UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
Commission file number: 0-20758
HA-LO INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
ILLINOIS 36-3573412
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5980 TOUHY AVENUE, NILES, ILLINOIS 60714
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(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (847)647-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes[X] No[ ].
As of May 4, 1999, the registrant had an aggregate of 48,516,644 shares of
its common stock outstanding.
HA-LO INDUSTRIES, INC.
INDEX
Part I. FINANCIAL INFORMATION Page Number
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Item 1. Financial Statements.
Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998. 2
Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998. 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998. 4
Notes to Financial Statements. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote 11
of Security Holders.
Item 6. Exhibits and Reports on Form 8-K. 11
Signatures 12
1
PART 1. FINANCIAL INFORMATION
HA-LO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(Unaudited)
March 31, December 31,
(in thousands, except share amounts) 1999 1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,506 $ 7,276
Short term investments 14,016 50,922
Receivables 165,274 168,806
Inventories 34,370 29,637
Prepaid expenses & deposits 18,184 15,139
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Total current assets 244,350 271,780
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PROPERTY AND EQUIPMENT, net 46,383 42,225
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OTHER ASSETS:
Intangible assets, net 63,168 26,621
Other 7,326 6,391
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Total other assets 70,494 33,012
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$ 361,227 $ 347,017
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,826 $ 3,423
Book overdraft 3,171 287
Accounts payable 60,208 63,591
Accrued expenses 42,823 41,528
Due to related parties -- 200
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Total current liabilities 108,028 109,029
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LONG-TERM DEBT -- --
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DEFERRED LIABILITIES 2,542 2,497
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000
shares authorized and none issued -- --
Common stock, no par value; 100,000,000
shares authorized and 48,515,862 issued
and outstanding in 1999 and 47,780,742 in 1998 211,573 198,228
Other (4,886) (2,508)
Retained earnings 43,970 39,771
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Total shareholders' equity 250,657 235,491
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$ 361,227 $ 347,017
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The accompanying notes are an integral part of these balance sheets.
2
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED
MARCH 31, 1999 AND 1998
(Unaudited)
Three Months Ended
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March 31, March 31,
(in thousands, except per share amounts) 1999 1998
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NET SALES $ 156,967 $ 124,815
COST OF SALES 102,248 82,673
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Gross profit 54,719 42,142
SELLING EXPENSES 20,697 17,040
GENERAL AND ADMINISTRATIVE EXPENSES 27,310 18,435
NON-RECURRING CHARGES -- 1,500
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Income from operations 6,712 5,167
INTEREST INCOME(EXPENSE), NET 287 (747)
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Income before taxes 6,999 4,420
PROVISION FOR TAXES 2,800 1,890
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NET INCOME FOR THE PERIOD $ 4,199 $ 2,530
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PRO FORMA INCOME DATA:
Pro forma income tax benefit (124)
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PRO FORMA NET INCOME: $ 2,654
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EARNINGS PER SHARE (Pro forma in 1998):
Basic $ 0.09 $ 0.07
Diluted $ 0.09 $ 0.06
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WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 48,457 40,323
Diluted 49,171 42,210
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The accompanying notes are an integral part of these statements.
3
HA-LO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 and 1998
(Unaudited)
March 31, March 31,
(in thousands) 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the period $ 4,199 $ 2,530
Adjustments to reconcile net income to net
cash used for operating activities-
Depreciation and amortization 2,887 2,267
Increase in cash surrender value 170 60
Increase (decrease) in deferred liabilities - other 148 (281)
Changes in assets and liabilities, net of effects
of acquired companies -
Receivables 12,518 10,840
Inventories (285) (3,622)
Prepaid expenses and deposits (2,029) (1,302)
Accounts payable, accrued expenses and
due to related parties (18,447) (6,202)
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Net cash provided (used) by operating activities (839) 4,290
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,854) (4,369)
Decrease (increase) in short-term investments 36,906 (529)
Decrease (increase) in other assets (1,199) 204
Cash paid for acquisitions, net of cash acquired (26,259) (2,087)
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Net cash provided (used) for investing activities 4,594 (6,781)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on long-term debt (1,768) 4,384
Net borrowings (payments) under line of credit 112 (1,817)
Repayments from related party -- 427
Increase (decrease) in book overdraft 2,884 (3,575)
Net proceeds from issuance of common stock 2,685 3,623
Dividend payments of acquired companies -- (936)
Repurchase of common stock -- (450)
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Net cash provided by financing activities 3,913 1,656
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EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (2,438) (52)
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,230 (887)
CASH AND EQUIVALENTS, beginning of period 7,276 4,808
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CASH AND EQUIVALENTS, end of period $ 12,506 $ 3,921
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The accompanying notes are an integral part of these statements.
