<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 March 31, 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 May 7, 1997, the registrant had an aggregate of 20,164,864 shares of its
common stock outstanding.
<PAGE>
HA-LO INDUSTRIES, INC.
INDEX
Part I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements.
Balance Sheets as of March 31, 1997 and
December 31, 1996. 2
Statements of Income for the three months
ended March 31, 1997 and 1996. 4
Statements of Cash Flows for the three
months ended March 31, 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
of Security Holders. 11
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
1
<PAGE>
PART 1. FINANCIAL INFORMATION
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- -------------
(Unaudited) (Restated)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,540,319 $ 4,687,275
Short-term investments -- 2,908,370
Receivables 65,352,280 71,929,031
Related party receivable 1,530,159 --
Inventories 13,445,585 11,270,122
Prepaid expenses & deposits 3,503,272 4,142,199
------------- ------------
Total current assets 88,371,615 94,936,997
------------- ------------
PROPERTY AND EQUIPMENT, net 14,370,940 13,920,903
------------- ------------
OTHER ASSETS:
Intangible assets relating to acquired
businesses, net 10,526,439 10,906,275
Samples 1,279,340 1,216,429
Other 1,913,080 1,975,632
------------- ------------
Total other assets 13,718,859 14,098,336
------------- ------------
$116,461,414 $122,956,236
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
(Unaudited) (Restated)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 300,000 $ --
Book overdraft 2,802,746 1,218,122
Accounts payable 17,199,576 21,903,921
Accrued expenses 11,398,605 12,555,719
Due to related parties -- 138,120
Deferred taxes - current 1,058,087 1,058,087
-------------- --------------
Total current liabilities 32,759,014 36,873,969
-------------- --------------
LONG-TERM DEBT 23,351,124 26,693,173
-------------- --------------
DEFERRED LIABILITIES 1,712,380 1,755,335
-------------- --------------
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 19,821,651 issued
and outstanding in 1997 and 19,843,827
in 1996 49,196,746 48,788,272
Other (2,144,174) (2,208,471)
Retained earnings 11,586,324 11,053,958
-------------- --------------
Total shareholders' equity 58,638,896 57,633,759
-------------- --------------
$116,461,414 $122,956,236
------------- --------------
------------- --------------
</TABLE>
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
MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
1997 1996 (Restated)
------------- ---------------
<S> <C> <C>
NET SALES $ 78,587,413 $ 65,745,892
COST OF SALES 54,305,206 48,165,545
------------- -------------
Gross profit 24,282,207 17,580,347
SELLING EXPENSES 9,914,761 7,609,566
GENERAL AND ADMINISTRATIVE EXPENSES 11,081,875 8,836,136
NON RECURRING CHARGE RELATED TO
ACQUISITIONS 2,056,000 -
------------- -------------
Income from operations 1,229,571 1,134,645
INTEREST EXPENSE 341,757 253,871
INTEREST INCOME - 132,717
------------- -------------
Income before taxes 887,814 1,013,491
PROVISION FOR TAXES 355,448 565,966
------------- -------------
NET INCOME FOR THE PERIOD $ 532,366 $ 447,525
------------- -------------
------------- -------------
PRO FORMA INCOME DATA:
Net income as reported $ 447,525
Pro forma adjustment to income taxes (160,582)
-------------
PRO FORMA NET INCOME $ 608,107
-------------
-------------
EARNINGS PER SHARE (Pro forma for 1996)
Primary $ 0.03 $ 0.03
Fully diluted $ 0.03 $ 0.03
------------- -------------
------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING
Primary 20,704,755 19,992,754
Fully diluted 20,704,755 20,081,167
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
------------- -------------
(Unaudited) (Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 532,366 $ 447,525
Adjustments to reconcile net income to net
cash used for operating activities-
Depreciation and amortization 1,406,826 1,060,804
Increase in cash surrender value 26,431 --
Increase in deferred liabilities - other 30,320 28,632
Changes in assets and liabilities, net of
effects of acquired companies -
Receivables 5,046,592 10,183,227
Inventories (2,175,463) (323,428)
Prepaid expenses and deposits 638,927 (1,143,492)
Accounts payable, accrued expenses and
due to related parties (5,351,389) (7,937,864)
------------ -----------
Net cash provided by
operating activities 154,610 2,315,404
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,300,831) (1,025,080)
Purchases of samples (174,810) (88,645)
Increase (decrease) in short-term investments 2,908,370 (913,457)
Decrease (increase) in other assets 36,121 (30,284)
Cash paid for acquisition, including
deferred payments (73,275) (233,604)
------------- -------------
Net cash provided by (used for) investing
activities 1,395,575 (2,291,070)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on long-term debt - (160,323)
Net borrowings under line of credit (3,042,049) 254,789
Increase(decrease) in book overdraft 1,584,624 (1,215,977)
Net proceeds from issuance of common stock 661,340 344,796
Dividend payments of acquired companies - (68,626)
Repurchase of common stock (901,056) (579,185)
------------- -------------
Net cash used for
financing activities (1,697,141) (1,424,526)
------------- -------------
NET DECREASE IN CASH AND (146,956) (1,400,192)
EQUIVALENTS
CASH AND EQUIVALENTS, beginning of period 4,687,275 3,095,073
------------- -------------
CASH AND EQUIVALENTS, end of period $4,540,319 $1,694,881
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
HA-LO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 months ended March 31, 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 first quarter of 1997, options to acquire an aggregate of 1,166,649
shares of the Company's common stock were issued under the Company's Stock Plans
at exercise prices ranging from $13.38 to $25.25 per share. Additionally,
97,883 options and warrants were exercised in the first quarter at prices
ranging from $2.20 to $13.67 per share.
