UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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.
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(Exact Name of Registrant as specified in its charter)
Washington 91-1287341
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(State of Incorporation) (Employer Identification No.)
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
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As of April 28, 2000, the Registrant had 42,770,548 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: None.
LABOR READY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.........................................................2
Consolidated Statements of Income
Thirteen Weeks Ended
March 31, 2000 and April 2, 1999.............................................................4
Consolidated Statements of Cash Flows
Thirteen Weeks Ended
March 31, 2000 and April 2, 1999.............................................................5
Notes to Consolidated Financial Statements...................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................................9
Item 3. Qualitative and Quantitative Disclosures
About Market Risk...........................................................................13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................14
Signatures...........................................................................................15
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Page 1
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
ASSETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
------------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 27,637 $ 16,845
Accounts receivable, less allowance for doubtful accounts
of $8,089 and $9,899............................................. 81,632 93,716
Workers' compensation deposits and credits........................ 5,205 4,955
Prepaid expenses and other........................................ 8,188 9,310
Income tax receivable............................................. 4,232 2,004
Deferred income taxes............................................. 7,339 8,101
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Total current assets............................................. 134,233 134,931
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PROPERTY AND EQUIPMENT:
Buildings and land ............................................... 6,762 6,298
Computers and software............................................ 26,382 23,709
Cash dispensing machines.......................................... 12,456 10,797
Furniture and equipment........................................... 769 766
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46,369 41,570
Less accumulated depreciation .................................... 12,596 10,838
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Property and equipment, net...................................... 33,773 30,732
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OTHER ASSETS:
Restricted cash.................................................. 2,027 2,027
Deferred income taxes............................................. 6,968 6,743
Other assets...................................................... 561 48
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Total other assets............................................... 9,556 8,818
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Total assets...................................................... $ 177,562 $ 174,481
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See accompanying notes to consolidated financial statements.
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Page 2
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
----------------- -----------------
CURRENT LIABILITIES:
Accounts payable........................................................ $ 14,764 $ 11,756
Accrued wages and benefits.............................................. 9,160 8,531
Current portion of workers' compensation claims reserve................. 13,422 15,732
Current portion of capital lease obligations............................ 1,511 1,178
----------------- -----------------
Total current liabilities............................................. 38,857 37,197
----------------- -----------------
LONG-TERM LIABILITIES:
Capital lease obligations............................................... 7,638 6,590
Workers' compensation claims reserve.................................... 22,581 19,558
----------------- -----------------
Total long-term liabilities............................................ 30,219 26,148
----------------- -----------------
Total liabilities...................................................... 69,076 63,345
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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;
42,756 and 42,802 shares issued and outstanding......................... 62,614 62,928
Retained earnings....................................................... 45,018 47,354
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Total shareholders' equity............................................. 108,486 111,136
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Total liabilities and shareholders' equity............................. $ 177,562 $ 174,481
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----------------- -----------------
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
--------------------------------
MARCH 31, APRIL 2,
2000 1999
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Revenues from services....................................... $ 193,450 $ 156,933
Cost of services.......................................... 134,736 105,907
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Gross profit................................................. 58,714 51,026
Selling, general and administrative expenses.............. 60,767 42,662
Depreciation and amortization............................. 1,765 676
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Income (loss) from operations................................ (3,818) 7,688
Interest income, net......................................... 8 18
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Income (loss) before taxes and cumulative effect of accounting
change....................................................... (3,810) 7,706
Taxes (benefit) on income (loss)............................. (1,491) 3,019
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Income (loss) before cumulative effect of accounting change.. (2,319) 4,687
Cumulative effect of accounting change, net of income tax
benefit of $897.............................................. -- (1,453)
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Net income (loss)............................................ $ (2,319) $ 3,234
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Basic income (loss) per common share:
Income (loss) before cumulative effect of
accounting change......................................... $ (0.05) $ 0.11
Cumulative effect of accounting change, net............... -- (0.03)
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Net income (loss)............................................ $ (0.05) $ 0.08
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Diluted income (loss) per common share:
