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Filed Pursuant Rule 424(b)(4)
Registration No.333-69683
PROSPECTUS
3,500,000 SHARES
(AHL SERVICES, INC. LOGO)
COMMON STOCK
$31 PER SHARE
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AHL Services, Inc. is selling 3,255,570 shares of its common stock and the
selling shareholder named in this prospectus is selling 244,430 shares. The
underwriters named in this prospectus may purchase up to 525,000 additional
shares of common stock from AHLS and certain other shareholders under certain
circumstances. AHLS will not receive any proceeds from the sale of the shares by
the selling shareholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"AHLS." The last reported sale price of the common stock on the Nasdaq National
Market on January 25, 1999 was $32.6875 per share.
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INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price....................................... $ 31.00 $108,500,000
Underwriting discount....................................... $ 1.47 $ 5,145,000
Proceeds to AHLS (before expenses).......................... $ 29.53 $ 96,136,982
Proceeds to the selling shareholder (before expenses)....... $ 29.53 $ 7,218,018
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about January 29,
1999.
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SALOMON SMITH BARNEY BT ALEX. BROWN
CREDIT SUISSE FIRST BOSTON THE ROBINSON-HUMPHREY COMPANY
January 25, 1999
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[Two overlapping maps depicting (1) the Company's locations in North America
and (2) the Company's locations in Europe.]
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Price Range of Common Stock................................. 14
Capitalization.............................................. 14
Selected Pro Forma Financial Information.................... 15
Selected Financial and Operating Data....................... 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Overview.................................................. 17
Results of Operations..................................... 18
Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997........................ 18
Fiscal 1997 Compared to Fiscal 1996....................... 19
Fiscal 1996 Compared to Fiscal 1995....................... 20
Quarterly Results and Seasonality......................... 21
Liquidity and Capital Resources........................... 22
Inflation................................................. 23
Year 2000................................................. 23
Business.................................................... 25
Industry Overview......................................... 25
Strategy.................................................. 27
Services Provided......................................... 28
Acquisitions.............................................. 31
Contract Terms............................................ 31
Sales and Marketing....................................... 32
Workforce Management...................................... 32
Management Information Systems............................ 33
Competition............................................... 34
Government Regulation..................................... 34
Risk Management and Safety................................ 37
Litigation................................................ 37
Management.................................................. 38
Executive Officers, Directors and Key Employees........... 38
Principal and Selling Shareholders.......................... 40
Underwriting................................................ 42
Legal Matters............................................... 43
Experts..................................................... 43
Where You Can Find More Information......................... 43
Pro Forma Financial Statements.............................. F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
is important to you. To understand this offering fully, you should read
carefully the entire prospectus and the documents incorporated by reference,
including the risk factors. Unless we state otherwise, pro forma information in
this prospectus includes the acquisitions of Gage and EMD (as hereinafter
defined) as if the acquisitions had occurred on January 1, 1998 but does not
reflect other acquisitions completed since that date. Unless otherwise
indicated, all information contained in this prospectus assumes that the
underwriters will not exercise their option to purchase an additional 525,000
shares.
THE COMPANY
We are a leading provider of contract staffing and outsourcing solutions.
We professionally manage a large workforce that performs tasks that our clients
frequently regard as outside their core businesses. In assuming responsibility
for these tasks, we seek to improve the quality of the non-core operations of
our clients and to reduce their operating costs. Our services are generally
performed under long-term contracts, which have provided us with a significant
source of predictable and recurring revenues. We have the following four lines
of business:
<TABLE>
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- - AVIATION SERVICES
- pre-departure screening
- passenger profiling
- baggage claim and check
- sky cap and wheelchair assistance
- cargo handling
- into-plane fueling
- - FACILITY SUPPORT SERVICES
- access control personnel
- uniformed security officers
- fixed route dedicated shuttle bus services
- - MARKETING EXECUTION AND FULFILLMENT SERVICES
- consumer and trade fulfillment
- trade support services
- e-commerce fulfillment
- customer service support
- - OPERATIONAL SUPPORT STAFFING SERVICES
- assembly
- warehousing
- shipping
- electrical
- mechanical
</TABLE>
We service the multinational needs of our primarily Fortune 1000 clients
through our 103 offices in North America and 66 offices in Europe. Our ten
largest clients based on pro forma revenues are America OnLine, British Airways,
Delta Air Lines, Federal Express, Ford, Mattel, Northwest Airlines, Publishers
Clearing House, Reader's Digest and United Airlines. We focus on developing and
maintaining long-term client relationships. Our top ten clients have utilized us
or our predecessors for an average of ten years. In addition, we have achieved
an average annual retention rate of approximately 93% of contract billable hours
over the last three fiscal years (excluding two operations we terminated in
1996).
We have achieved significant growth in recent years, with our revenues
achieving a compound annual growth rate of 27.6% from 1993 to 1997. The compound
annual growth rate for our internal growth during the same period was 24.2%.
While we are focused on strong internal growth, we have also made accretive
acquisitions to provide complementary higher margin services to our clients.
These acquisitions have substantially changed our business mix, reducing our
historical dependence on the aviation industry, and improved our operating
margins. Operating income for the nine months ended September 30, 1998 increased
122% from the comparable period of 1997.
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Our core competency is our ability to recruit, hire, train, motivate and
manage a large workforce required to provide the non-core support services
needed by our clients. We believe there are significant opportunities to expand
our business as our existing clients and other large corporations and
institutions increasingly utilize contract staffing and outsourcing solutions.
In pursuing our strategy, we intend to:
(1) remain focused on our core competency;
(2) cross-sell our services and pursue opportunities with existing clients;
(3) develop and maintain long-term client relationships;
(4) capitalize on our multinational capabilities, predominantly in North
America, the United Kingdom and Germany;
(5) expand margins by continuing to change our business mix and leveraging
density in existing markets; and
(6) continue to seek strategic acquisitions that will be accretive to our
earnings.
Our executive offices are located at 3353 Peachtree Road, NE, Atlanta,
Georgia 30326 and our telephone number at that address is (404) 267-2222.
THE OFFERING
Total shares offered by this prospectus... 3,500,000 shares
Offered by us........................... 3,255,570 shares
Offered by one of our shareholders...... 244,430 shares
Shares outstanding at December 30, 1998... 14,119,922 shares
Shares to be outstanding after the
offering.................................. 17,375,492 shares
Use of proceeds........................... We intend to use proceeds from the
offering to repay outstanding
indebtedness.
Nasdaq National Market symbol............. AHLS
RISK FACTORS.............................. YOU SHOULD READ THE "RISK FACTORS"
SECTION, BEGINNING ON PAGE 7, AS
WELL AS THE OTHER CAUTIONARY
STATEMENTS THROUGHOUT THE ENTIRE
PROSPECTUS AND IN THE INCORPORATED
DOCUMENTS. THIS WILL HELP YOU
UNDERSTAND THE RISKS ASSOCIATED
WITH AN INVESTMENT IN OUR COMMON
STOCK.
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SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,(1) NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------- ----------------------------------
1995 1996 1997 1997 1998
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ACTUAL PRO FORMA(2) ACTUAL PRO FORMA(2)
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................... $168,601 $210,153 $276,013 $407,134 $196,563 $319,184 $397,951
Operating income............. 2,844 5,043 10,705 19,252 7,262 16,123 21,375
Income before income
taxes and extraordinary
charges.................... 2,355 3,618 10,269 12,860 6,710 14,729 16,542
Net income................... 1,438 2,171 6,034(3) 7,511(3) 3,740(3) 8,758 9,780
Net income per
share -- diluted........... 0.26(4) 0.55(3) 0.66(3) 0.36(3) 0.61 0.67
Weighted average common
and common equivalent
shares -- diluted.......... 8,433(4) 10,960 11,421 10,331 14,304 14,649
OPERATING DATA (AT PERIOD END):
Number of employees.......... 9,954 12,980 16,282 15,495 25,540
Number of offices............ 69 83 111 94 153
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
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ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 58,335 $ 58,335
Total assets.............................................. 329,240 329,240
Long-term debt, net of current portion.................... 143,027(6) 47,290
Shareholders' equity...................................... 100,798 196,535
</TABLE>
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(1) Our fiscal year ends on the last Friday in December. Each of the fiscal
years presented consists of 52 weeks.
(2) Pro forma to give effect to the Gage and EMD acquisitions as if they
occurred on the first day of the period presented.
(3) Includes extraordinary charges (actual and pro forma), net of taxes, of
$385,000, or $0.04 per share, resulting from early extinguishment of debt.
Excluding the extraordinary charges, for fiscal 1997 our net income was
$6,419,000 ($7,896,000 on a pro forma basis) and our net income per share --
diluted was $0.59 ($0.69 on a pro forma basis). Excluding the extraordinary
charges, for the nine months ended September 30, 1997 our net income was
$4,125,000 and our net income per share -- diluted was $0.40.
(4) Pro forma to give effect to the reorganization, completed in February 1997.
The reorganization included the contribution by Mr. Frank A. Argenbright,
Jr. to AHLS of all the outstanding shares of common stock of Argenbright
Holdings Limited, a holding company for our U.S. operations, and The ADI
Group Limited, a holding company for our European operations.
(5) Adjusted to give effect to the sale of the 3,255,570 shares of common stock
offered by us in this offering. This data assumes our use of the proceeds as
described in the "Use of Proceeds" section on page 13.
(6) Includes the $10 million convertible subordinated debenture issued in
connection with the Gage acquisition.
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RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. You should consider carefully
the risk factors described in this section as well as all of the other
information included and incorporated by reference in this prospectus before you
decide to purchase shares of our common stock.
Some of the information in this prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
words such as "may," "will," "expect," "anticipate," "estimate" and "continue."
These statements discuss our expectations for the future and contain projections
of results of operations or financial condition or state other "forward-looking"
information. When considering such forward-looking statements, you should keep
in mind the risk factors and other cautionary statements in this prospectus and
the incorporated documents, which explain why our actual results could differ
materially from those contained in any forward-looking statement. We do not
intend for any forward-looking statement to be a guarantee of any future results
or outcome.
Reliance on Major Clients and Aviation Industry. We derive a large portion
of our revenues from relatively few clients. For the nine months ended September
30, 1998, our three largest clients accounted for the following percentage of
our revenues through an aggregate of 116 contracts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998
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United Airlines..................................... 13.2%
Delta Air Lines..................................... 11.8
British Airways..................................... 5.5
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Total..................................... 30.5%
</TABLE>
Our ten largest clients accounted for an aggregate of 61.8% of our revenues
during fiscal 1997 and 42.4% of our revenues during the nine months ended
September 30, 1998. The financial performance of our airline clients is likely
to materially impact how many of our employees they utilize and the prices that
they are willing to pay us. If the airline industry continues to consolidate, we
may lose contracts. Financial difficulties of airlines may result in their
declaring bankruptcy or terminating operations, which could result in our having
material uncollectible accounts receivable and a reduction in our volume of
business. The aviation industry historically runs in cycles, and a downturn in
the aviation industry could hurt our business. A decrease in the number of
flights would have a material adverse effect on our business by decreasing the
demand for our services. Furthermore, our clients' contracts are generally
terminable by either party upon 30 to 90 days notice, and these contracts expire
at various times over the next several years. For these reasons, we cannot
predict whether one or more of our major clients will terminate or decide not to
renew one or more of its contracts with us. We also cannot predict whether any
of our clients will seek to renegotiate its contracts at lower margins to us.
The loss of, or a significant decrease in business from, one or more of our
major clients would have a material adverse effect on our business. See
"Business -- Industry Overview" beginning on page 25 of this prospectus.
Risks Associated with Managing a Growing Business. We have rapidly
expanded our operations in the past several years, and we intend to continue to
grow, both internally and through acquisitions. Additional growth of our client
base, the types of services we offer and the geographic markets we serve would
place additional demands on our resources. We cannot guarantee that we will be
able to manage growth effectively or profitably or that we will be able to grow
in the future at the same rate as we have grown in the past. In addition, we
cannot predict whether we will be able to identify acceptable
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acquisition candidates or complete the acquisition of any identified candidate
on terms favorable to us or in a timely manner.
A substantial portion of our capital resources could be used for
acquisitions. We may require additional debt or equity financings for future
acquisitions, which may not be available on terms favorable to us, if at all.
To realize the anticipated benefits of acquisitions, we must successfully
combine and integrate the operations of acquired entities. The process of
integrating acquired businesses can be time consuming and costly and may
distract management from day-to-day operations. Integration will be more
difficult if we have to coordinate geographically separated organizations,
integrate personnel with disparate business backgrounds or combine different
corporate cultures. We cannot be certain that we will be able to successfully
integrate any acquired business into our business or that we will be able to
profitably operate any acquired business.
Our future performance and profitability will depend in large part on our
ability to:
- attract and retain management and other key personnel;
- complete acquisitions and integrate the operations of acquired entities;
- successfully implement enhancements to our management systems; and
- adapt our management systems to respond to changes in our business.
See "Business -- Strategy" beginning on page 27 of this prospectus.
Risks Relating to Labor Force. The contract staffing and outsourcing
industry is labor intensive and is characterized by high rates of personnel
turnover and periodic shortages of personnel in some markets. We may from time
to time be required to increase the wages that we pay and the benefits that we
provide in order to attract and retain a sufficient number of qualified
employees to service our existing business and to grow. In addition, we may not
be able to pass along to our clients all additional costs associated with any
increase in compensation that we pay to our employees. A higher turnover rate
among our employees would increase our recruiting and training costs and may
adversely affect profitability. If we were unable to recruit and retain a
sufficient number of employees, we would be forced to limit our growth or
possibly reduce the scope of our operations. There is intense competition for
qualified personnel among contract staffing and outsourcing firms as well as
other employers of large numbers of hourly workers located in the markets where
we operate. We cannot be certain that we will be able to continue to hire and
retain a sufficient number of qualified personnel to support our existing
operations or planned growth.
We are in the business of placing our employees in public facilities and
the workplaces of our clients. Our business includes risks, such as claims by
our clients' customers or employees of discrimination, harassment and negligence
by our employees and other similar claims. We are exposed to liability for the
acts or negligence of our employees that cause personal injury or damages. We
are also exposed to claims of misuse of client proprietary information or theft
of client property. As a provider of aviation and facility support services, we
face potential liability claims in the event of any terrorist attempt or other
criminal activity that occurs on any airline or premises to which we are
providing these services. We have policies and guidelines in place to reduce our
exposure to these risks. We also maintain insurance coverage against certain of
these risks. Nonetheless, we cannot predict whether acts or omissions of our
employees will result in significant monetary damages, fines or adverse
publicity. We also cannot predict whether insurance coverage will continue to be
available on acceptable terms or whether it will be adequate in scope or amount
to cover any such liability. Any of these situations would have a material
adverse effect on our reputation, business, results of operations and financial
condition. See "Business -- Workforce Management" beginning on page 32 of this
prospectus and "-- Risk Management and Safety" on page 37 of this prospectus.
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Risks of Conducting International Operations. A substantial portion of our
revenues and earnings comes from international operations, specifically our
European operations. For the nine months ended September 30, 1998, approximately
31% of our revenue was derived from operations in Europe. Providing services in
foreign markets subjects us to a number of risks, including:
- trade barriers;
- social and severance cost;
- exchange controls;
- national and regional labor strikes;
- political risks;
- risks of increases in duties, taxes and governmental royalties; and
- changes in laws and policies governing operations of foreign-based
companies.
