<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 September 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.
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(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
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(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 November 1, 1996, the registrant had an aggregate of 13,131,819 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 September 30, 1996 and
December 31, 1995. 2
Statements of Income for the three months and nine
months ended September 30, 1996 and 1995. 4
Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995. 5
Notes to Financial Statements. 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote
of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
1
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PART 1. FINANCIAL INFORMATION
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,078,767 $ 2,264,594
Short-term investments 4,473,558 3,549,717
Receivables 46,380,807 49,351,240
Inventories 7,434,642 5,494,974
Prepaid expenses & deposits 2,322,112 1,225,793
------------- ------------
Total current assets 61,689,886 61,886,318
------------- ------------
PROPERTY AND EQUIPMENT, net 9,317,784 7,674,505
------------- ------------
OTHER ASSETS:
Intangible assets relating to acquired
businesses, net 6,862,162 7,887,243
Samples 1,165,617 1,026,588
Other 835,357 865,592
------------- ------------
Total other assets 8,863,136 9,779,423
------------- ------------
$79,870,806 $79,340,246
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------------- ------------
The accompanying notes are an integral part of these balance sheets.
2
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HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September 30, December 31,
1996 1995
------------ -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ - $ 755,000
Book overdraft 671,702 2,161,161
Accounts payable 11,004,261 16,269,312
Accrued expenses 13,749,465 11,808,089
Due to related parties 250,000 123,910
Deferred taxes - current 941,996 941,996
------------ ------------
Total current liabilities 26,617,424 32,059,468
------------ ------------
LONG-TERM DEBT 4,170,197 81,336
DEFERRED LIABILITIES 1,818,936 2,416,689
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 13,090,200 issued
and outstanding in 1996 and 12,945,409 in 1995 42,318,538 42,737,806
Unearned compensation-restricted stock (820,000) (1,000,000)
Cumulative Translation Adjustment 14,507 22,249
Deferred marketing costs (1,448,000) (1,448,000)
Retained earnings 7,199,204 4,470,698
------------ ------------
Total shareholders' equity 47,264,249 44,782,753
------------ ------------
$79,870,806 $ 79,340,246
------------ ------------
------------ ------------
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
SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $65,110,406 $57,997,188 $175,816,137 $ 142,057,465
COST OF SALES 46,577,220 42,175,632 126,323,400 101,407,708
-------------- ------------- ------------- -------------
Gross profit 18,533,186 15,821,556 49,492,737 40,649,757
SELLING EXPENSES 7,314,474 6,701,795 20,889,099 17,836,285
GENERAL AND ADMINISTRATIVE EXPENSES 8,426,742 5,963,191 21,134,668 16,843,739
-------------- ------------- ------------- -------------
Income from operations 2,791,970 3,156,570 7,468,970 5,969,733
INTEREST EXPENSE 96,908 424,461 128,419 1,089,703
INTEREST INCOME 107,931 15,858 406,093 38,499
-------------- ------------- ------------- -------------
Income before taxes 2,802,993 2,747,967 7,746,644 4,918,529
PROVISION FOR TAXES 1,120,303 947,397 3,098,068 1,403,017
-------------- ------------- ------------- -------------
NET INCOME FOR THE PERIOD $ 1,682,690 $ 1,800,570 $ 4,648,576 $ 3,515,512
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
PRO FORMA INCOME DATA (unaudited):
Net income as reported $ 1,800,570 $ 3,515,512
Pro forma adjustment to income taxes 151,802 564,395
------------ ------------
PRO FORMA NET INCOME $ 1,648,768 $ 2,951,117
------------ ------------
------------ ------------
EARNINGS PER SHARE (Pro forma for 1995)
Primary $ 0.12 $ 0.15 $ 0.34 $ 0.28
Fully diluted $ 0.12 $ 0.15 $ 0.34 $ 0.28
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING
Primary 13,827,996 10,673,424 13,703,855 10,486,413
Fully diluted 13,919,510 10,841,336 13,780,793 10,617,288
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 and 1995
(Unaudited)
September 30, September 30,
1996 1995
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 4,648,576 $ 3,515,512
Adjustments to reconcile net income to net
cash used for operating activities-
Depreciation and amortization 2,932,695 2,311,210
Increase in deferred liabilities - other 12,507 128,673
Changes in assets and liabilities, net
of effects of acquired companies -
Receivables 2,970,430 (6,690,249)
Inventories (1,939,668) (386,165)
Prepaid expenses and deposits (1,103,473) (843,921)
Accounts payable, accrued expenses and
due to related parties (2,094,625) 907,697
------------- --------------
Net cash provided by (used for) operating
activities 5,426,442 (1,057,243)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,123,096) (2,160,981)
Purchases of samples (398,549) (345,593)
Increase in short-term investments (923,841) -
Decrease (increase) in other assets 37,300 (72,322)
Cash paid for acquisition, including deferred
payments (604,981) (2,186,117)
------------- --------------
Net cash used for investing activities (5,013,167) (4,765,013)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long term debt - 3,000,000
Net payments on long-term debt (540,454) (1,669,932)
Net borrowings under line of credit 3,874,315 6,788,133
Advances to shareholder/officer - (124,263)
Increase(decrease) in book overdraft (1,489,459) 781,007
Net proceeds from issuance of common stock 717,245 1,148,900
Dividend payments of acquired companies (3,573,822) (757,829)
Repurchase of common stock (579,185) -
------------- --------------
Net cash provided by (used for) financing
activities (1,591,360) 9,166,016
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EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (7,742) (155)
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NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (1,185,827) 3,343,605
CASH AND EQUIVALENTS, beginning of period 2,264,594 1,919,379
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CASH AND EQUIVALENTS, end of period $ 1,078,767 $ 5,262,984
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------------- --------------
The accompanying notes are an integral part of these statements.