Income (loss) before cumulative effect of
accounting change......................................... $ (0.05) $ 0.10
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Cumulative effect of accounting change, net............... -- (0.03)
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Net income (loss)......................................... $ (0.05) $ 0.07
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Weighted average shares outstanding:
Basic..................................................... 42,818 42,044
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Diluted................................................... 42,818 43,469
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See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
THIRTEEN WEEKS ENDED
---------------------------------------
MARCH 31, APRIL 2,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................................... $ (2,319) $ 3,234
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.............................................. 1,765 672
Provision for doubtful accounts............................................ 2,935 2,751
Deferred income taxes...................................................... 537 (2,615)
Cumulative effect of accounting change..................................... -- 2,350
Changes in operating assets and liabilities
Accounts receivable........................................................ 9,149 (1,839)
Workers' compensation deposits and credits................................. (250) (1,907)
Prepaid expenses and other................................................. 1,122 (1,918)
Accounts payable........................................................... 339 (1,406)
Accrued wages and benefits................................................. 629 (116)
Income taxes............................................................... (2,194) 357
Workers' compensation claims reserve....................................... 713 942
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Net cash provided by operating activities..................................... 12,426 505
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................................... (3,125) (3,021)
Additions to other assets.................................................. (520) (521)
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Net cash used in investing activities......................................... (3,645) (3,542)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds on short term borrowing....................................... 2,702 --
Proceeds from options and warrants exercised............................... 22 1,370
Proceeds from sale of stock through employee benefit plans................. 564 206
Purchase and retirement of common stock.................................... (934) --
Payments on capital lease obligations...................................... (293) (181)
Preferred stock dividends paid............................................. (43) --
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Net cash provided by financing activities..................................... 2,018 1,395
Effect of exchange rates on cash........................................... (7) (55)
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Net increase (decrease) in cash and cash equivalents.......................... 10,792 (1,697)
CASH AND CASH EQUIVALENTS, beginning of period................................ 16,845 25,940
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CASH AND CASH EQUIVALENTS, end of period...................................... $ 27,637 $ 24,243
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See accompanying notes to consolidated financial statements.
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ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures usually
found in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
should be read in conjunction with the consolidated financial statements and
related notes included in Labor Ready, Inc.'s ("the Company") 1999 annual report
on Form 10-K. Certain amounts in the consolidated balance sheet at December 31,
1999 have been reclassified to conform to the 2000 presentation. The
accompanying consolidated financial statements reflect all adjustments,
including normal recurring adjustments, which in the opinion of management, are
necessary to present fairly the financial position, results of operations and
cash flows for the interim periods presented. Operating results for the thirteen
week period ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
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 45 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, to an aggregate maximum of $11.60 per $100 of temporary
worker payroll, or $18.8 million. For claims arising in 1998, 1999 and 2000, the
per occurrence deductible amount was increased to $350,000 and the maximum
aggregate stop-loss 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 and $10.4 million for the thirteen weeks ended March 31, 2000
For claims arising in years prior to 1997, the Company has insured all losses
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 March 31, 2000, and the total of claims paid and reserved
for in the Company's financial statements for the same periods is $11.5 million.
This amount represents the discounted maximum additional exposure, net of tax,
to the Company before its maximum aggregate stop-loss 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 March 31, 2000 and December 31, 1999, are workers' compensation
claims reserves in the non-monopolistic states of $35.6 million and $34.7
million and in the monopolistic states of $0.4 million and $0.7 million,
respectively. The claims reserves were computed using a discount rate of 6.0% at
March 31, 2000 and December 31, 1999.
Workers' compensation expense totaling $10.0 million, and $5.6 million was
recorded as a component of cost of services in each of the thirteen weeks ended
March 31, 2000 and April 2, 1999.
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 has provided approximately 50% of the required
collateral in the form of a surety bond, and 50% in letters of credit.
Accordingly, at March 31, 2000, $14.5 million of the collateral was satisfied
with surety bonds and $12.6 million was satisfied with letters of credit for the
1997 and 1998 program years.
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WORKERS' COMPENSATION (CONTINUED)
The Company has a deductible insurance policy for the non-monopolistic 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
required collateral was reduced to an amount equal to 60% of claims reserves.
Collateral for the 1999 and 2000 program years consists of 50% letters of credit
and 50% surety bond. Accordingly, as of March 31, 2000, the Company has provided
the insurance carrier with a letter of credit totaling $12.0 million and a
surety bond for $12.6 million. Subsequent to quarter end, the Company increased
the letter of credit by $5.0 million and the surety bond by $10.0 million for
the 2000 program year. The Company anticipates that the letters of credit
required by the insurance carrier will increase by $5.0 million over the balance
of the year, while the surety bonds should remain constant for the 2000 program
year.
