<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 JUNE 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: 17,406,267 shares on August 4,
1999.
<PAGE> 2
AHL SERVICES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Operations (Unaudited)
Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 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 12
PART II OTHER INFORMATION AND SIGNATURE
ITEM 1. Legal Proceedings 14
ITEM 4. Submission of Matters to a Vote of Security Holders 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>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 16,050 $ 18,239
Accounts receivable, less allowance for doubtful accounts
of $2,876 and $1,952 in 1999 and 1998, respectively 149,448 108,857
Reimbursable customer expenses 9,732 4,184
Work-in-process 9,848 4,711
Uniforms in service, net 2,781 2,457
Prepaid expenses and other 9,487 6,086
Deferred income taxes 481 563
--------- --------
Total current assets 197,827 145,097
Property and equipment, net 26,450 24,572
Intangibles, net 266,554 195,113
Other assets 1,211 1,051
--------- --------
$ 492,042 $365,833
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 20,907 $ 16,159
Accrued payroll and other current liabilities 60,914 58,654
Current portion of self-insurance reserves 1,220 980
Income taxes payable 118 3,046
Current portion of long-term debt 254 388
Customer deposits 8,566 5,287
--------- --------
Total current liabilities 91,979 84,514
--------- --------
Long-term debt, less current portion 184,504 169,338
--------- --------
Self-insurance reserves, less current portion 4,880 3,920
--------- --------
Deferred income taxes 1,544 1,139
--------- --------
Other non-current liabilities 806 1,234
--------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 17,397,642 and 14,119,922 shares issued and outstanding 174 142
Preferred stock, no par value; 5,000,000 shares
authorized, no shares outstanding -- --
Foreign currency translation adjustment (2,402) 26
Paid-in capital 176,801 80,827
Retained earnings 33,756 24,693
--------- --------
Total shareholders' equity 208,329 105,688
--------- --------
$ 492,042 $365,833
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
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AHL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues $ 189,559 $ 98,871
Cost of services 131,835 72,755
--------- --------
Gross margin 57,724 26,116
Operating expenses:
Field operating 38,379 15,197
Corporate, general and administrative 4,563 4,458
Depreciation and amortization 4,298 2,017
--------- --------
Operating income 10,484 4,444
Interest expense 2,239 177
Other income, net (335) (17)
--------- --------
Income before income taxes 8,580 4,284
Income tax provision 3,248 1,717
--------- --------
Net income $ 5,332 $ 2,567
========= ========
Earnings per share:
Net income per common and common equivalent share:
Basic $ 0.31 $ 0.19
========= ========
Diluted $ 0.30 $ 0.18
========= ========
Weighted average common and common equivalent shares:
Basic 17,388 13,610
========= ========
Diluted 17,937 14,220
========= ========
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Revenues $ 360,197 $ 183,371
Cost of services 251,563 135,597
--------- ---------
Gross margin 108,634 47,774
Operating expenses:
Field operating 72,130 28,099
Corporate, general and administrative 9,702 8,769
Depreciation and amortization 8,301 3,673
--------- ---------
Operating income 18,501 7,233
Interest expense 4,365 214
Other income, net (365) (299)
--------- ---------
Income before income taxes 14,501 7,318
Income tax provision 5,438 2,927
--------- ---------
Net income $ 9,063 $ 4,391
========= =========
Earnings per share: Net income per common and common equivalent share:
Basic $ 0.54 $ 0.32
========= =========
Diluted $ 0.52 $ 0.31
========= =========
Weighted average common and common equivalent shares:
Basic 16,934 13,607
========= =========
Diluted 17,522 14,163
========= =========
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,063 $ 4,391
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 8,301 3,673
Gain on sales of property and equipment (306) (297)
Changes in current assets and liabilities, net of assets of acquired
businesses (46,582) (10,279)
--------- --------
Net cash used in operating activities (29,524) (2,512)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (85,637) (18,907)
Purchases of property and equipment (4,717) (4,047)
Proceeds from sales of property and equipment 1,495 1,654
Other activities, net (949) (295)
--------- --------
Net cash used in investing activities (89,808) (21,595)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of credit facility (156,800) (37,954)
Borrowings under credit facility 193,577 51,774
Repayment of subordinated convertible debenture (10,000) --
Repayment of capital lease obligations (4,006) --
Proceeds from exercise of stock options 221 65
Net proceeds from follow-on offering 96,171 --
Other (383) --
--------- --------
Net cash provided by financing activities 118,780 13,885
--------- --------
Effect of exchange rates on cash and cash equivalents (1,637) (12)
--------- --------
Net change in cash and cash equivalents (2,189) (10,234)
Cash and cash equivalents at beginning of period 18,239 15,456
--------- --------
Cash and cash equivalents at end of period $ 16,050 $ 5,222
========= ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,591 $ 75
========= ========
Income taxes $ 8,366 $ 2,159
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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AHL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 30, 1999, the results of its operations for the
three and six months ended June 30, 1999 and 1998 and the results of
its cash flows for the six months ended June 30, 1999 and 1998. All
such adjustments are of a normal recurring nature. The results of
operations for the three and six months ended June 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.
