SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1999
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Commission File No. 1-8279
------
OLSTEN CORPORATION
------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2610512
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Broad Hollow Road, Melville, New York 11747-8905
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 844-7800
--------------
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.
Class Outstanding at May 13, 1999
- ------------------------------------ ---------------------------
Common Stock, $.10 par value 68,229,499 shares
Class B Common Stock, $.10 par value 13,066,976 shares
<PAGE>
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -
April 4, 1999 and January 3, 1999 (Restated), respectively 2
Consolidated Statements of Operations (Unaudited) -
Quarters Ended April 4, 1999 (Restated) and
March 29, 1998, respectively 3
Consolidated Statements of Cash Flows (Unaudited) -
Quarters Ended April 4, 1999 (Restated) and
March 29, 1998, respectively 4
Notes to Consolidated Financial Statements
(Restated and Unaudited) 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15-16
Item 5. Other Information 16-17
SIGNATURES 18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
Olsten Corporation
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
April 4, 1999 January 3, 1999
------------- ---------------
(Restated)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 31,876 $ 53,831
Receivables, net 1,048,287 1,005,685
Other current assets 131,925 134,303
----------- -----------
Total current assets 1,212,088 1,193,819
FIXED ASSETS, NET 233,670 233,131
INTANGIBLES, NET 606,314 613,616
OTHER ASSETS 16,337 18,241
----------- -----------
$ 2,068,409 $ 2,058,807
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 224,181 $ 251,594
Payroll and related taxes 146,333 144,330
Accounts payable 144,224 142,547
Insurance costs 40,555 36,338
----------- -----------
Total current liabilities 555,293 574,809
LONG-TERM DEBT 649,889 606,107
OTHER LIABILITIES 109,107 95,271
SHAREHOLDERS' EQUITY:
Common stock $.10 par value; authorized 110,000,000 shares;
issued 68,255,667 and 68,253,080 shares, respectively 6,826 6,825
Class B common stock $.10 par value; authorized 50,000,000
shares; issued 13,068,973 and 13,071,560 shares, respectively 1,307 1,307
Additional paid-in capital 447,510 447,488
Retained earnings 311,766 337,368
Accumulated other comprehensive loss (12,834) (9,913)
Less treasury stock, at cost; 45,700 shares (455) (455)
----------- -----------
Total shareholders' equity 754,120 782,620
----------- -----------
$ 2,068,409 $ 2,058,807
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Olsten Corporation
Consolidated Statements of Operations
(In thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
First Quarter Ended
-------------------
April 4, 1999 March 29, 1998
------------- --------------
(Restated)
<S> <C> <C>
Service sales, franchise fees,
management fees and other income $ 1,197,956 $ 1,049,942
Cost of services sold 903,476 783,885
----------- -----------
Gross profit 294,480 266,057
Selling, general and administrative expenses 316,038 236,860
Interest expense, net 8,998 5,906
----------- -----------
Income (loss) before income taxes and minority interests (30,556) 23,291
Income tax expense (benefit) (9,915) 9,026
----------- -----------
Income (loss) before minority interests (20,641) 14,265
Minority interests 1,711 1,464
----------- -----------
Net income (loss) $ (22,352) $ 12,801
=========== ===========
SHARE INFORMATION:
Basic earnings (loss) per share:
Net income (loss) $ (.28) $ .16
=========== ===========
Average shares outstanding 81,279 81,312
=========== ===========
Diluted earnings (loss) per share:
Net income (loss) $ (.28) $ .16
=========== ===========
Average shares outstanding 81,279 81,467
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Olsten Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
First Quarter Ended
-------------------
April 4, 1999 March 29, 1998
------------- --------------
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(22,352) $ 12,801
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 19,444 14,541
Minority interests in results of operations
of consolidated subsidiaries 1,711 1,464
Changes in assets and liabilities,
net of effect from acquisitions:
Accounts receivable and other current assets (58,366) (15,703)
Current liabilities 1,867 (17,307)
Other, net 18,301 (12,015)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (39,395) (16,219)
-------- --------
INVESTING ACTIVITIES:
Purchases of fixed assets (23,519) (13,048)
Acquisitions of businesses, net of cash acquired (8,882) (2,306)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (32,401) (15,354)
-------- --------
FINANCING ACTIVITIES:
Net proceeds from (repayments of) line of credit agreements 68,636 (10,000)
Redemption of debentures (6,804) --
Repayment of notes payable (6,517) (6,202)
Cash dividends (3,252) (5,689)
Issuances of common stock under stock plans -- 54
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 52,063 (21,837)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,222) (1,490)
-------- --------
NET DECREASE IN CASH (21,955) (54,900)
CASH AT BEGINNING OF PERIOD 53,831 84,810
-------- --------
CASH AT END OF PERIOD $ 31,876 $ 29,910
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Olsten Corporation
Notes to Consolidated Financial Statements
(Restated and Unaudited)
1. Accounting Policies
-------------------
The unaudited consolidated financial statements have been prepared by
Olsten Corporation (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission and, in the opinion of management,
include all adjustments necessary for a fair presentation of results of
operations, financial position and cash flows for each period presented.
Results for interim periods are not necessarily indicative of results for a
full year. The year-end balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles.