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.
For workers' compensation claims originating in the United Kingdom, the Company
has purchased an employers' liability insurance policy. This policy carries a 10
million GBP limit.
The Company's risk management department has established working relationships
with its insurers, third party claims administrators, and medical service
providers. To reduce wage-loss 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 on-line connection with
its third party administrators that allows the claims coordinators to maintain
visibility of all claims, manage their progress and generate required management
information.
CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, the Company adopted the provisions of Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP
98-5 establishes new rules for the financial reporting of start-up 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 98-5, any
unamortized capitalized pre-opening costs in the first quarter of the year
adopted. Prior to adopting SOP 98-5, pre-opening costs incurred to open new
dispatch offices, including salaries, recruiting, testing, training, lease and
other related costs, were capitalized and amortized using the straight-line
method over two years. The cumulative effect of adopting SOP 98-5 was to
decrease net income by $1.5 million or $0.03 per common share.
SUPPLEMENTAL CASH FLOW INFORMATION
(AMOUNTS IN THOUSANDS)
THIRTEEN WEEKS ENDED
-----------------------------------
MARCH 31, APRIL 2,
2000 1999
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Cash paid during the period for:
Interest ........................................................... $ 203 $ 160
Income taxes ....................................................... $ 169 $ 4,334
Non-cash investing and financing activities:
Tax benefits related to stock options............................... $ 34 $ 1,359
Assets acquired with capital lease obligations...................... $ 1,674 $ 2,309
Accrued preferred stock dividends................................... $ 11 $ --
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EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income (loss), less
preferred stock dividends, by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income (loss), less preferred stock dividends, by the weighted
average number of common shares and common share equivalents outstanding during
the period. Common share equivalents for the Company include the dilutive effect
of outstanding options, except where their inclusion would be anti-dilutive.
Basic and diluted earnings per share were calculated as follows (amounts in
thousands, except per share amounts):
THIRTEEN WEEKS ENDED
---------------------------------
MARCH 31, APRIL 2,
2000 1999
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Basic:
Net income (loss).................................... $ (2,319) $ 3,234
Less preferred stock dividends....................... (11) (11)
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Income (loss) allocable to common shareholders....... $ (2,330) $ 3,223
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Weighted average shares outstanding................. 42,818 42,044
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Net income (loss) per share.......................... $ (0.05) $ 0.08
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Diluted:
Income (loss) allocable to common shareholders....... $ (2,330) $ 3,223
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Weighted average shares outstanding.................. 42,818 42,044
Plus options to purchase common stock outstanding at
end of period...................................... -- 4,323
Less shares assumed repurchased...................... -- (2,898)
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Weighted average shares outstanding, including
dilutive effect of options......................... 42,818 43,469
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Net income (loss) per share.......................... $ (0.05) $ 0.07
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COMMITMENTS
During the thirteen weeks ended March 31, 2000, the Company entered into an
agreement to lease approximately 200 automated Cash Dispensing Machines ("CDMs")
for installation in the Company's dispatch offices opened in 2000. The fair
market value of the CDMs at inception of the lease was approximately $3.0
million. The lease is payable over 60 months with an imputed interest rate of
6.43% and a residual payment equal to 20% of the CDMs' original cost. The lease
is secured by the CDMs. During the thirteen weeks ended March 31, 2000, the
Company installed approximately 143 of the CDMs in its new dispatch offices
throughout the United States. Accordingly, the Company recorded assets under
capital lease and capital lease obligations totaling $1.6 million with future
minimum lease payments over the next 5 years of approximately $0.3 million per
year.
In May of 1999, the Company entered into 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 $0.5 million on deposit with a remaining balance of
$11.0 million, which will be disbursed by the end of the year. The Company
expects to move its corporate headquarters and administrative offices to this
building by the end of 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed in this Form 10-Q, including statements about the
Company's revenue growth, the demand for temporary labor and its plans for
opening new offices, are forward-looking statements within the meaning of the
Private Litigation Reform Act of 1995. As such, these forward-looking statements
may involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These factors include, but are not
limited to (1) the Company's ability to manage and continue its rapid growth,
(2) economic conditions in its key market areas, and (3) other risks as set
forth in the Company's Form 10-K for the year ended December 31, 1999. Although
the Company believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be attained.