In addition, earnings of our foreign subsidiaries and intercompany payments
are subject to foreign income tax rules that may reduce our cash flow. A
substantial amount of our revenues are received, and operating costs are
incurred, in foreign currencies, especially currencies used in the United
Kingdom and Germany. Because our financial statements are presented in U.S.
dollars, any significant increase in the value of the U.S. dollar relative to
the British Pound or German Deutsche Mark will negatively affect our results of
operations and financial condition. We do not currently engage in currency
hedging transactions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 17 of this prospectus.
In addition, our European operations may experience exchange rate
fluctuations related to the planned introduction of the single European currency
in accordance with the Treaty establishing the European Community (the
"Treaty"). Pursuant to the Treaty, a single currency (the "Euro") will be
introduced on January 1, 1999 in 11 of the member states (Germany, Belgium,
Luxembourg, Spain, France, Italy, Ireland, The Netherlands, Austria, Portugal
and Finland), when it will replace the existing currencies of those countries.
Final replacement will take place on December 31, 2001. We cannot predict how
the introduction of the Euro will affect the level or volatility of foreign
exchange rates. Consequently, we cannot predict the effects of a single European
currency on our business.
Employee-Related Costs and Claims Exposure. We are required to pay
unemployment insurance premiums and workers' compensation benefits for our
employees in the United States. Any increase in the cost of unemployment
insurance or workers' compensation benefits could hurt our profitability. We are
self-insured for the first $250,000 of each workers' compensation and automobile
or shuttle bus claim and we establish reserves for future claims and payments.
We cannot guarantee that our actual future workers' compensation or liability
claims will be less than the amount of our reserves or that we will not need to
establish additional reserves. Furthermore, we cannot predict whether we will be
able to pass along to our clients any increased costs related to unemployment
and workers' compensation insurance. See "Business -- Risk Management and
Safety" on page 37 of this prospectus.
Risks Relating to, and Dependence on, Government Regulation. Our aviation
security services are subject to extensive regulation by the Federal Aviation
Administration in the United States and comparable regulatory authorities in
Europe. If we fail to meet regulatory standards or requirements, we could lose
contracts or our license to perform services, either of which could adversely
affect our business. In addition, a license is required in order to perform
services at many of the airports in which we operate. The loss of, or failure to
obtain, any such license could have a material adverse effect on our business.
Demand for certain of our aviation services is significantly affected by
applicable regulatory requirements and security directives issued by
governmental authorities. We cannot predict whether applicable regulations will
be changed in a way that would adversely affect the demand for our services.
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For example, from time to time there have been proposals to shift responsibility
for certain aviation security functions from the airlines to airport authorities
or other governmental agencies. Any such shift could reduce demand for our
aviation services. Any shift in responsibility for aviation security functions
or any trend toward the relaxation of aviation security measures could have a
material adverse effect on our business. See "Business -- Government Regulation"
beginning on page 34 of this prospectus.
Competition. The contract staffing and outsourcing industry is extremely
competitive and highly fragmented. In addition, there are only limited barriers
to prevent new companies from offering the services we provide. Companies within
our industry compete on the basis of the quality of service provided, their
ability to provide national and international services, the range of services
offered and price. We compete in international, national, regional and local
markets with outsourcing companies, specialized contract service providers and
in-house organizations that provide services to potential clients and third
parties. Certain of our competitors and potential competitors have significantly
greater financial resources and larger operations than we do. We expect that the
level of competition will remain high or increase in the future, and we cannot
guarantee that we will continue to compete successfully. See
"Business -- Competition" on page 34 of this prospectus.
Fluctuations in Quarterly Operating Results. We have experienced, and we
expect to continue to experience, quarterly fluctuations in revenues and net
income as a result of various factors. These factors include:
<TABLE>
<S> <C>
- - the seasonality of air travel; - the timing of commencement of new
- - the timing of marketing promotions; contracts; and
- - the need for supplemental staffing; - the timing of additional selling,
- - the payment of holiday wages; general and administrative expenses to
- - changes in our revenue mix; support new business.
</TABLE>
Consequently, our operating results may experience significant quarterly
fluctuations. Our planned operating expenditures are based on revenue forecasts
and, if revenues are below expectations in any given quarter, our results are
likely to be materially adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
and Seasonality" on page 21 of this prospectus.
Dependence on Key Personnel. We are highly dependent on the efforts of our
senior management team, particularly the following individuals:
Frank A. Argenbright, Jr. - Chairman and Co-Chief Executive Officer
Edwin R. Mellett - Vice Chairman and Co-Chief Executive Officer
David L. Gamsey - Chief Financial Officer
Thomas J. Marano - President and Chief Operating Officer -- North American
Operations
Ernest Patterson - Chief Executive -- European Operations
The loss of the services of any of these individuals could adversely affect
our business. We have key-man life insurance only for Mr. Argenbright and we
have employment agreements with Messrs. Mellett, Gamsey, Marano and Patterson.
Mr. Mellett's employment agreement expires in December 2000, and the remaining
U.S. employment agreements expire in December 2001. As we continue to grow, we
will need to recruit and retain additional qualified management personnel, and
cannot predict whether these efforts will be successful. See "Management"
beginning on page 38 of this prospectus.
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Control by Principal Shareholder. Immediately following this offering, Mr.
Argenbright will beneficially own approximately 45.6% of our outstanding common
stock (approximately 43.7% if the underwriters' over-allotment option is
exercised in full). As a result, Mr. Argenbright will have substantial influence
over the election of the board of directors and the outcome of all other matters
requiring shareholder approval. Such voting concentration may delay or prevent a
change in control and could consequently adversely affect the market price for
our common stock. See "Principal and Selling Shareholders" beginning on page 40
of this prospectus.
Technological Developments. The services that we provide are labor
intensive. The development of technologies that would require less manpower for
these services or which are more effective or less expensive than our current
services would reduce demand for our services. The development and
implementation of such alternative systems could adversely affect our business.
See "Business -- Services Provided" beginning on page 28 of this prospectus.
Risks of Adverse Impact of Write-Off of Goodwill. When we acquire
businesses, the excess of the cost of net assets acquired over their fair value
is recorded as goodwill. Future acquisitions could add significantly to
goodwill. We amortize goodwill on a straight-line basis over varying periods
(typically 40 years), based on the nature of the assets acquired and the
underlying circumstances. If our operating results were to decline to the point
where the undiscounted cash flows from acquired businesses over the remaining
amortization period were less than the book value of the businesses' assets
(including goodwill), we would have to write off the excess goodwill as a charge
to earnings. A write-off of goodwill could adversely affect our financial
condition.
Potential Volatility of Stock Price. The market price of our common stock
may be volatile and may be significantly affected by factors such as:
- actual or anticipated fluctuations in our operating results;
- announcements of acquisitions or new services by us or our competitors;
- developments with respect to the contract staffing industry or the
industries we serve;
- governmental regulation;
- changes in estimates by securities analysts of our future financial
performance; and
- general market conditions.
A relatively small shortfall in revenues or earnings compared with analysts
expectations may cause an immediate and substantial decline in our stock price.
In addition, the stock markets have from time to time experienced significant
price and volume fluctuations that have adversely affected the market prices of
securities of companies for reasons often unrelated to their operating
performance. Investors in our common stock must be willing to bear the risk of
such fluctuations in stock price.
Shares Eligible for Future Sale. Sales of substantial amounts of our
common stock in the public market after this offering could adversely affect the
market price of the common stock. An aggregate of 7,900,000 shares of common
stock beneficially owned by Mr. Argenbright are eligible for public sale
pursuant to Rule 144 under the Securities Act of 1933 (the "Securities Act").
Each of our officers and directors (including Mr. Argenbright) and the selling
shareholders have agreed not to sell, offer for sale, or otherwise dispose of
any common stock for a period of 60 days from the date of this prospectus unless
they obtain the prior written consent of Salomon Smith Barney Inc. In addition,
we have registered the shares of common stock issuable pursuant to stock options
and an employee stock purchase plan. As a result, persons receiving those shares
will be able to resell them in the public markets. As of December 30, 1998,
options to purchase 653,625 shares were currently exercisable and options to
purchase 1,629,625 shares become exercisable at various times between 1999 and
2002.
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Certain Anti-Takeover Provisions. Our Amended and Restated Articles of
Incorporation and Bylaws provide for a five member board of directors to be
elected to staggered three year terms. Additionally, directors may only be
removed from office for cause upon a vote of 70% of the outstanding common
stock. The Articles and Bylaws also provide that they may not be amended in
certain respects except pursuant to the vote of 70% of the outstanding common
stock. These provisions of the Articles and Bylaws could discourage potential
acquisition proposals and could delay or prevent a change in control.
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USE OF PROCEEDS
We expect to receive net proceeds of approximately $95.7 million from this
offering. Net proceeds is computed by deducting the underwriting discount and
our estimated offering expenses from the total public offering price. Our
estimated net proceeds will be $103.0 million if the underwriters exercise their
over-allotment option in full.
We intend to use all the net proceeds from this offering to repay
outstanding indebtedness. This outstanding indebtedness consists of amounts
outstanding under our credit facility and under a convertible subordinated
debenture. Our credit facility had an outstanding balance of approximately
$167.0 million as of December 30, 1998. This facility matures in November 2003
and bears interest, at our option, at the prime rate, the Federal Funds rate
plus 50 basis points or LIBOR plus a variable spread. As of December 30, 1998,
the weighted average interest rate on the outstanding balance was 6.5%. We have
borrowed under our credit facility primarily to finance acquisitions. The
convertible subordinated debenture was issued in July 1998 in connection with
the Gage acquisition, has a balance of $10.0 million, currently bears interest
at 4.5% per annum and matures on July 24, 2000.
We will not receive any proceeds from the sale of common stock by the
selling shareholders.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock, and the board of
directors currently intends to retain all earnings for use in our business. Our
credit facility prohibits the payment of dividends. Any future payment of
dividends will depend upon our results of operations, financial condition, cash
requirements and other factors deemed relevant by the board of directors.
13
<PAGE> 14
PRICE RANGE OF COMMON STOCK
The Company completed its initial public offering on March 27, 1997 at
$10.00 per share. Since that date, the common stock has traded on the Nasdaq
National Market under the symbol "AHLS." The following table sets forth the high
and low closing sale prices per share for the common stock for the periods
indicated, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1997:
First Quarter (from March 27, 1997)............... $ 10.750 $ 10.000
Second Quarter.................................... 15.500 9.500
Third Quarter..................................... 19.500 15.125
Fourth Quarter.................................... 24.625 15.250
1998:
First Quarter..................................... 32.625 21.000
Second Quarter.................................... 39.375 29.969
Third Quarter..................................... 42.125 27.438
Fourth Quarter.................................... 33.750 21.750
1999:
First Quarter (through January 25, 1999).......... 37.375 30.875
</TABLE>
On January 25, 1999, the last sale price of the common stock as reported on
the Nasdaq National Market was $32.6875 per share. As of that date, there were
25 holders of record of our common stock.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of September 30, 1998: (1) on a historical basis and (2) as
adjusted to give effect to the sale of the 3,255,570 shares of common stock
offered by the Company in this offering and the application of the estimated net
proceeds from such sale as described under "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 492 $ 492
======== ========
Long-term debt, net of current portion:
Credit facility........................................... $130,551 $ 44,814
Convertible subordinated debenture........................ 10,000 --
Equipment financing and other............................. 2,476 2,476
-------- --------
Total long-term debt.............................. 143,027 47,290
-------- --------
Shareholders' equity:
Preferred Stock: no par value; 5,000,000 shares
authorized; none issued or outstanding................. -- --
Common Stock: $.01 par value; 50,000,000 shares
authorized; 14,072,672 shares issued and outstanding
actual; 17,328,242 shares issued and outstanding as
adjusted(1)............................................ 141 174
Paid in capital........................................... 79,988 175,692
Cumulative translation adjustment......................... 341 341
Retained earnings......................................... 20,328 20,328
-------- --------
Total shareholders' equity........................ 100,798 196,535
-------- --------
Total capitalization......................... $243,825 $243,825
======== ========
</TABLE>
- ---------------
(1) Excludes 2,321,500 shares of common stock issuable upon exercise of
outstanding options.
14
<PAGE> 15
SELECTED PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following unaudited pro forma financial information was derived from
the Pro Forma Statements of Operations for the year ended December 31, 1997 and
the nine months ended September 30, 1998 included in this prospectus. The Pro
Forma Statements of Operations give effect to the acquisitions of certain assets
of Gage Marketing Group LLC ("Gage") and EMD Gesellschaft fur
Elektroinstallation-und Maschinenbau-Dienstleistungen GmbH ("EMD") as if each
had occurred at the beginning of each period presented. The information below
should be read in conjunction with the Pro Forma Financial Statements and the
corresponding Notes included elsewhere in this prospectus. The pro forma
financial information does not purport to represent what the Company's results
of operations would actually have been had such transactions actually occurred
on any of the dates described above or to project the Company's results of
operations for any future period.
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Revenues.................................................... $407,134 $397,951
Operating expenses:
Cost of services.......................................... 278,323 274,390
Field operating........................................... 88,223 83,999
Corporate general and administrative...................... 21,336 18,187
-------- --------
Total operating expenses.......................... 387,882 376,576
-------- --------
Operating income............................................ 19,252 21,375
Interest expense, net....................................... 7,005 5,112
Other income, net........................................... (613) (279)
-------- --------
Income before income taxes and extraordinary charges........ 12,860 16,542
Income tax provision........................................ 4,964 6,762
-------- --------
Income before extraordinary charges......................... 7,896 9,780
Extraordinary charges....................................... (385) --
-------- --------
Net income.................................................. $ 7,511 $ 9,780
======== ========
Diluted earnings per share:
Number of shares.......................................... 11,421 14,649
======== ========
Earnings per share........................................ $ 0.66 $ 0.67
======== ========
</TABLE>
15
<PAGE> 16
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following selected financial and operating data of the Company are
qualified by reference to and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto incorporated
by reference in this prospectus. The selected financial data presented below as
of and for each of the fiscal years in the five-year period ended December 31,
1997 have been derived from the Company's financial statements which have been
audited by Arthur Andersen LLP, independent public accountants. The selected
financial data for the nine months ended September 30, 1997 and 1998 have been
derived from the Company's unaudited financial statements, which have been
prepared on the same basis as the audited financial statements. In the opinion
of management, the unaudited financial statements contain all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1998 or for any other interim period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31,(1) SEPTEMBER 30,
---------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $104,143 $123,234 $168,601 $210,153 $276,013 $196,563 $319,184
Operating expenses:
Cost of services........................ 78,019 91,873 124,491 155,926 204,512 146,011 230,102
Field operating......................... 18,284 20,931 30,328 37,492 45,956 32,146 59,054
Corporate general and administrative.... 6,796 8,797 10,938 11,692 14,840 11,144 13,905
-------- -------- -------- -------- -------- -------- --------
Operating income................... 1,044 1,633 2,844 5,043 10,705 7,262 16,123
Interest expense, net..................... 593 904 1,309 1,726 1,159 995 1,686
Other income, net......................... (89) (26) (820) (301) (723) (443) (292)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes and
extraordinary charges............ 540 755 2,355 3,618 10,269 6,710 14,729
Income tax provision(2)................... 700 627 917 1,447 3,850 2,585 5,971
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
charges.......................... (160) 128 1,438 2,171 6,419 4,125 8,758
Extraordinary charges, net of taxes(3).... -- -- -- -- (385) (385) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).................. $ (160) $ 128 $ 1,438 $ 2,171 $ 6,034 $ 3,740 $ 8,758
======== ======== ======== ======== ======== ======== ========
Net income per share -- diluted........... $ 0.26(4)$ 0.55(5)$ 0.36(6)$ 0.61
======== ======== ======== ========
Weighted average common and common
equivalent shares -- diluted............ 8,433(4) 10,960 10,331 14,304
======== ======== ======== ========
OPERATING DATA (AT PERIOD END):
Number of employees....................... 5,714 7,334 9,954 12,980 16,282 15,495 25,540
Number of offices......................... 26 33 69 83 111 94 153
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 4,341 $ (763) $13,216 $17,353 $ 42,823 $ 58,335
Total assets........................................ 21,036 29,094 40,687 51,953 109,794 329,240
Long-term debt, net of current portion.............. 7,281 1,437 14,609 19,706 3,495 143,027(7)
Shareholders' equity................................ 2,123 2,252 3,577 5,409 74,531 100,798
</TABLE>
- ---------------
(1) The Company's fiscal year ends on the last Friday in December. Each of the
fiscal years presented consists of 52 weeks except that fiscal 1993 consists
of 53 weeks.
