SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 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
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock, $.10 par value
------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
[Cover page 1 of 2 pages]
The aggregate market value of the registrant's voting stock (Common
Stock and Class B Common Stock, assuming conversion of Class B Common Stock into
Common Stock on a share for share basis) held by nonaffiliates of the registrant
as of March 15, 1999 was $395,572,943 based on the closing price of the Common
Stock on the New York Stock Exchange on such date.
The number of shares outstanding of the registrant's Common Stock and
Class B Common Stock, as of March 15, 1999, were 68,209,893 shares and
13,068,927 shares, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Proxy Statement for 1999 Annual Meeting of Shareholders of the
registrant. Certain information to be included therein is incorporated by
reference into PART III hereof.
[Cover page 2 of 2 pages]
Information contained in this Report, 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 its industries and numerous other factors discussed in
this Report and in the Company's filings with the Securities and Exchange
Commission. Accordingly, actual results may differ materially from those in any
forward-looking statements.
PART I
Item 1. Business.
- ------- ---------
Introduction
- ------------
Olsten Corporation (herein, together with its subsidiaries unless the context
otherwise requires, generally referred to as the "Company" or "Registrant") was
incorporated in Delaware in 1967 as the successor to a business founded in 1950.
The Company operates through subsidiaries in the United States and thirteen
other countries and engages in and derives substantially all of its revenues
from three industry segments, Staffing Services, Information Technology Services
and Health Services. The Company's owned, licensed and franchised operations
conduct business through more than 1,500 offices in 50 states, the District of
Columbia, Puerto Rico, Canada, Denmark, Finland, France, Germany, Norway, Spain,
Sweden, United Kingdom, Argentina, Brazil, Chile and Mexico.
Olsten Staffing Services in the United States and Canada, and the Company's
other staffing operations in Europe and Latin America, provide supplemental
staffing to business, industry and government. In addition, Olsten Staffing
Services' specialty staffing division provides a full spectrum of accounting and
financial professionals and support-level candidates to a wide array of clients
and further provides attorneys, paralegals and legal support staff to law firms,
corporate law departments and government.
IMI Systems Inc., the Company's Information Technology Services division with
operations in North America and Europe, provides services for the design,
development and maintenance of information systems.
Olsten Health Services in the United States and Canada provides home care
management and coordination for the managed care community; caregivers for home
health care and institutions; home infusion and other therapies; marketing and
distribution services for pharmaceutical, biotechnology and medical device
firms; and institutional, occupational and alternate site health care staffing.
Selected financial information relating to the Company's industry segments is
contained herein in Note 12 of Notes to Consolidated Financial Statements.
Staffing Services, Information Technology Services and Health Services revenues
accounted for approximately 62%, 9% and 29%, respectively, of the Company's 1998
revenues, approximately 58%, 7% and 35%, respectively, of the Company's 1997
revenues and approximately 54%, 5% and 41%, respectively, of the Company's 1996
revenues.
1
Staffing Services
- -----------------
In Staffing Services, the Company provides assignment employees in a full
spectrum of skills, from entry level workers to seasoned professionals and
managers. Service areas include: 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 provision of
staffing services is not generally subject to extensive federal and state
regulation.
The Company believes that utilization of assignment employees has become a
valuable and recognized management tool, allowing many companies to convert
fixed costs to variable costs, especially in view of corporate reengineering and
restructuring in a more competitive global environment. With the availability of
such services, a client can maintain on a cost-effective basis a nucleus of core
personnel that can be supplemented by skilled specialists for long- and
short-term assignments. The expense and inconvenience of hiring additional
employees for assignments of a limited duration, including recruiting,
interviewing, reference-checking and testing, are reduced. Additionally, the
Company believes that its comprehensive added-value services enable clients to
eliminate the record-keeping, payroll taxes, insurance and administrative costs
usually associated with regular, full-time personnel. A client pays only for
actual hours worked by the Company's assignment employees. Upon completion of
the assignment, services can be immediately terminated without the adverse
effects associated with employee layoffs.
By supplying a supplemental work force to its Staffing Services clients, the
Company believes it affords them added efficiencies and economies, as well as
greater productivity and flexibility. The Company's assignment employees help
meet clients' staffing requirements for peak periods caused by such recurring
factors as seasonal demands, inventories, month-end requirements and vacations
and such unpredictable factors as special projects, marketing promotions,
illnesses and emergencies. Assignments of personnel may be for hours, days,
weeks, months or longer periods, as the clients' needs dictate.
In Staffing Services, the Company is pursuing strategic relationships with
clients that have become increasingly important to the Company. Through its
Partnership Program(R) services with major corporate and other clients, the
Company acts as a master vendor responsible for the recruitment, training and
ongoing management of large groups of employees for companies at a single site
or at multiple sites, allowing clients to focus better on growing their core
businesses. Other clients have outsourced entire functions whereby people,
processes and technology are all managed by the Company. The Company's services
can also include multilocation coordination, customized orientation and
training, billing and electronic information exchange programs for its clients.
These arrangements can enable a client to better manage overhead and personnel
expenses and can help save a client time and money by reducing its employee
recruitment and training efforts, particularly if the client is experiencing a
high employee turnover rate.
Information Technology Services
- -------------------------------
In Information Technology Services, the Company provides information technology
consultants on either a project management or consulting basis to assist clients
in the design, development and maintenance of computer systems, including
focused solutions, comprising both horizontal practices and
2
vertical industry offerings, including particular strength in the financial
services and telecommunications industries.
Information Technology Services provide a wide range of technology solutions in
the areas of 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 RadSTAR proprietary
methodology; Enterprise Support Services, including help desk support,
technology and software deployment, infrastructure/operability testing and
Web/Internet support; and Staff Augmentation, providing staff augmentation to
clients' internal information technology operations to help improve
efficiencies, reduce cost and furnish hard-to-obtain expertise in various
information technology areas.
The provision of Information Technology Services is not generally subject to
extensive federal and state regulation.
Health Services
- ---------------
In Health Services, the Company provides home health care through the Company's
licensed health care personnel, such as registered nurses, offering a broad
range of services, including physician-prescribed skilled nursing, patient and
family education, care management and coordination, pediatric and perinatal
care, physical, occupational, neurological and speech therapies, administration
of drugs, nutrients and other solutions intravenously and orally, and disease
management programs, as well as institutional, occupational and alternate site
staffing and marketing, distribution and staffing solutions for pharmaceutical,
biotechnology and medical device firms. Through its network of 39 pharmacies
across the United States, the Company has the ability to deliver nutrients and
medications utilized in certain of its home health care services. Home health
care provided by the Company's unlicensed personnel, such as home health aides,
may involve assistance with personal hygiene, dressing, feeding and preparation
of meals.
Through four regional centers in the United States, the Company provides Network
Services. These services involve care management and coordination for managed
care customers desiring a single source for centralized intake and billing,
claims adjudication, quality assurance and data reporting and analysis. In
providing home infusion therapy services, the Company delivers, manages and
administers intravenous medications in the home setting, as well as performing
patient, family and home environmental assessments, evaluating equipment needs
and providing patient and family education. In carrying out supplemental
institutional staffing, the Company's health care professionals perform services
for hospitals, nursing homes, clinics and other health care facilities and
furnish business and industry with specialized staffing. Health care
institutions use supplemental staffing for peak periods, illnesses and
vacations, helping these facilities to control employee costs.
Factors that the Company believes have contributed to the development of home
health care in particular include recognition that home health care can be a
cost-effective alternative to lengthy, more expensive institutional care; an
aging population; increasing consumer awareness and interest in home health
care; the psychological benefits of recuperating from an illness or accident in
one's own home; and advanced technology that allows more health care procedures
to be provided at home.
The Company is actively pursuing relationships with managed care organizations.
The Company believes that its nationwide office network, financial resources and
the quality, range and cost-effectiveness of its services are important factors
as it seeks opportunities in its managed care
3
relationships in a consolidating home health care industry. The Company offers
the direct and managed provision of care as a single gatekeeper, thereby
optimizing utilization.
Of the Company's 1998 Health Services revenues, approximately 15% are
attributable to Medicare reimbursement and approximately 23% are attributable to
Medicaid reimbursement and state and local government contracts.
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.
Periodic and random audits conducted by intermediaries may also result in a
delay in receipt, or an adjustment to the amounts of reimbursement due or
received under Medicare, Medicaid, CHAMPUS and other federal health care
programs. The Company has received a Notice of Amount of Program Reimbursement
for its 1997 Medicare cost reports from the Company's Medicare fiscal
intermediary notifying the Company that it disagrees with the methodology used
to allocate a portion of the Company's overhead. The Health Care Financing
Administration has indicated that it agrees with the fiscal intermediary. The
notice indicates a possible disallowance of approximately $7 million of costs in
1997. Since the Company used the same or a similar methodology for allocating
overhead costs in 1998 and 1999, a comparable disallowance could result for
those years. 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. The Company is unable to
predict the outcome of the appeal.
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's being
excluded from participation in the Medicare, Medicaid and/or CHAMPUS programs
and can subject the provider to substantial civil and/or criminal penalties.
General
- -------
In general, the Company obtains clients through personal and corporate sales
presentations, telephone marketing calls, direct mail solicitation, referrals
from other clients and advertising in a variety of local and national media,
including the Yellow Pages, newspapers, magazines, trade publications and
television. The Company's marketing efforts for Health Services also involve
personal contact with case managers for managed health care programs, such as
those involving health maintenance organizations (HMOs) and preferred provider
organizations (PPOs), physicians and their staffs, hospital management, hospital
discharge planners, nursing home supervisors, insurance company representatives
and employers with self-funded employee health benefit programs.
The Company believes that its success in furnishing assignment employees,
information technology consultants and caregivers is based, among other factors,
on its reputation for quality and local market expertise combined with the
resources of its extensive office network and its state of the art information
systems. The Company also empowers its branch managers and branch directors with
a high level of responsibility, providing strong incentives to manage the
business effectively at the local level--one of the central ingredients in a
business where relationships are vital to success.
There is no one client that accounts for as much as 10% of the Company's
revenues. In the opinion of the Company, its business is not seasonal to any
material degree. There have not been any significant changes in the kinds of
services rendered or methods of distribution of the Company since the end of the
last fiscal year. The Company's capabilities as a provider of home infusion
therapies substantially increased as a result of the Company's acquisition of
Quantum Health Resources, Inc. in June 1996. Following its acquisition of IMI
Systems Inc. in August 1995, the Company expanded its information technology
services business by its acquisition of ARMS, Inc. in March 1996, Systems
Partners, Inc. in June 1996 and Vistech, Inc. in January 1997. The Company
expanded into legal staffing services through its acquisition of Co-Counsel,
Inc. in August 1996 and five smaller subsequent acquisitions and further
expanded its financial staffing services business through the acquisition of
Accountants Overload in June 1997.
4
The Company's assignment employees and caregivers, as well as the employees of
other firms providing similar services, are generally paid weekly for their
services (the Company's information technology consultants are generally paid
twice a month) while payments are generally received from customers within five
to sixteen weeks on average of the related billings for such services.
Consequently, as new offices are established or acquired or as existing offices
expand, there is an ongoing requirement for cash resources to fund current
operations as well as to provide for the expansion of the business.
The Company has grown and pursued expansion opportunities by strengthening
relationships with many clients, making acquisitions within and outside the
United States, opening additional offices and developing and extending
specialized services and service offerings, particularly in health care,
information technology, financial and accounting, and legal.
