<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to______
Commission File No. 0-22195
AHL SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-2277249
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3353 Peachtree Road, NE, Atlanta, GA 30326
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (404) 267-2222
--------------
Not Applicable
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 17,408,767 shares on November
10, 1999.
<PAGE> 2
AHL SERVICES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of Operations (Unaudited)
Nine Months Ended September 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II OTHER INFORMATION AND SIGNATURE
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
AHL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,753 $ 18,239
Accounts receivable, less allowance for doubtful accounts
of $2,920 and $1,952 in 1999 and 1998, respectively 158,433 103,570
Reimbursable customer expenses 14,384 4,184
Work-in-process 14,579 4,711
Uniforms in service, net 2,935 2,457
Prepaid expenses and other 8,645 6,086
Deferred income taxes 487 563
--------- --------
Total current assets 218,216 139,810
Property and equipment, net 33,047 26,489
Intangibles, net 281,358 193,196
Other assets 838 1,051
--------- --------
$ 533,459 $360,546
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 19,939 $ 16,159
Accrued payroll and other current liabilities 64,925 58,654
Current portion of self-insurance reserves 1,270 980
Income taxes payable 6,250 3,046
Current portion of long-term debt 279 388
--------- --------
Total current liabilities 92,663 79,227
--------- --------
Long-term debt, less current portion 216,417 169,338
--------- --------
Self-insurance reserves, less current portion 5,080 3,920
--------- --------
Deferred income taxes 1,835 1,139
--------- --------
Other non-current liabilities 772 1,234
--------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 17,408,767 and 14,119,922 shares issued and
outstanding, respectively 174 142
Preferred stock, no par value; 5,000,000 shares
authorized, no shares outstanding -- --
Foreign currency translation adjustment (1,586) 26
Paid-in capital 176,660 80,827
Retained earnings 41,444 24,693
--------- --------
Total shareholders' equity 216,692 105,688
--------- --------
$ 533,459 $360,546
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
<PAGE> 4
AHL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Revenues $ 217,357 $135,813
Cost of services 150,369 94,505
--------- --------
Gross margin 66,988 41,308
Operating expenses:
Field operating 40,300 25,687
Corporate, general and administrative 5,650 4,709
Depreciation and amortization 4,994 2,022
--------- --------
Operating income 16,044 8,890
Interest expense 3,425 1,472
Other (income) expense, net
(62) 7
--------- --------
Income before income taxes 12,681 7,411
Income tax provision 4,992 3,043
--------- --------
Net income $ 7,689 $ 4,368
========= ========
Earnings per share:
Net income per common and common equivalent share:
Basic $ 0.44 $ 0.31
========= ========
Diluted $ 0.43 $ 0.30
========= ========
Weighted average common and common equivalent shares:
Basic 17,406 13,958
========= ========
Diluted 18,040 14,579
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 5
AHL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Revenues $ 577,554 $ 319,184
Cost of services 401,932 230,102
--------- ---------
Gross margin 175,622 89,082
Operating expenses:
Field operating 112,431 53,786
Corporate, general and administrative 15,352 13,478
Depreciation and amortization 13,295 5,695
--------- ---------
Operating income 34,544 16,123
Interest expense 7,790 1,686
Other income, net (427) (292)
--------- ---------
Income before income taxes 27,181 14,729
Income tax provision 10,430 5,971
--------- ---------
Net income $ 16,751 $ 8,758
========= =========
Earnings per share:
Net income per common and common equivalent share:
Basic $ 0.98 $ 0.64
========= =========
Diluted $ 0.95 $ 0.61
========= =========
Weighted average common and common equivalent shares:
Basic 17,093 13,726
========= =========
Diluted 17,697 14,304
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 6
AHL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,751 $ 8,758
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 13,295 5,695
Gain on sales of property and equipment (418) (297)
Changes in current assets and liabilities, net of assets of acquired
businesses (66,163) (19,613)
--------- ---------
Net cash used in operating activities (36,535) (5,457)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (96,580) (125,002)
Purchases of property and equipment (9,486) (7,603)
Proceeds from sales of property and equipment 1,490 1,654
Other activities, net (264) (86)
--------- ---------
