SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 2000 or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period from ______to______
Commission file number: 0-20758
HA-LO INDUSTRIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3573412
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5980 TOUHY AVE., NILES, ILLINOIS 60714
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(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area
code:
(847)647-2300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
--------------------------
(Title of each class)
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/ /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of common stock held by stockholders who were not
affiliates of the registrant was approximately $73,859,097 - as of March 13,
2001 (based on the closing sale price on that date as reported by Midwest
Edition of THE WALL STREET JOURNAL). For this computation, the registrant has
excluded the market value of all shares of its common stock reported as
beneficially owned by executive officers and directors of the registrant and
certain other stockholders; such exclusion shall not be deemed to constitute
an admission that any such person is an "affiliate" of the registrant. At
March 13, 2001, the registrant had issued and outstanding an aggregate of
69,764,856 shares of its common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the proxy statement for the Annual Meeting of
Stockholders to be held in June, 2001 described in Part III hereof are
incorporated by reference in this report.
PART I
ITEM 1. BUSINESS
GENERAL
HA-LO is a full service, innovative brand marketing organization whose
diverse marketing disciplines are centered around its client's brand. Brand
marketing builds the value of the brand by connecting it with target
audiences to achieve strategic marketing objectives. The Company is organized
into two segments: promotional products and marketing services.
HA-LO's promotional products group is the leading player in the
fragmented promotional products industry with over 2.8% of market share.
Promotional products allow a company to physically connect brands with
identified target markets and individuals through repeated exposure to
merchandise that builds brand awareness, enhances brand recognition and
creates brand loyalty.
HA-LO's marketing services segment provides full-service brand
marketing capabilities focusing on connecting the brand with the consumer at
strategic points of contact. HA-LO offers complete brand marketing services
such as advertising, promotion, merchandising, direct and database marketing,
retail planning, event marketing, field marketing, and sports marketing.
INDUSTRY
BRANDED SOLUTIONS. According to Promotional Products Association
International, the United States market for promotional products, measured by
distributors' sales, has grown from approximately $6.2 billion in 1993 to
approximately $14.9 billion in 1999, the latest year for which data is
available. This translates to a compound annual growth rate of over 16%. The
promotional products industry is highly fragmented and according to industry
sources, is undergoing consolidation. There currently are more than 23,000
distributors of promotional products in the United States. Distributors tend
to be closely-held entities with a local or regional focus ranging from
one-person, one-product businesses who bring sample cases and suppliers'
catalogs to their customers, to entities similar to HA-LO, which maintain
showrooms to assist customers in selecting from an array of available
products.
The largest 498 distributors control a market share of about 62%. These
distributors experienced a growth rate of 52.7% in 1999, while distributors
with sales of less than $2.5 million declined at rates of 19.9%. Currently,
the Company has greater than a 2.8% share of the promotional products market.
Many of the larger distributors are also manufacturers (or affiliates of
manufacturers) of products traditionally used in the promotional products
industry.
The Company believes that many companies increasingly are patronizing a
limited number of promotional products suppliers and are focusing on
sole-source, full-service distributors. The criteria for selecting a
distributor include such factors as cost, quality and responsiveness, as well
as whether a distributor has full-service capabilities, such as design and
customization services and the ability to develop marketing programs. Many of
the Company's customers are requiring their suppliers to reduce marketing
costs and provide increasing support for upfront design and marketing program
management services. Generally, distributors with sufficient size,
capabilities and financial resources to meet such demands can best satisfy
these requirements. These changes are providing an opportunity for
full-service providers of promotional products, such as the Company, to grow
by acquiring new customers previously served by smaller competitors.
Additionally, the rapid growth of the internet is providing companies an
opportunity to generate additional sales through various on-line marketing
approaches and also to streamline the ordering process and better serve the
customer.
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MARKETING SERVICES. The Company's promotion marketing agency focuses on
developing strategies and implementing creative marketing plans to directly
connect brands with people. Marketing solutions may include consumer and
retail promotions, event sponsorships, direct and database marketing,
and merchandising.
PRODUCTS AND SERVICES
BRANDED SOLUTIONS. Approximately 85% of the Company's revenue is
generated from distribution of promotional products. Promotional products
generally are articles of merchandise imprinted or otherwise customized with
an advertiser's name, logo or message, which are used for marketing to,
providing sales incentives and awards for and developing goodwill among a
targeted audience. Promotional products include (i) apparel, such as jackets,
sweaters, hats and golf shirts, (ii) business accessories, such as clocks,
portfolios, briefcases, blotters and pen and pencil sets, (iii) recognition
awards, such as trophies and plaques and (iv) other miscellaneous items, such
as etched crystalware, calendars, golf accessories, key chains, watches and
mugs. The Company has a network of showrooms throughout the United States,
Canada and Europe in which it displays more than 300,000 promotional products
available from a network of over 5,000 vendors. The Company's sales
representatives work with each customer to develop a marketing program that
utilizes promotional products designed to reach the specific audience
targeted by the customer. The Company also provides corporate fulfillment
services, which enable a customer to purchase a large quantity of promotional
products that the Company then stores in its warehouses and ships from
time-to-time in small quantities at the direction of the customer. Corporate
fulfillment programs generally are implemented in conjunction with a customer
catalog or brochure featuring the type of customized products available for
shipment. The Company's corporate fulfillment programs afford large customers
lower per unit costs and the ability to receive timely deliveries of small
quantities as needed. The Company currently is providing corporate
fulfillment services for a number of customers, including Ford Motor Company,
General Electric, Guinness Import Company, IBM, Siemens, Security Link from
Ameritech, Sports Illustrated, Disney and Robert Half.
MARKETING SERVICES. The Company's ability to operate as a brand
marketing organization differentiates it from the more than 23,000 other
companies in the promotional product industry. The Company's marketing
services are composed of:
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UPSHOT, a marketing agency: UPSHOT connects the brand with the consumer
at strategic points of contact through brand marketing services that
include strategic brand planning, advertising, merchandising, promotion,
retail planning, event planning, field marketing and creative planning.
HA-LO Sports, a presence marketing agency: HA-LO Sports connects the
brand with the target audience through sports sponsorships and licensing.
Events By HA-LO, a presence marketing agency: Events By HA-LO connects
the brand with the target audience by planning and coordinating corporate
meetings, events and sales incentive programs.
BUSINESS STRATEGIES
PENETRATE CLIENT BASE THROUGH MULTI-DISCIPLINE APPROACH. By offering its
customers a comprehensive array of promotional products and marketing
services, the Company has positioned itself to benefit from the corporate
trends toward utilizing a limited number of preferred vendors and outsourcing
marketing functions. In addition to its core promotional product offerings,
the Company also offers brand marketing services.
LEVERAGE EXPENSE STRUCTURE. The Company's organizational structure
leverages fixed overhead costs across its operating divisions by centralizing
primary corporate functions such as accounting, human resources and
information systems. Additionally, the Company leverages costs in the
promotional product business by: (i) centralizing warehousing and
information systems, (ii) compensating its sales force almost exclusively on
a commission basis and (iii) minimizing inventory carrying costs by handling
a substantial majority of its sales via direct shipment from the vendor to
the customer. The Company believes that the high proportion of its variable
expenses relative to its fixed costs results in less fluctuation in its
profitability.
E-COMMERCE SOLUTIONS. The Company is developing strategies to take
advantage of recent trends for businesses and consumers to conduct business
through the Internet. On-line solutions are a natural extension of the
promotional product and brand marketing services, enabling powerful
one-to-one relationships among companies, brands and consumers. In addition
to expanding service offerings to meet
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client demand for speed, convenience and innovation, Internet solutions have
the potential to provide significant cost advantages by streamlining the
chain of supply.
EXPAND PROMOTIONAL PRODUCT LINE AND LEVERAGE BUYING POWER. The Company
seeks to offer its customers a wide range of high-quality promotional
products. Currently, the Company has access to over 300,000 types of
promotional products from more than 5,000 vendors located primarily
throughout North America and the Far East, including premium name brand
merchandise typically available only through leading department and specialty
stores. The Company's broad product line provides its customers with
comprehensive, one-stop shopping for most of their promotional products and
advertising specialty needs. As the nation's largest distributor of
promotional products, the Company has successfully negotiated preferred
pricing and rebate programs from many of its vendors and has developed
relationships with reliable overseas manufacturers that satisfy the Company's
strict quality and delivery standards. The Company believes its sales volume
and financial strength have earned it a reputation as a low-cost,
high-service provider of promotional products.
PURCHASING
In its promotional products business the Company purchases products
directly from manufacturers and typically arranges to have the customer's
name, logo or advertising message imprinted on the products by the
manufacturer or another third party. A majority of all promotional products
sold by the Company are shipped directly by the manufacturer or third party
supplier to its customers. The remaining products are warehoused by the
Company in conjunction with its corporate fulfillment programs.
As the nation's largest distributor of promotional products, the Company
has been able to successfully negotiate preferred pricing and rebate programs
from many vendors. The Company has developed relationships with U.S. and
overseas manufacturers that meet the Company's strict quality and delivery
standards and enable the Company to be very competitive on pricing large
orders. The Company generally is required to order products further in
advance from foreign manufacturers than from its domestic suppliers. The
Company is not dependent upon any single manufacturer.
PERSONNEL
The Company believes a key component of its success is the quality of
its employees including sales representatives and it is continually refining
its approach to hiring, training and motivating qualified employees and
personnel. The Company believes that it will retain and attract high quality
employees through a combination of its performance-based compensation
structure, financing capabilities, corporate visibility and the ability to
provide a full range of marketing services to its clients.
The Company employs approximately 1,200 people in its branded solutions
business and approximately 300 people in its promotion marketing agency. The
Company is not a party to any collective bargaining agreements and has not
experienced a strike or work stoppage. The Company believes that its
relationship with its employees is excellent.
CUSTOMERS
The Company's extensive client roster includes manufacturing,
pharmaceutical, financial service, broadcasting, consumer product and
communications companies as well as professional sports teams. Selected
customers of the Company include Abbott Laboratories, The Coca-Cola Company,
Discover Financial Services, Ford Motor Company, General Electric, Sears,
Pfizer, IBM, J.E. Seagram & Sons and SBC Communications. For the year ended
December 31, 2000, no single customer accounted for more than 10% of the
Company's net sales.
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BACKLOG
With respect to its promotional products business, the Company usually
has a modest backlog, which it defines as firm orders placed with suppliers
but for which the promotional products have not yet been shipped to the
customer. As of February 28, 2001, the Company had a backlog of firm orders
of approximately $46,385,000 as compared to a backlog of $52,685,000 at
February 29, 2000, substantially all of which the Company believes will be
shipped by the second quarter of 2001.
PATENTS AND TRADEMARKS
The Company believes the "HA-LO" name is important to its business. The
Company has registered the following trademarks: "HA-LO"(R) "HA-LO
Advertising Specialties"(R), "HA-LO Marketing and Promotions"(R), "Events by
HA-LO"(R) and "HA-LO Sports"(R).
COMPETITION
The industries in which the Company competes are highly fragmented and
competitive and the cost of entry is low. The Company's existing competitors
and new companies that may enter the market may have substantially greater
financial and other resources than HA-LO. The Company also competes for
advertising dollars with other media, such as television, radio, newspapers,
magazines and billboards. The primary bases for competition are customer
service, creativity, customer relationships, product innovation and pricing.
