-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LVslIcCnyidHYsurOPA7+PMHQKJlQPgrzAJGzW45Ya8AKoDj9xvE1mLGrnG/DSyD sXwCEDW0hrOF19FIC+/ivg== 0000950162-99-000949.txt : 19991018 0000950162-99-000949.hdr.sgml : 19991018 ACCESSION NUMBER: 0000950162-99-000949 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990404 FILED AS OF DATE: 19991001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OLSTEN CORP CENTRAL INDEX KEY: 0000074386 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 132610512 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-08279 FILM NUMBER: 99722168 BUSINESS ADDRESS: STREET 1: 175 BROAD HOLLOW RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5168447800 MAIL ADDRESS: STREET 1: 175 BROAD HOLLOW RD CITY: MELVILLE STATE: NY ZIP: 11747 10-Q/A 1 AMENDMENT NO. 1 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 ------------- 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 INDEX ----- Page No. -------- 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 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. -------------------- Olsten Corporation Consolidated Balance Sheets (In thousands, except share amounts) (Unaudited)
April 4, 1999 January 3, 1999 ------------- --------------- (Restated) 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 =========== ===========
See notes to consolidated financial statements. 2 Olsten Corporation Consolidated Statements of Operations (In thousands, except share amounts) (Unaudited)
First Quarter Ended ------------------- April 4, 1999 March 29, 1998 ------------- -------------- (Restated) 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 =========== ===========
See notes to consolidated financial statements. 3 Olsten Corporation Consolidated Statements of Cash Flows (In thousands) (Unaudited)
First Quarter Ended ------------------- April 4, 1999 March 29, 1998 ------------- -------------- (Restated) 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 ======== ========
See notes to consolidated financial statements. 4 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 restatement on the consolidated Statement of Operations for the three-month ended April 4, 1999 financial statements:
As Reported As Restated ----------- ----------- 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) =========== ===========
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 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:
Accounts Compensation Dollars in Receivable and and Severance Integration Thousands Settlements Other Assets(1) Costs Costs Other Total --------- ----------- ------------- --------------- ------------- ----- ----- 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 ======== ======== ======== ======== ======== ========
(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 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
Services sales, franchise Income (loss) before Dollars In fees, management fees income taxes and Thousands and other income minority interests --------- ------------------------- --------------------- (Restated) 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 =========== ===========
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 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 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 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 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 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 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 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 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 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 EX-27 2 ARTICLE 5 FDS FOR 1ST QUARTER 10-Q
5 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. 1,000 3-MOS JAN-02-2000 APR-04-1999 31,876 0 1,080,154 31,867 0 1,212,088 386,945 153,275 2,068,409 555,293 0 0 0 8,133 745,987 2,068,409 1,197,956 1,197,956 903,476 903,476 46,000 0 8,998 (30,556) (9,915) (22,352) 0 0 0 (22,352) (.28) (.28)
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