See also Note 4 with regard to the restatement.
2. Comprehensive Income (Loss)
---------------------------
Total comprehensive loss amounted to $25 million during the first quarter
of 1999 and income of $12 million for the comparable period of 1998.
See also Note 4 with regard to the restatement.
3. Acquisitions
------------
Under the terms of the 1997 purchase agreement for Olsten Travail
Temporaire (formerly Sogica S.A.), an additional payment of approximately
$31 million was paid in the second quarter of 1998. An additional purchase
price payment will be required in the year 2000, calculated based upon the
average net income for the three fiscal years ended 1999. Such additional
payments relate to the Company's original purchase of 70 percent of the
Olsten Travail Temporaire shares. The Company is also obligated in the year
2000 to purchase the remaining 30 percent of the shares at a price to be
determined by a multiple ranging from an upper limit of 16 to a lower limit
of 10, applied to the average net income for the fiscal years ended 1998
and 1999.
During the first three months of 1999, the Company purchased additional
Staffing Services operations in France and Health Services operations in
the United States for approximately $9 million in cash. All acquisitions
have been accounted for by the purchase method of accounting.
4. Special Charges, Adjustments and Restatement
--------------------------------------------
On March 30, 1999, the Company's Health Services' division announced plans
to record a $56 million special charge for the settlement of two federal
investigations focusing on the Company's Medicare home office cost reports
and certain transactions with Columbia/HCA Healthcare Corporation. The
civil, administrative and criminal agreements were finalized and signed on
July 19, 1999 and the settlement amount was paid on August 11, 1999. The
payment was funded by the Company's revolving credit agreement in the
amount of $45 million, with the remainder coming from operating cash flows.
The settlement had originally been disclosed as a subsequent event to the
financial statements for the year ended January 3, 1999. However, it has
been determined that it was more appropriate to accrue such amount in the
financial statements for the year ended January 3, 1999 and, accordingly,
the financial statements for the year ended January 3, 1999 and for the
three months ended April 4, 1999 have been restated. The following
information represents the impact of the
5
<PAGE>
restatement on the consolidated Statement of Operations for the three-month
ended April 4, 1999 financial statements:
<TABLE>
<CAPTION>
As Reported As Restated
----------- -----------
<S> <C> <C>
Service sales, franchise fees, $ 1,197,956 $ 1,197,956
management fees and other income
Cost of services sold 903,476 903,476
----------- -----------
Gross profit 294,480 294,480
Selling, general and administrative expenses 372,038 316,038
Interest expense, net 8,998 8,998
----------- -----------
Loss before income taxes and
minority interests (86,556) (30,556)
Income tax benefit (26,015) (9,915)
----------- -----------
Loss before minority interests (60,541) (20,641)
Minority interests 1,711 1,711
----------- -----------
Net loss $ (62,252) $ (22,352)
=========== ===========
Share Information:
Basic loss per share $ (.77) $ (.28)
=========== ===========
Diluted loss per share $ (.77) $ (.28)
=========== ===========
</TABLE>
The effect of the restatement on the January 3, 1999 balance sheet was an
increase to accrued expenses of $56 million, a decrease to deferred income
taxes included in other liabilities of $16.1 million and a decrease to
retained earnings of $39.9 million.
On March 30, 1999, the Company also announced plans to take a special
charge during the first quarter of 1999 aggregating $46 million for the
realignment of business units, as part of a new restructuring plan ,
including compensation and severance costs of $22 million to be paid to
operational support staff, branch administrative personnel and management,
asset write-offs of $16 million and integration costs of $8 million,
primarily related to obligations under lease agreements for offices and
other facilities being closed. Asset write-offs relate primarily to fixed
assets being disposed of in offices being closed and facilities being
consolidated as well as fixed assets and goodwill attributable to the
Company's exit from certain businesses previously acquired but not within
the Company's strategic objectives. The Company expects that the
realignment of the business units will achieve a reduction of expenses of
approximately $14 million for the last three quarters of 1999, due to
reduced employees, lease and depreciation expenses.
The Health Services' division represented $17 million of the total charge,
inclusive of compensation and severance costs of $5 million, asset
write-offs of $7 million and integration costs of $5 million.
The charge for the Staffing Services' division totaled $16 million
related to business realignments, including $6 million for compensation and
severance costs, $8 million for asset write-offs and $2 million for
integration costs.
The balance of the charge of $13 million relates to corporate operations
and consists primarily of compensation and severance costs.
As of the end of the first quarter of 1999, 30 percent of the closures and
consolidations of facilities have been completed and approximately 10
percent of the 640 expected terminations have occurred.