4
HA-LO INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1. BASIS OF PRESENTATION:
The accompanying financial statements have been prepared by the Company,
without audit, in accordance with generally accepted accounting principles
for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring matters)
considered necessary for a fair presentation have been included.
The results of operations for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the full
year. These financial statements should be read in conjunction with the
Company's financial statements and related notes in the Company's 1998 Annual
Report on Form 10-K.
NOTE 2. CAPITAL STOCK:
During the first three months of 1999, options to acquire an aggregate of
1,404,368 shares of the Company's common stock were issued under the
Company's Stock Plans at exercise prices ranging from $9.19 to $24.00 per
share. Additionally, 300,557 options were exercised during the same period at
prices ranging from $1.51 to $19.17 per share.
Basic earnings per share is calculated using the average number of common
shares outstanding. Diluted earnings per share is computed on the basis of
the average number of common shares outstanding plus the effect of
outstanding stock options and warrants using the "treasury stock" method.
(in thousands, except per share amounts) Three months ended March 31,
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1999 1998
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Net income available to common shareholders'
(pro forma in 1998)(A) $ 4,199 $ 2,654
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Average outstanding:
Common stock (B) 48,457 40,323
Effect of stock options and warrants 714 1,887
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Common stock and common stock equivalents (C) 49,171 42,210
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Earnings per share:
Basic (A/B) $ 0.09 0.07
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Diluted (A/C) $ 0.09 $ 0.06
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5
NOTE 3. STATEMENTS OF CASH FLOWS:
The supplemental schedule of non-cash activities for the three months ended
March 31, 1999 and 1998 includes the following:
(in thousands) 1999 1998
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Issuance of common shares in connection with
business acquisitions, net $ 9,787 $ 551
Payments accrued and liabilities assumed in
connection with business acquisitions $ 14,725 $ 1,730
Recognition of tax benefits from options and restricted stock $ 872 $ 2,121
NOTE 4. RELATED-PARTY TRANSACTIONS:
A member of the Board of Directors renders acquisition consulting services to
the Company pursuant to an agreement. The director's compensation is directly
contingent upon the successful completion of an acquisition. During the first
quarter of 1999, the director earned approximately $476,000 and was granted
50,255 options at fair market value under this agreement.
NOTE 5. BUSINESS COMBINATIONS:
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 $27.5 million in cash, excluding transaction expenses. The
transaction also includes a two year earn-out period in which the Company may
incur an additional $23.5 million payment, payable in common stock, if
certain profit levels are attained.
Additionally, the Company completed the acquisitions of two domestic
promotional product companies, Idea Man, Inc. in February and Grotte
Advertising Company in March, for an aggregate of approximately $5.8 million
in cash, net of transaction expenses. The Company also issued approximately
33,000 shares of common stock with a fair market value of approximately
$787,000 in connection with an earn-out related to a 1997 acquisition.
Goodwill 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.
6
NOTE 6: BUSINESS SEGMENTS:
The Company's reportable segments are strategic business units that offer
different products and services. Summarized financial information by business
segment follows:
Three months ended March 31,
(in thousands) 1999 1998
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Net Sales:
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Promotional products $122,504 $ 97,991
Marketing services 18,650 13,077
Telemarketing 15,813 13,747
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Total $156,967 $124,815
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Operating income:
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Promotional products $ 5,541 $ 4,685
Marketing services 649 379
Telemarketing 522 102
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Total consolidated $ 6,712 $ 5,166
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NOTE 7: COMPREHENSIVE INCOME:
The Company's comprehensive income includes net income and unrealized gains
and losses from currency translation. The calculation of total comprehensive
income for the three month periods ending March 31, 1999 and 1998 is as
follows:
Three months ended
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March 31, March 31,
(in thousands) 1999 1998
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Net income (pro forma in 1998) $ 4,199 $ 2,654
Other comprehensive loss, net of taxes (1,463) (31)
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Comprehensive income $ 2,736 $ 2,623
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7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net sales for the first quarter of 1999 increased 25.8% to $157.0 million
compared to $124.8 million in the corresponding quarter of 1998. Sales
generated by the promotional products, marketing services and telemarketing
segments increased 25.0%, 42.6% and 15.0% respectively over the prior year.
