<PAGE>
UNITED STATES
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, 1997 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 (IRS Employer No.)
Identification
of incorporation or organization)
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 November 4, 1997, the registrant had an aggregate of 20,673,821
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, 1997
and December 31, 1996. 2
Statements of Income for the three months
and nine months ended September 30, 1997 4
and 1996.
Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996. 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 11
Of Security Holders.
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
<PAGE>
PART 1. FINANCIAL INFORMATION
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September 30, December 31,
1997 1996
------------- ------------
(Unaudited) (Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,305,635 $ 4,910,619
Short-term investments - 2,908,370
Receivables 101,988,800 74,004,096
Related party receivable 1,580,159 -
Inventories 19,729,144 11,957,796
Prepaid expenses & deposits 5,837,749 4,172,539
------------ -----------
Total current assets 131,441,487 97,953,420
------------ -----------
PROPERTY AND EQUIPMENT, net 17,837,924 14,689,285
------------ -----------
OTHER ASSETS:
Intangible assets relating to acquired
businesses, net 24,928,482 10,906,275
Samples 1,376,630 1,216,429
Other 2,560,579 2,066,918
------------ -----------
Total other assets 28,865,691 14,189,622
------------ -----------
$ 178,145,102 $ 126,832,327
============= =============
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, 1997 AND DECEMBER 31, 1996
September 30, December 31,
1997 1996
------------- ------------
(Unaudited) (Restated)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 542,667 $ 300,000
Book overdraft 4,723,291 1,218,122
Accounts payable 37,604,343 23,644,275
Accrued expenses 18,821,467 12,725,472
Due to related parties - 138,120
Deferred taxes - current 1,130,304 1,058,087
------------ ----------
Total current liabilities 62,822,072 39,084,076
------------ ----------
LONG-TERM DEBT 32,744,078 27,996,259
------------ ----------
DEFERRED LIABILITIES 6,150,688 1,768,838
------------ -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000
shares authorized and none issued - -
Common stock, no par value: 100,000,000
shares authorized and 20,672,127 and
20,183,876 issued and outstanding in
1997 and 1996, respectively 61,070,121 48,837,750
Other (2,042,653) (2,208,471)
Retained earnings 17,400,796 11,353,875
------------ -----------
Total shareholders' equity 76,428,264 57,983,154
------------ -----------
$ 178,145,102 $ 126,832,327
============ ===========
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, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
September 30, September 30, September 30, September 30,
1997 1996 (Restated) 1997 1996 (Restated)
------------- --------------- ------------- ---------------
NET SALES $ 98,296,781 $ 85,195,939 $269,520,713 $231,533,285
COST OF SALES 67,005,673 60,389,332 185,209,759 166,009,148
---------- ---------- ----------- -----------
Gross profit 31,291,108 24,806,607 84,310,954 65,524,137
SELLING EXPENSES 12,354,616 9,765,871 33,905,287 27,102,783
GENERAL AND ADMINISTRATIVE EXPENSES 12,376,794 10,379,559 35,278,924 29,865,268
NON-RECURRING CHARGES RELATED TO
ACQUISITIONS - 1,693,000 2,653,671 1,693,000
---------- ---------- ----------- -----------
Income from operations 6,559,698 2,968,177 12,473,072 6,863,086
INTEREST EXPENSE, NET 525,447 345,473 1,273,045 563,934
---------- ---------- ----------- -----------
Income before taxes 6,034,251 2,622,704 11,200,027 6,299,152
PROVISION FOR TAXES 2,417,127 1,193,808 4,483,651 3,116,363
---------- ---------- ----------- -----------
NET INCOME FOR THE PERIOD $ 3,617,124 $ 1,428,896 $ 6,716,376 $ 3,182,789
========== ========== =========== ===========
PRO FORMA INCOME DATA:
Net income as reported $ 1,428,896 $ 3,182,789
Pro forma adjustment to income taxes (145,621) (597,292)
---------- -----------
PRO FORMA NET INCOME: $ 1,574,517 $ 3,780,081
========== ===========
EARNINGS PER SHARE (Pro forma for 1996):
Primary $ 0.17 $ 0.08 $ 0.32 $ 0.18