Net cash used in investing activities (104,840) (131,037)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of credit facility (189,069) (64,038)
Borrowings under credit facility 250,290 196,700
Repayment of subordinated convertible debenture (10,000) --
Repayment of capital lease obligations (4,006) --
Repayment of long-term debt, net -- (423)
Proceeds from exercise of stock options 344 108
Net proceeds from follow-on offering 96,171 --
Other (589) --
--------- ---------
Net cash provided by financing activities 143,141 132,347
--------- ---------
Effect of exchange rates on cash and cash equivalents (1,252) 16
--------- ---------
Net change in cash and cash equivalents 514 (4,131)
Cash and cash equivalents at beginning of period 18,239 15,456
--------- ---------
Cash and cash equivalents at end of period $ 18,753 $ 11,325
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest $ 7,748 $ 938
========= =========
Income taxes $ 7,266 $ 4,131
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Long-term seller note payable issued for the Draefern acquisition $ 6,000 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 7
AHL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. SUMMARY OF PRESENTATION - The condensed consolidated financial
statements included herein have been prepared by AHL Services, Inc.
("AHL" or the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information not misleading. In the opinion of
management, the condensed consolidated financial statements contain all
adjustments necessary to present fairly the financial position of the
Company as of September 30, 1999, the results of its operations for the
three and nine months ended September 30, 1999 and 1998 and the results
of its cash flows for the nine months ended September 30, 1999 and
1998. All such adjustments are of a normal recurring nature. The
results of operations for the three and nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for
the year ended December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto for the year
ended December 31, 1998 included in the Company's annual report on Form
10-K for such period.
2. ACQUISITIONS AND DIVESTITURES - On December 28, 1998, the Company
acquired Unicco Security Services, Inc. ("Unicco"), a subsidiary of
USC, Inc., for $12 million in cash. Unicco is an access control and
security services company operating under long-term contracts with a
geographic focus primarily in the northeastern United States and
Chicago. Unicco had annual revenues of over $50 million in 1998.
On April 30, 1999, the Company acquired Professional Inventory
Management and Merchandising Services Corporation ("PIMMS") for $65
million in cash plus potential contingent consideration. PIMMS is
headquartered in Minneapolis and provides outsourced in-market
merchandising services to major consumer product manufacturers and
large retail chains. PIMMS had annual revenues of over $40 million in
1998.
On April 30, 1999, AHL also acquired MM Zeitarbeit GmbH ("MM"), a
German operational support staffing services provider, for $1.75
million in cash. MM provides outsourced light industrial services in
the Bavaria region of Germany, operating within the same geographic
region as TUJA, a light industrial services company acquired by AHL
during 1998. Combined with the TUJA operations, MM creates greater
density for AHL within the Bavaria region, and creates a broader base
of clients for future growth. MM's 1998 revenues were over $3 million.
On June 30, 1999, the Company acquired Excel Resourcing Limited
("Excel"), an industrial staffing company in the UK, for $3 million in
cash. Excel had annual revenues of over $7 million in 1998.
On June 30, 1999, the Company sold its UK bus transportation business
to National Express Group, PLC. The shuttle bus business generated
approximately $6 million in 1998 revenues. This divestiture allowed AHL
to retire approximately $4 million in capital lease obligations.
5
<PAGE> 8
On July 27, 1999, the Company acquired Draefern Holdings, PLC
("Draefern"), an industrial staffing company in the U.K., for $18
million in cash and a seller note payable issued for $6 million plus
potential contingent consideration. Draefern had trailing twelve-month
revenues of approximately $30 million.
The results of operations of these acquisitions have been included in
the attached condensed consolidated financial statements included
herein since the applicable date of acquisition. These acquisitions
were accounted for using the purchase method of accounting. As a
result, the purchase prices have been allocated to the assets acquired,
including intangibles, based on their respective fair values. The
purchase price allocations are preliminary and subject to adjustment.
