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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended DECEMBER 31, 1999.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-23828
LABOR READY, INC.
(Exact name of registration as specified in its Charter)
WASHINGTON 91-1287341
(State of Incorporation (I.R.S. Employer
of Organization) Identification Number)
1016 S. 28th Street, Tacoma, Washington 98409
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(Address of Principal Executive Offices) (Zip Code)
(253) 383-9101
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(Registrant's Telephone Number)
Securities Registered Under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, No Par Value The New York Stock Exchange
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Securities Registered Under Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
None None
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Indicated 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 any definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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 last ninety days.
YES X NO___.
The aggregate market value (based on the NYSE quoted closing price) of the
common stock held by non-affiliates (36,940,937 shares) of the Registrant at
March 15, 2000 was approximately $304.8 million. As of March 15, 2000, there
were 42,763,598 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Page-1
LABOR READY, INC.
FORM 10-K
PART I.
ITEM 1. BUSINESS
Information in this Annual Report on Form 10-K includes forward-looking
statements, which are often identified by the words "believes", "anticipates"
and similar expressions. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Factors which could affect the Company's financial results are
described below and in Item 7 of this report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
INTRODUCTION
Labor Ready, Inc. (the "Company"), incorporated in Washington in 1985, is a
leading national provider of temporary workers for manual labor jobs. The
Company's customers are primarily businesses in the freight handling,
warehousing, landscaping, construction and light manufacturing industries. These
businesses require workers for lifting, hauling, cleaning, assembling, digging,
painting and other types of manual or unskilled work. The Company has rapidly
grown from eight dispatch offices in 1991 to 687 dispatch offices at December
31, 1999. All of the growth in dispatch offices was achieved by opening Company
owned locations rather than through acquisitions. The Company's revenues have
grown from $6.0 million in 1991 to $850.9 million in 1999. This revenue growth
has been generated both by opening new dispatch offices and by continuing to
increase sales at existing dispatch offices. In 1999, the average cost to open a
new dispatch office was approximately $45,000 and dispatch offices opened in
1999 typically generated revenues sufficient to cover their operating costs
within six months. The average revenue per dispatch office open for more than
one full year was approximately $1.5 million in 1999 and $1.6 million in 1998.
INDUSTRY OVERVIEW
The temporary staffing industry has grown rapidly in recent years as
companies have used temporary employees to control personnel costs and to meet
fluctuating personnel needs. According to the STAFFING INDUSTRY REPORT (May
1998), the United States' market for the industrial segment of the temporary
staffing marketplace (which includes the short-term, light industrial market
that the Company serves) grew at a compound annual growth rate of approximately
17% from approximately $6.0 billion in 1992 to an estimated $14.6 billion in
1998. The Company believes the short-term light industrial segment of the
temporary staffing industry is highly fragmented and presents opportunities for
larger, well capitalized companies to compete effectively, mainly through the
development of information systems which efficiently process a high volume of
transactions and coordinate multi-location activities, and the management of
workers' compensation costs.
Historically, the demand for temporary workers has been driven primarily by
the need to satisfy peak production requirements and to temporarily replace
full-time employees absent due to illness, vacation or abrupt termination. More
recently, competitive pressures have forced businesses to focus on reducing
costs, including converting fixed, permanent labor costs to variable or flexible
costs. The use of temporary workers typically shifts employment costs and risks,
such as workers' compensation and unemployment insurance and the possible
adverse effects of changing employment regulations, to temporary staffing
companies, which can allocate those costs and risks over a larger pool of
employees and customers. In addition, through the use of temporary employees,
businesses avoid the inconvenience and expense of hiring and firing regular
employees.
COMPANY STRATEGY
The Company's goal is to maintain and enhance its status as a leading
national provider of temporary workers for manual labor jobs. Key elements of
the Company's strategy to achieve this objective are as follows:
- - AGGRESSIVELY OPEN NEW DISPATCH OFFICES. The Company's strategy is to
increase revenues by expanding its network of dispatch offices. From
January 1, 2000 to March 17, 2000, the Company has opened 126 new dispatch
offices and plans to open approximately 74 additional dispatch offices
during the first half of the year for a total of approximately 200
additional dispatch offices in 2000. The Company also plans to open 200
additional dispatch offices in 2001.
Page-2
- - INCREASE REVENUES FROM EXISTING DISPATCH OFFICES. As each dispatch office
matures, the Company attempts to increase its revenues by expanding sales
to existing customers and by aggressively expanding the number and mix of
customers served. More experienced area directors and district managers
assist the dispatch office general manager in this process. The Company
also coordinates sales and marketing strategies designed to complement
these efforts, including sales representatives in large branches, the
development of national accounts, targeted direct mail, telemarketing
campaigns and national advertising.
- - IMPROVE OPERATING EFFICIENCIES AND REDUCE OPERATING COSTS. Due to the
short-term temporary labor market's extensive fragmentation, the Company
believes its national presence provides it with key operating efficiencies,
competitive advantages and access to capital markets to provide needed
working capital. The Company has standardized the operation, general
design, staffing and equipment of its dispatch offices. In addition, the
Company has designed and implemented a proprietary management information
system that efficiently manages an extensive, Company-wide employee,
payroll, sales and customer database and provides management with valuable,
timely management reporting.
- - PROVIDE SUPERIOR SERVICE. The Company emphasizes customer responsiveness
and maintains a commitment to providing a superior quality of service
through policies such as opening offices no later than 5:30 a.m. and
extending hours of operation to 24 hours, 7 days per week where the market
demands. One of the Company's competitive advantages is that it is able to
provide workers on short notice, usually the same day as requested and
offers a "satisfaction guaranteed" policy. The Company is committed to
supplying motivated workers to its customers. Most workers find the
Company's "Work Today, Paid Today" policy appealing and arrive at the
dispatch office early in the morning motivated to put in a good day's work
and receive a paycheck at the end of the day. With the use of an automated
Cash Dispensing Machine ("CDM") at each dispatch office, workers find the
Company's policy of "Work Today, Cash Today" even more appealing.
- - AGGRESSIVELY RECRUIT TEMPORARY WORKERS. The Company has installed a CDM in
most of its dispatch offices in the United States. With the CDMs in
operation, workers have a choice of a daily paycheck or cash payment
through the CDM. The Company retains the change on each worker's daily pay
plus $1 for the service. Management believes the CDM program will enhance
the Company's ability to attract temporary workers. In 1999, the Company
issued approximately 9.8 million payroll payments in the form of either
check or cash to its temporary workers.
DISPATCH OFFICE EXPANSION
The Company has rapidly grown from 51 dispatch offices at the beginning of
1995 to 687 dispatch offices at December 31, 1999. The Company's expansion has
been achieved primarily by opening Company owned dispatch offices. The following
table sets forth the number and country of dispatch offices open at the end of
each of the last five years. The information below does not include four Labor
Ready franchised dispatch offices located in the Minneapolis/St. Paul, Minnesota
metropolitan area and one franchised dispatch office located in Fargo, North
Dakota.
LABOR READY DISPATCH OFFICES
BY COUNTRY
AT DECEMBER 31,
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1999 1998 1997 1996 1995
------------ --- ----------- -- --------- -- ---------- --- -----------
United States....................................... 670 474 308 196 102
Canada.............................................. 15 11 8 4 4
Puerto Rico......................................... 1 1 -- -- --
United Kingdom...................................... 1 -- -- -- --
- ------------------------------------------------------- --- ---------- -- ----------- -- --------- --- ---------- -- -----------
Total 687 486 316 200 106
======================================================= === ========== == =========== == ========= === ========== == ===========
The Company currently anticipates opening 200 dispatch offices during the
first half of 2000 and 200 in 2001. Dispatch office openings in 2000 will be
primarily in the United States with 10 to 20 dispatches offices opening in each
of Canada and the United Kingdom. The Company analyzes acquisition
opportunities, and from time to time, may pursue acquisitions in certain
circumstances and may also accelerate expansion based on future developments.
In 1994, the Company licensed one franchisee in Minnesota, who now operates
five locations, four in Minneapolis/St. Paul and one in Fargo, North Dakota. The
Company has not pursued, and does not intend to grant, any additional
franchises. Revenues generated from franchised dispatch offices have not been
significant during the periods presented herein.
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Page-3
ECONOMICS OF DISPATCH OFFICES. The Company has standardized the process of
opening dispatch offices. In 1999, the average aggregate cost of opening a new
dispatch office was approximately $45,000. Approximately $13,000 of these costs
includes salaries, recruiting, testing, training, lease and other related costs;
the remaining $32,000 of the cost of opening a dispatch office includes computer
systems and other equipment related costs, leasehold improvements and a cash
dispensing machine and related equipment. These costs are not expected to
increase significantly in 2000. New dispatch offices are expected to generate
revenue sufficient to cover their operating costs within six months. On average,
the volume necessary for profitable operations is approximately $12,000 per
week. Dispatch offices open for at least one full year generated average annual
revenue of approximately $1.5 million in 1999 or approximately $30,000 per
dispatch office, per week.
CRITERIA FOR NEW DISPATCH OFFICES. Labor Ready identifies desirable areas
for locating new dispatch offices with an economic model that analyzes the
potential supply of temporary workers and customer demand based on a zip code
resolution of employment figures, demographics and the relative distance to the
nearest Labor Ready dispatch office. In addition, the Company locates dispatch
offices in areas convenient for its temporary workers, which are on or near
public transportation, and have parking available. After the Company establishes
a dispatch office in a metropolitan area, the Company usually clusters
additional locations within the same area. Multiple locations in a market reduce
both opening costs and operating risk for new dispatch offices because direct
mail and other advertising costs are spread among more dispatch offices and
because the new dispatch office benefits from existing customer relationships
and established Labor Ready brand recognition.
DISPATCH OFFICE MANAGEMENT. The Company believes that the key factor
determining the success of a new dispatch office is identifying and retaining an
effective dispatch office general manager. Each general manager has primary
responsibility for managing the operations of the dispatch office, including the
recruiting and daily dispatch of temporary workers, sales and accounts
receivable collection. The Company pays monthly bonuses to its general managers
based on accounts receivable collections and gross margins during the month.
Each general manager has primary responsibility for customer service and
the dispatch office's sales efforts, including identifying and soliciting local
businesses likely to have a need for temporary manual workers. The Company's
experience is that certain types of individuals are better suited to perform the
critical management functions necessary for the dispatch office to generate the
revenues required to achieve profitability, regardless of the size of the
metropolitan area. The Company commits substantial resources to the training,
development, and operational support of its general managers.
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OPERATIONS
DISPATCH OFFICES. Dispatch offices are locations where workers report prior
to being assigned to jobs, including those being called back to the same
employer. Workers are required to report to the dispatch office in order to
minimize "no-shows" to the customer's job site. If a worker fails to report to
the dispatch office as scheduled, the Company identifies a replacement so that
the customer has the number of workers expected at the job site, on time, and
ready to work.
During the early morning hours, the general manager and an assistant
coordinate incoming customer work orders, assign the available workers to the
job openings for the day, and arrange transportation to the job site. Prior to
dispatch, a branch employee checks to make sure workers have the basic safety
equipment required for the job, such as boots, back braces, hard hats, or safety
goggles, all of which are provided at no charge to the worker and the customer.
The customer provides additional safety and other equipment, if required. New
assignments are filled from a daily sign-in sheet, considering customer requests
for specific temporary workers on repeat work orders or new engagements.
Workers who pass on a particular job are moved to the bottom of the list.
Most work assignments have been scheduled in advance; a majority of which are
repeat work orders from customers. However, a significant portion of job
openings are requested on short notice, often the same day as the workers are
needed at the job site.
The workers are provided with a work order, which is endorsed by the
customer to confirm work performance, and which must be presented at the
dispatch office in order to receive payment for the hours worked. Workers are
generally paid daily by check, and with the addition of a CDM at each dispatch
office, workers have the choice of being paid each day in cash. Computer systems
at each dispatch office perform the calculations necessary to determine the
wages, less taxes and applicable withholdings, and print security-controlled
checks, which are distributed to each worker. Alternatively, the system prints a
payroll voucher which contains a unique security code. The worker enters the
code into the CDM and their net pay is disbursed, less the change and $1 for the
CDM service.
Dispatch offices generally open by 5:30 a.m., with some open 24 hours
depending on market demand, and generally remain open until the last temporary
worker is paid. Dispatch offices are generally staffed with at least two
full-time employees, including the general manager and a customer service
representative. General managers manage the daily dispatch of temporary workers,
and are responsible for monitoring and collecting receivables, managing the
credit application process for each customer, inspecting customer job sites for
site safety, as necessary, and managing the sales and marketing efforts of the
dispatch office.
Employment applications are taken throughout the day for potential new
temporary employees. Applications are used to facilitate workers' compensation
safeguards and quality control systems by permitting the Company to test for
alcohol or drugs in case of a work-related illness or injury, to obtain a signed
"Condition of Employment" statement, and to comply with applicable immigration
requirements.
CUSTOMERS. The Company's customers require workers for lifting, hauling,
cleaning, assembling, digging, painting and other types of manual or unskilled
work. The Company's customers are primarily businesses in the freight handling,
warehousing, landscaping, construction and light manufacturing industries. Over
the past several years, the Company has been diversifying its customer base to
include more customers in the retail, wholesale, sanitation, printing, and
hospitality industries.
New dispatch offices initially target businesses in its market area with
direct mail and telemarketing campaigns. Dispatch office general managers, the
regional or local sales force and telemarketers are responsible for following up
the marketing campaigns with telephone or personal calls. Frequently, a new
dispatch office will have a high concentration of customers in the construction
industry. As dispatch offices mature, the customer base broadens and the mix of
work diversifies. Many customers have elements of seasonality in their workflow,
especially customers in the construction and landscaping industries. The Company
currently derives its business from a large number of customers, and is not
dependent on any single large customer for more than 1% of its revenues. During
1999, the Company's ten largest customers accounted for sales of $37.9 million,
or 4.5% of total revenues and $28.5 million, or 4.7% of total revenues in 1998.
While a single dispatch office may derive a substantial percentage of its
revenues from a single customer, the loss of that customer would not have a
significant impact on the Company's revenues. During 1999, the Company provided
temporary workers to in excess of 254,000 customers. Labor Ready filled
approximately 6.5 million work orders in 1999 and 4.8 million in 1998.
Many customers use Labor Ready to screen prospective employees for future
permanent hires. Because Labor Ready does not charge a fee if a customer hires a
Company worker, customers on occasion send prospective employees to the Company
with a specific request for temporary assignment to their business. Customers
thereby have the opportunity to observe the prospective employee in an actual
working situation, minimizing the expense of employee turnover and personnel
agency fees.
