##### Table of Contents

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





[MARK ONE]





| | [X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
| | --- |  | ----------------------------------------------------------------------------------------




For the quarterly period ended JUNE 30, 2002





OR





| |  ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
| | - |  | -----------------------------------------------------------------------------------------




For the transition period
from    to





Commission File No. 000-22195








AHL SERVICES, INC.


(Exact name of registrant as specified in its charter)








GEORGIA

58-2277249(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification
No.)1000 WILSON BLVD, STE 910 ARLINGTON, VA

22209(Address of principal executive offices)

(Zip Code)Registrants telephone number, including area code (703) 528-9688Not Applicable Former name, former address and former fiscal year, if changed since last report.








Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.





Yes  x    No  ̈





Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 15,246,792 shares on August 1, 2002.






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##### Table of Contents

AHL SERVICES, INC.





TABLE OF CONTENTS





PAGEPART IFINANCIAL INFORMATIONItem  1.

Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001

1Condensed Consolidated Statements of Operations for the three and six month periodsended June 30, 2002 and 2001

2Condensed Consolidated Statements of Cash Flows for the six months endedJune 30, 2002 and 2001

3Notes to Condensed Consolidated Financial Statements

4Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

8Item 3.

Quantitative and Qualitative Disclosures About Market Risk

15PART IIOTHER INFORMATIONItem 4.

Submission of Matters to a Vote of Security Holders

16Item 5.

Other Information

16Item 6.

Exhibits and Reports on Form 8-K

16









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##### Table of Contents

PART IFINANCIAL INFORMATION





ITEM 1FINANCIAL STATEMENTS





AHL SERVICES, INC.


CONDENSED CONSOLIDATED
BALANCE SHEETS


(Amounts in thousands, except share and per share data)





June 30, 2002


December 31, 2001(Unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
1,100


$
6,817Accounts receivable, net of allowance of $5,904 and $ 7,650 in 2002 and 2001, respectively


21,117



16,349Unbilled services


5,086



7,873Work in process


1,239



1,350Reimbursable customer expenses


7,061



5,542Prepaid expenses and other


4,551



3,144Income taxes receivable


375



10,997Deferred income taxes


1,473



1,675Net current assets of discontinued operations


2,856



1,022Total current assets


44,858



54,769Property and equipment, net


21,705



22,553Intangibles, net


82,441



103,295Other assets


437



341Notes receivable






5,000Net noncurrent assets of discontinued operations


30,544



58,725Total assets

$
179,985


$
244,683LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
3,143


$
6,465Accrued expenses


13,011



17,426Customer deposits


2,388



4,961Current portion of self-insurance reserves


1,856



1,296Current portion of settlement obligation


9,000



Current portion of debt


81,384



27,035Total current liabilities


110,782



57,183Debt, less current portion






77,114Self-insurance reserves, less current portion


1,469



1,475Settlement obligations, less current portion


9,000



18,000Total liabilities


121,251



153,772Shareholders equity:Common stock, $.01 par value:17,427,392 shares issued; 15,246,792 shares outstanding


175



175Preferred stock, no par value: no shares outstanding






Paid-in capital


177,011



177,011Accumulated deficit


(98,452
)


(66,275
)Treasury stock at cost: 2,180,600 shares


(20,000
)


(20,000
)Total shareholders equity


58,734



90,911Total liabilities and shareholders equity

$
179,985


$
244,683





The accompanying notes are an integral part of these condensed consolidated
financial statements.




1




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##### Table of Contents

AHL SERVICES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


(Amounts in thousands, except per share data)





Three Months Ended June 30,


Six Months Ended June
30,2002


2001


2002


2001Revenues

$
33,714


$
35,381


$
65,930


$
73,254Cost of services


15,096



15,647



29,303



33,198Gross margin


18,618



19,734



36,627



40,056Costs and expenses:Operating


15,665



15,365



31,381



32,600Corporate general and administrative


856



911



1,735



2,522Depreciation and amortization


1,430



2,255



2,625



4,375Final PIMMS severance costs














2,523Operating income (loss)


667



1,203



886



(1,964
)Interest expense, net


1,732



1,024



3,354



1,776Other expense


1,775







1,775



Income (loss) from continuing operations before income taxes


(2,840
)


179



(4,243
)


(3,740
)Income tax provision (benefit)






72







(1,496
)Income (loss) from continuing operations


(2,840
)


107



(4,243
)


(2,244
)Discontinued operations:Loss from discontinued operations, net of taxes


(1,186
)


(1,042
)


(3,102
)


(25
)Loss on sale of business, net of taxes


(4,109
)






(4,109
)


Loss from discontinued operations


(5,295
)


(1,042
)


(7,211
)


(25
)Net loss before cumulative effect of change in accounting principle


(8,135
)


(935
)


(11,454
)


(2,269
)Cumulative effect of change in accounting principle










(20,723
)


Net loss

$
(8,135
)

$
(935
)

$
(32,177
)

$
(2,269
)Basic and diluted earnings (loss) per share:Income (loss) from continuing operations

$
(0.18
)

$
0.01


$
(0.28
)

$
(0.15
)Loss from discontinued operations

$
(0.35
)

$
(0.07
)

$
(0.47
)

$
Cumulative effect of change in accounting principle

$



$



$
(1.36
)

$
Net loss

$
(0.53
)

$
(0.06
)

$
(2.11
)

$
(0.15
)Weighted average common and common equivalent shares:Basic


15,247



15,255



15,247



15,320Diluted


15,247



15,302



15,247



15,320





The accompanying notes are an integral part of these condensed consolidated
financial statements.




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AHL SERVICES, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(Amounts in thousands)





Six months ended June
30,2002


2001CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(32,177
)

$
(2,269
)Less: Loss from discontinued operations


(7,211
)


(25
)Loss from continuing operations before cumulative effect of change in accounting principle


(24,966
)


(2,244
)Cumulative effect of change in accounting principle


20,723



Adjustments to reconcile loss from continuing operations to net cashused in operating activities of continuing
operations:Depreciation and amortization


2,625



4,375Loss on sale of assets


1,775



Changes in operating assets and liabilities:Accounts receivable and unbilled services, net


(2,174
)


10,776Work in process, prepaid expenses and other


(2,993
)


(5,361
)Accounts payable


(3,322
)


(25
)Accrued expenses and other liabilities


(7,081
)


(6,426
)Self-insurance reserves


554



(749
)Income taxes receivable


10,622



(1,762
)Deferred income taxes


202



Net cash used in operating activities of continuing operations


(4,035
)


(1,416
)Net cash used in operating activities of discontinued operations


(7,708
)


(14,088
)Net cash used in operating activities


(11,743
)


(15,504
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment, net


(2,157
)


(6,254
)Proceeds from sale of note receivable


3,500



Proceeds from sale of assets


604



Proceeds from the sale of discontinued operations, net of transaction costs


26,844



Acquisition consideration paid






(12,901
)Net cash provided by (used in) investing activities


28,791



(19,155
)CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings (repayments) under Credit Facility


(22,765
)


21,763Repurchases of AHL common stock






(2,335
)Proceeds from exercise of stock options






175Net cash provided by (used in) financing activities


(22,765
)


19,603Net decrease in cash and cash equivalents


(5,717
)


(15,056
)Cash and cash equivalents at beginning of period


6,817



19,926Cash and cash equivalents at end of period

$
1,100


$
4,870





The accompanying notes are an integral part of these condensed consolidated
financial statements.







