Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- -----------
Commission File Number 0-22195
AHL SERVICES, INC.
(Exact name of registrant as specified in governing instrument)
Georgia 58-2277249
(State of organization) (IRS Employer Identification No.)
3353 Peachtree Road, NE, Atlanta, Georgia, 30326
(Address of Principal Executive Offices -- Zip Code)
Registrant's telephone number, including area code: (404) 684-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 per share The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant (based upon the closing sale price on The Nasdaq Stock Market)
on March 15, 2001 was approximately $64,315,000. As of March 15, 2001, there
were 15,322,792 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement in connection with its Annual
Meeting of Shareholders to be held May 10, 2001 are incorporated by reference in
Part III.
1
2
AHL SERVICES, INC.
TABLE OF CONTENTS
ITEM NO. PAGE NO.
ITEM 1. BUSINESS...........................................................................................................3
Industry Overview.......................................................................................................3
Strategy ...............................................................................................................3
Services Provided.......................................................................................................4
Divestitures and Abandonments...........................................................................................6
Acquisitions............................................................................................................7
Contract Terms......................................................................................................... 7
Sales and Marketing.....................................................................................................7
Management Information Systems..........................................................................................7
Competition.............................................................................................................8
ITEM 2 PROPERTIES.........................................................................................................8
ITEM 3 LEGAL PROCEEDINGS..................................................................................................8
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................................8
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT...............................................................................8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................10
ITEM 6. SELECTED FINANCIAL DATA...........................................................................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................11
Overview ..............................................................................................................11
Results of Operations..................................................................................................13
Fiscal 2000 Compared to Fiscal 1999....................................................................................13
Fiscal 1999 Compared to Fiscal 1998....................................................................................16
Quarterly Results and Seasonality......................................................................................18
Liquidity and Capital Resources........................................................................................19
Forward-Looking Statements.............................................................................................20
Inflation ............................................................................................................20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................................21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................................22
ITEM 11. EXECUTIVE COMPENSATION............................................................................................22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................................22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K................................................23
2
3
PART I
ITEM 1. BUSINESS
AHL Services, Inc. ("AHL" or the "Company"), headquartered in Atlanta,
Georgia, is a leading provider of outsourced business services including
marketing services in the United States and specialized staffing services in
Europe. AHL's marketing services include integrated customer relationship
management, information management, fulfillment of products, promotions and
trade materials and merchandising services. AHL's European specialized staffing
services provide electricians, welders, plumbers, customer service
representatives and industrial workers for clients throughout Germany and the
United Kingdom. AHL's clients include a range of Global 500 companies including
leaders in the automotive, consumer goods, entertainment, retail and technology
sectors.
INDUSTRY OVERVIEW
Many corporations need to provide non-core functions to their
customers, potential customers or for their own production demands. Enterprises
incur considerable expense and invest substantial amounts of management time in
managing non-core functions. Outsourced business services 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
and facility costs and responsibilities and allows enterprises to reduce the
administrative overhead and time necessary to properly manage non-core
functions.
The market for outsourced business 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
and shares in the economic benefits derived from improved execution of the
function. These functions can include designing and implementing a solution for
its client. 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 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
outsourcing services industry.
Marketing services includes a broad spectrum of activities that are
required to implement the strategies and plans developed by manufacturers,
retailers, service providers and advertising agencies. Important segments of the
marketing services industry include customer relationship management,
fulfillment, merchandising, direct mail, lead generation, Web design, database
management and mining, continuity programs, loyalty programs, promotional
programs and market research. The marketing services industry is large, with
significant growth expected as companies place greater emphasis on retaining
existing customers by appealing to them on a more personalized basis.
The European staffing market is large and highly fragmented with rapid
growth expected as more countries deregulate the staffing industry and implement
labor policies that favor the use of outsourced services. The United Kingdom
represents about 40 percent of the total European industry. Overall, growth is
expected to continue making the European staffing industry one of the largest in
the world with Germany expected to be one of the fastest growing marketplaces
for staffing over the next several years.
STRATEGY
AHL believes that there are significant opportunities to expand its
business as existing clients and other large corporations utilize outsourcing
solutions that will enable them to focus on their core competencies. Key
elements of AHL's strategy include:
Continued focus on the marketing services industry. The shifting of
marketing budgets from advertising toward marketing services, changes in
technology and fragmentation of media are driving significant changes in the
marketing industry. Mass media and national promotions are giving way to
one-to-one marketing and more account-specific promotions. Promotion is moving
closer to the customer, with employment of more sophisticated, personalized
marketing techniques. As customers become more costly to attract, marketers are
increasing their focus on customer retention by utilizing continuity programs,
sophisticated databases, and investments in merchandising to ensure product
availability. The result is a shift of marketing budgets from advertising toward
marketing services such as those provided by AHL.
Continued focus on European specialized staffing in the United Kingdom
and Germany. The expanding European staffing market is growing rapidly to
address emerging labor shortages in the largest countries as regulations
surrounding outsourcing services are relaxed and employment laws make it
increasingly difficult for manufacturers to maintain a flexible workforce. The
European Union has a labor force that is 20 percent larger than the United
States labor force, creating an opportunity for continued growth as the
3
4
staffing industry becomes less restricted. Clients are increasingly expecting
leading staffing companies to service them at all locations within one country,
driving the consolidation of strong regional companies to create companies such
as AHL in the United Kingdom and Germany with national coverage in both
countries.
Develop Long-Term Client Relationships. AHL targets large corporations
and institutions that have significant needs for outsourced business services to
develop long-term client relationships. AHL has established long-term
relationships with most of its large clients through preferred outsourcing
vendor relationships. These long-term relationships have provided AHL 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 AHL.
Continue to Seek Strategic Acquisitions. AHL continues to seek
selective accretive acquisitions in an effort to further develop its service
offerings and geographic coverage. Since May 1997, AHL has completed 22
acquisitions. AHL believes that a disciplined acquisition program and an
effective integration process allow it to leverage its existing infrastructure
and capitalize on the fragmented nature of outsourced business services.
SERVICES PROVIDED
The following table presents information with respect to the percentage
of AHL's revenues by business line for the periods shown:
YEAR ENDED
DECEMBER 31, (1)
-------------------------------
BUSINESS LINE 2000 1999 1998
---------------------------------- -------------------------------
Marketing Services ............... 43% 42% 38%
Specialized Staffing Services .... 57% 58% 62%
----- ----- -----
Total ................... 100% 100% 100%
===== ===== =====
(1) Reported continuing results from operations include the
marketing services businesses in the United States and
specialized staffing services businesses in the United Kingdom
and Germany, the divested U.S. industrial staffing business
and the abandoned PIMMS store set-up business.
MARKETING SERVICES
AHL's marketing services business unit is a leading provider of
outsourced marketing executional services in the United States. Current service
offerings include fulfillment of products, promotional programs and trade
programs, customer service, merchandising services and information management.
Clients are primarily Fortune 500 companies and selected fast-growing smaller
companies. AHL integrates its services to custom fit the specific objectives of
client's marketing programs, with the primary objectives to improve its clients'
marketing effectiveness, maximize their customer relationships and increase
sales.
AHL currently has eight fulfillment centers located in Detroit,
Minneapolis, Kankakee, Phoenix, Los Angeles and Juarez, Mexico. AHL's four major
customer service centers are located in Minneapolis, Kankakee, and Selkirk and
Winnipeg, Canada. Merchandising services is managed through a network of field
offices, with sales offices in Minneapolis, Troy, Bentonville and St. Louis.
AHL's fulfillment services include order processing, warehousing,
kitting and light assembly, pick, pack, ship, customer service, inventory
management, coupon/rebate fulfillment and custom letter production. Customer
relationship management services include order management, payment processing,
responding to questions about shipments, product characteristics, product usage
and promotional execution details on a 24-hour, 7-day basis via telephone,
e-mail, online chat, fax and mail. Merchandising services include inventory
management, shelf management, product resets, promotional execution and audits,
and product resets within major retailers' stores. Information management
services include creation and maintenance of clients' databases and the
extraction of critical information from the database to improve effectiveness of
subsequent marketing programs.
AHL continues to invest in technologies and new processes, which build
productivity and service quality for its clients. AHL has expanded the use of
radio frequency systems, added pick-to-light technology for its production lines
and is adding websites that allow clients to order and get information online.
AHL has added e-mail, e-chat and voice-over Internet protocol features to its
customer service systems. In addition, AHL is upgrading its warehouse systems to
ensure real time tracking of inventory and orders.
4
5
AHL's focus on quality was evident during fiscal year 2000 as it
continued to improve its performance regarding accuracy and timeliness. AHL
received ISO 9000 certification for two additional facilities and successfully
completed re-certification audits in three other facilities that had been
previously certified. Certification of remaining facilities is expected to be
completed in fiscal year 2001.
AHL provides a comprehensive array of marketing support services,
enabling it to execute and administer complex, multifaceted marketing programs
for its clients. These programs include the following:
FULFILLMENT OF PRODUCTS, PROMOTIONAL PROGRAMS AND TRADE PROGRAMS
Consumer and Trade Fulfillment Programs. AHL's execution and
administration of consumer promotion programs and direct response fulfillment
services typically involves:
- receiving consumer orders (via mail, telephone or the
Internet);
- processing the order to check for compliance and validate
materials submitted;
- 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;
- reporting program results to the client, either by mail or
electronically;
- providing customer service regarding the product, promotion or
order status; and
- providing related data entry services, including information
from warranty cards, credit cards and promotion media.
Similarly, corporations use AHL'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, AHL:
- receives, stores, controls and manages inventory owned by the
client;
- prints and personalizes trade materials;
- manages and coordinates shipment of materials;
- provides database management and information processing
services; and
- operates call centers to process requests for information.
In providing trade materials and trade promotion fulfillment, AHL 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. AHL executes trade support services for its
clients that have extensive distribution or franchise networks. Services
include:
- the collection and sorting of memoranda and informational
mailings, training and support materials, and other
communications;
- packaging and shipping the information; and
- in-bound teleservices support to answer questions and solve
problems for the client's trade channels.
Fulfillment. AHL executes fulfillment services for clients which
include:
- receipt and tracking of client inventory;
- storage of customer inventory in secured areas;
- receipt of customer orders via the Internet;
- fulfillment of orders by selecting from inventory the
merchandise ordered and packing, labeling and shipping the
merchandise to the consumer within 24 hours; and
- production of reports, files, and transaction records
transmitted to the client via the Internet.
CUSTOMER SERVICES
AHL receives orders from consumers and also provides inbound customer
service focusing on business-to-consumer applications, with increasing activity
in business-to-business applications. AHL receives and processes orders from
consumers and handles
5
6
inquiries relating to billing, product information, product uses, product
problems or concerns, and client services. AHL has particular expertise in
utilities, housewares, electronics, publishing and packaged goods.
MERCHANDISING SERVICES
AHL provides merchandising services to major consumer products
manufacturers and large retail chains. These services strengthen AHL's in-store
presence at the point of purchase, increasing its opportunities with retailers
and manufacturers who seek to outsource their in-store merchandising
requirements. Merchandising is a logical extension of AHL's traditional
business-to-business fulfillment activities. For example, not only can AHL pack
and ship promotional materials, it can also fully execute the promotions at the
store level. AHL offers a complete solution to its clients.
INFORMATION MANAGEMENT
AHL provides management services which include creation and maintenance
of clients' databases and the extraction of critical information from the
database to improve effectiveness of subsequent marketing programs.
SPECIALIZED STAFFING SERVICES
AHL provides specialized staffing services throughout the United
Kingdom and Germany. AHL has over 10,000 skilled and semi-skilled workers
assisting large, global 500 clients primarily in the automotive, engineering,
aeronautical, food, call center and consumer packaged goods industries. AHL's
employees perform skilled, semi-skilled and customer service tasks. Examples of
these workers include electricians, welders, plumbers and mechanics. The social
environment in Europe creates an opportunity for staffing companies to now serve
clients as part of their permanent staffing solution. Clients may rely upon AHL
for as much as 10% to 15% of their work force, especially during peak periods,
creating relatively steady demand for services. In total, AHL has 103 staffing
branches in Europe, 66 in Germany and 37 in the United Kingdom.
About 60% of AHL's staffing business is in Germany, a market with
particularly strong growth rates. AHL entered the German staffing market in 1998
and through a series of acquisitions has built Germany's fifth largest staffing
company. AHL will continue to grow the German staffing business through
increased internal growth as well as through acquisitions, as appropriate
opportunities present themselves.
In the United Kingdom, AHL has focused its business in the higher
growth, higher margin segments of the staffing industry, achieving growth rates
and margins in excess of the market average. United Kingdom services include
call center and warehousing operations for a variety of large, national
companies.
