SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- ----- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
| X | EXCHANGE ACT OF 1934
- -----
For the quarterly period ended September 28, 1997
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Commission File No. 0-3532
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OLSTEN CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2610512
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Broad Hollow Road, Melville, New York 11747-8905
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 844-7800
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Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
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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 November 6, 1997
- ------------------------------------ -------------------------------
Common Stock, $.10 par value 67,549,822 shares
Class B Common Stock, $.10 par value 13,759,160 shares
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 28, 1997 (Unaudited) and December 29, 1996 2
Consolidated Statements of Income (Unaudited) -
Quarters and Nine Months Ended September 28, 1997 and
September 29, 1996, respectively 3
Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended September 28, 1997
and September 29, 1996, respectively 4
Notes to Consolidated Financial Statements
(Unaudited) 5 - 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 5. Other Information 9 - 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
1
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
---------------------
Olsten Corporation
Consolidated Balance Sheets
(In thousands, except share amounts)
September 28, 1997 December 29, 1996
ASSETS ------------------ -----------------
(Unaudited)
CURRENT ASSETS:
Cash $ 33,564 $ 105,725
Receivables, net 832,093 661,806
Other current assets 90,066 110,904
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Total current assets 955,723 878,435
FIXED ASSETS, NET 172,683 130,021
INTANGIBLES, NET 539,666 413,549
OTHER ASSETS 10,897 17,235
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$1,678,969 $1,439,240
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses $ 142,460 $ 111,325
Payroll and related taxes 78,378 57,059
Accounts payable 37,298 58,920
Insurance costs 37,783 35,538
--------- ----------
Total current liabilities 295,919 262,842
LONG-TERM DEBT 432,039 330,329
OTHER LIABILITIES 116,759 76,796
SHAREHOLDERS' EQUITY:
Common stock $.10 par value; authorized
110,000,000 shares; issued 67,530,896
and 66,652,997 shares, respectively 6,753 6,665
Class B common stock $.10 par value;
authorized 50,000,000 shares; issued
13,761,240 and 14,086,024 shares,
respectively 1,376 1,409
Additional paid-in capital 447,879 438,956
Retained earnings 373,200 320,496
Cumulative translation adjustment 5,044 1,747
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Total shareholders' equity 834,252 769,273
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$1,678,969 $1,439,240
========== ==========
See notes to consolidated financial statements.
2
Olsten Corporation
Consolidated Statements of Income
(In thousands, except share amounts)
(Unaudited)
Third Quarter Ended Nine Months Ended
-------------------- ------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
--------- -------- --------- ---------
Service sales, franchise fees,
management fees and
other income $1,063,281 $876,369 $3,028,519 $2,446,755
Cost of services sold 779,946 629,963 2,220,043 1,730,876
---------- -------- ---------- ----------
Gross profit 283,335 246,406 808,476 715,879
Selling, general and
administrative expenses 233,965 189,828 674,692 559,996
Interest expense, net 5,536 2,919 14,885 9,179
Merger, integration and other
non-recurring charges -- 74,500 -- 80,000
--------- -------- ---------- ----------
Income (loss) before income
taxes and minority interests 43,834 (20,841) 118,899 66,704
Income tax charge (benefit) 17,095 (8,162) 46,371 27,615
--------- -------- ---------- ----------
Income (loss) before minority
interests 26,739 (12,679) 72,528 39,089
Minority interests 1,482 419 2,775 997
--------- ------- ---------- ----------
Net income (loss) $ 25,257 $(13,098) $ 69,753 $ 38,092
========= ======== ========= ==========
SHARE INFORMATION:
Primary:
Net income (loss) $ .31 $ (.16) $ .86 $ .49
========= ======== ========== ==========
Average shares outstanding 81,588 79,387 81,487 77,722
========= ======== ========== ==========
See notes to consolidated financial statements.