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##### Table of Contents

AHL SERVICES, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE 30, 2002


(UNAUDITED)





|1. |  | BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
|-- |  | ----------------------------------------------




BUSINESS DESCRIPTION





The continuing operations of AHL Services, Inc. (AHL or the
Company), a Georgia corporation incorporated in March 1997, provide outsourced marketing support services. The Companys service offerings include trade promotion and fulfillment services, consumer promotion and fulfillment services
and retail merchandising. The Company currently operates in one segment, with continuing operations in North America.





BASIS OF
PRESENTATION





The condensed consolidated financial statements included herein, except for the December 31, 2001 balance sheet, which was
extracted from the audited financial statements of December 31, 2001, have been prepared by AHL Services, Inc. (AHL or the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (all of which are normal and recurring in nature) that are necessary for a fair presentation of the interim periods
presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and
regulations. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for any subsequent quarter or the year ending December 31, 2002. These unaudited consolidated
financial statements and the notes included herein should be read in conjunction with the financial statements and the notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2001.





Reported results from operations for 2002 include the continuing marketing support services businesses. Results from operations for 2001 include the
continuing marketing services businesses as well as the PIMMS store set-up business which ceased operations on March 16, 2001.





On July
20, 2001, AHL announced, as part of the strategic transformation of the business, its intention to divest the European specialized staffing services business. On March 19, 2002, the Company sold its United Kingdom specialized staffing services
business for $29.5 million in cash. AHL is in discussions with potential acquirers of the German staffing business. See Note 2 for a discussion of these divestitures. In accordance with the provisions of Accounting Principles Board Opinion No. 30,
the Company has reflected the results of its European specialized staffing businesses as discontinued operations in the accompanying condensed consolidated balance sheets and statements of operations and cash flows. For all periods presented, this
presentation reflects the net assets of these operations segregated from the assets and liabilities of continuing operations, and the earnings of these businesses segregated from the results of continuing operations. The accompanying notes to the
condensed consolidated financial statements, except Note 2, relate only to the continuing operations of AHL.





RECLASSIFICATIONS





Certain prior period amounts have been reclassified to conform with current year presentation.




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|2. |  | DIVESTITURES AND ABANDONMENTS
|-- |  | -----------------------------




DISCONTINUED OPERATIONS





On March 19, 2002, AHL sold its United Kingdom specialized staffing services business for $29.5
million in cash. Net of transaction costs of $2.7 million, the sale yielded $26.8 million of proceeds, which were used to reduce outstanding debt.





As announced on July 20, 2001, AHL also intends to divest the German specialized staffing services business. Deutsche Bank was retained as the Companys advisors and discussions are underway with potential acquirers. Management
believes that the Company will be able to dispose of the German specialized staffing business in the upcoming months. Net proceeds from the divestiture will be used to further reduce outstanding debt.





After a comprehensive review of the business by Deutsche Bank, and due to economic and capital market conditions, the Company adjusted the net basis of the
European specialized staffing services business in the third quarter of 2001 to approximately $92.0 million, taking a charge of $25.0 million. Based on negotiations for the sale of the German specialized staffing services business, and concurrent
with a $9.4 million charge taken for the UK business, AHL recorded an additional charge of $20.8 million related to the impairment of goodwill on the German business in the fourth quarter of 2001.





In order to reflect the current status of negotiations for the sale of the German staffing business, the Company recorded an additional impairment charge of $4.1
million in the second quarter of 2002.





Revenues of discontinued operations were $31.6 million and $51.9 million for the three months
ended June 30, 2002 and 2001, respectively, and $77.6 million and $105.3 million for the six months ended June 30, 2002 and 2001, respectively. Excluding the revenues of the sold United Kingdom specialized staffing business, revenues of discontinued
operations were $31.6 million and $32.0 million for the three months ended June 30, 2002 and 2001, respectively, and $58.8 million and $66.9 million for the six months ended June 30, 2002 and 2001, respectively. It is the Companys policy to
allocate interest expense to discontinued operations in accordance with EITF 87-24, based on the net assets of the discontinued operations relative to the total net assets plus debt of the consolidated company. Interest allocated to discontinued
operations was $814,000 and $830,000 for the three months ended June 30, 2002 and 2001, respectively, and $1.5 million and $1.6 million for the six months ended June 30, 2002 and 2001, respectively. Loss from discontinued operations of $1.2 million
and $1.0 million for the three months ended June 30, 2002 and 2001, respectively, are net of income tax provision (benefit) of $13,000 and ($748,000) for the same period in 2002 and 2001, respectively. Loss from discontinued operations of $3.1
million and $25,000 for the six months ended June 30, 2002 and 2001, respectively, are net of income tax provision (benefit) of $45,000 and ($147,000) for the same period in 2002 and 2001, respectively.





OTHER DIVESTITURES AND ABANDONMENTS





On December
29, 2000, AHL sold its U.S. and European aviation and facility services businesses for $185 million in cash to Securicor plc (Securicor), a business services company headquartered in the United Kingdom. The sale price for the U.S. and
European aviation and facilities services businesses was subject to post-closing adjustments based upon the 2001 actual performance of the businesses and a reconciliation of actual closing-date working capital to a target level of working capital.
At December 31, 2001, the Company had reserved $18.0 million for the final adjustments.





On April 12, 2002, AHL entered into a definitive
settlement agreement with Securicor pursuant to which AHL agreed to pay Securicor $13.0 million with respect to the amount of the adjustments to the purchase price. Securicor also released the Company from all pending and potential indemnity claims
related to the sale of the U.S. and European aviation and facility services businesses, with limited exceptions. In connection with the settlement, AHL agreed to pay Mr. Frank Argenbright, the Chairman of AHLs board of directors, $5.0 million.