DIVESTITURES AND ABANDONMENTS
On December 29, 2000, wholly-owned subsidiaries of AHL sold the stock
in the AHL's subsidiaries Argenbright Security, Inc. and The ADI Group Limited,
AHL's U.S. and European aviation and facility services businesses, for $185
million in cash to Securicor plc., a business services company headquartered in
the United Kingdom. The final purchase price is subject to adjustment within a
range of $175 to $210 million based on 2001 actual performance of the U.S.
aviation and facility services businesses. Net after-tax proceeds from the sale
were used to retire debt.
In accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 30, AHL has reflected the results of its aviation and
facility services businesses as discontinued operations in the accompanying
consolidated statements of operations. This presentation reflects the net
earnings of these businesses as a single line item segregated from the results
of continuing operations for all periods presented. It is AHL's policy to
allocate interest expense to discontinued operations based primarily on the
revenue of the discontinued operations in relation to the total revenue of AHL.
AHL has allocated $10.9 million, $7.8 million, and $2.6 million of interest
expense to discontinued operations in fiscal years 2000, 1999 and 1998,
respectively.
On October 13, 2000, AHL sold the assets of its U.S. industrial
staffing business to an investor group led by the president of AHL's Baltimore
staffing operation. This business was sold for $22.5 million, which includes
notes receivable from the purchaser of $9.5 million, resulting in a loss on
disposition of $2.9 million. In addition, AHL retained the accounts receivable
of the business, which totaled approximately $6.5 million, net, as of the date
of the sale. The results of the U.S. industrial staffing business are reflected
within continuing operations through the date of the sale in the accompanying
consolidated statements of operations.
6
7
On December 28, 2000, AHL made the decision to abandon operations of
its store set-up business unit, formerly called PIMMS. A comprehensive strategic
review of the unprofitable store set-up business indicated AHL has more
attractive options, and that the store set-up business did not meet criteria for
continued investment. The store set-up business had become more project-driven
than anticipated with increasing surge capacity requirements and difficulties in
forecasting utilization rates. To become a profitable business would require
significant additional investment to develop geographic density and maintain a
national infrastructure. As a result of this decision, AHL recorded $66.7
million in impairment and other related costs in December 2000, that included
write-off of goodwill of $60.1 million, write-off of assets, primarily computer
systems which will no longer be utilized, of $2.6 million, severance paid during
2000 of $2.6 million and the accrual for lease termination costs for the PIMMS
facility of $1.4 million. In addition, AHL recorded, in field operating
expenses, $12.8 million in working capital adjustments related to the abandoned
PIMMS operations, primarily for disputed accounts receivable. AHL completed the
closing of the PIMMS business unit on March 16, 2001, and will record a final
charge for the related severance expense of approximately $2.5 million in the
first quarter of 2001. The results of the PIMMS business are reflected within
continuing operations from the date of acquisition, April 30, 1999, through
December 31, 2000, in the accompanying consolidated statements of operations.
On June 30, 1999, AHL sold its United Kingdom bus transportation
business to National Express Group PLC. The shuttle bus business generated
approximately $6.0 million in 1998 revenues. As a result of this divestiture,
AHL recorded a gain of approximately $400,000 and assigned approximately $4.0
million in lease obligations to the purchaser.
ACQUISITIONS
Since the completion of its initial public offering in March 1997, AHL
has completed 22 acquisitions. Each acquired company had operating margins in
excess of AHL's operating margin at the time of acquisition and was immediately
accretive to earnings. Together these acquisitions have significantly increased
AHL's presence in Europe, added new lines of business to AHL's operations and
increased density in AHL's existing lines of business.
The table on page 20 (Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview) provides certain
information with respect to the acquisitions that AHL has completed during the
three year period ended December 31, 2000.
CONTRACT TERMS
In the Marketing Services business, AHL generally enters into one to
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.
In the European specialized staffing business, AHL generally enters
into contracts with its clients pursuant to which it agrees to provide
specialized staffing on an as needed basis at a specific rate to the client.
SALES AND MARKETING
AHL targets large corporations and institutions that have significant
outsourcing needs, marketing its services to potential clients through senior
management, field managers and AHL's sales force. As part of its operating
philosophy, AHL emphasizes building and maintaining relationships with personnel
at various levels of its clients' organizations, including relationships with
both senior executives and operating personnel.
In January 2001, AHL appointed six new senior vice presidents to
spearhead the marketing services business development in the automotive,
consumer products, entertainment, retail and technology markets. These
experienced marketing professionals will help AHL's clients maximize their
marketing programs.
MANAGEMENT INFORMATION SYSTEMS
AHL's management information systems contribute significantly to its
daily operations, financial performance and customer service. AHL has invested,
and will continue to invest, resources in the development of systems to grow and
support the business needs of its clients.
7
8
In marketing services, AHL 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 systems. Across all its business
lines, AHL has utilized technology to simplify, automate and integrate the
administrative and management processes that serve its business units. In
European specialized staffing, AHL acquired several integrated scheduling and
accounting systems through its acquisitions.
COMPETITION
The outsourcing industry is extremely competitive and highly
fragmented, with limited barriers to entry. Companies within the outsourcing
industry compete on the basis of the quality of service provided, the range of
services offered, and price. AHL 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. Many of AHL's competitors offer a more
limited range of services and focus on a few specific industries.
AHL 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.
AHL's principal national competitors include:
- Marketing Services - Harte-Hanks, Young America Corporation
and StarTek, Inc.; and
- Specialized Staffing Services -- Manpower, Inc., DIS and
Adecco SA.
Certain of AHL's competitors have significantly greater financial
resources and larger operations than AHL.
ITEM 2 PROPERTIES
AHL maintains 18 offices and facilities for marketing services in
various metropolitan areas in North America and 103 branches for specialized
staffing services in Europe, primarily the United Kingdom and Germany. AHL's
executive headquarters (9,700 square feet) are located in Atlanta, Georgia in a
leased facility. The initial term of the executive headquarters lease expires in
July 2003.
ITEM 3 LEGAL PROCEEDINGS
AHL is involved in various routine litigation, disputes and claims in
the ordinary course of business, primarily related to employee and customer
contract issues. While unfavorable outcomes are possible, management is of the
opinion that the resolution of these matters will not have a material effect on
the results of operations or financial condition of AHL.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
AHL's executive officers and key employees are as follows:
EXECUTIVE OFFICERS: AGE POSITION
-------------------------- ------- ----------------------------------------------------------
Edwin R. Mellett........ 62 Chairman and Chief Executive Officer
Frank A. Argenbright, Jr 53 Vice Chairman
Thomas J. Marano........ 50 President and Chief Operating Officer, Marketing Services
Ernest Patterson......... 54 Chief Executive, European Specialized Staffing
Ronald J. Domanico....... 42 Executive Vice President and Chief Financial Officer
Edwin R. Mellett has been Chairman and Chief Executive Officer of AHL
Services since December 29, 2000, and was Vice Chairman and Co-Chief Executive
Officer from December 1994 to December 29, 2000. He served on AHL Services'
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.
8
9
Frank A. Argenbright, Jr. founded AHL Services in 1979. In connection
with the sale of AHL's U.S. and European aviation and facility services
businesses to Securicor plc on December 29, 2000, Mr. Argenbright assumed the
position of Chief Executive Officer of the U.S. Security Operations of Securicor
in order to facilitate a smooth transition and ensure proper customer service.
Mr. Argenbright therefore resigned as AHL's Chairman and Co-Chief Executive
Officer and assumed the position of AHL's Vice Chairman on December 29, 2000. He
served as AHL Services' Chairman from 1979 until December 29, 2000. Mr.
Argenbright was Co-Chief Executive officer from 1994 until December 29, 2000,
and was Chief Executive Officer from 1979 to 1994.
Thomas J. Marano has been a director of AHL Services since July 2000.
He has been President and Chief Operating Officer of marketing services business
of AHL since May 1999. From July 1995 to April 1999, he was President and Chief
Operating Officer-United States Operations of AHL. 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.
Ronald J. Domanico has been a director of AHL Services since July 2000.
He has been Executive Vice President and Chief Financial Officer of AHL Services
since May 2000. From February 2000 to May 2000, he was a independent management
consultant. Mr. Domanico served as Senior Vice President and Chief Financial
Officer of Nabisco International from July 1997 to February 2000. From June 1981
to June 1997, he held various positions with Kraft, Inc., most recently as Chief
Financial Officer of Kraft Scandanavia from September 1990 to June 1997.
Ernest Patterson has been Chief Executive, European Operations of AHL
since June 1997. From 1996 to 1997, Mr. Patterson was a 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.
9
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AHL completed its initial public offering on March 27, 1997 at $10.00
per share and, since that date, its common stock has traded on the Nasdaq
National Market under the symbol "AHLS." The following table sets forth the high
and low sales prices per share for the common stock, for the periods indicated,
as reported by the Nasdaq National Market.
HIGH LOW
-------- --------
2000:
First Quarter .......... $ 21.625 $ 8.875
Second Quarter ......... 10.313 6.125
Third Quarter .......... 9.625 6.688
Fourth Quarter ......... 12.500 6.750
1999:
First Quarter .......... $ 37.375 $ 18.000
Second Quarter ......... 30.563 19.938
Third Quarter .......... 31.625 23.750
Fourth Quarter ......... 28.250 16.000
On March 15, 2001, the last sale price of the common stock as reported
on the Nasdaq National Market was $9.00 per share, and there were 47 holders of
record of the common stock.
AHL has never paid any cash dividends on its common stock, and the
board of directors currently intends to retain all earnings for use in AHL's
business for the foreseeable future. AHL's credit facility prohibits the payment
of dividends. Any future payment of dividends will depend upon AHL's results of
operations, financial condition, cash requirements and other factors deemed
relevant by the board of directors.
10
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of AHL 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 AHL's "Consolidated
Financial Statements and Notes thereto" included elsewhere in this Annual Report
on Form 10-K. The selected financial data presented below as of and for each of
the fiscal years in the five-year period ended December 31, 2000, have been
derived from AHL's financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants.
Fiscal Year Ended December 31, (1) and (2)
(In thousands, except per share data) 2000 1999 1998 1997 1996
- ------------------------------------------------------ --------- --------- --------- -------- -------
Statement of Operations Data:
Revenues $ 456,163 $ 372,447 $ 152,249 $ 7,524 $ --
Cost of services 279,002 232,068 102,091 6,586 --
--------- --------- --------- -------- -------
Gross margin 177,161 140,379 50,158 938 --
Operating expenses:
Field operating 143,842 94,544 29,187 374 --
Corporate general and administrative 7,514 7,100 5,537 1,499 --
Depreciation and amortization 14,181 11,778 3,012 250 --
Impairment and other related charges 66,718 -- -- -- --
--------- --------- --------- -------- -------
Operating income (loss) (55,094) 26,957 12,422 (1,185) --
Interest expense, net 7,730 4,760 1,226 35 --
Loss on sale of U.S. industrial staffing business 2,900 -- -- -- --
Other income, net -- (385) (304) (723) --
--------- --------- --------- -------- -------
Income (loss) from operations before income (65,724) 22,582 11,500 (497) --
Income tax provision (benefit) (25,896) 8,921 4,588 (187) --
--------- --------- --------- -------- -------
Income (loss) from operations (39,828) 13,661 6,912 (310) --
Discontinued operations - U.S. and European
aviation and facility services businesses:
Gain on sale, net of taxes 50,002 -- -- -- --
Income (loss) from discontinued operations,
net of taxes (5,813) 5,933 6,211 6,729 2,171
Extraordinary charges -- -- -- (385) --
--------- --------- --------- -------- -------
Net income $ 4,361 $ 19,594 $ 13,123 $ 6,034 $ 2,171
========= ========= ========= ======== =======
Net income per share - diluted $ 0.27 $ 1.11 $ 0.91 $ 0.55 $ 0.26
========= ========= ========= ======== =======
Weighted average common shares - diluted 16,181 17,710 14,419 10,960 8,433
========= ========= ========= ======== =======
December 31,
(In thousands) 2000 1999 1998 1997 1996
--------- --------- --------- -------- -------
Balance Sheet Data:
Working capital, net of discontinued operations $ 30,762 $ 36,142 $ 20,822 $ 3,062 $ --
Total assets 364,498 507,282 347,292 96,540 25,115
Long-term debt, net of current portion 68,016 216,148 169,338 3,495 19,706
Shareholders' equity 205,740 220,356 105,688 74,531 5,409
--------- --------- --------- -------- -------
(1) Reported continuing results from operations include the marketing
services businesses in the United States and specialized staffing
services businesses in the United Kingdom and Germany, the divested
U.S. industrial staffing business and the abandoned PIMMS store set-up
business.