3. ACQUISITIONS SUBSEQUENT TO QUARTER END - On September 30, 1999,
subsequent to the quarter end of the Company's U.S. operations
(September 24, 1999), the Company acquired Continental Data, Inc.
("CDI"), a promotional fulfillment services company, for $5.2 million
in cash. CDI had annual revenues of approximately $4.4 million in 1998.
On October 1, 1999, the Company acquired Total Work Services, Ltd.
(d/b/a Jobspot) ("Jobspot"), a light industrial staffing company in the
UK, for $3.9 million in cash. The acquisition of Jobspot will add
density to the Company's existing business in Southeast England which
operates as Right Associates. Jobspot had annual revenues of over $6
million in 1998.
On November 3, 1999, AHL acquired BMP, a German outsourced labor
services company, for $2.7 million in cash. BMP provides outsourced
skilled industrial services such as electricians and welders through
four branch offices in Hanover, Germany, the same area where AHL
already has a substantial industrial staffing operation. BMP creates a
broader base of clients for future growth, enhances AHL's local
operational efficiency and builds density. BMP had annual revenues of
over $5 million in 1998.
4. BUSINESS SEGMENT INFORMATION - The following table presents information
regarding the Company's operating segments (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
Operating Operating
Revenues Income Revenues Income
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
1999
- ----
Aviation services $ 54,678 $ 4,854 $151,889 $ 11,706
Facility services 56,362 4,687 171,021 12,417
Operational services 64,163 7,546 146,127 14,468
Marketing execution and fulfillment services 42,154 4,607 108,517 11,305
Corporate and other -- (5,650) -- (15,352)
-------- --------- -------- --------
$217,357 $ 16,044 $577,554 $ 34,544
======== ========= ======== ========
1998
- ----
Aviation services $ 48,441 $ 4,428 $135,280 $ 11,660
Facility services 35,842 3,211 102,032 9,010
Operational services 30,763 3,061 53,564 4,356
Marketing execution and fulfillment services 20,767 2,899 28,308 4,575
Corporate and other -- (4,709) -- (13,478)
-------- --------- -------- --------
$135,813 $ 8,890 $319,184 $ 16,123
======== ========= ======== ========
</TABLE>
6
<PAGE> 9
5. COMPREHENSIVE INCOME - Other comprehensive income includes only foreign
currency translation adjustments. The calculation of other
comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $7,689 $4,368 $ 16,751 $8,758
Other comprehensive
income (loss) 816 337 (1,612) 424
------ ------ -------- ------
Comprehensive income $8,505 $4,705 $ 15,139 $9,182
====== ====== ======== ======
</TABLE>
6. LEGAL MATTERS - As reported in the Quarterly Report on Form 10Q for the
quarter ended June 30, 1999, AHL learned that the U.S. Attorney's
Office for the Eastern District of Pennsylvania is investigating prior
recruiting and training practices and other matters at the Philadelphia
location of Argenbright Security, Inc. ("Argenbright Security"), a
subsidiary of the Company, and that Argenbright Security is a target of
this investigation. The Company believes that certain employees, who
have since been terminated, may have violated FAA regulations, as well
as Company policies and procedures in these matters. The FAA has
reviewed Argenbright Security's other major airport locations and has
not uncovered any similar issues. The Company has been informed that
the matters being investigated are limited to the operations of the
Philadelphia office, and the Company does not believe that the matters
under review represent a systemic problem. Since learning of the
issues, the Company has taken the necessary actions to ensure
compliance with all FAA regulations and Company policies and procedures
in Philadelphia. Additionally, management has reviewed this
investigation with the major clients of its Philadelphia operations and
the Company does not believe that this investigation has had any
adverse affect on its relationship with these clients.
The Company is cooperating with the U.S. Attorneys' Office in this
investigation and believes this investigation may be concluded in the
next several months. In the third quarter of 1999, the Company accrued
$500,000 to cover potential attorneys' fees and expenses associated
with this investigation. This expense was recorded in corporate,
general and administrative expenses in the accompanying condensed
consolidated statements of operations.
