<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ______to______
Commission file number: 0-20758
HA-LO INDUSTRIES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Illinois 36-3573412
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5980 TOUHY AVENUE, NILES, ILLINOIS 60714
----------------------------------------
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (847)647-2300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No[ ].
As of July 31, 1996, the registrant had an aggregate of 10,509,055 shares of
its common stock outstanding.
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HA-LO INDUSTRIES, INC.
INDEX
Part I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Balance Sheets as of June 30, 1996 and
December 31, 1995. 2
Statements of Income for the three months
and six months ended June 30, 1996 and 1995. 4
Statements of Cash Flows for the six months
ended June 30, 1996 and 1995. 5
Notes to Financial Statements. 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 10
Signatures 11
1
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HA-LO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company,
without audit, in accordance with generally accepted accounting principles
for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring matters)
considered necessary for a fair presentation have been included.
The results of operations for the three month and six month periods ended
June 30, 1996 are not necessarily indicative of the results that may be
expected for the full year. These financial statements should be read in
conjunction with the Company's financial statements and related notes in the
Company's 1995 Annual Report to shareholders.
NOTE 2. CAPITAL STOCK:
Effective June 3, 1996, the Company's Board of Directors declared a
3-for-2 stock split, to be paid as a 50 percent stock dividend on its common
stock. All information in this form 10Q has been retroactively adjusted to
give effect to the stock split.
In the second quarter of 1996, options to acquire an aggregate of 175,137
shares of the Company's common stock were issued under the Company's Stock
Plan at exercise prices ranging from $12.92 to $25.25 per share.
Additionally, 48,713 options were exercised in the second quarter at prices
ranging from $3.50 to $4.33 per share.
The difference in the outstanding common shares as of June 30, 1996 and the
common shares used in computing earnings per share for the second quarter of
1996 is shown in the following table:
1996
----
Common shares outstanding per balance sheet 10,509,716
Effect of shares issuable under stock options
after applying the "treasury stock" method 944,679
Effect of using weighted average common shares
outstanding during the year (21,801)
Other (124,486)
----------
Common shares used in computing fully diluted
earnings per share 11,308,108
==========
6
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NOTE 3. SIGNIFICANT CUSTOMERS:
Approximately 14.0% of the Company's net sales for the second quarter of 1996
were obtained from Montgomery Ward & Co., Inc.. Approximately, 13% of the
Company's net sales for the same period in 1995 were obtained from
R.J.Reynolds, Inc.
For the six months ended June 30, 1996, approximately 15.0% of net sales were
obtained from Montgomery Ward & Co., Inc.. There were no such significant
customers in the first six months of 1995.
NOTE 4. STATEMENTS OF CASH FLOWS:
The supplemental schedule of noncash activities for the six months ended June
30, 1996 and 1995 includes the following:
1996 1995
---- ----
Issuance of common shares in connection
with bonus $ 31,250 --
Recognition of tax benefits from options
and restricted stock $ 875,000 --
Issuance of common shares in connection with
acquisition of certain businesses -- $ 550,000
Issuance of common stock recorded as unearned
compensation -- $1,200,000
NOTE 5. BUSINESS COMBINATIONS
On June 14, 1996 the Company signed an agreement to purchase two teleservices
companies for 2,550,000 of its common stock. The business combination is
subject to approval from the Company's shareholders and is expected to close
in the 3rd Quarter.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
Net sales for the second quarter of 1996 increased 24.7% to $47.5 million
compared to the corresponding quarter of 1995. Of the $9.4 million increase
in sales, approximately $6.6 million resulted from additional sales under the
Company's exclusive agreement with Montgomery Ward and $1.0 million was due
to acquisitions. The remainder was due to internal growth.
Gross profit for the second quarter of 1996 increased to $14.6 million
compared to $11.3 million in the corresponding quarter of 1995. This is
primarily due to the increasing sales. The gross profit percentage also
increased 1.1% to 30.7% due to product mix.
Selling expenses as a percentage of net sales increased slightly to 15.4% in
the second quarter of 1996 ($7.3 million) compared to 15.0% in the second
quarter of 1995 ($5.7 million). The most significant factor of the $1.6
million increase relates to commission expense which increased due to the
additional sales.
General and administrative expenses as a percentage of net sales decreased to
10.9% in the second quarter of 1996 ($5.2 million) compared to 11.7% in the
second quarter of 1995 ($4.5 million). This decrease is primarily
attributable to increased sales without a proportionate increase in general
and administrative costs. The most significant factor causing the $720,000
increase related to higher salary and related costs necessary to support the
additional sales.
