<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 June 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 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 August 4, 1997, the registrant had an aggregate of 20,397,094 shares of
its common stock outstanding.
<PAGE>
HA-LO INDUSTRIES, INC.
INDEX
Part I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
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<S> <C>
Item 1. Financial Statements.
Balance Sheets as of June 30, 1997 and December 31, 1996. 2
Statements of Income for the three months and six months
ended June 30, 1997 and 1996. 4
Statements of Cash Flows for the six months ended
June 30, 1997 and 1996. 5
Notes to Financial Statements. 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote 12
of Security Holders.
Item 6. Exhibits and Reports on Form 8-K. 12
Signatures 13
</TABLE>
1
<PAGE>
PART 1. FINANCIAL INFORMATION
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Restated)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,921,120 $ 4,910,619
Short-term investments - 2,908,370
Receivables 82,855,967 74,004,096
Related party receivable 1,560,159 -
Inventories 17,582,118 11,957,796
Prepaid expenses & deposits 5,729,814 4,172,539
------------ ------------
Total current assets 109,649,178 97,953,420
------------ ------------
PROPERTY AND EQUIPMENT, net 15,923,829 14,689,285
------------ ------------
OTHER ASSETS:
Intangible assets relating to acquired
businesses, net 14,215,333 10,906,275
Samples 1,293,049 1,216,429
Other 1,930,321 2,066,918
------------ ------------
Total other assets 17,438,703 14,189,622
------------ ------------
$143,011,710 $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
JUNE 30, 1997 AND DECEMBER 31, 1996
June 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Restated)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 300,000 $ 300,000
Book overdraft 8,802,923 1,218,122
Accounts payable 22,554,735 24,212,361
Accrued expenses 11,315,928 12,725,472
Due to related parties - 138,120
Deferred taxes - current 1,058,087 1,058,087
------------ ------------
Total current liabilities 44,031,673 39,652,162
------------ ------------
LONG-TERM DEBT 31,315,695 27,428,173
------------ ------------
DEFERRED LIABILITIES 1,689,553 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 20,366,104 issued
and outstanding in 1997 and 20,183,876 in 1996 53,634,730 48,837,750
Other (2,113,068) (2,208,471)
Retained earnings 14,453,127 11,353,875
------------ ------------
Total shareholders' equity 65,974,789 57,983,154
------------ ------------
$143,011,710 $126,832,327
------------ ------------
------------ ------------
The accompanying notes are an integral part of these balance sheets.
3
<PAGE>
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1997 1996 (Restated) 1997 1996 (Restated)
----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
NET SALES $90,854,347 $78,488,617 $171,223,932 $146,337,346
COST OF SALES 62,744,232 55,908,773 118,204,085 105,619,816
----------- ----------- ------------ ------------
Gross profit 28,110,115 22,579,844 53,019,847 40,717,530
SELLING EXPENSES 11,337,652 9,506,670 21,550,671 17,336,912
GENERAL AND ADMINISTRATIVE EXPENSES 11,554,768 10,315,764 22,902,130 19,485,709
NON-RECURRING CHARGES RELATED TO
ACQUISITIONS 597,671 - 2,653,671 -
----------- ----------- ------------ ------------
Income from operations 4,620,024 2,757,410 5,913,375 3,894,909
INTEREST EXPENSE, NET 407,150 107,909 747,598 218,461
----------- ----------- ------------ ------------
Income before taxes 4,212,874 2,649,501 5,165,777 3,676,448
PROVISION FOR TAXES 1,684,550 1,356,589 2,066,525 1,922,555
----------- ----------- ------------ ------------
NET INCOME FOR THE PERIOD $ 2,528,324 $ 1,292,912 $ 3,099,252 $ 1,753,893
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
PRO FORMA INCOME DATA:
Net income as reported $ 1,292,912 $ 1,753,893
Pro forma adjustment to income taxes (296,472) (451,671)
----------- ------------
PRO FORMA NET INCOME: $ 1,589,384 $ 2,205,564
----------- ------------
----------- ------------
EARNINGS PER SHARE (Pro forma for 1996):
Primary $ 0.12 $ 0.08 $ 0.15 $ 0.11
Fully diluted $ 0.12 $ 0.08 $ 0.15 $ 0.11
