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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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) 267-2222
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 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 20, 1998 was approximately $127,410,366. As of March 20, 1998, there were
13,605,000 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 14, 1998 are incorporated by reference in
Part III.
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AHL SERVICES, INC.
TABLE OF CONTENTS
ITEM NO. PAGE NO.
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PART I
1. Business.................................................... 1
2. Properties.................................................. 11
3. Legal Proceedings........................................... 11
4. Submission of Matters to a Vote of Security Holders......... 11
X. Executive Officers of the Registrant........................ 11
PART II
5. Market for Registrant's Common Equity and Related 14
Stockholder Matters.......................................
6. Selected Financial Data..................................... 15
7. Management's Discussion and Analysis of Financial Condition 16
and Results of Operations.................................
8. Financial Statements and Supplementary Data................. 21
9. Changes in and Disagreements with Accountants on Accounting 21
and Financial Disclosure..................................
PART III
10. Directors and Executive Officers of the Registrant.......... 22
11. Executive Compensation...................................... 22
12. Security Ownership of Certain Beneficial Owners and 22
Management................................................
13. Certain Relationships and Related Transactions.............. 22
PART IV
14. Exhibits, Financial Statements, Schedules and Reports on 23
Form 8-K..................................................
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PART I
ITEM 1. BUSINESS
This Annual Report contains certain forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, with respect to
the financial condition, results of operations and business of the Company,
including statements under the captions "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." These
forward-looking statements involve certain risks and uncertainties. There can be
no assurance that any of such matters will be realized. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements include, among others, the following: (i) competitive
pressures in the contract staffing and outsourcing industries; (ii) management
and integration of the operations of acquired businesses; (iii) the Company's
business and growth strategies and (iv) general economic conditions, including
the ability to recruit staff.
AHL Services, Inc. ("AHL" or the "Company") provides contract staffing and
management of its clients' labor-intensive operational support functions on an
outsourced basis throughout the United States and Europe. The Company's core
competencies include recruiting, hiring, training, motivating and managing the
large numbers of personnel required to provide many of the support services
needed by its clients while incorporating quality systems and cost efficiency in
its operations. Founded in 1979, the Company is a leader in providing
pre-departure screening, passenger profiling and other passenger services to the
aviation industry and, increasingly, provides services to other large
corporations, including Federal Express, America OnLine, Georgia Power,
BellSouth, Nike and Motorola. Through its 83 offices in the United States and 28
offices in six European countries, AHL is able to service the multinational
outsourcing needs of its largely Fortune 1000 client base. The Company currently
has approximately 630 contracts to provide services and has established
long-term relationships with its largest clients, providing the Company with a
significant source of predictable recurring revenues. The Company intends to
take advantage of market trends toward contract staffing and become the
preferred provider of outsourced labor management solutions for its clients by
leveraging its core competencies, international scale, reputation for quality,
performance-based quality measurement systems, management depth and senior-level
relationships with its key clients. To capitalize on these market trends and to
enter new complementary business lines, the Company has completed six
acquisitions since its initial public offering in March 1997.
As of February 1, 1997, Mr. Frank A. Argenbright, Jr., Chairman and
Co-Chief Executive Officer of the Company, contributed to the Company (i) all of
the outstanding shares of Argenbright Holdings Limited, a holding company for
U.S. operations, and The ADI Group Limited (together with its predecessors,
"ADI"), a holding company for European operations, (ii) certain real estate, a
portion of which was previously rented by the Company (with the Company assuming
the related mortgage debt) and (iii) a note with a balance of $528,000 payable
by the Company to Mr. Argenbright (collectively, the "Reorganization"). As a
result of the Reorganization, Argenbright and ADI became wholly-owned
subsidiaries of the Company.
INDUSTRY OVERVIEW
Many corporations and other institutions need to recruit, hire, train,
motivate and manage large numbers of personnel to handle non-core functions in
labor environments often characterized by relatively low pay and high turnover
rates. Enterprises incur considerable expense and invest substantial amounts of
management time in managing this process. These enterprises are increasingly
contracting with specialized third party providers to better ensure long-term
labor availability for support functions. Contract staffing providers often are
able to provide higher quality services at a lower cost than these enterprises
are able to do themselves. Outsourcing these functions shifts employment costs
and risks, such as workers' compensation, recruitment and turnover costs and
changes in labor regulations, to outside vendors and allows enterprises to
reduce the administrative overhead and time necessary to properly manage
non-core functions.
The nature of the contract staffing industry is changing. As enterprises
centralize purchasing decisions and seek to reduce the number of vendors with
whom they do business, the ability of providers to offer national account
capability and national and international coverage is growing in importance.
Large enterprises are
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increasingly seeking partnering opportunities whereby the third party provider,
in addition to providing on-site management of staff, assumes responsibility for
a particular function, including designing and implementing a solution for its
client, and shares in the economic benefits derived from improved execution of
the function. These trends, as well as the increasing need for capital and
management depth for growth, are creating consolidation opportunities in the
highly fragmented contract staffing industry.
While the aviation industry has historically outsourced certain functions,
such as food service, fueling and pre-departure screening, aviation companies
are increasingly outsourcing operational support functions not directly related
to flight operations. Functions which are increasingly being outsourced include
passenger profiling, baggage claim and check, sky cap, cargo and baggage
handling, aircraft clean and search, frequent flyer lounge operations, ramp
services, wheelchair assistance, shuttle bus, inter-gate cart, ticketing and
check-in services. Opportunities for outsourcing of security-related
labor-intensive operational support functions within the aviation industry have
increased in recent years and are expected to continue to increase if the FAA
approves more stringent security measures. Measures under consideration or
recently recommended by the FAA and the White House Commission on Aviation
Safety and Security (the "Gore Commission") in the United States include
certification of service providers, X-raying and matching all checked baggage,
implementation of a passenger profiling system and under-the-wing security
guards for parked aircraft.
Growth in demand for contract staffing and outsourcing services, including
fulfillment services, in the United States and Europe is expected to continue.
Companies in numerous industries are seeking to reduce costs and focus on their
core competencies and, as a result, are increasingly outsourcing support
functions which have traditionally been performed in-house. The trend toward
outsourcing labor management in Europe is not as developed as it is in the
United States, due in part to historically more restrictive labor regulations
which are beginning to be liberalized. Two trends are expected to increase
demand for aviation-related contract staffing services in Europe: (i) the
privatization of major airlines, which should increase their focus on improving
operating performance, and (ii) the liberalization of airport authority
licensing, which currently restricts the number of vendors that may provide
aviation services at a particular airport. The European Union has mandated that
European airports be opened to increased competition to provide various ground
services beginning in January 1999.
ACQUISITION HISTORY
Since 1992, the Company has completed nine acquisitions. The Company
intends to continue to seek acquisitions that will build density in the
Company's existing markets, add geographic coverage to the Company's existing
businesses, broaden the Company's service offerings and expand the Company's
client base. Through acquisitions of smaller operations providing the same type
of services already provided by the Company, AHL believes it can leverage its
existing management and systems infrastructure and increase its market share in
locations at which the Company already has an established presence. In most
instances, these operations can be integrated into the Company's existing
operations, resulting in elimination of duplicative overhead and operating
costs. The Company will seek to efficiently integrate these acquired companies
while retaining the existing management of those companies.
In March 1992, the Company formed ADI to acquire a portion of the aviation
security operation of British Airways at Heathrow Airport. The Company has used
ADI as a platform to expand its operations in Europe. In August 1993, ADI
acquired Express Baggage Reclaim Services Limited, a provider of lost baggage
delivery and replacement services in the United Kingdom. In July 1996, the
Company acquired Intersec, a provider of commercial and governmental security
services in the Baltimore/Washington metropolitan area (the "Intersec
Acquisition"). The Intersec Acquisition added density in a region where the
Company had an existing well-developed infrastructure.
The following acquisitions have been completed in 1997 and through March 1,
1998:
Aviation Services
EAS. To strengthen its outsourcing relationship with British Airways, in
May 1997 ADI entered into a joint venture with British Airways to acquire
Executive Aircraft Services ("EAS"), a division of British
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Airways. EAS provides ground handling (including arranging fueling, runway and
gate access, baggage handling and transport), passenger handling and concierge
services for large, private executive aircraft at Heathrow Airport. Heathrow
Airport licensing rules prevented an outright purchase of the business by ADI,
so the parties entered into a joint venture and agency agreement under which ADI
retained an option to purchase all of the business when regulatory authorities
permit. ADI receives all of the revenues and profits from the business performed
by EAS. ADI paid approximately $2.8 million to British Airways and British
Airways contributed the license to operate the executive aircraft services
business at Heathrow Airport to the joint venture. In addition, ADI has
committed to pay British Airways up to $550,000 for each of three years if EAS
achieves certain operating results. EAS had revenues for the twelve months prior
to the acquisition of approximately $2.4 million.
Access Control/Facilities Management
USA Security. To increase its operational density in the northeastern
region of the United States, in May 1997 AHL acquired the access control
business of USA Security Services, Inc. ("USA Security"), located in New Jersey,
for approximately $2.6 million in cash (the "USA Security Acquisition"). USA
Security had revenues for the twelve months prior to the acquisition of
approximately $8.6 million. Since completion of the USA Security Acquisition,
AHL has realized cost efficiencies by integrating USA Security into its existing
New York and New Jersey operations.
Light Industrial/Warehouse "Pick and Pack"
Lloyd. To begin providing staffing for warehouse "pick and pack" and light
industrial functions, in September 1997 AHL acquired Lloyd Creative Temporaries,
Inc. ("Lloyd") for approximately $5.0 million in cash plus contingent
consideration based on future operating results (the "Lloyd Acquisition").
Lloyd, a provider of staffing for warehouse "pick and pack" and light industrial
(such as product assembly) functions to companies in the Chicago area, had
revenues for the twelve months prior to the acquisition of approximately $14.0
million. The Lloyd Acquisition has served as a platform from which the Company
intends to begin adding branch offices and increasing the number of "vendor on
premises" locations.
Midwest Staffing. In December 1997, the Company acquired Midwest Staffing
Systems, Inc. ("Midwest Staffing"), a Chicago-based company that provides
staffing for warehouse "pick and pack" and light industrial functions, for $5.0
million in cash. Midwest Staffing had revenues for the twelve months preceding
the acquisition of approximately $8.4 million. This acquisition, combined with
the Lloyd Acquisition, provides the Company with ten offices in the Chicago
market, consistent with the Company's strategy of building geographic density in
key markets.
SES. In February 1998, the Company acquired SES Staffing Solutions, Inc.
("SES"), a Baltimore-based company that provides warehouse "pick and pack" and
light industrial staffing for commercial entities for $12.6 million in cash.
SES, with revenues for the twelve months preceding the acquisition of
approximately $16.0 million, operates in five offices in the Baltimore area.
Order Fulfillment
RightSide Up. To expand its services to include order fulfillment, whereby
it would provide warehousing services, fill orders and ship consignment
inventory and other materials to customers, in October 1997 the Company acquired
RightSide Up, Inc. ("RightSide Up"), a California company, for $6.0 million in
cash plus contingent consideration based on future operating results (the
"RightSide Up Acquisition"). RightSide Up had revenues of approximately $6.4
million for the twelve months ended August 31, 1997. RightSide Up provides
operators that take inbound customer orders and fulfills these orders by
"picking and packing" and shipping the items from the company's warehouse.
RightSide Up's clients are predominantly in the entertainment industry.
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SERVICES PROVIDED
The following table presents information with respect to the percentage of
the Company's revenues by major service category for the periods shown:
FISCAL YEARS ENDED
DECEMBER 31, PRO FORMA
-------------------- FISCAL YEAR ENDED
SERVICES PROVIDED 1995 1996 1997 DECEMBER 31, 1997(1)
- ----------------- ---- ---- ---- --------------------
Aviation services(2)......................... 58% 55% 54% 47%
Access control/facilities management(3)...... 36 41 39 35
Light industrial/warehouse "pick and
pack"(4)................................... 6 4 7 16
Order fulfillment(5)......................... -- -- * 2
--- --- --- ---
Total.............................. 100% 100% 100% 100%
=== === === ===
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* Less than 1%.
(1) Includes revenues of all acquisitions, including SES, as if the acquisitions
had occurred on January 1, 1997.
(2) Includes revenues of EAS from the date of acquisition in May 1997.
(3) Includes revenues of Intersec and USA Security, providers of access control
services, from the dates of acquisition in July 1996 and May 1997,
respectively.
(4) Includes cargo handling. Includes revenues of Lloyd and Midwest Staffing
from the dates of acquisition in September 1997 and December 1997,
respectively.
(5) Includes revenues of RightSide Up from its date of acquisition in October
1997.
Aviation Services
Management believes, based on its knowledge of the industry, that the
Company is one of the largest providers of pre-departure screening and passenger
profiling services in the United States and Europe combined, with approximately
5,000 employees currently providing services at 32 airports in the United States
and 27 airports in Europe. Pre-departure screening is a security approach
maintained at all commercial airports in the United States and the United
Kingdom under mandates of the Federal Aviation Administration (the "FAA") and
the United Kingdom's Department of Transportation (the "U.K. DOT") and at many
other airports throughout the world under similar mandates of other regulatory
authorities. At pre-departure screening checkpoints, all passengers and other
airport patrons must physically pass through a device called a magnetometer,
designed to reveal the presence of metal objects and all carry-on baggage and
other items carried into the concourse or gate area must pass through an X-ray
device to determine whether certain suspicious materials are present. Major
airports at which the Company provides pre-departure screening services include
Los Angeles International, New York -- Kennedy and LaGuardia,
Washington -- National and Dulles, Denver International, Chicago -- O'Hare, San
Francisco, Orlando, Boston and Memphis in the United States.