6
<PAGE>
The major components, as well as the activity during the quarter ended
April 4, 1999 of the previous years charges, as well as the 1999 special
charge, were as follows:
<TABLE>
<CAPTION>
Accounts Compensation
Dollars in Receivable and and Severance Integration
Thousands Settlements Other Assets(1) Costs Costs Other Total
--------- ----------- ------------- --------------- ------------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1996 charge balance at
January 3, 1999 $ 5,200 -- $ 1,123 $ 94 -- $ 6,417
Cash expenditures -- -- (1,009) (94) -- (1,103)
Non-cash write-offs -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at April 4, 1999 5,200 -- 114 -- -- 5,314
-------- -------- -------- -------- -------- --------
1998 charge balance at
January 3, 1999 56,000 $ 98 260 802 $ 476 57,636
Cash expenditures (330) -- (260) (203) (476) (1,269)
-------- -------- -------- -------- -------- --------
Balance at April 4, 1999 55,670 98 -- 599 -- 56,367
-------- -------- -------- -------- -------- --------
Charge - 1999 -- 16,060 22,245 7,695 -- 46,000
Cash expenditures -- -- (11,003) (716) -- (11,719)
Non-cash write-offs -- (10,368) -- -- -- (10,368)
-------- -------- -------- -------- -------- --------
Balance at April 4, 1999 -- 5,692 11,242 6,979 -- 23,913
-------- -------- -------- -------- -------- --------
Balance of all charges
Combined at
April 4, 1999 $ 60,870 $ 5,790 $ 11,356 $ 7,578 $ -- $ 85,594
======== ======== ======== ======== ======== ========
</TABLE>
(1) Amounts represent contra assets.
5. Long-Term Debt
--------------
In February 1999, the Company's revolving credit agreement, which expires
in 2001, was amended, to revise the provision related to the maintenance of
various financial ratios and covenants, including granting the Company
approval to repurchase up to $40 million of the convertible subordinated
debentures. The Company had retired $7.7 million of the convertible
subordinated debentures in January 1999 at 88.5 percent of the principal
amount, resulting in a gain of approximately $900. In May 1999, the
Company's revolving credit agreement was further amended to revise the
provision related to the maintenance of various financial ratios and
covenants and to restrict further repurchase of the convertible
subordinated debentures, as well as, the Company's common shares.
Interest expense, net, consists primarily of interest on long-term debt for
the quarter of $10 million in 1999 and $7 million in 1998, offset by
interest income from investments of $1 million for both 1999 and 1998.
6. Business Segment Information
----------------------------
The Company operates in three business segments:
7
<PAGE>
Staffing Services
The Company operates Olsten Staffing Services in the United States and
Canada, and staffing companies in 12 countries of Europe and Latin America,
providing supplemental staffing, evaluation and training for office
technology; general office and administrative services; accounting and
other financial services; legal, scientific, engineering and technical
services, including production technical training; call centers;
production/ distribution/assembly services; training and pre-employment
services; retail services; marketing support and teleservices;
manufacturing, construction and industrial services; and managed services
for corporations. The Company's services meet the full range of business
needs, including traditional temporary help, project staffing,
professional-level staffing, strategic partnerships, regular full-time
hires and outsourcing. The Company's Financial Staffing Services operations
provide temporary, "temp-to-hire" and full-time placement of accounting and
financial professionals. The Company's Legal Staffing Services operations
provide temporary and full-time attorneys, paralegals and legal support
staff to law firms, corporate law departments and government, as well as
computerized litigation support.
Information Technology Services
The Company operates IMI Systems Inc. in the United States and related
companies in Canada and the United Kingdom providing design, programming
and maintenance of computer systems, on either a project or consulting
basis; focused solutions, comprising both horizontal practices and vertical
industry offerings; applications management, encompassing applications
outsourcing, and the support and development of legacy systems and
enterprise resource planning systems; quality assurance services, including
testing environment assessment and/or creation, test planning and
execution, and use of IMI's proprietary methodology, RadSTAR(TM); and
enterprise support services, including help desk support, technology and
software deployment, infrastructure operability/testing and Web/Internet
support.
Health Services
The Company operates Olsten Health Services in the United States and
Canada, delivering home health-related services, including Network Services
providing care management and coordination for managed care organizations
and self-insured employers; skilled nursing, home health aide and personal
services; acute and chronic infusion therapy;
physical/occupational/neurological/speech therapies; pediatric and
perinatal care; disease management; marketing and distribution services for
pharmaceutical, biotechnology and medical device firms; and institutional,
occupational and alternate site health care staffing.
The Company evaluates performance and allocates resources based on income
or loss from operations before income taxes and minority interests. Segment
data includes charges for allocating corporate costs to each of the
operating segments. Prior period segment data has been restated to conform
with the current period presentation. Information about the Company's
operations, net of a special charge of $46 million, before taxes in the
first quarter of 1999 ($16 million related to Staffing Services, $17
million related to Health Services, and $13 million related to Corporate
and other), is as follows:
8
<PAGE>
<TABLE>
<CAPTION>
Services sales, franchise Income (loss) before
Dollars In fees, management fees income taxes and
Thousands and other income minority interests
--------- ------------------------- ---------------------
(Restated)
<S> <C> <C>
First quarter ended April 4, 1999
---------------------------------
Staffing Services $ 722,318 $ (4,773)
Information Technology Services 108,362 3,775
Health Services 367,276 (16,458)
Corporate and other -- (13,100)
----------- -----------
$ 1,197,956 $ (30,556)
=========== ===========
First quarter ended March 29, 1998
----------------------------------
Staffing Services $ 625,484 $ 23,305
Information Technology Services 92,491 2,467
Health Services 331,967 (2,481)
Corporate and other -- --
----------- -----------
$ 1,049,942 $ 23,291
=========== ===========
</TABLE>
See also Note 4 with regard to the restatement.