(2) AHL's United States operations' fiscal year ends on the last Friday in
December. Fiscal years 2000, 1998, 1997 and 1996 consist of 52 weeks.
Fiscal year 1999 consists of 53 weeks.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
AHL Services, Inc., headquartered in Atlanta, Georgia, is a leading
provider of outsourced business services including marketing services within the
United States and specialized staffing services in Europe. AHL's marketing
services include integrated customer relationship management, information
management, fulfillment of products, promotions and trade materials and
merchandising services. AHL's European specialized staffing services provide
electricians, welders, plumbers, customer service representatives and industrial
workers for clients throughout Germany and the United Kingdom.
11
12
As part of a strategic realignment, in the fourth quarter of fiscal
2000, AHL sold its aviation and facility services businesses, sold its U.S.
industrial staffing business and abandoned its PIMMS store set-up operation. A
discussion of these events is as follows:
- - On December 29, 2000, wholly-owned subsidiaries of AHL sold the stock
in the Company's subsidiaries, Argenbright Security, Inc. and The ADI
Group Limited, AHL's U.S. and European aviation and facility services
businesses, for $185 million in cash to Securicor plc., a business
services company headquartered in the United Kingdom, resulting in a
pre-tax gain of $80.1 million. The final purchase price is subject to
adjustment within a range of $175 to $210 million based on 2001 actual
performance of the U.S. aviation and facility services businesses. In
accordance with the provisions of APB No. 30, the Company has reflected
the results of its aviation and facility services businesses as
discontinued operations in the accompanying consolidated statements of
operations. This presentation reflects the net earnings of these
businesses as a single line item segregated from the results of
continuing operations for all periods presented.
- - On October 13, 2000, AHL sold the assets of its U.S. industrial
staffing business to an investor group led by the President of AHL's
Baltimore staffing operation for $22.5 million, resulting in a pre-tax
loss of $2.9 million.
- - On December 28, 2000, AHL made the decision to discontinue operations
of its store set-up business unit, formerly called PIMMS, and take
charges in Q4 of 2000 of $79.5 million related to the closing of the
unit.
During the three years ended December 31, 2000, AHL completed 15
acquisitions of marketing services and European specialized staffing businesses.
These acquisitions were financed with borrowings under AHL's bank revolving
credit facility (the "Credit Facility") and proceeds from its follow-on public
offering in January 1999. The table below provides certain information with
respect to the acquisitions that the Company has completed for the years ended
December 31, 2000, 1999 and 1998:
Revenues for the
Calendar Year
Prior to
Date Acquisition
of Acquisition Company (In millions) Headquarters Services Provided
- ------------------------------------------------------------------------------------------------------------
2000:
July 2000 GFZ $11.0 Southern Germany European specialized staffing
July 2000 HPD 10.0 Eastern Germany European specialized staffing
1999:
December 1999 Service Advantage 15.0 Taylorville, IL Marketing services
October 1999 BMP 5.0 Hanover, Germany European specialized staffing
September 1999 Jobspot 6.0 Southeast England European specialized staffing
September 1999 CDI 4.4 Minneapolis, MN Marketing services
July 1999 Draefern 30.0 Midlands England European specialized staffing
June 1999 Excel 7.0 Southeast England European specialized staffing
April 1999 PIMMS 40.0(1) Minneapolis, MN Marketing services
April 1999 MM 3.0 Munich, Germany European specialized staffing
December 1998(2) UNICCO 50.0(3) Boston, MA Facility services
1998:
December 1998 Verfurth 20.0 Munster, Germany European specialized staffing
August 1998 Right Associates 17.0 Portsmouth, England European specialized staffing
August 1998 EMD 50.0 Frankfurt, Germany European specialized staffing
July 1998 Gage Marketing 80.0 Minneapolis, MN Marketing services
April 1998 TUJA 16.0 Munich, Germany European specialized staffing
February 1998 SES Staffing Solutions 16.0(3) Baltimore, MD U.S. industrial staffing
(1) Abandoned on December 28, 2000.
(2) The UNICCO acquisition was completed on December 28, 1998, subsequent
to the year-end of AHL's United States operations. As such, the
acquisition has been excluded from all fiscal year 1998 financial
statement information.
(3) Sold during fiscal year 2000.
12
13
RESULTS OF OPERATIONS
The following table sets forth Consolidated Statement of Operations data as
a percentage of revenues for the periods indicated:
Fiscal Year Ended December 31,
-------------------------------
2000 1999 1998
----- ----- -----
Statement of Operations Data:
Revenues 100.0% 100.0% 100.0%
Cost of services 61.2 62.3 67.1
----- ----- -----
Gross margin 38.8 37.7 32.9
Operating expenses:
Field operating 31.5 25.4 19.2
Corporate general and administrative 1.6 1.9 3.6
Depreciation and amortization 3.1 3.2 1.9
Impairment and other related charges 14.6 -- --
----- ----- -----
Operating income (loss) (12.0) 7.2 8.2
Interest expense, net 1.8 1.2 0.8
Loss on sale of U.S. industrial staffing business 0.6 -- --
Other income, net -- (0.1) (0.2)
----- ----- -----
Income (loss) from operations before income taxes (14.4) 6.1 7.6
Income tax provision (benefit) (5.7) 2.4 3.1
----- ----- -----
Income (loss) from operations (8.7) 3.7 4.5
Discontinued operations - U.S. and European aviation and facility services
businesses:
Gain on sale, net of taxes 11.0 -- --
Income (loss) from discontinued operations, net of taxes (1.3) 1.6 4.1
----- ----- -----
Net income 1.0% 5.3% 8.6%
===== ===== =====
FISCAL 2000 COMPARED TO FISCAL 1999
RESULTS FROM OPERATIONS
Reported continuing results from operations include the marketing
services businesses in the United States, specialized staffing services
businesses in the United Kingdom and Germany, the divested U.S. industrial
staffing business and the abandoned PIMMS store set-up business.
Revenues increased $83.7 million, or 22%, to $456.2 million for fiscal
2000 from $372.5 million for fiscal 1999. Revenues for fiscal 2000 and 1999
included $77.6 million and $86.8 million, respectively, for the sold U.S.
industrial staffing business and the abandoned PIMMS operation. Excluding these
business units, revenues for fiscal 2000 increased $92.9 million, or 33%.
Revenues for fiscal 1999 would have been approximately $45.1 million greater
with the impact of acquisitions subsequent to January 1, 1999 treated as though
they were acquired on January 1, 1999. Revenues for fiscal 2000 were negatively
impacted as compared to the revenues for fiscal 1999 by the decline in foreign
currencies versus the U.S. dollar, primarily the British pound and the
Euro/German mark. Revenues for fiscal 2000 were negatively impacted by
approximately $34.8 million due to the effect of declines in foreign currency
exchange rates during fiscal 2000. The remaining increase of 29%, after the
impact of acquisitions and foreign currency rates, was due to a strong demand in
fiscal 2000 for customer service and consumer promotional fulfillment services
in the Company's marketing services division and due to the continued growth of
the European specialized staffing business driven by the opening of 10
additional branches during fiscal 2000, bringing the total to 103 branches at
December 31, 2000.
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 $46.9 million, or 20%, to $279.0 million for fiscal
2000 from $232.1 million for fiscal 1999. Cost of services for fiscal 2000 and
1999 included $54.7 million and $60.4 million, respectively, for the sold U.S.
industrial staffing business and the abandoned PIMMS operation. Excluding these
business units, costs of services increased $52.6 million, or 31%. As a
percentage of revenues, cost of services decreased to 59.2% for fiscal 2000 from
60.1% for fiscal 1999. This decrease was primarily due to the effect of the
growth of the Company's higher margin marketing services business in fiscal
2000.
Gross margin increased $36.8 million, or 26%, to $177.2 million for
fiscal 2000 from $140.4 million for fiscal 1999. Gross margin for fiscal 2000
and 1999 included $22.9 million and $26.4 million, respectively, for the sold
U.S. industrial staffing business and the abandoned PIMMS operation. Excluding
these business units, gross margin increased $40.2 million, or 35%. As a
percentage
13
14
of revenues, gross margin increased to 40.8% for fiscal 2000 from 39.9% for
fiscal 1999, due to the growth of the Company's higher margin marketing services
business in fiscal 2000.
Field operating expenses represent expenses which directly support
field and facility operations, such as field management, facility expenses (such
as rent, utilities and communication costs), equipment leasing, maintenance and
local sales and marketing activities. These expenses increased $49.3 million, or
52%, to $143.8 million for fiscal 2000 from $94.5 million for fiscal 1999. Field
operating expenses for fiscal 2000 and 1999 included $33.2 million and $16.4
million, respectively, for the sold U.S. industrial staffing business and the
abandoned PIMMS operation. The expense for fiscal 2000 includes $12.8 million in
working capital adjustments primarily for disputed accounts receivable related
to the decision to abandon the PIMMS operation in December 2000. Excluding these
business units, field operating expenses increased $32.4 million, or 42%. As a
percentage of revenues, field operating expenses increased to 29.2% for fiscal
2000 as compared to 27.4% for fiscal 1999, due to the growth of the Company's
marketing services businesses, which have higher field operating costs, and the
investment by the Company in 10 additional branch offices for the Company's
European specialized staffing business in fiscal 2000.
Corporate, general and administrative expenses, which include the cost
of services the Company provides to support and manage its field operations and
facilities, increased $414,000, or 6%, to $7.5 million for fiscal 2000 from $7.1
million for fiscal 1999. As a percentage of revenues, excluding the sold U.S.
industrial staffing business and the abandoned PIMMS operation, these expenses
decreased to 2.0% for fiscal 2000 from 2.5% for fiscal 1999, due to better
leveraging of corporate personnel.
Depreciation and amortization increased $2.4 million, or 20%, to $14.2
million for fiscal 2000 from $11.8 million for fiscal 1999. Depreciation and
amortization for fiscal 2000 and 1999 included $2.4 million and $2.3 million,
respectively, for the sold U.S. industrial staffing business and the abandoned
PIMMS operation. Excluding these business units, depreciation and amortization
increased $2.3 million, or 25%. As a percentage of revenues, depreciation and
amortization were relatively consistent at 3.1% for fiscal 2000 and 3.3% for
fiscal 1999.
Impairment and other related charges represent certain costs related to
the abandonment of the PIMMS operation in fiscal 2000. In December 2000, AHL
committed to discontinue operations of its store set-up business unit, formerly
called PIMMS, which AHL purchased in April 1999, for $65.0 million. A
comprehensive strategic review of the unprofitable store set-up business
indicated AHL had more attractive options and that the store set-up business did
not meet criteria for continued investment. The store set-up business had become
more project driven than anticipated with increasing surge capacity requirements
and difficult-to-forecast utilization rates. To become a profitable business
would require significant additional investment to develop geographic density
and maintain a national infrastructure. The Company recorded $66.7 million in
impairment and other related costs in December 2000, which included write-off of
goodwill of $60.1 million, write-off of assets, primarily computer systems which
will no longer be utilized, of $2.6 million, severance paid during 2000 of $2.6
million and the accrual for lease termination costs for the PIMMS facility of
$1.4 million. In addition, the Company recorded, in field operating expenses,
$12.8 million in working capital adjustments related to the abandoned PIMMS
operations, primarily for disputed accounts receivable. The Company expects the
PIMMS business unit to wind down operations and to be completely closed by March
15, 2001. At that time, the Company will take a final charge for the related
severance expense of approximately $2.5 million for the first quarter of 2001.
Operating income (loss) decreased $82.1 million to an operating loss of
$55.1 million for fiscal 2000 from operating income of $27.0 million for fiscal
1999. The operating loss for fiscal 2000 included an $84.2 million loss for the
abandoned PIMMS operation and operating income of $4.7 million for the sold U.S.
industrial staffing business. Operating income for fiscal 1999 included $7.7
million for the sold U.S. industrial staffing business and the abandoned PIMMS
operation. Excluding these business units, operating income increased $5.1
million, or 26%. As a percentage of revenues, operating income was 6.4% for
fiscal 2000 as compared to 6.8% for fiscal 1999.
Interest expense, net, represents the interest on the outstanding debt
of the Company allocated to the continuing operations. Interest expense, net,
increased $3.0 million, or 62%, to $7.7 million for fiscal 2000 from $4.8 for
fiscal 1999. This increase was due to the increase in the outstanding debt
balance in fiscal 2000 compared to fiscal 1999 due to the use of the Company's
Credit Facility to fund acquisitions, the repurchase of shares of AHL's common
stock in fiscal 2000 and the significant rise in interest rates in fiscal 2000
compared to fiscal 1999.