(2) The income tax provision for 1993 and 1994 was negatively impacted by the
significance of non-deductible expenses relative to income before income
taxes.
(3) In the second quarter of 1997, the Company recorded extraordinary charges
resulting from the early extinguishment of debt.
(4) Pro forma to give effect to the reorganization, completed in February 1997.
(5) Excluding the extraordinary charges, net income per share -- diluted would
have been $0.59 per share.
(6) Excluding the extraordinary charges, net income per share -- diluted would
have been $0.40 per share.
(7) Includes the $10.0 million convertible subordinated debenture issued in
connection with the Gage acquisition.
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AHL Services, Inc. ("AHLS" or the "Company") is a leading provider of
contract staffing and outsourcing solutions, through which it professionally
manages a large workforce that performs tasks that its clients frequently regard
as outside their core businesses. Through its 103 offices in North America and
66 offices in Europe, AHLS services the multinational needs of its primarily
Fortune 1000 client base. The Company's services are generally performed under
long-term contracts, which have provided the Company with a significant source
of predictable recurring revenues. As of September 30, 1998, the Company had
approximately 1,200 contracts to provide services. Revenues have grown from
$104.1 million in 1993 to $276.0 million in 1997, representing a compound annual
growth rate of 27.6%. The compound annual growth rate for the Company's internal
growth during the same period was 24.2%.
Since its initial public offering in March 1997, the Company has
experienced significant growth. The Company has focused on internal growth and
made acquisitions of companies that have operating margins in excess of the
Company's operating margin at the time of acquisition and that were immediately
accretive to earnings. These acquisitions have substantially changed the
Company's product mix, reducing its dependence on the aviation industry and
adding new lines of business. The Company intends to continue to seek accretive
acquisitions in an effort to further develop its service offerings within its
current lines of business, to add density within these lines of business, and to
expand its geographic coverage. Specifically, the Company intends to further
expand its operational support staffing and marketing execution and fulfillment
businesses, which represent a natural extension of the Company's existing core
lines of business and an opportunity to achieve higher operating margins.
Since its initial public offering, the Company has completed twelve
acquisitions. For a description of these acquisitions see
"Business -- Acquisitions" on page 31 of this prospectus. These acquisitions
were financed with borrowings under the Company's five year bank revolving
credit facility (the "Credit Facility") and proceeds from the Company's public
offerings in March 1997 and October 1997.
The Company recognizes revenues as services are performed. A substantial
amount of the Company's revenues are received, and operating costs are incurred,
in foreign currencies (primarily the British Pound and the German Deutsche
Mark), with a significant amount of operating income being derived from
operations in the United Kingdom and Germany. The denomination of foreign
subsidiaries' account balances in their local currency exposes the Company to
certain foreign exchange rate risks. The Company addresses the exposure by
financing most working capital needs in the applicable foreign currencies. The
Company does not engage in hedging transactions to reduce exposure to
fluctuations in foreign currency exchange rates. Historically, the impact of
foreign currency fluctuations on the Company has been insignificant.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth Statement of Operations data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED ENDED
DECEMBER 31,(1) SEPTEMBER 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of services......................... 73.8 74.2 74.1 74.3 72.1
Field operating.......................... 18.0 17.8 16.6 16.4 18.5
Corporate general and administrative..... 6.5 5.6 5.4 5.7 4.4
----- ----- ----- ----- -----
Operating income...................... 1.7 2.4 3.9 3.7 5.1
Interest expense, net...................... 0.8 0.8 0.4 0.5 0.5
Other income, net.......................... (0.5) (0.1) (0.2) (0.2) (0.1)
----- ----- ----- ----- -----
Income before income taxes and
extraordinary charges............... 1.4 1.7 3.7 3.4 4.6
Income tax provision....................... 0.5 0.7 1.4 1.3 1.9
----- ----- ----- ----- -----
Income before extraordinary charges... 0.9 1.0 2.3 2.1 2.7
Extraordinary charges, net of taxes........ -- -- (0.1) (0.3) --
----- ----- ----- ----- -----
Net income............................ 0.9% 1.0% 2.2% 1.9% 2.7%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The Company's fiscal year ends on the last Friday in December. Each of the
fiscal years presented consists of 52 weeks.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues. Revenues increased $122.6 million, or 62%, to $319.2 million for
the nine months ended September 30, 1998 from $196.6 million in the comparable
period of 1997. Of this increase, approximately $85.5 million was attributable
to the acquisitions completed within one year. The remaining increase was a
result of providing additional services to existing clients, entering into
contracts to provide services to new clients and rate increases on existing
contracts.
Cost of Services. Cost of services represents the direct costs
attributable to a specific contract, predominantly wages and related benefits,
as well as certain related expenses such as workers' compensation and other
direct labor related expenses. Cost of services increased $84.1 million, or 57%,
to $230.1 million for the nine months ended September 30, 1998 from $146.0
million in the comparable period of 1997. As a percentage of revenues, cost of
services decreased to 72.1% for the nine months ended September 30, 1998 from
74.3% in 1997. This decrease was primarily due to the effect of the growth in
revenues of the Company's higher margin marketing execution and fulfillment and
operational support services businesses.
Field Operating Expenses. Field operating expenses represent expenses
which directly support field operations, such as each district's management,
facilities expenses (such as rent, communication costs and taxes), employee
uniforms, equipment leasing, depreciation and maintenance, local sales and
marketing activities and acquisition related goodwill. Field operating expenses
increased $26.9 million, or 84%, to $59.1 million for the nine months ended
September 30, 1998 from $32.1 million in the comparable period of 1997. As a
percentage of revenues, field operating expenses increased to 18.5% for the nine
months ended September 30, 1998 from 16.4% in 1997. This percentage increase was
primarily attributable to the facility expenses of Gage, the Company's newly
acquired marketing execution and fulfillment services business, and the
amortization of acquisition related goodwill in 1998.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses include the cost of services the Company provides to
support and manage its field activities. These expenses, which include corporate
management, accounting and payroll, general administration, human resources
management, professional fees, headquarters occupancy, marketing and management
information services,
18
<PAGE> 19
increased $2.8 million, or 25%, to $13.9 million for the nine months ended
September 30, 1998 from $11.1 million in the comparable period of 1997. As a
percentage of revenues, these expenses decreased to 4.4% for the nine months
ended September 30, 1998 from 5.7% in 1997. This percentage decrease was
primarily due to better leveraging of corporate personnel.
Operating Income. Operating income increased $8.9 million, or 122%, to
$16.1 million for the nine months ended September 30, 1998 from $7.3 million in
the comparable period of 1997. As a percentage of revenues, operating income
improved to 5.1% for the nine months ended September 30, 1998 from 3.7% in 1997.
Interest Expense, Net. Interest expense, net, increased $691,000, or 69%,
to $1.7 million for the nine months ended September 30, 1998 from $1.0 million
in the comparable period of 1997. Interest expense increased in 1998 due to the
use of the Company's credit facility to fund acquisitions made in 1998.
Income Tax Provision. Income tax provision increased $3.4 million, or
131%, to $6.0 million for the nine months ended September 30, 1998 from $2.6
million in the comparable period of 1997. The Company provided income taxes at a
rate of 40.5% in 1998 and 38.5% in 1997. The increase in 1998 is due to the EMD
and TUJA acquisitions in Germany, which has a higher corporate income tax rate.
Income Before Extraordinary Charges. The Company expensed extraordinary
items associated with the Company's initial public offering during the second
quarter of 1997 of $385,000, net of taxes of $257,000. The extraordinary items
consisted of the write-off of unamortized loan origination costs and debt
discount.
Net Income. Net income increased $5.0 million, or 134%, to $8.8 million,
or 2.7% of revenues, for the nine months ended September 30, 1998 from net
income of $3.7 million, or 1.9% of revenues, in the comparable period of 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Revenues increased $65.8 million, or 31%, to $276.0 million in
fiscal 1997 from $210.2 million in fiscal 1996. Of this increase, approximately
$6.3 million was attributable to the July 1996 Intersec acquisition and $15.2
million was attributable to the Midwest Staffing, RightSide Up, Lloyd, USA
Security and EAS acquisitions completed in 1997. The remaining increase was a
result of entering into contracts to provide services to new clients and as a
result of providing additional services and expanding into new markets with
existing clients.
Cost of Services. Cost of services increased $48.6 million, or 31%, to
$204.5 million in fiscal 1997 from $155.9 million in fiscal 1996. As a
percentage of revenues, cost of services improved slightly at 74.1% in fiscal
1997 from 74.2% in fiscal 1996.
Field Operating Expenses. Field operating expenses increased $8.5 million,
or 23%, to $46.0 million in fiscal 1997 from $37.5 million in fiscal 1996. As a
percentage of revenues, field operating expenses decreased to 16.6% in fiscal
1997 from 17.8% in fiscal 1996. This percentage decrease was primarily
attributable to the better leveraging of existing field operations and
termination of the Company's Florida transportation operations in the fall of
1996 which had significant field operating expenses.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses increased $3.1 million, or 27%, to $14.8 million in
fiscal 1997 from $11.7 million in fiscal 1996. As a percentage of revenues,
these expenses decreased to 5.4% in fiscal 1997 as compared to 5.6% in fiscal
1996. This percentage decrease was primarily due to the Company's ability to
increase revenues without a commensurate increase in corporate expenses.
Operating Income. Operating income increased $5.7 million, or 112%, to
$10.7 million in fiscal 1997 from $5.0 million in fiscal 1996. As a percentage
of revenues, operating income improved to 3.9% in fiscal 1997 from 2.4% in
fiscal 1996.
19
<PAGE> 20
Interest Expense. Interest expense decreased $567,000, or 33%, to $1.2
million in fiscal 1997 from $1.7 million in fiscal 1996. Interest expense for
fiscal 1997 decreased due to the application of the proceeds from the Company's
initial public offering to repay the Company's outstanding debt in 1997.
Income Tax Provision. Income tax provision increased $2.4 million, or
166%, to $3.9 million in fiscal 1997 from $1.5 million in fiscal 1996. The
Company provided income taxes at rates of approximately 38% in fiscal 1997 and
40% in fiscal 1996. The reduction in the effective rate was primarily due to a
reduction in the United Kingdom corporate tax rate in 1997.
Income Before Extraordinary Charges. Income before extraordinary charges
for fiscal 1997 increased $4.2 million, or 196%, to $6.4 million, or 2.3% of
revenues, from $2.2 million, or 1.0% of revenues, for fiscal 1996. The Company
expensed extraordinary charges during 1997 of $642,000, before income tax
benefit of $257,000. The extraordinary charges consisted of the write-off of
unamortized loan origination costs and debt discount.
Net Income. Net income increased $3.8 million, or 178%, to $6.0 million,
or 2.2% of revenues, in fiscal 1997 from $2.2 million, or 1.0% of revenues, in
fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Revenues increased $41.6 million, or 24.6%, to $210.2 million in
fiscal 1996 from $168.6 million in fiscal 1995. Of this increase, approximately
$26.2 million was attributable to higher revenues from existing clients,
approximately $9.1 million to services initiated for new clients and $6.3
million to the Intersec Acquisition. Revenues from existing clients increased
15.5% in fiscal 1996 over fiscal 1995 primarily as a result of providing
additional services and expanding into new markets with these clients.
Cost of Services. Cost of services increased $31.4 million, or 25.3%, to
$155.9 million in fiscal 1996 from $124.5 million in fiscal 1995. As a
percentage of revenues, cost of services increased to 74.2% in fiscal 1996 from
73.8% in fiscal 1995. This percentage increase was primarily attributable to
lower gross margins on the terminated Florida transportation operations and
operating inefficiencies associated with a contract in Detroit which began in
April 1996. The Company believes based on subsequent operating results that it
has corrected these inefficiencies through a change in management at the Detroit
location and increases in rates paid to the Company with respect to this Detroit
contract.
Field Operating Expenses. Field operating expenses increased $7.2 million,
or 23.6%, to $37.5 million in fiscal 1996 from $30.3 million in fiscal 1995,
primarily as a result of administrative staff, systems and facilities expenses
for new operations in Chicago, Cincinnati, San Francisco, Los Angeles and
Seattle opened during fiscal 1996. As a percentage of revenues, these expenses
decreased to 17.8% in fiscal 1996 from 18.0% in fiscal 1995.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses increased $754,000, or 6.9%, to $11.7 million in fiscal
1996 from $10.9 million in fiscal 1995. As a percentage of revenues, these
expenses decreased to 5.6% in fiscal 1996 from 6.5% in fiscal 1995. This
percentage decrease was primarily due to the Company's ability to increase
revenues without a commensurate increase in corporate expenses.
Operating Income. Operating income increased $2.2 million, or 77.3%, to
$5.0 million in fiscal 1996 from $2.8 million in fiscal 1995. As a percentage of
revenues, operating income improved to 2.4% in fiscal 1996 from 1.7% in fiscal
1995.
Interest Expense, Net. Net interest expense increased $417,000 to $1.7
million in fiscal 1996 from $1.3 million in fiscal 1995. This was the result of
approximately $4.7 million of additional indebtedness incurred in connection
with the Intersec Acquisition in July 1996 and higher borrowings under the
Company's revolving line of credit.
Other Income, Net. Other income, net decreased $519,000 to $301,000 in
fiscal 1996 from $820,000 in fiscal 1995. This decrease was primarily due to the
non-recurring collection of notes received in the sale of the Company's drug
testing subsidiary in October 1995. See Note 3 of the Notes to the Company's
Financial
20
<PAGE> 21
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Net Income. Net income increased $733,000, or 51.0%, to $2.2 million, or
1.0% of revenues, in fiscal 1996 from net income of $1.4 million, or 0.9% of
revenues, in fiscal 1995. The Company's effective income tax rate was
approximately 40.0% for fiscal 1996 compared to 38.9% in fiscal 1995.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth statement of operations data for the fiscal
quarters indicated. This quarterly information is unaudited but has been
prepared on a basis consistent with the Company's audited financial statements.
