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 March 31, 2000 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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 May 12, 2000, the registrant had an aggregate of 63,729,674 shares of its
common stock outstanding.
HA-LO INDUSTRIES, INC.
INDEX
Part I. FINANCIAL INFORMATION Page
Number
------
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999...................... 2
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999............................. 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999............................. 4
Notes to Financial Statements............................. 5
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.............................. 12
Item 6. Exhibits and Reports on Form 8-K................. 12
Signatures............................................................ 13
1
PART 1. FINANCIAL INFORMATION
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
March 31, December 31,
(in thousands, except share amounts) 2000 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,672 $ 10,729
Receivables 148,887 178,712
Inventories 40,824 37,746
Prepaid expenses & deposits 15,973 17,406
--------- ---------
Total current assets 223,356 244,593
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PROPERTY AND EQUIPMENT, net 39,228 37,003
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OTHER ASSETS:
Intangible assets, net 76,342 77,111
Other 36,738 21,596
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Total other assets 98,080 98,707
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$ 375,664 $ 380,303
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 799 $ 984
Book overdraft 4,562 3,177
Customer deposits 5,712 6,975
Accounts payable 58,094 58,729
Accrued expenses 19,435 31,590
Reserve for restructuring 3,041 3,771
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Total current liabilities 91,643 105,226
--------- ---------
LONG-TERM DEBT 33,500 21,230
RESERVE FOR RESTRUCTURING 11,863 11,863
DEFERRED LIABILITIES 5,540 5,438
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 48,867,205 issued
and outstanding in 2000 and 48,515,862 in 1999 215,123 214,060
Other (1,356) (1,488)
Accumulated other comprehensive loss (2,269) (2,259)
Retained earnings 21,620 26,233
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Total shareholders' equity 233,118 236,546
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$ 375,664 $ 380,303
========= =========
The accompanying notes are an integral part of these balance sheets.
2
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
MARCH 31, 2000 AND 1999
(UNAUDITED)
Three Months Ended
----------------------------
March 31, March 31,
(in thousands, except per share amounts) 2000 1999
----------- ----------
NET SALES:
Products $ 120,946 $ 119,503
Services 40,252 37,464
--------- ---------
Net Sales 161,198 156,967
COST OF SALES:
Products 82,370 77,627
Services 27,915 24,621
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Cost of Sales 110,285 102,248
Gross profit 50,913 54,719
SELLING EXPENSES 23,730 20,697
GENERAL AND ADMINISTRATIVE EXPENSES 34,211 27,310
--------- ---------
Income from operations (7,028) 6,712
INTEREST EXPENSE (892) (1,092)
INTEREST INCOME 232 1,379
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Income (loss) before taxes (7,688) 6,999
PROVISION (BENEFIT) FOR TAXES (3,075) 2,800
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NET INCOME (LOSS) FOR THE PERIOD $ (4,613) $ 4,199
========= =========
EARNINGS PER SHARE:
Basic $ (0.09) $ 0.09
Diluted $ (0.09) $ 0.09
========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 48,867 48,457
Diluted 48,867 49,171
========= =========
The accompanying notes are an integral part of these statements.
3
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 2000 AND 1999
(UNAUDITED)
March 31, March 31,
(in thousands) 2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ (4,613) $ 4,199
Adjustments to reconcile net income to net
cash used for operating activities-
Depreciation and amortization 4,076 2,887
Increase in cash surrender value (128) 170
Increase (decrease) in deferred liabilities - other (5) 148
Changes in assets and liabilities, net of effects
of acquired companies -
Receivables 29,825 12,518
Inventories (3,078) (285)
Prepaid expenses and deposits 1,425 (2,029)
Accounts payable, accrued expenses and
due to related parties (13,845) (18,447)
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Net cash provided (used) by operating activities 13,657 (839)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,660) (4,854)
Decrease (increase) in short-term investments -- 36,906
Decrease (increase) in other assets (117) (1,199)
Cash paid for acquisitions, net of cash acquired (1,522) (26,259)
-------- --------
Net cash provided (used) for investing activities (5,299) 4,594
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on long-term debt (32) (1,768)
Net borrowings (payments) under line of credit 12,117 112
Advances to related party (15,000) --
Increase (decrease) in book overdraft 1,385 2,884
Net proceeds from issuance of common stock 125 2,685
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Net cash provided by financing activities (1,405) 3,913
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EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (10) (2,438)
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 6,943 5,230
CASH AND EQUIVALENTS, beginning of period 10,729 7,276
-------- --------
CASH AND EQUIVALENTS, end of period $ 17,672 $ 12,506
======== ========
The accompanying notes are an integral part of these statements.
4
HA-LO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
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 period ended March 31, 2000 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 1999 Annual
Report on Form 10-K.
