess of certain cash balances totaling $499,210 and
$571,454, respectively, have been included in the revolving line of
credit in the accompanying balance sheets.

VENDOR DEPOSITS AND CUSTOMER ADVANCES - At the time an order is
placed, the Company's vendors frequently require the Company to submit
deposits on products to be produced or purchased on the Company's
behalf by the vendor. In turn, the Company frequently requires its
customers to make advance progress payments on orders in process.

PROPERTY - Property is stated at cost. Depreciation and amortization
are provided over estimated useful lives using the straight-line
method.

INCOME TAXES - Effective January 1, 1992, under provisions of the
Internal Revenue Code the Company elected to be taxed as an "S"
corporation. Under such election, the Company's taxable income or
loss and tax credits are passed through to the individual stockholders
for inclusion in their respective individual income tax returns.
Timing differences exist between income reported for financial
reporting and income tax purposes, related primarily to differences in
depreciation and related party balances.

The income tax provision in the accompanying 1993 financial statements
relates to adjustments resulting from a field audit made by the
Internal Revenue Service during 1993 of the Company's federal income
tax return for the year ended December 31, 1991.

<PAGE>

2. NOTES RECEIVABLE

As of December 31, 1994 and 1993, the Company held unsecured notes
receivable from employees totaling $42,000 and $135,135, respectively,
net of an $81,000 reserve. The notes provide for interest at 9%.
Since repayment terms are flexible, such balances have been classified
as noncurrent in the accompanying balance sheets.

3. LINE OF CREDIT

The Company has a revolving line of credit agreement with a bank which
provides for borrowings up to $3,000,000. Borrowing limitations
related to eligible accounts receivable and inventory balances are
specified in the agreement. Interest on the line accrues at the prime
rate (8.5% as of December 31, 1994) plus .5%. In addition, the
Company has a $1,000,000 credit line under which documentary letters
of credit may be drawn.

The Company's trade accounts receivable and inventory are pledged as
collateral for both lines. In addition, borrowings on the line are
personally guaranteed by the Company's stockholders. The agreement
contains certain financial covenants which include, among other
things, minimum net worth, working capital and coverage ratio
requirements. As of December 31, 1994 the Company was not in
compliance with several of the covenants. The bank has issued a
letter waiving these covenant violations through December 31, 1994.

4. OTHER OBLIGATIONS AND CONTINGENCIES

As of December 31, 1994, the Company had outstanding irrevocable
documentary letters of credit in the principal amount of $300,572 in
connection with certain vendor production agreements. The Company
pays a fee on the letters of credit as they are used.

5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS

The Company leases office and warehouse space and certain automobiles
and equipment under operating leases expiring at various dates through
1997. Total rent expense for the years ended December 31, 1994 and
1993 under such operating leases was $249,428 and $255,889,
respectively. Future minimum rental payments under such leases as of
December 31, 1994 are $88,948, $11,191, and $413 in the years ending
December 31, 1994 through 1997, respectively.

Included in rent expense above are two lease agreements for office
buildings owned by stockholders of the Company. Total rent expense
under such related party leases was $104,712 in 1994 and 1993.

<PAGE>

6. RETIREMENT PLAN

The Company maintains a qualified profit sharing plan which also
includes a salary reduction program under the provisions of Section
401(k) of the Internal Revenue Code. The plan covers all full-time
employees who are at least 21 years of age and have completed one year
of service with the Company. Contributions to the 401(k) program by
each employee may range from 1% to 10% of annual salary. The
Company's matching 401(k) contribution is discretionary but cannot
exceed 6% of each employee's salary. The amount of the annual profit
sharing plan contribution is also at the discretion of the board of
directors. The total Company contributions allocated to the plan for
the year ended December 31, 1993 were $197,472. There were no Company
contributions for the year ended December 31, 1994.

7. COMMON STOCK

Stockholders of both the Class A and Class B common stock are subject
to agreements specifying the terms under which their stock may be sold
to or purchased by the Company or the other stockholders in possession
of the respective classes of stock. Terms of one of the agreements
require the Company to purchase all of the voting and nonvoting shares
owned by two of the Company's stockholders at such time as the balance
in their respective "S" corporation accumulated adjustment account
balances equals $2,000,000. As of December 31, 1994, the balances in
such two accounts were approximately $449,000 and $405,000,
respectively. The purchase price specified is $2,000,000 per
stockholder payable in cash, subject to the approval of the bank(s)
having loan agreements with the Company at the time of the stock
purchase.

8. RETAINED EARNINGS

As of December 31, 1994 retained earnings consisted of the following:

- Pre "S" corporation retained earnings $506,981

- "S" corporation accumulated adjustment
account balance as of December 31, 1994 1,351,450

- Cumulative differences in the recognition
of income and expenses for financial
statement and income tax purposes (615,749)
----------

Total $1,242,682
----------
----------

<PAGE>

9. CASH FLOW INFORMATION

Supplemental cash flow information for the years ended December 31,
1994 and 1993 is as follows:
1994 1993
-------- -------
Cash payments for interest $160,140 $66,438
Cash payments for income taxes - $40,434

10. MAJOR CUSTOMER

The Company has a major customer, sales to which accounted for more
than 10% of the Company's total sales volume in both 1994 and 1993.
This customer operates in the tobacco industry. Sales to this
customer totaled $15,972,000 and $24,432,152 in 1994 and 1993,
respectively. The Company had accounts receivable balances of
$801,912 and $3,268,010 from this customer as of December 31, 1994 and
1993, respectively.

11. CONFORMITY ADJUSTMENTS FOR POOLING TRANSACTION

Effective December 29, 1995 substantially all of the Company's assets were
purchased and all of its liabilities were assumed by HA-LO Industries, Inc.
("HA-LO") The transaction has been accounted for as a pooling of
interests in accordance with the provisions of Accounting Principles Board
Opinion No. 16. The application of APB No. 16 requires that the financial
statements of the acquired company be restated using accounting policies
and methods consistent with those used by the acquiring company for all
accounting periods subject to combination. Accordingly, it was necessary
to retroactively apply certain conformity adjustments to the Company's
previously issued financial statements for the years ended December 31,
1994 and 1993.

The conformity adjustments applied to the Company's accompanying
financial statements include the following:

* The Company had utilized the specific identification method for the
write-off of accounts receivable. HA-LO uses the allowance method.
Accordingly, an accounts receivable allowance of $100,000 has been
applied in the Company's financial statements retroactive to
January 1, 1993 with an offsetting charge to retained earnings as of
that date.

<PAGE>
* The Company had valued its inventory using the lower of manufacturers'
latest list price (which approximated first-in, first-out cost) or
market. HA-LO has used a similar method, supplemented by a general
reserve for excess or obsolete inventory. Accordingly, an inventory
reserve of $139,000 has been applied in the Company's financial
statements retroactive to January 1, 1993 with an offsetting charge to
retained earnings as of that date.