AHLs obligation to pay Securicor the $13.0 million settlement payment is evidenced by two secured, subordinated promissory notes
in the amounts of $10.0 million and $3.0 million. The Companys obligation to pay the $13.0 million settlement payment matures in two installments. The first installment, in the amount of $9.0 million, matures on April 12, 2003; the remaining
installment of $4.0 million matures on October 12, 2003. AHL may prepay the notes at any time without premium or penalty. If the Company pays $10.0 million of the settlement amount on or before October 12, 2002, Securicor is obligated to forgive the
remaining $3.0 million. The notes are secured by a lien on substantially all of the Companys assets. AHLs obligation to pay the settlement amount, and the lien securing its obligation, is subordinate to its obligation to pay all amounts
outstanding or due pursuant to its existing Credit Facility and any substitute or replacement senior secured bank credit arrangement. The notes bear interest at a rate of 7% per annum. Interest on the notes will accrue and be added to the principal
until the Company repays or refinances




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the amounts outstanding under its Credit Facility, at which time interest on the notes will be payable
quarterly. AHLs obligation to pay Mr. Argenbright $5.0 million is unsecured and does not bear interest. The obligation matures on October 12, 2003; however, if the Company repays $10.0 million of the amount it owes Securicor on or before
October 12, 2002, then the Company has agreed, at the same time, to pay Mr. Argenbright $3.0 million of the amount owed him.





|3. |  | LONG-TERM DEBT
|-- |  | --------------




The
Company obtains its working capital from borrowings pursuant to a Credit Facility with a syndicate of commercial banks. Wachovia Bank, National Association is the Administrative Agent for the lenders. The Companys borrowings under the Credit
Facility are secured by a lien on substantially all of its assets and the assets of its operating subsidiaries.





The Company was not in
compliance with certain of its covenants as of December 31, 2001, and received a waiver from its bank group with respect to the non-compliance with these covenants through April 15, 2002. On April 12, 2002, AHL reached an agreement with its banks to
amend the facility. The amendment eliminated the defaults, extended the maturity of the Credit Facility from April 15, 2002 to January 3, 2003, reduced the amount the Company is permitted to borrow, increased the interest rates on the Credit
Facility and modified the financial covenants. Under the amended agreement, at June 30, 2002, the Company is permitted to borrow up to $86.7 million. Approximately $81.2 million was outstanding under the Credit Facility at June 30, 2002. At July 31,
2002 this outstanding balance had been reduced to approximately $76.0 million. The amount that the Company is permitted to borrow decreases incrementally each month to approximately $72.2 million as of December 31, 2002.





Under the Credit Facility, AHL is required to satisfy covenants relating to minimum consolidated adjusted EBITDA, fixed charge coverage ratios and limitations on
capital expenditures, among others. The Company has monthly targets for each financial covenant that it must meet. AHL is also required to pursue a sale of its German specialized staffing business. Finally, AHL is required to pursue opportunities to
raise cash through the sale of debt or equity securities. If the Company fails to comply with the covenants, it will be in default. Upon the occurrence of a default, unless the lenders grant a further waiver, the Company will not be permitted to
borrow additional amounts under the Credit Facility, and the outstanding amounts will become immediately due and payable. Failure of the Company to meet the monthly target for any of its financial covenants, to complete a sale of its German business
by July 31, 2002 or to repay the facility in full by September 30, 2002 requires AHL to pursue other measures to obtain sufficient funds to repay the borrowings under the Credit Facility, including a business combination transaction.





At July 31, 2002, AHL had complied with all financial covenants included in the Credit Facility, had received several non-binding proposals from
groups interested in acquiring its German specialized staffing business and had received non-binding offers from groups interested in purchasing its debt and equity securities. Because the Company had not completed the sale of its German specialized
staffing business by this date, however, it is required to pursue a business combination transaction. AHL has engaged CIBC World Markets to assist it in this process. It is anticipated that this process will run in parallel with its continued
efforts to complete the sale of the German specialized staffing business and to raise cash through a sale of debt or equity securities, in addition to the other measures which AHL is pursuing to obtain sufficient funds to repay the borrowings under
the Credit Facility.





The Company cannot provide assurance that it will successfully complete the disposition of its German business, the
issuance of debt or equity securities or the refinancing of any amounts that may remain outstanding under the Credit Facility. The Company is dependent on the availability of borrowings pursuant to the Credit Facility to meet its working capital
needs, capital expenditure requirements and other cash flow requirements. If borrowings under the Credit Facility are unavailable, the Company will be required to seek additional sources of financing in order to fund its working capital needs. If
the Company is unable to obtain additional sources of financing and cannot repay the outstanding balance of its Credit Facility when it becomes due, it is likely that a business combination transaction, restructuring or liquidation will be required
in whole or in part.





|4. |  | RESTRUCTURE AND OTHER UNUSUAL ITEMS
|-- |  | -----------------------------------




Due to the difficult economic environment, the Company performed a strategic review of continuing operations and recorded charges totaling $37.5 million during the third and fourth quarters of 2001. Charges to operating expenses
totaled $15.8 million and consisted of $4.4 million for estimated uncollectible accounts receivable, $3.8 million for the estimated costs of buying out unattractive or redundant leases, $2.9 million for workers compensation claims, legal and
other expenses related to the abandoned PIMMS operation, and $4.7 million for legal, bonus, severance for 66 employees and other costs associated with the Companys efforts to streamline operations. In the fourth quarter of 2001, the Company
recorded an additional charge of $2.9 million to reserve against an outstanding receivable for a customer in bankruptcy proceedings. Charges to corporate general and administrative expenses totaled $10.9 million and included a charge of $3.7 million
to adjust the note receivable balance due from the sale of the Companys U.S. specialized staffing businesses to its estimated net realizable value. The remaining $7.2 million of corporate general and administrative charges included $3.8
million to expense various business development costs incurred which, based on the current economic environment, will not be realized and charges of $2.6 million and $823,000 for severance for twelve employees and




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lease costs, respectively, incurred in conjunction with the closing of the Atlanta corporate offices. Finally, the Company recorded additional
charges to depreciation and amortization expense of $7.9 million during 2001, consisting of $4.4 million for various equipment and leasehold improvements at the facilities replaced during 2001 and $3.5 million for internally developed software which
was replaced during 2001.





On December 28, 2000, AHL decided to abandon operations of its store set-up business unit, formerly called
PIMMS. The Company completed the closing of the PIMMS business unit on March 16, 2001, and recorded a final charge for the related severance expense for 188 employees of approximately $2.5 million in 2001.





The restructure charges are recorded in accordance with EITF No. 94-3, Liability Recognition for Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). The following table summarizes the activity in the restructuring liability accounts from December 31, 2001 to June 30, 2002:





December 31, 2001

Usage


June 30, 2002(In thousands)Severance and related personnel expenses

$
2,719

$
(1,815
)

$
904Lease termination costs


4,361


(1,266
)


3,095Total

$
7,080

$
(3,081
)

$
3,999





Management believes that the remaining reserves for restructuring are adequate to complete
its plan. The restructuring reserves are included in accrued expenses in the accompanying condensed consolidated balance sheets.





|5. |  | OTHER EXPENSE
|-- |  | -------------




Other
expense includes losses incurred in the May 2002 sale of a non-core marketing division and a note receivable. The total includes a $1.5 million loss on the sale of a note receivable arising from the sale of the Companys U.S. staffing business
in 2000. The note, with a book value of $5.0 million, was sold for $3.5 million, resulting in the $1.5 million loss. Also in May 2002, the sale of a non-core marketing division for approximately $600,000 resulted in a loss on sale of $275,000.