3
Olsten Corporation
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
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Sept. 28, 1997 Sept. 29, 1996
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OPERATING ACTIVITIES:
Net income $ 69,753 $ 38,092
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 39,365 32,730
Deferred income taxes 7,247 (1,023)
Changes in assets and liabilities,
net of effects from acquisitions
and dispositions:
Accounts receivable and other
current assets (97,064) (79,339)
Current liabilities (10,457) (8,477)
Other, net 20,415 (12,486)
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NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 29,259 (30,503)
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INVESTING ACTIVITIES:
Acquisitions/dispositions of businesses and
reacquisitions of franchises (145,985) (106,967)
Purchases of fixed assets (54,219) (32,462)
Sale of investment securities 9,415 5,474
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NET CASH USED IN INVESTING ACTIVITIES (190,789) (133,955)
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FINANCING ACTIVITIES:
Net proceeds from (repayment of) line of
credit agreements 104,735 (8,947)
Cash dividends (17,049) (14,587)
Issuances of common stock under stock plans 1,683 4,054
Net proceeds from issuance of Senior Notes - 197,672
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NET CASH PROVIDED BY FINANCING ACTIVITIES 89,369 178,192
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NET (DECREASE) INCREASE IN CASH (72,161) 13,734
CASH AT BEGINNING OF PERIOD 105,725 107,418
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CASH AT END OF PERIOD $ 33,564 $ 121,152
========= =========
NON-CASH TRANSACTIONS:
Assets acquired through the issuance
of a note $ 12,719 $ -
Issuance of restricted stock $ 6,437 $ -
See notes to consolidated financial statements.
4
Olsten Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
--------------------
The 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.
2. Interest Expense, Net
---------------------
Interest expense, net, consists primarily of interest on long-term debt for
the quarter of $6.5 million in 1997 and $5.3 million in 1996, offset by
interest income from investments of $1 million and $2.4 million for both
1997 and 1996, respectively. Interest expense, net, for the nine months was
$18.1 million, reduced by interest income of $3.2 million in 1997 and was
$16.2 million in 1996 reduced by interest income of $7 million.
3. Acquisitions
------------
During the first nine months of 1997, the Company purchased various
businesses which were accounted for by the purchase method of accounting.
The aggregate cash outlay for these acquisitions was $144 million.
Additionally, contingent payments may be made relating to one of the
acquisitions if certain earnings criteria are achieved for 1997, 1998 and
1999.
4. Merger, Integration and Other Non-recurring Charges
---------------------------------------------------
In the third quarter of 1996, the Company recorded merger, integration and
other non-recurring charges of $74.5 million ($45 million, net of tax), or
$.56 per share, consisting of costs resulting from the Quantum and Co-Counsel
acquisitions aggregating $44.5 million ($27 million, net of tax), and certain
allowances, which approximate $30 million ($18 million, net of tax), for a
change in the methodology used by Medicare for computing reimbursements in
prior years related to the Company's home health care business.
In the first quarter of 1996, Quantum recorded a charge of $5.5 million
($3.2 million, net of tax), or $.04 per share, related to the settlement of
shareholder litigation.
5
5. Newly Issued Accounting Standards
---------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), which establishes standards for computing and presenting earnings per
share. SFAS No. 128 will be effective for financial statements issued for
periods ending after December 15, 1997. Earlier application is not permitted.
Management has not yet evaluated the effects of this change on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which requires that changes in comprehensive income be
shown in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 becomes effective in fiscal 1998.
Management has not yet evaluated the effects of this change on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which changes the way
public companies report information about segments. SFAS No. 131, which is
based on the management approach to segment reporting, includes requirements
to report selected segment information quarterly and entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds and reports revenues. SFAS No. 131 becomes effective
in fiscal 1998. Management has not yet evaluated the effect of this change on
the Company's financial statements.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations.
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Results of Operations
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Net income for the third quarter of 1997 decreased 21% to $25.2 million, or $.31
per share, compared to $31.9 million, or $.40 per share for last year's third
quarter, excluding the effect of non-recurring charges. Net income for the first
nine months was $69.8 million, or $.86 per share, a 19% decrease, excluding the
effect of the non-recurring charges, compared to $86.3 million, or $1.11 per
share, reported in 1996.
The results of operations for the nine months ended September 29, 1996 include
merger, integration and other non-recurring charges of $80 million ($48.2
million, net of tax), or $.62 per share. These non-recurring charges, before
taxes, consist of merger and integration charges resulting from the Quantum and
Co-Counsel acquisitions of $44.5 million. The remaining non-recurring charges
before taxes, which approximate $30 million ($18 million, net of tax), pertain
to certain allowances for a change in the methodology used by Medicare for
computing reimbursements in prior years related to the Company's home health
care business, and Quantum's charge of $5.5 million ($3.2 million, net of tax)
related to the settlement of shareholder litigation.