In Europe, the Company provides a passenger profiling procedure which has
been used by certain major European airlines for several years at high-risk
international airports in Europe and was mandated in 1994 by the FAA for U.S.
airlines' international flights from those airports. Passenger profiling seeks
to identify a potential threat before it materializes by means of interviewing,
document verification and behavioral analysis. This procedure results in the
classification of the vast majority of passengers as low risk, thereby enabling
more scrutiny to be focused on higher risk passengers. The Company has been
providing profiling services in Europe since 1992, currently has over 233
employees providing these services and believes that if the FAA were to mandate
profiling in the United States, the Company would be well-positioned to quickly
implement profiling procedures for its U.S. clients. See "-- Government
Regulation." Major airports at which the Company provides passenger profiling
services include London Heathrow and Gatwick, Paris -- Charles de Gaulle,
Frankfurt, Berlin and Dublin.
Historically, airlines have utilized their own employees to provide most
passenger services but are increasingly seeking to outsource support functions.
The Company provides a variety of other passenger
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services to its airline clients, including baggage claim and check in 22
airports in the United States and Europe, aircraft clean and search in two
European airports and lost baggage delivery or replacement services in 12
European airports. At 19 airports in the United States and Europe, the Company
provides an assortment of services including skycap, wheelchair assistance,
escorting of unaccompanied minors, inter-gate cart services and frequent flyer
lounge operations.
Access Control/Facilities Management
The Company provides business and facility access control, special event
security and uniformed security officer services to a broad range of commercial
and governmental clients. The Company's access control staff are used at office
and government buildings, airports, hospitals, distribution centers, sports
arenas, museums and other facilities. For aviation clients, the Company provides
guarding and control of airport entrances, checking of employee identification
cards and baggage, guarding and control of employee parking lots and
under-the-wing guarding of parked aircraft in Europe.
Depending on the needs of the client, security officers are on premises,
often around-the-clock, to provide facility security, access control, personnel
security checks and traffic and parking control and to guard against fire,
theft, sabotage and safety hazards. The Company's security officers are trained
to respond appropriately to emergency situations and report fires, intrusions,
natural disasters, work accidents and medical crises to appropriate authorities.
The Company provides dedicated, fixed route shuttle bus services in 10
locations within the United States and two locations in the United Kingdom
through its fleet of approximately 350 shuttle bus vehicles, which generally
seat between 15 and 50 passengers. Under all of its shuttle bus contracts, the
Company provides the shuttle bus and the driver. During fiscal 1997, AHL
vehicles traveled more than seven million miles and operated for more than
700,000 hours. AHL currently provides (i) campus shuttle services at The Georgia
Institute of Technology, Emory University and The American School in London,
(ii) corporate shuttle services between various facilities of The Coca-Cola
Company and Delta Air Lines, (iii) public parking shuttle services for the
Memphis/Shelby County Airport Authority and the Nashville Airport Authority,
(iv) aviation employee transportation services from employee parking lots for
Delta Air Lines and Federal Express and (v) airside crew and passenger transport
at Heathrow Airport.
Light Industrial/Warehouse "Pick and Pack"
The Company provides staffing for light industrial and warehouse "pick and
pack" functions, which includes providing staffing for warehousing functions and
inventory distribution. The Company began providing staffing for light
industrial and warehouse "pick and pack" markets with the completion of the
Lloyd Acquisition and further expanded its operations in this area through the
acquisitions of Midwest Staffing and SES.
The Company also prepares cargo and mail for flight by sorting, packaging
and transporting the cargo and mail to and from airplanes in certain markets. In
certain other markets, the Company provides the actual staffing of customer
counters and data input into the airline's cargo computer system, in addition to
handling the cargo. Cargo services are provided in these other markets pursuant
to outsourcing arrangements, under which the Company manages the entire process
for its clients. The Company processes air cargo for several of its major
aviation clients, including Delta Air Lines, United Airlines, Alaska Airlines,
America Trans Air and Royal Airlines. The Company also provides cargo services
to Air China, SwissAir, and Cathay Pacific and Vanguard pursuant to subcontracts
from Delta Air Lines. In addition to cargo handling, the Company provides U.S.
Postal Service mail handling for Delta Air Lines in selected locations.
Order Fulfillment
The Company provides order fulfillment services principally for clients in
the entertainment industry including Disney, Fox and Mattel among others. The
Company processes the inbound calls and fulfills these orders by "picking and
packing" and shipping the items from the Company's warehouse. The Company's
clients own the actual inventory.
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CONTRACT TERMS
Substantially all of the Company's aviation, transportation and access
control services are provided under contracts, typically having terms of one to
five years, which provides the Company with a significant source of predictable
recurring revenues. Although the terms of the Company's contracts vary
significantly, clients generally agree that the Company will provide a stated
service level and agree to pay the Company an hourly rate for services provided.
Certain of the Company's clients, especially in the cargo services area, are
billed a fixed dollar amount per month for services performed. Under some
contracts, the Company is entitled to rate increases when there are increases in
the Federal minimum wage, although most of the Company's employees are paid at
rates in excess of the Federal minimum wage. Most contracts have multi-year
terms and are generally terminable by either party upon 30 to 90 days written
notice. Most of the contracts entered into by the Company have been renewed or
extended upon the expiration of their original terms. The Company has
experienced an average annual retention rate of approximately 93% of contract
billable hours over the last three fiscal years (excluding operations the
Company has elected to terminate). The Company's access control services are
generally provided under contracts in which AHL assumes responsibility to
employ, schedule and pay all personnel and provide uniforms, equipment,
training, supervision, fringe benefits, bonding and workers' compensation
insurance. The Company's contracts typically provide that the Company will
indemnify the client from and against any claims for personal injury or death to
any person (other than an employee of the client) and for damage to any property
arising out of the acts or omissions of the Company unless the claim results
from any negligent act of the client.
CLIENTS
AHL's ten largest clients in fiscal 1997, which accounted for an aggregate
of 61.8% of the Company's revenues, were United Airlines, Delta Air Lines,
British Airways, Federal Express, the United States government, American
Airlines, Northwest Airlines, Georgia Power, America OnLine, USAir and BGS.
During fiscal 1997, United Airlines, Delta Air Lines, British Airways, and
Federal Express accounted for 18.8%, 17.2%, 12.7% and 3.9% of the Company's
revenues, respectively, through an aggregate of 86 contracts and, together,
represented 52.6% of the Company's revenues. AHL is increasingly providing
services to other large corporations, including Mattel, BellSouth, Nike and
Motorola. The Company has 24 contracts in the United States and eight contracts
in Europe that provide annual revenues in excess of $2 million each.
SALES AND MARKETING
Building and maintaining relationships with personnel at various levels of
its clients' organizations, including relationships with both senior executives
and local operating personnel has been, and will continue to be, an important
operating philosophy for the Company. The Company uses these relationships to
market its services to potential clients through individuals having senior
management and local operating responsibilities. AHL targets large corporations
and institutions that have significant contract staffing needs for
labor-intensive, task-repetitive functions. The Company has a local sales force
in the United States of 18 representatives located in AHL's regional offices in
New York, Atlanta, Florida, Dallas, Memphis, Washington, D.C., Denver and Los
Angeles and two sales representatives in Europe. The Company's eight regional
vice presidents in the United States are each responsible for two to four
districts. Regional and district managers also have sales responsibilities and a
portion of their incentive compensation is dependent on meeting sales goals.
The Company is developing a national sales and marketing strategy, under
which the Company focuses on improving the consistency of its sales approach.
The Company conducts in-house sale seminars, at which regional, district and
national account managers, along with the Company's local sales personnel, focus
on how to sell services to larger accounts. Furthermore, the Company has
designated certain senior managers as responsible for specific national account
relationships with specific large clients and added a national accounts sales
representative during 1997.
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WORKFORCE MANAGEMENT
The Company's core competencies include recruiting, hiring, training,
motivating and managing the large numbers of personnel required to provide many
of the support services needed by its clients. The Company's district managers
and their human resources staff have ongoing responsibility for hiring,
recruiting and training the Company's local workforce.
Recruiting. The Company has developed innovative recruiting methods that
have been particularly effective in reaching targeted pools of prospective
employees, in addition to utilizing traditional recruiting methods such as job
fairs, trade journals, local advertising, and interviewing at vocational
schools. After analyzing the demographics of each market, the Company seeks to
establish relationships with community groups and leaders. For example, in a
number of markets, the Company has found that senior citizens are an excellent
source of potential employees for its pre-departure screening services and
recruiters frequently visit senior citizen centers. The Company leverages these
community relationships to provide a feeder into the Company's employment pool
and believes that current Company employees serve as effective recruiters for
the Company. The Company believes these methods are more cost-effective than
more traditional recruiting methods.
Hiring. In 1997, the Company recruited, hired and trained over 17,000
full-time employees to provide services for its clients. Within the United
States, every employee must complete a written application and provide proof of
citizenship or resident alien status and every employee is subject to a ten-year
employment and criminal background check, which is conducted internally by the
Company. Unlike many of its competitors, the Company requires mandatory
pre-employment drug testing for all aviation and commercial-security services
employees.
In Europe, the Company screens potential applicants through a telephone
interview, and each potential employee must complete a written application and
undergo an interview that includes vision, hearing and psychological testing. An
initial one-year background check is required for every new employee. Each
European employee is hired subject to a three month probationary period and
continuity of employment is subject to a 20-year background check. Where legally
permitted, employees in certain European countries are also subject to random
drug testing.
Training. The Company provides in-house classroom and on-the-job training
programs for its hourly personnel through videos, guest lecturers and full-time
trainers who are employed at the Company's major district locations. The Company
is in the process of establishing performance measures to improve job focus and
accountability, create a quality audit process and implement "best practices and
procedures" in the Company's field operations. The Company is ISO 9002-certified
in its commercial security business in the United Kingdom. The Company is the
only organization approved by the U.K. DOT to provide aviation security training
to personnel of the U.K. DOT, the agency that regulates aviation security
matters in the United Kingdom.
Retention. The Company believes that employee retention is critical to
lowering operating costs and providing high quality service to its clients.
Accordingly, the Company places significant emphasis on programs to motivate its
employees and reduce employee turnover. Since inception, the Company has been
able to provide quality service and expand its business despite the high
employee turnover that is inherent in low wage, task-repetitive positions. The
Company's "110% Club" recognizes employees for superior attendance, attitude,
appearance and performance. Members receive quarterly bonuses and other rewards,
and are recognized throughout the Company. The Company's pre-departure screening
employees receive bonuses for detecting weapons and other illegal objects at
airport security checkpoints, including those detected during FAA-mandated
tests. The Company has also enhanced employee benefits by adding an employee
stock purchase plan, which is available to all employees with three months of
active service.
Field Management. The Company has developed a management structure under
which significant workforce decisions are made at the local level, thereby
requiring field managers to assume responsibility for recruiting, hiring and
retention. The Company's bonus system for regional and district managers is
based upon achievement of specific performance objectives, including revenue,
gross margin and net contribution, new
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business and client retention and losses and claims incurred. Regional and
district managers can earn bonuses of up to 35% of their base compensation by
achieving all of their objectives established annually by the Company. As an
added incentive, the Company established a stock option plan for key corporate
and field management in early 1997.
Employees. As of December 31, 1997, the Company had over 16,000 employees.
A total of 1,338 of the Company's employees are covered by collective bargaining
agreements including 782 of the Company's security employees working at New
York -- Kennedy and 457 working at Chicago -- O'Hare. Each of these agreements
was assumed by the Company in connection with an acquisition or an outsourcing
contract previously held by another vendor. In 1997, unions initiated one effort
to organize certain Company employees, which failed to receive sufficient
support to require a vote. The Company considers its relations with its
employees to be good.
MANAGEMENT INFORMATION SYSTEMS
The Company has invested, and intends to continue to invest, substantial
resources to develop systems that will enable it to deliver quality customer
service, centrally manage its operations and achieve substantial cost savings.
In April 1997, the Company hired a new Vice President and Chief Information
Officer. In addition, the Company's management information system integrates its
financial, general ledger, payables, receivables and payroll functions. The
system completes budgeting, forecasting and monthly profit and loss statements
on a contract-by-contract basis. The Company has networked its corporate offices
and all regional and district offices in the United States and has E-mail
capability to all U.S. offices and its London headquarters. The Company has also
made significant investments to upgrade field computers and has leased two
HP9000 systems which are run parallel to prevent downtime and give the Company
the capacity needed to handle anticipated future growth.
In 1998, the Company intends to enhance the computerized scheduling,
timekeeping and payroll system for hourly employees. This will enable AHL to
continue to develop performance measurements for its customers and to improve
scheduling to reduce the amount of non-billable overtime. In addition, the
Company will establish real-time links with the Company's European operations.
COMPETITION
The contract staffing industry is extremely competitive and highly
fragmented, with limited barriers to entry. Companies within the contract
staffing industry compete on the basis of the quality of service provided, their
ability to provide national and international services, the range of services
offered, as well as price. The Company believes its competitive advantages
include its reputation for providing high quality service and its ability to
serve large clients in the United States and Europe. Most of the Company's
competitors offer a more limited range of services and focus on a few specific
services.