|6. |  | NEW ACCOUNTING PRONOUNCEMENTS
|-- |  | -----------------------------




In July 2001, SFAS No. 142, Goodwill and Other Intangible Assets, was issued. Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable
intangible assets that are not deemed to have indefinite life will continue to be amortized over their useful lives. The Company adopted the provisions of SFAS No. 142 effective January 1, 2002. The following table presents the results of the
Company for all periods presented on a comparable basis (in thousands except per share information):





Three months ended June 30,


Six months ended June 30,2002


2001


2002


2001Reported net loss

$
(8,135
)

$
(935
)

$
(32,177
)

$
(2,269
)Add: Goodwill amortization






865







1,730Adjusted net loss

$
(8,135
)

$
(70
)

$
(32,177
)

$
(539
)Basic and diluted net loss per share:Reported net loss

$
(0.53
)

$
(0.06
)

$
(2.11
)

$
(0.15
)Add: Goodwill amortization






0.06







0.11Adjusted net loss

$
(0.53
)


(0.00
)

$
(2.11
)

$
(0.04
)





The standard also requires a reassessment of the useful lives of identifiable intangible
assets other than goodwill and a test for impairment of goodwill and intangibles with indefinite lives annually, unless events and circumstances indicate that the carrying amounts may not be recoverable. Following the impairment analysis under SFAS
No. 142, as of January 1, 2002 the Company recorded an impairment charge in the amount of $20.7 million as a cumulative change in accounting principle in the accompanying condensed consolidated statements of operations.





In August 2001, SFAS No. 143, Accounting for Asset Retirement Obligations, (effective for AHL January 1, 2003) and SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, (effective for AHL January 1,




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2002) were issued. SFAS No. 143 requires that entities recognize the fair value of a liability for an asset retirement obligation in the period
in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The statement supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and among other factors, establishes criteria beyond those previously specified in SFAS No. 121 to determine when a long-lived asset
is to be considered as held for sale. The adoption of SFAS No. 143 and SFAS No. 144 is not expected to have a significant impact on the Companys financial position or results of operations.





|ITEM  2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
|-------- |  | --------------------------------------------------------------------------------------




Certain statements made in this Quarterly Report on Form 10-Q and other written or oral statements made by or on behalf of AHL
may constitute forward-looking statements within the meaning of the federal securities laws. When used in this report, the words believes, expects, anticipates, estimates and similar
expressions are intended to identify forward-looking statements. Statements regarding future events and developments and our future performance, as well as our expectations, beliefs, plans, estimates or projections relating to the future, are
forward-looking statements within the meaning of these laws. All forward-looking statements are subject to certain risks and uncertainties that could cause actual events to differ materially from those projected. Management believes that these
forward-looking statements are reasonable; however, you should not place undue reliance on such statements. These statements are based on current expectations and speak only as of the date of such statements. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of future events, new information or otherwise, other than as required by law.





Among the important factors that could cause actual results to differ materially from those indicated in our forward-looking statements are: our ability to find a buyer for, and to negotiate and close
the sale of, our German specialized staffing business; our ability to close on a sale of debt or equity securities in the upcoming months; our ability to obtain an additional source of financing to refinance the indebtedness outstanding under our
Credit Facility; our ability to continue to satisfy our covenants under our Credit Facility; reliance on the trend toward outsourcing marketing services; reliance on a small number of clients for a significant portion of our revenues; dependence on
our labor force; competition in our industry; and general economic conditions. These and other risks are discussed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2002.





The following discussion and analysis of the financial condition and results of operations of AHL should be read in conjunction with the
consolidated financial statements and related notes for the year ended December 31, 2001, and included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission.





In our Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2001, we identified critical accounting policies and estimates for our
business.





OVERVIEW





AHL Services, Inc. is a leading provider of outsourced marketing services. Our 1998 acquisition of Gage Marketing Services, which has been in the marketing services business for over 45 years, provided us with experienced
personnel that have an understanding of the industry. Our integrated marketing execution solutions enhance the effectiveness and efficiency of many of the worlds most respected marketing companies. We deliver programs developed by
manufacturers, retailers, service providers and advertising agencies, and are active in both business-to-consumer and business-to-business arenas. Our strategic offerings include trade promotion and fulfillment services, consumer promotion and
fulfillment services and retail merchandising. Our successful delivery of these product offerings has enabled us to establish long-term client relationships with many of the largest companies in the world, with partnerships extending over several
decades. Clients span a range of Global 500 companies including major enterprises in the automotive, consumer products, entertainment, retail and technology sectors.





Historically we also have operated specialized staffing businesses in the United Kingdom and Germany. On March 19, 2002, we sold our United Kingdom specialized staffing
services business for $29.5 million in cash. We are currently in the process of divesting our German staffing business. Deutsche Bank was retained as our advisors and




8




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##### Table of Contents

discussions are underway with potential acquirers. Management believes that AHL will be able to dispose of the German specialized staffing
business in the upcoming months.





RESULTS OF OPERATIONS





We derive our revenue primarily from three sources: (1) consumer promotion and fulfillment services, (2) trade promotion and fulfillment services and (3) retail
merchandising services. Within our consumer promotion and fulfillment services division, our call centers recognize revenue based on the number of calls and agents assigned, according to written pricing agreements. Our consumer and trade promotion
and fulfillment services divisions record revenue at the conclusion of the material selection, packaging and shipping process. Our retail merchandising services division recognizes revenue as services are rendered, based on contracted hourly billing
rates. In general, we recognize revenues as programs are completed, services are rendered and/or as products are shipped in accordance with the terms of the contracts. Some of the contracts include postage and other items purchased by us as an agent
on behalf of our client. For these items, we record the net billings to our customers as revenue.





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.





Operating expenses represent primarily fixed expenses which directly support business operations, such as plant management,
facility expenses (such as rent, utilities and communication costs), equipment leasing, maintenance, information technology expenses, sales, marketing, finance, human resources and divisional management.





Corporate general and administrative expenses include the cost of the corporate management team and corporate, legal, audit and outside
service fees incurred to support and manage our operations and facilities.