Fully diluted $ 0.17 $ 0.08 $ 0.31 $ 0.18
============ ============ =========== ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary 21,496,764 20,712,762 21,220,753 20,557,586
Fully diluted 21,670,454 20,827,155 21,497,382 20,653,758
============ ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 and 1996
(Unaudited)
September 30, September 30,
1997 1996
------------ ------------
(Unaudited) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 6,716,376 $ 3,182,789
Adjustments to reconcile net income to net
cash used for operating activities-
Depreciation and amortization 3,968,331 3,482,688
Increase in cash surrender value 208,541 -
Increase in deferred liabilities - other 125,709 12,507
Changes in assets and liabilities,
net of effects of acquired companies -
Receivables (12,963,563) 2,567,341
Inventories (5,188,028) (3,153,748)
Prepaid expenses and deposits (1,225,103) (2,023,409)
Accounts payable, accrued expenses and
due to related parties 8,386,330 (4,513,116)
----------- -----------
Net cash provided by (used for)
operating activities 28,593 (444,948)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,465,708) (5,035,645)
Purchases of samples (482,100) (398,549)
Decrease (increase) in short-term investments 2,908,370 (923,841)
(Increase) decrease in other assets (52,091) 37,300
Cash paid for acquisition,
including deferred payments (4,164,429) (1,766,850)
----------- -----------
Net cash used for investing activities (6,255,958) (8,087,585)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 698,238 12,570,092
Increase(decrease) in book overdraft 2,973,289 (1,489,386)
Net proceeds from issuance of common stock 1,548,438 717,245
Dividend payments of acquired companies (669,455) (3,573,822)
Repurchase of common stock (901,056) (579,185)
----------- -----------
Net cash provided by financing activities 3,649,454 7,644,944
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (27,073) (7,742)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND (2,604,984) (895,331)
EQUIVALENTS
CASH AND EQUIVALENTS, beginning of period 4,910,619 3,095,373
----------- -----------
CASH AND EQUIVALENTS, end of period $ 2,305,635 $ 2,200,042
=========== ===========
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, 1997
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, 1997 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 1996 Annual Report on Form 10-K.
NOTE 2. CAPITAL STOCK:
The Articles of Incorporation of the Company were amended in the first
quarter of 1997 increasing the number of common shares authorized from
25,000,000 to 100,000,000.
In the third quarter of 1997, options to acquire an aggregate of 108,945
shares of the Company's common stock were issued under the Company's stock
plans at exercise prices ranging from $23.00 to $28.75 per share.
Additionally, 71,969 options were exercised in the third quarter at prices
ranging from $2.80 to $20.80 per share.
The difference in the outstanding common shares as of September 30,
1997 and the common shares used in computing earnings per share for the
third quarter of 1997 is shown in the following table:
1997
----
Common shares outstanding per balance sheet 20,672,127
Effect of shares issuable under stock options
after applying the treasury stock method 1,244,360
Effect of using weighted average common shares
outstanding during the period (246,033)
Common shares used in computing fully diluted ----------
earnings per share 21,670,454
==========
6
<PAGE>
NOTE 3. STATEMENTS OF CASH FLOWS:
The supplemental schedule of non-cash activities for the nine months ended
September 30, 1997 and 1996 includes the following:
1997 1996
---- ----
Issuance of common shares in connection
with bonus $ 31,250 $ 31,250
Issuance of common shares in connection with
acquisition of businesses $10,252,160 $ -
Non-cash consideration in connection with
acquistion of business $ 4,500,000 $ -
Recognition of tax benefits from options
and restricted stock $ 1,301,567 $1,102,960
Conversion of non-operating assets to
note receivable $ 1,530,159 $ -
NOTE 4. 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 1997, the director earned approximately $400,000 and was granted
9,100 options at fair value at the date of grant related to acquisitions.