5
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HA-LO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 nine month periods ended
September 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:
In the third quarter of 1996, options to acquire an aggregate of 136,466
shares of the Company's common stock were issued under the Company's Stock Plan
at exercise prices ranging from $22.50 to $30.75 per share. Additionally, 28,814
options were exercised in the third quarter at prices ranging from $2.75 to
$6.67 per share.
The difference in the outstanding common shares as of September 30, 1996 and
the common shares used in computing earnings per share for the third quarter of
1996 is shown in the following table:
1996
----------
Common shares outstanding per balance
sheet 13,090,200
Effect of shares issuable under stock
options after applying the
"treasury stock" method 1,003,292
Effect of using weighted average common
shares outstanding during the year (62,950)
Other (111,032)
----------
Common shares used in computing fully
diluted earnings per share 13,919,510
----------
----------
NOTE 3. SIGNIFICANT CUSTOMERS:
Approximately 18.3% and 14.1% of the Company's net sales for the three months
and nine months ended September 30, 1996, respectively, were obtained from
Montgomery Ward & Co., Inc. Approximately, 23.0% and 11.5% of the Company's
net sales for the same periods in 1995, respectively, were also obtained from
Montgomery Ward & Co., Inc.
6
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NOTE 4. STATEMENTS OF CASH FLOWS:
The supplemental schedule of noncash activities for the nine months ended
September 30, 1996 and 1995 includes the following:
1996 1995
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Issuance of common shares in connection
with bonus $ 31,250 --
Recognition of tax benefits from options $ 1,102,960 --
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. RELATED-PARTY TRANSACTIONS
A member of the Board of Directors renders acquisition consulting services to
the Company pursuant to an agreement. The director's compensation is directly
contingent upon the successful completion of an acquisition. During the third
quarter of 1996, the director earned approximately $250,000 and was granted
37,500 options at fair value at the date of grant related to the acquisition
discussed below.
NOTE 6. BUSINESS COMBINATIONS
On June 14, 1996 the Company signed an agreement to acquire two teleservices
companies, Market USA, Inc. and Marusa Marketing, Inc. (together "MUSA") for an
aggregate of 2,550,000 shares of its common stock. The acquisitions received
approval from the Company's shareholders on September 25, 1996 and were
completed on September 30, 1996. The acquisitions have been accounted for
using the pooling-of-interests accounting method. Accordingly, the
consolidated financial statements for all periods presented have been restated
to include the results of MUSA.
In connection with the acquisitions, the Company incurred approximately
$1,693,000 of non-recurring expenses.
A reconciliation of previously reported sales and earnings follows:
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
------------------ ------------------
Sales-
Previously Reported $48,005,000 $114,320,000
MUSA 9,992,000 27,738,000
------------------ ------------------
Net Sales $57,997,000 $142,057,000
------------------ ------------------
------------------ ------------------
Pro Forma Net Income-
Previously Reported $1,080,000 $1,693,000
MUSA 569,000 1,258,000
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Pro Forma Net Income $1,649,000 $2,951,000
------------------ ------------------
------------------ ------------------
7
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Prior to the acquisition, MUSA elected to be treated as an S Corporation for
Federal income tax purposes. Pro forma net income above includes an unaudited
provision for Federal and state income taxes at an effective rate of 40%.
NOTE 7: SUBSEQUENT EVENTS
On October 29, 1996, the Company signed an agreement to purchase all of the
outstanding stock of two distributors of promotional products for 2,250,000
shares of its common stock. The acquisitions will be accounted for under the
pooling-of-interest accounting method and are expected to close in the first
quarter of 1997.
On November 7, 1996 the Company's board of directors declared a 25% stock
dividend. The dividend will be paid on December 11, 1996 to shareholders of
record as of November 21, 1996.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for the third quarter of 1996 increased 12.3% to $65.1 million
compared to $58.0 million in the corresponding quarter of 1995. Of the $7.1
million increase in sales, approximately $1.2 million was due to acquisitions.