* In 1990 the Company acquired the assets of another promotional
advertising company in a transaction accounted for as a purchase.
This transaction included contingent consideration to the seller
totaling $891,000 paid out from July 1990 through December 31, 1995.
The Company had previously expensed any such contingent consideration
on an as-paid basis. In its prior acquisitions, HA-LO has recorded
any contingent consideration as an intangible asset at the date of
purchase, and has generally amortized such intangible assets over a
seven year period, subject to any realization reserve deemed
appropriate. Accordingly, in the accompanying financial statements a
retroactive charge to retained earnings of $453,191 has been applied
as of January 1, 1993, primarily related to a realization reserve
applied to the intangible asset. Previously reported net income for
the years ended December 31, 1994 and 1993 has been increased by
$158,531 and $87,288, respectively, in connection with this conformity
adjustment.
--------------------------------------------------------------------

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

SUPPLEMENTAL SCHEDULES OF SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
- ------------------------------------------------------------------------------------------
(Restated) (Restated)
1994 1993
---- ----
<S> <C> <C>
Salaries $ 2,238,482 $ 2,223,717
Commissions 3,275,482 2,717,535
Royalty expense, net 132,031 10,432
Payroll taxes 299,128 265,312
Employee benefits 17,343 89,979
Travel and entertainment 325,427 335,919
Samples and promotions, net (5,624) 56,652
Shipping 274,043 295,983
Retirement plan contribution 197,472
Telephone 399,584 294,837
Officers' life insurance, net 10,140 112,038
Other insurance 198,902 187,160
Depreciation and amortization 122,107 141,960
Taxes and licenses 24,407 29,415
Rent - office and warehouse 296,335 264,327
Rent - automobiles and other 187,802 170,547
Office supplies 470,005 314,572
Legal and professional 219,923 252,344
Dues and subscriptions 17,093 30,375
Bad debts 14,382 97,803
Maintenance and utilities 79,560 57,684
Bank charges 51,086 22,035
Miscellaneous 7,090 1,822
------------ ------------

TOTAL $ 8,654,728 $ 8,169,920
------------ ------------
------------ ------------
</TABLE>

See independent auditors' report.

<PAGE>

[LOGO]
FLETCHER-BARNHARDT & WHITE, INC.

FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1992 (RESTATED) AND
INDEPENDENT AUDITORS' REPORT

<PAGE>

[GREER & WALKER, L.L.P. LETTERHEAD]

INDEPENDENT AUDITORS' REPORT

Fletcher-Barnhardt & White, Inc.:

We have audited the accompanying balance sheet of Fletcher-Barnhardt & White,
Inc. as of December 31, 1992 and the related statements of income and retained
earnings, and of cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Fletcher-
Barnhardt & White, Inc. as of December 31, 1992, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

As discussed in Note 12 to the financial statements, the accompanying financial
statements have been restated to reflect certain conformity adjustments related
to a pooling of interests transaction which the Company entered into in December
1995.

/s/ Greer & Walker, LLP

July 12, 1993, except for Note 12 as to
which the date is February 16, 1996

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

BALANCE SHEET, DECEMBER 31,1992 (RESTATED)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS
- ------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 141,448
Accounts receivable:
Trade 9,817,986
Stockholders 7,284
Employees 45,059
Current portion of notes receivable 16,889
Inventory 283,667
Deposits with vendors 467,077
Prepaid expenses 28,265
-------------
Total current assets 10,807,675
-------------
PROPERTY:
Office furniture and equipment 729,992
Leasehold improvements 87,537
-------------
Total 817,529
Less accumulated depreciation and amortization 464,035
-------------
Property, net 353,494
-------------

NOTES RECEIVABLE 118,788
-------------
CASH VALUE OF LIFE INSURANCE
POLICIES (Net of loans: 1992 - $376,417;
1991 - $329,013) 271,255
-------------
INTANGIBLE ASSETS RELATING TO
ACQUIRED BUSINESS, NET 65,030
-------------

TOTAL $ 11,616,242
-------------
-------------
</TABLE>

<PAGE>

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES:
Revolving line of credit $ 1,441,833
Accounts payable - Trade 6,315,107
Advances from stockholders 25,614
Employee taxes withheld 3,287
Customer advances 33,668
Deferred payments relating to acquired business 518,221
Accrued liabilities:
Sales commissions 231,860
Dividends to stockholders 1,154,819
Retirement plan contributions 342,459
Sales and payroll taxes 78,944
Interest 16,912
Royalties 8,298
Other 24,301
-------------
Total current liabilities 10,195,323
-------------
STOCKHOLDERS' EQUITY:
Class A voting common - $1 par (10,000 shares
authorized; 1,000 shares outstanding) 1,000
Class B nonvoting common - $1 par (90,000 shares
authorized; 9,000 shares outstanding) 9,000
Retained earnings (deficit) 1,410,919
-------------
Total stockholders' equity (deficit) 1,420,919
-------------

TOTAL $ 11,616,242
-------------
-------------
</TABLE>

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1992 (RESTATED)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
SALES $ 62,201,456

COST OF SALES 51,122,683
-------------

GROSS PROFIT 11,078,773

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 8,039,435
-------------

INCOME FROM OPERATIONS 3,039,338
-------------
OTHER INCOME (EXPENSE):
Interest income 32,025
Interest expense (121,191)
Other income 513
Total (88,653)

NET INCOME 2,950,685

DIVIDEND DISTRIBUTIONS (1,488,370)

RETAINED EARNINGS (DEFICIT),
BEGINNING OF YEAR (51,396)
-------------

RETAINED EARNINGS, END OF YEAR $ 1,410,919
-------------
-------------
</TABLE>

See notes to financial statements.

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1992 (RESTATED)
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,950,685
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 121,402
Increase in cash surrender value (47,821)
Changes in operating assets and liabilities:
Accounts receivable (5,004,210)
Inventory 151,629
Deposits with vendors 6,712,071
Other assets 29,021
Accounts payable 3,309,519
Employee taxes withheld (2,267)
Customer advances (9,938,225)
Accrued liabilities 807,461
-------------
Net cash applied to operating activities (910,735)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred payments on acquisition (122,186)
Purchases of property (173,901)
Increase in notes receivable (47,675)
-------------
Net cash applied to investing activities (343,762)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend distributions (1,488,370)
Increase in advances from stockholders, net 13,321
Increase in line of credit, net 313,511
Decrease in subordinated notes payable to stockholders (266,842)
Principal payments on capital lease obligations (4,974)
-------------
Net cash applied to financing activities (1,433,354)
-------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (2,687,851)

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,829,299
-------------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 141,448
-------------
-------------
</TABLE>

See notes to financial statements.

<PAGE>

FLETCHER-BARNHARDT & WHITE, INC.

NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1992
- --------------------------------------------------------------------------------

1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS - The Company is a distributor of promotional advertising
products and other specialty goods.

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be "cash equivalents".

INVENTORY - Inventory is valued at the lower of the manufacturers'
latest list price (which approximates first-in, first-out cost) or
market.

PROPERTY - Property is stated at cost. Depreciation is provided over
estimated useful lives using the straight-line method. Leased
property under capital leases is amortized on a straight-line basis
over the lease term.

INCOME TAXES - Under provisions of the Internal Revenue Code,
effective January 1, 1992 the Company elected to be taxed as an "S"
corporation. Under such election, the Company's taxable income or
loss and tax credits are passed through to the individual stockholders
for inclusion in their respective individual income tax returns.
Timing differences exist between income reported for financial
reporting and income tax purposes, related primarily to differences in
depreciation and related party balances.

2. NOTES RECEIVABLE

As of December 31, 1992, the Company held unsecured notes receivable
from employees totaling $135,677. The notes provided for interest at
9% and are due in monthly installments totaling $2,331 through January
1998.

5
<PAGE>

3. LINE OF CREDIT

The Company has a revolving line of credit agreement with a bank which
provides for borrowings up to $2,000,000. The line expires on May 31,
1993 and is subject to annual renewal. Borrowing limitations related
to eligible accounts receivable and inventory balances are specified
in the agreement. Interest on the line accrues at the prime rate
(6.5% as of December 31, 1992) plus .5%.

The Company's trade accounts receivable and inventory are pledged as
collateral for the note. In addition, borrowings on the line are
personally guaranteed by the Company's stockholders. The agreement
contains certain financial covenants which include, among other
things, minimum net worth and retained earnings balance requirements.
As of December 31, 1992 the Company was not in compliance with several
of the covenants. However, the bank issued a letter waiving the
specific covenant violations through December 31, 1993.

4. OTHER OBLIGATIONS AND CONTINGENCIES

As of December 31, 1992, the Company had outstanding irrevocable
documentary letters of credit in the principal amount of $1,314,364 in
connection with certain vendor production agreements. The Company
pays a fee on the letters of credit as they are used.