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Page-5
BILLING AND COLLECTIONS. The Company has implemented an automated credit
and collections system that allows each dispatch office to establish a credit
limit for new customers by telephonically accessing a computer based credit
system. Initial credit limits are based on a credit-scoring matrix developed by
the Company. No workers are dispatched without using this system. Initial credit
limits range from COD to $100,000. The credit department, using other credit
reporting agencies, bank/trade references and balance sheet analysis, reviews
and approves additional credit extensions beyond those recommended by this
system. Once a customer has reached 75% of its credit limit, the customer screen
on the Company's information system has a red warning to alert the dispatch
office to monitor more closely the activity of the customer.
SALES AND MARKETING. Each dispatch office is responsible for its own sales
and marketing efforts in its local market area. The dispatch office general
manager is primarily responsible for sales and customer service, with all branch
employees being involved in sales and customer relations. The Company purchases
a direct marketing database, and from a centralized direct mail department,
conducts an intensive direct-mail campaign in the local market area of each
dispatch office. For new dispatch offices, the direct-mail campaign targets a
broad range of businesses in its local market area. Follow-up mailings target
business in the Company's traditional market niche. Follow-up telephone and
personal calls on qualified leads are made by the dispatch office general
manager or a sales representative. The Company currently employs approximately
200 sales personnel at the dispatch offices.
When entering new markets, the Company allows for an initial advertising
budget to generate an awareness of the new dispatch office. When opening
additional offices as warranted, based on area demographics, the Company can
also expand and coordinate its marketing efforts to the benefit of other
established offices in the local area. Marketing is accomplished primarily
through telemarketing and direct-mail campaigns, yellow-page advertising,
personal sales contacts, word of mouth, and billboard advertising.
TEMPORARY WORKERS. Most workers find the Company's "Work Today, Paid Today"
policy appealing and arrive at the dispatch office early in the morning
motivated to put in a good day's work and receive a paycheck or a CDM voucher
for cash at the end of the day. The majority of the workers are male and most
are between the ages of 18 and 40 and live in low-income neighborhoods.
The Company's daily pool of temporary workers at each dispatch office
generally numbers between 40 and 200, depending upon the time of year. Because
of increasing diversification of the Company's customer base and a wider
dispersion of dispatch offices in different geographic areas of the United
States, the Company is less dependent on weather than in its early years. Good
weather, nevertheless, brings incrementally more job orders and workers.
Consequently, the Company is busiest in the late spring, summer and early fall.
After reviewing work orders for that day's customer requests, the dispatch
office general manager prescreens the qualifications of the available temporary
workers to assure that they can perform the work required. Additionally, the
individual must be at least 18 years old, physically capable and in apparent
good health. The main objective is to dispatch the most suitable workers for the
positions available. Dispatch office employees over time come to know most
workers at the dispatch office and their capabilities. The Company is an equal
opportunity employer.
Under the Company's "satisfaction guaranteed" policy, replacements for all
unsatisfactory workers are promptly provided if the customer notifies the
Company within the first two hours of work. Employees who receive two complaints
from customers are generally reprimanded or terminated. The Company will
immediately terminate any employee who agrees to take a work order and does not
report at the customer's job site. Any use of obscene language, alcohol or drugs
on the dispatch office premises or at the customers' job sites are grounds for
immediate dismissal. The Company lists workers who were terminated in a central
database to prevent rehire by other dispatch offices.
The Company withholds FICA and federal, state, and, where applicable, city
and county income taxes from its temporary workers' wages for disbursement to
governmental agencies. Additionally, the Company maintains federal and state
unemployment insurance, and workers' compensation coverage for its temporary
employees.
RECRUITMENT OF TEMPORARY WORKERS. The Company attracts its pool of
temporary workers through billboard advertisements, flyers, newspaper
advertisements, dispatch office displays, and word of mouth. The Company
believes its strategy of locating dispatch offices in areas convenient for its
workers, with ready access to public transportation, is particularly important
in attracting workers.
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The Company's "Work Today, Paid Today" policy is prominently displayed at
most dispatch offices and, in the Company's experience, is a highly effective
method of attracting temporary workers. With the addition of a CDM at each
dispatch office, management believes that the Company's "Work Today, Cash Today"
policy is an added incentive for temporary workers. Workers also find other
Company policies attractive, such as the emphasis on worker safety, including
Company provided safety training and equipment, and modest cash advances for
lunch or gas to workers short on cash. Temporary workers are also aware of the
Company's no-fee policy toward customers who offer temporary workers a regular
position. The possibility of landing a regular position serves as an added
incentive to the Company's workers.
Management believes that Labor Ready has earned a good reputation with its
temporary laborers because the Company consistently has jobs available and
treats its workers with respect. The Company believes this also helps attract a
motivated and responsive workforce. As a result, the Company believes referrals
by current or former temporary workers who have had good experiences with the
Company account for a significant percentage of its recruiting successes.
The Company experiences from time to time, during peak periods, shortages
of available temporary workers. Dispatch offices with a shortage of workers
attempt to fill work orders by asking temporary workers to inform friends,
relatives and neighbors of job openings and by identifying prospective workers
from the Company's employee data base. On occasion, work orders requiring large
numbers of temporary workers will be filled through coordination with other
local dispatch offices.
MANAGEMENT, EMPLOYEES AND TRAINING. At December 31, 1999, the Company
employed approximately 250 administrative and executive staff in the corporate
office, and approximately 3,000 people as supervisors, general managers,
customer service representatives, district managers, area directors and support
staff. General managers report to district managers who in turn report to area
directors. For positions above general manager, the Company's recruiting focus
is on hiring additional management and supervisory personnel with experience in
managing multi-location operations.
After extensive interviews and tests, prospective district and general
managers undergo approximately one week of training at the Company's training
center which is located at the corporate office in Tacoma, Washington and four
weeks of on-the-job training at a dispatch office. The training center is
charged with providing the managers with all of the skills necessary for
operating a dispatch office. Staffed by experienced training professionals, the
training center has developed a curriculum, training manuals, and instruction
modules for the training program, which include rigorous sessions on topics such
as marketing and direct mail, credit and collections, payroll and personnel
policies, workers' compensation management and safety. Customer service
representatives receive on-the-job training at the branch where they work.
MANAGEMENT INFORMATION SYSTEMS. The Company has developed its own
proprietary system to process all required credit, billing, collection,
temporary worker payroll and related payroll tax returns, together with other
management information and reporting systems necessary for the management of
hundreds of thousands of workers and staff in multiple locations. The Company is
currently implementing a corporate wide Wide Area Network (WAN), which will
provide increased efficiency and timing in the transmission of multiple types of
management information between the multiple dispatch offices and corporate. In
1999, the Company completed the installation of the next generation, client
server version of its proprietary software in all dispatch offices.
The system maintains all of the Company's key databases from the tracking
of work orders to payroll processing to maintaining worker records. The current
system regularly exchanges all point of sale information between the corporate
headquarters and the dispatch offices, including customer credit information and
outstanding receivable balances. Dispatch offices can run a variety of reports
on demand, such as receivables aging, margin reports, and customer activity
reports. With the advent of the WAN, area directors and district managers will
be able monitor their territories from the field more effectively. The Company
believes its proprietary software system provides Labor Ready with significant
competitive advantages over competitors that utilize less sophisticated systems.
The Company's information system also provides the Company with key
internal controls. All work order tickets are entered into the system at the
dispatch office level. No payroll check can be issued at a dispatch office
without a corresponding work ticket on the computer system. When a payroll check
or CDM voucher is issued, the customer's weekly invoice and the dispatch office
receivables ledger are automatically updated. Printed checks have watermarks and
computer-generated signatures that are difficult to duplicate. The Company has
developed a proprietary system, which allows the payroll software to generate
either a payroll check, or at the workers' option, a cash withdrawal from the
dispatch office's CDM. All cash receipts are received in lockbox accounts and
are matched to customers' receivable records using an automated data capture
system.
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Page-7
WORKERS' COMPENSATION PROGRAM. The Company provides workers' compensation
insurance for its temporary workers and regular employees. For workers'
compensation claims originating in the majority of states (the 43
non-monopolistic states), the Company has purchased a deductible insurance
policy. Under terms of the policy, the Company's workers' compensation exposure
is limited to a deductible amount per occurrence and a maximum aggregate
stop-loss limit. Should any single occurrence exceed the deductible amount per
occurrence, all losses and expenses beyond the deductible amount are paid by
independent insurance companies unrelated to the Company. Similarly, should the
total of paid losses related to any one year period exceed the maximum aggregate
stop-loss limit for that year, all losses beyond the maximum aggregate stop-loss
limit are paid by independent insurance companies unrelated to the Company. In
1997, the per occurrence deductible amount was $250,000 per claim, with an
aggregate maximum of $11.60 per $100 of temporary worker payroll, or $18.8
million. For claims arising in 1998 and 1999, the per occurrence deductible
amount was $350,000 and the maximum aggregate stop-loss limit was $10.41 per
$100 of temporary worker payroll, or $31.7 million for the year ended December
31, 1998 and $45.6 million for the year ended December 31, 1999.
For claims arising in years prior to 1997, the Company has insured all
additional losses beyond amounts reserved in its financial statements with
independent insurance companies unrelated to the Company. The difference between
the discounted maximum aggregate stop-loss limit for claims arising in all
periods prior to December 31, 1999, and the total of claims paid and reserved
for in the Company's financial statements for the same periods is $10.1 million.
This amount represents the discounted maximum additional exposure, net of tax,
to the Company before its maximum aggregate stop-loss limits are met for all
periods before December 31, 1999.
The Company establishes its reserve for workers' compensation claims using
actuarial estimates of the future cost of claims and related expenses that have
been reported but not settled, and that have been incurred but not reported.
Adjustments to the claims reserve are charged or credited to expense in the
periods in which they occur. Included in the accompanying consolidated balance
sheets as of December 31, 1999 and 1998, are workers' compensation claims
reserves in the non-monopolistic states of $34.7 million and $24.4 million,
respectively. The claims reserves were computed using a discount rate of 6.0% at
December 31, 1999 and 1998.
Workers' compensation expense totaling $38.2 million, $30.6 million and
$19.2 million was recorded as a component of cost of services in each of the
years ended December 31, 1999, 1998 and 1997, respectively.
For the 1997 and 1998 program years, the Company is required to provide
collateral in the amount of the maximum aggregate stop-loss limits, less claims
paid to date. The Company provides approximately 50% of the required collateral
in the form of a surety bond and 50% in letters of credit. Accordingly, at
December 31, 1999, $14.5 million of the collateral was satisfied with surety
bonds and $15.1 million was satisfied with letters of credit for the 1997 and
1998 program years. Subsequent to year end, the letters of credit decreased by
$2.5 million, which results in a new outstanding balance of $12.6 million.
For the 1999 and 2000 program years, the policy includes substantially the
same terms and limitations as the 1998 policy described above except that the
Company is required to provide collateral in the amount of 60% of claims
reserves. The collateral for the 1999 program consists of 50% letters of credit
and 50% surety bond. Accordingly, as of December 31, 1999, the Company has
provided the insurance carrier with a letter of credit totaling $12.0 million
and a surety bond for $12.6 million. During 2000, the total amount of the
letters of credit and surety bonds for the 2000 program year will increase by
approximately $20.0 million.
For workers' compensation claims originating in Washington, Ohio and West
Virginia (the monopolistic states), Canada and Puerto Rico, the Company pays
workers' compensation insurance premiums as required by state administered
programs. The insurance premiums are established by each jurisdiction, generally
based upon the job classification of the insured workers and the previous claims
experience of the Company.
In October 1998, the Company purchased an employers' liability insurance
policy for the United Kingdom. This policy carries a 10 million GBP limit.
The Company has established a risk management department at its corporate
headquarters to manage its insurers, third party claims administrators, and
medical service providers. To reduce wage-loss compensation claims, the Company
employs claims coordinators. The claims coordinators manage the acceptance,
processing and final resolution of claims and administer the Company's return to
work program. Workers in the program are employed on customer assignments that
require minimal physical exertion or within the Company in the local dispatch
office. The Company has an on-line connection with its third party administrator
that allows the claims coordinators to maintain visibility of all claims, manage
their progress and generate required management information.
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Page-8
GOVERNMENT REGULATIONS
SAFETY PROGRAMS. As an employer, the Company is subject to applicable state
and/or federal statutes and administrative regulations pertaining to job site
safety. Where states do not have a safety program certified by the federal
Occupational Safety & Health Administration ("OSHA"), the Company is subject to
the standards prescribed by the federal Occupational Safety & Health Act and
rules promulgated by OSHA. However, the Company's temporary workers are
generally considered the customer's employees while on the customer's job site
for the purpose of applicable safety standards compliance.
In 1999, the Company's accident rate was approximately one incident per
7,769 man hours worked, compared to the Company's accident rate of approximately
one incident per 7,853 per man hours worked in 1998. The Company continues to
emphasize safety awareness, which helps control workers' compensation costs,
through training of its management employees and office staff, safety sessions
with temporary workers, issuing safety equipment, monitoring job sites, and
communicating with customers to promote job site safety. Temporary workers are
trained in safety procedures primarily by showing safety tapes at the beginning
of each day. Bulletin boards with safety-related posters are prominently
displayed. Additionally, "Tailgate" safety training sessions are conducted at
customers' job sites.
The Company maintains its own inventory of safety equipment at each
dispatch office. Standard equipment includes hard hats, metal-toed boots,
gloves, back braces, earplugs, and safety goggles. Equipment is checked out to
workers as appropriate. All construction jobs require steel-toed boots and a
hard hat. The dispatch office general manager ensures that workers take basic
safety equipment to job sites.
Dispatch office personnel are trained to discuss job safety parameters with
customers on incoming work order requests. Managers conduct job site visits for
new customer job orders and periodic "spot checks" of existing customers to
review safety conditions at job sites. Workers are encouraged to report unsafe
working conditions to the Company.
WAGE AND HOUR REGULATION. Labor Ready is required to comply with applicable
state and federal wage and hour laws. These laws require that the Company pay
its employees minimum wage and overtime at applicable rates when the employee
works more than forty hours in a workweek. In some states, overtime pay may be
required after eight or ten hours of work in a single day.
COMPETITION
The short-term, light industrial manual labor sector of the temporary
services industry is highly fragmented and highly competitive, with limited
barriers to entry. A large percentage of temporary staffing companies serving
this sector of the industry are local operations with fewer than five offices.
Within local or regional markets, these firms actively compete with the Company
for business. The primary basis of competition among local firms is service and
the ability to provide the requested amount of workers on time and price. While
entry into the market has limited barriers, lack of working capital frequently
limits growth of smaller competitors.