7. Subsequent Event
----------------
On August 18, 1999, the Company announced it intends to merge its staffing
and information technology services businesses with Adecco S.A. On closing,
the Company's health services business will be split off to Olsten
shareholders as an independent health services company.
When the transactions become effective, each holder of Olsten stock will
receive for each share of Olsten common stock and Olsten Class B common
stock, (a) .25 of a share of Olsten Health Services and (b), $8.75 in cash,
or 0.12472 of an Adecco American Depository Receipt (ADR) (one ADR
represents one-eighth of one share of Adecco common stock), or a mixture of
cash and Adecco ADRs valued in the aggregate at approximately $8.75 per
Olsten share, subject to proration in order that the aggregate
consideration received by all holders pursuant to this clause (b) will be
half cash and half Adecco ADR shares. The value of the stock received by
shareholders in the health services company will be determined upon
commencement of trading in the new security.
The transactions required by the merger agreement require the affirmative
vote of holders of a majority of Olsten's common stock and Class B stock,
voting as a single class, as well as customary regulatory and other
conditions. Stuart Olsten, Chairman of the Company, and certain other
holders of the Company's Class B stock, constituting a majority of the
voting power of the Company's combined classes of stock, have committed to
vote in favor of the transactions.
In September 1999, the Company received a Notice of Amount of Program
Reimbursement relating to its 1997 Medicare cost reports indicating that
the Medicare fiscal intermediary disagrees with the Company's methodology
of allocating a portion of its overhead. The Health Care Financing
Administration has indicated that it agrees with the fiscal intermediary.
Since the Company used a similar methodology for allocating overhead costs
in 1998 and 1999, a comparable disallowance could result. The Company
believes its cost reports are accurate and consistent with past practice
accepted by the fiscal intermediary, and will appeal the notice to the
Provider Reimbursement Review Board. While management believes that
adequate provisions have been made for revenue adjustments, the company is
unable to predict the outcome of this appeal and the final determination of
revenue ultimately recognized under the Medicare program.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
Results of Operations
---------------------
Revenues increased $148 million, or 14 percent, with 8 percent attributable
to acquisitions, to $1.2 billion for the first quarter. Staffing Services'
revenues increased 16 percent, with 9 percent attributable to acquisitions,
to $720 million for the first quarter over last year's first quarter of
$624 million. European operations contributed 7 percent, reflecting
industry growth and favorable economic conditions, while traditional North
American Staffing operations remained essentially flat compared to the
first quarter of 1998. Information Technology Services grew 17 percent to
$108 million compared to $92 million for the first quarter of 1998
primarily from internal growth. Health Services' revenues increased 11
percent to $367 million for the first quarter compared to $332 million in
1998, with 7 percent attributable to acquisitions. Health Services'
revenues for the quarter reflects internal growth of 4 percent attributable
to the Infusion, Staffing and Network businesses, partially offset by a
decline in the Nursing business due to a decreased number of Medicare
visits.
Gross profit margins, as a percentage of revenues, decreased to 24.6
percent for the first quarter from 25.3 percent for last year's first
quarter. Staffing Services' gross profit margins declined for the quarter
as a result of decreased markups, increased subcontractor utilization, and
growth in low margin Corporate Accounts and Partnership business in North
America. Additionally, increased international competition, a changing
business mix and increased social costs in Europe reduced margins.
Information Technology's gross profit margins remained essentially flat in
comparison to the first quarter of 1998. Health Services' gross profit
margins also declined, reflecting a change in the business mix,
specifically, a decline in higher margin health management operations and
Medicare business and growth in lower margin staffing business. These
margin decreases were slightly offset by productivity enhancements and
price increases in Nursing.
On March 30, 1999, the Company's Health Services' division announced plans
to record a $56 million special charge for the settlement of two federal
investigations focusing on the Company's Medicare home office cost reports
and certain transactions with Columbia/HCA Healthcare Corporation. The
civil, administrative and criminal agreements were finalized and signed on
July 19, 1999. The settlement had originally been disclosed as a subsequent
event to the financial statements for the year ended January 3, 1999.
However, it has been determined that it was more appropriate to accrue such
amount in the financial statements for the year ended January 3, 1999 and,
accordingly, the financial statements for the year ended January 3, 1999
and for the three months ended April 4, 1999 have been restated.
On March 30, 1999, the Company also announced plans to take a special
charge during the first quarter of 1999 aggregating $46 million for the
realignment of business units, as part of a new restructuring plan,
including compensation and severance costs of $22 million to be paid to
operational support staff, branch administrative personnel and management,
asset write-offs of $16 million and integration costs of $8 million,
primarily related to obligations under lease agreements for offices and
other facilities being closed. Asset write-offs relate primarily to fixed
assets being disposed of in offices being closed and facilities being
consolidated as well as fixed assets and goodwill attributable to the
Company's exit from certain businesses previously acquired but not within
the Company's strategic objectives. The Company expects that the
realignment of the business units will achieve a reduction of expenses of
approximately 14 million for the last three quarters of 1999, due to
reduced employees, lease and depreciation expenses.