The Internal Revenue Service is presently conducting a field audit of
the Company's income tax return for the year ended December 31, 1991.
As of July 12, 1993, the Company was awaiting a report from the
Internal Revenue Service as to any proposed adjustments to the 1991
tax return. In the opinion of the Company's management, the ultimate
liability of the Company, if any, arising from the foregoing audit
will not have a material adverse effect on the Company's financial
position or results of operations. Accordingly no provision for any
liability that might be incurred has been made in the accompanying
financial statements as of December 31, 1992.

5. LEASE COMMITMENTS AND RELATED PARTY TRANSACTIONS

The Company leases office and warehouse space and certain automobiles
and equipment under operating leases expiring at various dates through
November 1995. Total rent expense for the year ended December 31,
1992 under such operating leases was $298,568. Future minimum rental
payments under such leases as of December 31, 1992 are $178,429,
$102,508, and $53,280 in the years ending December 31, 1993 through
1995, respectively.

Included in rent expense above are two lease agreements for office
buildings owned by stockholders of the Company. Total rent expense
under such related party leases for the year ended December 31, 1992
was $104,562.

6
<PAGE>

6. RETIREMENT PLAN

The Company has a qualified profit sharing plan which covers
substantially all of its employees. During 1992 the Company amended
that plan to include a salary reduction plan under the provisions of
Section 401(k) of the Internal Revenue Code. This plan covers all
full-time employees who are 21 years of age and have completed one
year of service with the Company. Contributions to the 401(k) plan by
each employee may range from 1% to 10% of annual salary. The
Company's contribution is discretionary but cannot exceed 6% of each
employee's salary. The amount of the annual profit sharing plan
contribution is also at the discretion of the board of directors. The
total Company contributions to the plan for the years ended
December 31, 1992 were $342,459.

7. COMMON STOCK

8. STOCK OPTION PLAN

The Company has an incentive stock option plan that provides for
granting of options on its Class B common stock to key employees.
Three thousand shares of such stock have been reserved for issuance
under the plan. As of December 31, 1992, options for 200 shares of
stock were outstanding and exercisable at a price of $15 per share,
with an expiration date of August 1994. As of December 31, 1992,
2,800 shares remained available for future option. No options were
exercised during the year ended December 31, 1992.

9. RETAINED EARNINGS

As of December 31, 1992 retained earnings consisted of the following:

- Pre "S" corporation retained earnings $ 506,981

- "S" corporation accumulated adjustment
account balance as of December 31, 1992 1,681,465

- Cumulative differences in the recognition
of income and expenses for financial
statement and income tax purposes (Note 1) (777,527)
---------

Total $1,410,919
---------
---------

7
<PAGE>

10. CASH FLOW INFORMATION

Supplemental cash flow information for the year ended December 31,
1992 is as follows:

Cash payments for interest $127,893
Cash payments for income taxes $1,505

11. MAJOR CUSTOMER

The Company has a major customer, sales to which accounted for more
than 10% of the Company's total sales volume in 1992. This customer
operates in the tobacco industry. Sales to this customer totaled
$45,602,422 in 1992. The Company had accounts receivable balances of
$6,770,178 from this customer as of December 31, 1992.

12. CONFORMITY ADJUSTMENTS FOR POOLING TRANSACTION

Effective December 29, 1995 substantially all of the Company's assets
were purchased and all of its liabilities were assumed by HA-LO
Industries, Inc. ("HA-LO"). The transaction has been accounted for
as a pooling of interests in accordance with the provisions of
Accounting Principles Board Opinion No. 16. The application of APB
No. 16 requires that the financial statements of the acquired company
be restated using accounting policies and methods consistent with
those used by the acquiring company for all accounting periods subject
to combination. Accordingly, it was necessary to retroactively apply
certain conformity adjustments to the Company's previously issued
financial statements for the year ended December 31, 1992.

The conformity adjustments applied to the Company's accompanying
financial statements include the following:

* The Company had utilized the specific identification method for
the write-off of accounts receivable. HA-LO uses the allowance
method. Accordingly, an accounts receivable allowance of
$100,000 has been applied in the Company's financial statements
retroactive to December 31, 1992 with an offsetting charge to
bad debt expense for the year then ended.

* The Company had valued its inventory using the lower of
manufacturers' latest list price (which approximated first-
in, first-out cost) or market. HA-LO has used a similar
method, supplemented by a general reserve for excess or
obsolete inventory. Accordingly, an inventory reserve of
$139,000 has been applied in the Company's financial
statements retroactive to December 31, 1992 with an
offsetting charge to cost of sales for the year then ended.

8
<PAGE>

Previously reported net income for the year ended December 31,
1992 has been decreased by $133,814 in connection with the above
conformity adjustments.

- --------------------------------------------------------------------------------

9
<PAGE>

HA-LO Industries, Inc.
Combining Income Statement
For the Year Ended December 31, 1995
(Unaudited)

<TABLE>
<CAPTION>
HA-LO FBW COMBINED
----- --- --------
<S> <C> <C> <C>
NET SALES $ 126,311,471 $ 46,554,766 $ 172,866,237
COST OF SALES 87,548,731 35,432,894 122,981,625
---------------------------------------------
38,762,740 11,121,872 49,884,612
Gross Profit

SELLING EXPENSES 19,339,607 5,260,875 24,600,482
GENERAL & ADMINISTRATIVE EXPENSES 13,399,472 5,645,411 19,044,883
---------------------------------------------
32,739,079 10,906,286 43,645,365

Income from operations 6,023,661 215,586 6,239,247
---------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (1,125,708) (175,928) (1,301,636)
Interest income 37,802 3,738 41,540
---------------------------------------------
Total other expense, net (1,087,906) (172,190) (1,260,096)

Income before taxes 4,935,755 43,396 4,979,151

PROVISION FOR INCOME TAXES 1,974,242 17,358 1,991,600
---------------------------------------------

NET INCOME FOR THE YEAR $ 2,961,513 $ 26,038 $ 2,987,551
---------------------------------------------
---------------------------------------------
NET INCOME PER SHARE
Fully diluted 0.50 0.01 0.51

WEIGHTED AVERAGE SHARES OUTSTANDING
Fully diluted 5,814,942
</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Balance Sheet
December 31, 1995
(Unaudited)

<TABLE>
<CAPTION>
ASSETS
------
HA-LO FBW COMBINED
----- --- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,503,808 $ 21,637 $ 1,525,445
Short-term investments 3,549,717 - 3,549,717
Receivables-
Drop shipment 33,516,460 5,032,512 38,548,972
Corporate fulfillment program 3,665,877 - 3,665,877
Advances due from salesmen 1,166,462 - 1,166,462
Inventories 3,424,631 2,070,343 5,494,974
Prepaid expenses and deposits 661,938 131,862 793,800
--------------------------------------------
Total current assets 47,488,893 7,256,354 54,745,247
--------------------------------------------

PROPERTY AND EQUIPMENT, NET 3,640,727 713,776 4,354,503
--------------------------------------------

OTHER ASSETS:
Intangible assets relating acquired
businesses, net 7,887,243 - 7,887,243
Due from shareholder/officer - - -
Samples 1,026,588 - 1,026,588
Other 666,150 168,228 834,378
--------------------------------------------
Total other assets 9,579,981 168,228 9,748,209
--------------------------------------------

$ 60,709,601 $ 8,138,358 $ 68,847,959
--------------------------------------------
--------------------------------------------
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
HA-LO FBW COMBINED
----- --- --------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 220,000 $ 535,000 $ 755,000
Book overdraft 1,816,033 345,128 2,161,161
Accounts payable 11,070,423 4,275,595 15,346,018
Accrued expenses-
Commissions and wages 4,254,754 1,192,027 5,446,781
Other 2,021,769 524,619 2,546,388
Due to related parties 123,910 - 123,910
Deferred taxes-current 780,216 - 780,216
--------------------------------------------
Total current liabilities 20,287,105 6,872,369 27,159,474
--------------------------------------------
LONG-TERM DEBT,
less maturities shown above - - -
--------------------------------------------
DEFERRED LIABILITIES:
Income taxes - - -
Other 2,001,628 115,061 2,116,689
--------------------------------------------
Total deferred liabilities 2,001,628 115,061 2,116,689
--------------------------------------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Preferred stock, no par value - - -
Common stock, no par value 37,538,742 10,356 37,549,098
Unearned compensation-restricted stock (1,000,000) - (1,000,000)
Deferred marketing costs (1,448,000) - (1,448,000)
Retained earnings 3,330,126 1,140,572 4,470,698
--------------------------------------------
Total shareholders' equity 38,420,868 1,150,928 39,571,796
--------------------------------------------