Franchise Operations
- --------------------
At January 3, 1999, approximately 95 offices in the United States were operated
by eight franchisees under franchises granted by the Company. Franchisees, who
provide services similar to Olsten Staffing Services, have the exclusive right
to market and furnish assignment employees within a designated geographic area
using certain of the Company's trade names, service marks, advertising
materials, sales programs, manuals and forms. Franchisees are offered training,
attend seminars, participate in marketing programs and utilize the Company's
sales literature. The Company has established operating procedures and standards
to be followed by its franchisees. The Company offers franchisees billing,
payroll and other data processing systems and services, as well as accounts
receivable financing. The Company also assists its franchisees in obtaining
business from its corporate accounts and through its national and cooperative
local advertising.
Franchisees operate their businesses autonomously within the framework of the
Company's policies and standards, and recruit, employ and pay their own regular,
full-time employees and assignment employees. The Company receives royalty fees
from each franchise based upon its gross franchise sales. Royalty fees generally
start at 5% of gross franchise sales and decrease based upon volume. Sales by
franchisees to their clients are not included in the Company's revenues but are
included in the Company's systemwide sales. Franchise agreements are generally
for a term of ten years and typically are renewable at the option of the
franchisee for five additional five-year terms. The Company may terminate a
franchise if the franchisee fails to meet the Company's standards or otherwise
breaches the franchise agreement. The Company is not granting new franchises and
has not granted any since 1980.
Licensed Area Representative Operations
- ---------------------------------------
At January 3, 1999, approximately 80 offices in North America were operated by
42 licensed area representatives. A licensed area representative is a person
authorized by the Company to operate the Company's Staffing Services business
within an exclusive marketing area. The agreements governing licensed area
representative operations do not have a stated term. The licensed area
representative does not have an ownership interest in the business but receives
approximately 50% of the office's gross profit margin in the form of
commissions, which are reflected in the Company's selling, general and
administrative expenses. Sales by licensed area representatives are included in
the Company's revenues. The licensed area representative is responsible for the
office's operating expenses, such as rent, utilities and in-office staff
salaries, and the Company is responsible for the assignment employee wages and
related payroll taxes and insurances. The Company also provides national
advertising, shares in the costs of certain local advertising, conducts training
seminars and furnishes operating manuals, forms and sales materials to the
licensed area representatives.
5
Licensed area representatives are required to observe the Company's operating
procedures and standards and act for the Company in recruiting, screening,
evaluating and hiring assignment employees. The licensed area representatives
solicit orders for assignment employees from clients and assign the Company's
assignment employees to clients in response to such orders. The Company's
experience has shown that licensing is a more profitable method of operation
than franchising. The opening of licensed area representative offices is one of
the strategies by which the Company is pursuing expansion opportunities.
Source and Availability of Personnel
- ------------------------------------
To maximize the cost effectiveness and productivity benefits of its assignment
employees, information technology consultants and caregivers, the Company
utilizes customized systems and procedures that it has developed and refined
over the years. These processes include the recruitment and selection of
applicants who fit the client's individual parameters for skills, experience and
other criteria. Personalized matching is achieved through initial applicant
profiles, personal interviews, skill evaluations and background and reference
checks. The Company's new information systems enhance the Company's abilities to
better match employees to job assignments. Assignment employees and caregivers
are generally employed by the Company on an as-needed basis to meet client
demand. Specialized recruitment and retention programs are offered to assignment
employees, information technology consultants and caregivers as incentives for
them to remain in the employ of the Company.
Assignment employees, information technology consultants and caregivers are
recruited through a variety of sources, including advertising in local and
national media, job fairs, solicitations on web sites, direct mail and telephone
solicitations, as well as referrals obtained directly from clients and other
assignment employees, information technology consultants and caregivers. The
Company's assignment employees and caregivers are generally paid by the Company
on an hourly basis for time actually worked, subject to a four-hour daily
minimum on the days worked. Information technology consultants are paid hourly
or are salaried. Wages paid by the Company may vary in different geographic
areas to reflect the prevailing wages paid for the particular skills in the
community where the services are performed. Although conditions may vary in
different areas of the country and with respect to different skill requirements,
assignment employees, information technology consultants and caregivers were
generally less available during 1998 than they were in the preceding year.
Importance and Effect of Trademarks Held
- ----------------------------------------
Various trademarks are registered with the United States Patent and Trademark
Office protecting OLSTEN. Certain other marks that are registered or in the
process of being registered and are utilized in the Company's business include
AMERICA IS COMING HOME WITH US(SM), CHRONICARE(R), CO-COUNSEL(R), CUSTOMIZED
ADDED-VALUE(R), EXCELLENCE THROUGH OLSTEN PEOPLE(SM), MAKE THE SURE CALL(SM),
OFISS 2000(R), PARTNERSHIP PROGRAM(R), PRECISE(R), PROFILER(R), PROLAW
SYSTEM(SM), PROMETRICS(SM), RadSTAR(TM) THE FUTURE IS WORKING WITH OLSTEN(SM)
and TOP LINE PEOPLE FOR BOTTOM LINE RESULTS(R). Under current law, federal
trademark registrations can be renewed indefinitely. National advertising and
usage have, in the belief of the Company, given significance to the Company's
marks.
Competitive Position
- --------------------
The Staffing Services, Information Technology Services and Health Services
industries are highly competitive and fragmented throughout the world due, in
part, to the low barriers to entry. In addition,
6
competition in Staffing Services and Health Services is often limited to the
companies having offices in the customer's vicinity because assignment employees
and caregivers are not typically willing to travel long distances for
employment. Larger customers, however, have increased the practice of engaging
in sole source staffing services arrangements whereby the staffing suppliers are
limited to one, or a select few, larger, national suppliers. In any given
marketplace where the Company competes, the strongest competitors may be
national, regional, or local. Unlike the Company, such companies usually provide
staffing services and/or information technology services or health services, but
not all three. The Company competes globally with, among others, Adecco S.A.,
Manpower Inc., Kelly Services Inc., Randstad Holding N.V. and Vedior/Bis, which
provide staffing and information technology services, and with Computer Horizons
Corp., Computer Task Group, Inc., Analysts International, Inc., and Keane, Inc.
in the information technology services business. The Company's Health Services
division competes in North America with such competitors as Apria Healthcare
Group, Inc. and Coram Healthcare Corp. Based on revenues, we believe the Company
is one of North America's, and the world's, largest providers of staffing and
information technology services, as well as North America's largest provider of
home health care and home infusion therapy services.
The principal methods of competing are availability of personnel, quality and
expertise of services and the price of such services. The Company believes that
its favorable competitive position is attributable to its early industry entry,
to its widespread office network and to the consistently high quality and
targeted services it has provided over the years to its clients, as well as to
its screening and evaluation procedures, its training programs and its employee
retention techniques.
Number of Persons Employed
- --------------------------
At January 3, 1999, the Company employed approximately 12,300 regular, full-time
employees and during 1998 employed approximately 613,000 assignment employees,
information technology consultants and caregivers. In addition, the Company's
franchisees employed approximately 550 regular, full-time employees as well as
approximately 75,000 assignment employees during 1998. Employees of franchisees
are not the Company's employees.
As the employer of its assignment employees, information technology consultants
and caregivers, the Company is responsible for and pays the employer's share of
Social Security taxes, federal and state unemployment taxes, workers'
compensation insurance and other similar costs. Assignment employees,
information technology consultants and caregivers of the Company are covered by
general liability insurance and by a fidelity bond maintained by the Company. In
addition, caregivers are covered by professional medical liability insurance.
The Company believes that its insurance coverages are adequate for the purposes
of its business. The Company believes that its relationships with its employees
are generally good.
International Operations
- ------------------------
Through subsidiaries, the Company for many years has provided Staffing Services
and Health Services in Canada. The Company began providing temporary and
permanent placement services outside North America in 1993 with the acquisition
of Office Angels in the United Kingdom.
Expanding the geographic scope of its Staffing Services, the Company in 1995
purchased majority interests in Norsk Personal A/S in Norway (now doing business
as Olsten Personal Norden); Allegro Vikarservice Aps in Denmark (now doing
business as Attention); and Ready Office S.A. in Argentina (now doing business
as Olsten Ready Office). In 1996, the Company acquired, or purchased majority
interests in, OFFiS Unternehmen fur Zeitarbeit GmbH & Co. KG in Germany (now
doing business as Olsten Personal); Kontorsjouren AB in Sweden (now doing
business as Olsten Personalkraft); Top
7
Notch and Multiforce in Puerto Rico; and Dataset OY in Finland (now doing
business as Olsten Dataset). In 1997 the Company purchased majority interests in
Adyser, S.A. in Chile (now doing business as Olsten Adyser); Sogica S.A. in
France (now doing business as Olsten Travail Temporaire) and in Spain (now doing
business as Olsten Trabajo Temporal); Olsten Helsetjenester A/S in Norway (home
health care staffing); and Olsten BTV A/S in Denmark (home health care
staffing). In 1998, the Company purchased a majority interest in Top Services in
Brazil.
The Company expanded its information technology operations through the
acquisitions of Ward Associates Limited (now doing business as IMI Ward
Associates)in Canada in 1995 and Harvey Consultants Limited in the United
Kingdom and Vikar Konsulent A/S (majority owned and now doing business as Olsten
DataVikar) in Norway in 1996.
Certain financial information, summarized by geographic area, with respect to
the Company's international operations is contained herein in Note 12 of Notes
to Consolidated Financial Statements.
Item 3. Legal Proceedings.
- ------- ------------------
Government Investigations and Other Legal Matters
- -------------------------------------------------
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 the Company 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 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
8
the Columbia/HCA Investigation, to plead guilty to a criminal violation of the
federal mail fraud, conspiracy and kickback statutes. In addition, Kimberly Home
Health Care, Inc. is to be permanently excluded from participation in Medicare,
Medicaid and all other federal health care programs as defined in 42 U.S.C.
Section 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.
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.
On or about May 11, 1999, a Complaint was filed in the Delaware Chancery Court
in a derivative lawsuit, captioned Rubin v. May, No. 17135-NC, against certain
current and former directors of Olsten (the "Derivative Lawsuit"). The
Complaint, which names Olsten as a nominal defendant, alleges a claim for breach
of fiduciary duties arising out of the Class Action and the government
investigations described above. The plaintiffs seek a judgment (1) requiring the
defendants to account to Olsten 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, 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 our subsidiaries had management services agreements to provide services to
the hospitals' 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 approximately 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 sought to consolidate and stay the proceeding, in
part based upon its assertion that Columbia/HCA has claims against one of our
subsidiaries for breach of contract, 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.
By letter dated June 30, 1999, the Medicare Fraud Control Unit of the New Mexico
Attorney General's Office notified the Company that it has declined to
criminally prosecute the so-called "J-Code issue" relating to Quantum's past
practices in seeking government healthcare reimbursement.
9
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.
Shareholder Class Action Litigation
- -----------------------------------
In April 1997, a purported class action captioned Gail Weichman v. Olsten
Corporation, et al., No. CV 97-1946, was filed in the United States District
Court for the Eastern District of New York against the Company, Miriam Olsten,
Frank Liguori and Anthony Puglisi. In August 1997, two additional proposed class
action lawsuits, captioned Esta S. Goldman v. Olsten Corporation, et al., No. CV
97-4501, and Elliott Waldman v. Olsten Corporation, et al., No. CV 97-5056, were
filed in the United States District Court for the Eastern District of New York
against the same defendants named in the Weichman lawsuit, plus Stuart Olsten.