OVERVIEW
Labor Ready is the nation's leading provider of temporary manual labor. The
Company's customers are primarily in the freight handling, warehousing,
landscaping, construction, light manufacturing, and other light industrial
businesses. The Company has grown from eight dispatch offices in 1991 to 830
dispatch offices at March 31, 2000. Substantially all of the growth in dispatch
offices was achieved by opening Company-owned locations rather than through
acquisitions or franchising. The Company's annual revenues have grown from
approximately $6 million in 1991 to $851 million in 1999 and $193 million for
the thirteen weeks ended March 31, 2000. This revenue growth has been generated
both by opening new dispatch offices in markets throughout the U.S., Canada,
United Kingdom and Puerto Rico and by continuing to increase sales at existing
dispatch offices.
The Company opened 143 dispatch offices during the first thirteen weeks of 2000
and expects to open approximately 57 additional dispatch offices in the second
quarter. The average cost of opening each new dispatch office in 2000 was
approximately $45,000. Approximately, $13,000 of these costs includes salaries,
recruiting, testing, training, lease and other related costs which are expensed
and the remaining $32,000 is included in property and equipment and includes
computer systems and other equipment related costs, leasehold improvements and a
cash dispensing machine and related equipment. The cost of opening a new
dispatch office includes management training, the installation of computer and
other office systems and a CDM. Further, once open, the Company invests
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 weekly. Consequently, the Company may experience 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.
Approximately 20% of the Company's customers are construction and landscaping
businesses, which are significantly affected by the weather. 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. Further, 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 customer mix diversifies. From time to time, during peak
periods, the Company experiences shortages of available temporary workers. The
Company has completed the installation of the CDMs in substantially all of its
dispatch offices in the United States. The CDMs provide the Company's temporary
workers with the option of receiving cash payment instead of a payroll check.
The Company believes this additional feature is unique among its direct
competitors and should increase the Company's ability to attract available
temporary workers.
Revenue from services includes revenues earned on services provided by the
Company's temporary workers and fees generated by the CDMs.
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Cost of services includes the wages and related payroll taxes of temporary
workers, workers' compensation expense, unemployment compensation insurance and
transportation. Cost of services as a percentage of revenues has historically
been affected by numerous factors, including the use of lower introductory rates
to attract new customers at new dispatch offices, the use of higher pay rates to
attract more skilled workers, changes in the Company's workers' compensation
reserve rates and the changing geographic mix of new and established, more
mature markets. Although the Company has implemented policies and procedures to
prevent unplanned increases in pay rates, and is no longer required to discount
billing rates to attract new customers, significant continuing fluctuations in
cost of services may be experienced as the Company pursues further aggressive
growth.
Selling, general and administrative expenses include the salaries and wages of
the Company's operations and administrative personnel, dispatch office operating
expenses, corporate office operating expenses and the costs of the CDM program.
Labor Ready pays employee-related expenses of its temporary workers, including
workers' compensation coverage, unemployment compensation insurance, and Social
Security and Medicare taxes. The Company does not provide health, dental,
disability or life insurance to its temporary workers. The Company bills its
customers for the hours worked by its 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 are not material during any period presented herein.
RESULTS OF OPERATIONS
The following table compares the operating results of the Company for the
thirteen weeks ended March 31, 2000 and April 2, 1999 (in thousands):
THIRTEEN WEEKS ENDED
-------------------------------------------------
MARCH 31, PERCENT APRIL 2,
2000 CHANGE 1999
-------------------------------------------------
Revenues from services........................ $ 193,450 23.3 $ 156,933
Cost of services.............................. 134,736 27.2 105,907
Selling, general and administrative expenses.. 60,767 42.4 42,662
Depreciation and amortization................. 1,765 161.1 676
Interest income, net.......................... 8 (55.6) 18
Income (loss) before taxes and cumulative
effect of change in accounting principle...... (3,810) (149.4) 7,706
Net income (loss)............................. $ (2,319) (171.7) $ 3,234
THIRTEEN WEEKS ENDED MARCH 31, 2000 COMPARED TO THIRTEEN WEEKS ENDED APRIL 2,
1999
DISPATCH OFFICES
The number of offices grew to 830 for the thirteen weeks ended March 31, 2000
from 687 locations at December 31, 1999, a net increase of 143 dispatch
offices, or 20.8%. During the thirteen weeks ended April 2, 1999, the number
of offices grew to 652 from 486 locations at December 31, 1998, a net
increase of 166 dispatch offices, or 34.2%. The Company plans to open an
additional 57 offices in the second quarter of 2000 and 200 additional
offices in 2001. The approximate aggregate costs of opening the 143 and 166
additional offices in the first quarter were $6.4 million in 2000 and $7.5
million in 1999, for an average cost of $45,000 per office for both periods.