In the Company's opinion, this data includes all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1998 1998 1998
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues..................................... $79,450 $84,500 $98,871 $135,813
Operating expenses:
Cost of services........................... 58,501 62,842 72,755 94,505
Field operating............................ 13,810 14,420 17,074 27,560
Corporate general and administrative....... 3,696 4,449 4,598 4,858
------- ------- ------- --------
Operating income........................ 3,443 2,789 4,444 8,890
Interest expense, net........................ 164 37 177 1,472
Other (income) expense, net.................. (280) (282) (17) 7
------- ------- ------- --------
Income before income taxes.............. 3,559 3,034 4,284 7,411
Income tax provision......................... 1,265 1,210 1,717 3,043
------- ------- ------- --------
Net income.............................. $ 2,294 $ 1,824 $ 2,567 $ 4,368
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues..................................... $59,671 $60,424 $63,770 $72,369
Operating expenses:
Cost of services........................... 44,590 45,428 47,341 53,242
Field operating............................ 10,619 9,923 10,343 11,880
Corporate general and administrative....... 3,272 3,435 3,668 4,041
------- ------- ------- -------
Operating income........................ 1,190 1,638 2,418 3,206
Interest expense, net........................ 567 648 170 177
Other (income) expense, net.................. (82) (88) (154) (201)
------- ------- ------- -------
Income before income taxes and
extraordinary charges................. 705 1,078 2,402 3,230
Income tax provision......................... 282 427 948 1,210
------- ------- ------- -------
Income before extraordinary charges..... 423 651 1,454 2,020
Extraordinary charges, net of taxes.......... -- -- (385) --
------- ------- ------- -------
Net income.............................. $ 423 $ 651 $ 1,069 $ 2,020
======= ======= ======= =======
</TABLE>
While the effects of seasonality on AHLS' business often are less apparent
due to the timing of the addition of new clients, the performance of new
services for existing clients or the completion of acquisitions, the Company's
revenues tend to be lower in the first and fourth quarters of the fiscal year
and highest in the third quarter of the fiscal year.
21
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
To support its rapid growth, AHLS has historically relied on borrowings
under its Credit Facility. In November 1998, the Company amended its Credit
Facility to provide for an increase from $150 million to $210 million in
aggregate commitments from its lenders. Of the $210 million in aggregate
commitments, the U.S. dollar equivalent of $100 million is available in foreign
currencies. The interest rate under the Credit Facility is based, at the
Company's option, upon LIBOR plus an applicable margin or the Domestic Base Rate
(in the case of U.S. dollar borrowings) or the Foreign Base Rate (in the case of
borrowings denominated in pounds sterling). The Domestic Base Rate is the
greater of the rate publicly announced by First Union National Bank as its prime
rate or the Federal Funds Rate plus 50 basis points. The Foreign Base Rate is
the publicly announced base rate of Midland Bank plc plus 200 basis points. The
applicable margin for LIBOR borrowings is based upon a matrix ranging from 87.5
basis points to 175 basis points, based upon the ratio of the Company's most
recently reported total indebtedness to pro forma adjusted EBITDA. The Credit
Facility is secured by substantially all the assets of the Company and its
domestic subsidiaries, and borrowings under the Credit Facility made by foreign
subsidiaries of the Company are secured by the assets of the foreign
subsidiaries. The Credit Facility is subject to certain restrictive covenants.
Giving effect to the November 1998 amendment to the Credit Facility, there was
approximately $43.0 million of availability remaining under the Credit Facility
as of December 30, 1998. The Company will repay a substantial portion of the
amounts outstanding under the Credit Facility from the proceeds of this
offering.
Cash used in operating activities was $5.5 million for the nine months
ended September 30, 1998 compared to cash provided by operating activities of
$1.8 million for the nine months ended September 30, 1997. This decrease in cash
from operating activities was primarily the result of an increase of $6.6
million in net income before depreciation and amortization offset by $13.3
million of changes in working capital due to increases in accounts receivable as
a result of the Company's acquisitions, the growth in revenues and the timing of
payments of accounts payable and accrued expenses. Cash used in investing
activities for the nine months ended September 30, 1998 was $131.0 million
compared to $12.3 million for the nine months ended September 30, 1997. The
increased use of cash was principally as a result of the acquisitions made in
1998, which were larger than the acquisitions in 1997, and additional purchases
of transportation and computer equipment. Cash provided by financing activities
for the nine months ended September 30, 1998 was $132.3 million compared to
$10.8 million for the nine months ended September 30, 1997. The increase in cash
provided by financing activities for 1998 was principally the result of
additional borrowings under the Credit Facility in 1998 to fund the
acquisitions.
Cash used in operating activities was $2.6 million in fiscal 1997 compared
to cash provided by operating activities of $1.2 million for fiscal 1996. This
decrease was the result of the increase of $5.3 million in net income before
depreciation and amortization and extraordinary charges offset by $9.1 million
of changes in working capital due to an increase in accounts receivable as a
result of the increase in revenues and the timing of payments of accounts
payable and accrued expenses. Cash used in investing activities for fiscal 1997
was $26.8 million compared to $4.0 million for fiscal 1996. This was principally
the result of the five acquisitions completed in 1997 as compared to only one in
1996 as well as increased expenditures on capital assets, primarily
transportation and computer equipment. Cash provided by financing activities for
fiscal 1997 was $43.1 million compared to $3.4 million for fiscal 1996. The
increase was principally the result of net proceeds from the public offerings of
common stock in 1997 of $63.4 million offset by an increase in net payments of
debt of $24.7 million, as compared to 1996.
Cash provided by operating activities was $1.2 million for fiscal 1996 as
compared to cash used in operating activities of $3.5 million in fiscal 1995.
This increase was primarily the result of the increase of $1.0 million in net
income before depreciation and amortization and by $2.9 million of changes in
operating assets, primarily accounts receivable, accrued salaries and related
benefits payable. These changes were consistent with the Company's higher volume
of business. Cash used in investing activities for fiscal 1996 was $4.0 million
as compared to $1.6 million in fiscal 1995, principally as a result of the
Intersec acquisition made in July 1996. Cash provided by financing activities
for fiscal 1996 was $3.3 million compared to $5.1 million in
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<PAGE> 23
fiscal 1995, principally representing changes in borrowings under the Company's
Credit Facility and issuance of the subordinated notes associated with the
Intersec acquisition.
Capital expenditures were $4.7 million, $2.0 million and $2.6 million in
fiscal 1997, 1996 and 1995, respectively, and $7.6 and $1.9 million for the nine
months ended September 30, 1998 and 1997, respectively. Historically, capital
expenditures have been, and future expenditures are anticipated to be, primarily
to support expansion of the Company's operations, including transportation
equipment and management information systems. The Company's capital expenditures
over the next several years, as a percentage of its revenues, are expected to be
generally consistent with those of the past three fiscal years.
In connection with certain acquisitions, the Company has agreed to pay
additional consideration based on operating results of the acquired entity. The
payment of any such earnouts could result in an increase in the purchase prices
for such acquisitions and, as a result, additional goodwill.
The Company completed its initial public offering in March 1997, raising
net proceeds of approximately $22 million. These proceeds were used to repay all
outstanding amounts under the Credit Facility, to repurchase an outstanding
warrant and to retire other outstanding acquisition-related debt. The Company
completed a follow-on offering in October 1997, raising net proceeds of
approximately $41 million. These proceeds were used to repay outstanding debt of
approximately $16 million, to fund acquisitions and for general corporate
purposes, including working capital to support the Company's growth.
The Company believes that funds generated from operations, together with
existing cash, the net proceeds of this offering and borrowings under the Credit
Facility, will be sufficient to finance its current operations, planned capital
expenditures and internal growth for at least the next several years. If the
Company were to make a significant acquisition for cash, it may be necessary for
the Company to obtain additional debt or equity financing.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
YEAR 2000
The Company is currently in the process of addressing the Year 2000 issue,
which is the result of computer programs being written using two digits rather
than four to define the applicable year. As a result, computer applications and
software may recognize an input of two zeros (00) as the year 1900. This
incorrect date recognition could cause systems and software malfunctions that
may have a material adverse effect on business operations. This potential
problem could affect not only the Company's internal information systems but
also those of third parties, such as clients and vendors using information
systems that may interact with or affect the Company's operations.
Company's Readiness. To ensure minimal business interruption due to
computer failures, the Company has performed a review of various software
applications and computer infrastructure that are likely to be affected by the
Year 2000 issue. Both "IT systems" and "non-IT systems" were reviewed. IT
systems refer to all pre-packaged and internally developed software applications
and programs and related computer hardware. Non-IT systems refer to various
equipment and devices that have "embedded" computer language, examples of which
are computer integrated circuits ("chips") and telephone switches. The review
was completed using the Company's employees and various computer consulting
vendors.
The Company's response is being conducted in phases. First all relevant
computer systems were assessed as to functionality and to determine Year 2000
compliance. Second, for those systems and software found to be non-compliant or
in need of upgrading, corrective steps are being and will be taken. Corrective
steps primarily relate to development and purchasing of system software and
hardware. Finally, all systems will be tested and then implemented at necessary
levels. The Company has substantially completed the corrective phase and is
transitioning into the testing and implementation phase. The Company's
objectives are to
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<PAGE> 24
complete substantially all remediation and replacement of internal information
systems by June 1999, and to complete final testing and certification for Year
2000 readiness by September 1999.
The Company presently believes that, with planned conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems.
The Company has identified its significant clients and vendors that it
believes, at this time, to be critical to the Company's business operations and
steps are underway to ascertain their respective stages of readiness through the
use of questionnaires, interviews, and other available means to determine the
progress that those clients and vendors are making in remediating their own Year
2000 issues. The Company is requiring that significant clients and vendors
certify those products and services to be Year 2000 compliant. However, there
can be no assurance that the information systems provided by or utilized by
other companies which affect the Company's operations will be timely revised in
such a way as to allow them to continue normal business operations or furnish
products, services or data to the Company without disruption.
Cost of Compliance. The Company is replacing its non-compliant systems.
Preliminary estimates for these new systems are in the range of $2.0 to $3.0
million. To date, the Company has incurred approximately $1.0 million of this
estimated cost. The Company expects the majority of the remaining capital
expenditures to be incurred in 1999. The Company's Year 2000 project costs are
not expected to have a material impact on its results of operation or financial
condition.
Company Risk and Contingency Plans. The Company's systems identified as
non-compliant or in need of replacement are being replaced. The Company expects
these replacements to be substantially completed by year-end 1999. If needed
conversions to the Company's information systems are not made on a timely basis
or the Company's significant clients or vendors fail to make such remediations
and conversions on a timely basis, it could have a material adverse effect on
the Company's results of operation or financial condition.
Forward-Looking Statements. The preceding Year 2000 discussion contains
various forward-looking statements which represent the Company's beliefs or
expectations regarding future events. When used in this discussion, the words
"believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
remediation and testing phases of its Year 2000 program as well as its Year 2000
contingency plans; its estimated cost of achieving Year 2000 readiness; and the
Company's belief that its internal systems and equipment will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the expected results. Factors that may cause these differences include, but
are not limited to, the availability of qualified personnel and other
information technology resources, the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 issues.
24
<PAGE> 25
BUSINESS
The Company is a leading provider of contract staffing and outsourcing
solutions. The Company professionally manages a large workforce that performs
tasks that its clients frequently regard as outside their core businesses. By
assuming responsibility for these tasks, the Company seeks to improve the
quality of the non-core operations of its clients and to reduce their costs. The
Company's services are generally performed under long-term contracts, which have
provided a significant source of predictable and recurring revenues.
The Company services the multinational needs of its primarily Fortune 1000
clients through its 103 offices in North America and 66 offices in Europe. The
Company's ten largest clients based on pro forma revenues are America OnLine,
British Airways, Delta Air Lines, Federal Express, Ford, Mattel, Northwest
Airlines, Publishers Clearing House, Reader's Digest and United Airlines. The
Company focuses on developing and maintaining long-term client relationships.
The Company's top ten clients have utilized the Company or its predecessors for
an average of ten years. In addition, the Company has achieved an average annual
retention rate of approximately 93% of contract billable hours over the last
three fiscal years (excluding two operations the Company terminated in 1996).
The Company has achieved significant growth in recent years, with its
revenues achieving a compound annual growth rate of 27.6% from 1993 to 1997. The
compound annual growth rate for internal growth during the same period was
24.2%. While the Company is focused on strong internal growth, it has also made
accretive acquisitions to provide complementary higher margin services to our
clients. These acquisitions have substantially changed the Company's business
mix, reducing its historical dependence on the aviation industry, and improved
its operating margins. Operating income for the nine months ended September 30,
1998 increased 122% from the comparable period of 1997.
The Company's contract staffing and outsourcing solutions are divided into
four lines of business:
<TABLE>
<S> <C>
- - AVIATION SERVICES
- pre-departure screening
- passenger profiling
- baggage claim and check
- sky cap and wheelchair assistance
- cargo handling
- into-plane fueling
- - FACILITY SUPPORT SERVICES
- access control personnel
- uniformed security officers
- fixed route dedicated shuttle bus services
- - MARKETING EXECUTION AND FULFILLMENT SERVICES
- consumer and trade fulfillment
- trade support services
- e-commerce fulfillment
- customer service support
- - OPERATIONAL SUPPORT STAFFING SERVICES
- assembly
- warehousing
- shipping
- electrical
- mechanical
</TABLE>
The Company began providing marketing execution and fulfillment services in
October 1997 through its acquisition of RightSide Up and further expanded this
business line through its acquisition of Gage in July 1998. This line of
business represents a natural extension of the Company's contract staffing
operations, enabling the Company to capitalize on its labor management expertise
by providing higher margin services, such as program management and
administration, advanced information systems and facilities for the storage and
distribution of materials. The Company provides these services through a network
of 18 facilities in North America to clients principally in the automotive,
consumer, publishing and entertainment industries. The Company's marketing
execution and fulfillment services clients include The Coca-Cola Company,
Disney, Ford, Fox, General Motors, Kraft, Mattel, ONSALE, Proctor & Gamble,
Publishers Clearing House and Reader's Digest.
INDUSTRY OVERVIEW
Many corporations and other institutions need to recruit, hire, train,
motivate and manage large numbers of personnel to handle non-core functions in
labor environments often characterized by relatively low pay and
25
<PAGE> 26
high turnover rates. Enterprises incur considerable expense and invest
substantial amounts of management time in managing this process. These
enterprises are increasingly contracting with specialized third party providers
to better ensure long-term labor availability for support functions. Contract
staffing and outsourcing service providers often are able to provide higher
quality services at a lower cost than these enterprises are able to provide
themselves. Outsourcing these functions shifts employment costs and
responsibilities, such as workers' compensation, recruitment and turnover costs
and changes in labor regulations, to outside vendors and allows enterprises to
reduce the administrative overhead and time necessary to properly manage
non-core functions.
The market for contract staffing and outsourcing services has evolved as
companies increasingly outsource non-core functions. The outsourcing company
provides on-site management of staff, assumes responsibility for a particular
function (including designing and implementing a solution for its client) and
shares in the economic benefits derived from improved execution of the function.