In September 1997, a fourth proposed class action lawsuit, captioned Michael
Cannold v. Olsten Corporation, et al., No. CV 97-5408, was filed in the United
States District Court for the Eastern District of New York against the Company,
Miriam Olsten, Stuart Olsten, Frank Liguori and Anthony Puglisi. (The Weichman,
Goldman, Waldman and Cannold actions are referred to collectively as the "Class
Actions.") On September 8, 1998, after the Court consolidated the Class Actions
under the caption In re Olsten Corporation Securities Litigation, plaintiffs
filed their Consolidated Amended Class Action Complaint (the "Amended
Complaint"), naming as defendants the Company, Miriam Olsten, Stuart Olsten,
Frank Liguori and Anthony Puglisi. 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, alleging that, as a result of certain alleged
misstatements and omissions by certain of the defendants, the Company's common
stock was artificially inflated during the proposed Class Period (which is
defined in the Amended Complaint as the period from February 5, 1996 through
July 22, 1997). 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. On October 19, 1998, the Company
and the individual defendants served a motion seeking the dismissal of the
Amended Complaint; that motion was fully briefed on December 23, 1998. The
Company is unable at this time to assess the probable outcome of the Class
Actions 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 specificity.
10
Item 6. Selected Financial Data.
- ------- ------------------------
OLSTEN CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except share amounts)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Restated)(A)
(53 Weeks)
Service sales, franchise fees,
management fees and other income $4,602,790 $4,113,014 $3,377,729 $2,813,768 $2,588,697
Net income (loss) (35,539) 93,028 54,642 90,290 92,240
Working capital 619,010 687,513 615,593 493,970 438,432
Total assets 2,058,807 1,750,201 1,439,240 1,138,410 979,714
Long-term debt 606,107 461,178 330,329 267,030 211,250
Shareholders' equity 782,620 841,777 769,273 586,389 515,986
SHARE INFORMATION:
Basic earnings per share (.44) 1.15 .71 1.23 1.27
Diluted earnings per share (.44) 1.15 .71 1.19 1.21
Cash dividends .22 .28 .28 .21 .16
Book value 9.63 10.35 9.53 7.98 7.06
(A) See Note 14 to the consolidated financial statements with regard to the
restatements.
11
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations.
----------------------
OLSTEN CORPORATION & SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Operating results reflect the combined operations of Olsten Corporation (the
"Company"), Quantum Health Resources, Inc. ("Quantum") acquired on June 28, 1996
and Co-Counsel, Inc. ("Co-Counsel") acquired on August 9, 1996. Each of these
transactions has been accounted for as a pooling of interests. Comparisons with
prior years are based on restated combined results.
In March 1999, the Company reached a settlement, in principle, of two federal
investigations focusing on the Company's Medicare home office cost reports and
certain transactions with Columbia/HCA Healthcare Corporation. As discussed in
Note 14 to the Consolidated Financial Statements a provision of $56 million was
recorded in 1998.
In 1998, as a part of the Balanced Budget Act, the government enacted the
Interim Payment System ("IPS") for reimbursement of home care services provided
under Medicare, effective October 1, 1997. Prior to enactment of the IPS, home
care services were reimbursed based on cost subject to a cap determined by the
Health Care Financing Administration. The IPS reimburses home care services
based on costs, subject to both a per-beneficiary limit and a per-visit limit.
Further, the IPS reduced the per-visit limit to 1994 levels. As a result of
these cuts in reimbursement, provider reimbursements have been reduced. In order
to operate at the lower reimbursement rates, home health care companies reduced
the services provided to patients by providing fewer patient visits and
decreasing utilization. In addition, the regulatory climate in home health care
caused a lower level of physician referrals to home care services.
As a consequence of these circumstances, in 1998 the Company recorded
non-recurring charges and other adjustments of $66 million related to the
restructuring of the Company's Health Services division. These charges,
which were primarily for 60 office closings and consolidations in the United
States, were taken to help position the Company to operate more efficiently
under the new IPS. In addition, the Company has also made significant
technological investments in order to improve operational efficiencies and
employee retention levels. The benefit of the restructuring began to be
realized in the second quarter of 1998.
Included in this provision was $24 million charged to selling, general and
administrative expenses, which included lease payments of $3 million,
employee severance of $4 million, fixed asset and software write-offs of $5
million to reflect the loss incurred upon the Company's decision to dispose
of the assets in certain closed offices, and an increase in the allowance
for doubtful accounts of $12 million. All closures and consolidations,
related to this charge, of facilities have been completed and approximately
95% of the 700 expected employee terminations have occurred. The allowance
for doubtful accounts was increased because the collection of receivables is
highly dependent on the service provider's ability to provide certain
evidence of service and authorization documentation to a variety of
third-party payors. The office closings, consolidation of certain business
service centers and the termination of employees are all events that, in the
Company's past experience, impair its ability to provide the aforementioned
documentation and to collect receivables.
12
The Company also recorded other adjustments to selling, general and
administrative expenses of $13 million, which included professional fees and
related incurred costs resulting from the settlement with several government
agencies regarding certain past business practices of Quantum, the level of
effort required to respond to the significant inquiries conducted by the
government, and costs incurred to redesign the credit and collection process
of the home health business.
In addition, upon final announcement of the per-beneficiary limits by the
government, the Company recorded a reduction in revenues in the second
quarter of 1998 for the six month period ended June 28, 1998 of $14 million
in anticipation of lower Medicare reimbursements resulting from the new
per-visit and per-beneficiary limits that have been imposed by Medicare
under the IPS.
The Company recorded a charge to cost of sales of $15 million to reflect the
estimated increase in costs that have been incurred, but not yet reported,
upon a change in the actuarial estimates utilized to determine the level of
service to patients covered under the Company's capitated contracts.
In 1996, the Company recorded merger, integration and other non-recurring
charges totalling $80 million. These charges resulted from the Quantum and
Co-Counsel acquisitions of $45 million; $30 million of 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 related to the settlement of shareholder litigation. The $45 million
charge, related to the Quantum and Co-Counsel acquisitions, included transaction
costs of $8.1 million, compensation and severance costs of $12.4 million; asset
write-downs of $8.2 million, primarily comprised of fixed assets and an
unrecoverable majority-interest investment in a software development company
held by Quantum; and integration costs, for employee relocation, obligations
under lease agreements for planned vacancies and other activities required to
consolidate the operations, of $15.8 million.
At January 3, 1999, $64 million of the charges, consisting primarily of the
provision for the settlement of the two federal investigations, remain unpaid
and were included in accrued expenses.
Systemwide sales, which represent sales generated by Company, licensed and
franchised offices, and hospital-based home health agencies under management,
for the Company's three segments increased 5 percent to $5.1 billion in 1998; 18
percent, to $4.8 billion in 1997; and 24 percent to $4.1 billion in 1996.
Staffing Services' systemwide sales increased 18 percent for 1998 and 28 percent
for both 1997 and 1996. Information Technology Services' systemwide sales
increased 45 percent, 76 percent and 129 percent for 1998, 1997 and 1996,
respectively. Health Services' systemwide sales decreased 19 percent in 1998,
and increased 2 percent and 15 percent for 1997 and 1996, respectively.
Revenues increased 12 percent in 1998 to $4.6 billion compared to $4.1 billion
in 1997. This increase reflected internal growth in Staffing and Information
Technology Services and acquisitions in Staffing Services, offset by reduced
revenues in Health Services. Revenues in 1997 rose 22 percent from $3.4 billion
in 1996.
Staffing Services' revenues grew 20 percent in 1998 and 30 percent in 1997.
Acquisitions accounted for 12 percent of the growth in 1998 and 14 percent in
1997, with the balance resulting from increases in volume and pricing. European
revenues increased to $947 million in 1998 from $582 million in 1997,
contributing 33 percent of total Staffing Services' revenues in 1998 and 24
percent in 1997.
13
Information Technology Services' revenues grew 45 percent in 1998 to $418
million and 76 percent in 1997 to $287 million. Acquisitions accounted for 36
percent of the growth in 1997. Through the Company's Information Technology
Services division, the Company provides services for the design, development and
maintenance of information systems. The Company's Information Technology
Services division offers focused solutions for applications management, quality
assurance and enterprise support services. Since the Company estimates that less
that 10% of the division's revenues were associated with Year 2000 remediation
efforts, the Company does not expect a significant impact on future revenue
growth.
Health Services' revenues decreased 7 percent in 1998 versus 1997 and increased
4 percent in 1997 compared to 1996. The decline in revenues from 1997 to 1998 is
primarily the result of a reduction in Medicare visits stemming from the
enactment of the Interim Payment System, as well as the current regulatory
climate.
Cost of services sold increased 16 percent to $3.5 billion in 1998; 25 percent
to $3 billion in 1997; and 24 percent to $2.4 billion in 1996, due primarily to
the growth of revenues. Gross profit margins were 23.9 percent in 1998, 26.7
percent in 1997 and 28.3 percent in 1996. Gross profit margins on a consolidated
basis were negatively impacted by the change in the business mix. Staffing
Services and Information Technology Services, which operate at lower margins,
comprised a larger percentage of the total revenues in 1998 as compared to 1997.
In addition, the growth in large volume corporate and partnership accounts,
which carry lower markups and lower margins, negatively impacted North American
Staffing Services' gross profit margins for the year. International margins were
reduced due to competitive pricing and increased social costs. Information
Technology Services' gross profit margins were negatively impacted as a result
of subcontracted business managed on behalf of clients. Health Services' gross
profit margins were negatively impacted by the change in business mix reflecting
growth in lower margin Network and Institutional Staffing business and revenue
declines in our Medicare business serviced both by our Home Care-Nursing and the
visits managed under our Health Management business. The negative influences on
Health Services' gross profit margins were partially offset by growth in the
Infusion business.
Selling, general and administrative expenses as a percentage of revenues were 24
percent, or $1,106 million; 22.2 percent, or $915 million; and 22.8 percent, or
$768 million; in 1998, 1997 and 1996, respectively. The increase in expenses as
a percentage of revenues in 1998 resulted primarily from the non-recurring
charges and other adjustments recorded in 1998 (as restated) , investments in
infrastructure in all business segments, including new systems in both Staffing
Services' and Health Services' businesses, as well as the development of the
professional services' divisions in Staffing Services. These increases were
offset by the cost reduction initiatives, including closing and consolidating
offices within the Health Services division as announced in the second quarter
as part of the Company's restructuring and recovery plan.
Net interest expense of $30 million, $21 million and $12 million, in 1998, 1997
and 1996, respectively, 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.
The 1998 effective income tax rate was 23 percent, compared to 39 percent in
1997 and 41 percent in 1996. The Company's effective rate differs from the
Federal statutory rate primarily because of non-deductible settlement costs in
1998, goodwill amortization and state income taxes in all years, which vary from
year to year in relation to the mix of taxable income by state.
14
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.
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.
15
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,
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.
Liquidity and Capital Resources
- -------------------------------
Working capital at January 3, 1999, including $54 million in cash, was $619
million, a decrease of 10 percent versus the prior year. Receivables, net,
increased $158 million, or 19 percent, predominantly due to revenue growth and
acquisitions in the Staffing Services' business as well as growth in Health
Services' Infusion business, which requires more working capital. Fixed assets,
net, increased $47 million, or 25 percent, primarily relating to investments in
new information systems. Intangibles, principally goodwill, net, increased $79
million, or 15 percent, resulting from acquisitions.