REVENUES FROM SERVICES
The increase in revenues is due primarily to the increase in the number of
dispatch offices and a slight increase in the average bill rate. Included in
revenues from services for the thirteen weeks ended March 31, 2000 and April
2, 1999 are CDM fees of $1.7 million and $1.2 million.
COST OF SERVICES
The increase in cost of services is directly related to the corresponding
increase in revenues. Cost of services were 69.7% of revenue for the thirteen
weeks ended March 31, 2000 compared to 67.5% of revenue for the same period
in 1999, an increase of 2.2% of revenue. The increase as a percentage of
revenue is mainly due to a one time benefit received, in the first quarter of
1999, for several changes made to the workers' compensation program.
Fluctuations in cost of services may be expected as the Company pursues
further aggressive growth.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expenses is largely due
to the 23.3% increase in revenues from 1999 to 2000. Selling, general and
administrative expenses were 31.4% of revenues for the first quarter of 2000
as compared to 27.2% of revenues in the first quarter of 1999. The increase
in selling, general and administrative expenses as a percentage of revenue in
the first quarter of 2000 is due mainly to an increase in staffing costs of
approximately 2.0% of revenue over the same quarter a year ago and an
increase in advertising costs. The increase in staffing costs is a result of
the addition of 178 offices from a year ago, as well as rehiring and training
sales representatives to support future growth. Advertising costs increased
due to the launch of the national advertising campaign, which was initiated
in the first quarter of 2000. Included in selling, general and administrative
expense for the thirteen weeks ended March 31, 2000 and April 2, 1999 are CDM
related expenses of $0.4 million and $0.5 million.
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 adjusts its staffing at the dispatch offices and upgrades its
operating and administrative capabilities to accommodate anticipated revenue
and dispatch office growth.
DEPRECIATION AND AMORTIZATION EXPENSE
The increase in quarterly depreciation and amortization expense is primarily
the result of the addition of $14.7 million of property and equipment since
the first quarter of 1999. These additions primarily include CDMs, computer
equipment, software, and other equipment needed for the new offices opened in
the first quarter and to expand the Company's data processing capabilities to
accommodate this growth. 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. Prior to
the change, the Company had capitalized pre-opening costs and amortized them
over two years. Included in depreciation and amortization expense for the
thirteen weeks ended March 31, 2000 and April 2, 1999 are depreciation on
CDMs of $0.4 million and $0.3 million.
INTEREST INCOME, NET
The decrease in net interest income was the result of increases in interest
expense on CDM leases, higher letter of credit and line of credit fees than
in 1999 and a decline in market interest rates on invested cash balances.
Additionally, the Company had cash balances of approximately $12.4 million
held in the CDMs at March 31, 2000 compared to $13.3 million at April 2,
1999.
The Company expects to incur interest expense during the balance of 2000 as
its cash demands will increase during its busiest time of year, which will
result in increased borrowing on the Company's line of credit. Additionally,
cash balances held in the CDMs for payment of temporary worker payrolls will
continue to reduce cash available for investing.
TAXES (BENEFIT) ON INCOME (LOSS)
The increase in the tax benefit for the quarter is commensurate with the
decrease in income from operations on a quarter over quarter basis. The
Company's effective tax rate was 39.1% in the first quarter of 2000 as
compared to 39.2% for the same period in 1999. The decrease in the effective
rate was primarily due to reductions in the Company's expected state income
tax rates. The principal difference between the statutory federal income tax
rate and the Company's effective income tax rate results from state income
taxes and certain non-deductible expenses.