In the second quarter of 1996 the Company had interest expense of $7,000,
compared to $355,000 in the second quarter of 1995. Interest income for the
second quarter of 1996 was $149,000. This was due to the Company paying-off
its debt with the proceeds from the public sale of the Company's common stock
in the fourth quarter of 1995, and investments made with the remaining
proceeds.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net sales for the first six months of 1996 increased 29.6% to $86 million
compared to the corresponding period of 1995. Of the $19.7 million increase
in sales, approximately $12.9 million resulted from additional sales under
the Company's exclusive agreement with Montgomery Ward and $2.2 million was
due to acquisitions. The remainder was due to internal growth.
Gross profit for the first six months of 1996 increased to $25.3 million
compared to $20.7 million in the corresponding period of 1995. This is due to
the increasing sales. The gross profit percentage decreased 1.8% to 29.4%
primarily due to the effect of lower gross margin of Montgomery Ward sales,
which began in the second quarter of 1995.
Selling expenses as a percentage of net sales decreased to 15.2% in the first
six months of 1996 ($13.0 million) compared to 16.1% in the first six months
of 1995 ($10.7 million). The most significant factor of the $2.3 million
increase relates to commission expense which increased due to additional
sales. The 0.9% decrease as a percentage of net sales was
8
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primarily the result of lower commission expense due to the aforementioned
decrease in gross profit percentage.
General and administrative expenses as a percentage of net sales decreased to
11.5% in the first six months of 1996 ($9.9 million) compared to 12.5% in
first six months of 1995 ($8.3 million). This decrease is primarily
attributable to increased sales without a proportionate increase in general
and administrative costs. The most significant factor causing the $1.6
million increase is higher salary and related costs necessary to support the
additional sales.
Interest expense for the first six months of 1996 was $8,000, compared to
$666,000 in the first six of 1995. Interest income for the first six months
of 1996 was $256,000. This was due to the same reason as noted in the three
month period ended June 30,1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio increased from 2.02 to 1 at December 31, 1995 to
2.53 to 1 as of June 30, 1996. Working capital was $29.4 million at June 30,
1996 compared to $27.6 million at December 31, 1995.
Capital expenditures for property and equipment were approximately $1.2
million for the first six months of 1996, and management expects capital
expenditures to be approximately $1.5 million for the full year of 1996,
excluding acquisitions. The Company maintains a credit facility with a bank,
maturing October 1996, to provide for borrowings of up to $16.0 million. The
Company is in the process of refinancing the facility to increase the maximum
borrowing level. The Company anticipates that the available funds from the
Company's credit facility together with the remaining funds from its public
offering, will be adequate to satisfy any of the Company's operating cash
needs for the foreseeable future.
INFLATION
Management does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
9
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -- None
(b) The Company amended its Form 8-K dated January 16, 1996 (and amended
on Form 8-K/A filed March 13,1996) with respect to the acquisition of
Fletcher-Barnhardt & White, Inc., on Form 8-K/A filed on May 28, 1996.
10
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HA-LO INDUSTRIES, INC.
Dated: August 12, 1996 /s/ Gregory J. Kilrea
------------------------
Gregory J. Kilrea
Duly Authorized Officer
and Chief Financial Officer
<PAGE>
PART 1. FINANCIAL INFORMATION
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,342,926 $ 1,525,445
Short-term investments 4,477,308 3,549,717
Receivables 31,975,569 43,381,311
Inventories 7,428,340 5,494,974
Prepaid expenses & deposits 3,405,203 793,800
----------- ----------
Total current assets 48,629,346 54,745,247
----------- ----------
PROPERTY AND EQUIPMENT, net 5,145,945 4,354,503
----------- ----------
OTHER ASSETS:
Intangible assets relating to acquired
businesses, net 7,333,435 7,887,243
Samples 1,159,584 1,026,588
Other 824,616 834,378
----------- -----------
Total other assets 9,317,635 9,748,209
----------- -----------
$63,092,926 $68,847,959
=========== ===========
The accompanying notes are an integral part of these balance sheets.
2
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HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
June 30, December 31,
1996 1995
---------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 755,000
Book overdraft 666,531 2,161,161
Accounts payable 11,351,007 15,346,018
Accrued expenses 6,405,735 7,993,169
Due to related parties -- 123,910
Deferred taxes -- current 780,216 780,216
---------- ----------
Total current liabilities 19,203,489 27,159,474
---------- ----------
LONG-TERM DEBT -- --
DEFERRED LIABILITIES 1,765,266 2,116,689
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000
shares authorized and none issued -- --
Common stock, no par value: 25,000,000
shares authorized and 10,509,716 issued
and outstanding in 1996 and 7,817,285 in 1995 38,443,234 37,549,098
Unearned compensation-restricted stock (880,000) (1,000,000)
Deferred marketing costs (1,448,000) (1,448,000)
Retained earnings 6,008,937 4,470,698
---------- ----------
Total shareholders' equity 42,124,171 39,571,796
---------- ----------
$63,092,926 $68,847,959
========== ==========
The accompanying notes are an integral part of these balance sheets.