In May 1998, the Company's wholly-owned subsidiary, Olsten International B.V.
issued in a public offering, 800 million French Franc (approximately U.S. $134
million at that date), 6 percent Euronotes due 2008. The net proceeds were used
to repay existing indebtedness and for general financing purposes.
The Company has a revolving credit agreement with a consortium of 11 banks for
up to $400 million in borrowings and letters of credit. The agreement, which
expires in 2001, was amended in February and May 1999 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 and then to restrict further repurchase of the
convertible subordinated debentures, as well as the Company's common shares. As
of January 3, 1999, there were $178 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. The civil, administrative
and criminal agreements relating to the two federal investigations 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 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 any 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
16
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 1998 annual dividend on common stock and Class B common stock was
$.22 per share.
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 January 3, 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.
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 year. 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
Income 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 January 3, 1999.
17
Legal Matters
- -------------
Government Investigations and Other Legal Matters
- -------------------------------------------------
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 the Company 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 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 to a criminal violation of the federal mail fraud, conspiracy and
kickback statutes. In addition, Kimberly Home Health Care, Inc. is to be
permanently excluded from participation in Medicare, Medicaid and all other
federal health care programs as defined in 42 U.S.C. Section 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
18
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.
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.
On or about May 11, 1999, a Complaint was filed in the Delaware Chancery Court
in a derivative lawsuit, captioned Rubin v. May, No. 17135-NC, against certain
current and former directors of Olsten (the "Derivative Lawsuit"). The
Complaint, which names Olsten as a nominal defendant, alleges a claim for breach
of fiduciary duties arising out of the Class Action and the government
investigations described above. The plaintiffs seek a judgment (1) requiring the
defendants to account to Olsten 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, 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 our subsidiaries had management services agreements to provide services to
the hospitals' 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 agreement had periods ranging
from approximately 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 sought to consolidate and stay the proceeding, in part based
upon its assertion that Columbia/HCA has claims against one of our subsidiaries
for breach of contract, 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.
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
Indiana Attorney General's Office seeks an unspecified amount of monetary
damages, double or treble damages, penalties and investigative costs.
By letter dated June 30, 1999, the Medicare Fraud Control Unit of the New Mexico
Attorney General's Office notified the Company that it had declined to
criminally prosecute the so-called "J-Code issue" relating to Quantum's past
practices in seeking government health care reimbursement.
Shareholder Class Action Litigation
- -----------------------------------
In April 1997, a purported class action captioned Gail Weichman v. Olsten
Corporation, et al., No. CV 97-1946, was filed in the United States District
Court for the Eastern District of New York against the Company, Miriam Olsten,
Frank Liguori and Anthony Puglisi. In August 1997, two additional proposed class
action lawsuits, captioned Esta S. Goldman v. Olsten Corporation, et al., No. CV
97-4501, and
19
Elliott Waldman v. Olsten Corporation, et al., No. CV 97-5056, were filed in the
United States District Court for the Eastern District of New York against the
same defendants named in the Weichman lawsuit, plus Stuart Olsten. In September
1997, a fourth proposed class action lawsuit, captioned Michael Cannold v.
Olsten Corporation, et al., No. CV 97-5408, was filed in the United States
District Court for the Eastern District of New York against the Company, Miriam
Olsten, Stuart Olsten, Frank Liguori and Anthony Puglisi. (The Weichman,
Goldman, Waldman and Cannold actions are referred to collectively as the "Class
Actions.") On September 8, 1998, after the Court consolidated the Class Actions
under the caption In re Olsten Corporation Securities Litigation, plaintiffs
filed their Consolidated Amended Class Action Complaint (the "Amended
Complaint"), naming as defendants the Company, Miriam Olsten, Stuart Olsten,
Frank Liguori and Anthony Puglisi. 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, alleging that, as a result of certain alleged
misstatements and omissions by certain of the defendants, the Company's common
stock was artificially inflated during the proposed Class Period (which is
defined in the Amended Complaint as the period from February 5, 1996 through
July 22, 1997). 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. On October 19, 1998, the Company
and the individual defendants served a motion seeking the dismissal of the
Amended Complaint; that motion was fully briefed on December 23, 1998. The
Company is unable at this time to assess the probable outcome of the Class
Actions 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 specificity.
7A. Quantitative and Qualitative Disclosures about Market Risk.
- --- -----------------------------------------------------------
The information required by this item is included in the text in response to
Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, above and is incorporated herein by reference.
20
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The following financial statements of the Company are included in this
Report:
Page(s) in this Report
----------------------
Consolidated Financial Statements:
Balance Sheets as of January 3, 1999 (restated)
and December 28, 1997 F-2
Statements of Income for the three years ended
January 3, 1999 (restated) F-3
Statements of Changes in Shareholders' Equity for the three years
ended January 3, 1999 (restated) F-4
Statements of Cash Flows for the three years
ended January 3, 1999 (restated) F-5
Notes to Consolidated Financial Statements (restated) F-6 - F-28
Schedule II - Valuation and Qualifying Accounts F-29
Report of Independent Accountants F-30
21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- -----------------------------------------------------------------
(a)(1) Financial Statements
See Index to Financial Statements attached (Page F-1).
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts (Page F-29)
(a)(3) Exhibits:
3(a) Restated Certificate of Incorporation of Registrant, as
amended, filed as Exhibit 4.1 to Registrant's Registration
Statement on Form S-8 (File No. 33-61761), is incorporated
herein by reference.
+3(b) By-Laws of Registrant.
4(a) Restated Certificate of Incorporation of Registrant, as
amended, filed as Exhibit 3(a).
4(b) By-Laws of Registrant, filed as Exhibit 3(b).
4(c) Indenture dated as of March 15, 1996 between Registrant and
First Union National Bank, as Trustee, relating to
Registrant's 7% Senior Notes due 2006, filed as Exhibit 4 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, is incorporated herein by reference.
- --------------
+ Filed with Form 10-K for fiscal year ended January 3, 1999.
22
4(d) Form of Indenture dated as of October 8, 1993 between Quantum
Health Resources, Inc. and First Trust National Association,
as Trustee, relating to 4 3/4% Convertible Subordinated
Debentures Due 2000 of Quantum Health Resources, Inc., filed
as Exhibit 4.1 to Registration Statement on Form S-3 (Reg. No.
33-69088) of Quantum Health Resources, Inc., is incorporated
herein by reference.
4(e) Supplemental Indenture dated as of June 28, 1996 between
Quantum Health Resources, Inc. and First Trust National
Association, as Trustee, filed as Exhibit 4(e) to Registrant's
Annual Report on Form 10-K for the year ended December 29,
1996, is incorporated herein by reference.
*10(a) Registrant's Incentive Restricted Stock Plan, as amended,
filed as Exhibit 10(e) to Registrant's Annual Report on Form
10-K for the year ended January 2, 1994, is incorporated
herein by reference.
*10(b) Form of agreement under Registrant's Incentive Restricted
Stock Plan, filed as Exhibit 10(g) to Registrant's Annual
Report on Form 10-K for the year ended December 30, 1990, is
incorporated herein by reference.
10(c) Credit Agreement dated as of August 9, 1996 among Registrant,
the Banks signatory thereto and The Chase Manhattan Bank, as
Agent, covering $400 million credit facility, filed as Exhibit
10 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, is incorporated herein by
reference.
10(c)(1) Amendment No. 1 dated as of August 27, 1997 to Credit
Agreement dated as of August 9, 1996 among Registrant, the
Banks signatory thereto and The Chase Manhattan Bank, as
Agent, filed as Exhibit 10 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 28, 1997, is
incorporated herein by reference.
- --------------
*Management contract or compensatory plan or arrangement.
23
10(c)(2) Amendment No. 2 dated as of February 24, 1998 to Credit
Agreement dated as of August 9, 1996 among Registrant, the
Banks signatory thereto and The Chase Manhattan Bank, as
Agent, filed as Exhibit 10 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 29, 1998, is
incorporated herein by reference.
10(c)(3) Amendment No. 3 dated as of July 30, 1998 to Credit Agreement
dated as of August 9, 1996 among Registrant, the Banks
signatory thereto and The Chase Manhattan Bank, as Agent,
filed as Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 28, 1998, is incorporated
herein by reference.
*10(d) Registrant's 1990 Non-Qualified Stock Option Plan for
Non-Employee Directors and Consultants, as amended and
restated, is incorporated by reference to Exhibit B to
Registrant's definitive Proxy Statement with respect to its
1998 Annual Meeting of Shareholders.
*10(e) Registrant's Supplemental Retirement Plan for Key Executives
filed as Exhibit 10(k) to Registrant's Annual Report on Form
10-K for the year ended January 3, 1993, is incorporated
herein by reference.
*10(f) Registrant's Executive Voluntary Deferred Compensation Plan
and Trust Agreement between Registrant and Prudential Trust
Company, filed as Exhibit 10(k) to Registrant's Annual Report
on Form 10-K for the year ended January 2, 1994, is
incorporated herein by reference.
- --------------
*Management contract or compensatory plan or arrangement.
24
*10(g) Registrant's Deferred Compensation Plan for Outside Directors,
filed as Exhibit 10(m) to Registrant's Annual Report on Form
10-K for the year ended January 2, 1994, is incorporated
herein by reference.
*10(h) Employment Agreement dated March 28, 1994 between Registrant
and Frank N. Liguori, filed as Exhibit 10(q) to Registrant's
Annual Report on Form 10-K for the year ended January 2, 1994,
is incorporated herein by reference.
*10(i) Amendment dated March 27, 1996 to Employment Agreement between
Registrant and Frank N. Liguori, filed as Exhibit 10(k) to
Registrant's Annual Report on Form 10-K for the year ended
December 29, 1996, is incorporated herein by reference.
+*10(j) Separation Agreement dated as of February 10, 1999 between
Registrant and Frank N. Liguori.
*10(k) Agreement dated November 8, 1993 between Registrant and Frank
N. Liguori covering incentive award under Incentive Restricted
Stock Plan and amendment thereto dated March 27, 1994, filed
as Exhibit 10(r) to Registrant's Annual Report on Form 10-K
for the year ended January 2, 1994, is incorporated herein by
reference.
*10(l) Form of change in control agreement between Registrant and
each of Robert A. Fusco, Gerald J. Kapalko and Anthony J.
Puglisi, filed as Exhibit 10(o) to Registrant's Annual Report
on Form 10-K for the year ended January 1, 1995, is
incorporated herein by reference.
- ----------------
*Management contract or compensatory plan or arrangement.
+Filed with Form 10-K for fiscal year ended January 3, 1999.
25
*10(m) Registrant's 1994 Stock Incentive Plan, as amended and
restated, is incorporated by reference to Exhibit A to
Registrant's definitive Proxy Statement with respect to its
1998 Annual Meeting of Shareholders.
*10(n) Registrant's Executive Officers Bonus Plan is incorporated by
reference to Exhibit A to Registrant's definitive Proxy
Statement with respect to its 1999 Annual Meeting of
Shareholders.
*10(o) Registrant's Stock & Deferred Compensation Plan for
Non-Employee Directors is incorporated by reference to Exhibit
C to Registrant's definitive Proxy Statement with respect to
its 1998 Annual Meeting of Shareholders.