The Company competes in international, national, regional and local markets
with outsourcing companies, specialized contract service providers and in-house
organizations that provide services to potential clients and third parties.
AHL's principal competitors include, in the aviation services industry, ICTS
International N.V., Globe Aviation Securities Corporation and International
Total Services, Inc. and, in the commercial security industry, Borg-Warner
Security Corporation, Guardsmark, Inc. and The Wackenhut Corporation. The
Company's warehouse "pick and pack" and light industrial services and order
fulfillment services compete primarily with numerous local and regional
companies as well as divisions of several major staffing companies. Certain of
the Company's competitors and potential competitors have significantly greater
financial resources and larger operations than the Company.
GOVERNMENT REGULATION
Current Regulations Relating to Aviation Security. Aviation security in
the United States is subject to regulations and directives issued by the FAA and
to legislation enacted by the United States Congress. Under current regulations,
responsibility for aviation security is shared between the FAA and various other
federal, state and local agencies and industry participants (which include air
carriers and airport authorities as well as
8
11
independent contractors that perform services for or on behalf of these industry
participants). The FAA conducts threat and vulnerability assessments and,
through its regulatory authority, directs the aviation industry to implement
measures that address existing and anticipated threat situations. The FAA also
tests security measures at airports to assess vulnerabilities in current airport
security systems.
Under FAA regulations, each air carrier and airport authority must adopt
and carry out an FAA-approved security program that provides for the safety of
persons and property traveling in air transportation against acts of criminal
violence and aircraft piracy. Air carriers are responsible for providing
security measures for all people and items connected with their aircraft,
including passengers, baggage, and maintenance and flight crews. Airport
authorities are responsible for maintaining a secure environment on airport
grounds and for providing law enforcement support and training.
Each security program adopted by an airline must include: (i) the screening
of passengers and their carry-on baggage, and other persons having access to
controlled areas, to prevent the carriage aboard aircraft of weapons or
explosive devices, (ii) controlling access to aircraft, checked baggage and
cargo, (iii) appropriate controls on shipping of cargo in Europe and (iv)
security inspection of any aircraft left unattended.
Airlines may utilize either their own employees or third-party contractors
to carry out their security programs. Proposed FAA regulations would require
pre-departure screeners to undergo a 10-year criminal and employment background
check and a five-year employment verification, with the employer required to
maintain records of these investigations throughout the term of employment. The
comment period for the proposed regulations closed on May 19, 1997. The FAA is
analyzing the comments received and is drafting a final rule to extend
background check regulations to include screeners. Screeners operating X-ray
systems must receive initial and recurrent training in the detection of weapons
and other dangerous articles.
From time to time, the FAA issues directives requiring the implementation
of specific actions by air carriers and airport authorities. For example,
following the destruction of TWA flight 800 in July 1996, the FAA began to
require additional matching of passengers and checked baggage, additional
searching of aircraft cabins and cargo areas, additional physical searches of
carry-on-items and other enhanced security measures.
Generally, European standards for aviation security are more stringent than
those currently in effect in the United States. Passengers are subject to more
comprehensive "profiling" and review of documents; parked aircraft must be
guarded, searched and cleaned in accordance with applicable regulations,
passenger baggage is subject to match procedures as well as random X-ray and
hand searches, commercial cargo is guarded and subject to random X-ray searches;
and airline employees and other crews are subject to additional security
measures. The FAA requires that U.S. airlines utilize similar passenger
profiling programs in their European operations.
Recent Developments Relating to Aviation Security. Several initiatives by
United States governmental authorities and industry participants have resulted
in recommended changes in regulatory requirements relating to aviation security.
These initiatives have been undertaken by the United States Congress, through
provisions of the Federal Aviation Reauthorization Act of 1996 (the "1996 Act");
the White House Commission on Aviation Safety and Security (the "Gore
Commission"), which published its final report on February 12, 1997; and the
Aviation Security Advisory Committee ("ASAC"), a committee of government and
industry participants that issued its recommendations on December 12, 1996. Each
of these groups has considered issues that have ranged from the fundamental
structure of, and sharing of responsibilities relating to, aviation security to
specific near-term measures that could be implemented to improve aviation
security.
The Gore Commission, which was formed following the destruction of TWA
Flight 800 in July 1996, included the heads of various federal agencies and was
charged with making recommendations as to how the partnership between the U.S.
government and industry participants can achieve improved aviation security. The
Gore Commission issued its final report on February 12, 1997 and included among
its recommendations: (i) development of uniform performance standards for the
selection, training and certification of pre-departure screening companies; (ii)
implementation of procedures for matching of passengers and checked baggage on a
nationwide basis no later than December 31, 1997; (iii) the continued
development and implementation of an
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automated passenger profiling system; and (iv) utilization of U.S. Customs
Service personnel and computer systems to complement the efforts of the FAA and
other federal agencies. On February 12, 1998, Transportation Secretary Rodney
Slater presented Vice President Gore with a one year status report on the
progress of the implementation of the recommendations of the White House
Commission on Aviation Safety and Security. With regard to development of
uniform standards for the selection, training, and certification of
pre-departure screening companies, the FAA issued an Advance Notice of Proposed
Rulemaking ("ANPRM") on March 17, 1997 to solicit comments on certification of
screening companies. The comment period for this ANPRM closed on May 1, 1997,
and the FAA has reviewed the comments received. The next step in the regulatory
process is to issue a Notice of Proposed Rulemaking. The FAA has also been
working with airlines to deploy the Screener Proficiency Evaluation and
Reporting System ("SPEARS"), a system for improving the training and monitoring
skills of screeners through computer-based training aids. Regarding
implementation of bag match and automated profiling systems, the FAA has
developed an automated passenger profiling system referred to as Computer
Assisted Passenger Screening ("CAPS"). Several airlines have begun developing
CAPS systems in 1997. Both CAPS and manual passenger screening systems are being
used in the passenger bag match system, to select passengers' luggage which will
either be examined by explosives detection systems or will not be allowed to be
transported unless a passenger is on the flight. Lastly, the U.S. Customs
Service is deploying personnel to assist aviation security efforts and is
working to evaluate select and deploy high technology cargo and baggage
screening equipment.
The 1996 Act required that the FAA conduct a study and report to Congress
on whether to transfer certain responsibilities of air carriers to either
airport authorities or to the federal government or whether to provide for some
other sharing of current responsibilities. This report has not yet been issued
by the FAA. However, the Company believes that the FAA is likely to follow the
final recommendation released by the Gore Commission, as described above. The
1996 Act directed the FAA to "certify" companies that provide pre-departure
screening, continue to assist air carriers in developing computer-assisted
passenger profiling programs, assess programs for matching of passengers and
checked baggage that are currently being utilized in the industry on a test
basis, and report on changes to enhance and supplement the screening and
inspection of cargo and mail shipments.
Other Applicable Regulations. Airport authorities in many foreign
countries require that companies receive licenses in order to be able to perform
services at the airport and limit the number of licenses that are issued. The
Company is also required to maintain various licenses and permits from state and
local government authorities in order to provide commercial security, shuttle
bus and certain other services.
RISK MANAGEMENT AND SAFETY
Because the Company's business is labor intensive, workers' compensation is
a significant operating expense for the Company in the United States. In
addition, the Company is exposed to possible claims by its clients' customers or
employees, alleging discrimination or harassment by the Company's employees. The
Company is also exposed to liability for the acts or negligence of its employees
who cause personal injury or damage while on assignment, as well as claims of
misuse of client proprietary information or theft of client property. The
Company has adopted policies and procedures intended to reduce its exposure to
these risks.
The Company maintains insurance against these risks with policy limits it
considers sufficient, subject to self insurance of $250,000 per incident and an
aggregate stop-loss. In addition, the Company maintains aviation liability
insurance of $500 million per incident. The Company establishes reserves in its
financial statements for the estimated costs of pending claims as well as the
estimated costs of incurred but not yet reported claims. The reserve for these
unreported claims is based on prior experience. The Company's reserves are
periodically revised, as necessary, based on developments related to pending
claims. At December 31, 1997, the Company's reserve for workers' compensation
and automobile claims was $3.8 million.
The Company's risk management specialist, with the assistance of the
Company's regional managers, is responsible for claims management and the
establishment of appropriate reserves for the deductible portion of claims. In
the first quarter of 1997, the Company implemented a number of new risk control
strategies, which include establishing a risk allocation program that provided
local managers with financial incentives to
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improve safety performance by decreasing the number of workplace accidents. The
Company has also implemented quarterly safety committee meetings with its local
managers and field employees, conducted defensive driving training sessions for
its transportation employees, conducted routine safety inspections of local work
sites and instructed personnel in proper lifting techniques in an effort to
reduce the number of preventable accidents.
EQUIPMENT
As of December 31, 1997, the Company operated a fleet of approximately 350
shuttle bus vehicles, which generally seat between 15 and 50 passengers. A
majority of these vehicles are leased, with lease terms that generally match the
term of the contract for which the vehicles are provided. In the event of early
termination of a contract, certain of the Company's clients are required to
assume liability for the vehicle leases.
The Company performs its own vehicle maintenance at each major location
through a separate maintenance division. Preventive maintenance is provided at
defined mileage intervals. Each maintenance shop has experience with all
maintenance and repair requirements for the Company's fleet, including air
conditioning and component maintenance.
ITEM 2. PROPERTIES
The Company maintains 111 offices in various metropolitan areas in the
United States and Europe. The Company's executive headquarters and corporate
operations are located in Atlanta, Georgia in leased facilities consisting of
approximately 3,700 and 15,200 square feet of office space, respectively. The
initial term of the executive headquarters lease expires in November 2001. In
addition, the Company's regional offices each consist of between 150 and 6,350
square feet. The Company believes its facilities are adequate to meet its needs
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers and key employees are as follows:
EXECUTIVE OFFICERS: AGE POSITION
------------------- --- --------
Frank A. Argenbright, Jr............. 50 Chairman and Co-Chief Executive
Officer
Edwin R. Mellett..................... 59 Vice Chairman and Co-Chief Executive
Officer
Thomas J. Marano..................... 47 President and Chief Operating
Officer -- Argenbright Holdings
Limited
Ernest Patterson..................... 50 Chief Executive -- The ADI Group
Limited
David L. Gamsey...................... 40 Chief Financial Officer
KEY EMPLOYEES:
--------------
Alan J. Cordover..................... 53 President, RightSide Up
Charlie P. Graziani.................. 55 President, Lloyd and Midwest Staffing
A. Trevor Warburton(1)............... 55 Managing Director -- The ADI Group
Limited
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KEY EMPLOYEES: AGE POSITION
-------------- --- --------
Daniel E. DiGiusto................... 46 Senior Vice President of Field
Operations -- Argenbright Holdings
Limited
Larry G. Parrotte.................... 38 Senior Vice President of Field
Operations -- Argenbright Holdings
Limited
Henry F. Anthony..................... 46 Vice President of Human Resources --
Argenbright Holdings Limited
L. Celeste Bottorff.................. 44 Vice President of Marketing and
Strategic Planning -- Argenbright
Holdings Limited
Barry J. Jenkins..................... 35 Vice President of
Finance -- Argenbright Holdings
Limited
Mark T. Ryall........................ 38 Vice President and Chief Information
Officer -- Argenbright Holdings
Limited
Nicholas G. Bailey................... 47 Finance Director -- The ADI Group
Limited
Nigel D.J. Cotton.................... 45 Human Resources Director -- The ADI
Group Limited
- ---------------
(1) Mr. Warburton was an executive officer of the Company through June 1997.
Mr. Argenbright founded the Company in 1979 and has been its Chairman and
Chief Executive Officer since that time. Mr. Argenbright graduated from the
Owner/President Management Program at Harvard Business School in 1991.
Mr. Mellett has been Vice Chairman and Co-Chief Executive Officer of the
Company since December 1994 and served on the Company's Advisory Board during
1994. From 1993 to 1994, he was a consultant and private investor. From 1984 to
1992, Mr. Mellett was Senior Vice President of The Coca-Cola Company, serving
also as President of Coca-Cola Northern Europe from 1990 to 1992 and President
of Coca-Cola USA from 1986 to 1988. From 1972 to 1984, Mr. Mellett was President
of the Food Services Division of PepsiCo.
Mr. Marano has been President and Chief Operating Officer of Argenbright
Holdings Limited, the holding company for the Company's U.S. operations, since
July 1995. From 1990 to June 1995, Mr. Marano was Vice President and a Global
Customer Director for The Coca-Cola Company, and from 1986 to 1990, he was Vice
President of U.S. Sales, Fountain Division, of The Coca-Cola Company. From 1985
to 1986, Mr. Marano was Vice President of U.S. Sales of Apple Computer.
Mr. Patterson has been Chief Executive -- The ADI Group Limited, the
holding company for AHL's European operations, since June 1997. From 1996 to
1997, Mr. Patterson was the Group Chief Executive Officer for National Express
Group PLC. From 1990 to 1996, he was the Chief Executive Officer, Worldwide
Distribution Services for B.E.T. PLC, and from 1985 to 1990, he was the Managing
Director of a foreign subsidiary of B.E.T. PLC.