7
<PAGE> 10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATING RESULTS - THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Revenues
increased $81.6 million, or 60%, to $217.4 million for the third quarter of 1999
from $135.8 million in the third quarter of 1998. Third quarter 1999 revenues
included approximately $62.0 million attributable to acquisitions owned less
than one year and third quarter 1998 revenues included approximately $1.6
million attributable to the UK transportation business sold on June 30, 1999.
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 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 $55.9 million, or 59%, to $150.4 million for the
third quarter of 1999 from $94.5 million in the third quarter of 1998. As a
percentage of revenues, cost of services decreased to 69.2% for the third
quarter of 1999 from 69.6% in the third quarter of 1998. This decrease was
primarily due to the effect of the growth in revenues of the Company's higher
margin marketing execution and fulfillment services businesses.
Gross margin increased $25.7 million, or 62%, to $67.0 million for the third
quarter of 1999 from $41.3 million in the third quarter of 1998. As a percentage
of revenues, gross margin improved to 30.8% for the third quarter of 1999 from
30.4% in the third quarter of 1998.
Field operating expenses represent expenses which directly support field
operations, such as each district's management, facility expenses (such as rent,
communication costs and taxes), employee uniforms, equipment leasing,
maintenance, local sales and marketing activities. These expenses increased
$14.6 million, or 57%, to $40.3 million for the third quarter of 1999 from $25.7
million in the third quarter of 1998. As a percentage of revenues, field
operating expenses decreased slightly to 18.5% for the third quarter of 1999 as
compared to 18.9% for the third quarter of 1998.
Corporate, general and administrative expenses, which includes the cost of
services the Company provides to support and manage its field activities,
increased $941,000, or 20%, to $5.7 million for the third quarter of 1999 from
$4.7 million in the third quarter of 1998. As a percentage of revenues, these
expenses decreased to 2.6% for the third quarter of 1999 from 3.5% in the third
quarter of 1998. This percentage decrease was primarily due to better leveraging
of corporate personnel, offset by the special one-time charge of $500,000 in the
third quarter of 1999 related to potential legal fees and expenses associated
with the Philadelphia location of Argenbright Security, Inc. (See Note 6 to the
Condensed Consolidated Financial Statements).
Depreciation and amortization increased $3.0 million, or 147%, to $5.0 million
for the third quarter of 1999 from $2.0 million in the third quarter of 1998. As
a percentage of revenues, these expenses increased to 2.3% for the third quarter
of 1999 from 1.5% in the third quarter of 1998. The increase was primarily due
to the depreciation and amortization expense of acquisition related fixed and
intangible assets.
Operating income increased $7.1 million, or 81%, to $16.0 million for the third
quarter of 1999 from $8.9 million in the third quarter of 1998. As a percentage
of revenues, operating income improved to 7.4% for the third quarter of 1999
from 6.6% in the third quarter of 1998.
8
<PAGE> 11
Interest expense increased $1.9 million to $3.4 million for the third quarter of
1999 from $1.5 in the third quarter of 1998. Interest expense increased in 1999
due to the use of the Company's credit facility to fund acquisitions.
Income tax provision increased $2.0 million, or 64%, to $5.0 million for the
third quarter of 1999 from $3.0 million in the third quarter of 1998. The
Company provided income taxes at a rate of 39.4% in the third quarter of 1999
and 41.1% in the third quarter of 1998. The decrease in the effective tax rate
in 1999 as compared to 1998 is due to the change in business mix by country as a
result of acquisitions.
Net income increased $3.3 million, or 76%, to $7.7 million, or 3.5% of revenues,
for the third quarter of 1999 from net income of $4.4 million, or 3.2% of
revenues, in the third quarter of 1998.