The Company believes its national and international distribution
capabilities, and its complementary, value-added marketing services, provide
it with a competitive advantage; however, these capabilities also may result
in higher administrative costs than those incurred by certain of HA-LO's
smaller competitors. In addition, several of the Company's promotional
products competitors are manufacturers as well as distributors and may enjoy
an advantage over the Company with respect to the cost of the goods they
manufacture.
6
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
Name Age Position with the Company
---- --- --------------------------
Marc S. Simon 52 Chief Executive Officer
Gregory J. Kilrea 37 Chief Financial Officer and Asst. Secretary
Eric Lefkofsky 31 Vice President and Secretary
Jon Sloan 40 Executive Vice President - National Accounts
Officers are elected annually and serve at the discretion of the Board
of Directors.
MARC S. SIMON was appointed Chief Executive Officer and a director of
the Company in February 2001. From June 1995 to February 2001, Mr. Simon
served as an executive officer of APAC Customer Services, Inc., including the
positions of president, vice chairman, executive vice president, chief
operating officer and chief financial officer. Prior to June 1995, Mr. Simon
was a partner in the law firm of Neal, Gerber & Eisenberg and served as a
director of and legal counsel to the Company.
GREGORY J. KILREA was appointed Chief Financial Officer in July of 1996.
Additionally, he was the Vice President of Planning from April, 1996 through
July, 1996. From 1985 until joining the Company in 1996, he was employed by
the accounting firm of Arthur Andersen LLP, most recently as an audit and
financial consulting manager.
ERIC P. LEFKOFSKY was appointed Vice President and a director of the
Company in May 2000. From May 2000 through March 2001, he also served as
Chief Operating Officer of the Company. He previously served as chairman of
the board, secretary and treasurer of Starbelly.com, Inc., which was acquired
by the Company in May 2000. From 1994 until early 2000, Mr. Lefkofsky served
as director and chief executive officer of Brandon Apparel Group, Inc., which
is a manufacturer and marketer of licensed apparel. In connection with a
creditor's claim against Brandon Apparel Group, Inc., Mr. Lefkofsky has been
enjoined by a Wisconsin state court from transferring or selling any stock of
the Company individually owned by him.
7
JON SLOAN was appointed Vice President - National Accounts in July of
1998. Prior to that he held several sales positions at the Company and at
Creative Concepts in Advertising (CCA), which was acquired by the Company in
January 1997. Prior to joining CCA in 1994, he was a Partner in 1045 Park, a
New York based apparel company.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Niles,
Illinois, a suburb of Chicago. The Company's other facilities include sales
offices and showrooms, warehouses, and administrative offices located
throughout the United States, Canada, Europe and Hong Kong. All of these
facilities are leased.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders,
through solicitation of proxies or otherwise, during the fourth quarter of
2000.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is publicly traded on the New York Stock Exchange
under the symbol "HMK." As of March 13, 2001, there were 480 holders of
record of the Company's Common Stock. The following table sets forth, for the
periods indicated, the range of high and low sales prices, by quarter, for
the Common Stock.
High Low
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2000
First quarter $ 12 3/16 $ 6 7/8
Second quarter 8 7/16 4 1/2
Third quarter 5 7/8 3 7/8
Fourth quarter $ 3 15/16 $ 1 15/16
1999
First quarter $ 25 7/16 $ 8 9/16
Second quarter 14 3/4 9 1/2
Third quarter 9 7/8 5 5/16
Fourth quarter $ 9 $ 4 7/16
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The Company has not paid a cash dividend on its common stock since its
initial public offering in 1992. The Company does not intend to pay such
dividends in the foreseeable future.
The registrar and transfer agent for the Company's common stock is
Computershare Investor Services, L.L.C., Chicago, Illinois.
The registrar and transfer agent for the Series A convertible
participating preferred stock is Neal Gerber & Eisenberg, Chicago, Illinois.
9
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net Sales (a) $612,107 $562,039 $506,451 $382,599 $305,275
Operating Income/(Loss) before restructuring
and acquisition expenses (b) $(64,235) $ 784 $ 41,314 $ 22,927 $ 13,206
Net Income(Loss) from continuing operations $(53,055) $(16,783) $ 20,195 $ 9,925 $ 6,098
Income from Discontinued Operations $ 5,671 $ 3,246 $ 4,325 $ 4,793 $ 3,628
Net Income(Loss) Per Share, Diluted $ (0.84) $ (0.28) $ 0.53 $ 0.36 $ 0.25
Weighted Average Shares
Outstanding, Diluted 59,491 48,598 46,447 41,112 40,266
Net Income (Loss) Per Diluted Share, from $ (0.93) $ (0.35) $ 0.43 $ 0.24 $ 0.15
continuing operations
BALANCE SHEET DATA (END OF YEAR):
BALANCE SHEET DATA:
Working Capital (c) $ 50,399 $118,406 $162,751 $78,741 $60,706
Total Assets $574,977 $366,197 $336,695 $222,175 $134,801
Long-term Debt $ - $ - $ - $43,761 $28,435
Stockholders' Equity (d) $336,472 $236,546 $235,491 $ 85,473 $62,032
(a) Excludes revenue from discontinued operations of $102,705,000 in
2000, $88,373,000 in 1999, $83,218,000 in 1998, $83,123,000 in 1997,
and $70,461,000 in 1996.
(b) Excludes $7,672,000 of restructuring credit in 2000 and $30,000,000 of
restructuring charges in 1999 and other expenses primarily related to
business acquisitions of $9,227,000, $3,845,000, and $1,693,000 in
1998, 1997, and 1996 respectively.
(c) Includes outstanding borrowings on the Company's credit facility of
$66,432,000 and $20,961,000 in 2000 and 1999, respectively, which is
classified as current on the accompanying consolidated balance sheets.
(d) Includes cash dividends of $11,518,000, $5,296,000 and $6,887,000
declared by acquired companies in 1998, 1997 and 1996, respectively,
prior to their acquisition by the Company.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth for the years indicated the percent of
net sales represented by each line item presented in the Company's
Consolidated Statements of Income:
Percent of Net Sales
---------------------------------------------
Year Ended December 31,
---------------------------------------------
2000 1999 1998
- --------------------------------------------------------------- -------------- --------------- --------------
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Sales 67.4 % 65.4 % 64.3 %
Gross Profit 32.6 % 34.6 % 35.7 %
Selling Expenses 14.9 % 15.6 % 13.7 %
General and Administrative Expenses 28.1 % 19.4 % 13.8 %
Restructuring and Other Expenses (1.2) % 4.9 % 1.8 %
- --------------------------------------------------------------- -------------- --------------- --------------
Operating Income(Loss) (9.2)% (5.3)% 6.4 %
Interest Income (Expense), Net (1.0 )% - .3 %
- --------------------------------------------------------------- -------------- --------------- --------------
Income(Loss) Before Income Taxes (10.2)% (5.3)% 6.7 %
- --------------------------------------------------------------- -------------- --------------- --------------
Net Income(Loss) (8.6)% (2.9)% 4.0 %
- --------------------------------------------------------------- -------------- --------------- --------------
Discontinued Operations, net of tax .9% .5% .9%
- --------------------------------------------------------------- -------------- --------------- --------------
Net Income(Loss) Applicable to Common Stockholders (8.1)% (2.4)% 4.8 %
- --------------------------------------------------------------- -------------- --------------- --------------
The following table summarizes the concentration of net sales by continuing
business segment:
Percent of Net Sales
---------------------------------------------
Business Segment 2000 1999 1998
- -------------------------------------------------------------- ------------- ---------------- --------------
Branded Solutions 85 % 88 % 92 %
Marketing Services 15 % 12 % 8 %
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999.
The following discussion includes the Company's continuing operations
only. Therefore, the effect of the Company's brand strategy and identity and
telemarketing subsidiaries, which are reflected in the accompanying
consolidated financial statements as discontinued operations, has been
excluded.
Net sales for 2000 increased 8.9% to $612.1 million from $562.0 million
for 1999. Of the $50.1 million increase, $46.2 million was due to internal
growth and $3.9 million was from acquired companies. Branded solutions net
sales increased $26.2 million in 2000. Of this amount, $24.0 million was
internal, resulting in an internal growth rate for the year of 4.9%. Internal
growth in this segment was due to a combination of the addition of new
sales representatives, further penetration of existing customers and
development of new accounts.
Net sales from the marketing services business segment, which includes
the Company's promotion marketing agency, increased $23.9 million in 2000. Of
this amount, $22.1 million was internal, resulting in an internal growth rate
for the year of 32.1%. Internal growth in this segment was due to increased
penetration of existing customers.
Gross profit as a percentage of net sales for 2000 was 32.6% ($199.4
million) compared to 34.6% ($194.5 million) for 1999. Branded Solutions gross
profit as a percentage of net sales decreased in 2000 due
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a change in the sales mix. Specifically, certain high margin consumer premium
sales from 1999 did not recur in 2000. In addition, the decrease was caused
by a change in service mix in the marketing services business segment from
higher margin execution and strategy work to lower margin production work.
Selling expenses as a percentage of net sales for 2000 were 14.9% ($91.5
million) compared to 15.6% ($87.7 million) for 1999. The decrease in the
percentage was primarily due to more efficient leverage of fixed selling
expenses in the branded solutions business segment. To a lesser extent, the
decrease in the percentage is due to a change in sales mix toward the
marketing services business segment. This segment does not have the same
selling expense component, primarily commissions, as the branded solutions
segment.
Recurring general and administrative expenses as a percentage of net
sales for 2000 were 28.1% ($172.1 million), compared to 19.4% ($108.8
million) a year earlier. Principle components of the $63.3 million increase
include goodwill amortization related to the acquisition of Starbelly.com
($40.0 million), payroll costs for Starbelly employees ($8.4 million),
payroll costs to support the growth in the marketing services business
segment ($9.3 million) and non capitalized technology expenditures ($2.1).
The above translates to a recurring operating loss of $64.2 million,
excluding a non recurring restructuring reversal ($7.7M), for twelve months
ended December 31, 2000 versus recurring operating income of $784,000,
excluding the $30 million restructuring charge discussed below, for the same
period last year. The decrease in the operating performance is primarily
related to funding of technology development in the branded solutions
business segment and decreased gross margins in the marketing services
business segment.
Accretion to the redemption value of preferred stock relates to the
amortization of the net present value discount assigned to the preferred
stock issued in the Starbelly.com acquisition.
Net interest expense in 2000 was $6.4 million compared to net interest
income of $29,000 in 1999. The change was due to borrowing necessary to
complete Starbelly.com acquisition and the subsequent funding of its
operations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.
The following discussion includes the Company's continuing operations
only. Therefore, the effect of the Company's brand strategy and identity and
telemarketing subsidiaries, which are reflected in the accompanying
consolidated financial statements as discontinued operations, has been
excluded.
Net sales for 1999 increased 11.0% to $562.0 million from $506.5 million
for 1998. Net sales from acquired companies were $92.1 million while internal
sales declined by $36.5 million. Promotional product net sales increased
6.1%, or $28.4 million in 1999. In the promotional product segment,
acquisitions contributed $66.4 million in sales while internal sales declined
$38.0 million or 8.2%. The decline in internal sales was primarily due to a
decrease in the Company's consumer premium business.
Net sales from the marketing services business segment, which includes
the Company's promotion marketing agency, increased 65.3% or $27.2 million in
1999. Virtually all of the growth relates to an acquisition completed in
December of 1998.
Gross profit as a percentage of net sales for 1999 was 34.6% ($194.5
million) compared to 35.7% ($180.6 million) for 1998. Excluding the effect of
$2.7 million of non-recurring write-offs resulting from the Company's
restructuring plan (see below), 1999 gross profit as a percentage of net
sales would have been 35.1%. The decrease in the recurring percentage was
primarily due higher margin consumer premium business from 1998 that did not
recur in 1999.