The Company had a net deferred tax asset of approximately $14.3 million at
March 31, 2000, resulting primarily from workers' compensation claims
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 (LOSS)
As a percentage of revenues from services, the net loss was (1.2)% for the
first quarter of 2000, which compares to 2.1% for the first quarter of 1999,
a decrease of 3.3%. This decrease in net income as a percentage of revenue
was related to the increase in cost of services and selling, general and
administrative expenses as a percentage of sales.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $12.4 million for the period
ended March 31, 2000 compared to $0.5 million for the period ended April 2,
1999. The increase in cash provided by operations for the thirteen weeks
ended March 31, 2000, is largely due to the increase in the collection of
accounts receivable and a decrease in prepaid expenses, offset by the net
loss for the quarter and an increase in income taxes receivable.
The Company used net cash in investing activities of $3.6 million in the
first quarter of 2000, compared to $3.5 million in the first quarter of 1999.
The increase in cash used in investing activities in 2000 as compared to 1999
is due primarily to an increase in the Company's internal software
development costs to accommodate the growth in dispatch offices and the
development of a new web site, which allows customers to order workers online
and to review and analyze invoices. The Company's cash used for capital
expenditures in 2000 and 1999 include property and equipment acquired other
than through capital lease.
Net cash provided by financing activities was $2.0 million for the period
ended March 31, 2000 and $1.4 million for the period ended April 2, 1999. The
increase in cash provided by financing activities in 2000 as compared to 1999
is due mainly to the increase in net proceeds on short term borrowings offset
by the purchase and retirement of common stock of $0.9 million.
In February 1999, the Company entered into a line of credit agreement with
U.S. Bank. The 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 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 certain minimum
net worth and working capital amounts and ratios. The Company was in
compliance with the requirements at March 31, 2000.
As discussed further in the notes to 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 March 31, 2000, the Company had provided its insurance carriers
with letters of credit totaling $24.6 million. The letters of credit bear
fees of 0.75% per year and are supported by an equal amount of available
borrowings on the line-of-credit. Accordingly, at March 31, 2000, the Company
did not have an outstanding balance on the line-of-credit, $24.6 million was
committed by the letters of credit and $35.4 million was available for
borrowing. Subsequent to quarter end, the letters of credit increased to
$29.6 million leaving $30.4 million available for borrowing.
During the first quarter of 2000, the Company entered into a tentative
agreement to lease approximately 200 automated CDMs for installation in the
Company's dispatch offices opened in 2000. The fair market value of the CDMs
at inception of the lease is approximately $3.0 million. The lease is payable
over 60 months with an imputed interest rate of 6.43% and a residual payment
equal to 20% of the CDMs' original cost. The lease is secured by the CDMs.
During the thirteen weeks ended March 31, 2000, the Company installed
approximately 143 CDMs in dispatch offices throughout the United States.
Accordingly, the Company recorded assets under capital lease and capital
lease obligations totaling $1.6 million with future minimum lease payments
over the next 5 years of approximately $0.3 million per year.
Included in cash and cash equivalents at March 31, 2000, is approximately
$12.4 million as compared to $13.3 million at April 2, 1999, of cash which is
located in the CDMs for payment of temporary worker payrolls.
Historically, the Company has financed its operations through cash generated
by external financing including term loans, credit lines and stock offerings.
The principal use of cash is to finance the growth in receivables, and fund
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 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.
INFORMATION PROCESSING SYSTEMS AND THE YEAR 2000
We are exposed to the risk that the Year 2000 Issue could disrupt our
operations. However, as discussed in prior filings, we undertook certain
planning and implementation efforts. We did not experience any significant
system failures at the turning of the new millennium. We presently believe
that the Year 2000 Issue has been mitigated. The amounts incurred and
expensed for developing and carrying out the plans to complete the Year 2000
modifications did not have a material effect on our operations.
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ITEM 3. 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 March 31, 2000, 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 March 31, 2000 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
THE FOLLOWING EXHIBIT IS BEING FILED AS A PART OF THIS REPORT:
EXHIBIT NO. DESCRIPTION
27. Financial Data Schedule as of March 31, 2000
and for the thirteen week period then ended.
27.1 Financial Data Schedule as of April 2, 1999
and for the thirteen week period then ended.
(b) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REGISTRANT: LABOR READY, INC.
By: /s/ Glenn A. Welstad May 12, 2000
----------------------------------- ------------
Glenn A. Welstad Date
Chairman of the Board, Chief Executive
Officer and President
By: /s/ Joseph P. Sambataro, Jr. May 12, 2000
----------------------------------- -------------
Joseph P. Sambataro, Jr. Date
Executive Vice President,
Chief Financial Officer, Treasurer
and Assistant Secretary
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