Revenues increased $187 million, or 21%, to $1.1 billion for the third quarter,
as compared to $876 million for last year's third quarter. Revenue increased
$582 million, or 24%, to $3 billion for the first nine months of 1997, as
compared to $2.4 billion for the comparable period of 1996. Staffing Services
reported increased revenues of 34% for the third quarter and 38% for the nine
months over last year's third quarter and nine-month periods. Acquisitions
accounted for approximately 18% of the third quarter increase, European
operations contributed 3%, Latin American operations contributed 1%, with the
remaining 12% attributable to internal growth in our North American operations.
The internal growth was comprised of increases in volume and pricing of 9% and
3%, respectively. Health Services' revenues grew 3% for the third quarter and 5%
for the nine months compared to the same periods in 1996. This growth was
primarily due to increased volume from Network services and infusion therapy,
offset by a decline in Medicare volume and non-network managed care. This
decline resulted from a reduction in home care referrals within the branch
network and agencies under management.
Cost of services sold increased $150 million, or 23.8%, to $780 million for the
third quarter and 28.2% to $2.2 billion for the nine months of 1997 due
primarily to the growth in revenues. Gross profit margins, as a percentage of
revenues, decreased to 26.6% for the third quarter and 26.7% for the nine months
from 28.1% and 29.3% for last year's third quarter and nine months. Staffing
Services' gross profit margin declined due to growth in high-volume, low-margin
subcontractor volume related to corporate account requirements and recruitment
challenges resulting from the continued strong demand for our services. Health
Services' gross margin declined due to growth in the Network business, which
carries lower margin than nursing and infusion business, and a decrease in
Health Management volume.
7
Selling, general and administrative expenses increased $44 million, or 23.3%, to
$234 million for the third quarter and $115 million, or 20.5%, to $675 million
for the nine months. As a percentage of revenues, such expenses increased to 22%
from 21.7% for the quarter and decreased to 22.3% from 22.9% for the nine
months. The increase in the quarter resulted from internal investments to expand
our organizational infrastructure. The overall decline in expenses for the
nine-month period resulted from management's ongoing cost control efforts,
combined with the operating efficiencies inherent in an expanding revenue base,
offset by investments in the third quarter.
Net interest expense was $5.5 million and $2.9 million for the third quarters of
1997 and 1996, respectively, and $14.9 million and $9.2 million for the
nine-month periods of 1997 and 1996, 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 its acquisition program.
Liquidity and Capital Resources
- --------------------------------
Working capital increased from $616 million at December 29, 1996 to $660 million
at September 28, 1997. Cash provided by operations for the nine-month period was
$29 million, net of an increase in accounts receivable and other current assets
of $97 million. The increase in accounts receivable was attributed to revenue
growth and consolidated billing requirements of large corporate accounts and the
growth of managed care and infusion therapy accounts, which impacted the timing
of the collection process. Overall, cash decreased $72 million for the
nine-month period primarily as a result of acquisitions which amounted to $144
million and were partially funded by $110 million borrowed from line of credit
agreements, and capital expenditures of $54 million, offset by cash generated
from operations.
In 1996, the Company completed a revolving credit agreement with a consortium of
eleven banks for up to $400 million in borrowings and letters of credit. As of
September 28, 1997, there were $147 million in borrowings outstanding and $47
million in standby letters of credit. The Company has invested available funds
in short-term, interest-bearing investments. The Company believes that its
levels of working capital, liquidity and available sources of funds are
sufficient to support present operations and to continue to fund future growth
and business opportunities as the Company increases its scope of services.
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.