Although there are several large full-service and specialized temporary
labor companies competing in national, regional and local markets, to date,
those companies have not aggressively expanded in the Company's targeted market
segment. However, many of these competitors have substantially greater financial
and marketing resources than those of the Company. One or more of these
competitors may decide at any time to enter or expand their existing activities
in the short-term, light industrial market and provide new and increased
competition to Labor Ready. The Company believes that, among the larger
competitors, the primary competitive factors in obtaining and retaining
customers are the cost of temporary labor, the quality of the temporary workers
provided, the responsiveness of the temporary labor company, and the number and
location of offices. The availability to the Company's customers of multiple
temporary service providers can create significant pricing pressure as
competitors compete for the available customers, and this pricing pressure could
adversely impact profit margins.
TRADEMARKS
The Company's business is not presently dependent on any patents, licenses,
franchises, or concessions. "Labor Ready," and the service mark "Work Today,
Paid Today" are registered with the U.S. Patent and Trademark Office. The
Company has filed with the U.S. Patent and Trademark Office, for registration of
the service mark "Work Today, Cash Today" and has been granted a patent for the
system of controlling a network of CDMs for the disbursement of payroll.
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Page-9
ITEM 2. PROPERTIES
The Company leases virtually all of its dispatch offices. Dispatch office
leases generally permit the Company to terminate the lease on 60 days notice and
upon payment of three months rent. Certain leases have a minimum one-year term
and require additional payments for taxes, insurance, maintenance and renewal
options.
The Company owns a 24,000 square foot building and a 44,000 square foot
office building and an adjoining 10,000 square foot warehouse in Tacoma,
Washington. The buildings currently serve as Labor Ready's corporate
headquarters and administrative offices. Additionally, the Company owns a
dispatch office in Kansas City, Missouri and Tacoma, Washington. Management
believes all of the Company's facilities are currently suitable for their
intended use.
In May of 1999, the Company entered a purchase and sale agreement to
purchase a 157,000 square foot office building with an attached parking garage
in downtown Tacoma, Washington. The aggregate purchase price of the building,
parking garage and estimated tenant improvements is approximately $11.5 million.
The Company currently has $500,000 on deposit with a remaining balance of $11.0
million, which is due upon closing. The Company expects to move its corporate
headquarters and administrative offices to this building by the end of 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
employee-related issues and disputes with customers. The Company carries
insurance for actions or omissions of its temporary employees. Since the
temporary workers are under the supervision of the customer or its employees,
the Company believes the terms of its contracts with its customers, which
provide that the customers are responsible for all actions or omissions of the
temporary workers, limit the Company's liability. Nevertheless, any future
claims are subject to the uncertainties related to litigation and the ultimate
outcome of any such proceedings or claims cannot be predicted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock commenced trading on the New York Stock Exchange
("NYSE") on October 28, 1998. Beginning on June 12, 1996, the Company's common
stock was traded on the Nasdaq National Market and prior to that date, the
Company's common stock was traded over-the-counter. The high and low bids (for
periods before October 28, 1998) and sale prices (for periods after October 28,
1998) were as follows:
QUARTER ENDED HIGH* LOW*
March 31, 1998 15.51 7.03
June 30, 1998 20.13 12.67
September 30, 1998 26.25 7.58
December 31, 1998 16.04 8.17
March 31, 1999 18.80 13.5
June 30, 1999 27.63 15.5
September 30, 1999 22.33 9.94
December 31, 1999 14.75 9.88
*Dollar amounts are adjusted to reflect the three-for-two stock
splits, which were effective on May 29, 1998 and June 24, 1999.
The Company had 719 shareholders of record as of December 31, 1999. The
quotation information has been derived from the NYSE and Nasdaq Stock Market and
information for periods prior to October 28, 1998 does not include retail
markups, markdowns or commissions and may not be reflective of actual
transactions. No cash dividends have been declared on the Company's common stock
to date and the Company does not intend to pay a cash dividend on common stock
in the foreseeable future. Future earnings will be used to finance the growth
and development of the Company.
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ITEM 6. SELECTED FINANCIAL INFORMATION.
The following selected consolidated financial information of the Company
has been derived from the Company's audited Consolidated Financial Statements.
The Consolidated Balance Sheet as of December 31, 1999 and 1998, and the
Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for the
years ended December 31, 1999, 1998 and 1997 were audited by Arthur Andersen
LLP, whose report thereon appears elsewhere herein. The Statement of Operations
Data for the years ended December 31, 1996 and 1995, and the Balance Sheet Data
at December 31, 1997, 1996 and 1995 are derived from the Company's audited
financial statements which do not appear herein. The data should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere herein.
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF OFFICES)
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996 1995
--------------- -- ---------- -- ----------- -- ---------- --- ----------
STATEMENT OF OPERATIONS DATA:
Revenues from services............................. $850,873 $606,895 $335,409 $163,450 $94,362
Gross profit....................................... 263,507 183,971 98,742 47,919 29,479
Income before taxes, cumulative effect of change in
accounting principle and extraordinary item........ 40,430 33,390 12,522 3,506 3,214
Cumulative effect of change in accounting principle
and extraordinary item, net of income tax.......... (1,453) -- -- (1,197) --
Net income......................................... 23,124 19,799 6,963 724 2,062
Earnings per common share
Basic........................................... $ 0.54 $ 0.47 $ 0.17 $ 0.02 $ 0.07
Diluted......................................... $ 0.53 $ 0.46 $ 0.17 $ 0.02 $ 0.07
Weighted average shares outstanding (1)
Basic........................................... 42,521 41,694 41,504 35,697 27,975
Diluted........................................ 43,456 42,999 42,251 36,650 29,339
AT DECEMBER 31,
1999 1998 1997 1996 1995
------------- --- ----------- -- ----------- -- ------------ -- ---------
BALANCE SHEET DATA:
Current assets..................................... $134,931 $105,933 $ 65,617 $ 48,534 $20,730
Total assets....................................... 174,481 130,736 80,367 64,125 26,182
Current liabilities................................ 37,197 34,842 15,788 10,961 7,956
Long-term liabilities.............................. 26,148 15,397 6,538 1,572 9,695
Total liabilities.................................. 63,345 50,239 22,326 12,533 17,650
Shareholders' equity............................... 111,136 80,497 58,041 51,592 8,532
Cash dividends declared (2)........................ 43 43 43 43 43
Working capital.................................... 97,734 71,091 49,829 37,573 12,774
OPERATING DATA: (UNAUDITED)
Revenues from dispatch office open for full year... $754,348 $508,980 $ 280,538 $133,156 $65,798
Revenues from dispatch offices opened during year.. $ 96,525 $ 97,915 $ 54,871 $ 30,294 $28,564
Dispatch offices open at period end............... 687 486 316 200 106
(1) The weighted average shares outstanding have been adjusted to reflect
the three for two stock splits which were each effective on July 7, 1996,
October 24, 1997, May 29, 1998 and June 24, 1999.
(2) Represents cash dividends on the Preferred Stock. The Company has never
paid cash dividends on its Common Stock and does not anticipate that it
will do so in the foreseeable future. See Item 5 "Market for Registrant's
Common Equity and Related Stockholder Matters".
Page-12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in connection with the
Company's Consolidated Financial Statements and the notes thereto and other
financial information included elsewhere in this document.
OVERVIEW
Labor Ready is a leading national provider of temporary workers for manual
labor jobs. The Company's customers are primarily in freight handling,
warehousing, landscaping, construction, light manufacturing, and other light
industrial businesses. The Company has rapidly grown from 51 dispatch offices in
1994 to 687 dispatch offices at December 31, 1999. All of the growth in dispatch
offices was achieved by opening Company owned locations rather than through
acquisitions. The Company's revenues grew from approximately $39.0 million in
1994 to $850.9 million in 1999. This revenue growth has been generated both by
opening new dispatch offices and by continuing to increase sales at existing
dispatch offices. In 1999, the average annual revenue per dispatch office open
for more than a full year was approximately $1.5 million in 1999 and
approximately $1.6 million in 1998.
The Company expects to open 200 new dispatch offices in the first half of
each year in 2000 and 2001. In 1999, the Company incurred costs of approximately
$9.1 million to open 201 new dispatch offices, an average of approximately
$45,000 per dispatch office. Approximately $13,000 of these costs includes
salaries, recruiting, testing, training, lease and other related costs; the
remaining $32,000 of the cost of opening a dispatch office includes computer
systems and other equipment related costs, leasehold improvements and a cash
dispensing machine and related equipment. Further, once open, the Company
invests significant amounts of additional cash into the operations of new
dispatch offices until they begin to generate sufficient revenue to cover their
operating costs, generally within six months. The Company pays its temporary
workers on a daily basis, and bills its customers on a weekly basis. The average
collection cycle for 1999 was approximately 40 days. Consequently, the Company
historically has experienced significant negative cash flow from operations and
investment activities during periods of high growth and may require additional
sources of working capital in order to continue to grow. See "Liquidity and
Capital Resources" and "Outlook: Issues and Uncertainties--Working Capital
Requirements."
Construction and landscaping businesses and, to a lesser degree, other
customer businesses typically increase activity in spring, summer and early fall
months and decrease activity in late fall and winter months. Inclement weather
can slow construction and landscaping activities in such periods. As a result,
the Company has generally experienced a significant increase in temporary labor
demand in the spring, summer and early fall months, and lower demand in the late
fall and winter months.
Depending upon location, new dispatch offices initially target the
construction industry for potential customers. As dispatch offices mature, the
customer base broadens and the mix of work diversifies. From time to time during
peak periods, the Company experiences shortages of available temporary workers.
See "Outlook: Issues and Uncertainties -- Availability of Temporary Workers."
Cost of services includes the wages and related payroll taxes of temporary
workers, workers' compensation expense, unemployment compensation insurance, and
transportation.
Temporary workers assigned to customers remain Labor Ready employees. Labor
Ready is responsible for employee-related expenses of its temporary workers,
including workers' compensation, unemployment compensation insurance, and
Medicare and Social Security taxes. The Company does not provide health, dental,
disability or life insurance to its temporary workers. Generally, the Company
bills its customers for the hours worked by the temporary workers assigned to
the customer. Because the Company pays its temporary workers only for the hours
actually worked, wages for the Company's temporary workers are a variable cost
that increases or decreases directly in proportion to revenue.
The Company has one franchisee, which operates five dispatch offices. The
Company does not intend to grant additional franchises. Royalty revenues from
the franchised dispatch offices were not material during any period presented
herein.
The typical customer order is for two temporary workers and the typical
payroll check paid or CDM voucher issued by the Company is less than $50. The
Company is not dependent on any individual customer for more than 1% of its
annual revenues. During 1999, the Company provided temporary workers to in
excess of 254,000 customers and filled more than 6.5 million work orders.
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Page-13
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Operations for the
periods indicated.
YEAR ENDED DECEMBER 31,
1999 1998 1997
----------------- -- --------------- -- ---------------
Revenues from services........................... 100.0% 100.0% 100.0%
Cost of services................................. 69.0 69.7 70.6
Selling, general and administrative expenses..... 25.5 23.8 25.1
Depreciation and amortization.................... 0.6 1.0 1.2
Interest income (expense) and other, net......... (0.1) (0.4) 0.6
Income before taxes on income and cumulative
effect of change in accounting principle......... 4.8 5.5 3.7
Net income....................................... 2.7 3.3 2.1
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
DISPATCH OFFICES. The number of offices grew to 687 at December 31, 1999
from 486 locations at December 31, 1998, a net increase of 201 dispatch offices
or 41.4% and from 316 locations at December 31, 1997, a net increase of 170
dispatch offices, or 53.8%.
REVENUES FROM SERVICES. Revenues from services increased to $850.9 million
in 1999 as compared to $606.9 million in 1998, an increase of $244.0 million or
40.2%. The increase in revenues is primarily due to continued increases in
revenues from mature dispatch offices as the Company consolidates its position
in the marketplace and builds brand awareness. The Company opened 201 offices,
which produced average revenues of approximately $480,000 as compared to 1998
when the Company opened 170 offices, which had average revenues of $576,000.
Included in revenues from services for the years ended December 31, 1999 and
1998 were CDM fees of $7.7 million and $3.6 million, respectively.
Revenues from services increased to $606.9 million in 1998 as compared to
$335.4 million in 1997, an increase of $271.5 million or 80.9%. The increase in
revenues was primarily due to continued increases in revenues from mature
dispatch offices. Additionally, the Company opened 170 new dispatch offices in
1998 and increased its average revenues per new dispatch office from
approximately $473,000 in 1997 to approximately $576,000 in 1998. In 1998, the
Company opened 161 of its 170 new dispatch offices in the first half of the
year, compared to 97 dispatch offices opened in the first half and 19 opened in
the second half of 1997. Opening dispatch offices in the first half of the year
enables each new dispatch office to realize higher revenues during the Company's
busiest time of the year. Included in revenues from services for the years ended
December 31, 1998 and 1997 were CDM fees of $3.6 million and $0, respectively.
(IN THOUSANDS)
1999 1998 1997
------------- --- ------------------ --- --------------
Increase in revenues from dispatch offices open for full year..... $ 147,453 $ 173,571 $ 117,088
Revenues from new dispatch offices opened during year............. 96,525 97,915 54,871
- ---------------------------------------------------------------------- -- ------------- --- --- -------------- --- -- -----------
Total increase over prior year.................................... $ 243,978 $ 271,486 $ 171,959
====================================================================== == ============= === === ============== === == ===========
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Page-14
COST OF SERVICES. Cost of services increased to $587.4 million in 1999 from
$422.9 million in 1998, an increase of $164.5 million or 38.9%. The increase in
cost of services was due largely to the 40.2% increase in revenue from 1998 to
1999. Cost of services was 69.0% of revenue in 1999 compared to 69.7% of revenue
in 1998, an improvement of 0.7%. Cost of services as a percentage of revenues
decreased as compared to 1998 levels as the Company's workers' compensation
claims experience continues to improve offset by a slight increase to wages paid
to workers. The increase in CDM fees in revenues from services contributed 0.4%
to the improvement in cost of services as a percentage of revenue from 1999 to
1998.
Cost of services increased to $422.9 million in 1998 from $236.7 million in
1997, an increase of $186.2 million or 78.7%. The increase in cost of services
was due largely to the 80.9% increase in revenue from 1997 to 1998. Cost of
services was 69.7% of revenue in 1998 compared to 70.6% of revenue in 1997, an
improvement of 0.9%. Cost of services as a percentage of revenues decreased as
compared to 1997 levels as the Company's workers' compensation claims experience
continues to improve. Additionally, the Company's sales increased in mature
stores and margins improved as it realized benefits related to its size in the
market. The inclusion of CDM fees in revenues from services contributed 0.4% to
the improvement in cost of services as a percentage of revenue from 1998 to
1997.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $217.3 million in 1999 as compared to $144.2
million in 1998, an increase of $73.1 million, or 50.6%. The increase was
largely due to the 40.2% increase in revenue from 1998 to 1999. Selling, general
and administrative expenses were 25.5% of revenues in 1999 as compared to 23.8%
of revenues in 1998. The increase in selling, general and administrative
expenses as a percentage of revenue is due mainly to an increase in bad debt
expense and recruiting and training fees related to hiring additional branch
managers and sales representatives. Included in selling, general and
administrative costs for the years ended December 31, 1999 and 1998 are CDM
related expenses of $2.9 million and $1.9 million, respectively. The Company
expects that selling, general and administrative expenses as a percentage of
revenues may fluctuate in future periods as the Company from time to time
upgrades its administrative capabilities to accommodate anticipated revenue
growth.