10(p) Lease Agreement dated as of April 1, 1995 between Suffolk
County Industrial Development Agency and OLS Holdings, Inc.
covering headquarters facility at 175 Broad Hollow Road,
Melville, New York, filed as Exhibit 10(t) to Registrant's
Annual Report on Form 10-K for the year ended December 31,
1995, is incorporated herein by reference.
10(q) Fiscal Agency Agreement, dated May 6, 1998, relating to French
Franc 800,000,000 6% Notes due 2008 guaranteed by Registrant,
filed as Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 28, 1998, is incorporated
herein by reference.
+21 Subsidiaries of Registrant.
++23 Consent of PricewaterhouseCoopers LLP, independent
accountants.
++27 Financial Data Schedule.
- ----------------
*Management contract or compensatory plan or arrangement.
+Filed with Form 10-K for fiscal year ended January 3, 1999.
++Filed herewith.
26
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter
of the period covered by this Report.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: October 1, 1999 By:/s/ Anthony J. Puglisi
-----------------------------
Anthony J. Puglisi
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28
OLSTEN CORPORATION and SUBSIDIARIES
INDEX to FINANCIAL STATEMENTS
Pages
-----
Consolidated Financial Statements:
Balance Sheets as of January 3, 1999 (restated)
and December 28, 1997 F-2
Statements of Income for the three years
ended January 3, 1999 (restated) F-3
Statements of Changes in Shareholders' Equity for the
three years ended January 3, 1999 (restated) F-4
Statements of Cash Flows for the three years
ended January 3, 1999 (restated) F-5
Notes to Consolidated Financial Statements (restated) F-6 - F-28
Schedule II - Valuation and Qualifying Accounts F-29
Report of Independent Accountants F-30
F-1
OLSTEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
January 3, 1999 December 28, 1997
--------------- -----------------
(Restated)
ASSETS
Current assets
Cash $ 53,831 $ 84,810
Receivables, less allowance for doubtful
accounts of $35,555 and $25,326, respectively 1,005,685 847,419
Inventories 90,383 56,893
Prepaid expenses and other current assets 43,920 33,822
----------- -----------
Total current assets 1,193,819 1,022,944
Fixed assets, net 233,131 186,347
Intangibles, principally goodwill, net of
accumulated amortization of $131,779
and $102,998, respectively 613,616 534,284
Other assets 18,241 6,626
----------- -----------
$ 2,058,807 $ 1,750,201
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accrued expenses $ 251,594 $ 152,239
Payroll and related taxes 144,330 86,071
Accounts payable 142,547 55,851
Insurance costs 36,338 41,270
----------- -----------
Total current liabilities 574,809 335,431
Long-term debt 606,107 461,178
Other liabilities 95,271 111,815
Commitments -- --
Shareholders' equity
Common stock $.10 par value; authorized
110,000,000 shares; issued 68,253,080
shares and 68,151,708 shares, respectively 6,825 6,815
Class B common stock $.10 par value; authorized
50,000,000 shares; issued 13,071,560 shares and
13,157,617 shares, respectively 1,307 1,316
Additional paid-in capital 447,488 447,297
Retained earnings 337,368 390,786
Accumulated other comprehensive income (9,913) (4,437)
Less treasury stock, at cost; 45,700 shares in 1998 (455) --
----------- -----------
Total shareholders' equity 782,620 841,777
----------- -----------
$ 2,058,807 $ 1,750,201
=========== ===========
See notes to consolidated financial statements.
F-2
OLSTEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Years Ended January 3, 1999
(In thousands, except share amounts)
1998 1997 1996
---- ---- ----
(Restated)
(53 Weeks)
Service sales, franchise fees, management
fees and other income $ 4,602,790 $ 4,113,014 $ 3,377,729
Cost of services sold 3,500,941 3,016,802 2,422,160
----------- ----------- -----------
Gross profit 1,101,849 1,096,212 955,569
Selling, general and administrative expenses 1,106,339 914,632 768,448
Interest expense, net 30,481 21,101 12,260
Merger, integration and other non-recurring charges -- -- 80,000
----------- ----------- -----------
Income (loss) before income taxes and minority interests (34,971) 160,479 94,861
Income tax expense (benefit) (7,951) 62,587 38,627
----------- ----------- -----------
Income (loss) before minority interests (27,020) 97,892 56,234
Minority interests 8,519 4,864 1,592
----------- ----------- -----------
Net income (loss) $ (35,539) $ 93,028 $ 54,642
=========== =========== ===========
SHARE INFORMATION:
Basic earnings (loss) per share:
Net income (loss) $ (.44) $ 1.15 $ .71
----------- ----------- -----------
Average shares outstanding 81,300 81,237 77,362
----------- ----------- -----------
Diluted earnings (loss) per share:
Net income (loss) $ (.44) $ 1.15 $ .71
----------- ----------- -----------
Average shares outstanding 81,300 83,115 82,025
----------- ----------- -----------
See notes to consolidated financial statements.
F-3
OLSTEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
For the Three Years Ended January 3, 1999
(In thousands, except share amounts)
Accumulated
Common stock Additional other
------------ paid-in Retained comprehensive Treasury Stock
Shares Amount capital earnings (loss) income Shares Amount Total
------ ------ ------- -------- ------------- ------ ------ -----
(Restated) (Restated)
Balance at December 31, 1995 73,487,548 $7,349 $294,758 $ 286,037 $(1,755) -- $-- $ 586,389
Comprehensive income:
Net income and cumulative
translation adjustment -- -- -- 54,642 3,502 -- --
58,144
Cash dividends -- -- -- (20,183) -- -- -- (20,183)
Exercise of stock options, warrants
and employee stock purchases 1,870,185 187 20,916 -- -- -- -- 21,103
Amortization of restricted stock -- -- 952 -- -- -- -- 952
Conversion of debentures 5,381,288 538 122,330 -- -- -- -- 122,868
---------- ------ -------- --------- ------- --------- ---- ---------
Balance at December 29, 1996 80,739,021 8,074 438,956 320,496 1,747 -- -- 769,273
Comprehensive income:
Net income and cumulative
translation adjustment -- -- -- 93,028 (6,184) -- -- 86,844
Cash dividends -- -- -- (22,738) -- -- -- (22,738)
Exercise of stock options 133,924 13 1,948 -- -- -- -- 1,961
Issuance of restricted stock 436,380 44 5,674 -- -- -- -- 5,718
Amortization of restricted stock -- -- 719 -- -- -- -- 719
---------- ------ -------- --------- ------- --------- ---- ---------
Balance at December 28, 1997 81,309,325 8,131 447,297 390,786 (4,437) -- -- 841,777
Comprehensive income:
Net income and cumulative
translation adjustment -- -- -- (35,539) (5,476) -- -- (41,015)
Cash dividends -- -- -- (17,879) -- -- -- (17,879)
Exercise of stock options 6,515 -- 72 -- -- -- -- 72
Non-employee director stock
compensation 8,800 1 119 -- -- -- -- 120
Repurchase of common stock -- -- -- -- -- (45,700) (455) (455)
---------- ------ -------- --------- ------- --------- ----- ---------
Balance at January 3, 1999 81,324,640 $8,132 $447,488 $ 337,368 $(9,913) $(45,700) $(455) $ 782,620
========== ====== ======== ========= ======= ======== ===== =========
See notes to consolidated financial statements.
F-4
OLSTEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended January 3, 1999
(In thousands)
1998 1997 1996
---- ---- ----
(Restated)
(53 Weeks)
OPERATING ACTIVITIES:
Net income $ (35,539) $ 93,028 $ 54,642
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 69,433 55,506 43,897
Provision for doubtful accounts 27,881 28,605 20,342
Deferred income taxes (431) 14,102 (446)
Loss on disposal of fixed assets 5,292 3,743 6,161
Minority interests in results of operations of consolidated
subsidiaries 8,519 4,864 1,592
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable (131,647) (151,140) (127,071)
Inventories, prepaid expenses
and other current assets 718 11,806 (15,679)
Current liabilities 98,817 43,272 14,426
Other, net 16,246 (18,411) (12,223)
--------- --------- ---------
Net cash provided by (used in) operating activities 59,289 85,375 (14,359)
--------- --------- ---------
INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (106,997) (149,603)
(136,218)
Purchases of fixed assets (92,826) (72,795) (47,375)
Disposition of fixed assets and businesses 2,824 1,834 6,220
Proceeds from sale of investment securities -- 9,415 842
--------- --------- ---------
Net cash used in investing activities (196,999) (211,149) (176,531)
--------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of notes 132,427 -- --
Cash dividends (17,879) (22,738) (20,183)
Repayment of notes payable (6,202) (6,816) --
Net (repayments of) proceeds from line of credit agreements (1,694) 135,437 (8,947)
Repurchase of common stock (455) -- --
Issuances of common stock under stock plans 72 1,961 21,103
Net proceeds from issuance of senior notes -- -- 197,224
--------- --------- ---------
Net cash provided by financing activities 106,269 107,844 189,197
--------- --------- ---------
Effect of exchange rate changes on cash 462 (2,985) --
--------- --------- ---------
Net decrease in cash (30,979) (20,915) (1,693)
Cash at beginning of year 84,810 105,725 107,418
--------- --------- ---------
Cash at end of year $ 53,831 $ 84,810 $ 105,725
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 28,581 $ 24,415 $ 15,260
Cash payments for income taxes $ 34,697 $ 20,702 $ 64,073
NON-CASH TRANSACTIONS:
Assets acquired through the issuance of a note $ -- $ 19,535 $ --
Issuance of restricted stock $ -- $ 6,437 $ --
Conversion of debt to equity $ -- $ -- $ 124,846
See notes to consolidated financial statements.
F-5
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The Company's fiscal year ends
on the Sunday nearest to December 31st, which was January 3, 1999 for 1998,
December 28, 1997 for 1997 and December 29, 1996 for 1996. Certain prior period
amounts have been reclassified to conform with the current year presentation.
Revenue Recognition
Service and product sales and related costs, including labor, payroll taxes,
fringe benefits and products and supplies, are recognized in the period in which
the services and products are provided and are adjusted in future periods as
final settlements are determined. Sales are recorded based on fee-for-service or
contractual arrangements, including capitated agreements, with customers and
third party payors, estimates of expected reimbursement under arrangements with
Medicare and state reimbursed programs, contractual percentages of sales of
franchisees and management fees generated from services provided to hospital
based home health agencies. Sales representing estimated reimbursements from
Medicare and state reimbursed programs amounted to 11%, 15% and 19% of total
sales in 1998, 1997 and 1996, respectively.
Under capitated agreements with managed care customers, the Company recognizes
revenue based on a predetermined contractual rate for each member of the managed
care plan. Costs are determined based on estimates of expected service and
product requirements. These estimates are developed by applying actuarial
assumptions and historical patterns of utilization to authorized levels of
service. Sales from capitated agreements with managed care payors represented
less than 2% of total sales in 1998.
Sales adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payor and other reasons unrelated to credit
risk. Sales adjustments are deducted directly from gross accounts receivable.
Included in accounts receivable is a receivable of $1 million for 1998 and a
payable of $3.3 million for 1997 related to net contractual adjustments and
third party settlements. Management prepares various analyses to evaluate its
receivable valuation accounts. Such analyses include accounts receivable aging
trends, historical collection and write-off data and other statistical
information.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-6
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Cash
Cash includes equivalents, which are highly liquid investments with original
maturities of three months or less.