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Selling expenses as a percentage of net sales for 1999 increased to
15.6% ($87.7 million) compared to 13.7% ($69.4 million) for 1998. The
increase was primarily due to fixed cost investments, primarily people, to
support promotional product sales growth which did not materialize.
Recurring general and administrative expenses as a percentage of net
sales for 1999 were $108.8 compared to $69.9 million in 1998. Of the $38.9
million increase, $18.4 million is attributable to acquired companies. The
remaining increase was caused by a combination of two factors. First,
investments in personnel and facilities to support rapid growth in the
marketing services business segment. Secondly, the Company invested in
infrastructure, primarily personnel and information systems, necessary to
support growth in the branded solutions segment that was not achieved.
Operating results for 1999 and 1998 include other expenses of $30.0
million and $9.3 million, respectively. The 1999 expenses relate to the
Company's restructuring plan to consolidate operations (see below) while the
1998 expenses primarily relate to completed acquisitions accounted for using
the pooling-of-interests accounting method.
Net interest income in 1999 was $.029 compared to net interest income of
$1.6 in 1998. The change was due to a reduction in the average balance in
short-term investments. The short-term investments were used to fund the
acquisition of additional promotional product companies.
RESTRUCTURING PLAN
As discussed in Note 10 to the consolidated financial statements, the
Company recorded a restructuring charge of $30 million in the third quarter
of 1999. Major components of the charge related to lease buyouts and
accruals, asset write-downs, severance and termination costs and other
charges. In the fourth quarter of 2000 the company reversed $7,672,000 of the
reserve as the plan was implemented more efficiently than originally
projected. The remaining reserve of $3,430,000 is expected to be utilized in
the first half of 2001.
SEASONALITY
Some of the Company's customers tend to utilize a greater portion of
their advertising and promotional budgets in the latter half of the year, which
historically has resulted and may continue to result in a disproportionately
large share of the Company's net sales being recognized in the second half of
the year. The Company incurs general and administrative expenses evenly
throughout the year, which historically has resulted and may continue to result
in a disproportionate share of its net income being reported in the second half
of the year.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company has a credit facility that provides a commitment of $80
million. Maximum borrowings are based on eligible accounts receivable, are
secured by the Company's domestic assets and bear interest based on a defined
ratio at either between prime and prime plus 1.50% or the London Interbank
Offered Rate (LIBOR) plus 3.00%. As of December 31, 2000, outstanding
borrowings on the facility were $64.2 million.
The Company's credit facility includes various financial covenants, including
maintenance of an interest coverage ratio based on operating results for the
previous four quarters. The Company violated this covenant at December 31,
2000, and because of the cumulative nature of the calculation, has advised its
banks it will be in violation at the end of the first quarter. The existing
covenant violation has been waived by the banks. The Company and its banks
have discussed the need to redefine the covenant to more attainable levels,
but until such redefinition occurs, the Company could be in violation
throughout 2001. The Company's financial institutions have been cooperative
in working with the Company in its efforts to dispose of certain of its
business units and management believes the banks will continue to waive
existing violations as long as the Company continues to execute its
strategies to reduce outstanding borrowings. Current borrowings on the credit
facility are are within the formula amounts defined in the agreement and
outstanding borrowings from the bank have fallen from a peak of $71.9 million
on February 9, 2001 to $53.5 million at March 27, 2001. Subsequent to the
completion of the sale of the entities discussed below, the Company intends
to renegotiate its lending arrangements with its financial institutions. The
debt outstanding under the Revolver has been classified as a current
liability in the accompanying financial statements.
In addition to its credit facility, the Company has an obligation to holders
of the redeemable preferred stock. The Company is precluded from borrowing on
its credit facility to fund the preferred stock redemption. Management is in
the process of renegotiating the terms of the preferred stock and has received
preliminary indications from the majority preferred stockholder that this will
result in some combination of an extension of payment terms of at least twelve
months, modification of conversion rights, and revision of dividend rates for
default payments.
Management's strategies to continue reducing its leverage include the
following: implementation of a cost reduction program, which will improve
operating cash flow, and consummation of a transaction to sell one or both of
two business units. Each of these actions are described below.
The Company hired a new Chief Executive Officer on February 22, 2001. At his
direction, the Company began an aggressive initiative to identify cost
reduction opportunities and eliminate discretionary spending. Some of the
identified opportunities have already been implemented, and various
discretionary expenditures have been eliminated. The initiative is continuing
and the first phase is expected to be completed during the second quarter of
2001, with full implementation occurring before the end of 2001. Management
believes the result of the initiative will reduce expenses in 2001 by $10
- -$15 million. During this initiative, management will review its business
strategy. This review could result in a second quarter restructuring charge
and may also result in an impairment charge for certain of its long lived
assets.
The Company is actively engaged in the sale of two subsidiaries. (See
footnote 6). One of these transactions is in the final stages of contract
review. The material terms of the transaction have been agreed to by the
parties. The Company has received a fairness opinion on this transaction from
its investment banker. The second transaction is subject to a letter of
intent which defines the significant terms of the transaction. The buyers in
both transactions have completed their due diligence analyses and management
believes that both transactions will be completed during the second quarter.
The net proceeds from these sales, based on the terms of the contract and the
letter of intent, are expected to exceed $50 million, exclusive of earnout
consideration to be received during the first quarter of 2002. Additionally,
in March 2001, the Company sold a portion of its interest in a joint venture
for $6 million. The buyer, a group that includes the former Vice Chairman of
the Company, has an option to purchase the remaining interest for an
additional $14 million if exercised by April 15, 2001 and closed by April 30,
2001.
Capital expenditures for 2000 were approximately $20.9 million and include
significant investment in software development and other technology costs
which will not recur. Management expects capital expenditures in 2001 will not
exceed $10 million.
In management's opinion the actions identified will be sufficient to meet the
needs of the Company for 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks relating to fluctuations in
currency exchange rates and interest rates. As required by Securities and
Exchange Commission (SEC) rules, the Company has calculated the sensitivity
of operating results to hypothetical changes in exchange rates and interest
rates as if these changes had actually occurred during 2000.
The Company is subjected to a risk from currency translation
fluctuations due to their operations in Europe and Canada. Had the US dollar
been 10% less favorable compared to foreign currencies during 1999 the
Company would have recognized a $4.1 million reduction in net assets, about
1.1% of the total reported at year end. The effect on operations and cash
flow in 2000 would have been immaterial. Management does not believe the risk
of unfavorable currency fluctuations is significant, and has not entered into
any foreign exchange contracts for the purpose of hedging against this risk.
The Company is exposed, through short-term investments and borrowings,
to the risk of unfavorable changes in interest rates. Had interest rates
during 2000 been 10% less favorable, net income would have been negatively
affected by approximately $570,000. Management does not believe that the risk
of unfavorable fluctuations in interest rates is significant to the Company's
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by item 8 is included elsewhere in
this report (see Part IV, Item 14)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 regarding Executive Officers is
included in the "Executive Officers of the Registrant" section of Item I,
except that information regarding "Beneficial Ownership Reporting Compliance"
is incorporated by reference from such section of the Company's Proxy
Statement for its June 2001 Annual Meeting of Stockholders.
The information regarding Directors is incorporated by reference from
the "Election of Directors", "Executive Compensation" and "Security Ownership
of Management" and "Beneficial Ownership Reporting Compliance" sections of
the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
"Executive Compensation" and "Certain Transactions" sections of the Company's
Proxy Statement for its June 2001 Annual Meeting of Stockholders; provided,
however, that neither the Report of the Compensation Committee on Executive
Compensation nor the Performance Graph set forth therein shall be incorporated
by reference herein, in any of the Company's previous filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, or in any of the Company's future filings.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the "Security Ownership of Certain Beneficial Owners and Management" section
of the Company's Proxy Statement for its June 2001 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
"Executive Compensation" and "Certain Transactions" sections of the Company's
Proxy Statement for its June 2001 Annual Meeting of Stockholders; provided,
however, that neither the Report of the Compensation Committee on Executive
Compensation nor the Performance Graph set forth therein shall be incorporated
by reference herein, in any of the Company's previous filings under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, or in any of the Company's future filings.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements PAGE
----
(i) Report of Independent Public Accountants; F-2
(ii) Consolidated Balance Sheets at December 31, 2000 and F-3
1999;
(iii) Consolidated Statements of Operations for each of the years
ended December 31, 2000, 1999 and 1998; F-4
(iv) Consolidated Statements of Stockholders' Equity for each
of the years ended December 31, 2000, 1999 and 1998; F-5
(v) Consolidated Statements of Cash Flows for each of the
years ended December 31, 2000, 1999 and 1998; and F-6
(vi) Notes to Consolidated Financial Statements. F-7
2. Schedules
Schedule II, Valuation and Qualifying Accounts:
For each of the three years in the period ended December, 31 2000 F-24
3. Exhibits
The exhibits to this report are listed in the Exhibit Index
included elsewhere herein.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth
quarter of 2000.
16
HA-LO INDUSTRIES, INC.
EXHIBIT INDEX
Exhibit
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Certificate of Ownership and Merger, filed by the Company on August 31,
2000. (10)
3.1 Amended and Restated Certificate of Incorporation of the Company, dated
August 29, 2000, including Certificate of Designations Establishing
Series A Convertible Participating Preferred Stock. (11)
3.2 Amended and Restated Bylaws of the Company. (12)
4.1 Specimen of Stock Certificate for Common Stock. (1)
4.2 Specimen of Stock Certificate for Common Stock. (8)
4.3 New Specimen of Stock Certificate for Common Stock. (15)
10.3 Lease, dated June 30, 1999, between Maple Lane Acquisition Limited
Liability Company and Creative Concepts in Advertising, Inc.(9)
10.4 Employment Agreement, dated as of September 30, 1996, between the
Company, Market USA, Inc. and Seymour N. Okner (5, 19)
10.5 Employment Agreement, dated January 3, 1997, among the Company,
Creative Concepts in Advertising, Inc. and Jon Sloan. (8,19)
10.6* First Amendment to Employment Agreement, dated as of January 2, 2000,
among the Company, Creative Concepts in Advertising, Inc. and Jon
Sloan. (19)
10.7* Amendment 1A to Employment Agreement, between the Company and Jon
Sloan. (19) 10.8 HA-LO Industries, Inc. Key Employee Incentive Plan.
(1, 19)
10.9 Exclusive Premium Purchasing Agreement, dated January 11, 1995, between
Montgomery Ward & Co., Incorporated and the Company. (3)
10.12 Form of Indemnity Agreement between the Company and each of its
directors and officers. (1, 19)
10.15 Building Lease, dated December 30, 1992, between the Company and
LaSalle National Trust N.A. No. 115722. (2)
10.16 Agreement, dated as of March 17, 1999, between the Company and Marshall
J. Katz. (9, 19)
10.19 Employment Agreement, dated as of January 3, 1997, between the Company
and Linden D. Nelson. (6, 19)
10.20 Employment Agreement, dated as of November 9, 1999, between the Company
and Gregory J. Kilrea. (9, 19)
10.21 Employment Agreement, dated as of June 30, 1998, between Promotional
Marketing, L.L.C. and John R. Kelley, Jr. (9, 19)
10.22* Employment Agreement, dated as of February 7, 2001, between the Company
and Marc S. Simon (19).