Of the total $32.2 million increase, approximately $12.0 million was due to
internal growth and the remainder was due to acquisitions.
Gross profit increased to 34.9% of net sales ($54.7 million) in the first
quarter of 1999 from 33.8% of net sales ($42.1 million) in the first quarter
of 1998. The increase is due primarily to increased margins in the marketing
services and telemarketing segments.
Selling expenses as a percentage of net sales decreased slightly to 13.2% in
the first quarter of 1999 ($20.7 million) compared to 13.7% in the first
quarter of 1998 ($17.0 million). The decrease as a percentage of net sales is
attributable primarily to a change in service mix toward marketing services,
and to a lesser extent, telemarketing. These business segments do not have
the commission structure of the promotional products business segment.
General and administrative expenses as a percentage of net sales were 17.4%
in the first quarter of 1999 ($27.3 million) compared to 14.8% in the first
quarter of 1998 ($18.4 million). The increase in the percentage is due to
infrastructure investments required to support the growth of the marketing
services businesses and a change in mix toward those businesses
Operating income increased 29.9% to $6.7 million in 1999 from $5.2 million in
1998. Recurring operating income as a percentage of net sales decreased to
4.3% in the first quarter of 1999 compared to 5.3% in 1998. The decrease
primarily reflects increases in infrastructure required to support the growth
of the marketing services businesses. Expenses to support these businesses
are generally incurred ratably throughout the year, while revenues are
usually more seasonal, with a disproportionately large share recognized in
the second half of the year.
Operating results for the first quarter of 1998 include non-recurring charges
of $1.5 million related to fire damage to an office and distribution facility
and the closing of a warehouse acquired as part of a 1997 acquisition.
In the first quarter of 1999 the Company had net interest income of $287,000
compared to net interest expense of $746,000 in the first quarter of 1998.
The change is due to a portion of the proceeds received through the May, 1998
public stock offering which was used to pay down debt and fund acquisitions.
Excess proceeds were invested in short term government investments.
8
LIQUIDITY AND CAPITAL RESOURCES
The Company has an unsecured revolving line of credit (the "Revolver")
totaling $75 million which matures on March 1, 2000. The facility bears
interest at either prime less .25% or LIBOR plus between .5% and 1.5% based
on a defined ratio. The agreement contains certain financial covenants that
the Company must meet, including minimum tangible net worth, maximum
leverage, and a fixed charge ratio.
In addition to the facility discussed above, one of the Company's European
subsidiaries has revolving credit facilities with several banks. These
facilities provide for borrowings of up to $5 million at rates ranging from
8-13% and are generally unsecured.
As of March 31, 1999, the Company's working capital was $136.3 million
compared to $162.8 million at December 31, 1998. The decrease was primarily
attributable to $26.3 million of net cash paid for acquisitions. Capital
expenditures for property and equipment were approximately $4.9 million for
the first three months of 1999, and management expects capital expenditures
to be approximately $15 million for the full year of 1999, excluding
acquisitions.
The Company anticipates its current level of cash and cash equivalents as
well as future operating cash flows and funds available under its credit
facilities will be adequate to satisfy its cash needs for the foreseeable
future.
YEAR 2000 READINESS DISCLOSURE
Date sensitive computer applications that currently record years in
two-digit, rather than four-digit century format may be unable to properly
categorize and process dates after December 31, 1999 (the "Year 2000 Issue").
Also, embedded computer chips that control devices such as building security
systems, elevators and telephone equipment may fail, resulting in disruption
of operations to the Company, its customers and suppliers.