Loss on sale of the U.S. industrial staffing business consists of a
non-operating loss of $2.9 million in fiscal 2000. On October 13, 2000, the
Company sold its U.S. industrial staffing business to an investor group led by
the President of AHL's Baltimore staffing operation. This business was sold for
$22.5 million, which includes notes receivable from the purchaser of $9.5
million. In addition, the Company retained the accounts receivable of the
business which totaled approximately $6.5 million at October 13, 2000.
14
15
Income tax provision (benefit) decreased $34.8 million to a benefit of
$25.9 million for fiscal 2000 from a provision of $8.9 million for fiscal 1999.
The Company provided income taxes at a rate of 39.4% for fiscal 2000 and 39.5%
for fiscal 1999.
DISCONTINUED OPERATIONS - U.S. AND EUROPEAN AVIATION AND FACILITY SERVICES
BUSINESSES
On December 29, 2000, AHL sold the U.S. and European aviation and
facility services businesses for $185 million in cash to Securicor plc., a
business services company headquartered in the United Kingdom. The final
purchase price is subject to adjustment within a range of $175 to $210 million
based on 2001 actual performance of the U.S. aviation and facility services
businesses. As a result of this sale, the Company recorded an $80.1 million
pre-tax gain in December 2000 on the $185.0 million cash proceeds less the
potential purchase price reduction of $10.0 million, net book value of assets
and liabilities of $82.7 million and disposal and transaction costs of $12.2
million.
Income (loss) from discontinued operations include the results of
operations for these businesses, net of the applicable interest expense and
taxes. Income (loss) from discontinued operations decreased $11.7 million to a
loss of $5.8 million for fiscal 2000 from income of $5.9 million for fiscal
1999. The decrease is due in part to a $2.7 million legal settlement in fiscal
2000, higher interest expense in fiscal 2000 and investments in field and
corporate overhead in order to enhance future years' performance.
NET INCOME
Net income decreased $15.2 million, or 78%, to $4.4 million, or 1.0% of
revenues, for fiscal 2000 from net income of $19.6 million, or 5.3% of revenues,
for fiscal 1999. This decrease was a result of one-time gains and costs
associated with the Company's strategic transformation in the fourth quarter of
2000 in which AHL sold its U.S. industrial staffing business, sold its aviation
and facility services businesses and abandoned operations of its PIMMS store
set-up business.
15
16
FISCAL 1999 COMPARED TO FISCAL 1998
RESULTS FROM OPERATIONS
Reported continuing results from operations include the marketing
services businesses in the United States and specialized staffing services
businesses in the United Kingdom and Germany, the divested U.S. industrial
staffing business and the abandoned PIMMS store set-up business for the period
after the acquisition date of April 30, 1999.
Revenues increased $220.2 million, or 145%, to $372.4 million for
fiscal 1999 from $152.2 million for fiscal 1998. Revenues for fiscal 1999 and
1998 included $86.8 million and $37.5 million, respectively, for the sold U.S.
industrial staffing business and the abandoned PIMMS operation. Excluding these
business units, revenues for fiscal 1999 increased $170.9 million, or 149%.
Revenues for fiscal 1998 would have been approximately $150.6 million greater
with the impact of acquisitions subsequent to January 1, 1998, treated as though
they were acquired on January 1, 1998. Revenues for fiscal 1999 were negatively
impacted as compared to the revenues for fiscal 1998 by the decline in foreign
currencies versus the U.S. dollar, primarily the British pound and the
Euro/German mark. Revenues for fiscal 1998 were negatively impacted by
approximately $3.0 million due to the effect of foreign currency exchange rates.
The remaining increase of 20%, after the impact of acquisitions and foreign
currency rates, was due to strong demand for the Company's marketing services
and European specialized staffing services.
Cost of services increased $130.0 million, or 127%, to $232.1 million
for fiscal 1999 from $102.1 million for fiscal 1998. Cost of services for fiscal
1999 and 1998 included $60.4 million and $27.7 million, respectively, for the
sold U.S. industrial staffing business and the abandoned PIMMS operation.
Excluding these business units, costs of services increased $97.2 million, or
131%. As a percentage of revenues, cost of services decreased to 60.1% for
fiscal 1999 from 64.8% for fiscal 1998. This decrease was primarily due to the
effect of the growth of the Company's higher margin marketing services business
in fiscal 1999.
Gross margin increased $90.2 million, or 180%, to $140.4 million for
fiscal 1999 from $50.2 million for fiscal 1998. Gross margin for fiscal 1999 and
1998 included $26.4 million and $9.8 million, respectively, for the sold U.S.
industrial staffing business and the abandoned PIMMS operation. Excluding these
business units, gross margin increased $73.7 million, or 183%. As a percentage
of revenues, gross margin increased to 39.9% for fiscal 1999 from 35.2% for
fiscal 1998, due to the growth of the Company's higher margin marketing services
business in fiscal 1999.
Field operating expenses increased $65.4 million, or 224%, to $94.5
million for fiscal 1999 from $29.2 million for fiscal 1998. Field operating
expenses for fiscal 1999 and 1998 included $16.4 million and $7.1 million,
respectively, for the sold U.S. industrial staffing business and the abandoned
PIMMS operation. Excluding these business units, field operating expenses
increased $56.1 million, or 254%. As a percentage of revenues, field operating
expenses increased to 27.4% for fiscal 1999 as compared to 19.2% for fiscal
1998, due to the growth of the Company's marketing services businesses, which
have higher field operating costs.
Corporate, general and administrative expenses increased $1.6 million,
or 28%, to $7.1 million for fiscal 1999 from $5.5 million in fiscal 1998. As a
percentage of revenues, excluding the sold U.S. industrial staffing business and
the abandoned PIMMS operation, these expenses decreased to 2.5% for fiscal 1999
from 4.8% for fiscal 1998, due to better leveraging of corporate personnel.
Depreciation and amortization increased $8.8 million, or 291%, to $11.8
million for fiscal 1999 from $3.0 million for fiscal 1998. Depreciation and
amortization for fiscal 1999 and 1998 included $2.3 million and $406,000,
respectively, for the sold U.S. industrial staffing business and the abandoned
PIMMS operation. Excluding these business units, depreciation and amortization
increased $6.8 million, or 263%. As a percentage of revenues, depreciation and
amortization were 3.3% for fiscal 1999 and 2.3% for fiscal 1998. This increase
was due to the depreciation and amortization expense of acquisition-related
fixed and intangible assets.
Operating income increased $14.5 million to $27.0 million for fiscal
1999 from $12.4 million for fiscal 1998. Operating income for fiscal 1999 and
1998 included $7.7 million and $2.3 million, respectively, for the sold U.S.
industrial staffing business and the abandoned PIMMS operation. Excluding these
business units, operating income increased $9.2 million, or 90%. As a percentage
of revenues, operating income was 6.8% for fiscal 1999 as compared to 8.8% for
fiscal 1998.
Interest expense, net, increased $3.5 million, or 288%, to $4.8 million
for fiscal 1999 from $1.2 for fiscal 1998. This increase was due to the increase
in the outstanding debt balance in fiscal 1999 compared to fiscal 1998 due to
the use of the Company's Credit Facility to fund acquisitions.
Income tax provision increased $4.3 million to $8.9 million for fiscal
1999 from $4.6 million for fiscal 1998. The Company provided income taxes at a
rate of 39.5% for fiscal 1999 and 39.9% for fiscal 1998.
16
17
DISCONTINUED OPERATIONS - U.S. AND EUROPEAN AVIATION AND FACILITY SERVICES
BUSINESSES
On December 29, 2000, AHL sold the Company's U.S. and European aviation
and facility services businesses. Income from discontinued operations of $5.9
million for fiscal 1999 and $6.2 million for fiscal 1998 include the results of
operations for these businesses, net of the applicable interest expense and
taxes. The decrease is due primarily to higher interest expense in fiscal 1999.
NET INCOME
Net income increased $6.5 million, or 49%, to $19.6 million, or 5.3% of
revenues, for fiscal 1999 from net income of $13.1 million, or 8.6% of revenues,
for fiscal 1998. This decrease in net income as a percentage of revenues was
primarily a result of the increase in depreciation and amortization and interest
expense as a result of the acquisitions made during the third quarter of 1998
and during 1999.
17
18
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth Consolidated Statements of Operations data
for the four quarters of fiscal 2000 and 1999. This quarterly information is
unaudited but has been prepared on a basis consistent with AHL's audited
consolidated financial statements presented elsewhere herein and, in AHL's
opinion, 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.
Quarter Ended March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-------------- ------------- ------------------ -----------------
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues $ 109,693 $ 112,896 $126,724 $ 106,850
Cost of services 65,777 68,807 79,038 65,380
--------- --------- -------- ---------
Gross margin 43,916 44,089 47,686 41,470
Operating expenses:
Field operating 32,714 31,282 30,950 48,896
Corporate general and administrative 1,550 1,125 1,954 2,885
Depreciation and amortization 3,632 3,720 3,411 3,418
Impairment and other related charges -- -- -- 66,718
--------- --------- -------- ---------
Operating income (loss) 6,020 7,962 11,371 (80,447)
Interest expense, net 1,934 1,862 2,134 1,800
Loss on sale of U.S. industrial staffing business -- -- -- 2,900
Other expense (income), net -- (8) -- 8
--------- --------- -------- ---------
Income (loss) from operations before income taxes 4,086 6,108 9,237 (85,155)
Income tax provision (benefit) 1,726 2,561 3,868 (34,051)
--------- --------- -------- ---------
Income (loss) from operations 2,360 3,547 5,369 (51,104)
Discontinued operations - U.S. and European
aviation
and facility services businesses:
Gain on sale, net of taxes -- -- -- 50,002
Income (loss) from operations, net of taxes (2,071) 869 1,240 (5,851)
--------- --------- -------- ---------
Net income (loss) $ 289 $ 4,416 $ 6,609 $ (6,953)
========= ========= ======== =========
Net income (loss) per share - diluted $ 0.02 $ 0.27 $ 0.42 $ (0.45)
========= ========= ======== =========
Weighted average common shares - diluted 17,107 16,503 15,861 15,493
========= ========= ======== =========
Quarter Ended March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
-------------- ------------- ------------------ -----------------
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues $ 67,268 $ 81,061 $106,314 $ 117,804
Cost of services 40,076 50,089 65,887 76,016
--------- --------- -------- ---------
Gross margin 27,192 30,972 40,427 41,788
Operating expenses:
Field operating 17,978 22,287 25,691 28,588
Corporate general and administrative 1,624 1,668 1,788 2,020
Depreciation and amortization 2,726 3,082 3,456 2,514
Impairment and other related charges -- -- -- --
--------- --------- -------- ---------
Operating income (loss) 4,864 3,935 9,492 8,666
Interest expense, net 820 863 1,321 1,756
Loss on sale of U.S. industrial staffing business -- -- -- --
Other expense (income), net 4 (486) 55 42
--------- --------- -------- ---------
Income from operations before income taxes 4,040 3,558 8,116 6,868
Income tax provision (benefit) 1,470 1,305 3,027 3,119
--------- --------- -------- ---------
Income from operations 2,570 2,253 5,089 3,749
Discontinued operations - U.S. and European
aviation
and facility services businesses:
Gain on sale, net of taxes -- -- -- --
Income (loss) from discontinued operations,
net of taxes 1,161 3,079 2,600 (907)
--------- --------- -------- ---------
Net income $ 3,731 $ 5,332 $ 7,689 $ 2,842
========= ========= ======== =========
Net income per share - diluted $ 0.22 $ 0.30 $ 0.43 $ 0.16
========= ========= ======== =========
Weighted average common shares - diluted 17,102 17,937 18,040 17,766
========= ========= ======== =========
While the effects of seasonality on AHL's 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, AHL's revenues
and operating margins tend to be lower in the first and second quarters of the
fiscal year and highest in the third and fourth quarters of the fiscal year.
18
19
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $30.4 million for fiscal 2000
compared to cash used in operating activities of $18.0 million for fiscal 1999.
This increase in cash provided by operating activities was primarily the result
of a change of $71.9 million in working capital due to decreases in days
outstanding for accounts receivable and the timing of payments of accounts
payable and accrued expenses, offset by a $23.5 million decrease in net income
before depreciation and amortization and the gain/loss on the sale, disposition
and abandonment of business units. Cash provided by investing activities for
fiscal 2000 was $141.7 million compared to cash used in investing activities of
$136.6 million for fiscal 1999. The cash provided by investing activities for
fiscal 2000 of $141.7 million was primarily due to the net proceeds from the
sale of businesses in fiscal 2000 of $183.3 million offset by acquisition
consideration paid and additions to property and equipment of $41.6 million. The
use of cash for investing activities of $136.6 million in fiscal 1999 was
principally a result of acquisition consideration paid and additions to property
and equipment made during the period. Cash used by financing activities for
fiscal 2000 was $161.5 million compared to cash provided by financing activities
of $147.5 million for fiscal 1999. The Company used the proceeds from the sale
of businesses to repay the Credit Facility by $143.8 million in fiscal 2000. The
Company repurchased 1,920,600 shares of its common stock in fiscal 2000 for
$17.7 million. During the first quarter of 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.