Inventories
Inventories consist primarily of biological and pharmaceutical products and
supplies held for sale or distribution to patients through prescription. The
Company records inventories at the lower of cost (weighted average cost) or
market.
Fixed Assets
Fixed assets, including external costs of Company developed software, are stated
at cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the life of the lease or the life of the improvement.
Intangibles
Intangibles, principally goodwill, associated with acquired businesses and the
unexpired terms of acquired franchise contracts are being amortized on a
straight-line basis primarily over 40 years. When events and circumstances so
indicate, all long-term assets, including intangibles, are assessed for
recoverability based upon undiscounted operating cash flow forecasts. No
impairment losses have been recognized in any of the periods presented.
Foreign Currency Translation
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period for revenues,
expenses, gains and losses and cash flows. Translation adjustments are recorded
within accumulated other comprehensive income. Transaction gains and losses that
arise from exchange rate fluctuations on transactions denominated in a currency
other than the functional currency are not significant.
Income Taxes
The Company provides for taxes based on current taxable income and the future
tax consequences of temporary differences between the financial reporting and
income tax carrying values of its assets and liabilities. Under SFAS No. 109,
assets and liabilities acquired in purchase business combinations are assigned
their fair values, and deferred taxes are provided for lower or higher tax
bases.
Earnings Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Earnings per share amounts for all periods prior to
December 28, 1997, have been restated to conform to the SFAS No. 128
requirements.
F-7
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Newly Issued Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
establishes standards for the reporting and presentation of comprehensive income
and its components in a full set of financial statements. As shown in the
Statement of Changes in Shareholders' Equity, comprehensive income includes all
changes in equity during a period, except those resulting from investments by
and distributions to the Company's stockholders. As this standard only requires
additional information in the financial statements, it does not affect the
Company's results of operations or financial position.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way that publicly-held companies report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 did not impact the Company's results of
operations or financial position, but did affect the disclosure of segment
information.
Note 2. 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 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 1998, the Company continued to expand by acquiring additional offices in
North America, France, Denmark, Brazil and Norway for an aggregate cash outlay
of $41 million. In addition, the Company acquired certain home health care
operations, primarily in the state of Florida, in asset transactions totalling
approximately $35 million in cash.
Assets acquired and liabilities assumed for the purchase acquisitions were $55
million and $42 million, respectively. Substantially all of the purchase price
of acquisitions in excess of net assets acquired was recorded as goodwill
(approximately $97 million) and will be amortized over 40 years. The results of
operations of the acquired companies are included in the Company's 1998
Consolidated Statement of Income from the dates of acquisition. Pro forma
results of operations are not presented as the pro forma impact of the purchased
acquisitions, which were accounted for by the purchase method of accounting, was
not significant to the Company's Financial Statements.
F-8
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 3. Merger, Integration and Other Non-Recurring Charges
In March 1999, the Company reached an understanding to settle, in principle, of
two federal investigations focusing on the Company's Medicare home office cost
reports and certain transactions with Columbia/HCA Healthcare Corporation
("Columbia/HCA"). As discussed in Note 14 a provision of $56 million was
recorded in 1998 and is included in accrued expenses at January 3, 1999.
In 1998, as a part of the Balanced Budget Act, the government enacted the
Interim Payment System ("IPS") for reimbursement of home care services provided
under Medicare effective October 1, 1997. Prior to enactment of the IPS, home
care services were reimbursed based on cost subject to a cap determined by the
Health Care Financing Administration. The IPS reimburses home care services
based on costs, subject to both a per-beneficiary limit and a per-visit limit.
Further, the IPS reduced the per-visit limit to 1994 levels. As a result of
these cuts in reimbursement, provider margins have been reduced. In order to
operate at the lowered reimbursement rates, home health care companies reduced
the services provided to patients by providing fewer patient visits. In
addition, the regulatory climate that ensued in home health care caused a lower
level of physician referrals.
As a consequence of these circumstances, in 1998 the Company recorded
non-recurring charges and other adjustments of $66 million related to the
restructuring of the Company's Health Services division. These charges,
which were primarily for 60 office closings and consolidations in the United
States, were taken to help position the Company to operate cost efficiently
under the new IPS. In addition, the Company has also made significant
technological investments in order to improve operational efficiencies and
employee retention levels. The benefit of the restructuring began to be
realized in the second quarter of 1998.
Included in this provision was $24 million charged to selling, general and
administrative expenses, which included lease payments of $3 million,
employee severance of $4 million, fixed asset and software write-offs of $5
million to reflect the loss incurred upon the Company's decision to dispose
of the assets in certain closed offices, and an increase in the allowance
for doubtful accounts of $12 million. All closures and consolidations,
related to this charge, of facilities have been completed and approximately
95% of the 700 expected employee terminations have occurred. The allowance
for doubtful accounts was increased because the collection of receivables is
highly dependent on the service provider's ability to provide certain
evidence of service and authorization documentation to a variety of
third-party payors. The office closings, consolidation of certain business
service centers and the termination of employees are all events that, in the
Company's past experience, impair the ability to provide the aforementioned
documentation and to collect on receivables.
F-9
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
The Company also recorded other adjustments to selling, general and
administrative expenses of $13 million, which included professional fees and
related costs, resulting from the settlement with several government
agencies regarding certain past business practices of Quantum, the level of
effort required to respond to the significant inquiries conducted by the
government, and costs incurred to redesign the credit and collection process
of the home health business. See also Note 14 regarding restatements.
In addition, upon final announcement of the per-beneficiary limits by the
government, the Company recorded a reduction in revenues of $14 million in
the second quarter of 1998 for the six month period ended June 28, 1998, in
anticipation of lower Medicare reimbursements resulting from the new
per-visit and per-beneficiary limits that have been imposed by Medicare
under the Interim Payment System.
The Company recorded a charge to cost of sales of $15 million to reflect the
estimated increase in costs that have been incurred, but not yet reported,
based upon a change in the actuarial estimates utilized to determine the
level of service to patients covered under the Company's capitated
contracts.
In 1996, the Company recorded merger, integration and other non-recurring
charges totalling $80 million. These charges resulted from the Quantum and
Co-Counsel acquisitions of $45 million ; $30 million of 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 related to the settlement of shareholder litigation. The $45 million
charge, related to the Quantum and Co-Counsel acquisitions, included transaction
costs of $8.1 million; compensation and severance costs of $12.4 million; asset
write-downs of $8.2 million, primarily comprised of fixed assets and an
unrecoverable majority-interest investment in a software development company
held by Quantum; and integration costs, for employee relocation, obligations
under lease agreements for planned vacancies and other activities required to
consolidate the operations, of $15.8 million.
At January 3, 1999, $64 million of charges, consisting primarily of a provision
for the settlement of two federal investigations, remain unpaid and were
included in accrued expenses.
The major components, and amounts of costs charged during the year ended January
3, 1999 of the previous year's charges as well as the 1998 charges, were as
follows:
F-10
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Accounts Compensation
Dollars in Receivable and and Severance Integration
Thousands Settlements Other Assets(1) Costs Costs Other Total
- --------- ----------- ------------- ------------- ----------- ----- -----
Balance at December
28, 1997 $ 5,200 $ 5,301 $ 3,423 $ 860 $ 279 $ 15,063
Cash expenditures -- -- (2,300) (766) -- (3,066)
Non-cash write-offs -- (5,301) -- -- (279) (5,580)
--------- --------- --------- --------- --------- ---------
Balance at January 3, 1999 5,200 -- 1,123 94 -- 6,417
--------- --------- --------- --------- --------- ---------
Charge - 1998 56,000 17,309 4,000 34,641 10,050 122,000
Cash expenditures -- -- (3,740) (33,839) (9,574) (47,153)
Non-cash write-offs -- (17,211) -- -- -- (17,211)
--------- --------- --------- --------- --------- ---------
Balance at January 3, 1999 56,000 98 260 802 476 57,636
--------- --------- --------- --------- --------- ---------
Balance of all charges
combined at January
3, 1999 $ 61,200 $ 98 $ 1,383 $ 896 $ 476 $ 64,053
========= ========= ========= ========= ========= =========
(1) Amounts represent contra costs.
See also Note 14 with regard to the restatements.
Note 4. Fixed Assets, Net
January 3, 1999 December 28, 1997
--------------- -----------------
Computer equipment and software $212,528 $160,936
Furniture and fixtures 74,166 73,082
Buildings and improvements 67,358 60,162
Machinery and equipment 26,875 23,234
-------- --------
380,927 317,414
Less accumulated depreciation and amortization 147,796 131,067
-------- --------
$233,131 $186,347
======== ========
Depreciation expense was approximately $46 million in 1998, $36 million
in 1997 and $28 million in 1996.
F-11
Note 5. Long-Term Debt
January 3, 1999 December 28, 1997
--------------- -----------------
7% Senior Notes due 2006, net of unamortized discount $199,257 $199,154
Revolving credit agreement 178,400 175,774
6% Guaranteed Notes due 2008, net of unamortized discount 142,200 --
4 3/4% Convertible Subordinated Debentures due 2000 86,250 86,250
------- -------
$606,107 $461,178
======= =======
F-12
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
In March 1996, the Company issued $200 million in 7% Senior Notes due 2006. The
proceeds were used to repay a portion of its revolving credit facility; to
expand the Company's existing office network and the types of services provided
to clients, both internally and through acquisitions; and for general working
capital purposes.
The Company has a revolving credit agreement with 11 banks, providing for up to
$400 million in borrowings and letters of credit in both U.S. and various
foreign currencies. Borrowings under the revolving credit agreement have
original maturities of three months or less. At the Company's option, the
interest rate on borrowings under the agreement is based on the London Interbank
Offered Rate (LIBOR), the United States prime rate, or the Eurocurrency rate.
The agreement, which expires in 2001, was amended in February and May 1999 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 and then to restrict further
repurchase of the convertible subordinated debentures, as well as the Company's
common shares. As of January 3, 1999, there were $178 million in borrowings and
$14 million in standby letters of credit outstanding.
In May 1998, the Company's wholly-owned subsidiary, Olsten International B.V.,
issued in a public offering, 800 million French Franc (approximately U.S. $134
million at that date), 6 percent Euronotes due 2008. The net proceeds were used
to repay existing indebtedness and for general financing purposes.
In 1993, Quantum issued $86.3 million of 4 3/4% Convertible Subordinated
Debentures maturing in 2000. The debentures are convertible into the Company's
Class B common stock at $52.26 per share. Subsequent to January 3, 1999, the
Company retired $7.7 million of the convertible subordinated debentures at 88.5
percent of the principal amount, resulting in a gain of approximately $.9
million
Interest expense is net of interest income of $3.8 million in 1998, $4.3 million
in 1997 and $9.1 million in 1996.
Note 6. Legal Matters
Government Investigations
- -------------------------
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").
F-13
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
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 the Company 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 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 to a criminal violation of the federal mail fraud, conspiracy and
kickback statutes. In addition, Kimberly Home Health Care, Inc. is to be
permanently excluded from participation 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.
F-14
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
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.
On or about May 11, 1999, a Complaint was filed in the Delaware Chancery Court
in a derivative lawsuit, captioned Rubin v. May, No. 17135-NC, against certain
current and former directors of Olsten (the "Derivative Lawsuit"). The
Complaint, which names Olsten as a nominal defendant, alleges a claim for breach
of fiduciary duties arising out of the Class Action and the government
investigations described above. The plaintiffs seek a judgment (1) requiring the
defendants to account to Olsten 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, 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 our subsidiaries had management services agreements to provide services to
the hospitals' 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 agreement 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 sought to consolidate and stay the proceeding, in part based upon its
assertion that Columbia/HCA has claims against one of our subsidiaries for
breach of contract, 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.