10.23 HA-LO Industries, Inc. Stock Plan (as amended and restated) (3, 19)
10.25 Second Amendment to the HA-LO Industries, Inc. Stock Plan (as amended
and restated), adopted October 28, 1995. (4)
10.26 Third Amendment to the HA-LO Industries, Inc. Stock Plan (as amended
and restated), adopted on February 26, 1996. (4)
10.27 First Amendment to Exclusive Premium Purchasing Agreement, dated
December 27, 1995, between Montgomery Ward & Co., Inc. and the Company.
(4)
10.29* First Amendment to Employment Agreement, dated on or about August 11,
2000, between the Company and Gregory J. Kilrea (19)
17
10.31* First Amendment to Employment Agreement, dated July 31, 2000, among the
Company, Promotional Marketing, L.L.C. and John R. Kelley, Jr. (19).
10.39 Amended and Restated HA-LO Industries, Inc. 1997 Stock Plan. (17, 19)
10.40 1997 Employment Agreement between the Company and Lou Weisbach. (7, 19)
10.42* Agreements by and between the Company and certain employees dated
November, 1997, regarding change of control. (19)
10.45 1998 Restatement of the HA-LO 401(k) Savings Plan. (7, 19)
10.46 HA-LO Industries, Inc. Executive Deferred Compensation Plan (as amended
and restated) effective February 1, 1997.(7, 19)
10.47 Executive Incentive Compensation Plan for Various Employees.(7, 19)
10.48 Agreement dated June 29, 1998 between the Company and Montgomery Ward &
Co., Inc. (8)
10.49 Second Amendment to Exclusive Premium Purchasing Agreement dated June
29, 1998 between Montgomery Ward & Co., Inc. and the Company. (8)
10.50 Warrants, dated January 10, 1996, from the Company to Montgomery Ward &
Co., Inc., ValueVision International Inc. and Merchant Development
Corporation. (8)
10.51 First Amendment to Warrant dated June 29, 1998 between Montgomery Ward
& Co., Inc. and the Company (relative to Exhibit 10.50) (8)
10.52 Warrants, dated January 10, 1996, from the Company to Montgomery Ward &
Co., Inc., ValueVision International Inc. and Merchant Development
Corporation (8)
10.53 First Amendment to Warrant dated June 29, 1998 between Montgomery Ward
& Co., Inc. and the Company (relative to Exhibit 10.52). (8)
10.54 Agreement dated January 26, 1999 between the Company and Montgomery
Ward & Co., Inc. (8)
10.55 First Amendment to the 1998 Restatement of the HA-LO 401(k) Savings
Plan, effective January 1, 1999. (8, 19)
10.56 Second Amendment to the 1998 Restatement of the HA-LO 401(k) Savings
Plan, effective January 1, 1999. (8, 19)
10.57 Amendment to Industrial Space Lease, dated May 1, 1995, between
Centerpoint Properties Corporation and the Company. (9)
10.58 Second Amendment to Industrial Space Lease, dated April 1996, between
Centerpoint Properties Corporation and the Company. (9)
10.59 Third Amendment to Industrial Space Lease, dated November 1996, between
Centerpoint Properties Corporation and the Company. (9)
10.60 Fourth Amendment to Industrial Space Lease, dated April 1997, between
Centerpoint Properties Corporation and the Company. (9)
10.61 Office and Industrial Building Lease, dated November 30, 1998, between
Centerpoint Realty Services Corporation and the Company. (9)
10.62 Guaranty, dated June 30, 1999, made by the Company to Maple Lane
Acquisition Limited Liability Company. (9)
10.63 Agreement and Plan of Merger and Plan of Reorganization, dated January
17, 2000, among the Company, Starbelly.com, Inc. and HA-LO Industries,
Inc. (a subsidiary of the Company). (9)
10.64 Promissory Note, dated January 6, 2000, made by Starbelly.com, Inc. to
the Company in the amount of $5,000,000. (9)
10.65 Promissory Note, dated January 17, 2000, made by Starbelly.com, Inc. to
the Company in the amount of $5,000,000. (9)
10.66 Promissory Note, dated March 1, 2000, made by Starbelly.com, Inc. to
the Company in the amount of $5,000,000. (9)
10.67 Credit Agreement, dated February 25, 2000, amount the Company, American
National Bank and Trust Company of Chicago and the Lenders which are or
become parties thereto. (9)
10.68 First Amendment to Credit Agreement, dated March 2000, among the
Company, American National Bank of Trust Company of Chicago, Harris
Trust and Savings Bank and Comerica Bank. (9)
10.69 Assumptions and Supplements to Guaranty Agreement, dated March 2000, by
UPSHOT (New York), Inc., Market USA, Inc., UPSHOT Direct, Inc., Lipson
Associates, Inc., HA-LO Sports, Inc., CF Napa Design, Inc., and Premier
Promotions and Marketing, Inc. (9)
18
10.70 Guaranty Agreement, dated March 1, 2000 by Lee Wayne Corporation,
Creative Concepts in Advertising, Inc. and Promotional Marketing,
L.L.C. (9)
10.71 Letter Loan Agreement, dated March 1, 2000, between the Company, HA-LO
Canada, Inc. and Bank One Canada. (9)
10.73 HA-LO Industries, Inc. Stock Option Plan for Starbelly Employees,
Directors and Consultants. (16, 19)
10.74 HA-LO Industries, Inc. 2000 Stock Option Plan. (18, 19)
10.75 Amendment No. 1 to Merger Agreement, dated April 11, 2000, among the
Company, Starbelly.com, Inc. and HA-LO Industries, Inc. (a subsidiary
of the Company). (13)
10.76 Revolving Credit Agreement, dated as of March 31, 2000, among the
Company, HA-LO Canada Inc., Comerica Bank and LaSalle Bank National
Association, as agents for certain banks. (14)
10.77* Revolving Credit Note, dated as of March 31, 2000, made by the Company
to the order of Comerica Bank.
10.78* Revolving Credit Note, dated as of March 31, 2000, made by the Company
to the order of LaSalle Bank National Association.
10.79* Swing Line Note, dated as of March 31, 2000 made by the Company to the
order of Comerica Bank.
10.80* Pledge Agreement (Company), dated as of March 31, 2000, between the
Company and Comerica Bank, as agent for certain banks.
10.81* Domestic Security Agreement, dated as of March 31, 2000, among the
Company, certain subsidiaries of the Company and Comerica Bank, as
agent for certain banks.
10.82* Guaranty, dated as of March 31, 2000, made by the Company and certain
subsidiaries of the Company to Comerica Bank and LaSalle Bank National
Association, as agents for certain banks.
10.83* Swing Line Note (Canadian Permitted Borrower), dated as of March 31,
2000, made by HA-LO Canada Inc. to the order of Comerica Bank.
10.84* Canadian Stock Pledge and Security Agreement, dated as of March 31,
2000, between the Company and Comerica Bank, as agent for certain
banks.
10.86* Stockholder's Agreement, dated as of January 17, 2000, between the
Company and Bloomfield Partners Family Limited Partnership.
10.87* Stockholder's Agreement, dated as of January 17, 2000, between the
Company and Bradley A. Keywell.
10.88* Stockholder's Agreement, dated as of January 17, 2000, between the
Company and Coventry Partners Family Limited Partnership.
10.89* Stockholder's Agreement, dated as of January 17, 2000, between the
Company and Eric P. Lefkofsky.
10.90* Promissory Note, dated April 4, 2000, made by Starbelly.com, Inc. to
the Company in the amount of $5,000,000.
10.91* Employment Agreement, dated as of May 3, 2000, between the Company and
Bradley A. Keywell. (19)
10.93* Employment Agreement, dated as of May 3, 2000, between the Company and
Eric P. Lefkofsky. (19)
10.94* Agreement and Covenant Not to Compete, dated as of May 3, 2000, between
the Company and Bradley A. Keywell.
10.95* Agreement and Covenant Not to Compete, dated as of May 3, 2000, between
the Company and Eric P. Lefkofsky.
10.96* Employment Escrow Agreement, dated as of May 3, 2000, among the
Company, American National Bank and Trust Company of Chicago and
Bloomfield Partners Family Limited Partnership.
10.97* Employment Escrow Agreement, dated as of May 3, 2000, among the
Company, American National Bank and Trust Company of Chicago and
Coventry Partners Family Limited Partnership.
19
10.98* Third Amendment to the 1998 Restatement of the HA-LO 401(k) Savings
Plan, effective April 1, 1999. (19)
10.99* Fourth Amendment to the 1998 Restatement of the HA-LO 401(k) Savings
Plan, effective July 1, 1999. (19)
10.100* Fifth Amendment to the 1998 Restatement of the HA-LO 401(k) Savings
Plan, effective August 1, 1999. (19)
10.101* Sixth Amendment to the 1998 Restatement of the HA-LO 401(k) Savings
Plan, effective January 1, 1999. (19)
10.102* Seventh Amendment to the 1998 Restatement of the HA-LO 401(k) Savings
Plan, effective January 1, 2001. (19)
21.1 List of subsidiaries of registrant (9)
23.1* Consent of independent public accountants.
27.1 Financial Data Schedule - (9)
- ------------------------------
(1) Incorporated by reference to the correspondingly numbered exhibit to
the Registration Statement (no. 33-51698) on Form S-1, as amended,
filed by the Company under the Securities Act of 1933, as amended.
(2) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1992.
(3) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1994.
(4) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
(5) Incorporated by reference to the Registration Statement (no. 333-10481)
on Form S-4, as amended, filed by the Company under the Securities Act
of 1933, as amended.
(6) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
(7) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
(8) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
(9) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
(10) Incorporated by reference to Appendix A to the Company's Definitive
Proxy Statement which was filed on July 28, 2000 pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended, and is
incorporated by reference herein pursuant to Rule 12b-32 under such
Act.
(11) Incorporated by reference to Appendix B to the Company's Definitive
Proxy Statement which was filed on July 28, 2000 pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended, and is
incorporated by reference herein pursuant to Rule 12b-32 under such
Act.
(12) Incorporated by reference to Appendix C to the Company's Definitive
Proxy Statement which was filed on July 28, 2000 pursuant to Rule 14a-6
under the Securities Exchange Act of 1934, as amended, and is
incorporated by reference herein pursuant to Rule 12b-32 under such
Act.
(13) Incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K which was filed on May 12, 2000.
(14) Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.
(15) Incorporated by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K which was filed on September 1, 2000.
(16) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement (no. 333-36236) on Form S-8, filed by the Company under the
Securities Act of 1933, as amended.
20
(17) Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement (no. 333-37470) on Form S-8, filed by the Company under the
Securities Act of 1933, as amended.
(18) Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement (no. 333-45060) on Form S-8, filed by the Company under the
Securities Act of 1933, as amended.
(19) Management contract or compensatory plan or arrangement.
* Filed herewith.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 30, 2001
HA-LO INDUSTRIES, INC.
Registrant
By: /s/ GREGORY J. KILREA
-----------------------
Gregory J. Kilrea
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 30, 2001:
Signature Title
--------- -----
/s/ MARC S. SIMON Chief Executive Officer and Director
--------------------
Marc S. Simon
/s/ JOHN R. KELLEY JR. Director
--------------------
John R. Kelley Jr.
/s/ LOU WEISBACH Chairman of the Board of Directors
--------------------
Lou Weisbach
/s/ THOMAS HERSKOVITS Director
---------------------
Thomas Herskovits
22
/s/ MARSHALL J. KATZ Director
---------------------
Marshall J. Katz
/s/ ERIC LEFKOFSKY Vice President and Director
---------------------
Eric Lefkofsky
/s/ BRADLEY A. KEYWELL Director
---------------------
Bradley A. Keywell
/s/ RICHARD A. HEISE, JR. Director
---------------------
Richard A. Heise, Jr.