Cash used in operating activities was $18.0 million for fiscal 1999
compared to cash provided by operating activities of $7.3 million for fiscal
1998. This change was primarily the result of an increase of $15.2 million in
net income before depreciation and amortization offset by $40.6 million of
changes in working capital due to the timing of billings of accounts receivable,
the growth in revenues and therefore accounts receivable, and the timing of
payments of accounts payable and accrued expenses. Cash used in investing
activities for fiscal 1999 was $136.6 million compared to $160.0 million for
fiscal 1998. The use of cash for investing activities was principally the
acquisitions made during those periods. Cash provided by financing activities
for fiscal 1999 was $147.5 million compared to $155.2 million for fiscal 1998.
Capital expenditures were $17.3 million, $14.5 million and $10.2
million in fiscal 2000, 1999 and 1998, respectively. Historically, capital
expenditures have been, and future expenditures are anticipated to be, primarily
to support expansion of AHL's marketing services business' facilities and
computer systems. AHL's capital expenditures over the next several years, as a
percentage of its revenues, excluding revenues from discontinued operations, are
expected to be generally consistent with those of the most recent fiscal year.
In connection with certain acquisitions, AHL 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 Credit Facility allows the Company to repurchase up to $20.0
million of its common stock. During fiscal 2000, the Company repurchased
1,920,600 shares at an average price of $9.20 per share. For the period January
1, 2001 through February 19, 2001, the Company repurchased an additional 167,500
shares at an average price of $9.84 per share.
AHL completed its initial public offering of common stock in March
1997, raising net proceeds of approximately $22.0 million. These proceeds were
used to repay all outstanding amounts under AHL's Credit Facility to repurchase
an outstanding warrant, and to retire other outstanding acquisition-related
debt. AHL completed a follow-on public offering in October 1997, raising net
proceeds of approximately $41.0 million. These proceeds were used to repay
outstanding debt used to fund acquisitions of approximately $16.0 million, with
the balance used for general corporate purposes, including working capital to
support AHL's growth and acquisitions. AHL completed another follow-on public
offering in January 1999, raising net proceeds of approximately $96.1 million.
These proceeds were used to repay outstanding indebtedness.
Effective December 29, 2000, AHL amended its Credit Facility to reduce
the aggregate commitments from its lenders, subsequent to the sale of the U.S.
and European aviation and facility services businesses, to $201.3 million from
$375.0 million and to change the maturity date to April 15, 2002. At December
29, 2000, after the disposition of the U.S. and European aviation and facility
services businesses, AHL has approximately $67.0 million outstanding under the
Credit Facility.
AHL 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 expenditure requirements, share
repurchases and internal growth for at least
19
20
the next 12 months. If AHL were to make a significant acquisition for cash, it
may be necessary for AHL 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 AHL, 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 AHL's future performance, as well as its
expectations, beliefs, plans, estimates or projections relating to the future,
are forward-looking statements within the meaning of these laws. Examples of
such statements in this report include descriptions of its plans with respect to
developing the two business lines, expectations relating to future acquisitions
and its continuing growth. All forward-looking statements are subject to certain
risks and uncertainties that could cause actual events to differ materially from
those projected. 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. AHL undertakes no obligation to publicly update or revise
any forward-looking statement, whether as a result of future events, new
information or otherwise.
The following are some of the factors that could cause AHL's actual
results to differ materially from the expected results described in AHL's
forward-looking statements:
- AHL's ability to manage a business that has been growing both
internally and through acquisitions, and management's ability
to identify acceptable acquisition candidates, finance or
complete acquisitions on favorable terms and integrate
acquired businesses;
- the exposure of AHL's international operations to special
risks, including trade barriers; risks of increases in duties,
taxes and governmental royalties; social and severance costs;
exchange controls; changes in laws and policies governing
operations of foreign-based companies; national and regional
labor strikes; political risks and risks of the new single
European currency;
- the impact of competition, including competition for labor and
in other important aspects of AHL's business. AHL's primary
competitors include outsourcing companies, specialized
contract service providers and in-house organizations that
provide services to potential clients and third parties. AHL's
business is extremely competitive and highly fragmented;
- AHL's historical reliance on certain major clients;
- the unfavorable outcome of any possible pending litigation,
disputes or claims against AHL; and
- general economic conditions which affect the overall level of
economic activity.
INFLATION
AHL 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
AHL's business will not be affected by inflation in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
A substantial amount of AHL's revenues are received, and operating
costs are incurred, in foreign currencies (primarily the British pound and the
Euro/German 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 AHL to certain
foreign exchange rate risks. AHL addresses the exposure by financing most
working capital needs in the applicable foreign currencies. AHL has not engaged
in hedging transactions to reduce exposure to fluctuations in foreign currency
exchange rates.
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 Credit
Facility had a balance outstanding at December 31, 2000, of $67.0 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 in the notional amount of $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 $45.0 million. On January 31, 2000, the Company entered
into an additional interest rate swap agreement in the notional amount of
approximately $15.0 million. On November 1, 2000, these interest rate swap
agreements were replaced with a one-year agreement in the notional amount of
Euro 61.6 million at a fixed rate of 4.63% plus the applicable margin. The fair
value of the interest rate swap
20
21
agreement at December 31, 2000, was not material. 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 $350,000. Fair values were determined from
discounted cash flows.
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires recognition of all derivatives as either assets or liabilities in
the statement of financial position at their fair value. SFAS No. 133 was
subsequently amended by SFAS No. 137 and SFAS No. 138 to, among other things,
defer the effective date of SFAS No. 133 such that it is applicable to AHL
beginning with its first quarter of fiscal 2001. The new standard will not have
a material impact on the Company's financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AHL's financial statements are listed under Item 14(a) of this Annual
Report on Form 10-K and are filed as part of this report on the pages indicated.
The supplementary data are included under Item 7 of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections under the heading "Election of Directors" entitled
"Nominees for Election -- Term Expiring 2004," "Nominee for Election -- Term
Expiring 2003," Nominee for Election -- Term Expiring 2002," "Incumbent
Directors - Term Expiring 2003" and "Incumbent Directors - Term Expiring 2002"
of the Proxy Statement for the Annual Meeting of Shareholders to be held May 10,
2001 (the "Proxy Statement") are incorporated herein by reference. See Item X in
Part I hereof for information regarding executive officers of the Registrant.
The section under the heading "Other Matters" entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The section under the heading "Election of Directors" entitled
"Compensation of Directors" of the Proxy Statement and the sections under the
heading "Executive Compensation" entitled "Summary Compensation Table", "Option
Grants Table", "Fiscal Year-End Option Value", "Noncompetition and Employment
Contracts" and "Compensation Committee Interlocks and Insider Participation" of
the Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section under the heading "Common Stock Ownership by Management and
Principal Shareholders" of the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section under the heading "Certain Transactions" of the Proxy
Statement is incorporated herein by reference.
22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
1. The following financial statements and schedule are filed with
this report on the pages indicated:
PAGE
AHL SERVICES, INC.:
Report of Independent Public Accountants ........................................................... 25
Consolidated Balance Sheets at December 31, 2000 and 1999 .......................................... 26
Consolidated Statements of Operations for the years ended December 31, 2000, 1999
and 1998 ........................................................................................... 27
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000,
1999 and 1998 ...................................................................................... 28
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998 ........................................................................................... 29
Notes to Consolidated Financial Statements ......................................................... 30
Schedule II--Valuation and Qualifying Accounts ..................................................... 41
2. Exhibits
See Item 14(c) below.
(b) The Company filed a Current Report on Form 8-K on December 29, 2000 to
report its divestiture of AHL's U.S and European aviation and facility
services businesses.
The Company filed a Current Report on Form 8-K on March 16, 2001 to
report its abandonment of the store set-up business unit, formerly
called PIMMS.
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Restated and Amended Articles of Incorporation of AHL
(incorporated by reference to the Registration Statement on Form
8-A dated March 25, 1997)
3.2 -- Bylaws of AHL (incorporated by reference to the Registration
Statement on Form 8-A dated March 25, 1997)
4.1 -- Specimen Common Stock Certificate (incorporated by reference to
AHL's Registration Statement on Form S-1 (File No. 333-20315))
4.2 -- 1997 Stock Incentive Plan (incorporated by reference to AHL's
Registration Statement on Form S-1 (File No. 333-20315))
4.3 -- AHL Services, Inc. 1997 Non-Qualified Employee Stock Purchase
Plan USA (incorporated by reference to AHL's Annual Report on
Form 10-K for the year ended December 31, 1997)
23
24
10.1 -- Employment Agreement between AHL and
Edwin R. Mellett dated as of January 1, 2001.
10.2 Employment Agreement between AHL and Frank A.
Argenbright, Jr. dated as of January 1, 2001.
10.3 -- Restated Employment Agreement between AHL and
Thomas J. Marano dated as of February 1, 1997, as
amended on February 28, 1997 (incorporated by
reference to AHL's Registration Statement on Form S-1
(File No. 333-20315))
10.4 -- Letter Agreement between AHL and Ernest Patterson
dated as of May 23, 1997 (incorporated by reference
to AHL's Registration Statement on Form S-1 (File No.
333-37327))
10.5 -- Second Amended and Restated Credit Agreement dated as of October
15, 1999 by and among AHL Services, Inc. and its subsidiaries,
First Union National Bank (London Branch), as European Swingline
Lender, First Union National Bank, as Administrative Agent, First
Union Capital Markets Corp. and Salomon Smith Barney Inc., as
Co-Arrangers, Salomon Brothers Holding Company Inc., as
Syndication Agent, and Bank Of America, N.A. and Wachovia Bank
N.A., as Managing Agents. (incorporated by reference to AHL's
Annual Report on Form 10-K dated December 31, 1999)
10.6 -- The Consent, Waiver and Third Amendment to the Second
Amended and Restated Credit Agreement, dated as of
December 20, 2000 by and among AHL Services, Inc. and
its subsidiaries and First Union National Bank, as
administrative agent, and the group of financial institutions
listed on the signature pages hereto (incorporated by
reference to AHL's Current Report on Form 8-K dated
December 29, 2000).
10.7 -- The Consent, Waiver and Fourth Amendment to the Second
Amended and Restated Credit Agreement, dated as of
March 19, 2001, by and among AHL Services, Inc. and
its subsidiaries and First Union National Bank, as
administrative agent, and the group of financial institutions
listed on the signature pages hereto.
10.8 -- Acquisition Agreement, dated as of December 4, 2000 by
and among Securicor plc., Securicor Georgia, Inc., AHL
Services, Inc., Argenbright Holdings Limited, Argenbright,
Inc., Argenbright Security, Inc., The ADI Group Limited and
AHL Europe Limited (incorporated by reference to
AHL's Current Report on Form 8-K dated December 29,
2000).
10.9 -- Registration Rights Agreement, dated July 24,
1998, by and between AHL Services, Inc. and Gage
Marketing Group, LLC (incorporated by reference to
AHL's Current Report on Form 8-K dated July 24,
1998).
11.1 -- Statement of Computation of Earnings Per Share
21.1 -- List of subsidiaries
23.1 -- Consent of Arthur Andersen LLP
24
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AHL Services, Inc.:
We have audited the accompanying consolidated balance sheets of AHL SERVICES,
INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 2000 and 1999,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and the schedule referred to
below based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of AHL Services, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 15, 2001
25
26
CONSOLIDATED BALANCE SHEETS
AHL SERVICES, INC.