$ 60,709,601 $ 8,138,358 $ 68,847,959
--------------------------------------------
--------------------------------------------
</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Statement of Cash Flows
For the Year Ended December 31, 1995
(Unaudited)

<TABLE>
<CAPTION>
HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the year $ 2,961,513 $ 26,038 $ 2,987,551
Adjustments to reconcile net income to net cash used for operating activities
Depreciation and amortization 2,020,522 132,013 2,152,535
Loss on lease buyout of property - 2,772 2,772
Increase in deferred liabilities-other 168,046 - 168,046
Changes in assets and liabilities-net of effect of acquired companies
Receivables (10,385,407) (46,604) (10,432,011)
Inventories (621,601) (411,504) (1,033,105)
Prepaid expenses and deposits 271,696 274,724 546,420
Accounts payable, accrued expenses and deferred income taxes 3,225,788 2,068,824 5,294,612
-------------------------------------------------
Net cash provided by (used for) operating activities (2,359,443) 2,046,263 (313,180)
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,100,085) (110,105) (2,210,190)
Purchases of samples (543,236) - (543,236)
Increase in short-term investments (3,549,717) - (3,549,717)
Decrease in other assets 9,302 1,100 10,402
Deferred payments on acquisitions (521,420) (49,357) (570,777)
Cash paid for acquisitions (1,845,890) - (1,845,890)
Intercompany accounts (1,148,331) 1,148,331 -
-------------------------------------------------
Net cash used for investing activities (9,699,377) 989,969 (8,709,408)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 1,000,000 - 1,000,000
Payments on long-term debt (5,837,459) (551,905) (6,389,364)
Net payments on line of credit (8,500,042) (2,224,210) (10,724,252)
Advances to shareholder/officer (91,076) - (91,076)
Repayments from shareholder/officer 290,355 (41,440) 248,915
Increase in book overdraft 1,012,130 345,127 1,357,257
Cash dividends paid - (555,410) (555,410)
Net proceeds from issuance of common stock 25,680,859 - 25,680,859
-------------------------------------------------
Net cash provided by (used for) financing activities 13,554,767 (3,027,838) 10,526,929
-------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,495,947 8,394 1,504,341

CASH AND EQUIVALENTS, beginning of the year 7,861 13,243 21,104
-------------------------------------------------
CASH AND EQUIVALENTS, end of year $ 1,503,808 $ 21,637 $ 1,525,445
-------------------------------------------------
-------------------------------------------------
</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Income Statement
For the Year Ended December 31, 1994
(Unaudited)

HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>

NET SALES $ 68,602,624 $ 41,793,870 $ 110,396,494
COST OF SALES 43,545,075 32,774,117 76,319,192
------------------------------------------------
25,057,549 9,019,753 34,077,302

Gross Profit

SELLING EXPENSES 13,694,637 4,518,113 18,212,750
GENERAL & ADMINISTRATIVE EXPENSES 8,521,129 4,142,509 12,663,638
------------------------------------------------
22,215,766 8,660,622 30,876,388

Income from operations 2,841,783 359,131 3,200,914
------------------------------------------------

OTHER INCOME (EXPENSE):
Interest expense (697,114) (152,400) (849,514)
Interest income 2,208 11,556 13,764
------------------------------------------------
Total other expense, net (694,906) (140,844) (835,750)

Income before taxes 2,146,877 218,287 2,365,164

PROVISION FOR INCOME TAXES 858,800 - 858,800
------------------------------------------------

NET INCOME FOR THE YEAR $ 1,288,077 $ 218,287 $ 1,506,364
------------------------------------------------
------------------------------------------------

PRO FORMA INCOME DATA
Net income as reported $ 1,288,077 $ 218,287 $ 1,506,364
Pro forma adjustment to
income taxes - 87,000 87,000
------------------------------------------------
PRO FORMA NET INCOME $ 1,288,077 $ 131,287 $ 1,419,364
------------------------------------------------
------------------------------------------------

PRO FORMA NET INCOME PER SHARE 0.30

WEIGHTED AVERAGE SHARES OUTSTANDING 4,800,365

</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Balance Sheet
December 31, 1994
(Unaudited)

ASSETS
------
HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,861 $ 13,243 $ 21,104
Short-term investments - - -
Receivables-
Drop shipment 18,414,960 5,537,457 23,952,417
Corporate fulfillment
program 4,801,631 - 4,801,631
Advances due from salesmen 911,331 - 911,331
Inventories 2,258,398 1,658,930 3,917,328
Prepaid expenses and deposits 811,211 406,586 1,217,797
--------------------------------------------------
Total current assets 27,205,392 7,616,216 34,821,608
--------------------------------------------------

PROPERTY AND EQUIPMENT, NET 2,208,246 376,323 2,584,569
--------------------------------------------------

OTHER ASSETS:
Intangible assets relating
acquired businesses, net 5,607,840 31,030 5,638,870
Due from shareholder/officer 199,279 - 199,279
Samples 786,455 - 786,455
Other 444,270 191,784 636,054
--------------------------------------------------
Total other assets 7,037,844 222,814 7,260,658
--------------------------------------------------

$36,451,482 $8,215,353 $44,666,835
--------------------------------------------------
--------------------------------------------------

</TABLE>

LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 696,439 $2,759,211 $ 3,455,650
Book overdraft 803,904 - 803,904
Accounts payable 6,025,458 2,960,844 8,986,302
Accrued expenses-
Commissions and wages 3,029,183 684,275 3,713,458
Other 1,750,149 302,286 2,052,435
Due to related parties 78,436 17,653 96,089
Deferred taxes-current 1,158,068 - 1,158,068
---------------------------------------------
Total current liabilities 13,541,637 6,724,269 20,265,906
---------------------------------------------

LONG-TERM DEBT,
less maturities shown above 12,511,966 - 12,511,966
---------------------------------------------

DEFERRED LIABILITIES:
Income taxes 316,616 - 316,616
Other 1,422,683 238,402 1,661,085
---------------------------------------------
Total deferred liabilities 1,739,299 238,402 1,977,701
---------------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Preferred stock, no par value - - -
Common stock, no par value 8,375,720 10,000 8,385,720
Retained earnings 282,860 1,242,682 1,525,542
---------------------------------------------
Total shareholders' equity 8,658,580 1,252,682 9,911,262
---------------------------------------------

$36,451,482 $8,215,353 $44,666,835
---------------------------------------------
---------------------------------------------

</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Statement of Cash Flow
For the Year Ended December 31, 1994
(Unaudited)