The following table sets forth
consolidated statements of operations data as a percentage of revenues for the periods indicated:





Three Months Ended June 30,


Six Months Ended June 30,2002


2001


2002


2001Revenues

100.0
%

100.0
%

100.0
%

100.0
%Cost of services

44.8


44.2


44.5


45.3Gross margin

55.2


55.8


55.5


54.7Costs and expenses:Operating

46.5


43.4


47.6


44.5Corporate general and administrative

2.5


2.6


2.6


3.5Depreciation and amortization

4.2


6.4


4.0


6.0Final PIMMS severance costs










3.4Operating income (loss)

2.0


3.4


1.3


(2.7
)Interest expense, net

5.1


2.9


5.1


2.4Loss on sale of assets

5.3





2.7


Income (loss) from continuing operations before income taxes

(8.4
)

0.5


(6.5
)

(5.1
)Income tax provision (benefit)




0.2





(2.0
)Income (loss) from continuing operations

(8.4
)

0.3


(6.5
)

(3.1
)Discontinued operations:Loss from discontinued operations, net of taxes

(3.5
)

(2.9
)

(4.7
)

Loss on sale of business, net of taxes

(12.2
)




(6.2
)

Loss from discontinued operations

(15.7
)

(2.9
)

(10.9
)

Net loss before cumulative effect of accounting change

(24.1
)

(2.6
)

(17.4
)

(3.1
)Cumulative effect of accounting change







(31.4
)

Net loss

(24.1
%)

(2.6
%)

(48.8
%)

(3.1
%)







9




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##### Table of Contents

COMPARISON OF RESULTSTHREE MONTHS ENDED JUNE 30, 2002 AND 2001





Revenues.    Revenues decreased $1.7 million, or 5%, to $33.7 million for the three months ended June 30, 2002 from $35.4 million for the same
period in 2001. Revenues for the three months ended June 30, 2002 included $473,000 from a non-core marketing division that was sold in May 2002. This division contributed approximately $1.1 million to revenues for the same period in 2001. Excluding
the effect of this division, revenues decreased $1.1 million, or 3%, from the same period in 2001, primarily as a result of the general economic decline. Sales in our consumer promotion and fulfillment division and our automotive trade fulfillment
division decreased from the same period of 2001 due to the economic slowdown and resulting cost reduction programs at our clients. The decline in sales in these divisions was partially offset by an increase in quarterly sales for a customer of our
retail merchandising division that had postponed first quarter scheduled projects until the current period.





Cost of Services.    Cost of services decreased $551,000, or 4%, to $15.1 million for the three months ended June 30, 2002 from $15.6 million for the same period in 2001. Cost of services for the three
months ended June 30, 2002 included approximately $226,000 from the sold non-core marketing division, while cost of services for the same period in 2001 included $508,000 from this division. Excluding the effects from the sold division, cost of
services decreased $269,000, or 2%. The decrease in cost of services is a result of the direct reduction in variable costs, including labor related costs and material handling costs, associated with the reduction in sales between periods. As a
percentage of revenues, cost of services increased to 44.8% for the three months ended June 30, 2002 from 44.2% for the same period in 2001.





Gross Margin.    Gross margin decreased $1.1 million, or 6%, to $18.6 million for the three months ended June 30, 2002 from $19.7 million for the same period in 2001. The
sale of the non-core marketing division accounted for approximately $320,000 of the decrease, or 2%. As a percentage of revenues, gross margin decreased slightly to 55.2% for the three months ended June 30, 2002, from 55.8% for the same period in
2001.





Operating.    Operating expenses increased $300,000, or 2%, to $15.7 million for
the three months ended June 30, 2002 from $15.4 million for the same period in 2001. Operating expenses for the three months ended June 30, 2002 included $360,000 in costs from the sold marketing division, while operating expenses for the same
period in 2001 included $680,000 from the sold division. Excluding the effects of the sold division, operating expenses increased $620,000, or 4%. Operating expenses increased in part from additional costs related to the support and maintenance of
our client information systems that were expanded to the consumer promotion and fulfillment division in the second quarter. In addition, the relocation of the corporate payroll and marketing functions from the Atlanta corporate offices to our
operating headquarters resulted in additional personnel costs for the period ended June 30, 2002 in excess of that experienced in the same period in 2001. As a percentage of revenues, operating expenses increased to 46.5% for the three months ended
June 30, 2002 as compared to 43.4% for the same period in 2001 due to the fixed nature of certain operating costs in relation to the reduction in revenues.





Corporate General and Administrative.    Corporate general and administrative expenses decreased $55,000, or 6%, to $856,000 for the three months ended June 30, 2002 from
$911,000 for the same period in 2001. The decrease is attributed to the reduction in personnel and occupancy costs from the closing of the Atlanta corporate headquarters. As a percentage of revenues, these expenses remained relatively consistent
between periods, at 2.5% for the three months ended June 30, 2002, compared to 2.6% for the same period in 2001.





Depreciation and Amortization.    Depreciation and amortization decreased $825,000, or 37%, to $1.4 million for the three months ended June 30, 2002 from $2.3 million for the same period in 2001. As a
percentage of revenues, depreciation and amortization decreased to 4.2% for the three months ended June 30, 2002 from 6.4% for the same period in 2001. Depreciation and amortization expense for the three months ended June 30, 2001 includes
approximately $865,000 of amortization of goodwill and intangibles which are no longer being amortized in 2002 in accordance with SFAS No. 142. Excluding the amortization of goodwill and intangibles in 2001, depreciation and amortization increased
5% between periods, due to additional depreciation resulting from the second quarter implementation of the expanded client information systems.





Operating Income.    Operating income was $667,000 for the three months ended June 30, 2002 as compared to $1.2 million for the same period in 2001. As a percentage of
revenues, operating income was 2.0% for the three months




10




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##### Table of Contents

ended June 30, 2002 as compared to 3.4% for the same period in 2001, primarily due to the fixed nature of operating expenses in relation to the
decrease in sales.





Interest Expense, Net.    Interest expense, net, represents the
interest on our outstanding debt allocated to continuing operations. Net interest expense increased $708,000, or 69%, to $1.7 million for the three months ended June 30, 2002 from $1.0 million for the same period in 2001. The increase is due to
additional amortization of fees arising from the amendment of the Credit Facility in April 2002 and higher interest rates charged in the three months ended June 30, 2002 compared to the same period in 2001. As a percentage of revenues, net interest
expense was 5.1% for the three months ended June 30, 2002 as compared to 2.9% for the same period in 2001.





Other Expense.    Other expense includes losses incurred in the May 2002 sale of a non-core marketing division and a note receivable. The total includes a $1.5 million loss on the sale of a note receivable
arising from the sale of the Companys U.S. staffing business in 2000. The note, with a book value of $5.0 million, was sold for $3.5 million, resulting in the $1.5 million loss. Also in May 2002, the sale of a non-core marketing division for
approximately $600,000 resulted in a loss on sale of $275,000.





Income Tax Provision.Income tax provision
was $72,000 for the three months ended June 30, 2001. Due to the uncertainty regarding the realization of our federal general business credit carryforwards, we have recorded a valuation allowance against our income tax benefit for 2002. In 2001, we
provided for income taxes at a rate of 40%.





DISCONTINUED OPERATIONS





On March 19, 2002, we sold our United Kingdom specialized staffing services business. As announced on July 20, 2001, we intend to divest our German specialized staffing
business in 2002. In accordance with the provisions of Accounting Principles Board Opinion No. 30, we have reflected the results of our European specialized staffing businesses as discontinued operations in the condensed consolidated balance sheets
and statements of operations and cash flows. For all periods presented, this presentation reflects the net assets of these operations segregated from the assets and liabilities of continuing operations, and the earnings of these businesses
segregated from the results of continuing operations.