By letter dated June 30, 1999, the Medicare Fraud Control Unit of the New Mexico
Attorney General's Office notified the Company that it has declined to
criminally prosecute the so-called "J-Code issue" relating to Quantum's past
practices in seeking government health care reimbursement.
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.
Shareholder Class Action Litigation
- -----------------------------------
In April 1997, a purported class action captioned Gail Weichman v. Olsten
Corporation, et al., No. CV 97-1946, was filed in the United States District
Court for the Eastern District of New York against the Company, Miriam Olsten,
Frank Liguori and Anthony Puglisi. In August 1997, two additional proposed class
action lawsuits, captioned Esta S. Goldman v. Olsten Corporation, et al., No. CV
97-4501, and Elliott Waldman v. Olsten Corporation, et al., No. CV 97-5056, were
filed in
F-15
the United States District Court for the Eastern District of New York
against the same defendants named in the Weichman lawsuit, plus Stuart Olsten.
In September 1997, a fourth proposed class action lawsuit, captioned Michael
Cannold v. Olsten Corporation, et al., No. CV 97-5408, was filed in the United
States District Court for the Eastern District of New York against the Company,
Miriam Olsten, Stuart Olsten, Frank Liguori and Anthony Puglisi. (The Weichman,
Goldman, Waldman and Cannold actions are referred to collectively as the "Class
Actions.") On September 8, 1998, after the Court consolidated the Class Actions
under the caption In re Olsten Corporation Securities Litigation, plaintiffs
filed their Consolidated Amended Class Action Complaint (the "Amended
Complaint"), naming as defendants the Company, Miriam Olsten, Stuart Olsten,
Frank Liguori and Anthony Puglisi. 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, alleging that, as a result of certain alleged
misstatements and omissions by certain of the defendants, the Company's common
stock was artificially inflated during the proposed Class Period (which is
defined in the Amended Complaint as the period from February 5, 1996 through
July 22, 1997). 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. On October 19, 1998, the Company
and the individual defendants served a motion seeking the dismissal of the
Amended Complaint; that motion was fully briefed on December 23, 1998. The
Company is unable at this time to assess the probable outcome of the Class
Actions or the materiality of the risk of loss in connection therewith, given
the preliminary stage of the Class Actions and the fact that the Amended
Complaint does not allege damages with specificity.
F-16
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 7. Lease Commitments
The Company rents certain properties under noncancellable, long-term operating
leases, which expire at various dates. Certain of these leases require
additional payments for taxes, insurance and maintenance and, in many cases,
provide for renewal options. Rent expense under all leases was $64,357 in 1998,
$51,190 in 1997 and $44,364 in 1996.
Future minimum rental commitments for all noncancellable leases having a
remaining term in excess of one year at January 3, 1999 are as follows:
$
1999 55,737
2000 42,816
2001 30,298
2002 19,617
2003 12,879
Thereafter 34,902
Note 8. Shareholders' Equity
Common stock consists of shares of common stock and Class B common stock as
follows:
January 3, 1999 December 28, 1997 December 29, 1996
--------------- ----------------- -----------------
Common stock 68,253,080 68,151,708 66,652,997
Class B common stock 13,071,560 13,157,617 14,086,024
Treasury stock (common stock) (45,700) -- --
---------- ---------- ----------
81,278,940 81,309,325 80,739,021
========== ========== ==========
Each share of Class B common stock is convertible into one share of common
stock, has a par value of $.10 and is entitled to 10 votes. The Company is also
authorized to issue 250,000 shares of preferred stock; no shares have been
issued.
In July 1998, the Board of Directors authorized the repurchase, at management's
discretion, of up to 4 million shares of the Company's $.10 par value common
stock. Approximately 46,000 shares have been repurchased at a total cost of
approximately $.5 million. The Company does not anticipate making additional
repurchases of its common stock within the foreseeable future.
F-17
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 9. Stock Plans
In 1998, shareholders of the Company approved the adoption of the Company's
Stock & Deferred Compensation Plan for Non-Employee Directors which provides for
payment of annual retainer fees to non-employee directors in the form of shares
of common stock and also allows deferral of such payments until termination of
the director's service. The total number of shares of common stock reserved for
issuance under this plan is 150,000. At January 3, 1999, 8,800 shares were
issued and 6,600 shares were deferred.
In 1994, shareholders of the Company approved the adoption of the 1994 Stock
Incentive Plan ("1994 Plan") under which 3 million shares of common stock were
reserved for issuance upon exercise of options thereunder. In 1995, shareholders
of the Company approved amendments to the 1994 Plan which increased the maximum
term of stock options granted under the 1994 Plan from five years to ten years
and extended eligibility under the 1994 Plan to the Company's franchisees and
licensees. In 1998, an additional 3 million shares were approved by the
shareholders, aggregating 6 million shares of common stock reserved for
issuance. These options may be awarded in the form of incentive stock options
("ISOs") or non-qualified stock options ("NQSOs"). The option price of an ISO
cannot be less than 100 percent, and the option price of the NQSO cannot be less
than 85 percent, of the fair market value at the date of grant. This plan
replaced the 1984 Incentive Stock Option Plan ("1984 ISO Plan") and the 1984
Non-Qualified Stock Option Plan ("1984 NQSO Plan"), which terminated in February
1994, except as to options then outstanding, which expired in 1998. Options
under the 1994 Plan have a term of ten years and generally become cumulatively
exercisable commencing one year after grant in four or five equal annual
installments. At January 3, 1999, there were options outstanding of 3,989,565
for the 1994 Plan.
In 1991, shareholders of the Company approved the adoption of the Non-Qualified
Stock Option Plan for Non-Employee Directors and Consultants authorizing the
grant of options to outside directors and consultants to purchase up to 225,000
shares of common stock. In 1995, shareholders of the Company approved an
amendment to this plan to increase the maximum term of stock options thereafter
granted under the Plan from five years to ten years. In 1998, an additional
150,000 shares were approved by the shareholders, aggregating 375,000 shares of
common stock authorized for issuance. Under this plan, options may be granted at
prices not less than the fair market value at the date of grant, have a maximum
term of ten years and become exercisable no earlier than six months from the
date of grant. At January 3, 1999, 150,000 options were outstanding under this
plan.
Lifetime Corporation ("Lifetime"), which was merged into the Company in 1993,
maintained four stock option plans. Options were granted under all plans at not
less than the fair market value at the date of grant. At the merger date, all of
the currently vested options under these plans were exchanged for Olsten Class B
common stock equal to their net economic value. Remaining outstanding options
were converted to options for Olsten Class B shares and are exercisable over
various periods, generally not exceeding five years from the date of grant. At
January 3, 1999, 64,559 options were outstanding under one of these plans.
F-18
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
IMI Systems Inc. ("IMI"), which was acquired by the Company in 1995, maintained
three stock option plans, which authorized the grant of options at not less than
the fair market value at the date of grant. At the acquisition date, all
outstanding options were converted to options for Olsten Class B shares and are
exercisable over various periods not exceeding ten years from their date of
grant. At January 3, 1999, 9,916 options were outstanding under these plans.
Quantum maintained three stock option plans. Options were granted for all plans
at not less than the fair market value at the date of grant. At the acquisition
date, all outstanding options were converted to options for Olsten Class B
shares and became immediately exercisable. At January 3, 1999, 162,655 options
were outstanding under these plans.
Co-Counsel maintained two stock option plans under which options were granted at
not less than the fair market value at the date of grant. At the acquisition
date, all outstanding options were converted to options for Olsten Class B
shares and became immediately exercisable. At January 3, 1999, 10,902 options
were outstanding under these plans.
A summary of the Company's stock options for the three years ended January 3,
1999 is as follows:
1998 1997 1996
------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ -------- ------ -------- ------ --------
Options outstanding, beginning of year 3,186,577 $ 19.27 2,552,403 $ 19.31 2,290,100 $ 21.80
Granted 2,014,800 11.32 1,122,650 19.47 878,142 14.67
Exercised (6,515) 10.20 (133,924) 13.98 (287,071) 13.04
Cancelled (807,265) 18.25 (354,552) 22.11 (328,768) 29.76
---------- --------- ---------- --------- ---------- ---------
Options outstanding, end of year 4,387,597 $ 15.83 3,186,577 $ 19.27 2,552,403 $ 19.31
========== ========= ========== ========= ========== =========
Options exercisable, end of year 1,378,904 $ 20.00 1,273,757 $ 19.93 1,067,768 $ 20.73
========== ========= ========== ========= ========== =========
Options available for grant, end of year 2,142,546 482,733 1,345,616
========== ======= =========
Weighted-average fair value of options
granted during the year $4.07 $8.13 $5.87
==== ==== ====
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.3, 6.3 and 6.5 percent;
dividend yield of 2 percent for 1998 and 1 percent for 1997 and 1996;
expected lives of six years for all; and volatility of 36 percent for
1998 and 1997 and 33 percent for 1996.
F-19
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
The following table summarizes information about stock options outstanding at
January 3, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------ ---------------------------------------
Number Weighted Weighted Number Weighted
Range of outstanding at average remaining average exercisable at average
exercise prices January 3, 1999 contractual life exercise price January 3, 1999 exercise price
--------------- --------------- ------------------ -------------- --------------- --------------
$ .86 to 1.08 4,785 .68 $1.07 4,785 $1.07
1.72 to 2.59 3,443 1.41 2.12 3,443 2.12
4.99 to 7.49 249,491 9.65 6.14 7,491 5.74
7.60 to 10.35 885,604 9.24 9.15 44,700 9.58
12.07 to 17.67 1,540,507 8.39 14.54 437,127 14.53
18.53 to 26.25 1,633,225 7.64 21.19 810,816 22.14
27.80 to 41.38 43,171 5.28 31.78 43,171 31.78
42.24 to 60.35 27,371 5.29 51.67 27,371 51.67
--------- ---- ------ --------- -----
$ .86 to 60.35 4,387,597 8.29 $15.83 1,378,904 $20.00
========= ==== ===== ========= =====
Under an Incentive Restricted Stock Plan amended in 1993 and in 1996,
up to 2,062,500 shares of common stock may be granted or sold at prices
less than the prevailing market price to officers, key employees and
others, subject to restrictions as to transfer or sale. Shares under
the plan are generally subject to restrictions as to transfer which
lapse ratably in three and five equal annual installments commencing
one year from the date of grant, provided that recipients are
continuously employed by the Company. At January 3, 1999, 758,970
shares were available for future grants.
Under the Incentive Restricted Stock Plan, the Company issued 436,380
shares of common stock in 1997 to an officer pursuant to a performance
award. At January 4, 1998 and 1997, 75,000 and 286,380 shares vested,
respectively, and were not subject to any restrictions. The remaining
75,000 shares vested on January 4, 1999. The Company charged
compensation expense over the performance award's measurement and
vesting period.
Options to purchase 3,244,274, 2,217,663, and 322,952 shares of common
stock at exercise prices of $12.07-$60.35, $18.53-$60.35 and
$27.80-$60.35 per share were outstanding for the years ended 1998, 1997
and 1996, respectively, but were not included in the computation of
diluted earnings per share since the options' exercise price was
greater than the average market price of the common shares.