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Primary 21,122,669 20,664,691 21,084,929 20,664,691
Fully diluted 21,242,696 20,750,403 21,195,118 20,750,403
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1996
(UNAUDITED)
June 30, June 30,
1997 1996
(Unaudited) (Restated)
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 3,099,252 $ 1,753,893
Adjustments to reconcile net income to net
cash used for operating activities-
Depreciation and amortization 2,687,370 2,231,761
Increase in cash surrender value 29,400 -
Increase in deferred liabilities - other 78,445 94
Changes in assets and liabilities, net of effects
of acquired companies -
Receivables (8,768,035) 13,557,450
Inventories (5,368,776) (1,583,625)
Prepaid expenses and deposits (1,394,877) (3,065,768)
Accounts payable, accrued expenses and
due to related parties (3,405,395) (6,866,640)
------------ -----------
Net cash provided by (used for) operating
activities (13,042,616) 6,027,165
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,950,811) (3,338,772)
Purchases of samples (293,519) (287,496)
(Increase) decrease in short-term investments 2,908,370 (927,591)
Decrease in other assets 222,041 9,762
Cash paid for acquisition, including
deferred payments (715,060) (346,335)
------------ -----------
Net cash used for investing activities (828,979) (4,890,432)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 3,887,522 2,744,681
Increase(decrease) in book overdraft 7,052,923 (1,494,630)
Net proceeds from issuance of common stock 875,898 567,071
Dividend payments of acquired companies - (1,255,902)
Repurchase of common stock (901,056) (579,185)
------------ -----------
Net cash provided by (used for) financing
activities 10,915,287 (17,965)
------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (33,191) (2,040)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND (2,989,499) 1,116,728
EQUIVALENTS
CASH AND EQUIVALENTS, beginning of period 4,910,619 3,095,373
------------ -----------
CASH AND EQUIVALENTS, end of period $ 1,921,120 $ 4,212,101
------------ -----------
------------ -----------
The accompanying notes are an integral part of these balance sheets.
5
<PAGE>
HA-LO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 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 six month periods ended
June 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 second quarter of 1997, options to acquire an aggregate of 226,500
shares of the Company's common stock were issued under the Company's Stock
Plans at exercise prices ranging from $16.00 to $23.63 per share.
Additionally, 29,049 options and warrants were exercised in the second
quarter at prices ranging from $2.80 to $15.33 per share.
The difference in the outstanding common shares as of June 30, 1997 and the
common shares used in computing earnings per share for the second quarter of
1997 is shown in the following table:
1997
----------
Common shares outstanding per balance sheet 20,366,104
Effect of shares issuable under stock options
after applying the "treasury stock" method 1,018,564
Effect of using weighted average common shares
outstanding during the period (141,972)
----------
Common shares used in computing fully diluted
earnings per share 21,242,696
----------
----------
6
<PAGE>
NOTE 3. STATEMENTS OF CASH FLOWS:
The supplemental schedule of noncash activities for the six months ended June
30, 1997 and 1996 includes the following:
1997 1996
---------- ---------
Issuance of common shares in connection
with bonus $ - $ 31,250
Issuance of common shares in connection with
acquisition of business $4,000,000 $ -
Recognition of tax benefits from options and
restricted stock $ 822,126 $ 875,000
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 second quarter of 1997, the director earned approximately $164,700 and
was granted 3,000 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 merger of the Company and 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 May 7, 1997, the Company acquired a Detroit-based distributor of
promotional products, Bradley Marketing Group, Inc. ("Bradley") for
approximately $5,000,000, payable in shares of its common stock. The
acquisition has 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 the acquired company.