As enterprises centralize purchasing decisions and seek to reduce the number of
vendors with whom they do business, the ability of providers to offer national
account capability and national and international coverage is growing in
importance. These trends, as well as the increasing need for capital and
management depth for growth, are creating consolidation opportunities in the
highly fragmented contract staffing and outsourcing services industry.
Aviation Services. While airlines have historically outsourced certain
functions, such as food service and pre-departure screening, they are
increasingly outsourcing other functions not directly related to flight
operations. Aviation service functions that are increasingly being outsourced
include passenger profiling, baggage claim and check, sky cap, aircraft clean
and search, wheelchair assistance, inter-gate cart, escorting of unaccompanied
minors, ticketing and check-in, cargo handling and into-plane fueling. While the
trend toward outsourcing labor management in Europe is not as developed as it is
in the United States, the Company expects two trends to increase demand for
contract staffing of aviation services in Europe: (i) the privatization of major
airlines, which should increase their focus on improving operating performance,
and (ii) the liberalization of airport authority licensing, which currently
restricts the number of vendors that may provide services at a particular
location. The European Union has mandated that European airports be opened to
increased competition to provide various ground and passenger services beginning
in January 1999.
Facility Support Services. In addition to the general trends that have
contributed to the growth of contract staffing and outsourcing services, several
developments have contributed to the increased demand for facility support
services in recent years. Increases in crime, the greater value of both business
equipment and various types of inventory, and growth in the size of many
facilities have contributed to greater demand for access control and commercial
security services. Businesses, educational institutions and governmental
authorities are also adding fixed route, dedicated shuttle bus services as the
scale of their physical facilities grows larger, the numbers of employees and
students increase, and urban congestion and sprawl increase the need for
transportation solutions.
Marketing Execution and Fulfillment Services. Recent trends in the way
marketers deliver their marketing messages and sell and deliver their goods have
resulted in growth in outsourcing of marketing execution and fulfillment
services. Marketing messages are delivered to more focused groups of customers
through specialized point of purchase, direct marketing and telemarketing
programs. In addition, product sales through the Internet and from catalogues
are growing. Customers expect reliable, rapid delivery of their purchases with
minimal delivery costs. Marketing execution and fulfillment companies specialize
in managing the complexities of implementing these sales and marketing programs,
including the receipt of orders, picking, packing and shipping of kits to
retailers and product orders to customers, customer service, credit card
processing, inventory management and database development. Due to the growing
complexity of efficiently performing these tasks, clients are increasingly
seeking larger, national vendors with capabilities to handle unique marketing
programs, multiple types of order taking and delivery methods, and handle both
large and small distribution volumes.
Operational Support Staffing Services. The trends toward outsourcing,
increased specialization and an emphasis on productivity have led many
enterprises to outsource task repetitive, labor intensive functions such as
light assembly and manufacturing, warehousing and shipping. Each of these
functions involves certain
26
<PAGE> 27
repetitive tasks, such as sorting, selecting, moving, packing and labeling
various items. Third party providers are increasingly developing "best
practices" for each of these functions in order to improve productivity and
efficiency. Additionally, enterprises are increasingly utilizing contract
staffing in order to manage their cost structures when faced with seasonality or
other factors causing fluctuations in their volume of production. Typically,
German companies outsource semi-skilled laborers, including mechanics, plumbers
and electricians. Outsourcing companies are able to charge higher billing rates
than for unskilled laborers, and the contracts generally have longer terms.
STRATEGY
AHLS believes there are significant opportunities to expand its business as
existing clients and other large corporations and institutions utilize contract
staffing and outsourcing solutions that will enable them to focus on their core
competencies. Key elements of the Company's strategy include:
Continue to Focus on Core Competency. The Company's core competency is
its ability to recruit, hire, train, motivate and manage a large workforce
to provide the non-core support services needed by its clients. The Company
believes that it has achieved lower employee turnover rates than are
typical in its lines of business, enabling the Company to provide higher
levels of service while expanding its business. The Company believes its
core labor management competencies can be leveraged across a wide range of
contract staffing and outsourcing functions.
Cross-Sell Services and Pursue New Opportunities. Throughout its
history, the Company has focused on internal growth by offering high
quality, value-added services, introducing and cross-selling new services
to existing clients and expanding into new geographic markets. The
Company's revenues (excluding revenues derived from acquired companies)
increased from $104.1 million in 1993 to $248.2 million in 1997,
representing a compound annual growth rate of 24.2%. The Company believes
that its reputation for quality service has been critical in attracting new
clients and retaining existing clients, as well as in securing contract
renewals. Once the Company begins to provide a client with a particular
service in a local market, the Company seeks to capitalize on its ability
to provide that service in additional markets and to provide new services
to the client. The Company believes there are substantial opportunities to
expand relationships with existing clients by cross-selling the full range
of its services. In addition, the Company believes its multinational
capabilities and breadth of services allow it to compete effectively
against companies that provide a more limited range of services. The
Company has 75 sales representatives in the United States and Europe, and
it is currently implementing a new marketing program that will increase its
emphasis on national account selling.
Develop Long-Term Client Relationships. AHLS targets large corporations
and institutions that have significant needs for contract staffing and
outsourcing solutions. The Company has established long-term relationships
with most of its large clients through preferred outsourcing vendor
relationships. The Company's top ten clients (based on pro forma revenues
for the nine months ended September 30, 1998) have utilized the Company or
its predecessors' services for an average of ten years. In addition, the
Company has achieved an average annual retention rate of approximately 93%
of contract billable hours over the last three fiscal years (excluding two
operations the Company terminated in 1996). These long-term relationships
have provided the Company with a significant source of predictable and
recurring revenues. Building and maintaining relationships with its
clients' senior executives and local operating personnel is an important
operating philosophy of the Company.
Capitalize on Multinational Capabilities. Companies are centralizing
purchasing decisions and seeking to reduce the number of vendors with whom
they do business. As a result, the ability of contract staffing and
outsourcing providers to offer national and international coverage is
growing in importance. Through its operations in 103 offices in North
America and 66 offices in three European countries, AHLS is able to service
the multinational needs of its clients. The Company's multinational
presence also reduces its reliance on the economic conditions in any single
country. For example, the Company's three largest clients utilize AHLS'
services in both their North American and European operations. The Company
believes its ability to provide a consistently high level of service at
numerous locations
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<PAGE> 28
worldwide provides it with a significant competitive advantage while
strengthening and diversifying its economic base.
Expand Margins by Changing its Business Mix and Leveraging its
Density. Since its March 1997 initial public offering, the Company has
added two lines of business -- operational support staffing and marketing
execution and fulfillment services. These higher margin businesses utilize
the Company's core competency of workforce retention and management, and
also include "value-added" elements such as program management and
administration, advanced information systems and facilities for the storage
and distribution of materials. By offering these value added services, the
Company believes it can better serve the needs of its clients and expand
its operating margins. The Company has also expanded its operating margins
by increasing the "density" in its existing lines of business in order to
achieve economies of scale and leverage its corporate and field operating
infrastructure. For the nine months ended September 30, 1998, the Company's
operating margin was 5.1% compared with 3.7% for the comparable period of
1997.
Continue to Seek Strategic Acquisitions. AHLS actively seeks accretive
acquisitions in an effort to further develop its service offerings and
geographic coverage. Since May 1997, the Company has completed twelve
acquisitions aggregating approximately $288 million in revenues (for the
calendar year prior to their acquisition), including seven acquisitions in
1998. Specifically, the Company has pursued acquisitions in the operational
support staffing and marketing execution and fulfillment businesses, which
represent a natural extension of the Company's previous lines of business
and an opportunity to achieve higher operating margins. The Company expects
to focus on completing additional acquisitions in these lines of business,
while continuing to acquire aviation services or facility support services
businesses on an opportunistic basis. The Company believes that a
disciplined acquisition program and an effective integration process allow
the Company to leverage its existing infrastructure and capitalize on the
fragmented nature of the contract staffing and outsourcing industry.
SERVICES PROVIDED
The following table presents information with respect to the percentage of
the Company's revenues by business line for the periods shown:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, 1998
--------------------- ---------------------
BUSINESS LINES 1995 1996 1997 ACTUAL PRO FORMA(1)
-------------- ----- ----- ----- ------ ------------
<S> <C> <C> <C> <C> <C>
Aviation services............................. 64% 59% 58% 43% 34%
Facility support services..................... 36 41 39 31 25
Operational support staffing services......... -- -- 3 17 22
Marketing execution and fulfillment
services.................................... -- -- * 9 19
--- --- --- --- ---
Total............................... 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
- ---------------
* Less than 1%.
(1) Includes revenues of Gage and EMD as if the acquisitions of Gage and EMD had
occurred on January 1, 1998. Does not include revenues of five other
companies acquired by the Company during 1998 for the period prior to their
acquisition. See "-- Acquisitions."
Aviation Services
The Company is one of the largest providers of pre-departure screening and
passenger profiling services in the United States and Europe, currently
providing services at 44 airports in the United States and 28 airports in
Europe. Pre-departure screening is a security procedure performed at all
commercial airports in the United States and the United Kingdom under mandates
of the Federal Aviation Administration ("FAA") and the United Kingdom Department
of Transport and at many other airports throughout the world under similar
mandates of other regulatory authorities. At pre-departure screening
checkpoints, all passengers and other airport patrons must physically pass
through a device called a magnetometer, designed to reveal the
28
<PAGE> 29
presence of metal objects, and all carry-on baggage and other items carried into
the concourse or gate area must pass through an X-ray device to determine
whether certain suspicious materials are present. Major airports at which the
Company provides pre-departure screening services in the United States include
Los Angeles International, New York -- Kennedy and LaGuardia,
Washington -- National and Dulles, Denver International, Chicago -- O'Hare, San
Francisco, Orlando, Boston and Dallas.
In Europe, the Company's employees perform a sophisticated passenger
profiling procedure which has been used by certain major European airlines for
several years at high-risk international airports in Europe. In 1994 the FAA
mandated passenger profiling for U.S. airlines' international flights from those
airports. Passenger profiling seeks to identify a potential threat before it
materializes by means of interviewing, document verification and behavioral
analysis. This procedure results in the classification of the vast majority of
passengers as low risk, thereby enabling more scrutiny to be focused on higher
risk passengers. The Company has been providing profiling services in Europe
since 1992 and management believes that if the FAA were to mandate profiling in
the United States, the Company would be well-positioned to quickly implement
profiling procedures for its U.S. clients. See "-- Government Regulation." Major
airports at which the Company provides passenger profiling services include
London -- Heathrow, Paris -- Charles de Gaulle, Frankfurt, Berlin and Munich.
The Company prepares cargo and mail for flight by sorting, packaging and
transporting the cargo and mail to and from airplanes. In some cases, the
Company provides the actual staffing of customer counters and data input into
the airline's cargo computer system, in addition to handling the cargo. Cargo
services are provided in certain markets pursuant to outsourcing arrangements,
under which the Company manages the entire process for its clients. The Company
processes air cargo for several of its major aviation clients, including Delta
Air Lines, United Airlines and Lufthansa Airlines. The Company also provides
cargo services to Air China and SwissAir in New York and Cathay Pacific and
Vanguard in Seattle pursuant to subcontracts from Delta Air Lines. In addition
to cargo handling, the Company provides U.S. Postal Service mail handling for
Delta Air Lines in selected locations.
The Company provides guarding and control of airport entrances, checking of
employee identification cards and baggage, guarding and control of employee
parking lots and under-the-wing guarding of parked aircraft in Europe.
Furthermore, the Company provides a variety of other aviation services to its
airline clients, including baggage claim and check, aircraft clean and search,
lost baggage delivery or replacement services, sky cap, wheelchair assistance,
escorting of unaccompanied minors, inter-gate cart services and into-plane
fueling.
Facility Support Services
The Company provides business and facility access control, special event
security and uniformed security officer services to a broad range of commercial
and governmental clients. The Company's access control personnel are used at
office and government buildings, airports, hospitals, distribution centers,
sports arenas, museums and other facilities.
Depending on the needs of the client, security officers are on premises,
often around-the-clock, to provide facility security, access control, personnel
security checks and traffic and parking control and to guard against fire,
theft, sabotage and safety hazards. The Company's security officers are trained
to respond appropriately to emergency situations and report fires, intrusions,
natural disasters, work accidents and medical crises to appropriate authorities.
Fewer than one percent of the Company's security personnel are armed. See "Risk
Factors -- Risks Relating to Labor Force."
The Company provides fixed route, dedicated shuttle bus services in 19
locations within the United States and two locations in the United Kingdom
through its fleet of approximately 295 shuttle bus vehicles. The vehicles
generally seat between 15 and 50 passengers. Under its shuttle bus contracts,
the Company provides the shuttle bus and the driver. During fiscal 1997, AHLS
vehicles traveled more than 7,000,000 miles and operated for more than 700,000
hours. AHLS currently provides (1) campus shuttle services at The Georgia
Institute of Technology, Emory University, S.W. Texas State University and The
American School in London, (2) corporate shuttle services between various
facilities of The Coca-Cola Company, Georgia Power
29
<PAGE> 30
and Federal Express, (3) public parking shuttle services for Port of New York,
the Memphis/Shelby County Airport Authority and the Nashville Airport Authority,
(4) employee transportation services from employee parking lots for Port of New
York, Federal Express and Delta Air Lines and (5) airside crew and passenger
transport at Heathrow Airport.
Operational Support Staffing Services
The Company provides staffing for operational support services, which
includes providing staffing for assembly, warehousing, shipping, electrical and
mechanical functions. The Company began providing operational support staffing
services with the acquisition of Lloyd and further expanded its operations in
this area through the acquisitions of Midwest Staffing and SES in the United
States, TUJA, EMD and Verfurth in Germany and Right Associates in the United
Kingdom. The Company's operational support staffing services are provided
through 16 branch offices located in the Chicago and Baltimore metropolitan
areas, through 38 offices located throughout the Hamburg, Munich and Frankfurt
metropolitan areas and through three branch offices located south of London.
Marketing Execution and Fulfillment Services
The Company began providing marketing execution and fulfillment services
with the acquisition of RightSide Up in October 1997 and further expanded its
operations in this area through the acquisition of Gage in July 1998. The
Company provides marketing execution and fulfillment services for clients in the
automotive, consumer, travel and entertainment industries, including The
Coca-Cola Company, Disney, Ford, Fox, General Motors, Kraft, Mattel, ONSALE,
Proctor & Gamble, Publishers Clearing House and Reader's Digest. The Company
provides a comprehensive array of marketing support services, enabling it to
execute and administer complex, multifaceted marketing programs for its clients.
These programs include consumer and trade fulfillment, trade support services,
e-commerce fulfillment and customer support services.
Consumer and Trade Fulfillment Programs. The Company's execution and
administration of consumer promotion programs and direct response fulfillment
services typically involves (1) receiving consumer orders (via mail, telephone
or the Internet), (2) processing the order to check for compliance and validate
materials submitted, (3) fulfilling the order by developing or selecting from
inventory the refund, coupon, premium, sample or merchandise and packing,
labeling and shipping it to the consumer, (4) reporting program results to the
client, either by mail or electronically, (5) providing customer service
regarding the product, promotion or order status, and (6) providing related data
entry services, including information from warranty cards, credit cards and
promotion media.