Mr. Gamsey has been Chief Financial Officer of the Company since September
1995. From 1988 to September 1995, Mr. Gamsey was a Managing Director of
Investment Banking of Price Waterhouse LLP. From 1987 to 1988, Mr. Gamsey was
Chief Financial Officer of Visiontech, Inc., and from 1979 to 1987, Mr. Gamsey
was a Senior Audit Manager for Arthur Andersen LLP. Mr. Gamsey is a Certified
Public Accountant.
Mr. Cordover has been President of RightSide Up since its acquisition by
the Company in October 1997. Mr. Cordover was President of RightSide Up, Inc.
since he purchased the division from Paramount Pictures
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in 1996. Prior thereto, he was Vice President of Theatrical Marketing for
Paramount Pictures and Senior Vice President for K-Tel International.
Mr. Graziani has been president of Lloyd and, upon its acquisition, Midwest
Staffing, since Lloyd was acquired by the Company in September 1997. Mr.
Graziani was President of Lloyd Creative Staffing of Chicago since he founded
the company in 1989. Prior thereto, he held marketing and sales positions with
AB Dick, IBM, Unisys and Digital Equipment Corp.
Mr. Warburton has been Managing Director -- The ADI Group Limited since
January 1993. From 1990 to 1992, Mr. Warburton was Senior Vice President of
Ground Services for Ogden Aviation Services. From 1989 to 1990, he was
Operations Director for Ogden Aviation Services at London-Gatwick. From 1987 to
1989, he was head of Ground Operations for British Airways at London-Gatwick,
and from 1961 to 1987, he held a number of senior management positions with
British Caledonian Airways.
Mr. DiGiusto has been Senior Vice President of Field
Operations -- Argenbright Holdings Limited since 1989. From 1974 to 1989, Mr.
DiGiusto was employed by Burns International Security, most recently as its
Northeast Division Vice President.
Mr. Parrotte has been Senior Vice President of Field
Operations -- Argenbright Holdings Limited since 1997. From 1992 to 1997, he was
Regional Vice President of the Company's Washington, D.C. area operations. Prior
thereto, he was a regional manager with Burns International Security.
Mr. Anthony has been Vice President of Human Resources -- Argenbright
Holdings Limited since January 1996. From 1993 to 1996, Mr. Anthony was Vice
President of Human Resources of National Linen Service. From 1989 to 1993, Mr.
Anthony was Vice President of Human Resources for BET Plant Services, Inc.
Ms. Bottorff has been Vice President of Marketing and Strategic
Planning -- Argenbright Holdings Limited since September 1996. From 1994 to
1996, Ms. Bottorff was Marketing Director of The Atlanta Journal-Constitution.
From 1990 to 1994, Ms. Bottorff was Director of Strategic Planning of Holiday
Inn Worldwide. From 1987 to 1990, she was Manager of Field Planning for The
Coca-Cola Company and, from 1983 to 1987, she was an Engagement Manager for
McKinsey Co., Inc.
Mr. Jenkins has been Vice President of Finance -- Argenbright Holdings
Limited since May 1997. From 1984 to 1997, he was employed by Price Waterhouse
LLP, most recently as a senior manager. Mr. Jenkins is a Certified Public
Accountant.
Mr. Ryall has been Vice President and Chief Information Officer
-- Argenbright Holdings Limited since April 1997. From 1990 to 1997, he was
Group Manager of Ryder Systems, Inc. From 1983 to 1990, he was a manager for
Andersen Consulting.
Mr. Bailey has been Finance Director -- The ADI Group Limited since May
1995. From January 1994 to April 1995, he worked in Kazakhstan establishing the
financial operations for Tengizchevroil, a joint venture between the Government
of Kazakhstan and Chevron Petroleum. From 1992 to 1993, Mr. Bailey was an
independent consultant to the airline industry. Prior thereto, Mr. Bailey held a
number of positions in the airline industry. Mr. Bailey is a Chartered
Accountant.
Mr. Cotton has been Human Resources Director -- The ADI Group Limited since
August 1993. From 1989 to 1993, he was Head of Human Resources -- United Kingdom
for Ericsson plc and, during 1988, he was a Personnel Manager with British
Airways. Prior thereto, he was employed by British Caledonian Airways.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering on March 27, 1997 at
$10.00 per share and, since that date, the Company's Common Stock has traded on
the Nasdaq National Market under the symbol "AHLS." The following table sets
forth the high and low closing sales prices per share for the Common Stock, for
the periods indicated, as reported by the Nasdaq National Market.
HIGH LOW
------- -------
1997:
First Quarter (from March 27, 1997)......................... $ 10.75 $ 10.00
Second Quarter.............................................. 15.50 9.50
Third Quarter............................................... 19.50 15.125
Fourth Quarter.............................................. 24.625 15.25
On March 20, 1998, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $29.50 per share and there were 17 holders of
record of the Common Stock.
The Company has never paid any cash dividends on its Common Stock, and the
Board of Directors currently intends to retain all earnings for use in the
Company's business for the foreseeable future. The Company's credit facility
prohibits the payment of dividends. Any future payment of dividends will depend
upon the Company's results of operations, financial condition, cash requirements
and other factors deemed relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Combined Financial Statements and Notes thereto included elsewhere in this
Annual Report. The selected financial data presented below as of and for each of
the fiscal years in the five year period ended December 31, 1997 have been
derived from the Company's financial statements which have been audited by
Arthur Andersen LLP, independent accountants.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues........................ $104,143 $123,234 $168,601 $210,153 $276,013
Operating expenses:
Cost of services.............. 78,019 91,873 124,491 155,926 204,512
Field operating............... 18,284 20,931 30,328 37,492 45,956
Corporate general and
administrative............. 6,796 8,797 10,938 11,692 14,840
-------- -------- -------- -------- --------
Operating income........... 1,044 1,633 2,844 5,043 10,705
Interest expense........... 593 904 1,309 1,726 1,159
Other income, net............... (89) (26) (820) (301) (723)
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary items........ 540 755 2,355 3,618 10,269
Income tax provisions(2)........ 700 627 917 1,447 3,850
-------- -------- -------- -------- --------
Income (loss) before
extraordinary items........ (160) 128 1,438 2,171 6,419
Extraordinary items, net of
taxes(3)...................... -- -- -- -- (385)
-------- -------- -------- -------- --------
Net income (loss)..... $ (160) $ 128 $ 1,438 $ 2,171 $ 6,034
======== ======== ======== ======== ========
Net income per
share -- diluted.............. $ 0.17(4) $ 0.26(4) $ 0.55(5)
======== ======== ========
Weighted average common and
common equivalent
shares -- diluted........ $ 8,353(4) 8,433(4) 10,960
======== ======== ========
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
BALANCE SHEET DATA:
Working capital................................. $ 4,341 $ (763) $13,216 $17,353 $ 42,823
Total assets.................................... 21,036 29,094 40,687 51,953 109,794
Long-term debt, net of current portion(6)....... 7,281 1,437 14,609 19,706 3,495
Shareholders' equity............................ 2,123 2,252 3,577 5,409 74,531
- ---------------
(1) The Company's U.S. operations fiscal year ends on the last Friday in
December. Each of the fiscal years presented consists of 52 weeks except
that fiscal 1993 consists of 53 weeks.
(2) The income tax provision for 1993 and 1994 was negatively impacted by the
significance of non-deductible expenses relative to income before income
taxes.
(3) In the second quarter of 1997, the Company recorded extraordinary items
resulting from the early extinguishment of debt associated with the
Company's initial public offering.
(4) Pro forma to give effect to the Reorganization.
(5) Excluding the extraordinary items, net income would have been $0.59 per
share.
(6) Includes a note payable to shareholder in the amount of $650,000 and
$528,000 at December 31, 1995 and 1996, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
AHL provides contract staffing and management of its clients'
labor-intensive operational support functions on an outsourced basis throughout
the United States and Europe. Through its 83 offices in the United States and 28
offices in six European countries, AHL is able to service the multinational
outsourcing needs of its largely Fortune 1000 client base. The Company currently
has approximately 630 contracts to provide services and has established
long-term relationships with its largest clients providing the Company with a
significant source of predictable recurring revenues. Revenues have grown from
$104.1 million in 1993 to $276.0 million in 1997, a compounded annual growth
rate of 27.5%. Frank A. Argenbright, Jr., the Company's Chairman and Co-Chief
Executive Officer, founded the Company in 1979. As of February 1, 1997, all of
the outstanding shares of common stock of Argenbright, a holding company for
U.S. operations, and ADI, a holding company for European operations, were
contributed to AHL by Mr. Argenbright. As a result, Argenbright and ADI became
wholly-owned subsidiaries of the Company.
Since 1992, the Company has completed nine acquisitions, all of which have
been accounted for under the purchase method of accounting. In March 1992, ADI
acquired a portion of the passenger services operation of British Airways at
Heathrow Airport. This passenger services operation had revenues in the first
twelve months of operations of approximately $18.0 million. The Company has used
ADI as a platform to expand its operations in Europe. In August 1993, ADI
acquired Express Baggage Reclaim Services Limited, a provider of lost baggage
delivery and replacement services in the United Kingdom, with revenues of
approximately $1.8 million for the twelve months prior to the acquisition. In
July 1996, the Company acquired Intersec, a provider of access control services
in the mid-Atlantic region of the United States, with revenues of approximately
$10.0 million for the twelve months prior to the acquisition. In 1997, the
Company recorded a non-recurring after tax charge of $385,000 as a result of the
early extinguishment of debt incurred to finance the Intersec acquisition.
Since its initial public offering in March 1997, the Company has completed
six acquisitions. In February 1998, AHL acquired SES, a company that provides
warehouse "pick and pack" and light industrial staffing for commercial entities,
with revenues for the twelve months preceding the acquisition of approximately
$16.0 million. In December 1997, the Company acquired Midwest Staffing, a
Chicago-based company that provides staffing for warehouse "pick and pack" and
light industrial functions, with revenues for the twelve months ended December
31, 1997 of approximately $8.0 million. In October 1997, AHL acquired RightSide
Up, an order fulfillment company, with revenues for the twelve months ended
August 31, 1997 of approximately $6.4 million. In September 1997, AHL acquired
Lloyd, a Chicago-based company that provides staffing for warehouse "pick and
pack" and light industrial functions, with revenues for the twelve months prior
to the acquisition of approximately $14.0 million. In May 1997, AHL acquired the
access control business of New Jersey-based USA Security, with revenues for the
twelve months prior to the acquisition of approximately $8.6 million. Also in
May 1997, AHL acquired EAS, an operation of British Airways at London's Heathrow
Airport. EAS provides ground handling and passenger services for large, private
executive aircraft with revenues for the twelve months prior to the acquisition
of approximately $2.4 million. These acquisitions were financed with borrowings
under the Company's credit facility and proceeds from the Company's public
offerings in March and October 1997.
The Company's services are primarily provided under contracts, typically
having terms of one to five years, which provide the Company with a significant
source of predictable recurring revenues. Although the terms of the Company's
contracts vary significantly, clients generally agree that the Company will
provide a stated service level and agree to pay an hourly rate for services
provided. Certain of the Company's clients, especially in the cargo services
area, are billed a fixed dollar amount per month for services performed. Under
some contracts, the Company is entitled to rate increases when there are
increases in the Federal minimum wage although most of the Company's employees
are paid at rates in excess of the Federal minimum wage.
The Company recognizes revenues as services are performed. A substantial
amount of the Company's revenues are received, and operating costs are incurred,
in foreign currencies (primarily the British Pound and the German Deutsche
Mark), with a significant amount of operating income having been derived from
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operations in the United Kingdom. The denomination of foreign subsidiaries'
account balances in their local currency exposes the Company to certain foreign
exchange rate risks. The Company addresses the exposure by financing most
working capital needs in the applicable foreign currencies. The Company does not
engage in other purchased hedging transactions to reduce any remaining exposure
to fluctuations in foreign currency exchange rates. However, management does not
believe that the remaining risks are significant.
In the fall of 1996, the Company made the decision to terminate the
paratransit and municipal bus services offered by its transportation subsidiary
in Florida. The Company incurred nonrecurring pre-tax losses (including
termination costs) associated with these operations aggregating $665,000 in
1996.
RESULTS OF OPERATIONS
The following table sets forth Statement of Operations data as a percentage
of revenues for the periods indicated:
FISCAL YEAR ENDED
DECEMBER 31,(1)
-----------------------
1995 1996 1997
----- ----- -----
Revenues.................................................... 100.0% 100.0% 100.0%
Operating expenses:
Cost of services.......................................... 73.8 74.2 74.1
Field operating........................................... 18.0 17.8 16.6
Corporate general and administrative...................... 6.5 5.6 5.4
----- ----- -----
Operating income....................................... 1.7 2.4 3.9
Interest expense............................................ 0.8 0.8 0.4
Other income, net........................................... (0.5) (0.1) (0.2)
----- ----- -----
Income before income taxes and extraordinary items..... 1.4 1.7 3.7
Income tax provision........................................ 0.5 0.7 1.4
----- ----- -----
Income before extraordinary items......................... 0.9 1.0 2.3
Extraordinary items, net of taxes........................... -- -- (0.1)
----- ----- -----
Net income................................................ 0.9% 1.0% 2.2%
===== ===== =====
- ---------------
(1) The Company's U.S. operations' fiscal year ends on the last Friday in
December. Each of the fiscal years presented consists of 52 weeks.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Revenues increased $65.8 million, or 31%, to $276.0 million in
fiscal 1997 from $210.2 million in fiscal 1996. Of this increase, approximately
$6.3 million was attributable to the July 1996 Intersec acquisition and $15.2
million was attributable to the Midwest Staffing, RightSide Up, Lloyd, USA
Security and EAS acquisitions completed in 1997. The remaining increase was a
result of entering into contracts to provide services to new clients and as a
result of providing additional services and expanding into new markets with
existing clients.