NOTE 2. CAPITAL STOCK:
During the first three months of 2000, options to acquire an aggregate of
742,172 shares of the Company's common stock were issued under the Company's
Stock Plans at exercise prices ranging from $6.88 to $12.19 per share.
Additionally, 39,245 options were exercised during the same period at prices
ranging from $1.87 to $9.11 per share.
Basic earnings per share is calculated using the average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the average
number of common shares outstanding plus the effect of outstanding stock options
and warrants using the "treasury stock" method.
(in thousands, except per share amounts) THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
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Net income available to common
shareholders' (A) $ (4,163) $ 4,199
======== ========
Average outstanding:
Common stock (B) 48,667 48,457
Effect of stock options and warrants - 714
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Common stock and common stock
equivalents (C) 48,667 49,171
======== ========
Earnings per share:
Basic (A/B) $ (0.09) $ 0.09
======== ========
Diluted (A/C) $ (0.09) $ 0.09
======== ========
5
NOTE 3. STATEMENTS OF CASH FLOWS:
The supplemental schedule of non-cash activities for the three months ended
March 31, 2000 and 1999 includes the following:
(in thousands) 2000 1999
---- ----
Issuance of common shares in connection
with business acquisitions, net $ 853 $ 9,787
Payments accrued and liabilities assumed in
connection with business acquisitions $ 218 $14,725
Recognition of tax benefits from options and
restricted stock $ 84 $ 872
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 2000, the director earned approximately $200,000 and was granted
21,971 options at fair market value under this agreement.
NOTE 5: BUSINESS SEGMENTS:
The Company's reportable segments are strategic business units that offer
different products and services. Summarized financial information by business
segment follows:
Three months ended March 31,
(in thousands) 2000 1999
----------------------------
Net Sales:
- --------------------------------------------------------------------------------
Promotional products $ 120,946 $119,503
Marketing services 40,252 37,464
- --------------------------------------------------------------------------------
Total $ 161,198 $156,967
================================================================================
Operating income:
- --------------------------------------------------------------------------------
Promotional products $ (5,884) $ 5,541
Marketing services (1,144) 1,171
- --------------------------------------------------------------------------------
Total consolidated $ (7,028) $ 6,712
================================================================================
6
NOTE 6: COMPREHENSIVE INCOME:
The Company's comprehensive income includes net income and unrealized gains and
losses from currency translation. The calculation of total comprehensive income
for the three month periods ending March 31, 2000 and 1999 is as follows:
Three months ended
---------------------
March 31, March 31,
(in thousands) 2000 1999
--------- ---------
Net income $(4,613) $ 4,199
Other comprehensive loss, net of taxes (6) (1,463)
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Comprehensive income $(4,619) $ 2,736
======= =======
NOTE 7: RESTRUCTURING AND OTHER CHARGES:
In July 1999, the Company adopted a plan to restructure its promotional product
operations and to a lesser extent its telemarketing and marketing service
divisions. The focus of the restructuring is to centralize back office
functions, consolidate distribution capabilities and information systems and
streamline the management reporting structure. The restructuring will result in
the elimination of approximately 200 positions and the consolidation and closing
of over 20 offices/warehouses.
During the third quarter of 1999 the Company recorded a charge to operations of
$30.0 million. Major components of the charge related to lease buyouts and
accruals, asset write-downs, severance and termination costs and other charges.
As of March 31, 2000, approximately 50 of the anticipated employee terminations
have occurred. The Company anticipates the restructuring will be completed by
September 30, 2000.
(in thousands) 12/31/99 3/31/00
Accrual Utilized Accrual
------- -------- -------
Facility consolidation $12,795 $ 191 $12,604
Asset write-downs - - -
Severance and termination costs 2,579 504 2,075
Other charges 260 35 225
------- ------- -------
Total $15,634 $ 730 $14,904
======= ======= =======
Asset write-downs are the result of consolidating the operations of various
promotional product operations. These asset write-downs relate to duplicate
computer systems and warehouse systems that will not be used due to the
consolidation. The entire accrual for inventory write-downs (approximately $2.7
million) was written off prior to December 31, 1999 and was classified as a
component of cost of sales, for the cancellation of certain promotional programs
and exiting certain lines of business.
7
The other charges captioned above primarily relate to sample products utilized
by the sales force. These long-term assets were previously capitalized when
purchased and amortized over six years. The restructuring plan includes a sales
force reduction. In conjunction with the implementation of the sales force
reduction, the company changed its policy to provide that ownership of the
sample products would revert to the sales force. Accordingly, the unamortized
balance of sample products is being written off as part of the restructuring
charge.