December 31,
(In thousands, except share and per share data) 2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,926 $ 9,527
Accounts receivable, less allowance for doubtful accounts of $4,264, and
$3,429 in 2000 and 1999, respectively 59,989 57,756
Reimbursable customer expenses 10,777 13,280
Work in process 3,457 11,109
Prepaid expenses and other 7,828 7,152
Notes receivable, current portion 2,000 --
Income taxes receivable 3,086 886
Deferred income taxes 1,170 342
Net assets of discontinued operations -- 94,669
-------- --------
Total current assets 108,233 194,721
PROPERTY AND EQUIPMENT, NET 27,538 25,759
INTANGIBLES, NET 220,027 286,526
NOTES RECEIVABLE, LESS CURRENT PORTION 7,500 --
OTHER ASSETS 1,200 276
-------- --------
$364,498 $507,282
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,414 $ 6,384
Accrued payroll and other current liabilities 58,590 56,985
Current portion of self-insurance reserves 406 325
Current portion of long-term debt 160 216
Contingent consideration payable 12,901 --
-------- --------
Total current liabilities 77,471 63,910
-------- --------
LONG-TERM DEBT, LESS CURRENT PORTION 68,016 216,148
-------- --------
SELF-INSURANCE RESERVES, LESS CURRENT PORTION 1,624 1,299
-------- --------
DEFERRED INCOME TAXES 967 4,797
-------- --------
DEFERRED PURCHASE PRICE 10,000 --
-------- --------
OTHER NONCURRENT LIABILITIES 680 772
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 6 AND 9) -- --
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized, 17,409,892 shares issued
and outstanding at December 31, 2000 and 1999 175 175
Preferred stock, no par value; 5,000,000 shares authorized, no shares outstanding -- --
Paid-in capital 176,836 176,836
Retained earnings 48,648 44,287
Foreign currency translation adjustment (2,254) (942)
Shares held in treasury (1,920,600 at December 31, 2000) (17,665) --
-------- --------
Total shareholders' equity 205,740 220,356
-------- --------
$364,498 $507,282
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
27
CONSOLIDATED STATEMENTS OF OPERATIONS
AHL SERVICES, INC.
Year Ended December 31,
(In thousands, except per share data) 2000 1999 1998
--------- --------- ---------
REVENUES $ 456,163 $ 372,447 $ 152,249
COST OF SERVICES 279,002 232,068 102,091
--------- --------- ---------
GROSS MARGIN 177,161 140,379 50,158
OPERATING EXPENSES:
Field operating 143,842 94,544 29,187
Corporate general and administrative 7,514 7,100 5,537
Depreciation and amortization 14,181 11,778 3,012
Impairment and other related charges 66,718 -- --
--------- --------- ---------
OPERATING INCOME (LOSS) (55,094) 26,957 12,422
Interest expense, net 7,730 4,760 1,226
Loss on sale of U.S. industrial staffing business 2,900 -- --
Other income, net -- (385) (304)
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (65,724) 22,582 11,500
Income tax provision (benefit) (25,896) 8,921 4,588
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS (39,828) 13,661 6,912
Discontinued operations - aviation and facility services
businesses:
Gain on sale, net of taxes of $30.1 million 50,002 -- --
Income (loss) from discontinued operations, net of taxes (5,813) 5,933 6,211
--------- --------- ---------
NET INCOME $ 4,361 $ 19,594 $ 13,123
========= ========= =========
EARNINGS PER SHARE:
Basic:
Net income per common share $ 0.27 $ 1.14 $ 0.95
========= ========= =========
Diluted:
Net income per common and common equivalent share $ 0.27 $ 1.11 $ 0.91
========= ========= =========
Weighted average common and common equivalent shares:
Basic 16,181 17,173 13,820
========= ========= =========
Diluted 16,181 17,710 14,419
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AHL SERVICES, INC.
Accumulated Other
Comprehensive Income
Foreign
AHL Services Shares Held In Currency
Comment Stock Treasury Paid-In Retained Translation Comprehensive
(In thousands, except share data) Shares Amount Shares Amount Capital Earnings Adjustment Income
---------- ------ ---------- -------- -------- -------- ----------- -------------
BALANCE, DECEMBER 31, 1997 13,605,000 $136 -- $ -- $ 62,908 $11,570 $ (83)
Issuance of common stock -
Gage acquisition 461,172 5 -- -- 16,995 -- --
Exercise of stock options 53,750 1 -- -- 924 -- --
Foreign currency translation
adjustment, net of tax of $73 -- -- -- -- -- -- 109 $ 109
Net income -- -- -- -- -- 13,123 -- 13,123
---------- ---- ---------- -------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1998 14,119,922 142 -- -- 80,827 24,693 26 $ 13,232
========
Issuance of common stock 3,255,570 33 -- -- 95,534 -- --
Exercise of stock options 34,400 -- -- -- 475 -- --
Foreign currency translation
adjustment, net of tax
benefit of $645 -- -- -- -- -- -- (968) $ (968)
Net income -- -- -- -- -- 19,594 -- 19,594
---------- ---- ---------- -------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1999 17,409,892 175 -- -- 176,836 44,287 (942) $ 18,626
========
Repurchase of common stock -- -- (1,920,600) (17,665) -- -- --
Foreign currency translation
adjustment, net of tax
benefit of $875 -- -- -- -- -- -- (1,312) $ (1,312)
Net income -- -- -- -- -- 4,361 -- 4,361
---------- ---- ---------- -------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2000 17,409,892 $175 (1,920,600) $(17,665) $176,836 $48,648 $(2,254) $ 3,049
========== ==== ========== ======== ======== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
AHL SERVICES, INC.
Year Ended December 31,
(In thousands) 2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,361 $ 19,594 $ 13,123
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 22,285 18,435 9,665
Gain on sale of aviation and facility services businesses (80,116) -- --
Loss on sale of U.S. industrial staffing business 2,900 -- --
Noncash impairment and other related charges - PIMMS operation 64,687 -- --
Gain on sales of property and equipment -- (418) (297)
Changes in assets and liabilities, net of assets of acquired and
disposed businesses:
Accounts receivable, net 11,861 (29,372) (30,360)
Reimbursable customer expenses 2,503 (8,550) (684)
Work in process 7,652 (6,398) 560
Prepaid expenses and other (4,142) (3,169) (1,407)
Accounts payable (1,312) (11,760) 6,252
Accrued payroll and other current liabilities 11,687 4,305 9,465
Self-insurance reserves 1,654 1,600 1,100
Income taxes receivable/payable (4,518) (3,829) 2,207
Deferred income taxes (5,507) 5,195 1,224
Other, net (3,569) (3,647) (3,501)
--------- --------- ---------
Net cash provided by (used in) operating activities 30,426 (18,014) 7,347
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on sale of aviation and facility services businesses 172,723 -- --
Proceeds on sale of U.S. industrial staffing business 10,524 -- --
Purchases of property and equipment, net of assets of acquired businesses (17,284) (14,512) (10,185)
Proceeds from sales of property and equipment -- 1,558 1,654
Purchase of businesses (24,233) (121,322) (149,055)
Other -- (2,292) (2,402)
--------- --------- ---------
Net cash provided by (used in) investing activities 141,730 (136,568) (159,988)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under Credit Facility (143,819) 61,453 154,649
Repayment of subordinated convertible debenture -- (10,000) --
Repurchases of AHL common stock (17,665) -- --
Proceeds from issuance of common stock -- 96,171 --
Expenses from issuance of common stock -- (604) --
Proceeds from exercise of stock options -- 475 538
--------- --------- ---------
Net cash provided by (used in) financing activities (161,484) 147,495 155,187
--------- --------- ---------
EFFECT OF EXCHANGE RATES ON CASH (273) (1,625) 237
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 10,399 (8,712) 2,783
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,527 18,239 15,456
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,926 $ 9,527 $ 18,239
========= ========= =========
CASH PAID DURING THE YEAR FOR:
Interest $ 18,686 $ 13,124 $ 3,030
========= ========= =========
Income taxes $ 2,656 $ 16,727 $ 6,704
========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes received from the U.S. industrial staffing business sale $ 9,500 $ -- $ --
========= ========= =========
Contingent consideration accrued $ 12,901 $ -- $ --
========= ========= =========
Notes issued for the Draefern acquisition $ -- $ 6,000 $ --
========= ========= =========
Assignment of capital lease obligations from
sale of United Kingdom transportation business $ -- $ 4,001 $ --
========= ========= =========
Subordinated convertible debenture issued for the Gage acquisition $ -- $ -- $ 10,000
========= ========= =========
Common stock issued for the Gage acquisition $ -- $ -- $ 17,000
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
29
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AHL SERVICES, INC.
1. DESCRIPTION OF THE BUSINESS
ORGANIZATION AND BUSINESS
The continuing operations of AHL Services, Inc. ("AHL" or the "Company") provide
marketing services in the United States and specialized staffing services in
Europe, primarily the United Kingdom and Germany.
BASIS OF PRESENTATION
On December 29, 2000, wholly-owned subsidiaries of AHL sold the stock in the
Company's subsidiaries Argenbright Security, Inc. and The ADI Group Limited,
AHL's U.S. and European aviation and facility services businesses, for $185
million in cash to Securicor plc., a business services company headquartered in
the United Kingdom. The final purchase price is subject to adjustment within a
range of $175 to $210 million based on 2001 actual performance of the U.S.
aviation and facility services businesses. On October 13, 2000, AHL sold the
assets of its U.S. industrial staffing business to an investor group led by the
president of AHL's Baltimore staffing operation for $22.5 million. On December
28, 2000, AHL made the decision to discontinue operations of its store set-up
business unit, formerly called PIMMS.
Reported results from operations include the continuing marketing
services and European specialized staffing services businesses as well as the
divested U.S. industrial staffing business and the abandoned PIMMS store set-up
business. The results of the aviation and facility services businesses have been
presented as discontinued operations for all periods presented (see Note 3).
PUBLIC OFFERING
In January 1999, the Company completed a follow-on public offering of 3,255,570
shares of its common stock at an offering price of $31 per share. The total
proceeds, net of underwriting discounts and offering expenses, were
approximately $96.1 million. The proceeds were used to repay debt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of AHL
and its wholly-owned subsidiaries. All significant intercompany accounts have
been eliminated.
FISCAL YEAR-END
The Company's fiscal year-end is December 31. The Company's United States
operation maintains its books by using a 52/53-week fiscal year ending on the
last Friday in December. The Company's United States operation's fiscal years
ended on December 29, 2000, December 31, 1999, and December 25, 1998. Fiscal
year 1999 includes 53 weeks. Fiscal years 2000 and 1998 include 52 weeks.
Management believes that the impact of the use of different year-ends is
immaterial to the Company's consolidated financial statements taken as a whole.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts, including those of discontinued operations, have
been reclassified to conform with current year presentation.
30
31
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
purchase maturities of three months or less.
REIMBURSABLE CUSTOMER EXPENSES
Reimbursable customer expenses consist of amounts billed to marketing services
customers for freight and postage related to fulfillment services and travel
expenses related to merchandising services.
REVENUE RECOGNITION
For marketing services customers, the Company recognizes revenues as programs
are completed, services are rendered and/or as products are shipped. For
European specialized staffing customers, the Company recognizes revenues as
services are performed.
The Securities and Exchange Commission ("SEC") staff issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," that will be applicable to AHL in its first quarter of fiscal year
2001. SAB No. 101 reflects the basic principles of revenue recognition in
existing accounting principles generally accepted in the United States and does
not supersede any existing authoritative literature. SAB No. 101 represents the
interpretations and practices of the SEC in administering the disclosure
requirements of the United States securities laws. Some of the topics addressed
by SAB No. 101 include persuasive evidence of an arrangement, delivery or
performance, customer acceptance and a fixed or determinable price. Once
adopted, these guidelines are not expected to significantly affect AHL's revenue
recognition practices.
WORK IN PROCESS
Work in process consists of labor and material costs for promotional programs
and merchandising support services provided to marketing services customers that
have not been completed.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over estimated useful lives of three to 10 years for furniture, equipment
and internally developed software. Leasehold improvements are amortized over the
lesser of their useful lives or the terms of the related leases.
During the first quarter of fiscal year 1999, the Company adopted
Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 provides for the
capitalization of certain internal software development costs and amortization
over the life of the related software, which is between three to five years.
Amounts capitalized during fiscal years 2000 and 1999 were $3.1 million and $1.4
million, respectively.
Property and equipment were comprised of the following:
December 31,
(In Thousands) 2000 1999
-------- --------
Furniture, equipment, and internally developed $ 31,101 $ 27,881
software
Leasehold improvements 4,753 2,867
-------- --------
35,854 30,748
Less accumulated depreciation (8,316) (4,989)
-------- --------
$ 27,538 $ 25,759
======== ========
Depreciation expense from continuing operations was $5.5 million, $3.8
million and $1.8 million, for the years ended December 31, 2000, 1999 and 1998,
respectively.
31
32
INTANGIBLES
Intangibles were comprised of the following:
December 31,
2000 1999
-------- --------
Goodwill $208,058 $261,896
Other intangibles 24,409 31,709
-------- --------
232,467 293,605
Less accumulated amortization (12,440) (7,079)
-------- --------
$220,027 $286,526
======== ========
Goodwill and other intangibles are amortized using the straight-line
method over periods ranging up to 40 years. Amortization expense from continuing
operations for goodwill and other intangibles was $8.1 million, $6.0 million and
$1.0 million for the years ended December 31, 2000, 1999 and 1998, respectively.
Subsequent to acquisition, the Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill might warrant revision, or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related business segment's undiscounted net income or other methods of
determining fair value, if more readily determinable, over the remaining life of
the goodwill in measuring whether the goodwill is recoverable.