In 1996, the Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized under the stock option plans. Had compensation
cost for the Company's stock option plans been determined based on the
fair value at the grant date for awards consistent with the provisions
of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
F-20
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
1998 1997 1996
---- ---- ----
(Restated)
Net income (loss) - as reported $(35,539) $93,028 $54,642
Net income (loss) - pro forma (39,667) 90,651 52,585
Basic earnings (loss) per share - as reported (.44) 1.15 .71
Basic earnings (loss) per share - pro forma (.49) 1.12 .68
Diluted earnings (loss) per share - as reported (.44) 1.15 .71
Diluted earnings (loss) per share - pro forma (.49) 1.12 .69
The statement provides for pro forma amounts for options granted beginning
in 1995; therefore, the pro forma expense will likely increase in future
years as the new option grants become subject to the pricing model.
See also Note 14 with regard to the restatement.
Note 10. Income Taxes
Comparative analysis of the provisions (benefits) for income taxes
follows:
1998 1997 1996
---- ---- ----
(Restated)
Current
Federal $(32,791) $34,230 $28,911
State and local 1,371 1,230 2,282
Foreign 23,900 13,025 7,880
-------- -------- --------
(7,520) 48,485 39,073
-------- -------- --------
Deferred
Federal (1,573) 10,142 (375)
State and local 173 2,403 (71)
Foreign 969 1,557 --
-------- -------- --------
(431) 14,102 (446)
-------- -------- --------
(7,951) 62,587 38,627
======== ======== ========
The components of book income (loss) before income taxes and minority
interests includes U.S. losses of $100.5 million and foreign income of
$65.5 million.
F-21
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
At January 3, 1999, the Company had a net operating loss for U.S. tax purposes
of $81.7 million, available for carryback or carryforward. The carryforward
period expires in 2019.
Reconciliations of the differences between income taxes computed at the Federal
statutory rate and provisions (benefits) for income taxes are as follows:
1998 1997 1996
---- ---- ----
(Restated)
Income taxes computed at Federal
statutory tax rate $(12,240) $56,168 $33,201
State income taxes, net of Federal
benefit 1,004 2,361 1,437
Nondeductible settlement of government
investigations 3,500 -- --
Amortization of intangibles 2,630 2,843 2,680
Adjustment resulting from conclusion
of tax examination related to prior years (4,334) -- --
Other, net 1,489 1,215 1,309
-------- ------ ------
$ (7,951) $62,587 $38,627
======== ====== ======
Deferred tax assets and liabilities are as follows:
January 3, 1999 December 28, 1997
--------------- -----------------
(Restated)
Deferred tax assets
Reserves and allowances $ 40,642 $ 22,578
Other 840 817
-------- --------
41,482 23,395
-------- --------
Deferred tax liabilities
Capitalized software (25,479) (14,164)
Intangible assets (30,437) (6,684)
Depreciation (2,057) --
Other (1,311) (1,299)
-------- --------
(59,284) (22,147)
-------- --------
Net deferred tax (liability) asset $(17,802) $ 1,248
======== ========
During the fourth quarter of 1998, the Company reached final agreement with the
Internal Revenue Service with respect to its examination of the Company's
federal income tax returns for the years 1989 through 1993. Accordingly, certain
amounts have been reclassified to deferred tax liabilities to reflect the
conclusion of such examination.
See also Note 14 with regard to the restatement.
F-22
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 11. Benefit Plans for Permanent Employees
The Company and its subsidiaries maintain qualified and non-qualified defined
contribution retirement plans for its salaried employees which provide for a
partial match of employee savings under the plans and for discretionary
profit-sharing contributions based on employee compensation. The Company also
maintains a non-qualified defined benefit retirement program for key employees
and officers which provides supplemental retirement benefits funded in part by
profit-sharing contributions.
Company contributions under the defined contribution plans were approximately
$7.2 million in 1998, $6.9 million in 1997 and $5.9 million in 1996.
Note 12. Business Segment Information
The Company operates in three business segments:
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.
F-23
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
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. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. Segment data includes charges for
allocating corporate costs to each of the operating segments. Information about
the Company's operations, net of non-recurring charges and other adjustments of
$122 million (related to Health Services) in 1998 and merger, integration and
other non-recurring charges of $80 million ($1 million related to Staffing
Services, $67 million related to Health Services, and $12 million related to
Corporate and other) in 1996, is as follows:
Service sales,
franchise fees, Income before Depreciation Expenditures
management fees income taxes and Identifiable and for long-lived
and other income minority interests assets amortization assets
---------------- ------------------ ------------ ------------ --------------
(Restated)
Year ended January 3, 1999
- --------------------------
Staffing Services $ 2,846,553 $ 80,365 $ 768,666 $ 20,982 $ 79,641
Information Technology
Services 418,075 15,880 158,348 3,651 3,037
Health Services 1,330,303 (146,739) 864,442 31,004 69,648
Corporate and other 7,859 15,523 267,351 13,796 48,603
----------- ----------- ----------- ----------- -----------
$ 4,602,790 $ (34,971) $ 2,058,807 $ 69,433 $ 200,929
=========== =========== =========== =========== ===========
Year ended December 28, 1997
- ----------------------------
Staffing Services $ 2,381,376 $ 88,602 $ 561,353 $ 13,429 $ 66,734
Information Technology
Services 287,423 12,042 143,370 2,761 48,157
Health Services 1,433,854 45,003 737,329 29,097 28,086
Corporate and other 10,361 14,832 308,149 10,219 105,325
----------- ----------- ----------- ----------- -----------
$ 4,113,014 $ 160,479 $ 1,750,201 $ 55,506 $ 248,302
=========== =========== =========== =========== ===========
F-24
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Year ended December 29, 1996
- ----------------------------
Staffing Services $1,832,512 $ 73,325 $ 390,083 $ 7,286 $ 23,172
Information Technology
Services 163,392 7,587 80,259 1,263 31,554
Health Services 1,374,353 12,420 749,893 26,612 51,234
Corporate and other 7,472 1,529 219,005 8,736 81,117
--------- -------- --------- ------ -------
$3,377,729 $ 94,861 $1,439,240 $43,897 $187,077
========= ======== ========= ====== =======
Financial information, summarized by geographic area, is as follows:
Service sales,
franchise fees,
management fees Long-lived
and other income assets
---------------- ------
Year ended January 3, 1999
--------------------------
United States $3,289,388 $552,688
Europe 1,013,949 273,692
Canada 155,736 17,742
Latin America 143,717 20,866
---------- --------
$4,602,790 $864,988
========== ========
Year ended December 28, 1997
----------------------------
United States $3,265,029 $496,753
Europe 627,852 201,715
Canada 141,192 15,528
Latin America 78,941 13,261
---------- --------
$4,113,014 $727,257
========== ========
Year ended December 29, 1996
----------------------------
United States $2,845,983 $408,613
Europe 366,501 129,452
Canada 115,314 12,334
Latin America 49,931 10,406
---------- --------
$3,377,729 $560,805
========== ========
See also Note 14 with regard to the restatement.
F-25
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 13. Quarterly Financial Information (Unaudited)
First
Quarter Second Quarter Third Quarter Fourth Quarter
------- -------------- ------------- --------------
(As reported)(As restated) (As reported)(As restated)(As reported)(As restated)
$ $ $ $ $ $ $
Year ended January 3, 1999
Service sales, franchise fees,
management fees and other income 1,049,942 1,126,142 1,126,142 1,170,037 1,170,037 1,256,669 1,256,669
Gross profit 266,057 243,125 243,125 283,916 283,916 308,751 308,751
Net income (loss) 12,801 (33,464) (32,178) 12,534 11,248 12,490 (27,410)
SHARE INFORMATION:
Basic and diluted earnings
(loss) per share .16 (.41) (.40) .15 .14 .15 (.34)
Year ended December 28, 1997
Service sales, franchise fees,
management fees and other income 950,851 1,014,387 1,063,281 1,084,495
Gross profit 254,959 270,182 283,335 287,736
Net income 19,167 25,329 25,257 23,275
SHARE INFORMATION:
Basic and diluted earnings per share .24 .31 .31 .29
The fourth quarters ended January 3, 1999 and December 28, 1997 include 14
weeks and 13 weeks, respectively.
All earnings per share amounts have been presented in accordance with SFAS
No. 128.
Second, third and fourth quarters of 1998 results include certain
non-recurring charges and other adjustments. See Note 3.
See also Note 14 with regard to the restatements.
F-26
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
Note 14. Subsequent Events and Restatements
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. 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
and changed for operations and recorded in the period ended April 4, 1999.
However, it has been determined that it is more appropriate to accrue such
amounts in the financial statements for the year ended January 3, 1999 and,
accordingly, the financial statements for the year ended January 3, 1999 have
been restated. The following information represents the impact of the
restatement on the consolidated Statement of Income for the year ended January
3, 1999:
As Reported As Restated
----------- -----------
Service sales, franchise fees, management fees and
other income $ 4,602,790 $ 4,602,790
Cost of services sold 3,500,941 3,500,941
----------- -----------
Gross profit 1,101,849 1,101,849
Selling, general and administrative expenses 1,050,339 1,106,339
Interest expense, net 30,481 30,481
----------- -----------
Income (loss) before income taxes and minority
interests 21,029 (34,971)
Income taxes 8,149 (7,951)
----------- -----------
Income (loss) before minority interests 12,880 (27,020)
Minority interests 8,519 8,519
----------- -----------
Net income (loss) $ 4,361 $ (35,539)
=========== ===========
Share Information
Basic earnings (loss) per share $ .05 $ (.44)
=========== ===========
Diluted earnings (loss) per share $ .05 $ (.44)
=========== ===========
The effect of the restatement on the January 3, 1999 balance sheet was an
increase to accrued expenses of $56 million, a decrease to income taxes included
in other liabilities of $16.1 million and a decrease to retained earnings of
$39.9 million.
F-27
OLSTEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share amounts)
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 $13.6
million for the last three quarters of 1999, due to reduced employee, 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.
The costs incurred to redesign the credit and collection process described in
Note 3 had originally been recorded within the second quarter 1998 $66 million
charge. However, it has been determined that approximately $2 million of these
costs relate to services rendered in the third quarter of 1998 and, accordingly,
the financial statements for the quarter and six months ended June 28, 1998
reflects a $2 million reduction of the charge which will be reflected in the
quarter ended September 27, 1998. See also Note 13 for the impact of the
restatement on the quarterly financial statements.
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 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
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.
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 costs 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.
F-28
Olsten Corporation
Schedule II - Valuation and Qualifying Accounts
Years Ended January 3, 1999, December 28, 1997 and December 29, 1996
Col. A. Col. B Col. C. Col. D. Col. E.
- ------- ------ ------- ------- -------
Balance at Additions Balance
beginning charged to costs at end of
Description of period and expenses Deductions of period
- ----------- --------- ------------ ---------- ---------
1998 $ 25,326 $ 27,881 $(17,652) $ 35,555
1997 $ 26,299 $ 28,605 $(29,578) $ 25,326
1996 $ 30,660 $ 20,342 $(24,703) $ 26,299
F-29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Of Olsten Corporation and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index, after the restatement described in Note 14, present fairly, in all
material respects, the financial position of Olsten Corporation and Subsidiaries
at January 3, 1999 and December 28, 1997, and the results of their operations
and their cash flows for each of the three years in the period ended January 3,
1999, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 28, 1999, except as to the
information presented in Notes 3, 6
and 14, for which the date is September
29, 1999.
F-30