3
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HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $47,513,278 $38,106,679 $85,972,582 $66,314,306
COST OF SALES 32,935,358 26,823,345 60,703,061 45,634,276
----------- ----------- ----------- ----------
Gross profit 14,577,920 11,283,334 25,269,521 20,680,030
SELLING EXPENSES 7,337,693 5,714,142 13,026,117 10,699,391
GENERAL AND ADMINISTRATIVE EXPENSES 5,190,216 4,470,628 9,927,498 8,292,920
----------- ----------- ----------- ----------
Income from operations 2,050,011 1,098,564 2,315,906 1,687,719
INTEREST EXPENSE 6,834 354,823 8,076 666,195
INTEREST INCOME 148,532 -- 256,409 953
----------- ----------- ----------- ----------
Income before taxes 2,191,709 743,741 2,564,239 1,022,477
PROVISION FOR TAXES 877,000 297,711 1,026,000 408,979
----------- ----------- ----------- ----------
NET INCOME FOR THE PERIOD $ 1,314,709 $ 446,030 $ 1,538,239 $ 613,498
=========== =========== =========== ==========
EARNINGS PER SHARE
Primary $ 0.12 $ 0.06 $ 0.14 $ 0.08
Fully diluted $ 0.12 $ 0.06 $ 0.14 $ 0.08
=========== ========== =========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING
Primary 11,239,539 7,867,287 11,091,783 7,842,908
Fully diluted 11,308,108 7,998,740 11,263,248 7,955,265
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 1,538,239 $ 613,498
Adjustments to reconcile net income to net
cash used for operating activities-
Depreciation and amortization 1,265,385 968,360
Increase in deferred liabilities - other 94 99,248
Changes in assets and liabilities, net of effects
of acquired companies -
Receivables 11,405,742 1,332,326
Inventories (1,933,366) (102,742)
Prepaid expenses and deposits (2,611,403) (359,412)
Accounts payable, accrued expenses and
due to related parties (4,831,355) (5,883,095)
----------- ----------
Net cash provided by (used for) operating activities 4,833,336 (3,331,817)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,202,451) (906,681)
Purchases of samples (287,496) (224,510)
Increase in short-term investments (927,591) --
Decrease (increase) in other assets 9,762 (27,050)
Cash paid for acquisition, including deferred payments (346,335) (1,776,808)
----------- ----------
Net cash used for investing activities (2,754,111) (2,935,049)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long term debt -- 3,000,000
Net payments on long-term debt -- (490,721)
Net payments(borrowings) under line of credit (755,000) 1,503,925
Advances to shareholder/officer -- (91,797)
Increase(decrease) in book overdraft (1,494,630) 1,313,703
Net proceeds from issuance of common stock 567,071 1,039,655
Repurchase of common stock (579,185) --
----------- ----------
Net cash provided by (used for) financing activities (2,261,744) 6,274,765
----------- ----------
NET INCREASE (DECREASE) IN CASH AND (182,519) 7,899
EQUIVALENTS
CASH AND EQUIVALENTS, beginning of period 1,525,445 21,104
----------- -----------
CASH AND EQUIVALENTS, end of period$ 1,342,926 $ 29,003
=========== ===========
5
</TABLE>
The accompanying notes are an integral part of these statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,342,926
<SECURITIES> 4,477,308
<RECEIVABLES> 31,475,569
<ALLOWANCES> 0
<INVENTORY> 7,428,340
<CURRENT-ASSETS> 48,629,346
<PP&E> 5,145,945
<DEPRECIATION> 0
<TOTAL-ASSETS> 63,092,926
<CURRENT-LIABILITIES> 19,203,489
<BONDS> 0
0
0
<COMMON> 38,443,234
<OTHER-SE> 3,680,937
<TOTAL-LIABILITY-AND-EQUITY> 63,092,926
<SALES> 85,972,582
<TOTAL-REVENUES> 85,972,582
<CGS> 60,703,061
<TOTAL-COSTS> 22,953,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (248,333)
<INCOME-PRETAX> 2,564,239
<INCOME-TAX> 1,026,000
<INCOME-CONTINUING> 1,538,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,538,239
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