The Health Services' division represented $17 million of the total charge,
inclusive of compensation and severance costs of $5 million, asset
write-offs of $7 million and integration costs of $5 million.
10
<PAGE>
The charge for the Staffing Services' division totaled $16 million related
to business realignments, including $6 million for compensation and
severance costs, $8 million for asset write-offs and $2 million for
integration costs.
The balance of the charge of $13 million relates to corporate operations
and consists primarily of compensation and severance costs.
As of the end of the first quarter of 1999, 30 percent of the closures and
consolidations of facilities have been completed and approximately 10
percent of the expected 640 terminations have occurred.
Selling, general and administrative expenses, increased to $316 million for
the first quarter from $237 million for the first quarter in 1998 primarily
as a result of the special charge of $46 million. As a percentage of
revenues, such expenses remained unchanged for the quarter at 22.5 percent,
excluding the impact of the $46 million special charge. The remaining
increase in expenses for the quarter period resulted primarily from
increased sales salaries in North America Staffing Services and Information
Technology Services as well as additional branch openings in European
Staffing Services.
Net interest expense was $9 million and $6 million for the first quarters
of 1999 and 1998, respectively. Net interest primarily reflected borrowing
costs on long-term debt offset by interest income on investments. The
increase resulted from interest expense incurred as the Company continued
to fund both its acquisition program and working capital requirements,
particularly accounts receivable, necessary to support growth in its
Staffing Services' business and Infusion business.
Liquidity and Capital Resources
-------------------------------
Working capital at April 4, 1999, including $32 million in cash, was $657
million, an increase of 6 percent versus $619 million at January 3, 1999.
Receivables, net, increased $43 million, or 4 percent, predominantly due to
revenue growth and acquisitions in the Staffing Services' business as well
as growth in Health Services' Infusion business, which requires additional
working capital.
The Company has a revolving credit agreement with a consortium of 11 banks
for up to $400 million in borrowings and letters of credit. In February
1999, the Company's revolving credit agreement, which expires in 2001, was
amended, to revise the provision related to the maintenance of various
financial ratios and covenants, including granting the Company approval to
repurchase up to $40 million of the convertible subordinated debentures.
The Company had retired $7.7 million of the convertible subordinated
debentures in January 1999 at 88.5 percent of the principal amount,
resulting in a gain of approximately $900. In May 1999, the Company's
revolving credit agreement was further amended to revise the provision
related to the maintenance of various financial ratios and covenants and to
restrict further repurchase of the convertible subordinated debentures, as
well as, the Company's common shares. As of April 4, 1999, there were $241
million in borrowings and $14 million in standby letters of credit
outstanding. The Company has invested available funds in secure,
short-term, interest-bearing investments. On August 11, 1999, the Company
paid $61 million in settlement of the U.S. Department of Justice home
office cost reports and Columbia/HCA Healthcare Corporation investigation
of which $45 million was funded by the Company's revolving credit agreement
with the remainder coming from operating cash flows.
11
<PAGE>
The Company anticipates that, in addition to its projected cash flow from
operations, new borrowings may be required to meet the Company's projected
working capital requirements to fund capital expenditures currently
anticipated by the Company, and to satisfy potential obligations arising
from resolution of current investigations. Although no assurance can be
given, the Company currently believes that cash flows from operations,
borrowings available to the Company under existing financing agreements,
and additional borrowings that the Company believes it will be able to
obtain should be adequate to meet its projected requirements during 1999
and thereafter. If cash flows from operations or availability under
existing and new financing agreements fall below expectations, the Company
may be forced to delay planned capital expenditures, reduce operating
expenses, or consider other alternatives designed to enhance the Company's
liquidity.
The Company's 1999 first quarter dividend on common stock and Class B
common stock was $.04 per share.
Year 2000
---------
The Year 2000 issue concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000.
The Company's technical infrastructure, encompassing all business
applications, is planned to be Year 2000 ready. Systems not directly
related to the financial operations of the business, primarily voice
communications, are also being upgraded to help ensure readiness.
The North American Staffing Services business is achieving Year 2000
readiness by replacing all business applications and related infrastructure
with compliant technology. This project, referred to as Project REach, is
being implemented to increase efficiencies and improve the Company's
ability to provide services to customers. The selected systems are Year
2000 compliant and, therefore, no remediation of current applications is
necessary. Project REach is approximately 75 percent completed and is on
schedule to be fully implemented by July 1999. The Company's European and
Latin American staffing operations are achieving readiness primarily
through remediation of existing systems and both are expected to be
completed by October 31, 1999.
The Information Technology Services business required minimal remediation
to achieve Year 2000 compliance and was completed June 30, 1999.
In the Health Services segment, systems critical to the business, which
have been identified as non-year 2000 compliant, are being replaced as part
of a project, referred to as Project REO, which is also being implemented
to increase efficiencies and improve the Company's ability to provide
services to customers. The new infrastructure, which is Year 2000
compliant, is currently being implemented in field offices and is scheduled
for completion by October 31, 1999. Other Health Services' systems, which
require remediation, are expected to be completed by October 31, 1999. The
total cost of the Company's remediation plan (exclusive of Project REach
and Project REO costs) is estimated to be approximately $3 million.