Loss From Discontinued Operations, Net of
Taxes.    Revenues of discontinued operations were $31.6 million and $51.9 million for the three months ended June 30, 2002 and 2001, respectively. Excluding the revenues of the sold United Kingdom specialized staffing
business, revenues of discontinued operations were $32.0 million for the three months ended June 30, 2001. It is the Companys policy to allocate interest expense to discontinued operations in accordance with EITF 87-24, based on the net assets
of the discontinued operations relative to the total net assets plus debt of the consolidated company. The loss from discontinued operations of $1.2 million for the three months ended June 30, 2002 is net of the applicable interest expense of
$814,000 and income tax provision of $13,000. Loss from discontinued operations of $1.0 million for the three months ended June 30, 2001 is net of the applicable interest expense of $830,000 and income tax benefit of $748,000. The loss from
discontinued operations for 2002 is due primarily to the effect of the difficult economic environment on the staffing business.





Loss on Sale of Business, Net of Taxes.    In order to reflect the current status of negotiations for the sale of the German staffing business, the Company recorded an additional impairment charge of $4.1
million in the second quarter of 2002.





NET LOSS





Net loss increased $7.2 million to a loss of $8.1 million for the three months ended June 30, 2002 from $935,000 for the same period in 2001, due primarily to the loss on
the sale of the note receivable and non-core marketing division, increased interest expense and the impairment charge recorded against the net assets of discontinued operations.





COMPARISON OF RESULTSSIX MONTHS ENDED JUNE 30, 2002 AND 2001





Reported continuing operating results for 2002 include the marketing support services businesses. Reported continuing operating results for 2001 include the marketing support services businesses as well as the PIMMS store setup
business, which ceased operations during the first quarter of 2001.




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##### Table of Contents

Revenues.    Revenues decreased $7.3 million, or 10%, to $65.9 million for the six months
ended June 30, 2002 from $73.3 million for the same period in 2001. Revenues for the six months ended June 30, 2002 included $1.5 million for the sold non-core marketing division, while revenues for the six months ended June 30, 2001 included
$918,000 for the abandoned PIMMS operation and $2.5 million for the sold non-core marketing division. Excluding PIMMS and the sold division, revenues for the period decreased $5.4 million, or 8%. The decrease is a result of the general economic
decline. Sales in our consumer promotion and fulfillment division and our automotive trade fulfillment division decreased from the same period of 2001 due to the economic slowdown and resulting cost reduction programs at our clients.





Cost of Services.    Cost of services decreased $3.9 million, or 12%, to $29.3 million for the six
months ended June 30, 2002 from $33.2 million for the same period in 2001. Cost of services for the six months ended June 30, 2002 included $707,000 for the sold non-core marketing division, while cost of services for the six months ended June 30,
2001 included $389,000 for the abandoned PIMMS operation and $1.1 million for the sold marketing division. Excluding PIMMS and the sold division, cost of services decreased $3.1 million, or 10%. The decrease in cost of services is a result of the
direct reduction in variable costs, including labor related costs and material handling costs, associated with the reduction in sales between periods and to efficiencies gained from the consolidation of several warehouses into one facility in late
2001. As a percentage of revenues, cost of services decreased to 44.5% for the six months ended June 30, 2002 from 45.3% for the same period in 2001.





Gross Margin.    Gross margin decreased $3.4 million, or 9%, to $36.6 million for the six months ended June 30, 2002 from $40.0 million for the same period in 2001. Gross
margin for the six months ended June 30, 2002 included $829,000 for the sold non-core marketing division. Gross margin for the six months ended June 30, 2001 included $529,000 from the abandoned PIMMS operation and $1.4 million for the sold
division. Excluding PIMMS and the sold division, gross margin decreased $2.4 million, or 6%. As a percentage of revenues, gross margin increased to 55.5% for the six months ended June 30, 2002 from 54.7% for the same period in 2001, due to the
reasons discussed above.





Operating.    Operating expenses decreased $1.2 million, or
4%, to $31.4 million for the six months ended June 30, 2002 from $32.6 million for the same period in 2001. Operating expenses for the six months ended June 30, 2002 included $957,000 for the non-core marketing division sold in May 2002, while
operating expenses for the six months ended June 30, 2001 included $529,000 for the abandoned PIMMS operations and $1.4 million for the sold marketing division. Excluding PIMMS and the sold division, operating expenses decreased $215,000, or 1%, due
to cost savings gained on lease, maintenance and utility costs from the consolidation of several warehouses into one new facility in late 2001, offset by increased personnel and occupancy costs from the relocation of the corporate payroll and
marketing functions from the Atlanta corporate offices to our operating headquarters and additional support for our client information systems. As a percentage of revenues, operating expenses increased to 47.6% for the six months ended June 30, 2002
as compared to 44.5% for the same period in 2001 due to the fixed nature of certain operating costs in relation to the reduction in revenues.





Corporate General and Administrative.    Corporate general and administrative expenses decreased $787,000, or 31%, to $1.7 million for the six months ended June 30, 2002 from
$2.5 million for the same period in 2001. As a percentage of revenues, these expenses decreased to 2.6% for the six months ended June 30, 2002 from 3.5% for the same period in 2001, due to reductions in personnel and occupancy costs from the closing
of the Atlanta corporate offices.





Depreciation and Amortization.    Depreciation and
amortization decreased $1.8 million, or 40%, to $2.6 million for the six months ended June 30, 2002 from $4.4 million for the same period in 2001. As a percentage of revenues, depreciation and amortization decreased to 4.0% for the six months ended
June 30, 2002 from 6.0% for the same period in 2002. Depreciation and amortization expense for the six months ended June 30, 2001 includes approximately $1.7 million of amortization of goodwill and intangibles, which are no longer being amortized in
2002 in accordance with SFAS No. 142. Excluding the amortization of goodwill and intangibles in 2001, depreciation and amortization remained consistent between periods.





Final PIMMS Severance Costs.    Final PIMMS severance costs represent severance costs related to the abandonment of the PIMMS operation. We
completed the closing of the PIMMS operation on March 16, 2001, and took a charge for the related severance expense of $2.5 million in 2001.




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##### Table of Contents

Operating Income (Loss).    Operating income was $886,000 for the six months ended June 30,
2002 as compared to an operating loss of ($2.0) million for the same period in 2001. The operating loss for the six months ended June 30, 2001 included a $2.5 million charge for the abandoned PIMMS operation. As a percentage of revenues, operating
income was 1.3% for the six months ended June 30, 2002 as compared to an operating loss of (2.7%) for the same period in 2001, primarily as a result of the operating efficiencies gained in 2002 and the severance charge from the PIMMS operation for
2001.





Interest Expense, Net.    Interest expense, net, represents the interest on our
outstanding debt allocated to continuing operations. Net interest expense increased $1.6 million, or 89%, to $3.4 million for the six months ended June 30, 2002, from $1.8 million for the same period in 2001. The increase is due to additional
amortization of fees arising from the amendment of the Credit Facility in April 2002 and higher interest rates charged in the six months ended June 30, 2002 compared to the same period in 2001. As a percentage of revenues, net interest expense was
5.1% for the six months ended June 30, 2002 as compared to 2.4% for the same period in 2001.