23
INDEX TO FINANCIAL STATEMENTS
Page
HA-LO Industries, Inc.
Report of Independent Public Accountants..................................................... F-2
Consolidated Balance Sheets at December 31, 2000 and 1999.............................. F-3
Consolidated Statements of Operations for each of the years ended
December 31, 2000, 1999 and 1998............................................................. F-4
Consolidated Statements of Stockholders' Equity for each of the
years ended December 31, 2000, 1999 and 1998.............................................. F-5
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2000, 1999 and 1998............................................................. F-6
Notes to Consolidated Financial Statements................................................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of HA-LO Industries, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets
of HA-LO Industries, Inc. (an Illinois corporation) and
Subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity
and cash flows for each of the years ended December 31, 2000,
1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of HA-LO Industries, Inc. and Subsidiaries
as of December 31, 2000 and 1999, and the consolidated results
of their operations and their cash flows for each of the years
ended December 31, 2000, 1999 and 1998, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
April 2, 2001
F-2
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
December 31,
-----------------------------
A S S E T S 2000 1999
----------- ---- ----
CURRENT ASSETS:
Cash and equivalents $ 13,444 $ 9,998
Receivables-
Trade 133,929 138,897
Services and costs billable to clients 15,023 13,336
Other 2,419 2,321
Net current assets of discontinued operations 9,099 11,659
Inventories 32,970 37,746
Prepaid expenses and deposits 30,599 16,799
-------------- ----------
Total current assets 237,483 230,756
-------------- ----------
PROPERTY AND EQUIPMENT, net 41,983 26,458
-------------- ----------
OTHER ASSETS:
Intangible assets, net 265,091 76,863
Net non-current assets of discontinued operations 10,615 11,412
Other 19,805 20,708
-------------- ----------
Total other assets 295,511 108,983
-------------- ----------
$ 574,977 $ 366,197
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 68,525 $ 21,855
Cash overdraft 8,024 3,177
Customer deposits 6,844 6,286
Accounts payable 84,188 56,960
Accrued expenses-
Commissions and wages 14,401 15,047
Other 1,171 5,341
Reserve for restructuring 3,430 3,684
-------------- -----------
Total current liabilities 186,583 112,350
-------------- -----------
RESERVE FOR RESTRUCTURING -- 11,863
DEFERRED LIABILITIES 4,463 5,438
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK, no par value; 10,000,000 shares authorized and
4,866,069 issued, net of unamortized discount. 47,459 --
STOCKHOLDERS' EQUITY:
Common stock, no par value; 100,000,000 shares authorized and 68,470,298 and
48,724,790 issued and outstanding in 2000 and 1999, respectively 379,583 214,060
Unearned Compensation (19,303) (1,488)
Accumulated other comprehensive income (loss) (254) (2,259)
Retained earnings (deficit) (23,554) 26,233
-------------- -----------
Total stockholders' equity 336,472 236,546
-------------- -----------
$ 574,977 $ 366,197
============== ===========
The accompanying notes are an integral part of these balance sheets.
F-3
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
Year Ended December 31,
-------------------------------------
2000 1999 1998
-------------- --------------- ----------------
NET SALES:
Products $ 519,368 $ 493,197 $ 464,826
Services 92,739 68,842 41,625
-------------- --------------- ----------------
Net Sales 612,107 562,039 506,451
COST OF SALES:
Products 355,382 326,759 296,730
Services 57,340 38,150 29,128
Restructuring - products - 2,653 -
-------------- --------------- ----------------
Cost of Sales 412,722 367,562 325,858
-------------- --------------- ----------------
Gross Profit 199,385 194,477 180,593
SELLING EXPENSES 91,487 87,656 69,362
GENERAL AND ADMINISTRATIVE EXPENSES 172,133 108,777 69,916
RESTRUCTURING AND OTHER (7,672) 27,260 9,227
-------------- --------------- ----------------
Operating Income(Loss) (56,563) (29,216) 32,088
-------------- --------------- ----------------
INTEREST INCOME - 1,743 2,742
INTEREST EXPENSE (6,384) (1,714) (1,162)
-------------- --------------- ----------------
Pretax Income(Loss) from Continuing Operations (62,947) (29,187) 33,668
PROVISION(BENEFIT) FOR INCOME TAXES (9,892) (12,404) 13,473
-------------- --------------- ----------------
NET INCOME(LOSS) FROM CONTINUING OPERATIONS (53,055) (16,783) 20,195
Accretion to Redemption Value of Preferred Stock (2,403) - -
-------------- --------------- ----------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS APPLICABLE TO COMMON
STOCKHOLDERS $ (55,458) $ (16,783) $ 20,195
DISCONTINUED OPERATIONS:
Income from Discontinued Operations (net of applicable income
tax expense of $3,780,000 in 2000, $3,379,000 in 1999,
and $2,650,000 in 1998) 5,671 3,245 4,325
-------------- --------------- ----------------
NET INCOME(LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (49,787) $ (13,538) $ 24,520
============== =============== ================
NET INCOME(LOSS) PER SHARE
Basic $ (.84) $ (.28) $ 0.55
Diluted $ (.84) $ (.28) $ 0.53
============== =============== ================
NET INCOME(LOSS) PER SHARE FROM CONTINUING OPERATIONS
Basic $ (.93) $ (.35) $ 0.45
Diluted $ (.93) $ (.35) $ 0.43
============== =============== ================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 59,491 48,598 44,734
Diluted 59,491 48,598 46,447
============== =============== ================
The accompanying notes are an integral part of these statements.
F-4
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands, except share amounts)
Common Stock
---------------------
Accumulated
Other
Shares Unearned Comprehensive
Issued Amount Compensation Income (Loss)
------ ------ ------------ -------------
BALANCE, December 31, 1997 40,171,844 $ 66,241 $ (1,985) $ (146)
Dividends declared by pooled companies - (5,176) - -
Issuance of shares through public offering 5,853,000 117,362 - -
Issuance of shares in connection with 51,986 1,426 - -
acquisitions, net
Amortization of unearned compensation - - 257 -
Recognition of tax benefits from options,
warrants and restricted stock - 9,490 - -
Exercise of stock options and warrants 1,728,959 9,335 - -
Repurchase of common stock (25,047) (450) - -
Net income - - - -
Foreign currency translation adjustments - - - (634)
---------------------------------------------------------
BALANCE, December 31, 1998 47,780,742 $198,228 $(1,728) $(780)
Issuance of shares in connection with 430,806 9,835 - -
acquisitions, net
Amortization of unearned compensation - - 240 -
Recognition of tax benefits from
options and warrants - 1,946 - -
Exercise of stock options and warrants 513,242 4,051 - -
Net loss - - - -
Foreign currency translation adjustments - - - (1,479)
---------------------------------------------------------
BALANCE, December 31, 1999 48,724,790 $ 214,060 $ (1,488) $ (2,259)
Issuance of shares in connection with 19,211,283 164,479 - -
acquisitions
Employment contracts issued in
connection with acquisition (23,307)
Amortization of unearned compensation - - 5,492 -
Recognition of tax benefits from
options and warrants - 273 - -
Exercise of stock options and warrants 534,225 771 - -
Net loss applicable to common - - - -
shareholders, including accretion to
redemption value of preferred stock
of $2,403
Foreign currency translation adjustments - - - 2,005
---------------------------------------------------------
BALANCE, December 31, 2000 68,470,298 $ 379,583 $ (19,303) $ (254)
=========================================================
Retained Total
Earnings Stockholders' Comprehensive
(Deficit) Equity Income(Loss)
-------- ------ -------------
BALANCE, December 31, 1997 $ 21,363 $ 85,473
Dividends declared by pooled companies (6,342) (11,518)
Issuance of shares through public offering - 117,362
Issuance of shares in connection with - 1,426
acquisitions, net
Amortization of unearned compensation - 257
Recognition of tax benefits from options,
warrants and restricted stock - 9,490
Exercise of stock options and warrants - 9,335
Repurchase of common stock - (450)
Net income 24,750 24,750 $ 24,750
Foreign currency translation adjustments
Net of allocated income tax - (634) (634)
benefits of $423
----------------------------------------
BALANCE, December 31, 1998 $39,771 $235,491 $ 24,116
Issuance of shares in connection with - 9,835 ==========
acquisitions, net
Amortization of unearned compensation - 240
Recognition of tax benefits from
options and warrants - 1,946
Exercise of stock options and warrants - 4,051
Net loss (13,538) (13,538) $ (13,538)
Foreign currency translation adjustments -
Net of allocated income tax benefits
of $986 - (1,479) (1,479)
----------------------------------------
BALANCE, December 31, 1999 $ 26,233 $ 236,546 $ (15,017)
Issuance of shares in connection with - 164,479 ==========
acquisitions
Employment contracts issued in
connection with acquisition (23,307)
Amortization of unearned compensation - 5,492
Recognition of tax benefits from
options and warrants - 273
Exercise of stock options and warrants - 771
Net loss applicable to common (49,787) (49,787) $ (49,787)
shareholders, including accretion to
redemption value of preferred stock
of $2,403
Foreign currency translation adjustments-
Net of allocated income tax benefits
of $986 - 2,005 2,005
----------------------------------------
BALANCE, December 31, 2000 $ (23,554) $ 336,472 $ (47,782)
========================================
The accompanying notes are an integral part of these statements.
F-5
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
------------------------------------
2000 1999 1998
-------- -------- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations and before $ (53,055) $ (16,783) $ 20,195
accretion of preferred stock discount
Adjustments to reconcile net income to net
cash provided by (used for)
operating activities-
Discontinued Operations, net of tax 5,671 3,245 4,325
Depreciation and amortization 49,368 11,806 7,855
Deferred taxes (1,311) (9,848) (889)
Increase (decrease) in cash surrender value 367 (1,734) (433)
Increase (decrease) in deferred liabilities -other (664) 1,755 120
Loss (gain) on disposal of property and equipment (326) (198) 65
Discontinued Operations, net assets 3,789 (3,180) (2,571)
Changes in assets and liabilities, net of effects of acquired
companies-
Receivables 3,880 (1,334) (17,575)
Inventories 4,832 (5,452) (1,032)
Prepaid expenses and deposits (11,978) 548 (7,992)
Accounts payable, accrued expenses and restructuring
reserve 7,422 (2,715) 24,610
----------- ----------- -----------
Net cash provided by (used for) operating 7,995 (23,890) 26,678
activities
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20,933) (14,438) (21,568)
Proceeds on sale of property and equipment 662 11,104 788
Maturity (purchase) of short-term investments 985 50,922 (50,922)
Increase in other assets 1,635 8 (1,139)
Cash paid for acquisitions, net of cash acquired (40,079) (41,708) (8,418)
----------- ----------- -----------
Net cash provided by (used for) investing (57,730) 5,888 (81,259)
activities
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on debt (1,695) (4,380) (11,074)
Net borrowings (payments) under line of credit 47,253 20,217 (38,050)
Decrease (increase) in cash overdraft 4,847 2,890 (8,146)
Net proceeds from issuance of common stock 771 4,050 128,123
Repayments from related party -- -- 663
Cash dividends paid by pooled companies -- -- (11,518)
Repurchase of common stock -- -- (450)
----------- ----------- -----------
Net cash provided by financing activities 51,176 22,777 59,548
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 2,005 (1,479) (634)
----------- ----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 3,446 3,296 4,333
CASH AND EQUIVALENTS, beginning of year 9,998 6,702 2,369
----------- ----------- -----------
CASH AND EQUIVALENTS, end of year $ 13,444 $ 9,998 $ 6,702
=========== =========== ===========
The accompanying notes are an integral part of these statements
F-6
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF THE BUSINESS:
HA-LO Industries, Inc. and Subsidiaries (the "Company") is a brand marketing
organization with diverse marketing disciplines centered around its clients'
brands. The Company's core business is the distribution of promotional and
premium products. These products are marketed by an international network of
sales representatives to customers throughout the United States, Canada and
Europe. Through a subsidiary, the Company also provides promotional marketing
services, principally to large corporations throughout the United States.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies used in the
preparation of these consolidated financial statements.