As part of its Year 2000 readiness activities, the Company has contacted
its significant vendors and third parties to determine the extent to which
the Company is vulnerable to their potential failure to remediate their own
systems to address the Year 2000 issues. Approximately 93% of those
inquired have responded in writing and indicated their current compliance
or that they will be compliant by the end of 1999.
12
<PAGE>
With respect to the risks associated with its systems, the Company believes
that the most reasonably likely worst case scenario is that the Company may
experience minor system malfunctions and errors in the early days and weeks
of the Year 2000. The Company does not expect these problems to have a
material impact on the Company's ability to place and pay workers or
invoice customers.
The Company is not heavily reliant on electronic transmissions from third
parties. With respect to the risks associated with the third parties, the
Company believes that the most reasonably likely worst case scenario is
that some of the Company's vendors and customers will not be compliant. The
Company believes that the number of such third parties will have been
minimized by the Company's program of contacting significant vendors and
large customers. Despite the Company's diligence, there can be no guarantee
that significant vendors and third parties that the Company relies upon to
conduct day to day business will be compliant. Failure by these companies,
or any governmental entities, to remediate their systems on a timely basis
could impact cash flow from operations.
Due to the general uncertainty inherent in the Year 2000 issue resulting,
in part, from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, and government agencies, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The continuing Year 2000 effort is expected to help
reduce the Company's level of uncertainty about the Year 2000 issue and, in
particular, about the Year 2000 readiness. The Company believes that the
implementation of new business systems and the completion of its Year 2000
plan as scheduled should help reduce the likelihood of significant
interruptions of normal operations.
The Company's plan is to address its significant Year 2000 issues prior to
being affected by them. Should the Company identify significant risks
related to its Year 2000 readiness or its progress deviates from the
anticipated timeline, the Company will develop contingency plans as deemed
necessary at that time.
The failure to correct a material Year 2000 problem could result in an
interruption or a failure of certain normal business activities or
operations. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company's exposure to market risk for changes in interest rates relates
primarily to the fair value of long-term fixed-rate debt. The Company has
historically managed interest rates through the use of a combination of
fixed and variable rate borrowings. Generally, the fair market value of
fixed rate debt will increase as interest rates fall and decrease as
interest rates rise.
The Company's long-term debt is primarily composed of fixed rate
obligations. Based on the overall interest rate exposure on the Company's
fixed rate borrowings at April 4, 1999, a 10 percent change in market
interest rates would not have a material effect on the fair value of the
Company's long-term debt.
Based on variable rate debt levels, a 10 percent change in market interest
rates (54 basis points on a weighted average) would have less than a 3
percent impact on the Company's interest expense, net.
13
<PAGE>
Other than intercompany transactions between the United States and the
Company's foreign entities, the Company generally does not have significant
transactions that are denominated in a currency other than the functional
currency applicable to each entity.
Fluctuations in currency exchange rates may also impact the shareholders'
equity of the Company. The assets and liabilities of the Company's non-U.S.
subsidiaries are translated into U.S. dollars at the exchange rates in
effect at the balance sheet date. Revenues and expenses are translated into
U.S. dollars at the weighted average exchange rate for the quarter. The
resulting translation adjustments are recorded in shareholders' equity as
accumulated other comprehensive income/loss.
Although currency fluctuations impact the Company's reported results of
operations, such fluctuations generally do not affect the Company's cash
flow or result in actual economic gains or losses. Each of the Company's
subsidiaries derives revenues and incurs expenses primarily within a single
country, and consequently, does not generally incur currency risks in
connection with the conduct of normal business operations. The Company
generally has few cross border transfers of funds, except for transfers
from or to the United States as working capital loans. To reduce the
currency risk related to the loans, the Company may borrow funds under the
existing revolving credit agreement in the foreign currency to lend to the
subsidiary.
Foreign exchange gains and losses are included in the Consolidated
Statements of Operations and historically have not been significant. The
Company generally does not engage in hedging activities, except as
discussed above. The Company did not hold any derivative instruments at
April 4, 1999.
OTHER
-----
INFORMATION CONTAINED HEREIN, OTHER THAN HISTORICAL INFORMATION, SHOULD BE
CONSIDERED FORWARD-LOOKING AND IS SUBJECT TO VARIOUS RISK FACTORS AND
UNCERTAINTIES. FOR INSTANCE, THE COMPANY'S STRATEGIES AND OPERATIONS
INVOLVE RISKS OF COMPETITION, CHANGING MARKET CONDITIONS, CHANGES IN LAWS
AND REGULATIONS AFFECTING THE COMPANY'S INDUSTRIES AND NUMEROUS OTHER
FACTORS DISCUSSED IN THIS DOCUMENT AND IN OTHER COMPANY FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE PROJECTED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- ------- ------------------
On September 8, 1998, a Consolidated Amended Class Action
Complaint (the "Amended Complaint") was filed by the
plaintiffs in the four previously disclosed purported class
action lawsuits (Weichman, Goldman, Waldman and Cannold)
pending against Olsten and certain of its officers and
directors (collectively, the "Class Action"). The Amended
Complaint asserts claims under Sections 10(b) (including Rule
10b-5 promulgated thereunder), 14(a) and 20(a) of the
Securities Exchange Act of 1934 and Sections 11, 12(a)(2) and
15 of the Securities Act of 1933. On October 19, 1998, the
Company and the individual defendants served a motion seeking
an Order dismissing the Amended Complaint; that motion was
fully briefed on December 23, 1998. The Amended Complaint
seeks certification of the proposed class, a judgment
declaring the conduct of the defendants to be in violation of
the law, unspecified compensatory damages and unspecified
costs and expenses, including attorneys' fees and experts'
fees. While the Company is unable at this time to assess the
probable outcome of the Class Action or the materiality of the
risk of loss in connection therewith (given the preliminary
stage of the Class Action and the fact that the Amended
Complaint does not allege damages with any specificity), the
Company believes that it acted responsibly with respect to its
shareholders and has vigorously defended the Class Action.