Cost of Services. Cost of services 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 $48.6 million, or 31%,
to $204.5 million in fiscal 1997 from $155.9 million in fiscal 1996. As a
percentage of revenues, cost of services improved slightly at 74.1% in fiscal
1997 from 74.2% in fiscal 1996.
Field Operating Expenses. Field operating expenses represent expenses
which directly support field operations, such as each district's management,
facilities expenses (such as rent, communication costs and taxes), employee
uniforms, equipment leasing, depreciation and maintenance, local sales and
marketing activities and acquisition related goodwill. These expenses increased
$8.5 million, or 23%, to $46.0 million in
17
20
fiscal 1997 from $37.5 million in fiscal 1996. As a percentage of revenues,
field operating expenses decreased to 16.6% in fiscal 1997 from 17.8% in fiscal
1996. This percentage decrease was primarily attributable to the better
leveraging of existing field operations and termination of the Company's Florida
transportation operations which had significant field operating expenses.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses, which includes the cost of services the Company
provides to support and manage its field activities, increased $3.1 million, or
27%, to $14.8 million in fiscal 1997 from $11.7 million in fiscal 1996. As a
percentage of revenues, these expenses decreased to 5.4% in fiscal 1997 as
compared to 5.6% in fiscal 1996. This percentage decrease was primarily due to
the Company's ability to increase revenues without a commensurate increase in
corporate expenses.
Operating Income. Operating income increased $5.7 million, or 112%, to
$10.7 million in fiscal 1997 from $5.0 million in fiscal 1996. As a percentage
of revenues, operating income improved to 3.9% in fiscal 1997 from 2.4% in
fiscal 1996.
Interest Expense. Interest expense decreased $567,000, or 33%, to $1.2
million in fiscal 1997 from $1.7 million in fiscal 1996. Interest expense for
fiscal 1997 decreased due to the application of the proceeds from the Company's
initial public offering to repay the Company's outstanding debt in 1997.
Income Tax Provision. Income tax provision increased $2.4 million, or
166%, to $3.9 million in fiscal 1997 from $1.5 million in fiscal 1996. The
Company provided income taxes at rates of approximately 38% in fiscal 1997 and
40% in fiscal 1996. The reduction in the effective rate was primarily due to a
reduction in the United Kingdom corporate tax rate in 1997.
Income Before Extraordinary Items. Income before extraordinary items for
fiscal 1997 increased $4.2 million, or 196%, to $6.4 million, or 2.3% of
revenues, from $2.2 million, or 1.0% of revenues, for fiscal 1996. The Company
expensed extraordinary items during 1997 of $642,000, before income tax benefit
of $257,000. The extraordinary items consisted of the write-off of unamortized
loan origination costs and debt discount.
Net Income. Net income increased $3.8 million, or 178%, to $6.0 million,
or 2.2% of revenues, in fiscal 1997 from $2.2 million, or 1.0% of revenues, in
fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues. Revenues increased $41.6 million, or 25%, to $210.2 million in
fiscal 1996 from $168.6 million in fiscal 1995. Of this increase, approximately
$26.2 million was attributable to higher revenues from existing clients,
approximately $9.1 million to services initiated for new clients and $6.3
million to the Intersec acquisition. Revenues from existing clients increased
16% in fiscal 1996 over fiscal 1995 primarily as a result of providing
additional services and expanding into new markets with these clients.
Cost of Services. Cost of services increased $31.4 million, or 25%, to
$155.9 million in fiscal 1996 from $124.5 million in fiscal 1995. As a
percentage of revenues, cost of services increased to 74.2% in fiscal 1996 from
73.8% in fiscal 1995. This percentage increase was primarily attributable to
lower gross margins on the terminated Florida transportation operations and
operating inefficiencies associated with a contract in Detroit which began in
April 1996. The Company has corrected these inefficiencies through a change in
management at the Detroit location and increases in rates paid to the Company
with respect to this Detroit contract.
Field Operating Expenses. Field operating expenses increased $7.2 million,
or 24%, to $37.5 million in fiscal 1996 from $30.3 million in fiscal 1995,
primarily as a result of administrative staff, systems and facilities expenses
for new operations in Chicago, Cincinnati, San Francisco, Los Angeles and
Seattle opened during fiscal 1996. As a percentage of revenues, these expenses
decreased to 17.8% in fiscal 1996 from 18.0% in fiscal 1995.
Corporate General and Administrative Expenses. Corporate general and
administrative expenses increased $754,000, or 7%, to $11.7 million in fiscal
1996 from $10.9 million in fiscal 1995. As a percentage of revenues, these
expenses decreased to 5.6% in fiscal 1996 from 6.5% in fiscal 1995. This
percentage decrease
18
21
was primarily due to the Company's ability to increase revenues without a
commensurate increase in corporate expenses.
Operating Income. Operating income increased $2.2 million, or 77%, to $5.0
million in fiscal 1996 from $2.8 million in fiscal 1995. As a percentage of
revenues, operating income improved to 2.4% in fiscal 1996 from 1.7% in fiscal
1995.
Interest Expense. Interest expense increased $417,000 to $1.7 million in
fiscal 1996 from $1.3 million in fiscal 1995. This was the result of
approximately $4.7 million of additional indebtedness incurred in connection
with the Intersec Acquisition in July 1996 and higher borrowings under the
Company's revolving line of credit.
Other Income, Net. Other income, net decreased $519,000 to $301,000 in
fiscal 1996 from $820,000 in fiscal 1995. This decrease was primarily due to the
non-recurring collection of notes received in the sale of the Company's drug
testing subsidiary in October 1995.
Net Income. Net income increased $733,000, or 51%, to $2.2 million, or
1.0% of revenues, in fiscal 1996 from net income of $1.4 million, or 0.9% of
revenues, in fiscal 1995. The Company's effective income tax rate was
approximately 40% for fiscal 1996 compared to 39% in fiscal 1995.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth statement of operations data for the four
quarters of fiscal 1996 and 1997. This quarterly information is unaudited but
has been prepared on a basis consistent with the Company's audited financial
statements presented elsewhere herein and, in the Company'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, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
------------ ------------ ------------- ------------
Revenues...................................... $60,424 $63,770 $72,369 $79,450
Operating expenses:
Cost of services............................ 45,428 47,341 53,242 58,501
Field operating............................. 9,923 10,343 11,880 13,810
Corporate general and administrative........ 3,435 3,668 4,041 3,696
------- ------- ------- -------
Operating income......................... 1,638 2,418 3,206 3,443
Interest expense.............................. 648 170 177 164
Other income, net............................. (88) (154) (201) (280)
------- ------- ------- -------
Income before income taxes and extraordinary
items.................................... 1,078 2,402 3,230 3,559
Income tax provision.......................... 427 948 1,210 1,265
------- ------- ------- -------
Income before extraordinary items........... 651 1,454 2,020 2,294
Extraordinary items, net of taxes ............ -- (385) -- --
------- ------- ------- -------
Net income.......................... $ 651 $ 1,069 $ 2,020 $ 2,294
======= ======= ======= =======
19
22
QUARTER ENDED
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
------------ ------------ ------------- ------------
Revenues...................................... $45,519 $47,643 $57,320 $59,671
Operating expenses:
Cost of services............................ 33,541 35,342 42,453 44,590
Field operating............................. 8,253 8,427 10,193 10,619
Corporate general and administrative........ 2,864 2,848 2,708 3,272
------- ------- ------- -------
Operating income......................... 861 1,026 1,966 1,190
Interest expense.............................. 309 301 549 567
Other income, net............................. (57) (81) (81) (82)
------- ------- ------- -------
Income before income taxes.................. 609 806 1,498 705
Income tax provision.......................... 244 322 599 282
------- ------- ------- -------
Net income.......................... $ 365 $ 484 $ 899 $ 423
======= ======= ======= =======
The Company's contracts at airports with large volumes of international
passengers (such as New York -- Kennedy and London -- Heathrow) result in an
increase in staffing for certain passenger services during periods of higher air
travel, typically in the summer. The Company's contracts at airports with fewer
international passengers generally require more constant staffing throughout the
year. Therefore, the Company has experienced, and expects to continue to
experience, quarterly variations in its results of operations principally as a
result of the seasonality of air travel primarily to and from Europe. While the
effects of seasonality on AHL's business often are obscured by the timing of the
addition of new clients and the commencement of new services for existing
clients, the Company's operating income tends to be lower in the first and
fourth quarters of the fiscal year and highest in the third quarter of the
fiscal year. Additionally, the Company's operating margin tends to be lower in
the fourth quarter because of the occurrence of holidays during which the
Company pays overtime wages to employees. Under certain of the Company's
contracts, the Company is not entitled to recoup the cost of these overtime
wages.
LIQUIDITY AND CAPITAL RESOURCES
To support its rapid growth, AHL has historically relied on borrowings
under its bank revolving credit facility. In May 1997, the Company entered into
a three-year, $35 million revolving bank line of credit to replace the Company's
prior $25 million revolving credit facility. In February 1998, the Company
expanded the credit facility (the "Credit Facility") to $100 million (of which
$35 million is available in foreign currencies) through a syndication of five
banks, lengthened the term to five years and lowered the interest rate.
Borrowings under the Credit Facility bear interest at the prime rate, the
Federal Funds rate plus 50 basis points or LIBOR plus 55 basis points. The
Credit Facility is collateralized by substantially all of the Company's assets.
In addition, the Credit Facility is subject to certain restrictive covenants. As
of December 31, 1997, there was approximately $1.8 million outstanding under the
Credit Facility.
Cash used in operating activities was $2.6 million in fiscal 1997 compared
to cash provided by operating activities of $1.2 million for fiscal 1996. This
decrease was the result of the increase of $5.3 million in net income before
depreciation and amortization and extraordinary items offset by $9.1 million of
changes in working capital due to increase in accounts receivable as a result of
the increase in revenues and the timing of payments of accounts payable and
accrued expenses. Cash used in investing activities for fiscal 1997 was $26.8
million compared to $4.0 million for fiscal 1996. This was principally the
result of the five acquisitions completed in 1997 as compared to only one in
1996 as well as increased expenditures on capital assets, primarily
transportation and computer equipment. Cash provided by financing activities for
fiscal 1997 was $43.1 million compared to $3.4 million for fiscal 1996. The
increase was principally the result of proceeds from the public offerings of
common stock in 1997, net of expenses, of $63.4 million offset by an increase in
net payments of debt of $24.7 million, as compared to 1996.
Cash provided by operating activities was $1.2 million for fiscal 1996 as
compared to cash used in operating activities of $3.5 million in fiscal 1995.
This increase was primarily the result of the increase of $1.0
20
23
million in net income before depreciation and amortization and by $2.9 million
of changes in operating assets, primarily accounts receivable, accrued salaries
and related benefits payable. These changes were consistent with the Company's
higher volume of business. Cash used in investing activities for fiscal 1996 was
$4.0 million as compared to $1.6 million in fiscal 1995, principally as a result
of the Intersec acquisition made in July 1996. Cash provided by financing
activities for fiscal 1996 was $3.3 million compared to $5.1 million in fiscal
1995, principally representing changes in borrowings under the Company's credit
facility and issuance of the subordinated notes associated with the Intersec
acquisition.
Capital expenditures were $2.6 million, $2.0 million and $4.7 million in
fiscal 1995, 1996 and 1997, respectively. Historically, capital expenditures
have been, and future expenditures are anticipated to be, primarily to support
expansion of the Company's operations and management information systems. The
Company's capital expenditures over the next several years, as a percentage of
its revenues, are expected to be generally consistent with those of the past
three fiscal years.
The Company completed its initial public offering of Common Stock in March
1997, raising net proceeds of approximately $22 million. These proceeds were
used to repay all outstanding amounts under the Company's Credit Facility, to
repurchase an outstanding warrant and to retire other outstanding acquisition-
related debt. The Company completed a follow-on offering in October 1997,
raising net proceeds of approximately $41 million. These proceeds were used to
repay outstanding debt used to fund acquisitions of approximately $16 million
with the balance for general corporate purposes, including working capital to
support the Company's growth and acquisitions.
The Company believes that funds generated from operations, together with
existing cash and borrowings under the Credit Facility, will be sufficient to
finance its current operations, planned capital expenditure requirements,
additional acquisitions and internal growth for at least the next several years.
If the Company were to make a significant acquisition for cash, it may be
necessary for the Company to obtain additional debt or equity financing.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
YEAR 2000
The Company has determined that the year 2000 issue will not have a
material effect on its business, operations or management information systems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are listed under Item 14(a) of this annual report
and are filed as part of this report on the pages indicated. The supplementary
data are included under Item 7 of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections under the headings "Election of Directors" entitled "Nominees
for Election -- Term Expiring 1998," "Incumbent Directors -- Term Expiring
1999," and "Incumbent Directors -- Term Expiring 2000" of the Proxy Statement
for the Annual Meeting of Shareholders to be held May 14, 1998 (the "Proxy
Statement") are incorporated herein by reference for information on Directors of
the Registrant. 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 titled "Executive Compensation" entitled "Summary Compensation Table",
"Fiscal Year-End Option Value Table", "Employment Agreements" 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
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
1. The following financial statements are filed with this report on the pages
indicated:
PAGE
----
AHL SERVICES, INC.:
Report of Independent Public Accountants.................... 26
Consolidated Balance Sheets at December 31, 1996 and 1997... 27
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... 28
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995, 1996 and 1997.............. 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... 30
Notes to Consolidated Financial Statements.................. 32
2. The Company is not required to file any financial statement schedules.
3. Exhibits
See Item 14(c) below.