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
HA-LO Industries, Inc. and its majority owned subsidiaries. All
significant intercompany transactions and accounts have been eliminated.
B. RECLASSIFICATION
Certain 1999 and 1998 balances have been reclassified to conform with the
2000 presentation.
C. STOCK SPLIT
On January 26, 1999, the Company's Board of Directors declared a 3-for-2
stock split. The split was effective February 19, 1999 to shareholders of
record on February 5, 1999. All share and per share data has been
retroactively adjusted to give effect to the stock split.
D. REVENUE RECOGNITION
Revenues derived from the distribution of promotional and premium products
are recognized when merchandise is shipped to customers. Revenues from
promotional marketing services are recognized as services are provided.
E. CASH AND EQUIVALENTS
Cash equivalents consist principally of short-term money market instruments
with original maturities of three months or less.
1
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated for financial
reporting purposes over the estimated useful lives on a straight-line basis as
follows:
Buildings 15-39 years
Furniture, fixtures and equipment 5-10 years
Computer and telephone equipment 5-7 years
Vehicles 5 years
Leasehold Improvements Life of lease
Property and equipment at December 31, are comprised of the following:
(in thousands) 2000 1999
- ---------------------------------------------------------------------------
Land $ 19 $ 146
Buildings 129 165
Furniture, fixtures and equipment 24,431 18,189
Computer and telephone equipment 36,056 20,369
Vehicles 486 562
Leasehold improvements 6,888 5,968
- ----------------------------------------------------------- -----------------
68,009 45,399
Less - Accumulated depreciation 26,026 18,941
- ----------------------------------------------------------- -----------------
Property and equipment, net $ 41,983 $ 26,458
- ----------------------------------------------------------- -----------------
Depreciation expense for 2000, 1999 and 1998 was $8,293,000, $6,433,000 and
$5,128,000 respectively.
G. LONG-LIVED ASSETS
Intangible assets consist primarily of the cost of purchased businesses in
excess of the fair value of net assets acquired and are amortized on a
straight-line basis from five to fifteen years. Amortization expense in 2000,
1999, and 1998 was approximately $41,075,000, $5,373,000, and $2,727,000,
respectively. Accumulated amortization as of December 31, 2000 and 1999 was
$49,897,000 and $12,730,000, respectively.
The Company reviews the carrying value of all long-lived assets to determine
whether there are any impairment losses. If this review indicates that the
carrying amounts of long-lived assets will not be recoverable, as determined
based on the expected future operating cash flows, an impairment loss would be
charged to expense in the period identified.
H. INVENTORIES
Inventories are valued at the lower of first-in, first-out (FIFO) cost or
market. The following are the major components of inventories at December 31.
Year Ended December 31,
----------------------------------------
(in thousands) 2000 1999
- -------------------------------------- -------------------- -------------------
Raw Materials $ 7,844 $ 7,113
Finished goods 25,126 30,633
- -------------------------------------- -------------------- -------------------
Inventories $ 32,970 $ 37,746
- -------------------------------------- -------------------- -------------------
Inventories on the accompanying consolidated balance sheets are net of
reserves of approximately $1,429,000 as of December 31, 2000 and $2,445,000
as of December 31, 1999.
2
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. ACCRUED EXPENSES
Accrued expenses - other is primarily comprised of accrued royalties and
rebates, income taxes, sales taxes and other miscellaneous expenses.
J. STATEMENTS OF CASH FLOWS
The Company considers investments purchased with an original maturity of
three months or less to be cash equivalents. Supplemental cash flow
information includes the following:
Year Ended December 31,
-----------------------------------------
(in thousands) 2000 1999 1998
- ------------------------------------------------------------------------- -------------- ------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during year for interest $ 4,835 $ 2,136 $ 1,259
Cash paid during year for income taxes $ 1,613 $ 3,004 $ 5,180
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Issuance of common shares in connection with business acquisitions,
net $164,479 $ 9,835 $ 1,426
Liabilities assumed in connection with business acquisitions $ 7,479 $24,063 $ 7,093
Issuance of redeemable preferred stock in connection with business
acquisitions, net $ 47,500 - -
Write-off of assets in connection with restructuring $ - $12,773 $ -
K. FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operations is the
applicable local currency. Revenues and expenses from foreign operations are
translated at average rates in effect at the time of the underlying
transaction. Assets and liabilities of foreign entities are translated at
year-end exchange rates with gains and losses resulting from such
translations included in stockholders' equity.
L. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 3. RECEIVABLES:
The Company provides services to customers in diversified industries and
grants unsecured trade credit to customers in the normal course of business.
Trade receivables in the accompanying consolidated balance sheets are net of
reserves for doubtful accounts of approximately $3,842,000 as of December 31,
2000 and $ 2,732,000 as of December 31, 1999. Services and
3
cost billable to clients represent earned, but unbilled receivables relating
to the Company's promotion marketing agency.
No single customer accounted for more than 10% of net sales in 2000, 1999 or
in 1998.
NOTE 4. INCOME TAXES:
The Company's provision(benefit) for income taxes consists of the following
amounts:
(in thousands) 2000 1999 1998
- ------------------------------- --------- --------- ---------
Current provision(benefit) $ (8,581) $ (4,042) $ 13,242
Deferred benefit (1,311) (8,362) 231
- ------------------------------- --------- --------- ---------
Total provision(benefit) $ (9,892) $ (12,404) $ 13,473
- ------------------------------- --------- --------- ---------
The Company's effective tax rate is reconciled to the Federal statutory rate
as follows:
2000 1999 1998
- ---------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes
(net of Federal benefit)
5.0 5.0 5.0
Amortization of non-deductible goodwill (24.1) 2.5
Other (.2) - -
- ---------------------------------------------------------------------------
Effective tax rate 15.7% 42.5% 40.0%
- ---------------------------------------------------------------------------
4
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes result from temporary differences in the recognition of
revenue and expense items for income tax and financial reporting purposes and
are summarized as follows:
(Asset)/Liability
--------------------
(in thousands) 2000 1999
- --------------------------------------------------------------------------------
DEFERRED TAXES - CURRENT:
Restructuring reserves (3,434) (3,574)
Credits due 2,022 2,327
Advanced commissions 413 354
Non-deductible reserves (2,053) (1,148)
Inventory valuation (546) (382)
Other (66) 450
- --------------------------------------------------------------------------------
Total deferred taxes-current $(3,664) $(1,973)
DEFERRED TAXES - NON-CURRENT:
Restructuring reserves $ - $ (4,713)
Acquisition costs (2,948) (2,968)
Depreciation 5,860 1,514
Amortization (1,998) (642)
Deferred costs (774) (1,189)
NOL Carryforwards (7,205) -
Tax credit carryforward (1,191) (1,006)
Other 1,851 735
- --------------------------------------------------------------------------------
Total deferred taxes-non-current (6,405) (8,269)
- --------------------------------------------------------------------------------
Less: Valuation allowance - 1,484
- --------------------------------------------------------------------------------
Total deferred taxes - non-current, net of valuation
allowance (6,405) (6,785)
- --------------------------------------------------------------------------------
Total deferred tax asset $(10,069) $(8,758)
- --------------------------------------------------------------------------------
Current and non-current deferred tax assets are included in prepaid expenses and
other assets, respectively, on the accompanying consolidated balance sheets.
In connection with the purchase of the capital stock of Starbelly.com, the
Company acquired a net operating loss carryforward of approximately
$14,300,000. This carryforward expires in 2014 and may be used to offset the
Company's future taxable income generated from operations. The Company has
additional net operating loss carryforwards of $45,300,000. Of this amount,
$3,300,000 expire in 2014 and the remainder in 2015. These carryforwards are
available to offset the Company's future taxable income and any gains
resulting from the sales of one or more of its business units.
NOTE 5. DEBT:
The Company has a facility that provides for a commitment of up to $80
million. Maximum borrowings are based on eligible accounts receivable, are
secured by the Company's domestic assets and bear interest at the option of
the Company at either prime plus 1.50% or the London Interbank Offered Rate
(LIBOR) plus 3.00%, 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. As of December 31, 2000,
the Company was either in compliance or had obtained waivers for the
financial covenants set forth in the credit agreement.
5
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The interest coverage ratio mentioned above is based on an annual operating
income amount that includes the previous four quarters. While the Company
obtained a waiver for the covenant as of December 31, 2000, the covenant will
need to be redefined in order for the Company to be in compliance for the
quarter ended March 31, 2001. The Company is in the process of working with
its banks to redefine the covenant.
As of December 31, 2000, the prime rate was 6.00% and LIBOR was 6.00%.
NOTE 6. DISCONTINUED OPERATIONS:
In March, 2001 the Company's Board of Directors approved a management
initiative to dispose of two of its business units. The initiative is
designed to focus the Company's resources on its core promotional products
business and reduce outstanding debt. The operating units to be disposed
include the Company's brand strategy and identity and telekmarketing business
units.
Accordingly, these businesses have been classified as discontinued operations
and have been treated in the accompanying financial statements in accordance
with APB Opinion No. 30. Amounts for 1999 and 1998 have been restated to give
effect to the discontinuance for all periods presented.
The operating results of the discontinued operations are summarized as
follows:
(in thousands, except per share amounts) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Sales $ 102,705 $ 88,373 $ 83,218
Pretax Income 9,451 6,624 7,206
Income tax provision 3,780 3,379 2,881
Net Income 5,671 3,245 4,325
Net income per share--Basic: $ .10 $ .07 $ .10
- -------------------------------------------------------------------------------------------------------------------
The Company allocates interest income and expense to its subsidiaries based
on actual cash generated or required to fund its operations and capital
expenditures. Interest income allocated to discontinued operations was
$980,000 in 2000, $326,000 in 1999, and $53,000 in 1998.
The net assets of discontinued operations are summarized as follows:
As of December 31, 2000 1999
- ------------------------------------------------------------------------------------------------
Accounts receivable, services billable to clients and
prepaid expenses and deposits $ 22,711 $25,495
Accounts payable, accrued expenses and other current
liabilities (13,612) (13,836)
--------- --------
Net current assets of discontinued operations 9,099 11,659
--------- --------
--------- --------
- ------------------------------------------------------------------------------------------------
Property and Equipment 9,737 10,545
Goodwill, net of amortization 819 248
Other non-current assets 181 889
Long term debt and other non-current liabilities (122) (270)
--------- --------
Net non-current assets of discontinued operations 10,615 11,412
--------- --------
--------- --------
- ------------------------------------------------------------------------------------------------
6
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. 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 strictly
contingent upon the successful completion of an acquisition and is paid in
the form of cash plus options at an exercise price equal to the fair market
value of the underlying stock on the date of grant. These options vest over
various periods up to two years. During 2000, the director earned cash
compensation of approximately $600,000 and was granted 121,971 options.