Similarly, corporations use the Company's fulfillment services to
distribute point-of-purchase displays, new product introduction literature,
posters, banners, demonstration kits, signs, samples and other sales and
marketing materials to distributors, retailers and other trade channels. In
providing these services, the Company (1) receives, stores, controls and manages
inventory owned by the client, (2) prints and personalizes trade materials, (3)
manages and coordinates shipment of materials, (4) provides database management
and information processing services and (5) operates call centers to process
requests for information. In providing trade materials and trade promotion
fulfillment, the Company provides many of the same services it provides to
clients utilizing its consumer promotion or direct response fulfillment
services, including order receipt, processing, fulfillment, reporting and
customer services.
Trade Support Services. The Company executes trade support services for
its clients that have extensive distribution or franchise networks. Services
include (1) the collection and sorting of memoranda and informational mailings,
training and support materials, and other communications, (2) packaging and
shipping the information, and (3) in-bound teleservices support to answer
questions and solve problems for the client's trade channels.
E-Commerce Fulfillment. The Company executes fulfillment services for
clients who sell products over the Internet's World Wide Web. The services
include (1) receipt and tracking of client inventory, (2) storage of inventory
in secured areas, (3) receipt of customer orders via the Internet, (4)
fulfillment of orders by
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<PAGE> 31
selecting from inventory the merchandise ordered and packing, labeling and
shipping the merchandise to the consumer within 24 hours, and (5) production of
reports, files, and transaction records transmitted to the client via the
Internet. Products fulfilled by the Company include personal computers, consumer
electronics, housewares, sports and fitness equipment, vacation packages and
specialty foods.
Customer Support Services. The Company receives orders from consumers and
also provides inbound customer service focusing on business-to-consumer
applications, with increasing activity in business-to-business applications. The
Company receives and processes orders from consumers and handles inquiries
relating to billing, product information, product uses, product problems or
concerns, and client services. The Company has particular expertise in regulated
industries, housewares, electronics, publishing and packaged goods.
ACQUISITIONS
The Company's management has extensive experience in identifying
acquisition candidates, completing acquisitions and integrating acquired
companies into the Company's operating infrastructure. Since the completion of
its initial public offering in March 1997, the Company has completed twelve
acquisitions. Each acquired company had operating margins in excess of the
Company's operating margin at the time of acquisition and was immediately
accretive to earnings. Together these acquisitions have significantly increased
the Company's presence in Europe, added new lines of business to the Company's
operations and increased density in the Company's existing lines of business.
The table below provides certain information with respect to the
acquisitions that the Company has completed since its initial public offering in
March 1997:
<TABLE>
<CAPTION>
REVENUES FOR THE
CALENDAR YEAR
DATE COMPANY PRIOR TO ACQUISITION HEADQUARTERS SERVICES PROVIDED
- ---- ------- ---------------------- ------------ -----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Dec 1998 Verfurth........ $20.0 Munster, Germany Operational Support Staffing
Dec 1998 UNICCO.......... 50.0 Boston, MA Facility Support Services
Aug 1998 Right
Associates...... 17.0 Portsmouth, England Operational Support Staffing
July 1998 EMD............. 50.0 Frankfurt, Germany Operational Support Staffing
July 1998 Gage Marketing
Support
Services........ 80.0 Minneapolis, MN Marketing Execution/Fulfillment
Apr 1998 TUJA............ 16.0 Munich, Germany Operational Support Staffing
Feb 1998 SES Staffing
Solutions....... 16.0 Baltimore, MD Operational Support Staffing
Dec 1997 Midwest
Staffing........ 8.0 Chicago, IL Operational Support Staffing
Oct 1997 RightSide Up.... 6.4(1) Los Angeles, CA Marketing Execution/Fulfillment
Sept 1997 Lloyd Creative
Staffing........ 14.0 Chicago, IL Operational Support Staffing
June 1997 USA Security.... 8.6 Hackensack, NJ Facility Support Services
May 1997 Executive
Aircraft
Services........ 2.4 London, England Aviation Services
</TABLE>
- ---------------
(1) For the twelve months ended August 31, 1997
CONTRACT TERMS
Substantially all the Company's services are provided under long-term
contracts, typically having terms of one to five years, which have provided the
Company with a significant source of predictable recurring revenues. Although
the terms of the Company's contracts vary significantly, the Company's aviation
services, facility support services and operational support services businesses
generally agree to provide a stated service level and clients generally agree to
pay the Company an hourly rate for services provided. Certain of the Company's
clients, especially in the cargo services area, are billed a fixed dollar amount
per month for services performed. Under some contracts, the Company is entitled
to rate increases when there are increases in the Federal minimum wage,
notwithstanding that most of the Company's employees are paid at rates in excess
of the Federal minimum wage. In the marketing execution and fulfillment services
business, the Company
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<PAGE> 32
generally enters into three year contracts with its clients, pursuant to which
it agrees to provide services for a fixed number of programs per year. The scope
and magnitude of the programs are determined by the client.
Most contracts have multi-year terms and are generally terminable by either
party upon 30 to 90 days written notice. The Company's contracts have rarely
been terminated. Most of the contracts entered into by the Company have been
renewed or extended upon the expiration of their original terms. The Company has
experienced an average annual retention rate of approximately 93% of its
contracts over the last three fiscal years (excluding two operations the Company
terminated in 1996).
SALES AND MARKETING
AHLS targets large corporations and institutions that have significant
contract staffing and outsourcing needs, marketing its services to potential
clients through senior management, regional and district managers and a local
sales force. As part of its operating philosophy, the Company emphasizes
building and maintaining relationships with personnel at various levels of its
clients' organizations, including relationships with both senior executives and
local operating personnel.
The Company is currently implementing a national sales and marketing
strategy, under which the Company focuses on cross-selling its services to its
primarily Fortune 1000 clients. Furthermore, the Company has designated certain
senior managers as responsible for specific national account relationships and
is in the process of adding national account sales representatives.
The Company's facility support services businesses have a local sales force
in the United States of 39 representatives located in AHLS' regional and
district offices and four sales representatives in Europe. The Company's
operational support staffing services business has 14 sales representatives in
the United States and Europe. The Company's marketing execution and fulfillment
services business has 18 sales representatives in the United States and is
planning to add a national account sales structure during 1999. Many of AHLS's
managers also have sales responsibilities and a portion of their incentive
compensation is dependent on meeting sales goals. The sales and marketing
function for the Company's aviation services business is handled primarily by
corporate management.
WORKFORCE MANAGEMENT
The Company's core competency includes recruiting, hiring, training,
motivating and managing the large numbers of personnel required to provide many
of the support services needed by its clients. The Company's district managers
and their human resources staff have ongoing responsibility for hiring,
recruiting and training the Company's local workforce.
Recruiting. The Company has developed innovative recruiting methods that
have been particularly effective in reaching targeted pools of prospective
employees, in addition to utilizing traditional recruiting methods such as job
fairs, trade journals, local advertising, and interviewing at vocational
schools. After analyzing the demographics of each market, the Company seeks to
establish relationships with community groups and leaders. For example, in a
number of markets, the Company has found that senior citizens are an excellent
source of potential employees for its pre-departure screening services and
recruiters frequently visit senior citizen centers. The Company leverages these
community relationships to provide a feeder into the Company's employment pool
and believes that current Company employees serve as effective recruiters for
the Company. The Company believes these methods are more effective than more
traditional recruiting methods.
Hiring. Within the United States, every employee hired by the Company must
complete a written application and provide proof of citizenship or resident
alien status. Further, most employees are subject to a 10-year employment and
criminal background check, which is conducted internally by the Company. Unlike
many of its competitors, the Company requires mandatory pre-employment drug
testing for all aviation and commercial security services employees.
In Europe, the Company screens potential applicants through a telephone
interview, and each potential employee must complete a written application and
undergo an interview that includes vision, hearing and psychological testing. An
initial one-year background check is required for every new employee. Each
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<PAGE> 33
European employee is hired subject to a three month probationary period and
continuity of employment is subject to a 20-year background check. Where legally
permitted, employees in certain European countries are also subject to random
drug testing.
Training. The Company provides in-house classroom and on-the-job training
programs for its hourly personnel through videos, guest lecturers and full-time
trainers who are employed at the Company's major district locations. The Company
is ISO 9002-certified in its commercial security business in the United Kingdom
and certain of its marketing execution and fulfillment services operations in
the United States. The Company is in the process of establishing performance
measures to improve job focus and accountability, create a quality audit process
and implement "best practices and procedures" in the Company's field operations.
The Company is the only organization approved by the U.K. DOT to provide
aviation security training to personnel of the U.K. DOT, the agency that
regulates aviation security matters in the United Kingdom.
Retention. The Company believes that employee retention is critical to
lowering operating costs and providing high quality service to its clients.
Accordingly, the Company places significant emphasis on programs to motivate its
employees and reduce employee turnover. Since inception, the Company has been
able to provide quality service and expand its business despite the high
employee turnover that is inherent in low wage, task-repetitive positions. The
Company's "110% Club" recognizes employees for superior attendance, attitude,
appearance and performance. Members receive quarterly bonuses and other rewards,
and are recognized throughout the Company. The Company has also enhanced
employee benefits by adding an employee stock purchase plan, which is available
to all employees with three months of active service. The Company believes its
historical retention rates are significantly higher than industry averages.
Field Management. The Company has developed a management structure under
which significant workforce decisions are made at the local level, thereby
requiring field managers to assume responsibility for recruiting, hiring and
retention. The Company's bonus system for regional and district managers is
based upon achievement of specific performance objectives, including revenue,
profitability, new business and client retention. Regional and district managers
can earn bonuses of up to 35% of their base compensation by achieving all their
objectives established annually by the Company. The Company has a stock option
plan for key corporate and field management.
Employees. As of September 30, 1998, the Company had 25,540 employees.
Approximately 1,840 of the Company's employees are covered by collective
bargaining agreements. Each of these agreements was assumed by the Company in
connection with an acquisition or an outsourcing contract previously held by
another vendor. Over the last three years, unions initiated five efforts to
organize certain Company employees, each of which failed to receive sufficient
support to require a vote. The Company considers its relations with its
employees to be good.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems contribute significantly to
its daily operations, financial performance and customer service. The Company
has invested, and will continue to invest, resources in the development of
systems to grow and support the business needs of its clients.
In aviation services, the Company has developed and is implementing an
application to help manage its large workforce effectively through integrated
employee tracking, scheduling, time recording and reporting. In facility support
services, the Company has implemented at certain locations an automated,
integrated scheduling and time capture application which confirms an employee is
serving the customer as required. The Company will continue to integrate these
systems into the contract management, billing and payroll processes during 1999.
In operational support staffing services, the Company acquired several
integrated scheduling and accounting systems through its acquisitions. In
marketing execution and fulfillment services, the Company uses technology
extensively. The state-of-the-art marketing and sales support applications and
related infrastructure provide the business with order entry and inventory
control automation, organized distribution facilities, efficient out-bound
logistics, and valuable management database and reporting system.
33
<PAGE> 34
Across all its business lines, the Company has utilized technology to
simplify, automate and integrate the administrative and management reporting
processes that serve its business units.
COMPETITION
The contract staffing and outsourcing industry is extremely competitive and
highly fragmented, with limited barriers to entry. Companies within the contract
staffing and outsourcing industry compete on the basis of the quality of service
provided, their ability to provide national and international services, the
range of services offered, and price. The Company believes its competitive
advantages include its reputation for providing high quality service and its
ability to serve large clients in the United States and Europe. Most of the
Company's competitors offer a more limited range of services and focus on a few
specific industries.
The Company competes in international, national, regional and local markets
with outsourcing companies, specialized contract service providers and in-house
organizations that provide services to potential clients and third parties.
AHLS' principal national competitors include:
- Aviation services -- ICTS International N.V., Globe Aviation Securities
Corporation and International Total Services, Inc.;
- Facility support services -- Borg-Warner Security Corporation,
Guardsmark, Inc. and The Wackenhut Corporation;
- Operational support staffing services -- Manpower, Inc., Kelly Services,
Inc. and Olsten Corporation; and
- Marketing execution and fulfillment services -- Young America
Corporation, StarTek, Inc. and LCS Industries.
The Company also competes with numerous local and regional companies as
well as divisions of several major staffing companies. Certain of the Company's
competitors and potential competitors have significantly greater financial
resources and larger operations than the Company.
GOVERNMENT REGULATION
Current Regulations Relating to Aviation Security. The Company's business,
particularly its aviation services line of business, is significantly affected
by government regulation. The aviation security services provided by the Company
are subject to extensive regulation by the Federal Aviation Administration in
the United States and comparable regulatory authorities in Europe. Aviation
security in the United States is subject to regulations and directives issued by
the FAA and to legislation enacted by the United States Congress. Under current
regulations, responsibility for aviation security is shared between the FAA and
various other federal, state and local agencies and industry participants (which
include air carriers and airport authorities as well as independent contractors
that perform services for or on behalf of these industry participants). The FAA
conducts threat and vulnerability assessments and, through its regulatory
authority, directs the aviation industry to implement measures that address
existing and anticipated threat situations. The FAA also tests security measures
at airports to assess vulnerabilities in current airport security systems. Any
change in the FAA's directives relating to aviation security could affect the
Company's operations in the aviation services business.
Under FAA regulations, which the FAA has proposed to revise through
rulemaking proceedings, each air carrier and airport authority must adopt and
carry out an FAA-approved security program that provides for the safety of
persons and property traveling in air transportation against acts of criminal
violence and aircraft piracy. Air carriers are responsible for providing
security measures for all people and items connected with their aircraft,
including passengers, baggage, and maintenance and flight crews. Airport
authorities are responsible for maintaining a secure environment on airport
grounds and for providing law enforcement support and training.
Each security program adopted by an airline must include: (1) the screening
of passengers and their carry-on baggage, and other persons having access to
controlled areas, to prevent the carriage aboard aircraft
34
<PAGE> 35
of weapons or explosive devices, (2) controlling access to aircraft, checked
baggage and cargo, (3) appropriate controls on shipping of cargo and (4)
security inspection of any aircraft left unattended.
Airlines may utilize either their own employees or third-party contractors
to carry out their security programs. Screeners operating X-ray systems must
receive initial and recurrent training in the detection of weapons and other
dangerous articles. Certain of these requirements are currently the subject of
an FAA rulemaking proceeding, which has been delayed until more data becomes
available, and may be modified upon adoption of final rules.
From time to time, the FAA issues directives requiring the implementation
of specific actions by air carriers and airport authorities. For example,
following the destruction of TWA flight 800 in July 1996, the FAA began to
require additional passenger profiling for specified types of flights, matching
of passengers and checked baggage, additional searching of aircraft cabins and
cargo areas, additional physical searches of carry-on items and other enhanced
security measures. The Company's business can be negatively or positively
affected by any such directives.
Generally, European standards for aviation security are more stringent than
those currently in effect in the United States. Passengers are subject to more
comprehensive "profiling" and review of documents; parked aircraft must be
guarded, searched and cleaned in accordance with applicable regulations;
passenger baggage is subject to match procedures as well as random X-ray and
hand searches; commercial cargo is guarded and subject to random X-ray searches;
and airline employees and other crews are subject to additional security
measures. The FAA requires that U.S. airlines utilize similar passenger
profiling programs in their European operations.