LONG-LIVED ASSETS
The Company reviews its long-lived assets, including goodwill and identifiable
intangibles, for impairment whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. Based on the
review, which entails assessing future cash flows on an undiscounted basis, the
Company believes that the carrying amounts of long-lived assets are recoverable.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding during the period. Diluted earnings per share is based on the
weighted average number of shares outstanding and the dilutive effect, if any,
of common stock equivalent shares issuable upon the conversion of stock options
(using the treasury stock method). Because of the loss from continuing
operations for the year ended December 31, 2000, diluted earnings for fiscal
year 2000 do not consider the incremental shares from assumed conversion of
stock options granted.
The following table reconciles the denominator of the basic and diluted
earnings per share computations:
Year Ended December 31,
(In Thousands) 2000 1999 1998
------ ------ ------
Weighted average common shares 16,181 17,173 13,820
Incremental shares from assumed conversion of stock options granted -- 537 599
------ ------ ------
Weighted average common shares outstanding and dilutive potential common shares 16,181 17,710 14,419
====== ====== ======
FOREIGN CURRENCY TRANSLATION AND EXPOSURE
In the accompanying consolidated balance sheets, all asset and liability
accounts of foreign subsidiaries are translated into U.S. dollars at the rate of
exchange in effect at the balance sheet date. Shareholders' equity is translated
at historical rates. All income statement accounts of foreign subsidiaries are
translated at average exchange rates during the year. Resulting translation
adjustments arising from these translations are charged or credited directly to
accumulated other comprehensive income. Gains or losses on foreign currency
transactions are included in income as incurred. The denomination of foreign
subsidiaries' account balances in their local currencies 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 other purchased hedging transactions to reduce any
remaining exposure to fluctuations in foreign currency exchange rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
32
33
The Company's carrying value of long-term debt approximated fair value since
most of the debt matures within 30-90 days of incurrence and is renewed at
current interest rates. The carrying value of all other financial instruments
approximated fair value due to their short-term nature.
3. DIVESTITURES AND ABANDONMENTS
On December 29, 2000, wholly-owned subsidiaries of AHL sold the stock in the
Company's subsidiaries Argenbright Security, Inc. and The ADI Group Limited,
AHL's U.S. and European aviation and facility services businesses, for $185
million in cash to Securicor plc., a business services company headquartered in
the United Kingdom. The final purchase price is subject to adjustment within a
range of $175 to $210 million based on 2001 actual performance of the U.S.
aviation and facility services businesses. Net after-tax proceeds from the sale
were used to retire debt. As a result of this sale, the Company recorded an
$80.1 million pre-tax gain in December 2000 on the $185.0 million cash proceeds
less the potential downward purchase price adjustment of $10.0 million, net book
value of assets and liabilities of $82.7 million and disposal and transaction
costs of $12.2 million.
In accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 30, the Company has reflected the results of its aviation
and facility services businesses as discontinued operations in the accompanying
consolidated statements of operations. This presentation reflects the net
earnings of these businesses as a single line item segregated from the results
of continuing operations for all periods presented. It is the Company's policy
to allocate interest expense to discontinued operations based primarily on the
revenue of the discontinued operations in relation to the total revenue of the
Company. The Company has allocated $10.9 million, $7.8 million, and $2.6 million
of interest expense to discontinued operations in fiscal years 2000, 1999 and
1998, respectively.
On October 13, 2000, AHL sold the assets of its U.S. industrial
staffing business to an investor group led by the president of AHL's Baltimore
staffing operation. This business was sold for $22.5 million, which includes
notes receivable from the purchaser of $9.5 million, resulting in a loss on
disposition of $2.9 million. In addition, the Company retained the accounts
receivable of the business, which totaled approximately $6.5 million, net, as of
the date of the sale. The results of the U.S. industrial staffing business are
reflected within continuing operations through the date of the sale in the
accompanying consolidated statements of operations.
On December 28, 2000, AHL made the decision to abandon operations of
its store set-up business unit, formerly called PIMMS. A comprehensive strategic
review of the unprofitable store set-up business indicated AHL has more
attractive options, and that the store set-up business did not meet criteria for
continued investment. The store set-up business had become more project-driven
than anticipated with increasing surge capacity requirements and difficulties in
forecasting utilization rates. To become a profitable business would require
significant additional investment to develop geographic density and maintain a
national infrastructure. As a result of this decision, the Company recorded
$66.7 million in impairment and other related costs in December 2000, that
included write-off of goodwill of $60.1 million, write-off of assets, primarily
computer systems which will no longer be utilized, of $2.6 million, severance
paid during 2000 of $2.6 million and the accrual for lease termination costs for
the PIMMS facility of $1.4 million. In addition, the Company recorded, in field
operating expenses, $12.8 million in working capital adjustments related to the
abandoned PIMMS operations, primarily for disputed accounts receivable. The
Company expects the PIMMS business unit to be completely closed by March 15,
2001, and will record a final charge for the related severance expense of
approximately $2.5 million for the first quarter of 2001. The results of the
PIMMS business are reflected within continuing operations from the date of
acquisition, April 30, 1999, through December 31, 2000, in the accompanying
consolidated statements of operations.
On June 30, 1999, the Company sold its United Kingdom bus
transportation business to National Express Group PLC. The shuttle bus business
generated approximately $6.0 million in 1998 revenues. As a result of this
divestiture, AHL recorded a gain of approximately $400,000 and assigned
approximately $4.0 million in lease obligations to the purchaser.
33
34
4. ACQUISITIONS
The table below provides certain information with respect to the acquisitions
that the Company has completed during the years ended December 31, 2000, 1999
and 1998:
Date Company Acquisition Price Headquarters Services Provided
(In Millions)
- ---- ---------------------- ----------------- ------------------- -----------------------------
2000:
July 2000 GFZ $ 7.0 Southern Germany European specialized staffing
July 2000 HPD 7.4 Eastern Germany European specialized staffing
1999:
December 1999 ServiceAdvantage 19.9(1) Taylorville, IL Marketing services
October 1999 BMP 2.7 Hanover, Germany European specialized staffing
September 1999 Jobspot 3.9 Southeast England European specialized staffing
September 1999 CDI 5.2 Minneapolis, MN Marketing services
July 1999 Draefern 26.3 Midlands England European specialized staffing
June 1999 Excel 3.0 Southeast England European specialized staffing
April 1999 PIMMS 65.0(2) Minneapolis, MN Marketing services
April 1999 MM 1.8 Munich, Germany European specialized staffing
December 1998 (3) UNICCO 12.0(4) Boston, MA Facility services
1998:
December 1998 Verfurth 12.5 Munster, Germany European specialized staffing
August 1998 Right Associates 6.5 Portsmouth, England European specialized staffing
August 1998 EMD 42.0 Frankfurt, Germany European specialized staffing
July 1998 Gage Marketing 81.1(5) Minneapolis, MN Marketing services
April 1998 TUJA 6.0 Munich, Germany European specialized staffing
February 1998 SES Staffing Solutions 12.6(4) Baltimore, MD U.S. industrial staffing
(1) Purchase price includes contingent payments made or accrued at December 31,
2000.
(2) Abandoned on December 28, 2000.
(3) The Unicco acquisition was completed on December 28, 1998, subsequent to the
year-end of AHL's United States operations. As such, the acquisition has been
excluded from all fiscal 1998 financial statement information.
(4) Sold during fiscal year 2000.
(5) Purchase price includes $17.0 million in common stock issued and a $10.0
million subordinated convertible debenture issued to the seller.
The aforementioned 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 estimated
fair values. The purchase price for the fiscal year 2000 acquisitions have been
allocated on a preliminary basis. Management does not believe that the final
purchase price allocation will differ materially from the original allocation.
Certain purchase agreements may require additional payments based upon future
operating results. Any contingent consideration amounts, when earned, will be
applied to goodwill of the respective acquisition and amortized over the
remaining life of the goodwill. At December 31, 2000, the Company accrued $12.9
million for the final contingent consideration payment on the ServiceAdvantage
acquisition, paid in January 2001.
The Company's unaudited pro forma results of continuing operations are
presented assuming that the acquisitions had been consummated January 1 of each
year presented, and are not necessarily indicative of the results of operations
which would have actually been obtained.
Year Ended December 31,
(In Thousands, Except Per Share Data) 2000 1999
---------- ----------
Pro forma revenue $ 466,906 $ 445,776
========== ==========
Pro forma income (loss) from continuing operations $ (39,684) $ 14,435
========== ==========
Pro forma earnings (loss) per share from continuing operations,
diluted $ (2.45) $ 0.82
========== ==========
Pro forma diluted weighted average shares 16,181 17,710
========== ==========
Pro forma adjustments were recorded to include (i) increased interest
expense to reflect interest on long-term debt borrowed to effect the
acquisitions; (ii) increased depreciation and amortization expense as a result
of the excess of the purchase price over the book value; and, (iii) provision
for income taxes for net income of the acquired companies and pro forma
adjustments.
34
35
5. INCOME TAXES
The income tax (benefit) provision attributable to continuing operations
consists of the following:
Year Ended December 31,
(In Thousands) 2000 1999 1998
--------- --------- ---------
Current:
Federal $ (22,023) $ 1,771 $ 1,778
State (3,146) 690 570
Foreign 3,931 2,838 1,594
--------- --------- ---------
(21,238) 5,299 3,942
--------- --------- ---------
Deferred:
United States (4,540) 2,701 448
Foreign (118) 921 198
--------- --------- ---------
(4,658) 3,622 646
--------- --------- ---------
Total $ (25,896) $ 8,921 $ 4,588
========= ========= =========
For the years ended December 31, 2000, 1999 and 1998, income tax
(benefit) expense of $(3.8) million, $3.9 million and $4.1 million has been
allocated to discontinued operations.
The reconciliation of the federal statutory rate to the Company's
effective tax provision attributable to continuing operations is as follows:
Year Ended December 31,
2000 1999 1998
---- ---- ----
Statutory federal tax rate 35.0% 35.0% 34.2%
State income taxes, net of federal benefit 2.0 2.0 3.3
Effect of foreign taxes greater (less) than U.S. statutory
federal rate 2.1 2.1 0.2
Permanent items 0.3 0.4 2.2
---- ---- ----
Total 39.4% 39.5% 39.9%
==== ==== ====
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts. The tax effect of significant temporary differences
representing deferred tax assets and liabilities is as follows:
December 31,
(In Thousands) 2000 1999
------- -------
Deferred tax assets:
Deferred purchase price $ 3,900 $ --
Allowance for doubtful accounts 936 291
Self-insurance reserves 780 702
Accruals 338 429
Other 444 151
------- -------
6,398 1,573
------- -------
Deferred tax liabilities:
Tax depreciation in excess of book (913) (1,668)
Tax amortization in excess of book (4,866) (3,982)
Other (416) (378)
------- -------
(6,195) (6,028)
------- -------
Net deferred tax asset (liability) $ 203 $(4,455)
======= =======
The Company has not recognized deferred tax liabilities for cumulative
earnings from its foreign subsidiaries as it is the Company's policy to
permanently reinvest such earnings, rather than repatriate them to the United
States.
35
36
6. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
(In Thousands) 2000 1999
--------- ---------
Credit Facility, interest at prime or Libor plus the applicable margin $ 66,961 $ 209,298
(composite 7.22% at December 31, 2000)
Seller note issued for Draefern acquisition, interest at LIBOR plus 1.375% (8.25% at December 31,
2000) payable in quarterly installments, principal due in full in July 2007 748 6,000
Equipment notes payable 467 1,066
--------- ---------
68,176 216,364
Less current portion 160 216
--------- ---------
$ 68,016 $ 216,148
========= =========
Future aggregate annual maturities of long-term debt are as follows as
of December 31, 2000:
(In Thousands)
2001 $ 160
2002 67,268
2003 --
2004 --
2005 --
Thereafter 748
-------
$68,176
=======
On December 20, 2000, the Company amended its credit facility (the
"Credit Facility") to reduce the aggregate commitment from its lenders to $201.3
million (from $375.0 million) upon the sale of the aviation and facility
services businesses, to change the maturity date to April 15, 2002, and to
adjust certain financial covenants and interest rate margins. Of the $201.3
million in aggregate commitments, the U.S. dollar equivalent of $100.6 million
is available in certain 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 plus an applicable margin (in the case of United
States dollar borrowings) or the foreign base rate plus an applicable margin (in
the case of borrowings denominated in pounds sterling or Euros/German marks).
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 domestic prime rate. The applicable margin
for LIBOR borrowings is based on a matrix ranging from 137.5 basis points to
212.5 basis points, based on the ratio of the Company's most recently reported
total indebtedness to pro forma adjusted EBITDA.