The difference in the outstanding common shares as of March 31, 1997 and the
common shares used in computing earnings per share for the first quarter of 1997
is shown in the following table:
1997
----
Common shares outstanding per balance sheet 19,821,651
Effect of shares issuable under stock options
after applying the "treasury stock" method 908,278
Effect of using weighted average common shares
outstanding during the year (25,174)
------------
Common shares used in computing fully diluted
earnings per share 20,704,755
------------
------------
6
<PAGE>
NOTE 3. STATEMENTS OF CASH FLOWS:
The supplemental schedule of noncash activities for the three months ended March
31, 1997 and 1996 includes the following:
1997 1996
---- ----
Issuance of common shares in connection
with bonus $ - $ 31,250
Recognition of tax benefits from options
and restricted stock $ 648,190 $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 first
quarter of 1997, the director earned approximately $653,400 and was granted
3,350 options at fair value at the date of grant related to acquisitions.
Creative Concepts in Advertising, Inc., 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 (see Note 5), 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 January 3, 1997, the Company completed the acquisitions of two distributors
of promotional products , Creative Concepts in Advertising, Inc. and Creadis
Group, Inc.(together "CCA") for an aggregate of 2,841,415 shares of its common
stock. On February 28, 1997, the Company acquired a telemarketing company,
Entertel, Inc. ("Entertel") for an aggregate of 246,303 shares of its common
stock. Both 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 CCA and Entertel.
7
<PAGE>
In connection with the acquisitions, the Company incurred approximately
$2,056,000 of non-recurring expenses for the first quarter of 1997.
A reconciliation of previously reported sales and earnings follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, 1996
--------------
<S> <C>
Sales-
Previously Reported $49,912,000
Acquired Companies 15,834,000
--------------
Net Sales $65,746,000
--------------
--------------
Pro Forma Net Income-
Previously Reported $ 943,000
Acquired Companies (335,000)
--------------
Pro Forma Net Income $ 608,000
--------------
--------------
</TABLE>
Prior to its 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 of CCA at an effective rate of
40%.
NOTE 6: SUBSEQUENT EVENTS
On May 7, 1997, the Company completed the acquisition of a Detroit-based
distributor of promotional products for approximately $5 million, payable in
shares of its common stock. The acquisition will be accounted for as a
pooling-of-interest. As the acquisition closed after March 31, 1997, the
consolidated financial statements for all periods presented exclude the
effects of this acquisition. The effect of this acquisition would not have
been material for the three month periods presented.
NOTE 7: ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards board (FASB) 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. 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 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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Net sales for the first quarter of 1997 increased 19.6% to $78.6 million
compared $65.7 million in the corresponding quarter of 1996. The increase
was primarily due to internal growth.
Sales under the Company's exclusive agreement with Montgomery Ward & Co.,
Inc. (MW) were insignificant in the first quarter of 1997 compared with $6.4
million for the same period a year earlier. In February, 1997, MW informed
the Company that it could not forecast its anticipated purchases for 1997 and
there can be no assurances that sales volume from MW will return to previous
levels. The loss of all or a significant portion of sales to MW will
adversely effect the Company's 1997 operating results. Nonetheless,
management does not believe the success of the Company is dependent upon any
one customer.