Creative Concepts in Advertising, Inc. (CCA), a wholly owned subsidiary of
the Company, leases its corporate headquarters from its Chief Executive
Officer and Vice Chairman of the Board of the Company. Rental payments
under this lease are $25,000 per month. The Company believes that the
lease terms are no more or less favorable than otherwise could be obtained
from unaffiliated third parties.
In connection with the acquisition by the Company of CCA, the Chief Executive
Officer of CCA and Vice Chairman of the Board of the Company converted
certain non-operating assets from CCA to a $1,530,159 note receivable. The
note bears interest at 7.0% and is due no later than December 31, 1997.
NOTE 5. BUSINESS COMBINATIONS:
On September 24, 1997 and September 25, 1997, the Company acquired Joking
S.p.A., an Italian-based distributor of promotional products, and Red
Sail Merchandising/The Corporate Choice, a San Francisco-based
distributor of promotional products, respectively. The acquisitions are
being accounted for under the purchase method of accounting and the results
of operations are included in the financial statements from the date of
acquisition.
7
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A reconciliation of previously reported sales and earnings for
acquisitions completed in the first nine months of 1997 and accounted for
using the pooling-of-interests method of accounting follows:
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Sales-
Previously Reported $65,110,000 $175,815,000
Acquired Companies 20,086,000 55,718,000
----------- ------------
Net Sales $85,196,000 $231,533,000
=========== ============
Pro Forma Net Income-
Previously Reported $ 1,682,000 $ 4,648,000
Acquired Companies (107,000) (868,000)
----------- ------------
Pro Forma Net Income $ 1,575,000 $ 3,780,000
=========== ============
Prior to their acquisition by the Company, certain entities elected to be
treated as S Corporations for Federal income tax purposes. Pro forma
net income above includes an unaudited tax benefit for Federal and state
income taxes at an effective rate of 40%.
NOTE 6: SUBSEQUENT EVENTS:
On November 7, 1997, the Company acquired Bavelco, b.v.b.a., a Belgium-based
distributor of promotional products. The acquisition will be accounted for
under the purchase method of accounting.
NOTE 7: ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, Statement No. 129, DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURE, Statement No. 130, REPORTING COMPREHENSIVE
INCOME, and Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION. These Statements become effective for financial
statements for both interim and annual periods ending after December 15,
1997. Management believes that the adoption of the standards would not
have a material effect on the financial statements presented.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales for the third quarter of 1997 increased 15.4% to $98.3 million
compared to $85.2 million in the corresponding quarter of 1996. The
increase is primarily due to internal growth.
Gross profit increased 26.1% to $31.3 million (31.8% of net sales) in the
third quarter of 1997 from $24.8 million (29.1% of net sales) in the
third quarter of 1996. As a percentage of net sales, the increase is due
to increased margins in the promotional products business, and a decrease in
sales to Montgomery Ward & Co., Inc. (MW), which contributed to a
lower gross profit percentage in the third quarter of 1996.
Selling expenses as a percentage of net sales for the third quarter of 1997
were 12.6% ($12.4 million) compared to 11.5% in the third quarter of 1996
($9.8 million). The increase as a percentage of net sales is attributable
primarily to an increase in gross profit as a percentage of net sales and
the decrease in sales to MW in 1997. Such sales are not subject to payment
of the Company's standard commissions.
General and administrative expenses as a percentage of net sales were
12.6% in the third quarter of 1997 ($12.4 million) compared to 12.2%
in the third quarter of 1996 ($10.4 million). The increase is
attributable primarily to higher personnel and occupancy costs necessary
to support internal growth.
Operating results for the third quarter of 1996 include a $1.7 million
non-recurring charge to complete an acquisition accounted for using the
pooling-of-interests method of accounting.
In the third quarter of 1997 the Company had net interest expense of
$525,000, compared to $345,000 in the third quarter of 1996. The
increase is a result of working capital needs necessary to fund growth
and an effort to speed up payments to vendors of acquired companies.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net sales for the first nine months of 1997 increased 16.4% to $269.5
million compared to $231.5 million in the corresponding period of 1996.