(b) The Company filed no Current Reports on Form 8-K during the last
quarter of the period covered by this Report.
(c) Exhibits.
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
3.1 -- Restated and Amended Articles of Incorporation of the
Company (incorporated by reference to the Registration
Statement on Form 8-A dated March 25, 1997)
3.2 -- Bylaws of the Company (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 the Company's Registration Statement on Form S-1 (File
No. 333-20315))
4.2 -- 1997 Stock Incentive Plan (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No.
333-20315))
4.3* -- AHL Services, Inc. 1997 Non-Qualified Employee Stock
Purchase Plan USA
10.1 -- Restated Employment Agreement between the Company and Edwin
R. Mellett dated as of February 1, 1997, as amended on
February 28, 1997 (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No.
333-20315))
10.2 -- Restated Employment Agreement between the Company and Thomas
J. Marano dated as of February 1, 1997, as amended on
February 28, 1997 (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No.
333-20315))
10.3 -- Restated Employment Agreement between the Company and David
L. Gamsey dated as of February 1, 1997, as amended on
February 28, 1997 (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No.
333-20315))
23
26
EXHIBIT
NUMBER NUMBER DESCRIPTION
- ------- ------------------
10.4 -- Director's Service Agreement between The ADI Group Limited
and Alan Trevor Warburton dated as of January 1, 1993
(incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-20315))
10.5 -- Letter Agreement between the Company and Ernest Patterson
dated as of May 23, 1997 (incorporated by reference to the
Company's Registration Statement on Form S-1 (File No. 333-
37327))
10.6* -- Credit Agreement dated as of February 10, 1998 by and among
AHL Services, Inc., Argenbright Security, Inc., Argenbright,
Inc., ADI U.K. Limited, Aviation Defense International
Germany Limited, Argenbright Holdings Limited and The ADI
Group Limited, as borrowers, the Lenders referred to
therein, First Union National Bank (London Branch), as
European Facility Lender and First Union National Bank of
Georgia, as Administrative Agent
10.7+ -- Agreement between Argenbright Security Inc. and United Air
Lines, Inc., dated as of November 16, 1996 (incorporated by
reference to the Company's Registration Statement on Form
S-1 (File No. 333-20315))
10.8+ -- Agreement between Argenbright Security, Inc. and United Air
Lines, Inc., dated of December 8, 1996 (incorporated by
reference to the Company's Registration Statement on Form
S-1 (File No. 333-20315))
10.9+ -- Security Services Agreement between Argenbright Security,
Inc. and America Online Inc., dated as of March 12, 1997 and
relating to services commenced on June 1, 1996 (incorporated
by reference to the Company's Registration Statement on Form
S-1 (File No. 333-20315))
11.1* -- Statement of Computation of Earnings Per Share
21.1* -- List of subsidiaries
23.1* -- Consent of Arthur Andersen LLP
27.1* -- Financial data schedule December 31, 1997 (for SEC filing
purposes only)
27.2* -- Restated Financial data schedule December 31, 1996 (for SEC
filing purposes only)
- ---------------
+ The Company has been granted confidential treatment of portions of this
Exhibit. Accordingly, portions thereof have been omitted and filed separately
with the Commission.
* Included herewith
24
27
AHL SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... 26
Consolidated Balance Sheets -- December 31, 1996 and 1997... 27
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996, and 1997......................... 28
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996, and 1997............. 29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996, and 1997......................... 30
Notes to Consolidated Financial Statements.................. 32
25
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
AHL Services, Inc.:
We have audited the accompanying consolidated balance sheet of AHL
SERVICES, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1997
and the combined balance sheets of ARGENBRIGHT HOLDINGS LIMITED (a Georgia
corporation) AND SUBSIDIARIES and THE ADI GROUP LIMITED (incorporated in the
United Kingdom) (collectively, AHL Services, Inc.) as of December 31, 1996 and
the related consolidated and combined statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 18, 1998
26
29
AHL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1996 1997
--------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,842 $ 15,456
Accounts receivable, less allowance for doubtful accounts
of $341 and $532
in 1996 and 1997....................................... 34,692 51,247
Due from related parties.................................. 269 --
Uniforms in service, net.................................. 1,987 2,087
Prepaid expenses and other................................ 2,085 2,761
------- --------
Total current assets.............................. 40,875 71,551
PROPERTY AND EQUIPMENT, net................................. 5,674 10,885
INTANGIBLES, net............................................ 4,141 25,665
DEFERRED INCOME TAXES....................................... 708 980
OTHER ASSETS................................................ 555 713
------- --------
$51,953 $109,794
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 4,667 $ 3,298
Accrued payroll and other current liabilities............. 15,413 22,561
Current portion of self-insurance reserves................ 640 760
Income taxes payable...................................... 1,018 1,281
Current portion of long-term debt......................... 1,617 496
Deferred income taxes..................................... 167 332
------- --------
Total current liabilities......................... 23,522 28,728
------- --------
LONG-TERM DEBT, less current portion........................ 19,178 3,495
------- --------
SELF-INSURANCE RESERVES, less current portion............... 2,560 3,040
------- --------
DEFERRED INCOME TAXES....................................... 50 --
------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, and 10).......... -- --
------- --------
REDEEMABLE WARRANT.......................................... 706 --
------- --------
NOTE PAYABLE TO SHAREHOLDER................................. 528 --
------- --------
SHAREHOLDERS' EQUITY:
Common stock of AHL Services, Inc., $.01 par value;
50,000,000 shares authorized, 13,605,000 shares issued
and outstanding in 1997................................ -- 136
Preferred stock of AHL Services, Inc., no par value;
5,000,000 shares authorized, no shares outstanding
Common stock of Argenbright, $1 par value; 50,000 shares
authorized, 500 and 0 shares issued and outstanding in
1996 and 1997.......................................... 1 --
Common stock of ADI, no par value; 5,000,000 shares
authorized, 296,868 and 0 shares issued and outstanding
in 1996 and 1997
Cumulative translation adjustment......................... 74 (83)
Paid-in capital........................................... -- 62,908
Retained earnings......................................... 5,952 11,570
Due from shareholder...................................... (618) --
------- --------
Shareholders' equity, net.............................. 5,409 74,531
------- --------
$51,953 $109,794
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
30
AHL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
REVENUES.................................................... $168,601 $210,153 $276,013
OPERATING EXPENSES:
Cost of services.......................................... 124,491 155,926 204,512
Field operating........................................... 30,328 37,492 45,956
Corporate, general, and administrative.................... 10,938 11,692 14,840
-------- -------- --------
Total operating expenses.......................... 165,757 205,110 265,308
-------- -------- --------
OPERATING INCOME............................................ 2,844 5,043 10,705
INTEREST EXPENSE............................................ 1,309 1,726 1,159
OTHER INCOME, net........................................... (820) (301) (723)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS.......... 2,355 3,618 10,269
INCOME TAX PROVISION........................................ 917 1,447 3,850
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEMS........................... 1,438 2,171 6,419
EXTRAORDINARY ITEMS--LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of tax benefit of $257................................ -- -- (385)
-------- -------- --------
NET INCOME.................................................. $ 1,438 $ 2,171 $ 6,034
======== ======== ========
EARNINGS PER SHARE:
Basic:
Income before extraordinary items per common and common
equivalent shares.................................... $ 0.17 $ 0.26 $ 0.60
Extraordinary items per common and common equivalent
shares............................................... -- -- (0.04)
-------- -------- --------
Net income per common and common equivalent shares..... $ 0.17 $ 0.26 $ 0.56
======== ======== ========
Diluted:
Income before extraordinary items per common and common
equivalent shares.................................... $ 0.17 $ 0.26 $ 0.59
Extraordinary items per common and common equivalent
shares............................................... -- -- (0.04)
-------- -------- --------
Net income per common and common equivalent shares..... $ 0.17 $ 0.26 $ 0.55
======== ======== ========
Weighted average common and common equivalent shares:
Basic.................................................. 8,353 8,353 10,707
======== ======== ========
Diluted................................................ 8,353 8,433 10,960
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
31
AHL SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AHL SERVICES, INC. ARGENBRIGHT ADI
COMMON STOCK COMMON STOCK COMMON STOCK CUMULATIVE
------------------- ------------------- ------------------- TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ADJUSTMENT
---------- ------ ---------- ------ ---------- ------ -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
BALANCE, DECEMBER 31,
1994................ -- $ -- 500 $ 1 296,868 $ - $ 18
Increase in due from
shareholder....... -- -- -- -- -- -- --
Translation
adjustment........ -- -- -- -- -- -- (16)
Net income.......... -- -- -- -- -- -- --
---------- ---- ---------- --- ---------- -- ----
BALANCE, DECEMBER 31,
1995................ -- -- 500 1 296,868 -- 2
Accretion of
redeemable
warrant........... -- -- -- -- -- -- --
Increase in due from
shareholder....... -- -- -- -- -- -- --
Translation
adjustment........ -- -- -- -- -- -- 72
Net income.......... -- -- -- -- -- -- --
---------- ---- ---------- --- ---------- -- ----
BALANCE, DECEMBER 31,
1996................ -- -- 500 1 296,868 -- 74
Reorganization (Note
1)................ 8,353,430 84 (500) (1) (296,868) -- --
Issuance of common
stock, net........ 5,251,570 52 -- -- -- -- --
Accretion of
redeemable
warrant........... -- -- -- -- -- -- --
Decrease in due from
shareholder....... -- -- -- -- -- -- --
Translation
adjustment........ -- -- -- -- -- -- (157)
Net income.......... -- -- -- -- -- -- --
---------- ---- ---------- --- ---------- -- ----
BALANCE, DECEMBER 31,
1997................ 13,605,000 $136 -- $-- -- $-- $(83)
========== ==== ========== === ========== === ====
PAID-IN RETAINED DUE FROM
CAPITAL EARNINGS SHAREHOLDER TOTAL
------- -------- ----------- -------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
BALANCE, DECEMBER 31,
1994................ $ -- $ 2,431 $(198) $ 2,252
Increase in due from
shareholder....... -- -- (97) (97)
Translation
adjustment........ -- -- -- (16)
Net income.......... -- 1,438 -- 1,438
------- ------- ----- -------
BALANCE, DECEMBER 31,
1995................ -- 3,869 (295) 3,577
Accretion of
redeemable
warrant........... -- (88) -- (88)
Increase in due from
shareholder....... -- -- (323) (323)
Translation
adjustment........ -- -- -- 72
Net income.......... -- 2,171 -- 2,171
------- ------- ----- -------
BALANCE, DECEMBER 31,
1996................ -- 5,952 (618) 5,409
Reorganization (Note
1)................ -- (372) -- (289)
Issuance of common
stock, net........ 62,908 -- -- 62,960
Accretion of
redeemable
warrant........... -- (44) -- (44)
Decrease in due from
shareholder....... -- -- 618 618
Translation
adjustment........ -- -- -- (157)
Net income.......... -- 6,034 -- 6,034
------- ------- ----- -------
BALANCE, DECEMBER 31,
1997................ $62,908 $11,570 $ -- $74,531
======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
29
32
AHL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
---------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,438 $ 2,171 $ 6,034
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Extraordinary items.................................... -- -- 385
Depreciation and amortization.......................... 3,897 4,158 5,234
Gain on sale of subsidiary............................. (823) (325) --
Loss (gain) on sales of property and equipment......... -- 133 (119)
Amortization of debt discount.......................... -- 180 93
Minority interest in net income........................ (26) -- --
Changes in assets and liabilities, net of assets of
acquired businesses:
Accounts receivable.................................. (12,511) (7,860) (16,859)
Due from related parties............................. 305 (538) 242
Uniforms in service.................................. (1,912) (2,575) (2,582)
Prepaid expenses and other........................... 1,343 3,304 (1,422)
Accounts payable..................................... (343) 141 (1,334)
Accrued payroll and other current liabilities........ 2,844 4,068 6,856
Self-insurance reserves.............................. 1,427 1,000 600
Income taxes payable................................. 1,769 (2,634) 413
Deferred income taxes................................ (949) (42) (157)
--------- --------- ---------
Net cash (used in) provided by operating
activities...................................... (3,541) 1,181 (2,616)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (2,571) (1,974) (4,653)
Proceeds from sales of property and equipment............. -- 245 440
Proceeds from sale of subsidiary.......................... 975 325 --
Purchase of businesses.................................... -- (2,500) (22,420)
Other activities, net..................................... -- (102) (172)
--------- --------- ---------
Net cash used in investing activities............. (1,596) (4,006) (26,805)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt............................... (909) (1,609) (8,346)
Repayments of line of credit.............................. (115,617) (142,350) (114,102)
Borrowings under line of credit........................... 107,938 144,094 101,925
Proceeds from issuance of common stock.................... -- -- 64,854
Expenses from issuance of common stock.................... -- -- (1,467)
Repurchase of outstanding warrant......................... -- -- (750)
Proceeds from refinancing of debt......................... 13,965 -- --
Proceeds from issuance of long-term debt.................. -- 4,000 --
(Increase) decrease in due from shareholder............... (97) (323) 618
Repayment of note from shareholder........................ -- -- 346
Repayment of note payable to shareholder.................. -- (122) --
Payment of debt issuance costs............................ (166) (340) --
--------- --------- ---------
Net cash provided by financing activities......... 5,114 3,350 43,078
--------- --------- ---------
EFFECT OF EXCHANGE RATES ON CASH............................ (18) 148 (43)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (41) 673 13,614
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 1,210 1,169 1,842
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 1,169 $ 1,842 $ 15,456
========= ========= =========
30
33
YEARS ENDED DECEMBER 31
---------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
CASH PAID DURING THE YEAR FOR:
Interest.................................................. $ 1,381 $ 1,427 $ 1,159
========= ========= =========
Income taxes.............................................. $ 562 $ 2,538 $ 3,710
========= ========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment purchases under capital lease obligations....... $ 530 $ 546 $ 472
========= ========= =========
Redeemable warrant issued in connection with Sirrom
Notes.................................................. $ -- $ 618 $ --
========= ========= =========
Accretion of redeemable warrant........................... $ -- $ 88 $ 44
========= ========= =========
Notes issued for Intersec acquisition..................... $ -- $ 1,155 $ --
========= ========= =========
Contribution of real estate (Note 1)...................... $ -- $ -- $ 1,637
========= ========= =========
Forgiveness of note payable to shareholder................ $ -- $ -- $ 528
========= ========= =========
Assumption of real estate debt............................ $ -- $ -- $ 2,532
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
31
34
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
AHL Services, Inc. ("AHL" or the "Company") provides predeparture
screening, passenger profiling, access control, shuttle bus, cargo handling,
staff for light industrial and warehouse pick and pack functions, order
fulfillment, and other services primarily throughout the United States, the
United Kingdom, France, and Germany to various customers, including airlines,
governmental entities, corporations, and other enterprises.