Also on April 30, 1999, AHL 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"), a small, fast-growing industrial staffing company in the UK,
for $3 million in cash. Excel had annual revenues of over $7 million in
1998.
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.
5
<PAGE> 8
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.
3. ANNOUNCED ACQUISITION SUBSEQUENT TO JUNE 30, 1999 - On July 27, 1999,
the Company acquired Draefern Holdings, PLC ("Draefern"), an outsourced
industrial staffing company in the U.K., for $14 million in cash and
seller notes plus potential contingent consideration. Draefern had
trailing twelve month revenues of approximately $30 million.
4. BUSINESS SEGMENT INFORMATION - The following table presents information
regarding the Company's operating segments (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
Operating Operating
Revenues Income Revenues Income
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
1999
- ----
Aviation services $ 50,221 $ 3,805 $ 97,211 $ 6,853
Facility services 58,277 3,982 114,659 7,730
Operational services 43,168 3,512 81,964 6,922
Marketing execution and fulfillment services 37,893 3,748 66,363 6,698
Corporate and other -- (4,563) -- (9,702)
-------- --------- -------- --------
$189,559 $ 10,484 $360,197 $ 18,501
======== ========= ======== ========
1998
- ----
Aviation services $ 45,374 $ 3,837 $ 86,839 $ 7,232
Facility services 33,664 2,966 66,190 5,799
Operational services 15,547 1,006 22,801 1,295
Marketing execution and fulfillment services 4,286 1,093 7,541 1,676
Corporate and other -- (4,458) -- (8,769)
-------- --------- -------- --------
$ 98,871 $ 4,444 $183,371 $ 7,233
======== ========= ======== ========
</TABLE>
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 5,332 $ 2,567 $ 9,063 $4,391
Other comprehensive
income (loss) (1,149) (89) (2,428) 87
------- ------- ------- ------
Comprehensive income $ 4,183 $ 2,478 $ 6,635 $4,478
======= ======= ======= ======
</TABLE>
6. LEGAL MATTERS - AHL has 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
6
<PAGE> 9
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 plans to
take a special one-time charge of $500,000 to cover potential
attorneys' fees and expenses associated with this investigation.
7
<PAGE> 10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATING RESULTS - THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues increased $90.7 million, or 92%, to $189.6 million for the second
quarter of 1999 from $98.9 million in the second quarter of 1998. Second quarter
1999 revenues included approximately $71.0 million attributable to acquisitions
owned less than 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 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 $59.1 million, or 81%, to $131.8 million for the
second quarter of 1999 from $72.8 million in the second quarter of 1998. As a
percentage of revenues, cost of services decreased to 69.5% for the second
quarter of 1999 from 73.6% in the second 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 $31.6 million, or 121%, to $57.7 million for the second
quarter of 1999 from $26.1 million in the second quarter of 1998. As a
percentage of revenues, gross margin improved to 30.5% for the second quarter of
1999 from 26.4% in the second 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
$23.2 million, or 153%, to $38.4 million for the second quarter of 1999 from
$15.2 million in the second quarter of 1998. As a percentage of revenues, field
operating expenses increased to 20.2% for the second quarter of 1999 from 15.4%
in the second quarter of 1998. This percentage increase was primarily
attributable to the facility expenses of Gage Marketing Support Services, a
company acquired in July 1998, which operates in the Company's marketing
execution and fulfillment services segment.
Corporate general and administrative expenses, which includes the cost of
services the Company provides to support and manage its field activities,
increased $105,000, or 2.4%, to $4.6 million for the second quarter of 1999 from
$4.5 million in the second quarter of 1998. As a percentage of revenues, these
expenses decreased to 2.4% for the second quarter of 1999 from 4.5% in the
second quarter of 1998. This percentage decrease was primarily due to better
leveraging of corporate personnel and allocation of certain corporate personnel
to field operations for the second quarter of 1999.
Depreciation and amortization increased $2.3 million, or 113%, to $4.3 million
for the second quarter of 1999 from $2.0 million in the second quarter of 1998.