NOTE 8- SUBSEQUENT EVENT
On May 3,2000, the shareholders of the Company approved the acquisition of
Starbelly.com, a privately held e-commerce provider of branded merchandise
for approximately $19 million of cash and 17 million shares of the Company's
common and 5.1 million shares of convertible preferred stock (including
shares of common and preferred stock underlying assumed stock options). Terms
of the acquisition are disclosed in the Form 8-K filed on May 12, 2000.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net sales for the first quarter of 2000 increased 2.7% to $161.2 million
compared to $157.0 million in the corresponding quarter of 1999. Sales
generated by the promotional products and marketing services segments
increased 1.2% and 7.5%, respectively over the prior year.
Gross profit decreased to 31.6% of net sales ($50.9 million) in the first
quarter of 2000 from 34.9% of net sales ($54.7 million) in the first quarter of
1999. The decrease was primarily due to a change in the sales mix of products
sold in the promotional products business segment. The first quarter of 1999
included certain high margin consumer premium sales which did not recur in
2000.
Selling expenses as a percentage of net sales increased to 14.7% in the first
quarter of 2000 ($23.7 million) compared to 13.2% in the first quarter of 1999
($20.7 million). The increase as a percentage is due primarily to the change in
the promotional products business mix as mentioned above as such consumer
premium sales are not subject to the Company's standard sales commissions.
General and administrative expenses as a percentage of net sales were 21.2%
in the first quarter of 2000 ($34.2 million) compared to 17.4% in the first
quarter of 1999 ($27.3 million). The increase in the percentage is due to
infrastructure investments, primarily personnel, required to support the
growth of the marketing services businesses.
The Company incurred an operating loss of $7.0 million in 2000 compared to
operating income of $6.7 million in 1999. The decreased operating performance is
primarily due to the change in the promotional products sales mix and the
infrastructure investments in the marketing services business segment.
In the first quarter of 2000 the Company had net interest expense of $660,000
compared to net interest income of $287,000 in the first quarter of 1999. The
change is primarily due to the increase of outstanding borrowings required to
fund the working capital of the business and infrastructure investments as
mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2000, the Company refinanced its unsecured revolving line of credit
with a secured revolving credit facility ("Revolver") totaling $80 million. The
facility allows for available borrowings based on a calculation related to the
domestic accounts receivable balance of the Company. The facility bears interest
at either a range of prime plus .20% to .85% or LIBOR plus a range between 1.25%
and 2.35% based on a defined ratio. The agreement contains certain financial
covenants that the Company must meet, including minimum tangible net worth,
maximum leverage, and interest coverage.
Additionally, in the first quarter of 2000, the Company advanced $15 million
to Starbelly.com, Inc., a related party. The amount of the advance is
reflected in other assets in the accompanying balance sheet.
9
In addition to the facility discussed above, one of the Company's European
subsidiaries has revolving credit facilities with several banks. These
facilities provide for borrowings of up to $5 million at rates ranging from
8-13% and are generally unsecured.
As of March 31, 2000, the Company's working capital was $147.3 million compared
to $139.4 million at December 31, 1999. Capital expenditures for property and
equipment were approximately $3.7 million for the first three months of 2000,
and management expects capital expenditures to be approximately $25 million for
the full year of 2000, excluding acquisitions.
The Company anticipates its current level of cash and cash equivalents as well
as future operating cash flows and funds available under its credit facilities
will be adequate to satisfy its cash needs for the foreseeable future.
10
FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of Financial
Condition and the Results of Operations regarding the amount and nature of
planned capital expenditures, the seasonality of the Company's future business,
the Company's belief that available cash will be sufficient to satisfy its
future needs, expected costs to be incurred in relation to Year 2000 issues and
HA-LO'S anticipated profitability in 2000 are forward-looking statements that
involve substantial risks and uncertainties. Following are important factors
that could cause the Company's actual results to differ materially from those
implied by such forward-looking statements: The Company's growth will be
dependent, in large part, upon its ability to hire, motivate and retain high
quality sales representatives. The Company does not maintain its own
manufacturing facilities and is dependent upon domestic and foreign
manufacturers for its supply of promotional products. The promotional products,
marketing services and telemarketing industries are very competitive. The
Company has experienced and may continue to experience rapid growth, which
growth has placed and may place significant demands on its management and
resources. Increased profitability will depend upon the Company's ability to
manage its growth and to integrate acquired companies into its existing
operations. Readers are encouraged to review HA-LO'S 1999 Annual Report on Form
10-K and quarterly reports on Form 10-Q for other important factors that may
cause actual results to differ materially from those implied in these forward
looking-statements.
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Restated Articles of Incorporation of the Company
including amendments thereto.
2.2 Amended and Restated By-Laws of the Company.
4.1 Certificate of Designation Establishing the Company's
Series A Convertible Participating Preferred Stock.
27.0 - Financial Data Schedule for the three month period
ended March 31, 2000
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on January 21, 2000
with respect to the proposed acquisition of Starbelly.com, Inc.
12
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 15, 2000 /s/ GREGORY J. KILREA
---------------------
Gregory J. Kilrea
Duly Authorized Officer
and Chief Financial Officer
13