The increase is due primarily to internal growth.
Gross profit increased 28.7% to $84.3 million (31.3% of net sales) in the
first nine months of 1997 from $65.5 million (28.3% of net sales) in the
corresponding period of 1996. As a percentage of net sales, the increase
is attributable to the same reasons listed for the three month period above.
Selling expenses as a percentage of net sales increased slightly to
12.6% in the first nine months of 1997 ($33.9 million) compared to 11.7% in
the corresponding period of 1996 ($27.1 million). The increase in the
percentage is due to the same reasons listed for the three month period above.
9
<PAGE>
General and administrative expenses as a percentage of net sales were
13.1% in the first nine months of 1997 ($35.3 million) compared to 12.9%
in the corresponding period of 1996 ($29.9 million). The increase in the
percentage is not significant.
In connection with acquisitions accounted for using the
pooling-of-interests method of accounting, the Company incurred
approximately $2.7 million and $1.7 million of non-recurring expenses for
the first nine months of 1997 and 1996, respectively.
In the first nine months of 1997 the Company had net interest expense
of $1.3 million compared to $564,000 in the corresponding period of 1996.
The increase is a result of working capital needs necessary to fund growth
and an effort to speed up payments to vendors of acquired companies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio decreased to 2.09 to 1 as of September 30, 1997
from 2.51 to 1 at December 31, 1996. The decrease is due to timing of
the Company's trade disbursement schedule in relation to the quarter end.
Working capital was $68.6 million at September 30, 1997 compared to $58.9
million at December 31, 1996. Capital expenditures for property and equipment
were approximately $4.5 million for the first nine months of 1997, and
management expects capital expenditures to be approximately $6.0 million for
the full year of 1997, excluding acquisitions.
The Company has an unsecured credit facility totaling $65 million,
consisting of a $45 million revolving line of credit and $20 million
term acquisition loan. The facility bears interest at either prime less
.25% or LIBOR plus between .375% and 1% based on a defined ratio. The
Company anticipates that the available funds from this facility will be
adequate to satisfy 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.
FORWARD-LOOKING STATEMENTS
Statements contained in this "Management's Discussion and Analysis of
Financial Condition and the Results of Operation" regarding the amount and
nature of planned capital expenditures and the Company's belief that
available borrowings under its credit facility will be sufficient to satisfy
its future operating cash needs are forward-looking statements that involve
substantial risKs and uncertainties. Actual results could differ materially
from those implied by such forward-looking statements.
10
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None
(b) Reports on Form 8-K - None.
11
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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: November 12, 1997 /s/ GREGORY J. KILREA
---------------------
Gregory J. Kilrea
Duly Authorized Officer
and Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF INCOME AND BALANCE SHEETS FROM SEPTEMBER
30, 1997 FORM 10Q REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,305,635
<SECURITIES> 0
<RECEIVABLES> 107,365,432
<ALLOWANCES> 3,796,473
<INVENTORY> 19,729,144
<CURRENT-ASSETS> 131,441,487
<PP&E> 27,346,716
<DEPRECIATION> 9,508,792
<TOTAL-ASSETS> 178,145,102
<CURRENT-LIABILITIES> 62,822,072
<BONDS> 32,744,078
0
0
<COMMON> 61,070,121
<OTHER-SE> 15,358,143
<TOTAL-LIABILITY-AND-EQUITY> 178,145,102
<SALES> 269,520,713
<TOTAL-REVENUES> 269,520,713
<CGS> 185,209,759
<TOTAL-COSTS> 185,209,759
<OTHER-EXPENSES> 71,837,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,273,045
<INCOME-PRETAX> 11,200,027
<INCOME-TAX> 4,483,651
<INCOME-CONTINUING> 6,716,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,716,376
<EPS-PRIMARY> .32
<EPS-DILUTED> .31
</TABLE>