Other
Expense.    Other expense includes losses incurred in the sale of a non-core marketing division and a note receivable. The total includes a $1.5 million loss on the May 2002 sale of a note receivable arising from the sale of
the Companys U.S. staffing business in 2000. The note, with a book value of $5.0 million, was sold for $3.5 million, resulting in the $1.5 million loss. Also in May 2002, the sale of a non-core marketing division for approximately $600,000
resulted in a loss on sale of $275,000.





Income Tax Benefit.    Income tax benefit was
$1.5 million for the six months ended June 30, 2001. Due to the uncertainty regarding the realization of our federal general business credit carryforwards, we have recorded a valuation allowance against our income tax benefit for 2002. In 2001, we
provided for income taxes at a rate of 40%.





DISCONTINUED OPERATIONS





On March 19, 2002, we sold our United Kingdom specialized staffing services business. As announced on July 20, 2001, we intend to divest our German specialized staffing
business in 2002. In accordance with the provisions of Accounting Principles Board Opinion No. 30, we have reflected the results of our European specialized staffing businesses as discontinued operations in the condensed consolidated balance sheets
and statements of operations and cash flows. For all periods presented, this presentation reflects the net assets of these operations segregated from the assets and liabilities of continuing operations, and the earnings of these businesses
segregated from the results of continuing operations.





Loss From Discontinued Operations, Net of
Taxes.    Revenues of discontinued operations were $77.6 million and $105.3 million for the six months ended June 30, 2002 and 2001, respectively. Excluding the revenues of the sold United Kingdom specialized staffing
business, revenues of discontinued operations were $58.8 million and $66.9 million for the six months ended June 30, 2002 and 2001, respectively. It is the Companys policy to allocate interest expense to discontinued operations in accordance
with EITF 87-24, based on the net assets of the discontinued operations relative to the total net assets plus debt of the consolidated company. The loss from discontinued operations of $3.1 million for the six months ended June 30, 2002 is net of
the applicable interest expense of $1.5 million and income tax provision of $45,000. Loss from discontinued operations of $25,000 for the six months ended June 30, 2001 is net of the applicable interest expense of $1.6 million and income tax benefit
of $147,000. The loss from discontinued operations for 2002 is due primarily to the effect of the difficult economic environment on the staffing business.





Loss on Sale of Business, Net of Taxes.    In order to reflect the current status of negotiations for the sale of the German staffing business, the Company recorded an
additional impairment charge of $4.1 million in the second quarter of 2002.





Cumulative effect of change in
accounting principle.    The completion of the impairment analysis under SFAS No. 142 as of January 1, 2002 resulted in an impairment charge in the amount of $20.7 million, recorded as a cumulative change in accounting
principle.





NET LOSS





Net loss increased $29.9 million to a loss of $32.2 million for the six months ended June 30, 2002 from $2.3 million for the same period in 2001, due primarily to the charge recorded as a cumulative
effect of change in accounting




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##### Table of Contents

principle, as well as the combination of the loss on the sale of the note receivable and non-core marketing division, increased interest expense
and the impairment charge recorded against the net assets of discontinued operations.





LIQUIDITY AND CAPITAL RESOURCES





Cash used in operating activities was $11.7 million for the six months ended June 30, 2002, compared to $2.2 million for the
same period in 2001. Of the $11.7 million of cash used in operating activities for the period ended June 30, 2002, $7.7 million of cash was used by discontinued operations. For the same period in 2001, cash used by discontinued operations was $14.1
million. The continuing operations use of cash in 2002 is primarily the result of an increase in working capital, offset in part by a federal tax refund.





Cash provided by investing activities for the six months ended June 30, 2002 was $28.8 million compared to cash used by investing activities of $19.2 million for the same period in 2001. In 2002, cash
was generated through the sale of the United Kingdom specialized staffing business for $26.8 million, the note receivable for $3.5 million and the non-core marketing business for approximately $600,000. Additions to property and equipment used cash
of $2.2 million. Cash used in 2001 was due to the acquisition consideration paid for the ServiceAdvantage earn-out of $12.9 million and additions to property and equipment of $6.3 million. Capital expenditures for 2002 are anticipated to be
significantly lower than 2001.





Cash used in financing activities for the six months ended June 30, 2002 was $22.8
million compared to cash provided by financing activities of continuing operations of $19.6 million for the same period in 2001. The March 19, 2002 sale of the United Kingdom specialized staffing services business provided funds for repayments on
our Credit Facility of $26.8 million, offset by borrowings for working capital needs of $4 million. In 2001, we had net borrowings under our Credit Facility of $21.8 million, using $2.3 million of these funds to repurchase 172,500 shares of our
common stock. The exercise of stock options generated $175,000 in proceeds in 2001.





Credit Facility





We obtain our working capital from borrowings pursuant to a Credit Facility with a syndicate of commercial banks. Wachovia Bank, National
Association is the Administrative Agent for the lenders. Our borrowings under the Credit Facility are secured by a lien on substantially all of our assets and the assets of our operating subsidiaries.





We were not in compliance with certain of our covenants under the Credit Facility as of December 31, 2001, and received a waiver from our
bank group with respect to the non-compliance with these covenants through April 15, 2002. On April 12, 2002, we reached an agreement with our banks to amend the facility. The amendment eliminated the defaults, extended the maturity of the Credit
Facility from April 15, 2002 to January 3, 2003, reduced the amount we are permitted to borrow, increased the interest rates that we are required to pay and modified our financial covenants. Under the amended agreement, at June 30, 2002, we were
permitted to borrow up to $86.7 million. Approximately $81.2 million was outstanding under the Credit Facility at June 30, 2002. At July 31, 2002 this outstanding balance had been reduced to approximately $76.0 million. The amount that we are
permitted to borrow decreases incrementally each month to approximately $72.2 million as of December 31, 2002.





Under the Credit Facility, we are required to satisfy covenants relating to minimum consolidated adjusted EBITDA, fixed charge coverage ratios and limitations on capital expenditures, among others. We have monthly targets for each
financial covenant that we must meet. We are also required to pursue the sale of our German specialized staffing business and opportunities to raise cash through the sale of debt or equity securities. If we fail to comply with the covenants, we will
be in default. Upon the occurrence of a default, unless our lenders grant a further waiver, we will not be permitted to borrow additional amounts under the Credit Facility, and the outstanding amounts will become immediately due and payable.
Furthermore, if we fail to meet the monthly target for any of our financial covenants, to complete the sale of our German specialized staffing business by July 31, 2002 or to repay the borrowings outstanding under the Credit Facility in full by
September 30, 2002, we are required to pursue a business combination transaction.