7
<PAGE>
On June 4, 1997, the Company acquired all of the capital stock of
Lees/Keystone, Inc., a New York based distributor of promotional products for
approximately $4,000,000, payable in shares of its common stock. The
acquisition is 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.
A reconciliation of previously reported sales and earnings for acquisitions
completed in the first and second quarters of 1997 and accounted for as
pooling-of-interests follows:
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
------------- -------------
Sales-
Previously Reported $60,793,000 $110,705,000
Acquired Companies 17,696,000 35,632,000
----------- ------------
Net Sales $78,489,000 $146,337,000
----------- ------------
----------- ------------
Pro Forma Net Income-
Previously Reported $ 2,023,000 $ 2,966,000
Acquired Companies (434,000) (760,000)
----------- ------------
Pro Forma Net Income $ 1,589,000 $ 2,206,000
----------- ------------
----------- ------------
Prior to the acquisition, CCA elected to be treated as an S Corporation 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 July 22, 1997, the Company signed an agreement to purchase Red Sail
Merchandising/The Corporate Choice, a San Francisco based distributor of
promotional products. The acquisition is expected to be completed in the
third quarter of 1997 and will be accounted for under the purchase method of
accounting.
NOTE 7: ACCOUNTING PRONOUNCEMENTS:
In the first quarter of 1997, the Financial Accounting Standards Board
issued Statement No. 128, EARNINGS PER SHARE, which establishes standards for
computing and presenting earnings per share for publicly held common stock or
potential common stock, and Statement No. 129, DISCLOSURE OF INFORMATION
ABOUT CAPITAL STRUCTURE which continues the existing requirements to disclose
the pertinent rights and privileges of all securities other than ordinary
common stock but expands the number of companies subject to portions of its
requirements. Statement No. 128 supersedes the standards for computing
earnings per share previously found in APB Opinion No. 15, EARNINGS PER SHARE
and simplifies the standards for computing earnings per share. In addition,
Statement No. 128 replaces the presentation of primary earnings per share
with a presentation of basic earnings per share, requires dual presentation
of basic and diluted earnings per share for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic earnings per share computation to the numerator and denominator of
the diluted earnings per share computation. The statements are effective for
financial statements for periods ending after December 15, 1997. Management
believes that the adoption of these standards will not have a material effect
on the quarters presented.
8
<PAGE>
In the second quarter of 1997, the Financial Accounting Standards Board
issued Statement No. 130, REPORTING COMPREHENSIVE INCOME, which establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
objective of the Statement is to report a measure of all changes in equity of
an enterprise that result from transactions and other economic events of the
period other than transactions with owners ("comprehensive income").
Comprehensive income is the total of net income and all other nonowner
changes in equity. The statement is effective for financial statements for
both interim and annual periods ending after December 15, 1997. Management
believes that the adoption of the standard would not have a material effect
on the quarters presented.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Net sales for the second quarter of 1997 increased 15.8% to $90.9 million
compared to $78.5 million in the corresponding quarter of 1996. The increase
is primarily due to internal growth.
Gross profit increased 24.3% to $28.1 million (30.9% of net sales) in the
second quarter of 1997 from $22.6 million (28.8% of net sales) in the second
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 second quarter of 1996.
Selling expenses as a percentage of net sales increased slightly to 12.5% in
the second quarter of 1997 ($11.3 million) compared to 12.1% in the second
quarter of 1996 ($9.5 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
decreased to 12.7% in the second quarter of 1997 ($11.6 million) compared to
13.1% in the second quarter of 1996 ($10.3 million). The decrease is
attributable to continued leverage of the Company's cost structure.
In connection with an acquisition accounted for as a pooling-of-interest, the
Company incurred approximately $598,000 of non-recurring expenses for the
second quarter of 1997.
In the second quarter of 1997 the Company had net interest expense of
$407,000, compared to $108,000 of net interest expense in the second 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.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net sales for the first six months of 1997 increased 17.0% to $171.2 million
compared to $146.3 million in the corresponding period of 1996. The increase
is due primarily to internal growth.