The accompanying consolidated financial statements for the years ended
December 31, 1995 and 1996 represent the combination of the consolidated
financial statements of Argenbright Holdings Limited ("Argenbright") and The ADI
Group Limited and its predecessor entities ("ADI"). On February 1, 1997, Frank
A. Argenbright, Jr. (the "primary shareholder") contributed all of the
outstanding shares of common stock of Argenbright and ADI to AHL. In addition to
the contribution of the shares of Argenbright and ADI to AHL, Mr. Argenbright
contributed certain real estate, a portion of which was previously rented by the
Company (with the Company assuming the related mortgage debt) and a note with a
balance of $528,000 payable by the Company to Mr. Argenbright (collectively the
"Reorganization"). All of these transactions were brought forward at historical
values. Effective with the Reorganization, the capital structure of AHL
consisted of 50,000,000 shares authorized, 8,353,430 shares issued and
outstanding of $.01 par value common stock and 5,000,000 shares authorized, no
shares issued and outstanding of no par value preferred stock. Shares
outstanding and all other references to shares of common stock for the years
ended December 31, 1995 and 1996 are pro forma to give effect to the revised
capital structure.
In March 1997, the Company completed an initial public offering of its
common stock. The Company issued 2,500,000 shares at an initial public offering
price of $10.00 per share. The total proceeds of the initial public offering,
net of underwriting discounts and offering expenses, were approximately
$22,000,000. Subsequent to the public offering of common stock, the Company
repaid outstanding debt of approximately $19,000,000 and repurchased the
outstanding warrant of $750,000. Upon repayment of outstanding debt, the Company
wrote off $642,000 of debt issuance costs before income tax benefit of $257,000,
which was reported as an extraordinary item.
In October 1997, the Company completed a follow-on offering of 2,751,570
shares of its common stock at an offering price of $16.00 per share. The total
proceeds, net of underwriting discounts and offering expenses, were
approximately $41,000,000. The proceeds were used to repay outstanding debt of
approximately $16,000,000 with the balance for general corporate purposes,
including working capital to support the Company's growth and acquisitions.
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 United States operation (Argenbright) maintains its books by
using a 52/53-week fiscal year ending on the last Friday in December. The end of
Argenbright's 1997 fiscal year was December 26. For purposes of the consolidated
financial statements, the year-end is stated as of December 31. The impact of
the use of different year-ends is immaterial, and each of the years ended
December 31, 1995, 1996, and 1997 include 52 weeks.
32
35
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
purchase maturities of three months or less.
UNIFORMS IN SERVICE
Uniforms in service are recorded at cost and are amortized over their
estimated useful life of 18 months.
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 2 to 10 years for office
furniture and equipment and transportation equipment and 25 years for buildings.
Leasehold improvements are amortized over the lesser of their useful lives or
the terms of the related leases.
Property and equipment were comprised of the following:
DECEMBER 31,
------------------
1996 1997
------- --------
(IN THOUSANDS)
Land........................................................ $ -- $ 321
Buildings and leasehold improvements........................ 1,493 3,029
Office furniture and equipment.............................. 6,223 10,163
Transportation equipment.................................... 6,266 7,745
------- --------
13,982 21,258
Less accumulated depreciation............................... (8,308) (10,373)
------- --------
$ 5,674 $ 10,885
======= ========
Depreciation expense was $1,806,000, $1,870,000, and $2,211,000 for the
years ended December 31, 1995, 1996, and 1997, respectively.
INTANGIBLES
Intangibles were comprised of the following:
DECEMBER 31,
----------------
1996 1997
------ -------
(IN THOUSANDS)
Goodwill.................................................... $3,757 $24,773
Other intangibles........................................... 881 1,702
------ -------
4,638 26,475
Less accumulated amortization............................... (497) (810)
------ -------
$4,141 $25,665
====== =======
33
36
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and other intangibles are amortized using the straight-line method
over periods ranging up to 40 years. Amortization expense for goodwill and other
intangibles was $153,000, $236,000, and $522,000 for the years ended December
31, 1995, 1996, and 1997, respectively.
ACCOUNTS PAYABLE
Accounts payable at December 31, 1996 includes book overdrafts created by
outstanding checks of $2,098,000. There were no book overdrafts at December 31,
1997.
REVENUE RECOGNITION
The Company recognizes revenues as services are performed.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective
for the Company's fiscal year ended December 31, 1997. The Company adopted the
new guidelines for the calculation in 1997 and presentation of earnings per
share, and all prior periods have been restated. Basic earnings per share are
based on the weighted average number of shares outstanding. Diluted earnings per
share are based on the weighted average number of shares outstanding and the
dilutive effect of common stock equivalent shares ("CSEs") issuable upon the
conversion of stock options and the warrant (using the treasury stock method).
Net income is not reduced by the $88,000 and $44,000 provisions for accretion of
the redeemable warrant redemption value for the years ended December 31, 1996
and 1997, respectively, because the calculation assumes that the related common
stock was outstanding in lieu of the redeemable warrant (Notes 6 and 8).
Pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin ("SAB") No. 83, common stock and CSEs issued at prices below the public
offering price during the 12-month period prior to the initial public offering
were included in the calculation in previously issued financial statements as if
they were outstanding for all periods presented, regardless of whether they are
dilutive. In February 1998, the SEC released SAB No. 98 on computations of
earnings per share. SAB No. 98 replaces SAB No. 83 and requires, among other
items, that only "nominal issuances" of common stock be reflected in the
calculation as if they were outstanding for all periods presented and that the
calculation be made in accordance with SFAS No. 128 for periods subsequent to
the offering. Accordingly, CSEs for 1996 have been restated to be included only
from the date of grant resulting on increase in earnings per share for the year
ended December 31, 1996 from $0.25 to $0.26.
The following table reconciles the denominator of the basic and diluted
earnings per share computations (in thousands):
YEARS ENDED
DECEMBER 31,
--------------
1996 1997
----- ------
Weighted average common shares.............................. 8,353 10,707
Incremental shares from assumed conversion of stock options
granted and warrants issued............................... 80 253
----- ------
Weighted average common shares and dilutive potential common
shares.................................................... 8,433 10,960
===== ======
FOREIGN CURRENCY TRANSLATION AND EXPOSURE
In the accompanying 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
34
37
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
shareholders' equity. 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. However, management
does not believe the remaining risks to be significant.
SIGNIFICANT CUSTOMER CONCENTRATION
During the years ended December 31, 1995, 1996, and 1997, the following
clients individually accounted for more than 10% of the Company's revenues:
1995 1996 1997
---- ---- ----
Customer A.................................................. 10.5% 11.3% 18.8%
Customer B.................................................. 23.6 23.1 17.2
Customer C.................................................. 15.7 12.6 12.7
As of December 31, 1996 and 1997, approximately 37.9% and 32.8%,
respectively, of the Company's accounts receivable were from these three
clients. The Company's policy does not require significant collateral or other
security to support such receivables.
3. SALE OF SUBSIDIARY
In October 1995, the Company sold substantially all of the assets of
Intergram, Inc., Argenbright's wholly owned subsidiary which provided drug
testing, for $1,300,000, of which $975,000 was received in cash and the
remaining $325,000 was in the form of a note receivable. During fiscal 1995, the
cash portion of the sale resulted in a gain of $823,000, which is reflected in
the accompanying statements of operations as other income, net in 1995. The
balance of the gain reflected by the note receivable of $325,000 was recognized
during 1996 upon receipt of the proceeds.
4. ACQUISITIONS
In July 1996, the Company acquired Intersec, Inc. ("Intersec") for
$2,500,000 in cash and $1,155,000 in the form of notes payable. Intersec
provides access control services in the Washington, D.C. area.
In May 1997, the Company entered into a joint venture with British Airways
to acquire Executive Aircraft Services ("EAS"), a division of British Airways.
EAS provides ground handling, passenger handling, and concierge services for
large private executive aircraft. Heathrow Airport licensing rules prevented an
outright purchase of the business by AHL, so the parties entered into a joint
venture and agency agreement under which AHL retained an option to purchase all
of the business when regulatory authorities permit and AHL receives all of the
revenues and profits from the business performed by EAS. AHL paid approximately
$2,800,000 to British Airways, and British Airways contributed the license to
operate the executive aircraft services business at Heathrow Airport to the
joint venture. In addition, AHL has committed to pay British Airways up to
$550,000 for each of three years if EAS achieves certain operating results.
In May 1997, the Company acquired the access control business of USA
Security Systems, Inc., located in New Jersey, for approximately $2,600,000 in
cash.
In September 1997, the Company acquired Lloyd Creative Staffing of Chicago
("Lloyd") for approximately $5,000,000 in cash plus contingent consideration
based on future operating results. Lloyd provides staff for warehouse "pick and
pack" and light industrial functions to companies in the Chicago area.
35
38
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1997, the Company acquired RightSide Up, Inc., a California
order fulfillment company, for $6,000,000 in cash plus contingent consideration
based on future operating results.
In December 1997, the Company acquired Midwest Staffing Systems, Inc., a
Chicago-based company that provides staff for warehouse "pick and pack" and
light industrial functions, for $5,000,000 in cash.
The acquisitions above were accounted for using the purchase method of
accounting. As a result, the purchase prices have been allocated to the assets
acquired, including intangibles, based on their respective fair values.
The Company's unaudited pro forma results of 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:
YEARS ENDED
DECEMBER 31,
---------------------
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Pro forma revenue........................................... $252,818 $303,473
======== ========
Pro forma net income........................................ $ 3,379 $ 6,793
======== ========
Pro forma earnings per share, diluted....................... $ 0.34 $ 0.57
======== ========
Pro forma dilutive weighted average shares.................. 9,982 11,930
======== ========
Pro forma adjustments were recorded to include (i) increased interest
expense to reflect interest expense on long-term debt entered into as a part of
the Intersec acquisition, (ii) increased depreciation and amortization expense
as a result of the excess of the purchase price over the book value, (iii)
contractually obligated reductions in former officers' salaries, and (iv)
provision for income taxes for net income of the acquired companies and pro
forma adjustments. In March and October 1997, the Company completed offerings to
finance acquisitions and growth (Note 1). Pro forma diluted weighted average
shares reflect the incremental shares that would have been issued to finance the
acquisitions.
SUBSEQUENT EVENT (UNAUDITED)
In February 1998, AHL acquired SES Staffing Solutions, Inc. ("SES"), a
Baltimore-based company that provides staffing for light industrial and
warehouse "pick and pack" functions, for approximately $12,625,000 in cash. The
transaction was accounted for as a purchase. The results of SES's operations
have been properly excluded from the above pro forma information.