Selling, general and administrative expenses were $144.2 million in 1998 as
compared to $84.1 million in 1997, an increase of $60.1 million, or 71.5%. The
increase was largely due to increases in personnel and infrastructure to support
the 80.9% increase in revenue from 1997 to 1998. Selling, general and
administrative expenses were 23.8% of revenues in 1998 as compared to 25.1% of
revenues in 1997. The decrease in selling, general and administrative expenses
as a percentage of revenue is due mainly to economies of scale on fixed and
semi-fixed administrative costs. Included in selling, general and administrative
costs for the years ended December 31, 1998 and 1997 are CDM related expenses of
$1.9 million and $0, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses were $4.8 million in 1999 and $6.1 million in 1998, a decrease of $1.3
million or 20.9%. The decrease in depreciation and amortization expense is
primarily the result of the elimination of amortization expense when the Company
adopted Statement of Position 98-5 (SOP 98-5). Beginning in 1999, SOP 98-5
requires the Company to expense as incurred, pre-opening costs for new dispatch
offices, and recognize as a cumulative effect of a change in accounting
principle, a one-time charge for the unamortized balance of pre-opening costs.
The cumulative effect of adopting SOP 98-5 resulted in a $1.5 million charge,
net of tax, in 1999 to relieve the unamortized balance of pre-opening costs.
Prior to the change, the Company had capitalized pre-opening costs and amortized
them over two years. Offsetting this decrease is higher levels of depreciation
resulting from the addition of $15.2 million in property and equipment during
the year. These additions primarily include CDMs and related equipment, computer
equipment, software and other equipment needed for the new offices opened during
the period and to expand the Company's data processing capabilities to
accommodate the Company's continued growth. Included in depreciation and
amortization expense for the years ended December 31, 1999 and 1998 is
depreciation on CDMs of $1.0 million and $0.6 million, respectively.
Depreciation and amortization expenses were $6.1 million in 1998 and $4.0
million in 1997, an increase of $2.1 million or 52.5%. The increase in
depreciation and amortization expense is the result of amortization of dispatch
office pre-opening costs as the Company continued its rapid expansion by adding
170 stores in 1998. Additionally, the Company added approximately $13.2 million
in property and equipment during the year, including information systems and
equipment for the new stores, cash dispensing machines for all of its United
States' stores and enhanced management information systems hardware and
software. Included in depreciation and amortization expense for the years ended
December 31, 1998 and 1997 is depreciation on CDMs of $0.6 million and $0,
respectively.
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Page-15
INTEREST INCOME (EXPENSE) AND OTHER, NET. The Company recorded net interest
expense of ($1.0) million for the period ending December 31, 1999 as compared to
($0.3) million of expense for the same period in 1998. The increase in net
interest expense was the result of increases in interest expense on CDM leases,
higher letter of credit and line of credit fees than in 1998 as a result of
providing additional collateral to the Company's workers' compensation insurers
and increasing the line of credit to $60 million, and an increase in borrowings
on the line of credit. Additionally, cash balances held in CDMs for payment of
temporary worker payrolls will continue to reduce cash for investing.
Interest income (expense) and other, net was an expense of ($0.3) million
in 1998 compared to income of $1.9 million in 1997, an increase in expense of
($2.2) million. Approximately $1.2 million of the difference was due to
investment income earned during 1997 on the Company's workers' compensation
deposits, which were replaced by letters of credit and surety bonds in 1998.
Additionally, the Company had lower cash balances available for investing in
1998 due to cash balances held in CDMs for payment of temporary worker payroll.
TAXES ON INCOME. Taxes on income increased to $15.9 million in 1999 from
$13.6 million in 1998, an increase of $2.3 million or 16.6%. The increase in
taxes was due to the increase in income before taxes and cumulative effect of
accounting change to $40.4 million for 1999 as compared to $33.6 million for
1998. The Company's effective tax rate was 39.2% in 1999 as compared to 40.7% in
1998. The decrease in the effective income tax rate was primarily due to
reductions in the Company's state income tax rates. The principal difference
between the statutory federal income tax rate and the Company's effective income
tax rate result from state income taxes and certain non-deductible expenses.
Taxes on income increased to $13.6 million in 1998 from $5.6 million in
1997, an increase of $8.0 million or 142.9%. The increase in taxes was largely
due to the 167.2% increase in pretax income to $33.4 million in 1998 from $12.5
million in 1997. The Company's effective tax rate was 40.7% in 1998 as compared
to 44.8% in 1997. The decrease in the effective income tax rate was due
primarily to prior period amounts included in the 1997 tax provision. The
principal difference between the statutory federal income tax rate and the
Company's effective income tax rate result from state income taxes and certain
non-deductible expenses.
The Company had a net deferred tax asset of approximately $14.8 million at
December 31, 1999, resulting primarily from workers' compensation deposits,
credits and reserves. The Company has not established a valuation allowance
against this net deferred tax asset as management believes that it is more
likely than not that the tax benefits will be realized in the future based on
the historical levels of pre-tax income and expected future taxable income.
NET INCOME. Net income increased to $23.1 million in 1999 from net income
of $19.8 million in 1998, an increase of $3.3 million or 16.8%. This increase in
net income is primarily the result of increased revenues and gross margins and
decreases in amortization expense, offset by a one-time charge of $1.5 million
related to the change in accounting principle for dispatch office pre-opening
costs as discussed above.
Net income increased to $19.8 million in 1998 from net income of $7.0
million in 1997, an increase of $12.8 million or 182.9%. This increase in net
income is primarily the result of increased revenues, gross margins and lower
selling, general and administrative costs as a percentage of revenue.
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Page-16
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was ($4.1) million,
$13.3 million and $11.3 million, in 1999, 1998 and 1997, respectively. The
decrease in cash flows from operations in 1999 as compared to 1998 is largely
due to the increase in accounts receivable and number of days in accounts
receivable, income taxes and deferred income taxes. The increase in accounts
receivable, of $44.2 million, is a result of the Company's growth. The decrease
in cash flow for these items were offset by the non-cash provision for bad debt,
depreciation and amortization and an increase in the reserve for workers'
compensation and net income for the year.
The increase in cash flows from operations in 1998 as compared to 1997 is
largely due to net income for the year, increases in non-cash expenses including
depreciation and amortization and the provision for doubtful accounts, offset by
an increase in the Company's net deferred tax asset during the year.
Additionally, the reserve for workers' compensation claims grew by $12.1
million, due mainly to the increase in revenues over 1997. Finally, income taxes
payable, net of income taxes receivable, increased by $5.7 million as a result
of the Company's increased profitability over 1997. These increases were offset
by the increase in accounts receivable of $36.3 million over 1997.
The Company used net cash in investing activities of $14.2 million in 1999,
$9.2 million in 1998 and $4.9 million in 1997. The increase in cash used in
investing activities in 1999 as compared to 1998 is due primarily to the
increase in capital expenditures incurred to open 201 new dispatch offices in
1999 and an increase to the Company's data processing capabilities to
accommodate the growth in dispatch offices and upgrade computer systems in
existing locations. The Company's cash used for capital expenditures in 1999 and
1998 include property and equipment acquired other than through capital lease.
The increase in cash used in investing activities in 1998 as compared to
1997 is due primarily to the increase in capital expenditures incurred to open
170 new dispatch offices in 1998 as compared to 116 in 1997. These expenditures
included primarily store pre-opening costs, computer systems and related
equipment, and leasehold improvements. Additionally, the Company continued to
acquire additional hardware and software to accommodate the Company's
information needs during its rapid expansion program.
Net cash provided by (used in) financing activities was $9.3 million,
($0.1) million and ($1.9) million in 1999, 1998 and 1997, respectively. The
increase in cash provided by financing activities in 1999 as compared to 1998 is
due mainly to the increase in short term borrowings and proceeds from the sale
of stock through stock options and warrants exercised and the Company's employee
benefit plans. Additionally, in 1999, the Company made payments of $0.9 million
on the CDM capital leases and used cash of $1.4 million to repurchase 136,300
shares of its common stock on the open market.
The decrease in cash used by financing activities in 1998 as compared to
1997 is due mainly to the increase in proceeds from the sale of stock through
the Company's employee stock option and employee stock purchase plans.
Additionally, in 1998, the Company made payments of $0.6 million on the CDM
capital leases and used cash of $1.9 million to repurchase 106,116 shares of its
common stock on the open market.
During 1999, the Company entered into a line-of-credit agreement with U.S.
Bank. The new agreement allows the Company to borrow up to the lesser of $60
million or 80% of eligible accounts receivable, as defined by the bank, with
interest at the lesser of the bank's prime rate (8.50% at December 31, 1999) or
the London Inter-Bank Offering Rate (LIBOR) plus 1.25. The line of credit is
secured primarily by the Company's accounts receivable and is due in full on
June 30, 2001. The line of credit agreement requires that the Company maintain
minimum net worth and working capital amounts. The Company was in compliance
with the requirements at December 31, 1999.
As discussed further in the consolidated financial statements, the Company
is required by the workers' compensation program to collateralize a portion of
its workers' compensation liability with irrevocable letters of credit. At
December 31, 1999, the Company had provided its insurance carriers with letters
of credit totaling $27.1 million. The letters of credit bear fees of .75% per
year and are supported by an equal amount of available borrowings on the
line-of-credit. Accordingly, at December 31, 1999, no borrowings were
outstanding on the line-of-credit, $27.1 million was committed by the letters of
credit and $32.9 million was available for borrowing. Subsequent to year end,
the Company decreased its outstanding letters of credit by $2.5 million.
- --------------------------------------------------------------------------------
Page-17
Historically, the Company has financed its operations through cash
generated by external financing including term loans and lines of credit. The
principal use of cash is to finance the growth in receivables and the cost of
opening new dispatch offices. The Company may experience cash flow deficits from
operations and investing activities while the Company expands its operations,
including the acceleration of opening new dispatch offices. Management expects
cash flow deficits to be financed by profitable operations, the use of the
Company's line-of-credit, and may consider other equity or debt financings as
necessary. The Company analyzes acquisition opportunities from time to time and
may pursue acquisitions in certain circumstances. Any acquisitions the Company
enters into may require additional equity or debt financing.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates, and to
a minor extent, foreign currency exchange rates, each of which could adversely
affect the value of our investments. We do not currently use derivative
financial instruments. At December 31, 1999, our purchased investments have
maturities of less than 90 days. As such, an increase in interest rates
immediately and uniformly by 10% from levels at December 31, 1999 would not have
a material affect upon our cash and cash equivalent balances. Because of the
relative short maturities of the investments we hold, we do not expect our
operating results or cash flows to be affected to any significant degree by a
sudden change in market interest rates on its cash and cash equivalents
portfolio.
We have a minor amount of assets and liabilities denominated in certain
foreign currencies related to our international operations. We have not hedged
our translation risk on these currencies and we have the ability to hold our
foreign-currency denominated assets indefinitely and do not expect that a sudden
or significant change in foreign exchange rates will have a material impact on
future net income or cash flows.
OUTLOOK: ISSUES AND UNCERTAINTIES
We do not provide forecasts of future financial performance. While our
management is optimistic about our long-term prospects, the following issues and
uncertainties, among others, should be considered in evaluating its growth
outlook.
IF WE FAIL TO MANAGE OUR RAPID GROWTH EFFECTIVELY, OUR RESULTS WILL SUFFER.
Our growth is dependent upon such factors as our ability to attract and retain
sufficient qualified management personnel to manage multiple and individual
dispatch offices, the availability of sufficient temporary workers to meet
customer needs, workers' compensation costs, collection of accounts receivable
and availability of working capital, all of which are subject to uncertainties.
We must continually adapt our management structure and internal control systems
as we continue our rapid growth.
THE LOSS OF ANY OUR KEY PERSONNEL COULD ADVERSELY US. Our success depends
to a significant extent upon the continued service of our Chief Executive
Officer and other members of our executive management. Future performance
depends on our ability to recruit, motivate and retain key management personnel.
THE COSTS OF GOVERNMENT REGULATIONS AND WORKERS' COMPENSATION ARE
SIGNIFICANT AND WILL, IF INCREASED AND WE ARE UNABLE TO PASS THESE COSTS ON TO
OUR CUSTOMERS, ADVERSELY AFFECT US. We incur significant costs to comply
with all applicable federal and state laws and regulations relating to
employment, including occupational safety and health provisions, wage and
hour requirements (including minimum wages), workers' compensation and
unemployment insurance. We attempt to increase fees charged to our customers
to offset increased costs relating to these laws and regulations, but may be
unable to do so. If Congress or state legislatures adopt laws specifying
benefits for temporary workers, demand for our services may be adversely
affected. In addition, workers' compensation expenses are based on our actual
claims experiences in each state and the actual aggregate workers'
compensation costs may exceed estimates.
OUR BUSINESS DEPENDS EXTENSIVELY ON RECRUITING AND RETAINING QUALIFIED
DISPATCH OFFICE MANAGERS. We rely heavily on the performance and productivity of
our dispatch office general managers, who manage the operation of the dispatch
offices, including recruitment and daily dispatch of temporary workers,
marketing and providing quality customer service. We opened 201 dispatch offices
in 1999 and plan to open 200 new offices in the first half of 2000 and 200 in
2001. We must therefore recruit a sufficient number of managers to staff each
new office and to replace managers lost through attrition or termination. Our
future growth and performance depend on our ability to hire, train and retain
qualified managers from a limited pool of qualified candidates who frequently
have no prior experience in the temporary employment industry.
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Page-18
WE EXPERIENCE INTENSE COMPETITION IN OUR INDUSTRY, WHICH COULD HARM OUR
RESULTS. The short-term, light industrial niche of the temporary services
industry is highly fragmented and highly competitive, with limited barriers to
entry. Several very large full-service and specialized temporary labor
companies, as well as small local operations, compete with us in the staffing
industry. Competition in some markets is intense, particularly for provision of
light industrial personnel, and price pressure from both competitors and
customers is increasing.