OPERATING RESULTS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Revenues
increased $258.4 million, or 81%, to $577.6 million for the nine months ended
September 30, 1999 from $319.2 million for the nine months ended September 30,
1998. Revenues for the nine months ended September 30, 1999 included
approximately $199.4 million attributable to acquisitions owned less than one
year and third quarter 1998 revenues approximately $1.6 million attributable to
the UK transportation business sold on June 30, 1999. 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 increased $171.8 million, or 75%, to $401.9 million for the
nine months ended September 30, 1999 from $230.1 million for the nine months
ended September 30, 1998. As a percentage of revenues, cost of services
decreased to 69.6% for the nine months ended September 30, 1999 from 72.1% for
the nine months ended September 30, 1998. This decrease was primarily due to the
effect of the growth in revenues of the Company's higher margin marketing
execution and fulfillment services businesses.
Gross margin increased $86.5 million, or 97%, to $175.6 million for the nine
months ended September 30, 1999 from $89.1 million for the nine months ended
September 30, 1998. As a percentage of revenues, gross margin improved to 30.4%
for the nine months ended September 30, 1999 from 27.9% for the nine months
ended September 30, 1998.
Field operating expenses increased $58.6 million, or 109%, to $112.4 million for
the nine months ended September 30, 1999 from $53.8 million for the nine months
ended September 30, 1998. As a percentage of revenues, field operating expenses
increased to 19.5% for the nine months ended September 30, 1999 from 16.9% for
the nine months ended September 30, 1998. This percentage increase was primarily
attributable to the facility expenses of the Company's acquisitions in the
marketing execution and fulfillment services segment.
Corporate, general and administrative expenses increased $1.9 million, or 14%,
to $15.4 million for the nine months ended September 30, 1999 from $13.5 million
for the nine months ended September 30, 1998. As a percentage of revenues, these
expenses decreased to 2.7% for the nine months ended September 30, 1999 from
4.2% for the nine months ended September 30, 1998. This percentage decrease was
primarily due to better leveraging of corporate personnel, offset by the special
one-time charge of $500,000 in the third quarter of 1999 related to potential
legal fees and expenses associated with the Philadelphia location of Argenbright
Security, Inc. (See Note 6 to the condensed consolidated financial statements).
9
<PAGE> 12
Depreciation and amortization increased $7.6 million, or 133%, to $13.3 million
for the nine months ended September 30, 1999 from $5.7 million for the nine
months ended September 30, 1998. As a percentage of revenues, these expenses
increased to 2.3% for the nine months ended September 30, 1999 from 1.8% for the
nine months ended September 30, 1998. This increase was primarily due to the
depreciation and amortization expense of acquisition related fixed and
intangible assets.
Operating income increased $18.4 million, or 114%, to $34.5 million for the nine
months ended September 30, 1999 from $16.1 million for the nine months ended
September 30, 1998. As a percentage of revenues, operating income improved to
6.0% for the nine months ended September 30, 1999 from 5.1% for the nine months
ended September 30, 1998.
Interest expense increased $6.1 million to $7.8 million for the nine months
ended September 30, 1999 from $1.7 for the nine months ended September 30, 1998.
Interest expense increased in 1999 due to the use of the Company's credit
facility to fund acquisitions.
Other income, net, increased $135,000 to $427,000 for the nine months ended
September 30, 1999 from $292,000 for the nine months ended September 30, 1998 as
a result of the gain on the Company's sale of its UK bus transportation business
which occurred on June 30, 1999.
Income tax provision increased $4.4 million, or 75%, to $10.4 million for the
nine months ended September 30, 1999 from $6.0 million for the nine months ended
September 30, 1998. The Company provided income taxes at a rate of 38.4% in 1999
and 40.5% in 1998. The decrease in the effective tax rate for the nine months
ended September 30, 1999 as compared to the nine months ended September 30, 1998
is due to the change in business mix by country as a result of the acquisitions
made after the second quarter of 1998.
Net income increased $8.0 million, or 91%, to $16.8 million, or 2.9% of
revenues, for the nine months ended September 30, 1999 from net income of $8.8
million, or 2.7% of revenues, for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $36.5 million for the nine months ended
September 30, 1999 compared to $5.5 million for the nine months ended September
30, 1998. This increase was primarily the result of an increase of $15.6 million
in net income before depreciation and amortization offset by $46.6 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, primarily relating to the Company's
marketing execution and fulfillment services businesses acquired. Cash used in
investing activities for the nine months ended September 30, 1999 was $104.8
million compared to $131.0 million for the nine months ended September 30, 1998.