36
39
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The income tax provision consists of the following:
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
Current:
Federal................................................... $ 861 $ 517 $2,033
State..................................................... 153 76 592
Foreign................................................... 852 785 1,382
------ ------ ------
1,866 1,378 4,007
------ ------ ------
Deferred:
United States............................................. (630) 39 (149)
Foreign................................................... (319) 30 (8)
------ ------ ------
(949) 69 (157)
------ ------ ------
Total............................................. $ 917 $1,447 $3,850
====== ====== ======
The reconciliation of the federal statutory rate to the Company's effective
tax provision is as follows:
YEARS ENDED
DECEMBER 31,
------------------
1995 1996 1997
---- ---- ----
Statutory federal tax rate.................................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit.................. 2.5 2.0 3.8
Effect of foreign taxes greater (less) than U.S. statutory
federal rate.............................................. -- 2.2 (1.6)
Other....................................................... 2.4 1.8 1.3
---- ---- ----
Total............................................. 38.9% 40.0% 37.5%
==== ==== ====
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,
-----------------
1996 1997
------- -------
(IN THOUSANDS)
Deferred tax assets:
Allowance for doubtful accounts........................... $ 115 $ 155
Self-insurance reserves................................... 1,229 1,590
Accruals.................................................. 339 187
Other..................................................... 61 116
------- -------
1,744 2,048
------- -------
Deferred tax liabilities:
Tax depreciation in excess of book value.................. (351) (511)
Tax amortization in excess of book value.................. -- (137)
Prepaid expenses currently deductible..................... (882) (732)
Other..................................................... (20) (20)
------- -------
(1,253) (1,400)
------- -------
Net deferred tax asset.................................... $ 491 $ 648
======= =======
37
40
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------
1996 1997
------- ------
(IN THOUSANDS)
Credit Facility, interest at prime (8.5% at December 31,
1997) with a LIBOR option at LIBOR plus 1.5% (5.7% at
December 31, 1997)........................................ $14,088 $1,785
Term note, interest at prime plus .75% with a LIBOR option
at LIBOR plus 3.0% payable in 36 equal monthly
installments through December 1998, repaid in full during
1997...................................................... 542 --
Subordinated notes payable to Sirrom Capital Corporation
("Sirrom Notes"), interest at 13.5%, principal of
$3,500,000 due July 9, 2001, secured by a second security
interest in substantially all of the assets of
Argenbright, repaid in full during 1997................... 3,130 --
Subordinated notes payable to former owners of Intersec,
interest at 9%, payable in varying installments through
April 1998, repaid in full during 1997.................... 1,155 --
Transportation and other equipment notes payable, interest
ranging from 7% to 15%, payable monthly through 2003,
secured by related equipment, denominated in U.S. dollars,
British pounds, and German deutsche marks................. 1,780 2,131
Other....................................................... 100 75
------- ------
20,795 3,991
Less current portion........................................ 1,617 496
------- ------
$19,178 $3,495
======= ======
Future aggregate annual maturities of long-term debt are as follows as of
December 31, 1997 (in thousands):
1998........................................................ $ 496
1999........................................................ 378
2000........................................................ 326
2001........................................................ 324
2002........................................................ 367
Thereafter.................................................. 2,100
------
$3,991
======
In May 1997, the Company entered into a three-year credit facility (the
"Credit Facility") with First Union National Bank, raising the total borrowing
availability to $35,000,000, of which $25,000,000 was denominated in U.S.
dollars and $10,000,000 was denominated in either U.S. dollars or British
pounds, at the Company's option. At December 31, 1997, $1,785,000 was
outstanding, $3,320,000 was utilized under standby letters of credit, and
$29,895,000 was available under the Credit Facility. In February 1998, the
Company expanded and restated its Credit Facility to $100 million through a
syndication of national banking organizations, led by First Union National Bank
as administrative agent, including NationsBank, SunTrust, Wachovia, and Bank of
America. Any unpaid balance on the Credit Facility is due upon expiration of the
new agreement in February 2003. The Credit Facility is secured by substantially
all of the Company's assets. In addition, the Credit Facility is subject to
certain restrictive covenants, including maintaining minimum debt-
38
41
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to-equity ratio, debt-to-earnings ratio, current ratio, and interest coverage
ratio. The carrying value of the Credit Facility approximates its fair value due
to the floating market interest rate charged on that facility.
The Sirrom Notes were issued in July 1996 for $3,500,000. As discussed in
Note 8, a warrant ("Redeemable Warrant") to purchase 3.5% of Argenbright's
common shares for an exercise price of $18.00 was issued with the notes (before
adjustment associated with the Reorganization). The value of this warrant at
issuance was determined to be $618,000 based on the relative fair value of the
warrant to the notes. A corresponding amount of the proceeds was allocated to
the warrant, net of deferred tax effects, and was accounted for as a debt
discount and amortized over the expected life of the related notes using the
effective interest method. The warrant was repurchased in 1997.
7. RELATED-PARTY TRANSACTIONS
The note payable to shareholder at December 31, 1996 of $528,000 was
contributed to the Company as part of the Reorganization (Note 1).
In addition to the note payable discussed above, prior to the
Reorganization, the Company had other transactions with the Company's chairman
and sole shareholder and other companies related by common ownership. During
1997, the Company's chairman repaid all amounts due from these transactions
totaling $964,000.
During fiscal 1996, the Company bought a 20% and a 49% interest in ASAP
Uniform Company, Inc. ("ASAP") and Premium Services Management, Inc. ("PSM"),
respectively. Both investments are accounted for using the equity method of
accounting and had an immaterial effect on the current year financial
statements. The Company made payments of $1,829,000 and $1,782,000 to ASAP and
$48,000 and $1,221,000 to PSM, respectively, for uniforms and services performed
for the years ended December 31, 1996 and 1997, respectively.
8. REDEEMABLE WARRANT
In connection with the issuance of the Sirrom Notes (Note 6), the Company
issued a Redeemable Warrant to purchase 3.5% of Argenbright's common shares
(146,185 pro forma shares of AHL at December 31, 1996, as adjusted for the
Reorganization) for an exercise price of $18.00. The Company repurchased the
warrant in 1997 for a purchase price of $750,000.
9. STOCK-BASED COMPENSATION
In October 1996, the Company issued nonqualified stock options to purchase
107,500 common shares at $4.64 per share. The options became exercisable upon
grant.
In December 1996, the Company issued nonqualified stock options to purchase
591,250 common shares at $11.76 per share. The options become exercisable in
varying percentages over four years. Effective February 28, 1997, the Company
amended its employment agreements with three officers (Note 10). The amendment
provides for 16,250 additional options to purchase shares of common stock at
$10.75 per share exercisable in varying percentages over four years. The
amendment also reduces 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 $10.00 per
share.
The options above were granted at exercise prices which were not less than
estimated fair value of the common stock at the dates of grant as determined by
the board of directors. While the Company estimates that the fair value of the
common stock increased between the October and December grant dates, the Company
believes that the $11.76 per share exercise price exceeded the estimated fair
value of the common stock at December 1, 1996, as there was no public market for
the Company's stock at that time. Events that
39
42
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributed to the increase in the value of the common stock between the dates
of the grants included the award of new contracts to the Company by certain
major clients and commitments by these clients for additional contract awards.
STOCK OPTION PLAN
The Company's stock option plan (the "Stock Option 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, AHL reserved 385,000 shares of common stock for
issuance under the Stock Option Plan. The Company expanded the plan in October
1997 by approving the reservation and issuance of 442,500 additional options. As
of December 31, 1997, 819,000 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 incentive
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 incentive stock option is ten years.
The aggregate fair market value on the date of the grant of the stock for which
incentive 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 Stock Option 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, 1995................................ -- $ --
---------
Granted................................................... 698,750 9.18
Exercised................................................. -- --
Forfeited................................................. -- --
---------
Balance at December 31, 1996................................ 698,750 9.18
---------
Granted................................................... 852,750 15.08
Exercised................................................. -- --
Forfeited................................................. 17,500 10.00
---------
Balance at December 31, 1997................................ 1,534,000 12.45
=========
Exercisable at December 31, 1997.......................... 372,750 $ 8.45
========= ======
Reserved for issuance..................................... 8,500
=========
The Company accounts for these stock option grants under Accounting
Principles Board 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-
40
43
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based Compensation," the Company's net income and earnings per share would have
been reduced to the following pro forma amounts during 1996 and 1997 (in
thousands, except per share data):
1996 1997
------ ------
Net income............................................... As reported $2,171 $6,034
Pro forma 1,701 4,867
Earnings per share:
Basic.................................................. As reported $ 0.26 $ 0.56
Pro forma 0.20 0.45
Diluted................................................ As reported 0.26 0.55
Pro forma 0.20 0.44
The weighted average fair value of the options granted was $4.19 and $3.80
for fiscal years 1996 and 1997, 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 1996
and 1997:
1996 1997
------ ------
Risk-free interest rate..................................... 5.84% 6.37%
Dividend yield.............................................. 0.00% 0.00%
Volatility factor........................................... 37.00% 41.00%
Average expected life (years)............................... 2.9 3.2
Forfeiture rate............................................. 0.00% 0.45%
EMPLOYEE STOCK PURCHASE PLAN
The Company has 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 intends to purchase such
shares of common stock on the open market.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space, transportation equipment, and office
equipment from unrelated parties under lease agreements expiring through
December 2003. Rental expense under these operating leases was $4,390,000,
$6,297,000, and $6,515,000 in 1995, 1996, and 1997, respectively.
Future minimum lease payments for noncancelable leases were as follows at
December 31, 1997 (in thousands):
1998........................................................ $5,162
1999........................................................ 2,876
2000........................................................ 1,869
2001........................................................ 1,316
2002........................................................ 495
Thereafter.................................................. 110
INSURANCE
Argenbright participates in partially self-insured, large-deductible
workers' compensation, auto, and health insurance plans. Argenbright's exposure
is limited per occurrence ($250,000 for workers' compensation and auto liability
claims) and in the aggregate. Reserves are estimated for both reported and
unreported claims. Revisions to estimated reserves are recorded in the periods
in which they become known. Estimated
41
44
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
self-insurance reserves as of December 31, 1996 and 1997 totaling $3,200,000 and
$3,800,000, respectively, represent management's best estimate. While there can
be no assurance that actual future claims will not exceed the amount of the
Company's reserves, in the opinion of the Company's management, any future
adjustments to estimated reserves included in the accompanying balance sheets
will not have a material impact on the financial statements.
The Company is exposed to liability for the acts or negligence of its
employees while on assignment that cause personal injury or damages as well as
claims of misuse of client proprietary information or theft of client property.
As a provider of access control services, the Company faces potential liability
claims in the event of any terrorist attempt or other criminal activity which
occurs on any airline or premises subject to the Company's access control
services. The Company has policies, guidelines, and insurance to reduce its
exposure to these risks.
EMPLOYMENT AGREEMENTS
In December 1996, the Company entered into employment agreements with three
officers which expire through December 1, 2001. If any agreement is 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 up to one year. The agreements provide for annual base
salaries of up to $350,000 per officer and bonuses up to 50% of salaries.
DEFERRED COMPENSATION
In September 1996, Argenbright entered into a nonqualified deferred
compensation arrangement with certain eligible employees by which they could
elect to defer a specified portion of their compensation. The participants may
choose among several investment options, but returns are not guaranteed. As of
December 31, 1997, the Company has an obligation of approximately $75,000 under
the plan.
BENEFIT PLAN
In April 1996, Argenbright began a 401(k) plan covering salaried employees,
excluding highly compensated employees. Employees must complete one year of
service to become eligible. Participants may contribute up to 15% of their
compensation to the plan. Argenbright modified the plan in October 1997 to begin
a matching of 20% of the first 4% contributed by the participants. Argenbright
expensed $6,000 for the employer match for the year ended December 31, 1997.
LITIGATION
The Company is involved in various routine litigation arising in the
ordinary course of business. Management is of the opinion that the resolution of
these matters will not have a material effect on the consolidated results of
operations or financial condition of the Company.
42
45
AHL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. OPERATIONS BY GEOGRAPHICAL AREA
The following table presents information regarding the Company's different
geographical regions (in thousands):
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
Revenue:
United States........................................ $107,388 $140,295 $193,437
United Kingdom....................................... 41,013 47,028 61,367
Germany.............................................. 15,638 17,617 14,700
Other European....................................... 4,562 5,213 6,509
-------- -------- --------
$168,601 $210,153 $276,013
======== ======== ========
Operating income:
United States........................................ $ 1,208 $ 2,639 $ 5,743
United Kingdom....................................... 1,809 2,182 4,397
Germany.............................................. 312 319 575
Other European....................................... (485) (97) (10)
-------- -------- --------
$ 2,844 $ 5,043 $ 10,705
======== ======== ========
Capital expenditures:
United States........................................ $ 1,143 $ 1,556 $ 2,776
United Kingdom....................................... 1,351 357 1,813
Germany.............................................. 66 47 31
Other European....................................... 11 14 33
-------- -------- --------
$ 2,571 $ 1,974 $ 4,653
======== ======== ========
DECEMBER 31,
------------------
1996 1997
------- --------
Identifiable assets:
United States............................................. $36,740 $ 83,287
United Kingdom............................................ 10,487 21,409
Germany................................................... 3,715 3,486
Other European............................................ 1,011 1,612
------- --------
$51,953 $109,794
======= ========
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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, 1998.
AHL SERVICES, INC.
(Registrant)
By: /s/ EDWIN R. MELLETT
------------------------------------
Edwin R. Mellett
Vice Chairman and Co-Chief 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, 1998.
SIGNATURE TITLE
--------- -----
/s/ FRANK A. ARGENBRIGHT, JR. Chairman of the Board, Co-Chief Executive
- -------------------------------------------- Officer and Director
Frank A. Argenbright, Jr.
/s/ EDWIN R. MELLETT Vice Chairman, Co-Chief Executive Officer
- -------------------------------------------- and Director
Edwin R. Mellett
/s/ DAVID L. GAMSEY Vice President, Chief Financial Officer
- -------------------------------------------- (Principal Financial Officer)
David L. Gamsey
/s/ ROBERT F. MCCULLOUGH Director
- --------------------------------------------
Robert F. McCullough
/s/ HAMISH LESLIE MELVILLE Director
- --------------------------------------------
Hamish Leslie Melville
44