OUR RAPID GROWTH AND EXPANSION REQUIRES SIGNIFICANT WORKING CAPITAL TO
FINANCE OUR BUSINESS. We have historically experienced significant negative cash
flow from operations and investment activities resulting from the rapid growth
in the number of dispatch offices. In 1999, we incurred costs of approximately
$9.1 million to open 201 new dispatch offices, an average of approximately
$45,000 per dispatch office. Once open, we invest significant additional cash
into the operations of new dispatch offices until they begin to generate
sufficient revenue to cover their operating costs. In addition, we pay our
temporary personnel on a daily basis and bill our customers on a weekly basis.
(This means that we must maintain sufficient cash reserves to pay our temporary
personnel prior to receiving payment from our customers.) We expect to require
additional sources of capital in order to continue to grow especially during
seasonal peaks in revenue experienced in the third and fourth quarter of the
year.
OUR INDUSTRY INCURS ALL THE RISK ASSOCIATED WITH EMPLOYING MANUAL LABOR,
WHICH WE TRY TO MANAGE BUT CAN LEAD TO SIGNIFICANT POTENTIAL LIABILITY.
Temporary staffing companies, such as ours, employ people in the workplace of
their customers. This creates a risk of potential litigation based on claims
of discrimination and harassment, violations of health and safety and wage
and hour laws, criminal activity, and other claims. While we try to limit our
liability by contract, we may be held responsible for the actions at a job
site of workers not under our direct control. Like other temporary staffing
companies, we are also affected by fluctuations and interruptions in the
business of their customers.
OUR BUSINESS WILL LIKELY BE AFFECTED BY ECONOMIC FLUCTUATIONS AFFECTING THE
U.S. ECONOMY. The general level of economic activity, interest rates and
unemployment in the U.S. and specifically within the construction, landscaping
and light industrial trades may significantly affect demand for our services.
OUR BUSINESS TENDS TO BE BUSIER DURING WARMER SEASONAL PERIODS. Many of our
customers are in the construction and landscaping industries, which are
significantly affected by seasonal factors such as the weather. We generally
experience increased demand in the spring, summer and early fall, while
inclement weather is generally coupled with lower demand for our services.
OUR BUSINESS WOULD SUFFER IF WE COULD NOT ATTRACT TEMPORARY WORKERS TO FILL
THE JOBS WE OFFER. We compete with other temporary personnel companies to meet
our customer needs. We must continually attract reliable temporary workers to
fill positions and may from time to time experience shortages of available
temporary workers.
OUR INFORMATION AND COMPUTER PROCESSING SYSTEMS ARE CRITICAL TO THE
OPERATIONS OF OUR BUSINESS AND ANY FAILURE COULD CAUSE SIGNIFICANT PROBLEMS.
Our management information systems, located at our headquarters, are
essential for data exchange and operational communications with dispatch
offices throughout the country. Any interruption, impairment or loss of data
integrity or malfunction of these systems could severely hamper our business.
OUR SYSTEMS WERE SUBJECT TO POTENTIAL YEAR 2000 ISSUES. We modified
significant portions of our management information systems (MIS) and non-MIS
systems so that they would function properly in the year 2000 and beyond. Prior
to the end of 1999, we completed a review of our internally developed and third
party supplied software to determine our readiness. Based upon our assessment,
we believe that our internally developed proprietary software is year 2000
compliant. In addition, we assessed the year 2000 readiness of our third party
supplied software, computer technology and other services. We have incurred
internal staff costs as well as consulting and other expenses related to the
enhancements necessary to complete the remediation of our systems for the year
2000. The incremental costs for the year 2000 remediation efforts have been
insignificant.
To date, we have not experienced and do not anticipate any year 2000
related problems with our internally developed software or our third party
supplied software and computer technology. However, there may be additional
problems that surface at key dates or events in the future. We do not anticipate
these future dates or events that may be related to the year 2000 to have a
material adverse effect on the results of operations, liquidity or financial
condition. Furthermore, we do not anticipate any significant expenditure in the
future related to year 2000 compliance.
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Page-19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in the Annual Report as set forth in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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Page-20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
TENURE OF DIRECTORS AND OFFICERS
The names, ages and positions of the directors, executive officers and
certain key employees of the Company as of March 1, 2000 are listed below along
with their business experience during the past five years. No family
relationships exist among any of the directors or executive officers of the
Company, except that Todd A. Welstad is the son of Glenn A. Welstad.
NAME AGE POSITION
Glenn A. Welstad..................................... 56 Chairman of the Board, Chief Executive Officer and
President
Ronald L. Junck...................................... 52 Director, Executive Vice President, General Counsel and
Secretary
Joseph P. Sambataro, Jr............................. 49 Director, Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Todd A. Welstad...................................... 30 Chief Information Officer
Richard W. Gasten.................................... 62 Director, Vice President and Secretary of Labour Ready
Temporary Services, Ltd.
Thomas E. McChesney.................................. 53 Director
Robert J. Sullivan................................... 69 Director
Carl W. Schafer..................................... 64 Director
BUSINESS EXPERIENCE
The business experience and brief resumes on each of the Directors,
Executive Officers, and significant employees are as follows:
GLENN A. WELSTAD has served as the Company's Chairman of the Board of
Directors, Chief Executive Officer and President since February 1988. Prior to
joining the Company, Mr. Welstad was an officer of Body Toning, Inc., W.I.T.
Enterprises, and Money Mailer from February 1987 to March 1989. In 1969 Mr.
Welstad founded Northwest Management Corporation, a holding company for
restaurant operations. Over the course of 15 years, Mr. Welstad expanded the
operations to twenty-two locations in five states, which included eight Hardee's
Hamburger Restaurants as well as pizza and Mexican restaurants. In March 1984,
Mr. Welstad sold his ownership interest in Northwest Management Corporation.
RONALD L. JUNCK has served as a Director and Secretary of the Company since
November 1995. In February 1998, Mr. Junck joined the Company as Executive Vice
President and General Counsel. From 1974 until 1998, Mr. Junck practiced law in
Phoenix, Arizona, specializing in business law and commercial transactions and
serving as the Company's outside counsel. As an attorney, he has extensive trial
experience in a variety of commercial cases and has lectured widely at a number
of colleges and universities.
JOSEPH P. SAMBATARO, JR. has served as Executive Vice President, Treasurer,
Chief Financial Officer and Assistant Secretary of the Company since August
1997. Subsequent to year end, Mr. Sambataro was also named to the Board of
Directors. Prior to joining the Company, he served as the Managing Partner of
the Seattle office of BDO Seidman, LLP, an accounting and consulting firm from
1990 to 1997. In 1985, Mr. Sambataro was co-founder, and served as Director and
Officer of Ecova Corporation, an on-site toxic waste remediation company until
1989. From 1972 until 1985 Mr. Sambataro was a Partner with KPMG Peat Marwick in
the New York, Miami and Seattle offices. Mr. Sambataro obtained a degree in
accounting from Fordham University in 1972 and is a member of the American
Institute of Certified Public Accountants.
TODD A. WELSTAD has served as Chief Information Officer of the Company
since August 1997. Mr. Welstad joined the Company in January 1994 as the manager
of the Tacoma dispatch office and in August 1994 was promoted to Systems Analyst
in the MIS Department. From October 1994 until August 1997, Mr. Welstad served
as Director of the MIS Department. From February 1989 to December 1994, Mr.
Welstad was employed as a Technical Supervisor at Micro-Rel, a division of
Medtronics.
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Page-21
RICHARD W. GASTEN has served as a Director of the Company since August
1996. Mr. Gasten has also served as a Director of Labour Ready Temporary
Services, Ltd., the Company's Canadian subsidiary and as a consultant to the
Company since September 1995. In June 1997, Mr. Gasten was appointed to the
position of Vice President and Secretary of Labour Ready. With this appointment,
the consulting agreement with Mr. Gasten terminated. Mr. Gasten has over 25
years experience as a member of executive management with Western Capital Trust
Company, Vancouver, B.C., Unity Bank of Canada and The Bank of Nova Scotia.
THOMAS E. MCCHESNEY has served as a director of the Company since July
1995. In September 1996, Mr. McChesney became associated with Blackwell
Donaldson and Company, as director of investment banking. Mr. McChesney is also
a director of USOL Holdings Inc., a NASDAQ listed company and Nations Express,
Inc. Previously, Mr. McChesney was an officer and director of Paulson Investment
Co. and Paulson Capital Corporation from March 1977 to June 1995.
ROBERT J. SULLIVAN has served as a director of the Company since November
1994. Prior to joining the Company he served as a financial consultant to the
Company from July 1993 to June 1994. Additionally, Mr. Sullivan has an extensive
career of over 35 years in financial management, as both a CPA and audit manager
with Price Waterhouse & Co. and as a member of executive management with
companies listed on NYSE and AMEX.
CARL W. SCHAFER has served as a Director of the Company since
September of 1999. Mr. Shafer currently serves as President of The Atlantic
Foundation. Prior to his work with The Atlantic Foundation, Mr. Shafer's
experience includes the U.S. Bureau of the Budget, Financial Vice President and
Treasurer of Princeton University, Chairman of the investment advisory committee
for the Howard Hughes Medical Institute and Principal of Rockefeller & Co., Inc.
He also serves on various boards including the Paine Webber and Guardian Groups
of mutual funds. Mr. Shafer received his bachelor's degree from the University
of Rochester.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's officers and directors and certain other persons to file
timely certain reports regarding ownership of, and transactions in, the
Company's securities with the Securities and Exchange Commission. Copies of the
required filings must also be furnished to the Company. Based solely on its
review of such forms received by it or representations from certain reporting
persons, the Company believes that during 1999 all applicable Section 16(a)
filing requirements were met.
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Page-22
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Chief
Executive Officer and the next four most highly compensated executive officers
of the Company.
SUMMARY COMPENSATION TABLE (1)
LONG -TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION AWARDS COMPENSATION
SECURITIES
UNDERLYING OPTIONS/ MATCHING 401(K) SPLIT DOLLAR LIFE
YEAR SALARY SARS(#) CONTRIBUTIONS INSURANCE
- ---------------------------------------- ----------- ------------- ----------------------- ----- ---------- ----- -----------
Glenn A. Welstad 1999 519,231 30,000 $ 2,500 $ 176,526
Chairman of the Board, Chief 1998 497,380 45,000 $ 2,500 $ 166,000
Executive Officer and President 1997 452,958 - $ 2,500 -
Ronald L. Junck 1999 207,692 30,000 - -
Director, Executive Vice President, 1998 73,077 382,500 - -
General Counsel and Secretary 1997 - - - -
Joseph P. Sambataro, Jr. 1999 207,692 30,000 $ 2,500 -
Director, Executive Vice President, 1998 192,692 45,000 $ 1,731 -
Chief Financial Officer, Treasurer 1997 53,328 405,000 - -
Assistant Secretary
Todd A. Welstad 1999 193,143 30,000 $ 1,932 -
Chief Information Officer 1998 137,769 45,000 $ 1,378 -
1997 104,808 146,757 $ 1,048 -
Thomas E. Gilbert 1999 193,786 30,000 $ 2,500 -
Senior Area Director of Operations 1998 168,000 9,554 $ 2,500 -
1997 153,577 35,438 $ 1,487 -
- ---------------------------------------- ----------- ------------- ----------------------- ----- ---------- ----- -----------
(1) None of the named executives received compensation reportable under the
Restricted Stock Awards or Long-Term Incentive Plan Payouts columns.
- --------------------------------------------------------------------------------
Page-23
OPTION GRANTS DURING 1999 FISCAL YEAR
The following table provides information related to options granted to the
named executive officers during 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
INDIVIDUAL GRANTS OPTION TERM (1)
Number of % of total
Securities Options/SARS Exercise
Underlying Granted to or base
Options/SARS Employees in Price Expiration
Granted Fiscal Year ($/sh)(3) Date 5% 10%
Glenn Welstad
Chairman of the Board, Chief 30,000 1.4% 17.33 3/1/04 143,700 317,400
Executive Officer and President
Ronald L. Junck
Director, Executive Vice President 30,000 1.4% 17.33 3/1/04 143,700 317,400
General Counsel and Secretary
Joseph P. Sambataro, Jr.
Director, Executive Vice 30,000 1.4% 17.33 3/1/04 143,700 317,400
President, Chief Financial Officer,
Treasurer and Assistant Secretary
Todd A. Welstad
Chief Information Officer 30,000 1.4% 17.33 3/1/04 143,700 317,400
Thomas E. Gilbert
Senior Area Director of Operations 30,000 1.4% 17.33 3/1/04 143,700 317,400
(1) The potential realizable value portion of the table illustrates value
that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded
rates of appreciation on the Company's Common Stock over the term of
the options. These numbers do not take into account certain provisions
of the options providing for cancellation of the option following
termination of employment.
(2) Options to acquire shares of Common Stock. The options vest 25%
annually over the next four years.
(3) The option exercise price may be paid in shares of Common Stock owned
by the executive officer, in cash, or in any other form of valid
consideration or a combination of any of the foregoing, as determined
by the Compensation Committee in its discretion.
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Page-24
OPTION EXERCISES DURING 1999 AND YEAR END OPTION VALUES
The following table provides information related to options exercised by
the named executive officers during 1999 and the number and value of options
held at year-end. The Company does not have any outstanding stock appreciation
rights ("SARs").
AGGREGATE OPTION/SAR EXERCISES IN 1999 AND
YEAR END OPTION/SAR VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
December 31, 1999 December 31, 1999 ($) (1)
---------------------------------------------------------------
SHARES
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Glenn Welstad
Chairman of the Board - - 11,250 63,750 $ 844 $ 2,531
Chief Executive Officer
And President
Ronald L. Junck - - 188,608 233,342 $ 569,520 $ 500,104
Director, Executive Vice
President, General
Counsel and Secretary
Joseph P. Sambataro, Jr. 45,750 $1,557,942 97,121 164,998 $ 724,479 $ 855,748
Director, Executive Vice
President, Chief
Financial Officer,
Treasurer and Assistant
Secretary
Todd A. Welstad 30,375 - 93,572 128,693 $ 440,351 $ 277,927
Chief Information
Officer
Thomas E. Gilbert - $ 427,651 5,062 51,510 $ 33,404 $ 121,559
Senior Area Director of
Operations
(1)The closing price for the Company's common stock as reported by the
New York Stock Exchange on December 31, 1999, was $12.13.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation is determined by a compensation
committee comprised of three members of the Board of Directors, Messrs.
McChesney, Sullivan and Shafer. The philosophy of the Company's executive
compensation program is that compensation of executive officers should be
directly and materially linked both to the operating performance of the Company
and to the interests of Shareholders.