During 1999, the director earned cash compensation of approximately $910,000
and was granted 49,191 options. During 1998, the director earned cash
compensation of approximately $770,000 and was granted 264,400 options. Cash
compensation paid to the director has been reflected as a cost of the related
acquisitions. Additionally, the fair value of the options granted to the
director in 2000 has been included in the cost of the acquisitions. The fair
value of options issued prior to 2000 was not material and therefore was not
included as a cost of the acquisition.
In June 1999, the Company received approximately $9.6 million, which
approximated fair market value of the facility, in connection with its
exercised option to sell an office and warehouse facility to an entity
controlled by the former Vice Chairman of the Board ("Vice Chairman") of the
Company. No gain or loss was recognized as a result of this sale. The Company
is currently leasing the facility from the entity controlled by the former
Vice Chairman. During 2000, the Company made rental payments of approximately
$1,033,000 under the lease. Additionally, the former Vice Chairman controls
another entity which leased office space to the Company for approximately
$404,000 and $601,000 in 2000 and 1999, respectively.
In 2000 and 1999, the Company paid approximately $1,445,000 and $1,306,000,
respectively, to an entity in which the former Vice Chairman indirectly owns
a 49% interest. Payments were primarily for embroidery services.
In 2000 the Company made lease payments of $150,000 to an entity controlled
by its Vice President, who is also a director of the Company, and another
director. These payments related to the rent on the office and warehouse
facility previously occupied by an entity acquired in 2000.
Additionally, in 2000, general legal services were provided to the Company by
a law firm in which the brother of the Vice President and director of the
Company is a partner. The total amount of legal fees paid to this firm in
2000 was $125,000.
In November 2000, the Company received approximately $8.5 million in
connection with the exercised option to sell certain operating facilities to
entities controlled by three principals of one of the businesses to be
disposed of. The Company then entered into long-term lease arrangements on
these facilities with lease terms ranging from seven to eleven years. The
Company made lease payments of approximately $128,000 for the use of the
facilities.
In addition to the above, the Company also leases other facilities from
entities that are controlled by the same three principals. During 2000, the
Company made lease payments to the related parties of approximately $130,549
for the use of these facilities during the year.
NOTE 8. COMMITMENTS AND CONTINGENCIES:
The Company has operating lease commitments primarily relating to sales and
support facilities in addition to certain office equipment. These leases
expire at various dates through December, 2018. The aggregate annual minimum
lease payments under non-cancelable leases on December 31, 2000 are as
follows:
7
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ending December 31- (in thousands)
- -------------------------------------------- --------
2001 $ 19,267
2002 18,838
2003 18,384
2004 17,137
2005 14,425
Thereafter 113,381
- -------------------------------------------- --------
$201,432
- -------------------------------------------- --------
Rent expense (exclusive of operating expenses) charged for the facilities
totaled approximately $11,288,000, $9,158,000 and $5,014,000 for 2000, 1999
and 1998, respectively.
At December 31, 2000, the Company has approximately $2,200,000 in outstanding
letters of credit issued in the ordinary course of business.
Various lawsuits have arisen in the ordinary course of the Company's
business. The Company believes that its defenses are meritorious and that the
eventual outcome of those lawsuits will not have a material effect on the
Company's financial position or results of operations.
NOTE 9. BUSINESS COMBINATIONS:
During 2000, the Company acquired two companies, both of which were accounted
for as purchases. In May 2000, the Company completed the acquisition of
Starbelly.com, an internet based promotional products company, for
approximately 17.1 million shares of its common stock, 5.1 million shares of
redeemable preferred stock (see note 13) and $19 million in cash. The Company
also loaned Starbelly.com $20 million to help fund its operations during the
approximately four-month period between the signing of the merger agreement
and the closing of the transaction. Common stock issued in the transaction
was valued at approximately $147 million. The redeemable preferred stock was
valued at approximately $45 million, which reflects its net present value on
the date of closing. In addition, approximately $23 million was assigned to
the value of employment contracts entered into with each of Starbelly.com's
two cofounders. This amount is reflected as unearned compensation, a
component of stockholders' equity on the accompanying consolidated balance
sheet, and is being amortized on a straight line basis over the three year
term of the agreements. Goodwill recognized on the transaction of approximately
$210 million is being amortized on a straight line basis over 5 years.
Additionally, the Company's promotion marketing agency completed an
acquisition in 2000 for 2.1 million exchangeable shares of stock. The shares
can be converted at the holder's option into shares of the Company's common
stock on a one-to-one basis, and are treated as common stock on the balance
sheet since they carry the same rights and priviledges as common stock.
Goodwill related to this acquisition is being amortized on a straight-line
basis over 15 years. The consolidated financial statements include the
results of these acquired companies since the date of acquisition.
During 1999, the Company acquired eight companies. All of the acquisitions
were accounted for as purchases. In January 1999, the Company completed the
acquisition of Parsons International, a French based promotional products
company, for approximately 400,000 shares of its common stock, which had a
fair market value of $9.0 million, and $36.0 million in cash. The transaction
originally included earn-out consideration of up to $23.5 million, payable in
stock up to defined limits with the balance due in cash. This consideration
could have been earned over 2 years, based on achievement of targeted
operating results. During 2000, the agreement was amended to cap the earnout
at $18.5 million and limit the period in which it could be earned to one
year. During the fourth quarter of 2000 and the first quarter of 2001, the
Company paid approximately $10 million and issued 3 million shares of its
common stock in settlement of the earnout.
8
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additionally in 1999, the Company completed the acquisitions of seven other
promotional product companies for an aggregate of approximately $11.5 million
in cash. Goodwill related to these acquisitions is being amortized on a
straight-line basis over 15 years. The consolidated financial statements
include the results of these acquired companies since the date of acquisition.
During 1998, the Company acquired five companies. Two of theses acquisitions
were accounted for as pooling-of-interests. In June, 1998, the Company
completed the acquisition of a promotion marketing agency, Promotional
Marketing, L.L.C, (d/b/a/UPSHOT), for approximately 3.3 million shares of its
common stock. In November 1998, the Company acquired a premium promotional
products company, Premier Promotions and Marketing, Inc. for approximately
2.7 million shares of its common stock.
Also during 1998, the Company acquired two distributors of promotional
products and one promotion marketing agency that were accounted for as
purchases. These companies were acquired for an aggregate 87,000 shares of
the Company's common stock and $3.7 million in cash. The common stock issued
in these acquisitions had a fair market value of approximately $1.8 million.
Goodwill resulting from these acquisitions is being amortized on a
straight-line basis over 15 years. The consolidated financial statements
include the results of these acquired companies since the date of acquisition.
NOTE 10: 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 was to centralize back
office functions, consolidate distribution capabilities and information
systems and streamline the management reporting structure. Upon completion,
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. In the fourth quarter of 2000 the Company reversed $7,672,000
million of the reserve as the plan was implemented more efficiently than
originally projected. The remaining reserve of $3,430,000 is expected to be
utilized in the first half of 2001. The following is a roll-forward of the
restructuring reserve:
Severance
(in thousands) Facility Asset and Other
Consolidation Write downs Terminations Charges Total
Expensed in 1999 14,994 8,804 3,528 2,674 30,000
Utilized in 1999 2,199 8,804 1,036 2,414 14,453
------ ----- ----- ----- ------
Balance--12/31/99 12,795 - 2,492 260 15,547
Utilized in 2000 3,020 - 1,292 133 4,445
Reversals in 2000 6,915 - 630 127 7,672
------ ----- ----- ----- ------
Balance--12/31/00 $ 2,860 - $ 570 - $3,430
====== ===== ===== ===== ======
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. Included in the asset write downs above,
9
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are inventory write-downs of $2.7 million, which have been classified as a
component of cost of goods sold, for the cancellation of certain promotional
programs and exiting certain lines of business.
The other changes 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 11. LIQUIDITY
The Company's credit facility includes various financial covenants, including
maintenance of an interest coverage ratio based on operating results for the
previous four quarters. The Company violated this covenant at December 31,
2000, and because of the cumulative nature of the calculation, has advised its
banks it will be in violation at the end of the first quarter. The existing
covenant violation has been waived by the banks. The Company and its banks
have discussed the need to redefine the covenant to more attainable levels,
but until such redefinition occurs, the Company could be in violation
throughout 2001. The Company's financial institutions have been cooperative
in working with the Company in its efforts to dispose of certain of its
business units and management believes the banks will continue to waive
existing violations as long as the Company continues to execute its
strategies to reduce outstanding borrowings. Current borrowings on the credit
facility are within the formula amounts defined in the agreement and
outstanding borrowings from the bank have fallen from a peak of $71.9 million
on February 9, 2001 to $53.5 million at March 27, 2001. Subsequent to the
completion of the sale of the entities discussed below, the Company intends
to renegotiate its lending arrangements with its financial institutions. The
debt outstanding under the Revolver has been classified as a current
liability in the accompanying financial statements.
In addition to its credit facility, the Company has an obligation to holders
of the redeemable preferred stock (see Note 13). The Company is precluded
from borrowing on its credit facility to fund the preferred stock redemption.
Management is in the process of renegotiating the terms of the preferred
stock and has received preliminary indications from the majority preferred
stockholder that this will result in some combination of an extension of
payment terms of at least twelve months, modification of conversion rights,
and revision of dividend rates for default payments.
Management's strategies to continue reducing its leverage include the
following: implementation of a cost reduction program, which will improve
operating cash flow, and consummation of a transaction to sell one or both of
two business units. Each of these actions are described below.
The Company hired a new Chief Executive Officer on February 22, 2001. At his
direction, the Company began an aggressive initiative to identify cost
reduction opportunities and eliminate discretionary spending. Some of the
identified opportunities have already been implemented,
10
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and various discretionary expenditures have been eliminated. The initiative
is continuing and the first phase is expected to be completed during the
second quarter of 2001, with full implementation occurring before the end of
2001. Management believes the result of the initiative will reduce expenses
in 2001 by $10 -$15 million. During this initiative, management will review its
business strategy. This review could result in a second quarter restructuring
charge and may also result in an impairment charge for certain of its long
lived assets.
The Company is actively engaged in the sale of two subsidiaries. (See
footnote 6). One of these transactions is in the final stages of contract
review. The material terms of the transaction have been agreed to by the
parties. The Company has received a fairness opinion on this transaction from
its investment banker. The second transaction is subject to a letter of
intent which defines the significant terms of the transaction. The buyers in
both transactions have completed their due diligence analyses and management
believes that both transactions will be completed during the second quarter.
The net proceeds from these sales, based on the terms of the contract and the
letter of intent, are expected to exceed $50 million, exclusive of earnout
consideration to be received during the first quarter of 2002. Additionally,
in March 2001, the Company sold a portion of its interest in a joint venture
for $6 million. The buyer, a group that includes the former Vice Chairman of
the Company, has an option to purchase the remaining interest for an
additional $14 million if exercised by April 15, 2001 and closed by April 30,
2001.
In management's opinion the actions identified will be sufficient to meet the
needs of Company for 2001.
NOTE 12. CAPITAL STOCK AND EARNINGS PER SHARE:
In May, 1998, the Company sold, through a public offering, 5,853,000 shares
of its common stock. The net proceeds realized from the offering were
approximately $117.4 million.