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 $45.0 million. On January 31, 2000, the Company entered into an
additional interest rate swap agreement in the notional amount of approximately
$15.0 million. On November 1, 2000, these interest rate swap agreements were
replaced with a one-year agreement in the notional amount of Euro 61.6 million
(approximately $57.0 million) whereby the Company pays a fixed rate of 4.63%
plus the applicable margin. The fair value of the interest rate swap agreement
at December 31, 2000, was not material.
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. At December 31, 2000, $67.0 million was outstanding, (the entire
balance in Euros) and $2.1 million was utilized under standby letters of credit.
Any unpaid balance on the Credit Facility is due upon the expiration of the
amended agreement on April 15, 2002. The carrying value of the Credit Facility
approximates its fair value.
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
It requires recognition of all derivatives as either assets or liabilities in
the statement of financial position at their fair value. SFAS No. 133 was
subsequently amended by SFAS No. 137 and SFAS No. 138 to, among other things,
defer the effective date of SFAS No. 133 such that it is applicable to AHL
beginning with its first quarter of fiscal 2001. The new standard will not have
a material impact on the Company's financial position or results of operations.
36
37
7. RELATED-PARTY TRANSACTIONS
In the normal course of business, the Company records revenues from a customer
that is controlled by a member of the board of directors of the Company.
Approximately $146,000 and $306,000 were due from this customer as of December
31, 2000 and 1999, respectively, and revenues recognized from this customer for
the years ended December 31, 2000 and 1999, and the period July 24, 1998 (date
of Gage acquisition) through December 31, 1998, totaled $1.4 million, $1.3
million and $1.1 million, respectively.
8. STOCK-BASED COMPENSATION
In October 1996, the Company issued nonqualified stock options to purchase
107,500 shares of common stock at $4.64 per share. The options became
exercisable upon grant.
In December 1996, the Company issued nonqualified stock options to
purchase 591,250 shares of common stock at $11.76 per share. The options become
exercisable ratably over five years. Effective February 28, 1997, the Company
amended its employment agreements with three officers. The amendment provided
for 16,250 additional options to purchase shares of common stock at $10.75 per
share, exercisable ratably over periods up to five years. The amendment also
reduced the exercise price of the December 1996 option grants from $11.76 per
share to $10.75 per share. Concurrent with the initial public offering in March
1997, the exercise price was changed from $10.75 to $10 per share.
STOCK OPTION PLAN
The Company's stock option plan (the "Plan") provides for the award of incentive
stock options to officers and employees of the Company and nonqualified stock
options to officers, employees and independent directors of the Company. In
February 1997, the Company reserved 385,000 shares of common stock for issuance
under the Plan. The Company expanded the Plan in May 1998 by approving the
reservation of 3,115,000 additional shares. As of December 31, 2000, 2,918,550
options to purchase common stock were outstanding under the Plan. The Plan is
administered by the compensation committee of the board of directors. The
purchase price of common stock upon grant of stock options must not be less than
the fair market value of the common stock on the date of grant. The maximum term
of any stock option is 10 years. The aggregate fair market value on the date of
the grant of the stock for which stock options are exercisable for the first
time by an employee during any calendar year may not exceed $100,000. Options
are exercisable over a period of time in accordance with the terms of option
agreements entered into at the time of grant. Options granted under the Plan are
generally nontransferable by the optionee and, unless otherwise determined by
the compensation committee, must be exercised by the optionee during the period
of the optionee's employment or service with the Company.
STOCK OPTION SUMMARY
The following is a summary of the Company's stock option information:
Weighted
Average
Exercise
Options Price
---------- ------
Balance at December 31, 1997 1,534,000 $12.45
Granted 1,659,000 27.65
Exercised (53,750) 10.00
Forfeited (46,500) 12.74
Canceled (809,500) 33.25
---------- ------
Balance at December 31, 1998 2,283,250 16.17
Granted 1,330,500 25.70
Exercised (34,400) 10.73
Forfeited (78,500) 20.63
---------- ------
Balance at December 31, 1999 3,500,850 19.75
Granted 787,500 7.93
Exercised -- --
Forfeited (699,500) 24.31
---------- ------
Balance at December 31, 2000 3,588,850 $16.26
========== ======
Exercisable at December 31, 2000 1,698,225 $15.67
========== ======
Reserved for issuance under the Plan 538,000
========== ======
37
38
The Company accounts for these stock option grants under APB Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no compensation
cost has been recognized. Had compensation cost for these plans been determined
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts during 2000, 1999 and 1998:
Year Ended December 31,
(In Thousands, Except Per Share Data) 2000 1999 1998
-------- -------- ---------
Net income (loss)
As reported $ 4,361 $ 19,594 $ 13,123
Pro forma (5,225) 12,152 9,322
Earnings (loss) per share:
Basic As reported $ 0.27 $ 1.14 $ 0.95
Pro forma (0.32) 0.71 0.67
Diluted
As reported $ 0.27 $ 1.11 $ 0.91
Pro forma (0.32) 0.69 0.65
The weighted average fair value of options granted was $4.45, $13.74
and $10.34 for fiscal years 2000, 1999 and 1998, respectively. The fair value of
each option granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants in 2000, 1999 and 1998:
2000 1999 1998
----- ----- -----
Risk-free interest rate 6.41% 5.53% 5.11%
Dividend yield 0.00% 0.00% 0.00%
Volatility factor 67.00% 65.00% 64.00%
Average expected life (years) 4.0 4.0 4.0
Forfeiture rate 5.00% 3.00% 3.00%
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted, effective January 1, 1998, an employee stock purchase
plan, pursuant to which employees are able to purchase shares of common stock
through a payroll deduction program. The Company has historically purchased such
shares of common stock on the open market.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and warehouse and space equipment from unrelated
parties under lease agreements expiring through December 2014. Rental expense
under these operating leases was $11.5 million, $9.5 million and $5.4 million,
in fiscal 2000, 1999 and 1998, respectively.
Future minimum lease payments for noncancelable leases were as follows
at December 31, 2000:
(In Thousands)
2001 $12,300
2002 8,410
2003 6,884
2004 5,127
2005 4,430
Thereafter 19,441
INSURANCE
The Company participates in partially self-insured, high-deductible workers'
compensation and auto insurance plans. Exposure is limited per occurrence
($250,000 for workers' compensation and auto liability claims) and in the
aggregate. In addition, the Company is partially self-insured for health claims
for certain U.S. employees. Reserves are estimated for both reported and
unreported claims. Revisions to estimated reserves are recorded in the periods
in which they become known. Estimated self-insurance reserves for workers'
compensation and auto liability claims as of December 31, 2000 and 1999,
totaling $2.0 million and $1.6 million, respectively, represent management's
best estimate. While there can be no assurance that actual future claims will
not exceed the
38
39
amount of the Company's reserves, in the opinion of the Company's management,
any future adjustments to estimated reserves included in the accompanying
consolidated balance sheets will not have a material impact on the consolidated
financial statements.
The Company is exposed to liability for the acts or negligence of its
employees. The Company has policies, guidelines and insurance to reduce its
exposure to these risks.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with five executive officers,
which expire at various times through December 31, 2003. If certain agreements
are terminated by the Company prior to the expiration date, except for cause or
upon the employee's death or disability, the Company must continue to pay the
employee's base salary and bonus for periods ranging from one year or through
the contract expiration date.
The Company has a 401(k) plan covering salaried employees, excluding
highly compensated employees. This plan requires the employee to complete
various service periods to become eligible. The plan requires the Company to
match a certain percentage of the amounts contributed by the employees. The
Company expensed $764,000, $416,000 and $99,000 for the employer match for the
years ended December 31, 2000, 1999 and 1998, respectively.
LITIGATION, DISPUTES AND CLAIMS
The Company is involved in various routine litigation, disputes and claims
arising in the ordinary course of business, primarily related to employee and
customer contract issues. While unfavorable outcomes are possible, management is
of the opinion that the resolution of these matters will not have a material
effect on the results of operations or financial condition of the Company.
10. BUSINESS SEGMENT INFORMATION FROM CONTINUING OPERATIONS
The Company's business is organized into two distinct operating segments, which
have separate management structures, which then report to the Company's senior
level executives. A brief summary of each of these segments is as follows:
- - Marketing services include integrated customer relationship management,
information management, fulfillment of products, promotions and trade
materials and merchandising services.
- - Specialized staffing services provide electricians, welders, plumbers,
customer service representatives, and industrial workers for clients
throughout Germany and the United Kingdom. The U.S. industrial staffing
business was included through the date of disposition, October 13,
2000.
The Company's corporate office provides functions such as treasury,
risk management and finance, which are not included in the operating segments'
measure of operating income.
39
40
The following table presents information regarding the Company's
operating segments:
Depreciation Capital
Operating and Expenditures
Income Identifiable Amortization Including
(In Thousands) Revenues (Loss) Assets Expense Acquisitions
--------- --------- ------------ ------------ ------------
2000:
Marketing services $ 197,870 $ (1,263) $188,514 $ 9,195 $ 24,886
Specialized staffing services 258,293 20,401 162,228 4,471 29,532
Impairment and other related charges -- (66,718) -- -- --
Corporate and other -- (7,514) 13,756 515 --
--------- --------- -------- -------- --------
$ 456,163 $ (55,094) $364,498 $ 14,181 $ 54,418
========= ========= ======== ======== ========
1999:
Marketing services $ 156,447 $ 16,437 $228,723 $ 7,027 $ 81,614
Specialized staffing services 216,000 17,620 170,328 4,266 43,316
Corporate and other -- (7,100) 13,562 485 --
--------- --------- -------- -------- --------
$ 372,447 $ 26,957 $412,613 $ 11,778 $124,930
========= ========= ======== ======== ========
1998:
Marketing services $ 58,266 $ 8,371 $124,828 $ 1,043 $ 90,738
Specialized staffing services 93,983 9,588 140,928 1,885 81,448
Corporate and other -- (5,537) 9,254 84 --
--------- --------- -------- -------- --------
$ 152,249 $ 12,422 $275,010 $ 3,012 $172,186
========= ========= ======== ======== ========
The following table presents information regarding the Company's
different geographical regions:
Identifiable
(In Thousands) Revenues Assets
-------- ------------
2000:
United States $238,872 $202,270
Germany 129,273 102,558
United Kingdom 88,018 59,670
-------- --------
$456,163 $364,498
======== ========
1999:
United States $206,919 $272,463
Germany 112,306 97,501
United Kingdom 53,222 42,649
-------- --------
$372,447 $412,613
======== ========
1998:
United States $ 95,725 $167,601
Germany 48,698 95,984
United Kingdom 7,826 11,425
-------- --------
$152,249 $275,010
======== ========
Revenues are attributed to specific geographic regions based on the
location of the wholly-owned subsidiary that generates the revenues.
During the years ended December 31, 2000, 1999 and 1998, there were no
individual customers who accounted for more than 10% of the Company's revenues
from continuing operations.
40
41
AHL Services, Inc.
Schedule II - Valuation and Qualifying Accounts
(in thousands)
Allowance for
Doubtful
Balance at Charged to Accounts Accounts Balance at
Beginning Costs and Assumed in Written End of
Classification of Period Expenses Acquisitions Off Period
- --------------------------------- ---------- ---------- ------------- -------- ----------
Year ended December 31, 1998:
Allowance for doubtful accounts $ 250 $ 326 $1,232 $ (256) $1,552
------ ------- ------ -------- ------
Year ended December 31, 1999:
Allowance for doubtful accounts $1,552 $ 656 $2,177 $ (956) $3,429
------ ------- ------ -------- ------
Year ended December 31, 2000:
Allowance for doubtful accounts $3,429 $14,482 $ 200 $(13,847) $4,264
------ ------- ------ -------- ------
41
42
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
30th day of March, 2001.
AHL SERVICES, INC.
(Registrant)
By: /s/ Edwin R. Mellett
--------------------------------------------
Edwin R. Mellett
Chairman and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on March 30, 2001.
SIGNATURE TITLE
/s/ Edwin R. Mellett Chairman and Chief Executive Officer and Director
- -----------------------------
Edwin R. Mellett
/s/ Frank A. Argenbright, Jr. Vice-Chairman of the Board and Director
- -----------------------------
Frank A. Argenbright, Jr.
/s/ Ronald J. Domanico Executive Vice President and Chief Financial Officer
- ----------------------------- (Principal Financial Officer) and Director
Ronald J. Domanico
/s/ Thomas J. Marano President and Chief Operating Officer, Marketing Support
- ----------------------------- Services and Director
Thomas J. Marano
/s/ Edwin C. Gage Director
- -----------------------------
Edwin C. "Skip" Gage
/s/ Robert F. McCullough Director
- -----------------------------
Robert F. McCullough
/s/John W. Ward Director
- -----------------------------
John W. Ward
42