Annual cash compensation, together with stock options, is designed to
attract and retain qualified executives and to ensure that such executives have
a continuing stake in the long term success of the Company. The annual
compensation of Mr. Welstad, the Company's Chairman and Chief Executive Officer,
has been set by a written employment contract entered into in 1999, which set
compensation of $41,667 per month, subject to annual increases on the
anniversary date of the agreement of 10% of the prior period's base salary. For
2000, Mr. Welstad's monthly compensation is $41,667. Mr. Welstad may also
receive stock options determined annually as provided by the Company's Employee
Stock Option and Incentive Plan, as administered by the Company's Board of
Directors or compensation committee. In 1999, the Board of Directors approved
annual grants of stock options to management and administrative personnel as
indicated in the preceding tables. Under the plan as approved, each of the
executive officers of the Company received a grant of 30,000 options; all future
grants and executive compensation are subject to annual approval by the
Compensation Committee.
Page-25
With respect to other executive officers compensation, the Compensation
Committee sets salary based on recommendations of the CEO, unless the officer's
salary is established by written contract. With respect to officers that have
recently joined the Company, the recommendations are based on the CEO's
negotiations with the officer as necessary to attract such persons to become
officers of the Company. The Compensation Committee reviews the salaries for
officers with comparable duties at the median of companies of comparable revenue
size in the Pacific Northwest. These companies are selected informally without
the use of a compensation consultant. Annual salary increases are typically
modest, except to reflect changes in responsibilities.
EMPLOYMENT AGREEMENTS:
In January of 1999, the Company entered into an employment agreement with
Glenn Welstad, the Company's Chairman and Chief Executive Officer, which
provides for annual compensation of $41,667 per month, subject to annual
increases on the anniversary date of the agreement of 10% of the prior period's
base salary and stock options determined annually as provided by the Company's
Employee Stock Option and Incentive Plan and an Executive Split Dollar Plan.
Under terms of the Executive Split Dollar Plan, a family trust established by
Mr. Welstad will purchase a $15 million life insurance policy on the life of Mr.
Welstad and his spouse. The Company will advance annual premiums of
approximately $167,000 and will receive repayment of these premium advances upon
surrender of the policy, the death of the insured or at the end of the tenth
policy year. The agreement runs through December 31, 2003.
In February 1998, the Company entered into an employment agreement with
Ronald L. Junck, the Company's Executive Vice President, General Counsel and
Secretary, which provides for initial annual compensation of $16,667 per month,
subject to annual increases on the anniversary date of the agreement at the
discretion of the Board of Directors. In addition, the employment agreement
provides for a bonus, as determined by the compensation committee, based on Mr.
Junck's performance, and the overall performance of the Company. The agreement
provides Mr. Junck with options to purchase 337,500 of the Company's common
stock at its fair market value at date of grant of $9.22. 42,188 options vest
semi-annually to 2001. The agreement expires in 2002.
In August 1997, the Company entered into an employment agreement with
Joseph P. Sambataro, Jr., the Company's Executive Vice President, Chief
Financial Officer, Treasurer, and Assistant Secretary, which provides for
initial annual compensation of $13,500 per month, subject to annual increases on
the anniversary date of the agreement at the discretion of the Board of
Directors. In addition, the employment agreement provides for a bonus, as
determined by the compensation committee, based on Mr. Sambataro's performance,
and the overall performance of the Company. The agreement provides Mr. Sambataro
with options to purchase 405,000 of the Company's common stock at its fair
market value at date of grant of $3.70. 101,250 of the options vest on the date
of grant and 50,625 options vest semi-annually to 2000. The agreement expires in
2001.
Page-26
ITEM 12. PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of each class of equity securities of the Company as of December 31,
1999 for (i) each person known to the Company to own beneficially 5% or more of
any such class as of December 31, 1999, (ii) each director of the Company, (iii)
each executive officer of the Company required to be identified as a Named
Executive Officer pursuant to Item 402 of Regulation S-K and (iv) all officers
and directors of the Company as a group. Except as otherwise noted, the named
beneficial owner has sole voting and investment power. See "Management" for a
description of each individual's position with the Company, if any.
AMOUNT AND
NAME & ADDRESS (NUMBER OF PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS SHARES)(1) OF CLASS
- ------------------- -------------- ---------- --------
Glenn A. Welstad (1) (2)..................... Common Stock 4,521,167 10.6%
Preferred Stock 4,814,739 74.2%
Ronald L. Junck (1).......................... Common Stock 437,207 1.0%
Joseph P. Sambataro, Jr. (1)................. Common Stock 212,250 *
Todd A. Welstad (1).......................... Common Stock 335,901 *
Thomas E. Gilbert............................ Common Stock 21,366 *
Richard W. Gasten (1)........................ Common Stock 33,519 *
Thomas E. McChesney (1)...................... Commona Stock 160,466 *
Robert J. Sullivan (1)....................... Common Stock 100,785 *
Carl W. Shafer (1)........................... Common Stock -- *
Wanger Asset Management, L.P. (3) (5)........ Common Stock 3,485,500 8.2%
Wallace R. Weltz & Company (4) (6)........... Common Stock 2,525,300 5.9%
All Officers and Directors as a Common Stock 5,822,661 13.6%
Group (9 Individuals) (1) Preferred Stock 4,814,739 74.2%
* Less than 1%.
(1) Beneficial ownership is calculated in accordance with Rule 13d-3(d)(1)
of the Securities Exchange Act of 1934, as amended and includes shares
of Common Stock issuable upon exercise of options, warrants, and other
securities convertible into or exchangeable for Common Stock currently
exercisable or exercisable within 60 days of December 31, 1999.
(2) The business address of Mr. Welstad is 1016 S. 28th Street, Tacoma,
Washington, 98409.
(3) The business address of Wanger Asset Management, L.P. is 227 West
Monroe Street, Suite 3000, Chicago, IL 60606.
(4) The business address of Wallace R. Weitz & Company is 1125 South 103rd
Street, Suite 600, Omaha, NE 68124-6008.
(5) Shared voting power.
(6) Sole voting power.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Junck is an employee of the Company, a member of its board of
directors, and is also a shareholder in a law firm that received approximately
$0, $429,000 and $587,000 in payment for legal services performed for the
Company in 1999, 1998 and 1997, respectively.
Page-27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Financial Statements are found on pages F-1 through F-20 of this Form
10-K. The Financial Statement Table of Contents is on Page F-1. The Exhibit
Index is found on Page 29 and 30 of this Form 10-K.
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.
LABOR READY, INC.
/s/ Glenn A. Welstad 3/30/00
--------------------------------------------
Signature Date
By: Glenn A. Welstad, Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Glenn A. Welstad 3/30/00
- ---------------------------------------------------
Signature Date
Glenn A. Welstad, Chairman of the Board, Chief Executive
Officer and President
/s/ Joseph P. Sambataro, Jr. 3/30/00
- ---------------------------------------------------
Signature Date
Joseph P. Sambataro, Jr., Director, Executive Vice President,
Chief Financial Officer, Treasurer and Assistant Secretary
/s/ Ronald L. Junck 3/30/00
- ---------------------------------------------------
Signature Date
Ronald L. Junck, Executive Vice President, Secretary,
General Counsel and Director
/s/ Robert J. Sullivan 3/30/00
- ---------------------------------------------------
Signature Date
Robert J. Sullivan, Director
/s/ Richard W. Gasten 3/30/00
- ---------------------------------------------------
Signature Date
Richard W. Gasten, Vice President and Secretary, Labour
Ready Temporary Services, Ltd. and Director
/s/ Thomas E. Mcchesney 3/30/00
- ---------------------------------------------------
Signature Date
Thomas E. McChesney, Director
/s/ Carl W. Schafer 3/30/00
- ---------------------------------------------------
Signature Date
Carl W. Schafer, Director
Page-28
EXHIBIT INDEX
FORM 10-K
LABOR READY, INC.
EXHIBIT NUMBER DESCRIPTION
3 Articles of Incorporation (1)
3.1 Articles of Amendment to Articles of Incorporation (1)
3.2 Bylaws (1)
4 Instruments Defining Rights of Security Holders (1)
4.1 Rights Agreement Dated January 6, 1998 (2)
10 Material Contracts
10.1 Warrant Purchase Agreements (1)
10.2 Executive Employment Agreement between Labor Ready, Inc. And Glenn A.
Welstad dated January 1,1999
10.3 Employment Agreement between Labor Ready, Inc. and Joseph P. Sambataro,
Jr. dated August 1, 1997 (1)
10.4 Business Loan Agreement between Labor Ready, Inc. and U.S. Bank of
Washington, N.A., dated February 3, 1999 (1)
10.5 Form of Lease for Labor Ready, Inc. dispatch office (1)
10.6 1996 Employee Stock Option and Incentive Plan (1)
10.7 1996 Employee Stock Purchase Plan (1)
10.8 Form of equipment lease and related schedules at various dates between
the Company as lessor, T&W Financial Corporation as Lessee and Diebold
Corporation as Vendor (1)
10.9 Excess Bond to Secure Premium and Deductible Obligations between Labor
Ready, Inc., Travelers Casualty and Surety Company of America, Mutual
Indemnity (U.S.) Ltd., and Legion Insurance Company dated September 1,
1998 (1)
10.10 Employment Agreement between Labor Ready, Inc. and Ronald L. Junck
dated March 20, 1998 (1)
10.11 Bond to Secure Premium and Deductible Obligations between Labor Ready,
Inc. Travelers Casualty and Surety Company of America, Reliance
National Indemnity Company dated February 16, 1999 (1)
10.12 Form of equipment lease and related schedules at various dates between
the Company as lessor, Wells Fargo Equipment Finance, Inc. as lessee
Page-29
EXHIBIT INDEX (CONTINUED)
EXHIBIT NUMBER DESCRIPTION
21 Subsidiaries of Labor Ready, Inc.
23 Consent of Arthur Andersen LLP - Independent Public
Accountants
27 Financial Data Schedules
27.1 December 31, 1999 and for the year then ended
27.2 December 31, 1998 and 1997, for each of the two
years then ended
(1) Incorporated by reference to the Company's Form 10 Registration
Statement, SEC File No. 0-2382.
(2) Incorporated by reference to the Company's Current Report on Form 8-K
Filed on January 16, 1998.
COPIES OF EXHIBITS MAY BE OBTAINED UPON REQUEST DIRECTED TO MR. JOSEPH P.
SAMBATARO, JR., LABOR READY, INC., 1016 S. 28TH STREET, TACOMA, WASHINGTON,
98409.
Page-30
LABOR READY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Report of Independent Public Accountants................................................ F-2
Consolidated Balance Sheets
December 31, 1999 and 1998............................................................ F-3
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997.......................................... F-5
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997.......................................... F-6
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997.......................................... F-7
Notes to Consolidated Financial Statements.............................................. F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Labor Ready, Inc.:
We have audited the accompanying consolidated balance sheets of Labor Ready,
Inc. (A Washington Corporation) and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Labor Ready, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
The Company adopted the provisions of Statement of Position 985, "Reporting on
the Costs of Startup Activities" which requires the Company to expense the cost
of establishing new dispatch offices as a cumulative effect of adopting the
Statement.
Seattle, Washington /s/ Arthur Andersen LLP
February 3, 2000
F-2
LABOR READY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
ASSETS
1999 1998
-------- --------
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 16,845 $ 25,940
Accounts receivable, less allowance for doubtful accounts
of $9,899 and $4,218 ................................... 93,716 65,484
Income tax receivable .................................... 2,004 --
Workers' compensation deposits and credits ............... 4,955 2,961
Prepaid expenses and other ............................... 9,310 4,947
Deferred income taxes .................................... 8,101 6,601
--------- --------
Total current assets .................................... 134,931 105,933
--------- --------
PROPERTY AND EQUIPMENT
Buildings and land ....................................... 6,298 4,854
Computers and software ................................... 23,709 13,443
Cash dispensing machines ................................. 10,797 7,376
Furniture and equipment .................................. 766 667
--------- --------
41,570 26,340
Less accumulated depreciation ............................ 10,838 6,069
--------- --------
Property and equipment, net ............................. 30,732 20,271
--------- --------
OTHER ASSETS
Intangible assets and other, less accumulated amortization
of $213 and $6,383....................................... 48 2,630
Deferred income taxes .................................... 6,743 1,751
Restricted cash in captive insurance subsidiary .......... 2,027 151
--------- --------
Total other assets ...................................... 8,818 4,532
-------- --------
Total assets ............................................. $ 174,481 $130,736
========= ========
See accompanying notes to consolidated financial statements.
F-3
LABOR READY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS EXCEPT PER SHARE DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
--------- ---------
CURRENT LIABILITIES:
Accounts payable ........................................... $ 11,756 $ 6,889
Accrued wages and benefits ................................. 8,531 7,544
Workers' compensation claims reserve, current portion ...... 15,732 15,300
Income taxes payable ....................................... -- 4,355
Current maturities of longterm debt ........................ 1,178 754
--------- ---------
Total current liabilities ................................. 37,197 34,842
--------- ---------
LONGTERM LIABILITIES:
Longterm debt, less current maturities ..................... 6,590 5,073
Workers' compensation claims reserve, less current portion . 19,558 10,324
--------- ---------
Total longterm liabilities ................................ 26,148 15,397
--------- ---------
Total liabilities ......................................... 63,345 50,239
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.131 par value, 20,000 shares authorized;
6,486 shares issued and outstanding ...................... 854 854
Common stock, no par value, 100,000 shares authorized;
42,802 and 41,961 shares issued and outstanding .......... 62,928 54,131
Cumulative translation adjustments ......................... (151) (159)
Retained earnings .......................................... 47,505 25,671
--------- ---------
Total shareholders' equity ................................ 111,136 80,497
--------- ---------
Total liabilities and shareholders' equity ................ $ 174,481 $ 130,736
========= =========
See accompanying notes to consolidated financial statements.
F-4
LABOR READY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
1999 1998 1997
--------- --------- ---------
Revenues from services ....................... $ 850,873 $ 606,895 $ 335,409
Cost of services ........................... 587,366 422,924 236,666
--------- --------- ---------
Gross profit ................................. 263,507 183,971 98,743
Selling, general and administrative expense 217,294 144,249 84,081
Depreciation and amortization .............. 4,804 6,076 4,011
--------- --------- ---------
Income from operations ....................... 41,409 33,646 10,651
Interest income (expense) and other, net ... (979) (256) 1,871
--------- --------- ---------
Income before taxes on income and
cumulative effect of accounting change ..... 40,430 33,390 12,522
Taxes on income ............................ 15,853 13,591 5,559
--------- --------- ---------
Income before cumulative effect of accounting
change ..................................... 24,577 19,799 6,963
Cumulative effect of accounting change, net of
income tax benefit of $897 ................. (1,453) -- --
--------- --------- ---------
Net income ................................... $ 23,124 $ 19,799 $ 6,963
========= ========= =========
Income Per Share:
Basic ...................................... $ 0.54 $ 0.47 $ 0.17
Diluted .................................... 0.53 0.46 0.16
Weighted average shares outstanding:
Basic ...................................... 42,521 41,694 41,504
Diluted .................................... 43,456 42,999 42,251
See accompanying notes to consolidated financial statements.