<TABLE>
<CAPTION>
HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the year $1,288,077 $ 218,287 $ 1,506,364
Adjustments to reconcile net income to net cash used for operating activities
Depreciation and amortization 1,003,869 122,107 1,125,976
Increase in cash surrender value of life insurance - (106,531) (106,531)
Increase in deferred liabilities-other 187,889 - 187,889
Stock issued in connection with bonus 31,251 - 31,251
Changes in assets and liabilities-net of effect of acquired companies
Receivables (9,266,871) 1,122,352 (8,144,519)
Inventories (1,232,246) (823,025) (2,055,271)
Prepaid expenses and deposits (162,469) 65,356 (97,113)
Accounts payable, accrued expenses and deferred income taxes 2,951,990 (455,839) 2,496,151
-----------------------------------------------
Net cash provided by (used for) operating activities (5,198,510) 142,707 (5,055,803)
-----------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (468,990) (122,763) (591,753)
Purchases of samples (280,957) - (280,957)
Decrease in other assets 10,980 29,930 40,910
Deferred payments on acquisitions - (497,541) (497,541)
Cash paid for acquisitions (844,756) - (844,756)
-----------------------------------------------
Net cash used for investing activities (1,583,723) (590,374) (2,174,097)
-----------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (1,126,090) - (1,126,090)
Net borrowings on line of credit 7,137,783 687,757 7,825,540
Advances to shareholder/officer (140,268) - (140,268)
Repayments from shareholder/officer 45,968 26,678 72,646
Increase in book overdraft 803,904 - 803,904
Policy loan proceeds - 480,747 480,747
Cash dividends paid - (746,018) (746,018)
-----------------------------------------------
Net cash provided by financing activities 6,721,297 449,164 7,170,461
-----------------------------------------------

NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (60,936) 1,497 (59,439)

CASH AND EQUIVALENTS, beginning of the year 68,797 11,746 80,543
-----------------------------------------------
CASH AND EQUIVALENTS, end of year $ 7,861 $ 13,243 $ 21,104
-----------------------------------------------
-----------------------------------------------

</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Income Statement
For the Year Ended December 31, 1993
(Unaudited)

HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>

NET SALES $ 35,716,650 $ 44,746,755 $ 80,463,405
COST OF SALES 23,301,431 35,960,649 59,262,9080
--------------------------------------------

Gross Profit 12,415,219 8,786,106 21,201,325

SELLING EXPENSES 7,077,395 4,250,375 11,327,770
GENERAL & ADMINISTRATIVE EXPENSES 4,952,408 3,923,424 8,875,832
--------------------------------------------
12,029,803 8,173,799 20,203,602

Income from operations 385,416 612,307 997,723
--------------------------------------------

OTHER INCOME (EXPENSE):
Interest expense (31,595) (57,266) (88,861)
Interest income 18,641 17,348 35,989
--------------------------------------------
Total other expense, net (12,954) (39,918) (52,872)

Income before taxes 372,462 572,389 944,851

PROVISION FOR INCOME TAXES 148,900 49,280 198,180
--------------------------------------------

NET INCOME FOR THE YEAR $ 223,562 $ 523,109 $ 746,671
--------------------------------------------
--------------------------------------------

PRO FORMA INCOME DATA
Net income as reported $ 223,562 $ 523,109 $ 746,671
Pro forma adjustment to income
taxes - 180,000 180,000
--------------------------------------------
PRO FORMA NET INCOME $ 223,562 $ 343,109 $ 566,671
--------------------------------------------
--------------------------------------------

PRO FORMA NET INCOME PER SHARE 0.12

WEIGHTED AVERAGE SHARES OUTSTANDING 4,715,637

</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Balance Sheet
December 31, 1993
(Unaudited)

ASSETS
------
HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 68,797 $ 11,746 $ 80,543
Receivables-
Drop shipment 9,902,412 6,668,834 16,571,246
Corporate fulfillment program 3,294,613 - 3,294,613
Advances due from salesmen 814,079 - 814,079
Inventories 875,505 835,905 1,711,410

Prepaid expenses and deposits 561,678 470,937 1,032,615
--------------------------------------------
Total current assets 15,517,084 7,987,422 23,504,506
--------------------------------------------

PROPERTY AND EQUIPMENT, NET 1,600,170 358,667 1,958,837
--------------------------------------------

OTHER ASSETS:
Intangible assets relating acquired
businesses, net 3,627,541 48,030 3,675,571
Due from shareholder/officer 104,979 - 104,979
Samples 694,376 - 694,376
Other 448,271 596,935 1,045,206
--------------------------------------------
Total other assets 4,875,167 644,965 5,520,132
--------------------------------------------

$21,992,421 $ 8,991,054 $ 30,983,475
--------------------------------------------
--------------------------------------------

</TABLE>

LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 681,651 $ 2,071,454 $ 2,753,105
Accounts payable 3,322,902 3,983,205 7,306,107
Accrued expenses- -
Commissions and wages 1,530,454 371,373 1,901,827
Other 732,069 506,407 1,238,476
Due to related parties 661,649 - 661,649
Deferred taxes-current 886,200 - 886,200
--------------------------------------------
Total current liabilities 7,814,925 6,932,439 14,747,364
--------------------------------------------

LONG-TERM DEBT,
less maturities shown above 5,518,747 - 5,518,747
--------------------------------------------

DEFERRED LIABILITIES:
Income taxes 910,494 - 910,494
Other 442,407 413,933 856,340
--------------------------------------------
Total deferred liabilities 1,352,901 413,933 1,766,834
--------------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
Preferred stock, no par value - - -
Common stock, no par value 7,068,383 10,000 7,078,383
Retained earnings 237,465 1,634,682 1,872,147
--------------------------------------------
Total shareholders' equity 7,305,848 1,644,682 8,950,530
--------------------------------------------
--------------------------------------------

$ 21,992,421 $ 8,991,054 $ 30,983,475
--------------------------------------------
--------------------------------------------

</TABLE>

<PAGE>

HA-LO Industries, Inc.
Combining Statement of Cash Flow
For the Year Ended December 31, 1993
(Unaudited)

<TABLE>
<CAPTION>
HA-LO FBW Combined
----- --- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income for the year $ 223,562 $ 523,109 $ 746,671
Adjustments to reconcile net income to net cash used for operating activities
Depreciation and amortization 475,582 141,960 617,542
Loss on lease buyout and sale of property 175,000 6,140 181,140
Increase in cash surrender value of life insurance - (57,687) (57,687)
Increase in deferred liabilities-other 315,064 - 315,064
Changes in assets and liabilities-net of effect of acquired companies
Receivables (5,023,386) 3,201,495 (1,821,891)
Inventories (599,835) (552,238) (1,152,073)
Prepaid expenses and deposits (347,178) (3,860) (351,038)
Accounts payable, accrued expenses and deferred income taxes 2,418,663 (1,781,915) 636,748
---------------------------------------------
Net cash provided by (used for) operating activities (2,362,528) 1,477,004 (885,524)
---------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (998,249) (136,273) (1,134,522)
Purchases of samples (165,945) - (165,945)
(Increase) Decrease in other assets (36,489) 21,607 (14,882)
Deferred payments on acquisitions - (104,288) (104,288)
Cash paid for acquisitions (4,247,536) - (4,247,536)
---------------------------------------------
Net cash used for investing activities (5,448,219) (218,954) (5,667,173)
---------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (84,230) - (84,230)
Proceeds from issuance of long term debt 4,660,672 - 4,660,672
Net borrowings on line of credit 1,582,257 58,167 1,640,424
Advances to shareholder/officer (104,979) (25,614) (130,593)
Payments on policy loan - (125,658) (125,658)
Cash dividends paid - (1,294,647) (1,294,647)
---------------------------------------------
Net cash provided by financing activities 6,053,720 (1,387,752) 4,665,968
---------------------------------------------

NET DECREASE IN CASH AND EQUIVALENTS (1,757,027) (129,702) (1,886,729)

CASH AND EQUIVALENTS, beginning of the year 1,825,824 141,448 1,967,272
---------------------------------------------
CASH AND EQUIVALENTS, end of year $ 68,797 $ 11,746 $ 80,543
---------------------------------------------
---------------------------------------------

</TABLE>

<PAGE>

HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Common Stock
---------------------------
Deferred Total
Shares Restricted Marketing Retained Shareholders'
Issued Amount Stock Cost Earnings Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>