The use of cash for investing activities was principally a result of the
acquisitions made during those periods. Cash provided by financing activities
for the nine months ended September 30, 1999 was $143.1 million compared to
$132.3 million for the nine months ended September 30, 1998. In January 1999,
the Company completed a follow-on public offering of its common stock. The
Company issued 3,255,570 shares at an offering price of $31 per share. The total
proceeds, net of underwriting discounts and offering expenses, were
approximately $96.1 million, of which the Company used a portion to repay a $10
million subordinated convertible debenture. The remaining $86.1 million was used
to reduce the outstanding balance under the credit facility.
10
<PAGE> 13
Capital expenditures were approximately $9.5 million for the nine months ended
September 30, 1999 compared to $7.6 million for the nine months ended September
30, 1998. Historically, capital expenditures have been, and future expenditures
are anticipated to be, primarily to support expansion of the Company's
operations, including equipment and management information systems.
Effective October 15, 1999, the Company expanded its credit facility to $375
million with a syndicate of banks led by First Union National Bank. The Company
plans to utilize the facility to grow its business through strategic
acquisitions. At September 30, 1999, there was approximately $167 million of
availability remaining under the expanded credit facility.
The Company believes that funds generated from operations, together with
existing cash 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 or series of acquisitions for cash, it may be necessary for the
Company to obtain additional debt or equity financing.
FORWARD-LOOKING STATEMENTS
Certain statements made in this report, and other written or oral statements
made by or on behalf of the Company, may constitute "forward-looking statements"
within the meaning of the federal securities laws. When used in this report, the
words "believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements. Statements regarding future events and
developments and the Company's future performance, as well as our expectations,
beliefs, plans, estimates or projections relating to the future, are
forward-looking statements within the meaning of these laws. All forward-looking
statements are subject to certain risks and uncertainties that could cause
actual events to differ materially from those projected. Such risks and
uncertainties include, among others, conditions affecting our reliance on major
clients; our ability to manage a growing business; the availability of labor;
conditions affecting our international operations; the impact of competition;
general economic conditions; the Year 2000 issue and changes in foreign currency
and interest rates. Management believes that these forward-looking statements
are reasonable; however, you should not place undue reliance on such statements.
These statements are based on current expectations and speak only as of the date
of such statements. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of future events, new
information or otherwise. Additional information concerning the risks and
uncertainties listed above, and other factors that you may wish to consider, is
contained in the Company's filings with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K. Copies of these filings are
available from the Company free of charge.
YEAR 2000 ISSUE
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
11
<PAGE> 14
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 have been taken. Corrective steps
primarily relate to development and purchasing of system software and hardware.
The Company has substantially completed the corrective and testing phases and is
well into the implementation phase. The Company has substantially completed all
remediation and replacement of internal information systems. The Company's
objective is to complete final testing and certification for Year 2000 readiness
by November 30, 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
have been taken 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 requesting 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 were in the range of $2.75 to $3.50
million. To date, the Company has incurred capital expenditures of approximately
$2.5 million. 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 operations or financial condition.
12
<PAGE> 15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
FOREIGN CURRENCY RISK - 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 because, historically, the annual impact of foreign currency fluctuations
on the Company has been insignificant.
INTEREST RATE RISK - The Company maintains a credit facility, an interest rate
swap agreement and other long-term debt which subjects the Company to the risk
of loss associated with movements in market interest rates. The Company's
five-year credit facility had a balance outstanding at September 30, 1999 of
$208.0 million, which was at a variable rate of interest. In order to hedge
against increasing interest rates, effective October 6, 1998, the Company
entered into a four-year interest rate swap agreement with a notional amount of
approximately $30.0 million to offset a portion of the floating interest rate
risk. On May 14, 1999, this swap agreement was replaced with a three-year
interest rate swap agreement with a notional amount of approximately $50.0
million. The fair value of the new swap agreement at September 30, 1999
approximates the value when entered into in May 1999. Thus, if the Company were
to unwind the swap agreement, no material gain or loss would be recognized. A
change in the prevailing interest rates of 10% would result in a change in the
total fair value of long-term debt by approximately $5.5 million. Fair values
were determined from discounted cash flows.