F-5
LABOR READY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Preferred stock
Balance, beginning of year ....................... $ 854 $ 854 $ 854
--------- --------- ---------
Balance, end of year ........................... 854 854 854
--------- --------- ---------
Common stock
Balance, beginning of year ....................... 54,131 49,694 49,517
Common stock issued on the exercise of
options and warrants ........................... 7,785 3,907 332
Common stock issued through employee benefit plans 1,209 954 456
Common stock repurchased ......................... (197) (424) (611)
--------- --------- ---------
Balance, end of year ........................... 62,928 54,131 49,694
--------- --------- ---------
Cumulative translation adjustment
Balance, beginning of year ....................... (159) 86 (50)
Foreign currency translation ..................... 8 (245) 136
--------- --------- ---------
Balance, end of year ........................... (151) (159) 86
--------- --------- ---------
Retained earnings
Balance, beginning of year ....................... 25,671 7,407 1,271
Net income ....................................... 23,124 19,799 6,963
Common stock repurchased ......................... (1,247) (1,492) (784)
Preferred stock dividends ........................ (43) (43) (43)
--------- --------- ---------
Balance, end of year ........................... 47,505 25,671 7,407
--------- --------- ---------
Total Shareholders' equity ................... $ 111,136 $ 80,497 $ 58,041
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
LABOR READY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................... $ 23,124 $ 19,799 $ 6,963
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 4,804 6,076 4,011
Provision for doubtful accounts .................... 15,998 7,398 5,761
Deferred income taxes and other .................... (6,492) (4,010) (3,908)
Cumulative effect of accounting change ............. 2,350 -- --
Changes in operating assets and liabilities
Accounts receivable ................................ (44,230) (36,281) (21,279)
Workers' compensation deposits and credits ......... (1,994) (1,880) 7,183
Prepaid expenses and other ......................... (4,161) (2,304) (676)
Accounts payable ................................... (1,714) 3,306 1,605
Accrued wages and benefits ......................... 987 3,492 1,035
Workers' compensation claims reserve ............... 9,666 12,053 8,494
Income taxes ....................................... (2,473) 5,715 2,121
-------- -------- --------
Net cash provided by (used in) operating activities ... (4,135) 13,364 11,310
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................... (12,358) (9,292) (3,847)
Restricted cash .................................... (1,876) (15) 1,579
Intangible assets and other ........................ -- 143 (2,595)
-------- -------- --------
Net cash used in investing activities ................. (14,234) (9,164) (4,863)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term borrowings, net ......................... 6,684 -- (1,139)
Payments on capital leases and longterm debt ....... (936) (654) (13)
Proceeds from options and warrants exercised ....... 3,899 1,672 280
Proceeds from sale of stock through employee benefit
plans.............................................. 1,063 838 375
Purchase and retirement of treasury stock .......... (1,444) (1,916) (1,395)
Preferred stock dividends paid ..................... -- (86) --
-------- -------- --------
Net cash provided by (used in) financing activities 9,266 (146) (1,892)
-------- -------- --------
Effect of exchange rates on cash ................... 8 (231) (36)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents .................................... (9,095) 3,823 4,519
CASH AND CASH EQUIVALENTS, beginning of
year ................................................ 25,940 22,117 17,598
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ................ $ 16,845 $ 25,940 $ 22,117
======== ======== ========
See accompanying notes to consolidated financial statements.
F-7
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
ACCOUNTING POLICIES
BASIS OF PRESENTATION. Labor Ready, Inc. and its whollyowned subsidiaries
(together, "the Company") provide temporary staffing for manual labor jobs to
customers primarily in the industrial and small business markets from 687
offices located throughout the United States, Canada, United Kingdom and Puerto
Rico. The Company provides services to a wide variety of customers, none of
which individually comprise a significant portion of revenues within a
geographic region or for the Company as a whole. The consolidated financial
statements include the accounts of Labor Ready, Inc. and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION. Revenue from the sale of services is recognized at the
time the service is performed. A portion of the Company's income is derived from
franchise and cash dispensing machine fees, which are insignificant, for all
years presented.
COST OF SERVICES. Cost of services includes the wages of temporary workers,
related payroll taxes, workers' compensation expenses and transportation.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
instruments purchased with a maturity of three months or less at date of
purchase to be cash equivalents.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed using the straightline method over the estimated
useful lives of the respective assets, which are 31 to 39 years for buildings
and improvements, 3 to 5 years for computers and software, 7 years for cash
dispensing machines and 5 to 7 years for furniture and equipment.
INTANGIBLE ASSETS AND OTHER. Intangible and other assets consist primarily of
acquired customer lists and noncompete agreements. Other intangible assets are
stated at cost and are amortized using the straightline method over periods not
exceeding ten years. Management evaluates, on an ongoing basis, the carrying
value of intangible assets and makes a specific provision against the asset when
an impairment is identified.
INCOME TAXES. Deferred income taxes are provided for temporary differences
between the financial statement and income tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the temporary
differences are expected to reverse. If it is more likely than not that some
portion of a deferred tax asset will not be realized, a valuation allowance is
recorded.
FOREIGN CURRENCY TRANSLATION. Cumulative translation adjustments relate to
the Company's consolidated foreign subsidiaries, Labour Ready Temporary
Services, Ltd. and Labour Ready Temporary Services United Kingdom, Ltd. Foreign
currency translation is calculated by application of the current rate method and
is included in the determination of consolidated shareholders' equity at the
respective balance sheet dates.
USE OF 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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-8
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
NEW ACCOUNTING STANDARDS. In December 1999, the Securities and Exchange
Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements (SAB 101). This pronouncement summarizes certain views
of the SEC staff in applying generally accepted accounting principles to revenue
recognition. SAB 101 did not impact the Company's revenue recognition policies.
In the first quarter of 1999, the Company adopted the provisions of Statement
of Position 985, "Reporting on the Costs of Startup Activities" (SOP 985").
SOP 985 establishes new rules for the financial reporting of startup costs,
and requires the Company to expense the cost of establishing new dispatch
offices as incurred and write off, as a cumulative effect of adopting SOP 985,
any capitalized preopening costs in the first quarter of the year adopted.
Prior to adopting SOP 985, preopening costs incurred to open new dispatch
offices, including salaries, recruiting, testing, training, lease and other
related costs, were capitalized and amortized using the straightline method
over two years. The cumulative effect of adopting SOP 985 was to decrease net
income by $1.5 million or $0.03 per common share.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of the hedge transaction. In July 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities
Deferral of the Effective Date of SFAS No. 133." SFAS No. 137 deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
Currently, the Company does not use derivative instruments; therefore the
adoption of this statement should not have a material effect on the Company's
results of operations or its financial position.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with the current year presentation.
F-9
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and noncash activities were as follows:
1999 1998 1997
------- ------- -------
Cash paid during the year for:
Interest ..................................... $ 1,517 $ 813 $ 30
Income taxes ................................. $24,192 $11,882 $ 7,979
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued to employee benefit
plans ....................................... $ 146 $ 116 $ 81
Preferred stock dividends accrued ............. $ 43 -- $ 43
Stock option income tax benefit ............... $ 3,886 $ 2,235 $ 51
Assets acquired with capital lease obligations $ 2,877 $ 6,393 --
WORKERS' COMPENSATION
The Company provides workers' compensation insurance to its temporary workers
and regular employees. For workers' compensation claims originating in the
majority of states (the 43 nonmonopolistic states), the Company has purchased a
deductible insurance policy. Under terms of the policy, the Company's workers'
compensation exposure is limited to a deductible amount per occurrence and a
maximum aggregate stoploss limit. Should any single occurrence exceed the
deductible amount per occurrence, all losses and expenses beyond the deductible
amount are paid by independent insurance companies unrelated to the Company.
Similarly, should the total of paid losses related to any one year period exceed
the maximum aggregate stoploss limit for that year, all losses beyond the
maximum aggregate stoploss limit are paid by independent insurance companies
unrelated to the Company. In 1997, the per occurrence deductible amount was
$250,000 per claim, to an aggregate maximum of $11.60 per $100 of temporary
worker payroll, or $18.8 million. For claims arising in 1998 and 1999, the per
occurrence deductible amount was increased to $350,000 and the maximum aggregate
stoploss limit was reduced to $10.41 per $100 of temporary worker payroll, or
$45.6 and $31.7 million for the years ended December 31, 1999 and 1998.
For claims arising in years prior to 1997, the Company has insured all losses
beyond amounts reserved in its financial statements with independent insurance
companies unrelated to the Company. The difference between the discounted
maximum aggregate stoploss limit for claims arising in all periods prior to
December 31, 1999 and the total of claims paid and reserved for in the Company's
financial statements for the same periods is $10.1 million. This amount
represents the discounted maximum additional exposure, net of tax, to the
Company before its maximum aggregate stoploss limits are met.
The Company establishes its reserve for workers' compensation claims using
actuarial estimates of the future cost of claims and related expenses that have
been reported but not settled, and that have been incurred but not reported.
Adjustments to the claims reserve are charged or credited to expense in the
periods in which they occur. Included in the accompanying consolidated balance
sheets as of December 31, 1999 and 1998, are workers' compensation claims
reserves in the nonmonopolistic states of $34.7 million and $24.4,
respectively. The claims reserves were computed using a discount rate of 6.0% at
December 31, 1999 and 1998.
F-10
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
WORKERS' COMPENSATION (CONTINUED)
Workers' compensation expense totaling $38.2 million, $30.6 million and $19.2
million was recorded as a component of cost of services in each of the years
ended December 31, 1999, 1998 and 1997, respectively.
For the 1997 and 1998 program years, the Company is required to provide
collateral in the amount of the maximum aggregate stoploss limits, less claims
paid to date. The Company provides approximately 50% of the required collateral
in the form of a surety bond, and 50% in letters of credit. Accordingly, at
December 31, 1999, $14.5 million of the collateral was satisfied with surety
bonds and $15.1 million was satisfied with letters of credit for the 1997 and
1998 program years. Subsequent to year end, the letters of credit decreased by
$2.5 million, which results in a new balance of $12.6 million.
For workers' compensation claims originating in Washington, Ohio and West
Virginia (the monopolistic states), Canada and Puerto Rico, the Company pays
workers' compensation insurance premiums as required by state administered
programs. The insurance premiums are established by each jurisdiction, generally
based upon the job classification of the insured workers and the previous claims
experience of the Company. The Washington program provides for a retroactive
adjustment of workers' compensation payments based upon actual claims
experience. Upon adjustment, overpayments to the program are returned to the
Company and underpayments, if any are assessed. At December 31, 1999 and 1998,
the Company recorded workers' compensation credit receivables of $0.7 million
and $1.4 million respectively, and workers' compensation liabilities of $0.6
million and $1.2 million respectively, related to the monopolistic states.
In December 1998, the Company purchased a deductible insurance policy for the
nonmonopolistic states covering the years ended 1999 and 2000. The policy
includes substantially the same terms and limitations as the 1998 policy
described above except that the Company is required to provide collateral in the
amount of 60% of claims reserves. The collateral for the 1999 program will
consist of 50% letters of credit and 50% surety bond. Accordingly, as of
December 31, 1999, the Company has provided the insurance carrier with a letter
of credit totaling $12.0 million and a surety bond for $12.6 million. During
2000, the total amount of the letters of credit and surety bonds for the 2000
program year will increase to approximately $20.0 million.
The Company has established a risk management department at its corporate
headquarters to manage its insurers, third party claims administrators, and
medical service providers. To reduce wageloss compensation claims, the Company
employs claims coordinators throughout the United States. The claims
coordinators manage the acceptance, processing and final resolution of claims
and administer the Company's return to work program. Workers in the program are
employed on customer assignments that require minimal physical exertion or
within the Company in the local dispatch office. The Company has an online
connection with its third party administrator that allows the claims
coordinators to maintain visibility of all claims, manage their progress and
generate required management information.
F-11
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
LINE OF CREDIT
In February 1999, the Company entered into a new line-of-credit agreement
with U.S. Bank. This agreement allows the company to borrow up to the lesser of
$60.0 million or 80% of eligible receivables as defined by the bank, with
interest at the lesser of the bank's prime rate (8.50% at December 31, 1999) or
the London InterBank Offering Rate plus 1.25%. The line-of-credit is secured
primarily by the Company's accounts receivable and expires in June 2001. The
line-of-credit agreement requires that the Company maintain minimum net worth
and working capital amounts. The Company was in compliance with the requirements
at December 31, 1999.
The Company is required by the workers' compensation program to collateralize
a portion its workers' compensation liability with irrevocable letters of
credit. At December 31, 1999, the Company had provided its insurance carriers
with letters of credit totaling $27.1 million. The letters of credit bear fees
of .75% per year and are supported by an equal amount of available borrowings
on the line-of-credit. Accordingly, at December 31, 1999, no borrowings were
outstanding on the line-of-credit, $27.1 million was committed by the letters
of credit and $32.9 million was available for borrowing. Subsequent to year end,
the Company decreased its letters of credit outstanding by $2.5 million.
During the years ended December 31, 1999 and 1998, short-term borrowing
activity was as follows:
DECEMBER 31,
1999 1998
------ ------
Balance outstanding at year-end $ -- $ --
Stated interest rate at year-end, including applicable fees 8.50% 7.75%
Maximum amount outstanding during the year $20,124 $19,475
Average amount outstanding $ 7,885 $ 5,486
Weighted average interest rate during the year, including
applicable fees 8.18% 8.10%
The average amount outstanding and the weighted average interest rate during
the year were computed based upon the average daily balances and rates.
INCOME PER SHARE
Basic earnings per share is computed by dividing net income less preferred
stock dividends by the weighted average number of common shares outstanding
during the year. Diluted earnings per share is computed by dividing net income
less preferred stock dividends by the weighted average number of common shares
and common stock equivalents outstanding during the year. Common stock
equivalents for the Company include the dilutive effect of outstanding options.
In October 1997, May 1998 and June 1999, the Company declared three-for-two
stock splits which have each been retroactively applied in the determination of
weighted average shares outstanding.