BALANCE, December 31, 1992. . . . . . . . . 4,675,428 $ 6,715,885 $ - $ - $ 1,195,726 $ 7,911,611
Transfer of S Corporation
retained earnings . . . . . . . . . . . - 1,181,823 - - (1,181,823) -
Dividends paid by acquired company. . . . - - - - (299,346) (299,346)
Issuance of contingent shares for
acquisition of business . . . . . . . . 50,000 262,500 - - - 262,500
Issuance of shares for acquisition
of business . . . . . . . . . . . . . . 23,529 99,998 - - - 99,998
Undistributed earnings
of S Corporation. . . . . . . . . . . . - 223,763 - - (223,763) -
Net income for the year . . . . . . . . . - - - - 746,671 746,671
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1993. . . . . . . . . 4,748,957 8,483,969 - - 237,465 8,721,434
Dividends paid by acquired company. . . . - (392,000) - - (218,287) (610,287)
Stock bonus in connection with
acquisition of business . . . . . . . . 6,945 31,251 - - - 31,251
Issuance of contingent shares in
connection with acquisition . . . . . . 50,000 262,500 - - - 262,500
Net income for the year . . . . . . . . . - - - - 1,506,364 1,506,364
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1994. . . . . . . . . 4,805,902 8,385,720 - - 1,525,542 9,911,262
Dividends paid by acquired company. . . . - (513,015) - - (42,395) (555,410)
Issuance of shares in connection
with acquisitions . . . . . . . . . . . 121,325 852,068 - - - 852,068
Issuance of stock warrants. . . . . . . . - 1,448,000 - (1,448,000) - -
Issuance of restricted stock. . . . . . . 160,000 1,200,000 (1,200,000) - - -
Amortization of unearned
compensation . . . . . . . . .. . . . . - - 200,000 - - 200,000
Recognition of tax benefits from
options and restricted stock. . . . . . - 495,466 - - - 495,466
Exercise of stock options . . . . . . . . 43,121 214,529 - - - 214,529
Issuance of shares for cash . . . . . . . 1,799,925 25,466,330 - - - 25,466,330
Net income for the year . . . . . . . . . - - - - 2,987,551 2,987,551
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995. . . . . . . . . 6,930,273 $ 37,549,098 $ (1,000,000) $ (1,448,000) $ 4,470,698 $39,571,796
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>

HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

A. PRINCIPLES OF CONSOLIDATION

The Company is a marketing and promotion firm primarily engaged in the sale and
distribution of promotional merchandise. The accompanying consolidated financial
statements include the accounts of HA-LO Industries, Inc. and its subsidiaries
(the "Company"). All intercompany transactions and accounts have been
eliminated. The financial statements are prepared on the accrual basis of
accounting. The principal accounting policies of the Company follow.

B. REVENUE RECOGNITION

The Company's revenues are primarily derived from drop shipment sales and sales
under its corporate fulfillment program.

Revenue from drop shipment sales is recognized at the time the merchandise is
shipped to the customer. Revenue for corporate fulfillment programs with a
guarantee at full sell price is recognized when the merchandise is complete and
available for release. Accordingly, the corporate fulfillment program
receivables represent unbilled revenues. For corporate fulfillment programs
which do not have such a guarantee, the Company recognizes revenue when the
merchandise is shipped.

C. PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated for financial
reporting purposes over the estimated useful lives on a straight-line basis as
follows:

Buildings . . . . . . . . . . . . . . . 15-31 years
Furniture, fixtures and equipment . . . 7-10 years
Computer equipment. . . . . . . . . . . 5 years
Vehicles. . . . . . . . . . . . . . . . 5 years
Leasehold improvements. . . . . . . . . life of lease
-------------
-------------

Property and equipment are composed of the following:

1995 1994
---- ----

Land . . . . . . . . . . . . . . . . . . . . $ 129,000 $ 129,000
Buildings. . . . . . . . . . . . . . . . . . 502,000 502,000
Furniture, fixtures and equipment. . . . . . 3,622,000 3,078,000
Computer equipment . . . . . . . . . . . . . 2,305,000 459,000
Vehicles . . . . . . . . . . . . . . . . . . 41,000 38,000
Leasehold improvements . . . . . . . . . . . 426,000 593,000
------------ ------------
7,025,000 4,799,000
Less- Accumulated depreciation . . . . . . . 2,670,000 2,214,000
------------ ------------
Property and equipment, net. . . . $ 4,355,000 $ 2,585,000
------------ ------------
------------ ------------

D. INTANGIBLES

Intangible assets relating to acquired businesses consist primarily of the cost
of purchased businesses in excess of the fair value of net assets acquired.
Intangible assets are amortized on the straight-line basis over periods ranging
from seven to fifteen years. The Company regularly reviews the performance of
acquired businesses to evaluate the realizability of the underlying goodwill.
Amortization expense in 1995, 1994 and 1993 was approximately $1,129,000,
$543,000 and $124,000, respectively. Accumulated amortization of goodwill as of
December 31, 1995 and 1994 was $1,796,000 and $667,000, respectively.

E. INVENTORIES

Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market.

F. SAMPLES

Samples are an integral part of the business and are used to promote the
Company's products in order to obtain new business and sales growth. The
Company's policy is to capitalize purchased samples and amortize these costs on
a straight-line basis over a six-year useful life. Amortization expense in 1995,
1994 and 1993 was approximately $304,000, $189,000 and $171,000, respectively.

G. SIGNIFICANT CUSTOMERS

Approximately 17% of net sales in 1995 were generated in connection with a
strategic alliance that began in 1995 with Montgomery Ward & Co., Inc.
("Montgomery Ward"). In 1994 and 1993, another customer accounted for
approximately 14% and 30%, respectively, of net sales. The Company provides
services to customers in diversified industries. As of December 31, 1995,
approximately $10.3 million of the Company's accounts receivable was from these
two companies. No other concentration of credit risk existed as of December 31,
1995, 1994 or 1993.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

H. STATEMENTS OF CASH FLOWS

The Company considers investments purchased with an original maturity of three
months or less to be cash equivalents. Supplemental cash flow information
includes the following:

1995 1994 1993
---- ---- ----
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION--
Cash paid during the year
for interest. . . . . . . . . . $ 1,292,000 $ 857,000 $ 98,000
Cash paid during the year
for taxes . . . . . . . . . . . $ 1,723,000 $ 1,199,000 $ 53,000
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE
OF NONCASH ACTIVITIES--
Recognition of tax
benefits from options
and restricted stock. . . . . . $ 495,000 $ - $ -
Recognition of common
shares issued in connection
with acquisitions . . . . . . . $ 852,000 $ 263,000 $ 362,000
------------ ------------ ------------
------------ ------------ ------------

I. SHORT-TERM INVESTMENTS

The Company classifies investments purchased with an original maturity of three
to twelve months as short-term investments. Such investments, which are held-to-
maturity, relate primarily to tax exempt securities and are carried at cost plus
accrued interest.

J. USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

K. NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") has issued FAS No. 121-
Accounting For The Impairment of Long-Lived Assets and For Long-Lived Assets To
Be Disposed Of which is effective for fiscal years beginning after December 15,
1995. The Company is studying FAS No. 121 but does not believe its adoption will
have a material impact on the financial statements.

In October 1995, the FASB issued FAS No. 123-Accounting For Stock Based
Compensation. Certain provisions of this statement were required to be adopted
during 1995 (see note 9). Remaining provisions of the statement must be adopted
in 1996. The Company does not believe the adoption of these provisions will have
a material impact on the financial statements.

L. RECLASSIFICATION

Certain amounts in previously issued financial statements have been reclassified
to conform to 1995 classifications.

NOTE 2. RECEIVABLES:

Receivables in the accompanying consolidated balance sheets are net of reserves
for doubtful accounts of approximately $748,000 as of December 31, 1995 and
$436,000 as of December 31, 1994. Receivables are unsecured and generally due
within 30 days from the invoice date. Drop shipment sales are billed when
merchandise is shipped to the customer. Sales from corporate fulfillment
programs are generally billed when the merchandise is released, at the
customer's request, from the Company's warehouse. In the normal course of
business, the Company makes advances to salesmen, which are applied against
commissions to be earned.

NOTE 3. INCOME TAXES:

Income taxes are provided based upon the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes". Accordingly,
deferred tax assets and liabilities are recognized for the estimated future tax
effects attributable to differences between the consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax law.