14




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##### Table of Contents




At July 31, 2002, we had complied with all financial covenants included in the
Credit Facility, had received several non-binding proposals from groups interested in acquiring our German specialized staffing business and had received non-binding offers from groups interested in purchasing our debt and equity securities. Because
we had not completed the sale of our German specialized staffing business by this date, however, we are required to pursue a business combination transaction. We have engaged CIBC World Markets to assist us in this process. It is anticipated that
this process will run in parallel with our continued efforts to complete the sale of our German specialized staffing business and to raise cash through a sale of debt or equity securities, in addition to the other measures which we are pursuing to
obtain sufficient funds to repay the borrowings under the Credit Facility.





We cannot assure you that we will
successfully complete the disposition of our German business, the issuance of debt or equity securities or the refinancing of any amounts that remain outstanding under the Credit Facility. We are dependent on the availability of borrowings pursuant
to the Credit Facility to meet our working capital needs, capital expenditure requirements and other cash flow requirements. If borrowings under the Credit Facility are unavailable, we will be required to seek additional sources of financing in
order to fund our working capital needs. If we are unable to obtain additional sources of financing and cannot repay the outstanding balance of our Credit Facility when it becomes due, it is likely that a business combination transaction,
restructuring or liquidation will be required in whole or in part.





ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





FOREIGN CURRENCY
RISK





Our discontinued operations include the European specialized staffing business. Revenues included in
discontinued operations are received, and operating costs are incurred, in foreign currencies (primarily the British pound and the Euro). The denomination of foreign subsidiaries account balances in their local currency exposes us to certain
foreign exchange rate risks. We address the exposure by financing most working capital needs in the applicable foreign currencies. However, our Credit Facility requires that we convert indebtedness outstanding in foreign currencies into dollars for
purposes of determining the total amount of indebtedness outstanding. An increase in the value of a foreign currency relative to the dollar has the effect of reducing the amount we are otherwise permitted to borrow pursuant to the Credit Facility.
We have not engaged in hedging transactions to reduce exposure to fluctuations in foreign currency exchange rates.





INTEREST RATE RISK





We maintain a Credit Facility which subjects us to the risk of increased interest expense associated with
movements in market interest rates. Our Credit Facility had a balance outstanding of $81.2 million at June 30, 2002, which was at a variable rate of interest. Due to the short-term nature of the Credit Facility, the carrying value approximates fair
value. Based on outstanding borrowings, it is estimated that an increase in the prevailing interest rates of 100 basis points would result in a decrease in net income of approximately $250,000, or $0.02 per share, for the year ended December 31,
2002.




15




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##### Table of Contents

PART IIOTHER INFORMATION





ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





AHL held its annual meeting of stockholders in Atlanta, Georgia on May 14, 2002. Of the 15,246,792
shares outstanding as of the record date, 14,354,241 shares were present or represented by proxy at the meeting. The following actions were voted upon:





| | A. |  | A proposal to elect two directors to serve until the 2005 Annual Meeting of Shareholders, elect one director to serve until the 2004 Annual Meeting of
Shareholders and elect one director to serve until the 2003 Annual Meeting of Shareholders.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Director

Term Expiration Date



Votes For



Votes WithheldEdwin C. Skip Gage

2005



13,183,221



1,171,020Wyck A. Knox, Jr.

2005



13,182,121



1,172,120Bill W. Shoptaw

2004



13,182,321



1,171,920A. Clayton Perfall

2003



13,179,271



1,174,970





The continuing directors are Frank A. Argenbright,
Jr. (2003) and John W. Ward (2004).





| | B. |  | A proposal to approve an amendment to the Companys 1997 Stock Incentive Plan to increase the number of shares of Common Stock authorized for issuance
pursuant to the Plan to 4,500,000 shares and to permit up to 1,200,000 shares subject to options to be granted in connection with the initial employment of an individual as the Companys Chief Executive Officer in the calendar year of the chief
executive officers initial employment.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Votes For

Votes Against

Abstentions8,683,787

1,352,199

656,805





ITEM 5.    OTHER INFORMATION





On August 1, 2002, AHL announced that
Edwin C. Skip Gage had resigned from the AHL Board of Directors effective July 25, 2002 in order to focus more energy on his personal business ventures.





Arthur Andersen LLP audited our accounts for fiscal 2001. As reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, Arthur Andersen advised us
orally that it would not be able to perform its review of our interim financial statements contained in the report, as it would not be able to provide reasonable assurance that there was appropriate continuity of Arthur Andersen personnel to perform
the review. In accordance with Release No. 34-45589 under the Securities Exchange Act of 1934, our interim financial statements contained in the report were not reviewed by an independent public accountant pursuant to Rule 10-01 of Regulation S-X.
On May 31, 2002, we dismissed Arthur Andersen LLP and appointed Ernst & Young LLP as our independent public accountants. Ernst & Young has subsequently reviewed the interim financial statements that were included in our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





|(a) |  | Exhibits:
|--- |  | ---------




EXHIBIT NUMBER

DESCRIPTION3.1

Restated and Amended Articles of Incorporation of AHL (incorporated by reference to the Registration Statement on Form 8-A dated March 3,
1997).3.2

Bylaws of AHL (incorporated by reference to AHLs Annual Report on Form 10-K for the year ended December 31, 2001).




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EXHIBIT NUMBER

DESCRIPTION4.1

Specimen Common Stock Certificate (incorporated by reference to AHLs Registration Statement on Form S-1 (File No. 333-20315)).10.1*

First Amendment to Third Amended and Restated Credit Agreement and Consent, dated as of June 28, 2002, by and among AHL Services, Inc. and certain of its
subsidiaries, Wachovia Bank, National Association (London Branch), as European Swingline Lender, the financial institutions named therein and Wachovia Bank, National Association, as Administrative Agent.10.2*

Second Amendment to Third Amended and Restated Credit Agreement and Consent, dated as of July 12, 2002, by and among AHL Services, Inc. and certain of its
subsidiaries, Wachovia Bank, National Association (London Branch), as European Swingline Lender, the financial institutions named therein and Wachovia Bank, National Association, as Administrative Agent.11.1*

Computation of Earnings Per Share.99.1*

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.99.2*

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.


---

|* |  | Filed herewith.
|- |  | ---------------




|(b) |  | Reports on Form 8-K:
|--- |  | --------------------




The following reports on Form 8-K were filed during the quarter ended June 30, 2002:





On April 3,
2002, AHL Services, Inc. filed a Current Report on Form 8-K on the sale of its UK staffing business to a UK-based private equity group and attaching the sale agreement and pro forma financial statements as exhibits.





On June 6, 2002, AHL Services Inc. filed a Current Report on Form 8-K announcing its change in certifying accountants and attaching a
letter from Arthur Andersen to the SEC as exhibit.





On June 12, 2002, AHL Services Inc. filed a Current Report on
Form 8-K/A regarding the change in certifying accountants and attaching a letter from Arthur Andersen to the SEC as exhibit.




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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





AHL SERVICES, INC. (REGISTRANT)Date: August 14, 2002

By:

/s/    HEINZ STUBBLEFIELDHeinz StubblefieldChief Financial Officer(Duly Authorized Officer, Principal Financial andChief Accounting Officer)







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