On or about May 11, 1999, a Complaint was served in a
derivative lawsuit, captioned Robert Rubin, et al. v. John M.
May, et al., No. 17135-NC (Delaware Chancery Court), which was
filed against the following current and former directors of
the Company: John M. May, Raymond S. Troubh, Jo[sh] S. Weston,
Victor F. Ganzi, Stuart R. Levine, Frank N. Liguori, Miriam
Olsten, Stuart Olsten and Richard J. Sharoff. The Complaint,
which names Olsten as a nominal defendant, alleges a claim for
breach of fiduciary duties arising out of the Class Action
referenced above and the Healthcare Investigations defined and
referenced in Item 5, below. Plaintiffs seek a judgment (1)
requiring the defendants to account to the Company for
unspecified alleged damages resulting from the defendants'
alleged conduct; (2) directing the defendants to establish and
maintain effective compliance programs; and (3) awarding
plaintiffs the costs and expenses of the lawsuit, including
reasonable attorneys' fees. On September 10, 1999, the
defendants in the Derivative Lawsuit filed a motion to dismiss
or, in the alternative, stay the lawsuit.
On January 14, 1999, Kimberly Home Health Care, Inc.
("KHHC") initiated three arbitration proceedings against
hospitals owned by Columbia/HCA with which one of the
Company's subsidiaries had management services agreements to
provide services to the hospital's home health agencies. The
basis for each of the arbitrations is that Columbia/HCA sold
the home health agencies without assigning the management
services agreements, while the management services
agreements had periods ranging from 18 to 42 months prior to
expiration and that Columbia/HCA has breached the management
services agreements. In response to the arbitrations,
Columbia/HCA has asserted that the arbitration be
consolidated and stayed, in part based upon its alleged
claim against KHHC for breach of contract and requests
indemnity and possibly return of management fees paid under
the disallowance provision of the management services
agreements. Columbia/HCA has not yet formally presented
these claims in the arbitrations or other legal proceedings,
and has not yet quantified the claims.
15
<PAGE>
In July 1999, the Company received notification that the
Indiana Attorney General's Office filed a civil complaint
against Olsten requesting the court to determine if Quantum
violated Indiana law with respect to Medicaid claims. The
complaint alleges that (1) overpayment was made to Quantum due
largely to advances paid by Medicaid that were not properly
credited by Quantum; (2) Quantum supplied the Indiana Attorney
General's Office with insufficient documentation regarding
services provided by one of our pharmacies; and (3) deliveries
exceeded the amounts of physicians' orders. The alleged
violations predate Olsten's acquisition of Quantum in June
1996. The complaint filed with the Indiana Attorney General's
office seeks an unspecified amount of monetary damages, double
or treble damages, penalties and investigative costs.
Item 5. Other Information.
------------------
Government Investigations. The Company's home health care
business is subject to extensive federal and state regulations
which govern, among other things, Medicare, Medicaid, CHAMPUS
and other government-funded reimbursement programs, reporting
requirements, certification and licensure standards for
certain home health agencies and, in some cases,
certificate-of-need and pharmacy-licensing requirements. The
Company is also subject to a variety of federal and state
regulations which prohibit fraud and abuse in the delivery of
health care services, including, but not limited to,
prohibitions against the offering or making of direct or
indirect payments for the referral of patients. As part of the
extensive federal and state regulation of the Company's home
health care business, the Company is subject to periodic
audits, examinations and investigations conducted by or at the
direction of governmental investigatory and oversight
agencies. Violation of the applicable federal and state health
care regulations can result in a health care provider being
excluded from participation in the Medicare, Medicaid and/or
CHAMPUS programs, and can subject the provider to civil and/or
criminal penalties.
The Company continues to cooperate with the previously
disclosed health care industry investigations being conducted
by certain governmental agencies (collectively, the
"Healthcare Investigations").
Among the Healthcare Investigations with which the Company
continues to cooperate is that being conducted into the
Company's preparation of Medicare cost reports by the Office
of Investigations section of the Office of Inspector General
(an agency within the U.S. Department of Health and Human
Services) and the U.S. Department of Justice (the "Cost
Reports Investigation").
The Company also continues to cooperate with the U.S.