Gross profit increased 30.2% to $53.0 million (31.0% of net sales) in the
first six months of 1997 from $40.7 million (27.8% 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 six months of 1997 ($21.6 million) compared to 11.8% in the
corresponding period of 1996 ($17.3 million). The increase is attributable to
the same reasons listed for the three month period above.
10
<PAGE>
General and administrative expenses as a percentage of net sales
increased to 13.4% in the first six months of 1997 ($22.9 million) compared
to 13.3% in the corresponding period of 1996 ($19.5 million). This increase
is due to personnel and facilities costs necessary to support the Company's
sales growth, partially offset by more efficient leverage of the Company's
cost structure.
In connection with acquisitions accounted for as pooling-of-interests, the
Company incurred approximately $2,654,000 of non-recurring expenses for the
first six months of 1997.
In the first six months of 1997 the Company had net interest expense of
$748,000, compared to $219,000 of net interest expense 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 increased to 2.49 to 1 as of June 30, 1997 from
2.47 to 1 at December 31, 1996. Working capital was $65.6 million at June
30, 1997 compared to $58.3 million at December 31, 1996. Capital
expenditures for property and equipment were approximately $2.9 million for
the first six months of 1997, and management expects capital expenditures to
be approximately $5.0 million for the full year of 1997, excluding
acquisitions.
In the first quarter of 1997, the Company refinanced its line of credit. The
new agreement provides for an unsecured credit facility totaling $65 million,
consisting of a $45 million revolving line of credit (the "Revolver") and $20
million term acquisition loan (the "Term"). The Revolver matures on January
31, 1999 and Term borrowings mature on the sooner of five years from the date
of borrowing or June 30, 2003. 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.
11
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on June 2, 1997, the following
proposals were adopted by the margins indicated.
1. To elect ten directors to serve until the next Annual Meeting of
Shareholders or until their successors are duly elected and qualified.
Number of Shares
For Withheld
Lou Weisbach 18,309,989 37,662
Linden D. Nelson 18,309,989 37,662
Seymour N. Okner 18,309,989 37,662
Richard A. Magid 18,309,989 37,662
David C. Robbins 18,309,989 37,662
David B. Hermelin 18,309,989 37,662
Thomas Herskovits 18,309,989 37,662
Jordon R. Katz 18,309,989 37,662
Marshall J. Katz 18,309,989 37,662
Neil A. Ramo 18,309,989 37,662
2. To approve the HA-LO Industries, Inc. 1997 Stock Plan (Restated).
For 13,617,074
Against 2,163,003
Abstained 27,113
Unvoted 2,540,461
3. To ratify the reappointment of the firm of Arthur Andersen LLP as the
Company's independent auditors for 1997.
For 18,324,667
Against 11,797
Abstained 11,187
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None
(b) Reports on Form 8-K - None
12
<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: August 14, 1997 /s/ GREGORY J. KILREA
----------------------------------
Gregory J. Kilrea
Duly Authorized Officer
and Chief Financial Officer
13
<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 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH JUNE 30, 1997 FORM 10Q REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,921,120
<SECURITIES> 0
<RECEIVABLES> 87,591,212
<ALLOWANCES> 3,175,086
<INVENTORY> 17,582,118
<CURRENT-ASSETS> 109,649,178
<PP&E> 24,624,904
<DEPRECIATION> 8,701,075
<TOTAL-ASSETS> 143,117,710
<CURRENT-LIABILITIES> 44,031,673
<BONDS> 31,315,695
0
0
<COMMON> 53,634,730
<OTHER-SE> 12,340,059
<TOTAL-LIABILITY-AND-EQUITY> 143,011,710
<SALES> 171,223,932
<TOTAL-REVENUES> 171,223,932
<CGS> 118,204,085
<TOTAL-COSTS> 118,204,085
<OTHER-EXPENSES> 47,106,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 747,598
<INCOME-PRETAX> 5,165,777
<INCOME-TAX> 2,066,525
<INCOME-CONTINUING> 3,099,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,099,252
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