F-12
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME PER SHARE (CONTINUED)
Basic and diluted earnings per share were calculated as follows:
-------- -------- --------
1999 1998 1997
-------- -------- --------
Basic:
Income before cumulative effect of
accounting change .......................... $ 24,577 $ 19,799 $ 6,963
Less preferred stock dividends ............... 43 43 43
-------- -------- --------
Income before cumulative effect of
accounting change available to common
shareholders ............................... 24,534 19,756 6,920
Cumulative effect of accounting change ....... (1,453) -- --
-------- -------- --------
Income available to common shareholders ...... $ 23,081 $ 19,756 $ 6,920
======== ======== ========
Weighted average shares outstanding .......... 45,521 41,694 41,504
======== ======== ========
Income before cumulative effect
of accounting change per share ............. $ 0.57 $ 0.47 $ 0.17
Cumulative effect of accounting change, net .. (0.03) -- --
-------- -------- --------
Income per share ............................ $ 0.54 $ 0.47 $ 0.17
======== ======== ========
Diluted:
Income available to common shareholders ...... $ 23,081 $ 19,756 $ 6,920
======== ======== ========
Weighted average shares outstanding .......... 42,521 41,694 41,504
Plus options to purchase common stock
outstanding at end of year ................. 3,525 3,273 3,050
Less shares assumed repurchased .............. (2,590) (1,968) (2,303)
-------- -------- --------
Weighted average shares outstanding, including
including dilutive effect of options ...... 43,456 42,999 42,251
======== ======== ========
Income before cumulative effect of
accounting change per share ................ $ 0.56 $ 0.46 0.16
Cumulative effect of accounting change, net .. (0.03) -- --
-------- -------- --------
Income per share ............................. $ 0.53 $ 0.46 $ 0.16
======== ======== ========
RELATED PARTY TRANSACTIONS
A member of the board of directors, is also a shareholder in a law firm that
received approximately $0, $429 and $587 in payment for legal services performed
for the Company in 1999, 1998 and 1997, respectively.
F-13
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
PREFERRED STOCK
The Company has authorized 20,000 shares of blank check preferred stock. The
blank check preferred stock is issuable in one or more series, each with such
designations, preferences, rights, qualifications, limitations and restrictions
as the board of directors of the Company may determine and set forth in
supplemental resolutions at the time of issuance, without further shareholder
action.
The initial series of blank check preferred stock of the corporation
authorized by the board of directors in accordance with the articles of
incorporation, was designated as Series A preferred stock. At December 31, 1999
and 1998, the Company had 6,486 outstanding shares of $0.131 par value Series A
preferred stock.
Each share of Series A preferred stock is entitled to one vote in all matters
submitted to a vote of the shareholders of the Company. The Series A preferred
stock will vote on par with the Common Shares as a single class unless the
action being considered involves a change in the rights of the Series A
preferred stock. The Series A preferred stock bears a cumulative annual dividend
rate of five percent accrued on December 31 of each year, is redeemable at par
value plus accumulated dividends at the option of the Company at any time after
December 31, 1994, and contains an involuntary preferential liquidation
distribution equivalent to the par value plus all accumulated dividends
remaining unpaid.
In October 1997, May 1998, and June 1999 the board of directors authorized
threefortwo preferred stock splits. These preferred stock splits were effected
in the form of three shares of preferred stock issued for every two shares of
preferred stock outstanding as of each date of declaration. All applicable share
and per share data have been adjusted for the effect of the stock splits.
Pursuant to the Rights Plan discussed further in Note 8, 563 shares of
preferred stock have been reserved for issuance under terms of the Plan.
A preferred stock dividend in the amount of $43 was accrued at December 31,
1999 and 1997 and paid in February 2000 and January 1998. The 1998 preferred
stock dividend in the amount of $43 was paid December 31, 1998.
COMMON STOCK
In October 1997, May 1998 and June 1999, the Board of Directors authorized
threefortwo common stock splits. These common stock splits were effected in
the form of three shares of common stock issued for every two shares of common
stock outstanding as of the date of declaration. All applicable share and per
share data have been adjusted for the effect of each of these stock splits.
During 1999, 1998 and 1997, the Company repurchased 136, 159 and 516 shares
of common stock on the open market for cash consideration of $1,444, $1,916 and
$1,395, respectively. The repurchased shares were retired and are not available
for reissuance. Excess acquisition cost over the average per share carrying
value of common stock is charged to retained earnings.
F-14
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
COMMON STOCK (CONTINUED)
In 1998, the board of directors adopted a Shareholders Rights Plan ("the
Rights Plan") and declared a dividend distribution of one right for each
outstanding share of the Company's common stock. Under the terms of the Rights
Plan, each Right entitles the holder to purchase one onehundredth of a share of
the Series A preferred stock at an exercise price of $75.37. The rights are
exerciseable a specified number of days following (1) the acquisition by a
person or group of persons of 15% or more of the Company's common stock, or (2)
the commencement of a tender or exchange offer for 15% or more of the Company's
common stock. The Company has reserved 563 shares of the Series A Preferred
stock for issuance upon exercise of the rights. The rights may be redeemed by
the Company, subject to the approval of the board of directors, for $.01 cents
per right in accordance with the provisions of the Rights Plan. If any group or
person acquires 50% or more of the Company's common stock, the holders of the
unredeemed rights (except for the acquiring group or person) may purchase for
the exercise price, the number of common shares having a market value equal to
two times the exercise price. The rights expire in January 2008, unless redeemed
earlier by the Company.
INCOME TAXES
Temporary differences, which give rise to deferred tax assets and
(liabilities) consist of the following:
DECEMBER 31,
---------------------------
1999 1998
-------- --------
Allowance for doubtful accounts .............................................. $ 3,762 $ 1,587
Prepaid expenses ............................................................. (1,222) (456)
Workers' compensation ........................................................ 13,260 8,197
Net operating loss carryforwards ............................................. 710 468
Depreciation and amortization expenses ....................................... (2,054) (1,666)
Other, net ................................................................... 388 222
-------- --------
Net tax deferrals ............................................................ $ 14,844 $ 8,352
======== ========
The Company has assessed its past earnings history and trends, budgeted
sales, expiration dates of loss carryforwards, and its ability to implement tax
planning strategies which are designed to accelerate or increase taxable income.
Based on the results of this analysis, no valuation allowance on net deferred
tax assets has been established for Labor Ready, Inc. as management believes
that it is more likely than not that the net deferred tax assets will be
realized.
At December 31, 1999, Labour Ready Temporary Services, Limited and Labour
Ready Temporary Services UK, Limited have federal net operating loss
carryforwards of approximately $1.5 million and $0.3 million with expiration
dates through 2006 and indefinite in the UK.
F-15
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME TAXES (CONTINUED)
Taxes on income consists of:
YEAR ENDED DECEMBER 31,
1999 1998 1997
-------- -------- --------
Current:
Federal ............................. $ 18,350 $ 14,077 $ 7,603
State ............................... 3,098 3,510 1,788
-------- -------- --------
Total Current .......................... 21,448 17,587 9,391
-------- -------- --------
Deferred:
Federal ............................. (4,514) (3,454) (3,259)
State ............................... (736) (542) (573)
Foreign ............................. (345) -- --
-------- -------- --------
Total deferred .......................... (5,595) (3,996) (3,832)
-------- -------- --------
Total taxes on income, including $897 tax
benefit of accounting change in 1999 .... $ 15,853 $ 13,591 $ 5,559
======== ======== ========
The differences between income taxes at the statutory federal income tax rate
and income taxes reported in the consolidated income statement are as follows:
YEAR ENDED DECEMBER 31,
1999 1998 1997
AMOUNT % AMOUNT % AMOUNT %
-------- --- -------- --- ------- ---
Income tax expense based on statutory rate...... $ 14,151 35 $ 11,686 35 $ 4,383 35
Increase (decrease) resulting from:
State income taxes, net of federal ............. 1,536 4 1,740 5 697 6
Prior year amounts ............................. -- -- -- -- 487 4
Other, net ..................................... 166 -- 165 1 (8) (1)
-------- -- -------- -- ------- --
Total taxes on income........................... $ 15,853 39 $ 13,591 41 $ 5,559 44
======== == ======== == ======= ==
COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its dispatch offices. These leases
generally provide for termination on 60 days notice and upon payment of three
months rent. Certain of these leases have 1 year minimum terms and are
cancelable thereafter upon 30 days notice and the payment of three months rent.
Many leases require additional payments for taxes, insurance, maintenance and
renewal options. Minimum lease commitments under terms of the leases at December
31, 1999 total approximately $4.2 million, substantially all of which would be
payable in 2000. Rent expense for the years ended December 31, 1999, 1998 and
1997 was $13.6 million, $9.0 million and $5.0 million, respectively.
F-16
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
COMMITMENTS AND CONTINGENCIES (CONTINUED)
In May of 1999, the Company entered a purchase and sale agreement to
purchase a 157,000 square foot office building with an attached parking garage
in downtown Tacoma, Washington. The aggregate purchase price of the building,
parking garage and estimated tenant improvements is approximately $11.5 million.
The Company currently has $500,000 on deposit with a remaining balance of $11.0
million, which is due upon closing. The Company expects to move its corporate
headquarters and administrative offices to this building by the end of 2000.
The Company has entered into lease agreements for automated Cash Dispensing
Machines ("CDM") for installation in the Company's dispatch offices. The leases,
which are classified as capital leases, are payable over 72 and 84 months with
imputed interest rates of 6.37% and 9.02% and are secured by the CDMs.
Cost and accumulated amortization of the CDMs are as follows at December 31,
1999:
Cash dispensing machines................... $ 10,797
Less accumulated amortization.............. 2,120
---------
$ 8,677
=========
Future minimum lease payments under capital leases together with the present
value of the minimum lease payments as of December 31, 1999 are as follows:
Year ended December 31:
2000..................................... $ 1,735
2001..................................... 1,735
2002..................................... 1,735
2003..................................... 1,735
2004..................................... 1,735
Thereafter............................... 507
---------
Total minimum lease payments.............. 9,182
Less imputed interest...................... (1,414)
---------
$ 7,768
=========
The Company is, from time to time, involved in various lawsuits arising in
the ordinary course of business. Although there can be no absolute assurance, in
the opinion of management, these will not have a material effect on the
Company's consolidated results of operations or financial condition.
RETIREMENT PLAN
Qualifying employees may participate in a company sponsored 401(k) plan ("the
Plan") and may elect to contribute up to 15% of their annual compensation to the
Plan. Matching contributions are made at the discretion of the Company's Board
of Directors and have been made in the form of the Company's common stock.
Employees are eligible to participate in the Plan the calendar quarter following
the completion of six months of service. Employees are fully vested in matching
contributions made to the Plan after completing five years of service. During
1999, 1998 and 1997, the Company issued 11, 14, and 20 shares of common stock to
the participating employees. The amount charged to expense under the Plan was
$220, $178 and $118 for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-17
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts activity was as follows:
YEAR ENDED DECEMBER 31,
1999 1998 1997
---------- ---------- ---------
Balance, beginning of year.................... $ 4,218 $ 2,851 $ 1,237
Charged to expense............................ 19,231 8,274 5,761
Writeoffs, net of recoveries................. (13,550) (6,907) (4,147)
---------- ---------- ---------
Balance, end of year.......................... $ 9,899 $ 4,218 $ 2,851
========== ========== =========
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (the "ESPP") to provide
substantially all employees who have completed six months of service and meet
certain limited qualifications, relative to weekly total hours and calendar
months worked, an opportunity to purchase shares of its common stock through
payroll deductions. The ESPP permits payroll deductions up to 10% of eligible
aftertax compensation. Participant account balances are used to purchase shares
of common stock at the lesser of 85% of the fair market value of shares on
either the first day or the last day of each month. The ESPP expires on June 30,
2001. 900 shares of common stock have been reserved for purchase under the ESPP.
During 1999, 1998 and 1997, participants purchased 98, 84 and 119 shares in the
plan for cash proceeds of $1,063, $838 and $375, respectively.
STOCK COMPENSATION PLANS
In June 1996, the Company adopted the 1996 Employee Stock Option and
Incentive Plan (the "Plan"). In accounting for the Plan, the Company applied APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. Under APB Opinion No. 25, because the exercise price of the
Company's employee stock options is not less than the market price of the
underlying stock at the date of grant, no compensation cost is recognized.
The Plan states that the exercise price of each option may or may not be
granted at an amount that equals the market value at the date of grant. The
majority of the options vest evenly over a four year period from the date of
grant and then expire if not exercised within five years from the date of grant.
4,838 shares of common stock have been reserved for issuance under terms of the
Plan.
Statement of Financial Accounting Standards No. 123, "Accounting for
StockBased Compensation", requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The fair value of option grants
is estimated on the date of grant utilizing the BlackScholes option pricing
model with the following weighted average assumptions for grants in 1999, 1998
and 1997, respectively: expected life of options of 5 years, expected volatility
of 89%, 88%, and 67%, riskfree interest rates of 5.5%, 5.0% and 6.0%, and a 0%
dividend yield.
F-18
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
STOCK COMPENSATION PLANS (CONTINUED)
Under 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:
1999 1998 1997
--------- --------- ---------
Net Income
As reported $ 23,124 $ 19,799 $ 6,963
Pro forma . $ 18,800 $ 16,401 $ 6,159
Pro forma earnings
per share
Basic ..... $ 0.44 $ 0.39 $ 0.15
Diluted ... $ 0.43 $ 0.38 $ 0.15
The following table summarizes stock option activity:
YEAR ENDED DECEMBER 31,
1999 1998 1997
-------------------- ----------------- --------------------
(1) (1) (1)
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year..... 3,267 $ 7.32 3,049 $ 4.65 1,406 $ 3.62
Granted.............................. 2,118 $ 14.91 1,173 $ 12.96 1,914 $ 5.54
Exercised............................ (868) $ 4.66 (421) $ 3.36 (110) $ 2.57
Canceled............................. (992) $ 10.94 (534) $ 8.73 (161) $ 3.35
---- --------- ---- -------- ---- ---------
Outstanding at end of year........... 3,525 $ 10.85 3,267 $ 7.32 3,049 $ 4.65
===== ========= ===== ======== ===== =========
Exercisable at end of year........... 996 $ 7.58 858 $ 4.42 716 $ 3.10
===== ========= ===== ======== ===== =========
Weighted average fair value of options
ganted............................... $ 10.37 $ 9.39 $ 5.24
========= ======== =========
(1) Weighted average exercise price.
At December 31, 1999, 758 shares of the Company's common stock were available
for future grant under the Company's stock option plan.
F-19
LABOR READY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS EXCEPT PER SHARE DATA)
STOCK COMPENSATION PLANS (CONTINUED)
Information relating to stock options outstanding and exercisable at December
31, 1999 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
------------ ----------- ------------------- ---------------- ----------- --------------
$1.47- 7.00 843 2.17 3.85 396 3.84
7.01-14.00 1,510 3.31 10.23 559 9.59
14.01-20.63 1,172 4.13 16.67 41 16.32
----------- -----------
$1.47-20.63 3,525 3.31 $10.85 996 $7.58
=========== ===========
F-20