The remainder was primarily due to internal growth.
Gross profit for the third quarter of 1996 increased 17.1% to $18.5 million
compared to $15.8 million in the corresponding quarter of 1995. This is
primarily due to the increase in sales and a change in sales mix to higher
margin products.
Selling expenses as a percentage of net sales decreased slightly to 11.2% in
the third quarter of 1996 ($7.3 million) compared to 11.5% in the third quarter
of 1995 ($6.7 million). The increase of $600,000 is attributable primarily to
the increase in commissions related to higher sales.
General and administrative ("G&A") expenses as a percentage of net sales
increased to 12.9% in the third quarter of 1996 ($8.4 million) compared to
10.3% in the third quarter of 1995 ($6.0 million). This increase is
attributable to $1,693,000 of non-recurring expenses incurred to complete the
acquisition of MUSA and higher payroll costs necessary to support the increase
in net sales.
In the third quarter of 1996 the Company had net interest income of $11,000
compared to $409,000 of expense in the third quarter of 1995. This change is
due to the Company paying off its debt with the proceeds from the public sale
of its common stock in the fourth quarter of 1995 and investments made with the
remaining proceeds.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net sales for the first nine months of 1996 increased 23.8% to $175.8 million
compared to $142.1 million in the corresponding period of 1995. Of the $33.7
million increase in sales, approximately $8.5 million resulted from additional
sales under the Company's exclusive agreement with Montgomery Ward and $3.4
million was due to acquisitions. The remainder was primarily due to internal
growth.
Gross profit for the first nine months of 1996 increased 21.8% to $49.5 million
compared to $40.6 million in the corresponding period of 1995. This is due to
the increase in sales.
Selling expenses as a percentage of net sales decreased to 11.9% in the first
nine months of 1996 ($20.9 million) compared to 12.6% in the first nine months
of 1995 ($17.8 million). The $3.1 million increase relates to increased sales.
The .7% decrease as a percentage of net sales relates to a greater proportion
of sales to Montgomery Ward & Co., Inc., which are non-commissionable.
9
<PAGE>
General and administrative expenses as a percentage of net sales increased to
12.0% in the first nine months of 1996 ($21.1 million) compared to 11.9% in
first nine months of 1995 ($16.8 million). The $4.3 million increase is due
primarily to the non-recurring expenses discussed above and additional costs
necessary to support the increase in sales. Before the effect of the
non-recurring expenses, G&A costs as a percent of net sales would have
decreased .8% compared with the same period for the prior year. The decrease
is reflective of more efficient leverage of G&A expenses (i.e. increased
sales without proportionate increases in G&A expenses).
Net interest income for the first nine months of 1996 was $278,000 compared to
$1,051,000 of expense in the first nine months of 1995. This change is
attributable to the same reason discussed during the three month period above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio increased from 1.9 to 1 at December 31, 1995 to
2.3 to 1 as of September 30, 1996. Working capital was $35.1 million at
September 30, 1996 compared to $29.8 million at December 31, 1995.
Capital expenditures for property and equipment were approximately $3.1 million
for the first nine months of 1996, and management expects capital expenditures
to be approximately $3.75 million for the full year of 1996, excluding
acquisitions. The Company has a credit facility with a bank that provides for
borrowings of up to $16.0 million. The Company is in the process of
refinancing the facility to increase its maximum borrowing level. Nonetheless,
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 its 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.
10
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the shareholders of the Company was held on
September 25, 1996 to approve the acquisition of Market USA, Inc. and
Marusa Marketing, Inc. A total of 10,509,055 shares were eligible to
vote of which 8,621,961 were represented in person or by proxy. A
total of 8,606,276 votes were cast in favor of the acquisition.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K - None
11
<PAGE>
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: November 13, 1996 /s/ Gregory J. Kilrea
---------------------------
Gregory J. Kilrea
Duly Authorized Officer
and Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,078,767
<SECURITIES> 4,473,558
<RECEIVABLES> 46,380,807
<ALLOWANCES> 0
<INVENTORY> 7,434,642
<CURRENT-ASSETS> 61,689,886
<PP&E> 9,317,784
<DEPRECIATION> 0
<TOTAL-ASSETS> 79,870,806
<CURRENT-LIABILITIES> 26,617,424
<BONDS> 0
0
0
<COMMON> 42,318,538
<OTHER-SE> 4,945,711
<TOTAL-LIABILITY-AND-EQUITY> 79,870,806
<SALES> 175,816,137
<TOTAL-REVENUES> 175,816,137
<CGS> 126,323,400
<TOTAL-COSTS> 42,023,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (277,674)
<INCOME-PRETAX> 7,746,644
<INCOME-TAX> 3,098,068
<INCOME-CONTINUING> 4,648,576
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,648,576
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