8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
On August 29, 1997, a proposed class action lawsuit, captioned
ELLIOTT WALDMAN v. OLSTEN CORPORATION, FRANK N. LIGUORI, MIRIAM
OLSTEN, WILLIAM OLSTEN, STUART OLSTEN and ANTHONY PUGLISI, No. CV
97-5056 (DRH), was filed in the United States District Court for the
Eastern District of New York. On September 19, 1997 another proposed
class action lawsuit, captioned MICHAEL CANNOLD v. OLSTEN
CORPORATION, FRANK N. LIGUORI, MIRIAM OLSTEN, STUART OLSTEN and
ANTHONY PUGLISI, No. CV 97-5408 (DRH), was filed in the United
States District Court for the Eastern District of New York. (The
WALDMAN and CANNOLD actions are referred to jointly as the
"Lawsuits.") The Complaints in the Lawsuits seek unspecified damages
in connection with alleged violations of Sections 10(b) (and Rule
10b-5 promulgated thereunder) and 20(a) of the Securities Exchange
Act of 1934. The Complaints allege that, as a result of certain
material misstatements and omissions in connection with the
Company's Medicare-reimbursed health care business, the Company's
common stock was artificially inflated during the proposed Class
Period, which is defined in the WALDMAN Complaint as the period from
March 6, 1996 through August 25, 1997, and in the CANNOLD Complaint
as the period from March 6, 1996 through July 16, 1997. Although the
Company is unable at this time to assess the probable outcome of the
Lawsuits or the materiality of the risk of loss in connection
therewith (given that the Complaints do not allege damages with any
particularity), the Company believes that it has acted responsibly
and intends to vigorously defend the Lawsuits. Pending before the
Court are various motions to consolidate the Lawsuits with related
purported class actions filed against the Company and the individual
defendants.
Item 5. Other Information.
-----------------
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
regulations can result in a health care provider's being excluded
from participation in the Medicare, Medicaid and/or CHAMPUS
programs, and can subject the provider to civil or criminal
penalties.
9
The frequency and scope of the audits, examinations and
investigations by federal and state regulators of the health care
industry have increased dramatically during the past year or so. The
May 6, 1997 edition of THE WALL STREET JOURNAL, as well as various
subsequent published articles around the country, reported that
federal authorities are using recent funding increases to widen
their investigations into potential health care fraud and regulatory
infractions across the board, examining, among others, mainstream
providers and academic medical centers.
The Company continues to cooperate with the Office of Investigations
section of the Office of Inspector General (an agency established at
the U.S. Department of Health & Human Services) and the U.S.
Department of Justice in connection with their investigation into
the Company's preparation of Medicare cost reports.
The Company also continues to cooperate with the federal agencies
investigating certain Columbia/HCA-owned home health care operations
that are managed under contract by Olsten Health Management, a unit
of Olsten Health Services which provides management services to
hospital-based home health agencies.
The Company continues to cooperate with various 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
("Task Force"), in connection with their investigations into certain
health care practices of Quantum Health Resources ("Quantum"). Among
the matters into which those agencies are inquiring are allegations
of improper billing and fraud against various federally-funded
medical assistance programs on the part of Quantum and its
post-acquisition successor, Olsten Health Services' Infusion Therapy
division. Most of the time period which the Company understands to
be at issue in the Task Force investigation (the period between
January 1992 and April 1997) predates the Company's June 1996
acquisition of Quantum.
Notwithstanding the Company's continuing cooperation with the
government investigations referenced above, it is possible that the
government may regard the Company and/or certain of its employees as
subjects or targets of one or more of such investigations.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) The following exhibits are filed herewith:
Exhibit 10 - Amendment No. 1 dated as of August 27, 1997 to
Credit Agreement dated as of August 9, 1996 among
the Company, the Banks signatory thereto and The
Chase Manhattan Bank, as Agent, covering $400
million credit facility.
Exhibit 27 - Financial Data Schedule
(b) The Company has not filed any report on Form 8-K during the
period for which this report is filed.
10
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: November 12, 1997 Frank N. Liguori
------------------------------
Frank N. Liguori
Chairman and Chief
Executive Officer
Date: November 12, 1997 Anthony J. Puglisi
-------------------------------
Anthony J. Puglisi
Senior Vice President and
Chief Financial Officer
11
EXHIBIT INDEX
Exhibit 10 - Amendment No. 1 dated as of August 27, 1997 to
Credit Agreement dated as of August 9, 1996 among
the Company, the Banks signatory thereto and The
Chase Manhattan Bank, as Agent, covering $400
million credit facility.
Exhibit 27 - Financial Data Schedule