As a percentage of revenues, these expenses increased to 2.3% for the second
quarter of 1999 from 2.0% in the second quarter of 1998. The increase was
primarily due to the depreciation and amortization expense of acquisition
related fixed and intangible assets.
Operating income increased $6.1 million, or 136%, to $10.5 million for the
second quarter of 1999 from $4.4 million in the second quarter of 1998. As a
percentage of revenues, operating income improved to 5.5% for the second quarter
of 1999 from 4.5% in the second quarter of 1998.
8
<PAGE> 11
Interest expense increased $2.0 million to $2.2 million for the second quarter
of 1999 from $177,000 in the second quarter of 1998. Interest expense increased
in 1999 due to the use of the Company's credit facility to fund acquisitions.
Other income, net, increased $318,000 to $335,000 for the second quarter of 1999
from $17,000 for the second quarter of 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 $1.5 million, or 89%, to $3.2 million for the
second quarter of 1999 from $1.7 million in the second quarter of 1998. The
Company provided income taxes at a rate of 37.9% in the second quarter of 1999
and 40.0% in the second 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 the acquisitions made after the second quarter of 1998.
Net income increased $2.8 million, or 108%, to $5.3 million, or 2.8% of
revenues, for the second quarter of 1999 from net income of $2.6 million, or
2.6% of revenues, in the second quarter of 1998.
OPERATING RESULTS - SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues increased $176.8 million, or 96%, to $360.2 million for the six months
ended June 30, 1999 from $183.4 million for the six months ended June 30, 1998.
Revenues for the six months ended June 30, 1999 included approximately $137.4
million attributable to acquisitions owned less than 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 increased $116.0 million, or 86%, to $251.6 million for the six
months ended June 30, 1999 from $135.6 million for the six months ended June 30,
1998. As a percentage of revenues, cost of services decreased to 69.8% for the
six months ended June 30, 1999 from 73.9% for the six months ended June 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 $60.9 million, or 127%, to $108.6 million for the six
months ended June 30, 1999 from $47.8 million for the six months ended June 30,
1998. As a percentage of revenues, gross margin improved to 30.2% for the six
months ended June 30, 1999 from 26.1% for the six months ended June 30, 1998.
Field operating expenses increased $44.0 million, or 157%, to $72.1 million for
the second quarter of 1999 from $28.1 million for the six months ended June 30,
1998. As a percentage of revenues, field operating expenses increased to 20.0%
for the six months ended June 30, 1999 from 15.3% for the six months ended June
30, 1998. This percentage increase was primarily attributable to the facility
expenses of Gage Marketing Support Services, a company acquired in July 1998,
which operates in the Company's marketing execution and fulfillment services
segment.
Corporate general and administrative expenses increased $933,000, or 10.6%, to
$9.7 million for the six months ended June 30, 1999 from $8.8 million for the
six months ended June 30, 1998. As a percentage of revenues, these expenses
decreased to 2.7% for the six months ended June 30, 1999 from 4.8% for the six
9
<PAGE> 12
months ended June 30, 1998. This percentage decrease was primarily due to better
leveraging of corporate personnel and allocation of certain corporate personnel
to field operations in the second quarter of 1999.
Depreciation and amortization increased $4.6 million, or 126%, to $8.3 million
for the six months ended June 30, 1999 from $3.7 million for the six months
ended June 30, 1998. As a percentage of revenues, these expenses increased to
2.3% for the six months ended June 30, 1999 from 2.0% for the six months ended
June 30, 1998. This increase was primarily due to the depreciation and
amortization expense of acquisition related fixed and intangible assets.
Operating income increased $11.3 million, or 156%, to $18.5 million for the six
months ended June 30, 1999 from $7.2 million for the six months ended June 30,
1998. As a percentage of revenues, operating income improved to 5.1% for the six
months ended June 30, 1999 from 3.9% for the six months ended June 30, 1998.
Interest expense increased $4.2 million to $4.4 million for the six months ended
June 30, 1999 from $214,000 for the six months ended June 30, 1998. Interest
expense increased in 1999 due to the use of the Company's credit facility to
fund acquisitions.
Income tax provision increased $2.5 million, or 86%, to $5.4 million for the six
months ended June 30, 1999 from $2.9 million for the six months ended June 30,
1998. The Company provided income taxes at a rate of 37.5% in 1999 and 40.0% in
1998. The decrease in the effective tax rate for the six months ended June 30,
1999 as compared to the six months ended June 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 $4.7 million, or 106%, to $9.1 million, or 2.5% of
revenues, for the six months ended June 30, 1999 from net income of $4.4
million, or 2.4% of revenues, for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $29.5 million for the six months ended
June 30, 1999 compared to $2.5 million for the six months ended June 30, 1998.