The Company's operating divisions and subsidiaries utilize various computer
systems. The Company relies on its computer systems and applications for many
business critical aspects, including financial systems, (including general
ledger, inventory, order processing, accounts payable and accounts
receivable), customer service, creative design, warehouse automation and
voice and data telecommunications. At the direction of its Board of
Directors, the Company formed a Year 2000 Committee in 1998 to assess its
state of readiness and address Year 2000 issues that may affect its business.
The Chief Information Officer of the Company has been appointed the Year 2000
Project Executive.
The Company has completed the inventory and assessment of all key computer
systems. In determining whether a system is Year 2000 compliant The Company
has adopted The British Standards Institution "Definition of Year 2000
Conformity Requirements", contained in BSI Publication PD2000-1. Under this
definition of Year 2000 conformity, neither performance nor functionality is
affected by dates prior to, during and after the year 2000.
During the assessment phase, the Company identified several systems that were
not Year 2000 ready. The Company has begun, and in certain cases, has
completed plans to remediate or convert all non-compliant systems to other
systems that are Year 2000 compliant. Beyond assessing the Year 2000
readiness of each system, the Company plans to develop and complete
9
a formal Year 2000 compliance test for each system, with all testing and
remediation completed by June 30, 1999. Based on the information gathered
during the assessment phase, the Company does not believe that the costs of
achieving Year 2000 compliance, including costs to remediate, convert and
test systems will exceed $500,000. All costs relating to the Year 2000 Issue
will be funded out of general operating funds.
The Company has also initiated formal communications with its significant
suppliers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their systems, business processes and
supply chains. The Company believes, due to its large, diverse product
supplier base, that the risk resulting from potential problems of any such
supplier is minimal. However, the Company is dependent upon many key
suppliers (including providers of electricity, telephone, water and gas
services) and may incur disruptions of operations if any one fails to deliver
product or services due to a Year 2000 problem. Upon analysis of responses of
Year 2000 readiness surveys received from vendors and suppliers, the Company
will prepare contingency plans to minimize the impact of operational or
product supply chain disruptions resulting from the Year 2000 issue.
Contingency plans will be prepared during the third and fourth quarters of
1999.
In addition to key vendor and supply chain risks, the Company is aware that
it may face Year 2000 issues as a result of any business or company acquired
in 1999 that is not Year 2000 compliant. The Company believes these risks can
be mitigated through conversion of non-compliant systems to Year 2000
compliant systems as part of overall acquisition integration plans.
FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of
Financial Condition and the Results of Operations regarding the amount and
nature of planned capital expenditures, the seasonality of the Company's
future business, the Company's belief that available cash will be sufficient
to satisfy its future needs, expected costs to be incurred in relation to
Year 2000 issues and HA-LO'S anticipated profitability in 1999 are
forward-looking statements that involve substantial risks and uncertainties.
Following are important factors that could cause the Company's actual results
to differ materially from those implied by such forward-looking statements:
The Company's growth will be dependent, in large part, upon its ability to
hire, motivate and retain high quality sales representatives. The Company
does not maintain its own manufacturing facilities and is dependent upon
domestic and foreign manufacturers for its supply of promotional products.
The promotional products, marketing services and telemarketing industries are
very competitive. The Company has experienced and may continue to experience
rapid growth, which growth has placed and may place significant demands on
its management and resources. Increased profitability will depend upon the
Company's ability to manage its growth and to integrate acquired companies
into its existing operations. Readers are encouraged to review HA-LO'S 1998
Annual Report on Form 10-K and quarterly reports on Form 10-Q for other
important factors that may cause actual results to differ materially from
those implied in these forward looking-statements.
10
PART II. OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.0 - Financial Data Schedule for the three month period ended March
31, 1999
(b) Reports on Form 8-K
The Company filed one report on Form 8-K, on March, 23 with respect to
a 3-for-2 stock split. The split was effective February 19, 1999 to
shareholders of record on February 5, 1999.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HA-LO INDUSTRIES, INC.
Dated: May 14, 1999 /s/ GREGORY J. KILREA
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Gregory J. Kilrea
Duly Authorized Officer
and Chief Financial Officer
12