The Company is subject to random periodic testing by the FAA with regard to
adherence to regulations relating to pre-departure screening and passenger
profiling, hiring practices (including background checks, drug testing, training
and individual employee file maintenance) and baggage handling. In the United
Kingdom, the U.K. DOT also conducts testing relating to passenger and baggage
handling, aircraft security, document verification and employee background
checks. Any failure to meet these performance standards or to pass these tests
may result in the loss of a contract or the Company's license to perform
services, either of which is likely to have a material adverse effect on the
Company's reputation, business, results of operations and financial condition.
Recent Developments Relating to Aviation Security. Several initiatives by
United States governmental authorities and industry participants have resulted
in recommended changes in regulatory requirements relating to aviation security.
These initiatives have been undertaken by the United States Congress, through
provisions of the Federal Aviation Reauthorization Act of 1996 (the "1996 Act");
the White House Commission on Aviation Safety and Security (the "Gore
Commission"), which published its final report in February 1997; and the
Aviation Security Advisory Committee ("ASAC"), a committee of government,
industry, and consumer advocacy representatives that issued its recommendations
in December 1996. Each of these groups has considered issues that have ranged
from the fundamental structure of, and sharing of responsibilities relating to,
aviation security to specific near-term measures that could be implemented to
improve aviation security.
The Gore Commission, included the heads of various federal agencies and was
charged with making recommendations as to how the partnership between the U.S.
government and industry participants can achieve improved aviation security. The
Gore Commission issued its final report in February 1997 and included among its
recommendations:
(1) development of uniform performance standards for the selection,
training and certification of pre-departure screening companies;
(2) implementation of procedures for matching of passengers and checked
baggage on a nationwide basis no later than December 31, 1997;
(3) the continued development and implementation of an automated
passenger profiling system; and
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<PAGE> 36
(4) utilization of U.S. Customs Service personnel and computer systems
to complement the efforts of the FAA and other federal agencies.
On February 12, 1998, Transportation Secretary Rodney Slater presented Vice
President Gore with a one year status report on the progress of the
implementation of the recommendations of the Gore Commission. With regard to
development of uniform standards for the selection, training, and certification
of pre-departure screening companies, the FAA issued an Advance Notice of
Proposed Rulemaking ("ANPRM") on March 17, 1997 to solicit comments on
certification of screening companies. The FAA announced the withdrawal of this
ANPRM in the May 13, 1998 Federal Register. The FAA noted that uniform screener
performance standards will be a key component of the rule regarding
certification of screener companies and that an automated screener testing
system is currently in the development and testing process. The FAA decided to
withdraw the ANPRM before proceeding with any rulemaking until the automated
system has been adequately field tested and evaluated. This automated system,
called Threat Image Projection ("TIP"), is installed onto existing X-ray
machines and is used to project artificial threat images onto X-ray screens.
Screeners' ability to detect these images is then used to evaluate individual
performance and identify areas for additional training. The TIP system is a
component of the Screener Proficiency Evaluation and Reporting System, a system
that the FAA has been working with airlines to deploy, which aims to improve the
training and monitoring of skills of screeners through computer-based training
aids. Regarding implementation of bag match and automated profiling systems, the
FAA has developed an automated passenger profiling system referred to as
Computer Assisted Passenger Screening ("CAPS"). By September 1998, five major
airlines and many regional carriers had voluntarily implemented the CAPS system.
Both CAPS and manual passenger screening systems are being used in the passenger
bag match system, to select passengers' luggage which will either be examined by
explosives detection systems or will not be allowed to be transported unless a
passenger is on the flight. As the airlines voluntarily implement the CAPS
program, the FAA is expected to initiate rulemaking proceedings to require the
use of the automated screening program. The FAA expects to issue a notice of
proposed rulemaking in the near future, dealing with the requirements for the
use of CAPS in conjunction with bag matching and screening by explosive
detection systems. Lastly, the U.S. Customs Service is deploying personnel to
assist aviation security efforts and is working to evaluate, select and deploy
high technology cargo and baggage screening equipment.
FAA regulations require pre-departure screeners and their supervisors to
undergo a 10-year criminal and employment background check and a five-year
employment verification, and a fingerprint based criminal record background
check if warranted, with the employer required to maintain records of these
investigations throughout the term of employment. Airport operations and air
carriers are required to audit employment history investigations. The Company
believes that it complies with these standards.
The 1996 Act required that the FAA conduct a study and report to Congress
on whether to transfer certain responsibilities of air carriers to either
airport authorities or to the federal government or whether to provide for some
other sharing of current responsibilities. This report has not yet been issued
by the FAA. However, the Company believes that the FAA is likely to follow the
final recommendation released by the Gore Commission, as described above. The
1996 Act directed the FAA to "certify" companies that provide pre-departure
screening, continue to assist air carriers in developing computer-assisted
passenger profiling programs, assess programs for matching of passengers and
checked baggage that are currently being utilized in the industry on a test
basis, and report on changes to enhance and supplement the screening and
inspection of cargo and mail shipments.
The Company cannot accurately predict the outcome of these or any future
aviation security initiatives. However, any such initiatives could have an
adverse effect on the Company.
Other Applicable Regulations. In many European airports in which the
Company operates, a license is required from the airport authority in order to
perform services at the airport. Some airport authorities limit the number of
licenses they issue. The Company is also required to maintain various licenses
and permits from state and local government authorities in order to provide
commercial security, shuttle bus and certain other services.
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<PAGE> 37
RISK MANAGEMENT AND SAFETY
Because the Company's business is labor intensive, workers' compensation is
a significant operating expense for the Company in the United States. In
addition, the Company is exposed to possible claims by its clients' customers or
employees, alleging discrimination or harassment by the Company's employees. The
Company is also exposed to liability for the acts or negligence of its employees
who cause personal injury or damage while on assignment, as well as claims of
misuse of client proprietary information or theft of client property. The
Company has adopted policies and procedures intended to reduce its exposure to
these risks.
The Company maintains insurance against these risks with policy limits it
considers sufficient, subject to self insurance of $250,000 per incident and an
aggregate stop-loss. In addition, the Company maintains aviation liability
insurance of $500 million per incident. The Company establishes reserves in its
financial statements for the estimated costs of pending claims as well as the
estimated costs of incurred but not yet reported claims. The reserve for these
unreported claims is based on prior experience. The Company's reserves are
periodically revised, as necessary, based on developments related to pending
claims. The Company's reserve for workers' compensation and automobile claims
was $4.9 million as of September 30, 1998.
The Company's risk management specialist, with the assistance of the
Company's regional managers, is responsible for claims management and the
establishment of appropriate reserves for the portion of claims not covered by
insurance. The Company has a risk allocation program which provides local
managers with financial incentives to improve safety performance by decreasing
the number of workplace accidents. The Company has quarterly safety committee
meetings with its local managers and field employees, conducts defensive driving
training sessions for its transportation employees, conducts routine safety
inspections of local work sites and instructs personnel in proper lifting
techniques in an effort to reduce the number of preventable accidents.
LITIGATION
From time to time, the Company is involved in routine legal proceedings
incidental to the conduct of its business. In the opinion of management, the
litigation, individually or in the aggregate, to which the Company is currently
a party, is not likely to have a material adverse effect on the Company's
results of operations or financial condition.
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<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The Company's executive officers, directors and key employees are as
follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS: AGE POSITION
--------------------------------- --- --------
<S> <C> <C>
Frank A. Argenbright, Jr. ......... 50 Chairman and Co-Chief Executive Officer
Edwin R. Mellett................... 59 Vice Chairman and Co-Chief Executive
Officer
Thomas J. Marano................... 48 President and Chief Operating
Officer -- U.S.
Ernest Patterson................... 51 Chief Executive -- Europe
David L. Gamsey.................... 41 Chief Financial Officer
Edwin C. "Skip" Gage............... 57 President -- Gage Marketing Support
Services and Director
Robert McCullough(1)(2)............ 56 Director
Hamish Leslie Melville(1)(2)....... 53 Director
KEY EMPLOYEES:
- -------------
Henry F. Anthony................... 46 Vice President of Human
Resources -- U.S.
Nicholas G. Bailey................. 47 Finance Director -- Europe
L. Celeste Bottorff................ 45 Vice President of Marketing and
Strategic Planning -- U.S.
Nigel D.J. Cotton.................. 45 Human Resources Director -- Europe
Daniel E. DiGiusto................. 46 Senior Vice President of Field
Operations -- U.S.
Barry J. Jenkins................... 36 Vice President of Finance -- U.S.
Larry G. Parrotte.................. 38 Senior Vice President of Field
Operations -- U.S.
John Rollo......................... 54 Managing Director -- Germany
Mark T. Ryall...................... 38 Vice President and Chief Information
Officer -- U.S.
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Mr. Argenbright founded the Company in 1979 and has been its Chairman and
Chief Executive Officer since that time. Mr. Argenbright graduated from the
Owner/President Management Program at Harvard Business School in 1991.
Mr. Mellett has been Vice Chairman and Co-Chief Executive Officer of the
Company since December 1994 and served on the Company's Advisory Board during
1994. From 1993 to 1994, he was a consultant and private investor. From 1984 to
1992, Mr. Mellett was Senior Vice President of The Coca-Cola Company, serving
also as President of Coca-Cola Northern Europe from 1990 to 1992 and President
of Coca-Cola USA from 1986 to 1988. From 1972 to 1984, Mr. Mellett was President
of the Food Services Division of PepsiCo.
Mr. Marano has been President and Chief Operating Officer -- U.S., since
July 1995. From 1990 to June 1995, Mr. Marano was Vice President and a Global
Customer Director for The Coca-Cola Company, and from 1986 to 1990, he was Vice
President of U.S. Sales, Fountain Division, of The Coca-Cola Company. From 1985
to 1986, Mr. Marano was Vice President of U.S. Sales of Apple Computer.
Mr. Patterson has been Chief Executive -- Europe since June 1997. From 1996
to 1997, Mr. Patterson was the Group Chief Executive Officer for National
Express Group PLC. From 1990 to 1996, he was the Chief Executive Officer,
Worldwide Distribution Services for B.E.T. PLC, and from 1985 to 1990, he was
the Managing Director of a foreign subsidiary of B.E.T. PLC.
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<PAGE> 39
Mr. Gamsey has been Chief Financial Officer of the Company since September
1995. From 1988 to September 1995, Mr. Gamsey was a Managing Director of
Investment Banking of Price Waterhouse LLP. From 1987 to 1988, Mr. Gamsey was
Chief Financial Officer of Visiontech, Inc., and from 1979 to 1987, Mr. Gamsey
was a Senior Audit Manager for Arthur Andersen LLP. Mr. Gamsey is a Certified
Public Accountant.
Mr. Gage has been a director of the Company since July 1998. He has been
President of Gage Marketing Group since he formed it in January 1992. Prior
thereto, Mr. Gage served in various capacities at Carlson Companies Inc. from
1977 to 1992, most recently as President and Chief Executive Officer of Carlson
Companies Inc. Mr. Gage is a member of the Board of Directors of Fingerhut
Corporation, SuperValu and Kellogg School of Management, Northwestern
University.
Mr. McCullough has been a director of the Company since consummation of its
initial public offering in March 1997. Mr. McCullough has been Chief Financial
Officer and member of the Board of Directors of AMVESCAP PLC (formerly AMVESCO
PLC and INVESCO PLC) since April 1996. He was a partner for Arthur Andersen LLP
from 1974 until April 1996.
Mr. Melville has been a director of the Company since consummation of its
initial public offering in March 1997. Mr. Melville has been a Managing Director
of Credit Suisse First Boston (Europe) Ltd. since June 1998 and, prior thereto,
was Chairman of Scottish Woodlands Limited from 1992 to June 1998. He was
Chairman of Dunedin Fund Managers Limited from 1992 to 1995, Chairman and Chief
Executive Officer of Capel Cure Myers Capital Management from 1988 to 1991 and
Founder and Chief Executive of Enskilda Securities from 1982 to 1987. Mr.
Melville is a director of Fleming Mercantile Investment Trust PLC, Mithras
Investment Trust PLC, Old Mutual South Africa Trust plc, Persimmon plc and the
Scottish Investment Trust PLC.
Mr. Anthony has been Vice President of Human Resources - U.S. since January
1996. From 1993 to 1995, Mr. Anthony was Vice President of Human Resources of
National Linen Service. From 1989 to 1993, Mr. Anthony was Vice President of
Human Resources for BET Plant Services, Inc.
Mr. Bailey has been Finance Director -- Europe since May 1995. From January
1994 to April 1995, he worked in Kazakhstan establishing the financial
operations for Tengizchevroil, a joint venture between the Government of
Kazakhstan and Chevron Petroleum. From 1992 to 1993, Mr. Bailey was an
independent consultant to the airline industry. Prior thereto, Mr. Bailey held a
number of positions in the airline industry. Mr. Bailey is a Chartered
Accountant.
Ms. Bottorff has been Vice President of Marketing and Strategic
Planning -- U.S. since September 1996. From 1994 to 1996, Ms. Bottorff was
Marketing Director of The Atlanta Journal-Constitution. From 1990 to 1994, Ms.
Bottorff was Director of Strategic Planning of Holiday Inn Worldwide. From 1987
to 1990, she was Manager of Field Planning for The Coca-Cola Company and, from
1983 to 1987, she was an Engagement Manager for McKinsey & Co., Inc.
Mr. Cotton has been Human Resources Director -- Europe since August 1993.
From 1989 to 1992, he was Head of Human Resources -- United Kingdom for Ericsson
plc and, during 1988, he was a Personnel Manager with British Airways. Prior
thereto, he was employed by British Caledonian Airways.
Mr. DiGiusto has been Senior Vice President of Field Operations -- U.S.
since 1989. From 1974 to 1989, Mr. DiGiusto was employed by Burns International
Security, most recently as its Northeast Division Vice President.
Mr. Jenkins has been Vice President of Finance -- U.S. since May 1997. From
1984 to 1997, he was a Senior Audit Manager with Price Waterhouse LLP. Mr.
Jenkins is a Certified Public Accountant.
Mr. Parrotte has been Senior Vice President of Field Operations -- U.S.
since 1997. From 1992 to 1997, he was Regional Vice President of the Company's
mid-Atlantic area operations. Prior thereto, he was a regional manager with
Burns International Security.
39
<PAGE> 40
Mr. Rollo has been Managing Director -- Germany since December 1998. From
1996 to November 1998, he was general manager of Blockbuster -- Germany. From
1980 to 1996, he held various positions with Grand Metropolitan, PLC's Burger
King division in Europe.
Mr. Ryall has been Vice President and Chief Information Officer -- U.S.
since April 1997. From 1990 to 1997, he was Group Manager of Ryder System, Inc.