This increase was primarily the result of an increase of $9.3 million in net
income before depreciation and amortization offset by $36.3 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, primarily relating to the Company's
marketing execution businesses acquired since the end of the second quarter of
1998. Cash used in investing activities for the six months ended June 30, 1999
was $89.8 million compared to $21.6 million for the six months ended June 30,
1998. The use of cash for investing activities was principally a result of the
acquisitions made during the periods. Cash provided by financing activities for
the six months ended June 30, 1999 was $118.8 million compared to $13.9 million
for the six months ended June 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.
Capital expenditures were approximately $4.7 million for the six months ended
June 30, 1999 compared to $4.0 million for the six months ended June 30, 1998.
Historically, capital expenditures have been, and future
10
<PAGE> 13
expenditures are anticipated to be, primarily to support expansion of the
Company's operations, including equipment and management information systems.
Effective April 23, 1999, the Company expanded its credit facility to $250
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 June 30, 1999, there was approximately $66 million of
availability remaining under the 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 but
also those of third parties, such as clients and vendors using information
systems that may interact with or affect the Company's operations.
11
<PAGE> 14
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 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 and testing phases and is
well into the implementation phase. The Company's objectives are to complete
substantially all remediation and replacement of internal information systems by
October 1999, and to complete final testing and certification for Year 2000
readiness by November 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 capital expenditures of approximately
$2.0 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.
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
12
<PAGE> 15
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.
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 June 30, 1999 of $184.5
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 June 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
of approximately $4.9 million. Fair values were determined from discounted cash
flows.
13
<PAGE> 16
PART II - OTHER INFORMATION AND SIGNATURE
Item 1 - Legal Proceedings
AHL has 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 plans to take a
special one-time charge of $500,000 to cover potential attorneys' fees and
expenses associated with this investigation.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on May 13, 1999.
The matters voted upon and the results of voting were as follows:
To elect two directors to serve until the annual meeting of
shareholders in 2002 or until their successors are duly elected and qualified:
The nominees, Messrs. Gage and McCullough were elected to the Company's board of
directors to serve until the annual meeting of shareholders in 2002. There were
15,187,081 votes for Mr. Gage and 15,187,781 votes for Mr. McCullough.
To approve and adopt an amendment to the Employee Stock Purchase Plan
USA: There were 15,240,631 votes for the approval of the Amended and Restated
Employee Stock Purchase Plan USA.
To ratify the appointment of Arthur Andersen LLP as independent
auditors for the Company for the year ending December 31, 1999: There were
15,273,471 votes for ratification of the appointment of Arthur Andersen LLP as
the Company's independent public accountants.
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 June 30,
1999.
14
<PAGE> 17
SIGNATURES
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: August 13, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Applicable to Common Stock:
Net income $ 5,332 $ 2,567 $ 9,063 $ 4,391
======= ======= ======= =======
Weighted Average Shares:
Common shares 17,388 13,610 16,934 13,607
Common share equivalents applicable to
stock options outstanding 549 610 588 556
------- ------- ------- -------
Weighted average common and common
equivalent shares outstanding during
the period 17,937 14,220 17,522 14,163
======= ======= ======= =======
Per Share Amount:
Net income:
Basic $ 0.31 $ 0.19 $ 0.54 $ 0.32
======= ======= ======= =======
Diluted $ 0.30 $ 0.18 $ 0.52 $ 0.31
======= ======= ======= =======
</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 JUNE 30, 1999
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX
MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 16,050
<SECURITIES> 0
<RECEIVABLES> 152,324
<ALLOWANCES> 2,876
<INVENTORY> 2,781
<CURRENT-ASSETS> 197,827
<PP&E> 41,994
<DEPRECIATION> 15,544
<TOTAL-ASSETS> 492,042
<CURRENT-LIABILITIES> 91,979
<BONDS> 184,504
0
0
<COMMON> 174
<OTHER-SE> 208,155
<TOTAL-LIABILITY-AND-EQUITY> 492,042
<SALES> 360,197
<TOTAL-REVENUES> 360,197
<CGS> 251,563
<TOTAL-COSTS> 251,563
<OTHER-EXPENSES> 90,133
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 4,365
<INCOME-PRETAX> 14,501
<INCOME-TAX> 5,438
<INCOME-CONTINUING> 9,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,063
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.52
</TABLE>