Department of Justice and other federal agencies investigating
the relationship between Columbia/HCA Healthcare Corporation
and Olsten in connection with the purchase, sale and operation
of certain home health agencies which had been owned by
Columbia/HCA and managed under contract by Olsten Health
Management, a unit of Olsten Health Services that provides
management services to hospital-based home health agencies
(the "Columbia/HCA Investigation").
The Company continues to cooperate with various state and
federal agencies, including the U.S. Department of Justice,
the Office of the Attorney General of New Mexico and the New
Mexico Health Care Anti-Fraud Task Force in connection with
their investigations into certain healthcare practices of
Quantum Health Resources ("Quantum"). Among the matters into
which the federal agencies are or were inquiring
16
<PAGE>
are allegations of improper billing and fraud against various
federally-funded medical assistance programs on the part of
Quantum and its post-acquisition successor, the Infusion
Therapy Services division of Olsten Health Services (the
"Quantum New Mexico Investigation"). Most of the time period
that the Company understands to be at issue in the Quantum New
Mexico Investigation predates the Company's June 1996
acquisition of Quantum.
On or about March 29, 1999, the Company reached an
understanding with the U.S. Department of Justice to settle
the civil and criminal aspects of the Cost Reports
Investigation and the Columbia/HCA Investigation. Pursuant to
the understanding, the Company has agreed to pay $61 million
to the U.S. Department of Justice, including approximately $10
million in fines and penalties, and a subsidiary of the
Company, Kimberly Home Health Care, Inc., a Missouri
corporation, has agreed, in connection with the Columbia/HCA
Investigation, to plead guilty of a criminal violation of the
federal mail fraud, conspiracy and kickback statues. In
addition, Kimberly Home Health Care, Inc. is to be permanently
excluded from participating in Medicare, Medicaid and all
other federal health care programs as defined in 42 U.S.C.
ss.1320a-7b(f). The Company has also executed a Corporate
Integrity Agreement with the Office of Inspector General of
the U.S. Department of Health and Human Services.
On January 28, 1999, the Company announced that it had been
advised by the United States Attorney's Office for the
District of New Mexico ("New Mexico U.S. Attorney's Office")
that, in connection with the Quantum New Mexico Investigation,
it had dropped its criminal investigation into certain past
practices of Quantum. The criminal aspect of the Quantum New
Mexico Investigation had focused on allegations of improper
billing and fraud against various federally funded medical
assistance programs on the part of Quantum during the period
between January 1992 and April 1997. By letter dated February
1, 1999, the New Mexico U.S. Attorney's Office advised the
Company that, having ended its criminal inquiry, the Office
has referred the Quantum matter to its Affirmative Civil
Enforcement ("ACE") Section. As it had done with the Criminal
Division of the New Mexico U.S. Attorney's Office, the Company
intends to cooperate fully with that Office's ACE Section in
connection with its civil inquiry into the Quantum matter that
has been referred to it. At this date, it is too early to
ascertain what relief the ACE Section will seek in
connection with the investigation, but such relief could
include money damages and/or civil penalties.
By letter dated June 30, 1999, the Medicare Fund Control
Unit of the New Mexico Attorney General's Office notified
Olsten that it had declined to criminally prosecute the
so-called "J-Code issue" relating to Quantum's past
practices in seeking government healthcare reimbursement.
On October 28, 1998, the Company announced that it had entered
into a final settlement agreement with several Government
agencies investigating certain past practices of Quantum. The
agreement was entered into with the U.S. Department of
Justice; the Office of Inspector General of the U.S.
Department of Health and Human Services; the U.S. Secretary of
Defense (for the CHAMPUS/Tricare program); and the Attorneys
General for the States of New York and Oklahoma. Pursuant to
the settlement, the Company reimbursed the government
approximately $4.5 million for certain disputed claims under
the Medicaid and CHAMPUS programs for reimbursement for the
provision of anti-hemophilia factor products to patients
covered by certain federal health care programs.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLSTEN CORPORATION
(REGISTRANT)
Date: Oct. 1 , 1999 By: /s/Anthony J. Puglisi
----------------------------
Anthony J. Puglisi
Executive Vice President and
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Olsten
Corporation and Subsidiaries Consolidated Balance Sheets at April 4, 1999
(unaudited) and Olsten Corporation and Subsidiaries Consolidated Statements of
Income for the three months ended April 4, 1999 (restated and unaudited) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> APR-04-1999
<CASH> 31,876
<SECURITIES> 0
<RECEIVABLES> 1,080,154
<ALLOWANCES> 31,867
<INVENTORY> 0
<CURRENT-ASSETS> 1,212,088
<PP&E> 386,945
<DEPRECIATION> 153,275
<TOTAL-ASSETS> 2,068,409
<CURRENT-LIABILITIES> 555,293
<BONDS> 0
0
0
<COMMON> 8,133
<OTHER-SE> 745,987
<TOTAL-LIABILITY-AND-EQUITY> 2,068,409
<SALES> 1,197,956
<TOTAL-REVENUES> 1,197,956
<CGS> 903,476
<TOTAL-COSTS> 903,476
<OTHER-EXPENSES> 46,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,998
<INCOME-PRETAX> (30,556)
<INCOME-TAX> (9,915)
<INCOME-CONTINUING> (22,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,352)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
</TABLE>