Gross profit increased 38.1% to $24.3 million (30.9% of net sales) in the first
quarter of 1997 from $17.6 million (26.7% of net sales) in the first quarter of
1996. As a percentage of net sales, the increase is due to increased margins
in the promotional products business and a change in sale mix toward
promotional products. Additionally, the gross profit percentage increased in
the first quarter of 1997 as sales to MW contributed to a lower gross profit
percentage in the first quarter of 1996.
Selling expenses as a percentage of net sales increased slightly to 12.6% in the
first quarter of 1997 ($9.9 million) compared to 11.6% in the first quarter of
1996 ($7.6 million). The 1% increase as a percentage of net sales is
attributable primarily to the decrease in sales in 1997 under the exclusive
agreement discussed above, which are not subject to payment of the Company's
standard commissions, and an increase in gross profit as a percentage of net
sales.
General and administrative ("G&A") expenses, including the non recurring
charge related to acquisitions as a percentage of net sales increased to
16.7% in the first quarter of 1997 ($13.1 million) compared to 13.4% in the
first quarter of 1996 ($8.8 million). Approximately $2.1 million of the $4.3
increase in G&A expenses is attributable to non-recurring expenses incurred
in the first quarter of 1997 to complete the acquisitions of CCA and
Entertel. Excluding these non-recurring expenses, G&A as a percentage of net
sales were 14.1% in 1997. Additionally, increased personnel and facilities
costs were necessary to support the Company's sales growth.
In the first quarter of 1997 the Company had net interest expense of $342,000,
compared to $121,000 of net interest expense in the first quarter of 1996. The
increase is due to increased borrowings at CCA resulting from an acquisition in
the third quarter of 1996 and additional working capital needs necessary to fund
growth.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio increased to 2.69 to 1 as of March 31, 1997 from
2.57 to 1 at December 31, 1996. Working capital was $55.6 million at March
31, 1997 compared to $58.1 million at December 31, 1996. Capital expenditures
for property and equipment were approximately $1.3 million for the first three
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 agreement
contains certain financial covenants which the Company must meet, including
minimum tangible net worth, maximum leverage, and minimum cash flow coverages.
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.
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 February 18, 1997 to approve an amendment to the Company's
Articles of Incorporation increasing the number of shares of
Common Stock authorized from 25,000,000 to 100,000,000 and to
amend the Company's Articles of Incorporation by adding an
Article to reduce the affirmative vote of shareholders
required to approve certain corporate actions. A total of
19,627,066 shares were eligible to vote of which 1,994,398
were unvoted on each matter presented at the special meeting.
In connection with the proposal to amend the Company's
Articles of Incorporation increasing the number of shares of
common stock authorized, 14,508,325 shares voted in favor of such
amendment, 3,114,229 shares voted against such amendment and
10,114 shares abstained.
With respect to the proposal to amend the Company's Articles
of Incorporation adding an Article to reduce the affirmative
vote of shareholders required to approve certain corporate
actions, 16,439,788 shares voted in favor of such amendment,
174,207 shares voted against such amendment, 19,137 shares
abstained and 999,536 shares were not voted.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - None
(b) The company filed one report on Form 8-K dated January 17, 1997
with respect to the acquisition of Creative Concepts in
Advertising, Inc. and Creadis Group, Inc. (together "CCA") and
amended this filing on Form 8-K/A on March 19, 1997.
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: May 14, 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
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH MARCH 31,
1997 FORM 10-Q REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,540,319
<SECURITIES> 0
<RECEIVABLES> 69,744,439
<ALLOWANCES> 2,862,000
<INVENTORY> 13,445,585
<CURRENT-ASSETS> 88,371,615
<PP&E> 24,493,940
<DEPRECIATION> 10,123,000
<TOTAL-ASSETS> 116,461,414
<CURRENT-LIABILITIES> 32,759,014
<BONDS> 23,351,124
0
0
<COMMON> 49,196,746
<OTHER-SE> 9,442,150
<TOTAL-LIABILITY-AND-EQUITY> 116,461,414
<SALES> 78,587,413
<TOTAL-REVENUES> 78,587,413
<CGS> 54,305,206
<TOTAL-COSTS> 54,305,206
<OTHER-EXPENSES> 23,052,636
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 341,757
<INCOME-PRETAX> 887,814
<INCOME-TAX> 355,448
<INCOME-CONTINUING> 532,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 532,366
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