13
<PAGE> 16
PART II - OTHER INFORMATION AND SIGNATURE
Item 1 - Legal Proceedings
As reported in the quarterly report on Form 10Q for the quarter ended
June 30, 1999, AHL learned that the U.S. Attorney's Office for the Eastern
District of Pennsylvania is investigating prior recruiting and training
practices and other matters at the Philadelphia location of Argenbright
Security, Inc. ("Argenbright Security"), a subsidiary of the Company, and that
Argenbright Security is a target of this investigation. The Company believes
that certain employees, who have since been terminated, may have violated FAA
regulations, as well as Company policies and procedures in these matters. The
FAA has reviewed Argenbright Security's other major airport locations and has
not uncovered any similar issues. The Company has been informed that the matters
being investigated are limited to the operations of the Philadelphia office, and
the Company does not believe that the matters under review represent a systemic
problem. Since learning of the issues, the Company has taken the necessary
actions to ensure compliance with all FAA regulations and Company policies and
procedures in Philadelphia. Additionally, management has reviewed this
investigation with the major clients of its Philadelphia operations and the
Company does not believe that this investigation has had any adverse affect on
its relationship with these clients.
The Company is cooperating with the U.S. Attorneys' Office in this
investigation and believes this investigation may be concluded in the next
several months. In the third quarter of 1999, the Company accrued $500,000 to
cover potential attorneys' fees and expenses associated with this investigation.
This expense was recorded in corporate, general and administrative expense in
the accompanying Condensed Consolidated Statements of Operations.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule (For SEC
Filing Purposes Only)
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
14
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AHL SERVICES, INC.
(REGISTRANT)
Date: November 15, 1999 By: /s/ David L. Gamsey
------------------------------------------
David L. Gamsey
Vice President and Chief Financial Officer
(On behalf of the Registrant and as Chief
Accounting Officer)
15
<PAGE> 1
EXHIBIT 11
AHL SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Applicable to Common Stock:
Net income $ 7,689 $ 4,368 $16,751 $ 8,758
======= ======= ======= =======
Weighted Average Shares:
Common shares 17,406 13,958 17,093 13,726
Common share equivalents applicable to
stock options outstanding 634 621 604 578
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding during
the period 18,040 14,579 17,697 14,304
======= ======= ======= =======
Per Share Amount:
Net income:
Basic $ 0.44 $ 0.31 $ 0.98 $ 0.64
======= ======= ======= =======
Diluted $ 0.43 $ 0.30 $ 0.95 $ 0.61
======= ======= ======= =======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AHL
SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) AT SEPTEMBER 30,
1999 AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,753
<SECURITIES> 0
<RECEIVABLES> 161,353
<ALLOWANCES> 2,920
<INVENTORY> 2,935
<CURRENT-ASSETS> 218,216
<PP&E> 50,094
<DEPRECIATION> 17,047
<TOTAL-ASSETS> 533,459
<CURRENT-LIABILITIES> 92,663
<BONDS> 216,417
0
0
<COMMON> 174
<OTHER-SE> 216,518
<TOTAL-LIABILITY-AND-EQUITY> 533,459
<SALES> 577,554
<TOTAL-REVENUES> 577,554
<CGS> 401,932
<TOTAL-COSTS> 401,932
<OTHER-EXPENSES> 141,078
<LOSS-PROVISION> 548
<INTEREST-EXPENSE> 7,790
<INCOME-PRETAX> 27,181
<INCOME-TAX> 10,430
<INCOME-CONTINUING> 16,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,751
<EPS-BASIC> 0.98
<EPS-DILUTED> 0.95
</TABLE>