From 1983 to 1990, he was a manager for Andersen Consulting.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's common stock as of December 30, 1998 and
as adjusted to reflect the sale of shares offered in this prospectus: (1) by
each person known to the Company to beneficially own more than five percent of
the outstanding common stock; (2) by each selling shareholder; (3) by each
executive officer and director of the Company; and (4) by all executive officers
and directors of the Company as a group. Unless otherwise indicated, the
business address of each person listed is c/o AHL Services, Inc., 3353 Peachtree
Road, NE, Suite 1120, North Tower, Atlanta, Georgia 30326.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING NUMBER OF AFTER OFFERING
----------------------- SHARES ----------------------
NAME NUMBER PERCENT(1) BEING OFFERED NUMBER PERCENT(1)
- ---- ---------- ---------- ---------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Frank A. Argenbright, Jr.(2)....... 7,937,500 56.1% -- 7,937,500 45.6%
Edwin R. Mellett(3)................ 311,875 2.2 -- 311,875 1.8
Thomas J. Marano(3)................ 177,500 * -- 177,500 *
Ernest Patterson(3)................ 37,500 * -- 37,500 *
David L. Gamsey(3)................. 43,500 * -- 43,500 *
Edwin C. "Skip" Gage(4)............ 461,172 3.3 244,430 216,742 1.2
Robert McCullough(5)............... 3,500 * -- 3,500 *
Hamish Leslie Melville(5).......... 17,225 * -- 17,225 *
Tapir Investments (Bahamas)
Ltd.(6).......................... 1,102,000 7.8 -- 1,102,000 6.3
All executive officers and
directors as a group (8
persons)(7)...................... 8,989,772 61.0 244,430 8,745,342 48.6
</TABLE>
- ---------------
* Less than 1.0%.
(1) Applicable percentages of ownership prior to the offering are based on
14,119,922 shares of common stock outstanding on December 30, 1998, adjusted
as required by rules promulgated by the SEC. Applicable percentages of
ownership after the offering are based on 17,375,492 shares of common stock
outstanding. This table is based upon information supplied by executive
officers, directors and principal shareholders, and Schedules 13D and 13G
(if any) filed with the SEC. Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, the
Company believes that each of the shareholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Any shares that any person named above has the right to
acquire within 60 days are deemed to be outstanding for purposes of
calculating the percentage ownership of such person, but are not deemed to
be outstanding for purposes of calculating the ownership percentage of any
other person.
(2) Includes (a) 633,660 shares beneficially owned by Argenbright Partners,
L.P., of which a limited liability company managed by Mr. Argenbright and
his spouse is the general partner, (b) 241,800 shares owned by a charitable
trust, of which Mr. Argenbright is sole trustee, (c) 2,500 shares owned by
Mr. Argenbright's spouse and (d) 37,500 shares issuable pursuant to
exercisable options.
(3) Represents shares of common stock issuable pursuant to exercisable options.
(4) Represents shares owned by Gage Marketing Services LLC, which is controlled
by Mr. Gage.
(5) Includes 2,500 shares issuable pursuant to exercisable options.
40
<PAGE> 41
(6) The address of Tapir Investments (Bahamas) Ltd. is Sandringham House, 83
Shirley Street, P. O. Box N-3247, Nassau, Bahamas. The information in the
table is based on a Schedule 13D dated December 16, 1998 that has been filed
with the SEC.
(7) Includes 612,875 shares issuable pursuant to exercisable options.
Mr. Argenbright and a trust controlled by Mr. Argenbright have granted to
the underwriters an option to purchase up to 200,000 shares of common stock to
cover over-allotments incurred in this offering. Mr. Mellett has granted to the
underwriters an option to purchase up to 80,000 shares of common stock to cover
over-allotments incurred in this offering. If the underwriters exercise such
options in full, Messrs. Argenbright and Mellett will beneficially own after the
offering 7,737,500 and 231,875 shares, respectively, representing 43.7% and
1.3%, respectively, of the outstanding shares of common stock.
41
<PAGE> 42
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof each underwriter named below has severally agreed to
purchase, and AHLS and the selling shareholder named herein have agreed to sell
to such underwriter, the number of shares set forth opposite the name of such
underwriter.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Salomon Smith Barney Inc.................................... 750,000
BT Alex. Brown Incorporated................................. 750,000
Credit Suisse First Boston Corporation...................... 750,000
The Robinson-Humphrey Company, LLC.......................... 750,000
Goldman, Sachs & Co......................................... 80,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 80,000
NationsBanc Montgomery Securities LLC....................... 80,000
Prudential Securities Incorporated.......................... 80,000
Gerard Klauer Mattison & Co., Inc........................... 60,000
Suntrust Equitable Securities Corporation................... 60,000
Wheat First Securities, Inc................................. 60,000
---------
Total............................................. 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., BT Alex. Brown
Incorporated, Credit Suisse First Boston Corporation and The Robinson-Humphrey
Company, LLC are acting as representatives, propose to offer some of the shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the shares to certain dealers at the public
offering price less a concession not in excess of $0.88 per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per share on sales to certain other dealers. After the initial offering
of the shares to the public, the public offering price and such concession may
be changed by the representatives.
AHLS and certain shareholders named in this prospectus have granted to the
underwriters an option exercisable for 30 days from the date of this prospectus,
to purchase up to 525,000 additional shares of common stock at the public
offering price less the underwriting discount. The underwriters may exercise
such option solely for the purpose of covering over-allotments, if any, in
connection with this offering. To the extent such option is exercised, each
underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares approximately proportionate to such underwriter's
initial purchase commitment.
AHLS, its executive officers and directors and the selling shareholders
have agreed that, for a period of 60 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc., offer,
sell, contract to sell, or otherwise dispose of, any shares of common stock of
AHLS or any securities convertible into, or exercisable or exchangeable for,
common stock. Salomon Smith Barney Inc., in its sole discretion, may release any
of the securities subject to these lock-up agreements at any time without
notice.
The common stock is quoted on the Nasdaq National Market under the symbol
"AHLS."
42
<PAGE> 43
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by AHLS and the selling shareholders in connection with
this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.
<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY AHLS SHAREHOLDER(S)
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share....................................... $ 1.47 $ 1.47 $ 1.47 $ 1.47
Total........................................... $4,785,688 $5,145,838 $359,312 $770,912
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Salomon Smith Barney Inc., in covering syndicate
short positions or making stabilizing purchases, repurchases shares originally
sold by that syndicate member. These activities may cause the price of the
common stock to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
on the Nasdaq National Market or in the over-the-counter market, or otherwise
and, if commenced, may be discontinued at any time.
Certain of the representatives have performed certain investment banking
and advisory services for AHLS from time to time for which they have received
customary fees and expenses. The representatives may, from time to time, engage
in transactions with and perform services for AHLS in the ordinary course of
their business.
AHLS and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of any of those liabilities.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by King & Spalding, Atlanta, Georgia. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Dewey
Ballantine LLP, New York, New York.
EXPERTS
The audited financial statements of AHL Services, Inc. and Gage Marketing
Support Services incorporated by reference in this prospectus and elsewhere in
the registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports. The audited financial statements
of EMD Gesellschaft fur Elektroinstallation-und Maschinenbau-Dienstleistungen
GmbH incorporated by reference in this prospectus and elsewhere in the
registration statement have been audited by Price Waterhouse GmbH, independent
public accountants as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
WHERE YOU CAN FIND MORE INFORMATION
AHLS files annual, quarterly and current reports, proxy statements and
other information with the SEC. You may read and copy the reports, statements or
other information we file at the SEC's public reference room in Washington, D.C.
located at 450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also
maintains regional offices where you can read and copy the reports. These are
located at 500 West Madison Street, Room 1400, Chicago, Illinois 60606 and at 7
World Trade Center, Suite 1300, New York, New York
43
<PAGE> 44
10048. You can request copies of these documents, upon payment of photocopying
fees, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings are
also available to the public on the SEC's internet site (http://www.sec.gov).
These documents are also available for viewing and copying at the offices of The
Nasdaq Stock Market, Inc. at 1735 K Street, NW, Washington, D.C. 20006-1506.
This prospectus is part of a registration statement on Form S-3 that we
filed with the SEC. This prospectus does not contain all the information in that
registration statement. For further information with respect to the Company and
the securities offered by this prospectus, you should review the registration
statement. You can obtain the registration statement from the SEC and The Nasdaq
Stock Market at the public reference facilities we referred to above.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information contained directly in this prospectus.
This prospectus incorporates by reference the documents set forth below that
AHLS has previously filed with the SEC. These documents contain important
information about AHLS and its financial condition.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that is also incorporated or deemed
to be incorporated by reference herein, modifies or supersedes the earlier
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.
The following documents are incorporated by reference into this prospectus:
<TABLE>
<CAPTION>
FILING PERIOD
- ------ ------
<S> <C>
Annual Report on Form 10-K................................. Year Ended December 31, 1997
Quarterly Report on Form 10-Q.............................. Quarter Ended March 31, 1998
Quarterly Report on Form 10-Q.............................. Quarter Ended June 30, 1998
Quarterly Report on Form 10-Q.............................. Quarter Ended September 30, 1998
Current Report on Form 8-K (relating to the
SES Staffing Solutions acquisition)...................... Dated February 6, 1998
Current Reports on Form 8-K and 8-K/A (relating to the
Gage acquisition)........................................ Dated July 24, 1998
Current Reports on Form 8-K and 8-K/A (relating to the
EMD acquisition)......................................... Dated July 31, 1998
The description of common stock included in the Company's
registration statement on Form 8-A....................... Dated March 3, 1997
</TABLE>
All documents filed by AHLS pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the date of this prospectus
will be deemed to be incorporated by reference into this prospectus and to be a
part hereof from the date of filing of such documents.
Documents incorporated by reference are available from AHLS without charge,
excluding all exhibits unless specifically incorporated by reference as an
exhibit to this prospectus. Prospective investors may obtain documents
incorporated by reference in this prospectus by requesting them in writing or by
telephone from the Company at its executive offices.
44
<PAGE> 45
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements (the "Pro Forma
Financial Statements") are based on the historical financial statements of the
Company, Gage and EMD for the year ended December 31, 1997 and for the nine
months ended September 30, 1998, adjusted to give effect to the acquisitions of
Gage and EMD (collectively, the "Recent Acquisitions"). The Pro Forma Statements
of Operations give effect to the Recent Acquisitions as if each had occurred on
the first day of each period presented.
The Pro Forma Financial Statements do not purport to represent what the
Company's results of operations would actually have been had such transactions
actually occurred on any of the dates set forth above or to project the
Company's results of operations for any future period. These statements are
qualified in their entirety by, and should be read in conjunction with, the
historical financial statements of the Company, Gage and EMD and the notes
thereto incorporated by reference in this prospectus.
The Recent Acquisitions were accounted for under the purchase method of
accounting. The total purchase price for these acquisitions has been allocated
to tangible and identifiable intangible assets and liabilities based upon their
fair values on the date of the acquisitions with the excess of cost over net
assets acquired allocated to goodwill. Each of the allocations of the purchase
price for these acquisitions is subject to revision when additional information
concerning asset and liability valuations is obtained. In management's opinion,
the asset and liability valuation for these acquisitions will not be materially
different from the pro forma financial information presented herein.
The Pro Forma Financial Statements give effect only to the adjustments set
forth in the accompanying notes and do not reflect any other benefits
anticipated by management as a result of the Recent Acquisitions and the
implementation of the Company's business strategy.
F-1
<PAGE> 46
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AHLS GAGE EMD ADJUSTMENTS TOTAL
-------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................... $276,013 $81,318 $49,803 $ -- $407,134
-------- ------- ------- ------- --------
Operating expenses:
Cost of services......................... 204,512 37,892 35,919 -- 278,323
Field operating.......................... 45,956 33,941 7,857 2,157(1)
(1,688)(2) 88,223
Corporate general and administrative..... 14,840 5,479 1,017 -- 21,336
-------- ------- ------- ------- --------
Total operating expenses......... 265,308 77,312 44,793 469 387,882
-------- ------- ------- ------- --------
Operating income........................... 10,705 4,006 5,010 (469) 19,252
Interest (income) expense, net............. 1,159 624 (78) 5,300(3) 7,005
Other (income) expense, net................ (723) 336 (226) -- (613)
-------- ------- ------- ------- --------
Income before income taxes and
extraordinary charges.................... 10,269 3,046 5,314 (5,769) 12,860
Income tax provision....................... 3,850 -- 2,332 (1,218)(4) 4,964
-------- ------- ------- ------- --------
Income before extraordinary charges........ 6,419 3,046 2,982 (4,551) 7,896
Extraordinary charges...................... (385) -- -- -- (385)
-------- ------- ------- ------- --------
Net income................................. $ 6,034 $ 3,046 $ 2,982 $(4,551) $ 7,511
-------- ------- ------- ------- --------
Diluted earnings per share:
Number of shares......................... 10,960 461(5) 11,421
======== ======= ========
Earnings per share....................... $ 0.55 $ 0.66
======== ========
</TABLE>
F-2
<PAGE> 47
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AHLS GAGE(6) EMD(7) ADJUSTMENTS TOTAL
-------- ------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................... $319,184 $47,715 $31,052 $ -- $397,951
-------- ------- ------- ------- --------
Operating expenses:
Cost of services......................... 230,102 21,977 22,311 -- 274,390
Field operating.......................... 59,054 19,924 4,746 1,262(1)
(987)(2) 83,999
Corporate general and administrative..... 13,905 3,687 595 -- 18,187
-------- ------- ------- ------- --------
Total operating expenses......... 303,061 45,588 27,652 275 376,576
-------- ------- ------- ------- --------
Operating income........................... 16,123 2,127 3,400 (275) 21,375
Interest (income) expense, net............. 1,686 137 (27) 3,316(3) 5,112
Other (income) expense, net................ (292) 14 (1) -- (279)
-------- ------- ------- ------- --------
Income before income taxes................. 14,729 1,976 3,428 (3,591) 16,542
Income tax provision....................... 5,971 -- 1,512 (721)(4) 6,762
-------- ------- ------- ------- --------
Net income................................. $ 8,758 $ 1,976 $ 1,916 $(2,870) $ 9,780
======== ======= ======= ======= ========
Diluted earnings per share:
Number of shares......................... 14,304 345(5) 14,649
======== ======= ========
Earnings per share....................... $ 0.61 $ 0.67
======== ========
</TABLE>
F-3
<PAGE> 48
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(1) Reflects additional amortization of intangible assets, primarily goodwill,
over estimated useful lives of 20 to 40 years.
(2) Reflects change in depreciation and amortization as a result of the
allocation of the purchase price to the estimated fair value of net assets
acquired.
(3) Reflects interest expense on the increase in the Company's Credit Facility
at an annual rate of 6.2% for the Gage acquisition and 5% for the EMD
acquisition and interest expense on the convertible subordinated debenture
issued in the Gage acquisition at an annual rate of 4.5%. The lower interest
rate for the EMD acquisition is due to the borrowings being in the acquired
company's foreign currency.
(4) Reflects effect of income taxes at 40% on Gage income, net of pro forma
adjustments, and at 44% on EMD income, net of pro forma adjustments.
(5) Weighted average common shares outstanding assumes that the 461,172 shares
of AHLS common stock issued as part of the Gage acquisition purchase price
were issued at the beginning of the respective periods.
(6) Includes the results of operations for Gage for the period from January 1,
1998 through July 24, 1998.
(7) Includes the results of operations for EMD for the period from January 1,
1998 through July 31, 1998.
F-4
<PAGE> 49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
AHL SERVICES, INC.
COMMON STOCK
(AHL SERVICES, INC. LOGO)
------------
PROSPECTUS
JANUARY 25, 1999
------------
SALOMON SMITH BARNEY BT ALEX. BROWN
CREDIT SUISSE FIRST BOSTON
THE ROBINSON-HUMPHREY COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