Basic net income per share is computed by dividing net income by the weighted
average number of shares outstanding during the period. Diluted net income
per share is computed by dividing net income by the weighted average number
of shares assuming dilutive stock options and warrants outstanding were
exercised during the period. The computation of net income per share was as
follows:
(in thousands, except per share amounts) 2000 1999 1998
- -------------------------------------------------------------------------------------------
Net income(loss) $(49,787) $(13,538) $ 24,520
Net income(loss) per share--Basic:
Weighted average common shares 59,491 48,598 44,734
Net income(loss) per share--Basic $ (.84) $ (.28) $ .55
Net income(loss) per share--Diluted:
Weighted average common shares 59,491 48,598 44,734
Effect of dilutive stock options
and warrants - - 1,713
- -------------------------------------------------------------------------------------------
Weighted average shares assuming dilution 59,491 48,598 46,447
- -------------------------------------------------------------------------------------------
Net income(loss) per share--Diluted $ (.84) $ (.28) $ .53
- -------------------------------------------------------------------------------------------
NOTE 13. REDEEMABLE PREFERRED STOCK:
Holders of the redeemable preferred stock have rights that enable them to
redeem their shares for a per share value of $10 or to convert each share to
a share of the Company's common stock. The preferred shares have the same
voting rights as the common shares. Redemption demands must be
made between May 5, 2001 and June 4, 2001. The Company is to make payment
within 60 days after receipt of redemption notification. In the event of
non-payment, the shares accrue dividends at the rate of 8% of the liquidation
price per annum. The rate at which dividends accrue will increase by 4% every
six months until the redemption price has been paid in full. Redeemable
preferred stock is reflected at the net present value of the redemption
obligation on the accompanying consolidated balance sheet.
11
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. STOCK OPTIONS:
The Company has three stock plans which provide for reservation and issuance
of options to purchase shares of the Company's common stock, restricted
stock, stock appreciation rights and phantom stock awards. The number of
option shares or rights to be issued and the terms thereof are at the
discretion of the Compensation Committee of the Company's Board of Directors.
Pursuant to the plans, an aggregate of 21,189,822 shares of the Company's
common stock have been reserved. At December 31, 2000, there was an aggregate
1,583,368 available for future grant under the plans. The exercise price for
incentive stock options and non-qualified stock options granted under the
plans may not be less than 100% and 85%, respectively, of the fair market
value of the common stock at the date of grant. As granted under the plans,
the majority of the options vest annually over three years, commencing one
year from the date of grant. All options granted under the plans expire ten
years from the date of grant.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method prescribed by FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
(in thousands, except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------
Net income(loss)
As reported $ (49,787) $ (13,538) $ 24,520
Pro forma $ (62,577) $ (22,158) $ 17,222
Basic earnings(loss) per share
As reported $ (.84) $ (.28) $ .55
Pro forma $ (1.05) $ (.46) $ .38
Diluted earnings(loss) per share
As reported $ (.84) $ (.28) $ .53
Pro forma $ (1.05) $ (.46) $ .37
- --------------------------------------------------------------------------------
Because the disclosure requirements of FASB Statement No. 123 have not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions; risk
free interest rate of 6.2% in 2000 and interest rates between 4.6% and 5.6%
in 1999 and 1998.; zero dividend yield for all years; expected lives of 4
years for all years; and volatility of 40 percent for all years.
A summary of the status of the Company's fixed stock option plan and warrants
issued as of December 31, 2000, 1999, and 1998, and changes during the years
ending on those dates is presented below:
12
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
---------------------------- --------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
BEGINNING OUTSTANDING 10,948,444 $14.37 9,117,825 $15.03 7,625,672 $ 11.76
GRANTED
Price equal to fair 6,222,582 $3.70 2,416,153 $11.14 3,294,210 $ 17.59
value
Price in excess of fair 709,400 $5.32 202,300 $8.25 -
value -
EXERCISED (534,225) $1.31 (513,242) $7.89 (1,728,959) $ 5.40
CANCELLED (952,423) $11.04 (274,592) $15.84 (73,098) $ 15.38
- ----------------------------------------------------------------------------------------------------------------------
ENDING OUTSTANDING 16,393,778 $10.58 10,948,444 $14.37 9,117,825 $ 15.03
EXERCISABLE AS OF 12/31 10,865,051 5,724,238 3,831,682
Weighted average fair value
of options granted:
Price equal to fair value $ 4.39 $ 4.20 $ 6.73
Price in excess of fair $ 0.32 $ 0.18 -
value
- ----------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options and
warrants outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices 12/31/00 Contractual Life Exercise Price 12/31/00 Exercise Price
- -------------------------------------------------------------------------------------------------------------------
$ 0.00 - $ 1.33 1,767,189 8.81 $1.20 1,412,358 $1.20
$ 1.47 - $ 5.06 1,965,591 8.84 $3.71 1,363,773 $3.89
$ 5.13 - $ 6.00 1,701,570 9.00 $5.39 425,089 $5.73
$ 6.06 - $ 8.62 1,792,326 8.77 $6.84 582,709 $6.89
$ 8.89 - $10.22 1,641,136 7.29 $9.33 997,724 $9.52
$ 10.44 - $14.83 1,646,970 7.63 $13.66 956,612 $13.22
$ 14.87 - $16.46 2,140,367 7.01 $15.78 1,711,343 $15.78
$16.50 - $17.25 1,656,811 6.20 $16.83 1,603,403 $16.82
$17.33 - $22.40 2,022,808 6.87 $20.60 1,756,303 $20.74
$22.50 - $24.00 59,010 7.93 $23.33 55,737 $23.35
- -------------------------------------------------------------------------------------------------------------------
$ 0.00 - $24.00 16,393,778 7.82 $10.58 10,865,051 $11.72
- -------------------------------------------------------------------------------------------------------------------
13
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. BUSINESS SEGMENT INFORMATION:
The Company's reportable segments are strategic business units that offer
different products and services. Summarized financial information by business
segment follows:
December 31,
------------------------------------------------
(in thousands) 2000 1999 1998
- -------------------------------------------- ----------------- -----------------
Net Sales:
- -------------------------------------------- ----------------- -----------------
Branded Solutions $ 519,368 $493,197 $464,826
Marketing services 92,739 68,842 41,625
- -------------------------------------------- ----------------- -----------------
Total consolidated $ 612,107 $562,039 $506,451
- -------------------------------------------- ----------------- -----------------
Operating income (loss)(1):
- -------------------------------------------- ----------------- -----------------
Branded Solutions (2) $ (59,123) $(36,376) $ 29,550
Marketing services 2,560 7,160 2,537
- -------------------------------------------- ----------------- -----------------
Total consolidated $ (56,563) $(29,216) $ 32,087
- -------------------------------------------- ----------------- -----------------
Depreciation and amortization:
- -------------------------------------------- ----------------- -----------------
Branded Solutions $ 47,574 $ 10,993 $ 7,587
Marketing services 1,794 813 268
- -------------------------------------------- ----------------- -----------------
Total consolidated $ 49,368 $ 11,806 $ 7,855
- -------------------------------------------- ----------------- -----------------
Total assets:
- -------------------------------------------- ----------------------------------
Branded Solutions $ 507,870 $303,801 $244,355
Marketing services 50,121 49,665 33,389
Corporate (3) 16,986 12,731 58,951
- -------------------------------------------- ----------------- -----------------
Total consolidated $ 574,977 $366,197 $336,695
- -------------------------------------------- ----------------- -----------------
Capital expenditures:
- -------------------------------------------- ----------------------------------
Branded Solutions $ 16,827 $ 11,382 $ 19,917
Marketing services 4,106 3,056 1,651
- -------------------------------------------- ----------------- -----------------
Total consolidated $ 20,933 $ 14,438 $ 21,568
- -------------------------------------------- ----------------- -----------------
(1) Includes $7,672,000 of income from a restructuring accrual reversal
in 2000, $30,000,000 of restructuring charges in 1999 and $10,300,000
of expenses incurred to complete pooling-of-interests acquisitions
in 1998.
(2) Includes corporate overhead expenses for all periods presented.
(3) Cash and short-term investments are considered corporate assets.
Summarized financial information by geographic area follows:
14
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31,
-------------------------------------------------
(in thousands) 2000 1999 1998
- ------------------------------------------ ----------------- -----------------
Revenues:
- ------------------------------------------ ----------------- -----------------
United States $ 505,260 $470,554 $452,679
Foreign 106,847 91,486 53,772
- ------------------------------------------ ----------------- -----------------
Total consolidated $ 612,107 $562,040 $506,451
- ------------------------------------------ ----------------- -----------------
Long-lived assets:
- ------------------------------------------ ----------------- -----------------
United States $ 284,237 $ 83,364 $ 63,028
Foreign 43,890 43,808 11,926
- ------------------------------------------ ----------------- -----------------
Total consolidated $ 328,127 $127,172 $ 74,954
- ------------------------------------------ ----------------- -----------------
NOTE 17. UNAUDITED SELECTED QUARTERLY OPERATING RESULTS:
The following table represents unaudited selected financial information for
the eight quarters ended December 31, 2000. This information has been
prepared by the Company on a basis consistent with the Company's audited
financial statements and includes all adjustments which management considers
necessary for a fair presentation of the results for such periods. The
operating results for any quarter are not necessarily indicative of results
for any future period.
(in thousands, except per share amounts) Quarter Ended
- ----------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------- --------------------------------------------
Mar.31 June 30 Sept. 30 Dec.31 Mar.31 June 30 Sept. 30 Dec.31
- ------------------------------- ---------- ---------- ---------- ---------- --- ---------- --------- ------------ ----------
Net sales $135,252 $149,959 $149,418 $ 177,478 $134,705 $136,990 $127,061 163,284
Gross profit $ 42,115 $ 51,443 $ 50,421 $ 55,406 $ 47,339 $ 47,454 $ 39,293 $60,391
Net income from Continuing
Operations $ (6,057) $(13,416) $(19,138) $ (16,847) $ 3,459 $ (472) $ 22,077) $ 2,307
Net Income Applicable to
Common Stockholders $ (4,613) $(11,678) $(17,577) $(15,919) $ 4,199 $ 853 $(20,583) $ 1,993
Net income(loss) per
share-diluted, from
Continuing Operations $ (.12) $ (.23) $ (.30) $ (.25) $ .05 $ (.02) $ (.45) $ .05
Net income(loss) per
share-diluted $ (.09) $ (.20) $ (.27) $ (.24) $ .09 $ .02 $ (.42) $ .04
15
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
To the Board of Directors and
Shareholders
Of HA-LO Industries, Inc. and
Subsidiaries:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of HA-LO Industries, Inc. and Subsidiaries
and issued our unqualified opinion thereon dated March 22, 2001. Our audits
were made for the purpose of forming an opinion on the basic consolidated
financial statements. The schedule of Valuation and Qualifying Accounts is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic consolidated financial
statements. This schedule has been subject to the auditing procedures applied
in our audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 2, 2001
16
HA-LO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II
Valuation and Qualifying Accounts
(in thousands)
ADDITIONS DEDUCTIONS
BEGINNING CHARGED TO WRITE-OFFS ENDING
DESCRIPTION BALANCE EXPENSE AND OTHER BALANCE
----------- ------- ------- ---------- -------
2000
Bad debt reserve 2,732 1,339 229 3,842
Inventory valuation reserve 2,084 243 898 1,429
1999
Bad debt reserve 2,654 789 711 2,732
Inventory valuation reserve 1,492 1,020 428 2,084
1998
Bad debt reserve 2,616 1,857 1,819 2,654
Inventory valuation reserve 1,078 942 528 1,492
(a) Other additions primarily relate to reserves acquired through business combinations
17