The entity acquired on December 28, 1995 (Note 8) and accounted for as a pooling
of interests had previously elected to be treated as an S Corporation for
Federal income tax purposes. Accordingly, this company was not subject to
Federal income tax purposes prior to its acquisition by the Company. Deferred
taxes relating to the termination of the acquired company's S Corporation status
were not material.

The provision for income taxes consisted of the following amounts:

1995 1994 1993
---- ---- ----
Current provision. . . . . . . . . $ 2,875,000 $ 1,138,000 $ 565,000
Deferred benefit . . . . . . . . . (883,000) (279,000) (367,000)
------------ ------------ ------------
Total provision . . . . . $ 1,992,000 $ 859,000 $ 198,000
------------ ------------ ------------
------------ ------------ ------------

11
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

The Company's effective tax rate is reconciled to the Federal statutory rate as
follows:

1995 1994 1993
---- ---- ----
Federal statutory rate . . . . . . 34.0 % 34.0 % 34.0 %
State income taxes
(net of Federal benefit). . . . 5.0 5.0 4.3
Non-taxable S Corporation
earnings (Note 8) . . . . . . . - (3.7) (19.0)
Other. . . . . . . . . . . . . . . 1.0 1.0 1.7
------------ ------------ ------------
Effective tax rate. . . . 40.0 % 36.3 % 21.0 %
------------ ------------ ------------
------------ ------------ ------------

Deferred income taxes result from temporary differences in the recognition of
revenue and expense for tax and financial reporting and are summarized as
follows:

(Asset)/Liability
---------------------------
1995 1994
---- ----
Deferred taxes-current
Change to accrual method
for income tax purposes . . . . . . . . . . $ - $ 618,000
Guaranteed sales,
net of related commissions. . . . . . . . . 411,000 515,000
Credits due . . . . . . . . . . . . . . . . . 545,000 253,000
Non-deductible reserves . . . . . . . . . . . (242,000) (211,000)
Other . . . . . . . . . . . . . . . . . . . . 66,000 (17,000)
------------ ------------
Total deferred taxes-current. . . . . . 780,000 1,158,000
------------ ------------
Deferred taxes-long-term
Samples . . . . . . . . . . . . . . . . . . . 400,000 306,000
Depreciation and amortization . . . . . . . . (471,000) (41,000)
Other . . . . . . . . . . . . . . . . . . . . (117,000) 52,000
------------ ------------
Total deferred taxes-non-current. . . . (188,000) 317,000
------------ ------------
Total deferred tax liability. . . . . . $ 592,000 $ 1,475,000
------------ ------------
------------ ------------

NOTE 4. PRO FORMA NET INCOME PER SHARE (UNAUDITED):

The unaudited pro forma income data in the consolidated statements of income for
1994 and 1993 provide information as if the company acquired in December, 1995
(see Note 8) had been a C Corporation for income tax purposes. Pro forma net
income per share is based on the weighted average number of shares of common
stock outstanding, including the 436,500 shares issued in connection with this
acquisition.

NOTE 5. DEBT:

As part of an overall credit facility with a bank, the Company has a line of
credit with a maximum availability of $16 million through October 1996. The line
bears interest at either prime or the London Interbank Offered Rate ("LIBOR")
plus 1.5%. The prime rate was 8.5% at December 31, 1995, while LIBOR was 5.69%.
Amounts outstanding under the agreements are secured by substantially all the
assets of the Company. The agreements contain certain financial covenants which
the Company must meet, including minimum tangible net worth, working capital,
and minimum cash flow coverages, as defined. The Company was in compliance with
all covenants as of December 31, 1995.

Long-term debt consists of the following:

1995 1994
---- ----
Line of credit as described above. . . . . . . . $ 220,000 $ 8,720,000
Line of credit of acquired company,
interest at prime plus .5%. . . . . . . . . . 535,000 2,759,000
Term loan with bank, interest at 7.11% . . . . . - 3,428,000
Term loan with bank, interest at 7.5%. . . . . . - 508,000
Term loans of acquired company,
interest at approximately 7.5%. . . . . . . . - 552,000
------------ ------------
Total debt. . . . . . . . . . . . . . . 755,000 15,967,000
Less: current maturities . . . . . . . . . . . . 755,000 3,455,000
------------ ------------
Total long-term debt. . . . . . . . . . $ - $ 12,512,000
------------ ------------
------------ ------------

All of the debt, except for the lines of credit, was repaid in 1995 with the
proceeds from the sale of the Company's common stock (Note 10). The line of
credit of the acquired company was paid in full subsequent to
December 31, 1995.

NOTE 6. RELATED-PARTY TRANSACTIONS:

Prior to December 31, 1993, the Company leased an office facility which was
beneficially owned by a party related to its majority shareholder. Effective
January 1, 1994, the Company reached an agreement with the related party to buy
out the remaining lease term for an aggregate of $175,000. Rent expense for
these facilities, including the lease buyout, was approximately $355,000 in
1993.

A member of the Board of Directors renders acquisition consulting services to
the Company pursuant to an agreement. The director's compensation is strictly
contingent upon the successful completion of an acquisition. During 1995, the
director earned cash compensation of approximately $850,000 and was granted
24,757 options at fair market value at the date of grant. During 1994, the
director earned cash compensation of approximately $154,000 and was granted
7,650 options. During 1993, the director earned cash compensation of
approximately $681,000 and was granted 186,463 options.

12
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

NOTE 7. COMMITMENTS:

The Company leases facilities from unrelated parties under operating leases
expiring at various dates through September, 2003. Rent expense charged for
these facilities totaled approximately $1,519,000, $968,000 and $615,000 for
1995, 1994 and 1993, respectively.

The aggregate annual minimum lease rentals at December 31, 1995, are as follows:

Year ending December 31-

1996. . . . . . . $ 1,327,000
1997. . . . . . . 1,256,000
1998. . . . . . . 1,246,000
1999. . . . . . . 1,143,000
2000. . . . . . . 1,032,000
thereafter. . . . 1,967,000
--------------
$ 7,971,000
--------------
--------------

At December 31, 1995, the Company has approximately $1,616,000 in outstanding
letters of credit issued in the ordinary course of business.

NOTE 8. BUSINESS COMBINATIONS:

The Company's acquisitions which are accounted for under the purchase method of
accounting are included in the consolidated financial statements from the date
of acquisition. At December 31, 1995, the valuations of certain assets and
liabilities acquired in these transactions were estimated. As additional
information becomes available, it may be necessary to make adjustments which
will affect intangible assets relating to acquired businesses.

During 1995, the Company acquired three companies. Two of the three acquisitions
were accounted for under the purchase method of accounting. These two businesses
were acquired for an aggregate of approximately $1,300,000 in cash, 121,325
shares of the Company's common stock and the assumption of certain liabilities.
The common stock issued had an approximate fair market value of $852,000 at the
date of closings. These two acquisitions were not determined to be material to
the Company's consolidated financial statements.

The third acquisition was completed on December 28, 1995 and was accounted for
as a pooling-of-interests. The Company issued 436,500 shares of its common stock
for all the outstanding shares of Fletcher-Barnhardt & White (FBW), an
advertising specialty company. Accordingly, the consolidated financial
statements for all periods presented have been restated to include the results
of FBW. A reconciliation of previously reported sales and earnings follows:

1995 1994 1993
---- ---- ----
Sales-
Previously reported. . . . . . . $ 126,311,000 $ 68,603,000 $ 35,717,000
FBW. . . . . . . . . . . . . . . 46,555,000 41,793,000 44,746,000
------------- ------------- -------------
Net Sales . . . . . . . . . . $ 172,866,000 $ 110,396,000 $ 80,463,000
------------- ------------- -------------
------------- ------------- -------------
Net Income (Proforma
in 1994 and 1993)
Previously reported. . . . . . . $ 2,962,000 $ 1,288,000 $ 224,000
FBW. . . . . . . . . . . . . . . 26,000 131,000 343,000
------------- ------------- -------------
Net income. . . . . . . . . . $ 2,988,000 $ 1,419,000 $ 567,000
------------- ------------- -------------
------------- ------------- -------------

During 1994, the Company acquired two companies. The businesses were acquired
for an aggregate of approximately $422,000 in cash and the assumption of certain
liabilities. Additional cash payments of up to $875,000 are contingent on the
achievement of specified earnings levels through 1998. The remaining contingent
payments are included in deferred liabilities in the consolidated balance
sheets. These two acquisitions were not determined to be material to the
Company's consolidated financial statements.

During 1993, the Company acquired four companies. Three of the four businesses
were acquired for an aggregate of approximately $876,000 in cash and 123,529
shares of the Company's common stock with an approximate fair market value of
$625,000 at the date of closing. These three acquisitions were determined not to
be material to the Company's consolidated financial statements. In addition, the
Company acquired the net assets of Lee Wayne Company, Inc. in 1993 for
approximately $3,858,000, including acquisition expenses.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

The 1993 acquisitions included the purchase of certain net assets of Lee Wayne
Company, Inc. The following unaudited pro forma results of operations assume the
acquisition occurred as of January 1, 1993.

1993
----
Revenue as reported. . . . . . . . . . . . . . . $ 80,463,000
Revenue of purchased business
for period prior to acquisition . . . . . . . 14,676,000
------------
Pro forma revenue . . . . . . . . . . . . . . $ 95,139,000
------------
------------
Net income as reported . . . . . . . . . . . . . $ 567,000
Net loss of acquired business
for period prior to acquisition . . . . . . . (244,000)
Adjustment for interest and amortization
of cost in excess of market value of net
assets acquired . . . . . . . . . . . . . . . 224,000
------------
Pro forma net income. . . . . . . . . . . . . $ 547,000
------------
------------
Earnings per share as reported . . . . . . . . . $ .12
Effect of purchased business
prior to acquisition. . . . . . . . . . . . . -
------------
Pro forma earnings per share. . . . . . . . . $ .12
------------
------------

NOTE 9. STRATEGIC ALLIANCE:

On January 11, 1995, the Company signed a multi-year agreement to be the
exclusive provider of premium advertising products to Montgomery Ward. In
connection with this agreement, Merchant Partners, an entity of which Montgomery
Ward is a limited partner, purchased 149,925 newly issued common shares of the
Company at fair market value ($6.67 per share). The Company also granted
warrants to Merchant Partners for 400,000 shares of the Company's common stock
at $6.67 per share. Vesting of these shares occurs over nine years but can be
accelerated if certain purchasing levels over the next five years are achieved.
Simultaneous with this agreement, Merchant Partners purchased an additional
149,925 shares of the Company's common stock from the majority
shareholder/officer at $6.67 per share.

In addition, 160,000 shares of restricted common stock of the Company were
issued to a sales representative in lieu of cash commission payments related to
the Montgomery Ward agreement. These shares have been included in unearned
compensation in the accompanying consolidated statements of shareholders'
equity. The Company expects the restricted shares to be earned over the next
five years.

On December 27, 1995, Montgomery Ward extended the exclusive agreement for five
additional years. The Company granted to Merchant Partners warrants to purchase
199,998 additional shares of the Company's common stock at $25 per share.
Effective December 15, 1995, FAS No. 123 requires that companies value warrants
issued to non-employees at fair market value. Accordingly, the warrants were
valued at $1,448,000, and included in the consolidated balance sheet as deferred
marketing costs, and will be charged to expense over the five year term of the
extended agreement beginning January 2000.

NOTE 10. CAPITAL STOCK AND EARNINGS PER SHARE:

On November 22, 1995, the Company sold, through a public offering, 1,650,000
shares of its common stock. The Company realized net proceeds of approximately
$24.5 million from this offering.

In connection with the FBW acquisition (Note 8) and the termination of the
predecessor company's S Corporation status, the Company was required to transfer
FBW retained earnings to common stock. Dividends of the predecessor company paid
subsequently are shown as a reduction to retained earnings to the extent of
their net income, with the remainder reducing common stock.

Earnings per share are computed on the basis of the weighted average number of
common and common equivalent shares outstanding during each year. The following
table reconciles the number of common shares shown as outstanding in the
consolidated balance sheets and the number of common shares used in computing
fully diluted earnings per share.

1995 1994
---- ----
Common shares outstanding per balance
sheets. . . . . . . . . . . . . . . . . . . . . . 6,930,273 4,805,902
Effect of shares issuable under stock options
after applying the "treasury stock" method. . . . 494,155 -
Effect of using weighted average common
shares outstanding during the year. . . . . . . . (1,528,575) (5,537)

Other. . . . . . . . . . . . . . . . . . . . . . . . (80,911) -
----------- -----------
Common shares used in computing
fully diluted earnings per share. . . . . . . . . 5,814,942 4,800,365
------------ ------------
------------ ------------

NOTE 11. UNAUDITED SUPPLEMENTARY EARNINGS PER SHARE:

The net proceeds from the offering were used to repay substantially all of the
Company's outstanding bank debt. Assuming the debt retirement occurred on
January 1, 1995, the unaudited supplementary pro forma primary earnings per
share would have been $.58 for the year ended December 31, 1995. This per share
amount reflects the reduction of interest expense of approximately $1,302,000
($781,000 after tax). Weighted average shares used in computing the per share
amount were increased by 960,000 to approximate the number of shares sold in the
offering to retire the debt.

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

NOTE 12. STOCK OPTIONS:

In 1992, the Company adopted a stock plan (the Plan) which provides for
reservation and issuance of options to purchase shares of the Company's common
stock, restricted stock, stock appreciation rights and phantom stock awards. The
number of options, shares or rights to be issued and the terms thereof are at
the discretion of the Compensation Committee of the Company's Board of
Directors. Pursuant to the Plan, as amended, 1,474,603 shares of the Company's
common stock have been reserved. At December 31, 1995, there were 428,265 shares
available for future grant under the Plan. The exercise price for incentive
stock options and non-qualified stock options granted under the Plan may not be
less than 100% and 85%, respectively, of the fair market value of the common
stock at the date of grant. As granted, the stock options usually vest 50%
annually, commencing upon completion of one year of employment subsequent to the
date of grant, and expire ten years from the date of grant.

The following schedule sets forth the status of the options granted under the
Plan and warrants issued (Note 9):

Shares Option Price
------ ------------
Outstanding at December 31, 1994. . . . . . . 541,702 $4.125 to $ 7.25
Granted in 1995 . . . . . . . . . . . . . . . 833,426 $5.563 to $25.00
Exercised in 1995 . . . . . . . . . . . . . . (43,121) $4.250 to $10.00
Canceled in 1995. . . . . . . . . . . . . . . (4,035) $4.125 to $10.375
---------
Outstanding at December 31, 1995* . . . . . . 1,327,972 $4.125 to $25.00
---------
---------
Exercisable at December 31, 1995. . . . . . . 554,100 $4.125 to $20.00
---------
---------

*Exercisable at various dates through December, 2005.

NOTE 13. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS:

The Company's common stock, which is quoted on the National Association of
Securities Dealers, Inc. National Market System under the symbol "HALO", was
held by approximately 128 shareholders of record as of March 11, 1996. The
following table sets forth the range of high and low bid quotations for each
quarterly period in 1995 and 1994 and reflects inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.

High Low
---- ---
1995
First Quarter. . . . . . 10 1/2 6
Second Quarter . . . . . 10 3/4 9
Third Quarter. . . . . . 18 1/4 10
Fourth Quarter . . . . . 30 3/4 14 1/2

1994
First Quarter. . . . . . 7 3/4 5
Second Quarter . . . . . 7 5 3/4
Third Quarter. . . . . . 6 3/4 5 1/2
Fourth Quarter . . . . . 6 1/2 5 1/2