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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 quarter ended April 3, 1998
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) (I.R.S. Employer
IdentificationNo.)
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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: 18,505,002 shares of no par
value common stock were outstanding as of April 16, 1998.
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Page 1
LABOR READY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
April 3, 1998 and December 31, 1997. . . . . . . . . . 3
Consolidated Statements of Operations
Thirteen Weeks Ended April 3, 1998 and March 31, 1997. 5
Consolidated Statements of Cash Flows
Thirteen Weeks Ended April 3, 1998 and March 31, 1997. 6
Notes to Consolidated Financial Statements . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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Page 2
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LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS OF DOLLARS
ASSETS
(UNAUDITED)
APRIL 3, DECEMBER 31,
1998 1997
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $17,880 $22,117
Accounts receivable, less allowance for doubtful accounts
of $2,963 and $2,851 . . . . . . . . . . . . . . . . . . . . . 37,150 36,614
Workers' compensation deposits and credits. . . . . . . . . . . 2,284 1,082
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . 3,567 2,660
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 2,150 3,144
------- -------
Total current assets . . . . . . . . . . . . . . . . . . . . . 63,031 65,617
------- -------
PROPERTY AND EQUIPMENT:
Buildings and land. . . . . . . . . . . . . . . . . . . . . . . 4,611 4,448
Computers and software. . . . . . . . . . . . . . . . . . . . . 9,726 8,220
Cash dispensing machines. . . . . . . . . . . . . . . . . . . . 4,208 --
Furniture and equipment . . . . . . . . . . . . . . . . . . . . 521 497
------- -------
19,066 13,165
Less accumulated depreciation . . . . . . . . . . . . . . . . . 3,395 2,839
------- -------
Property and equipment, net. . . . . . . . . . . . . . . . . . 15,671 10,326
------- -------
OTHER ASSETS:
Intangible assets and other, less amortization of
$4,393 and $3,569. . . . . . . . . . . . . . . . . . . . . . . 3,341 3,076
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 2,320 1,212
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . 122 136
------- -------
Total other assets . . . . . . . . . . . . . . . . . . . . . . 5,783 4,424
------- -------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $84,485 $80,367
------- -------
------- -------
See accompanying notes to consolidated financial statements.
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Page 3
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LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS OF DOLLARS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
APRIL 3, DECEMBER 31,
1998 1997
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CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $3,378 $3,711
Accrued wages and benefits. . . . . . . . . . . . . . . . . . . . 3,821 4,080
Workers' compensation claims reserve - current portion. . . . . . 6,932 7,109
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . -- 875
Current maturities of long-term debt. . . . . . . . . . . . . . . 404 13
------- -------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 14,535 15,788
------- -------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities . . . . . . . . . . . . . 3,798 76
Workers' compensation claims reserve, less current portion. . . . 7,363 6,462
------- -------
Total long-term liabilities. . . . . . . . . . . . . . . . . . . 11,161 6,538
------- -------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . 25,696 22,326
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.296 par value, 5,000 shares authorized;
2,883 shares issued and outstanding . . . . . . . . . . . . . . 854 854
Common stock, no par value, 25,000 shares authorized; 18,503
and 18,442 shares issued and outstanding. . . . . . . . . . . . 50,539 49,694
Cumulative other comprehensive income (expense):
Foreign currency translation adjustment.. . . . . . . . . . . . . (145) 86
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 7,541 7,407
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Total shareholders' equity . . . . . . . . . . . . . . . . . . . 58,789 58,041
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Total liabilities and shareholders' equity . . . . . . . . . . . $84,485 $80,367
------- -------
------- -------
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS OF DOLLARS (EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
-----------------------
APRIL 3, MARCH 31,
1998 1997
-------- ---------
Revenues from services . . . . . . . . . . . . . . . . $94,030 $51,714
Cost of services. . . . . . . . . . . . . . . . . 65,695 36,922
------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . 28,335 14,792
Selling, general and administrative . . . . . . . 26,913 15,383
Depreciation and amortization . . . . . . . . . . 1,380 929
------- -------
Income (loss) from operations. . . . . . . . . . . . . 42 (1,520)
Interest income, net . . . . . . . . . . . . . . . . . 208 162
------- -------
Income (loss) before income tax (provision) benefit. . 250 (1,358)
Income tax (provision) benefit . . . . . . . . . . . . (105) 565
------- -------
Net income (loss). . . . . . . . . . . . . . . . . . . $ 145 $ (793)
------- -------
------- -------
Net income (loss) per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . $0.01 $(0.04)
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------- -------
Diluted . . . . . . . . . . . . . . . . . . . . . $0.01 $(0.04)
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------- -------
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . 18,459 18,549
------- -------
------- -------
Diluted.. . . . . . . . . . . . . . . . . . . . . 19,001 18,549
------- -------
------- -------
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS OF DOLLARS
(UNAUDITED)
THIRTEEN WEEKS ENDED
-----------------------
APRIL 3, MARCH 31
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . $ 145 $ (793)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . 1,380 929
Provision for doubtful accounts . . . . . . . . . . 1,144 851
Deferred income taxes . . . . . . . . . . . . . . . (114) (670)
Changes in assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . (1,900) (3,351)
Workers' compensation deposits and credits. . . . . (1,206) (1,917)
Prepaid expenses and other. . . . . . . . . . . . . (908) 111
Accounts payable. . . . . . . . . . . . . . . . . . (228) (748)
Accrued wages and benefits. . . . . . . . . . . . . (260) (657)
Workers' compensation claims reserve. . . . . . . . 727 601
Income taxes payable. . . . . . . . . . . . . . . . (588) 70
------- -------
Net cash used in operating activities. . . . . . . . . (1,808) (5,574)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . (1,692) (1,379)
Increase (decrease) in restricted cash in
captive insurance subsidiary. . . . . . . . . . . 14 (727)
Additions to intangible assets and other. . . . . . . (1,087) (1,377)
------- -------
Net cash used in investing activities. . . . . . . . . (2,765) (3,483)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Checks issued against future deposits . . . . . . . -- 381
Proceeds from options and warrants exercised. . . . 343 8
Proceeds from sale of stock through Employee
Stock Purchase Plan . . . . . . . . . . . . . . . 100 28
Purchase and retirement of treasury stock . . . . . -- (529)
Payments on long-term debt and capital leases . . . (95) (4)
------- -------
Net cash provided by (used in) financing activities. . 348 (116)
Effect of exchange rates on cash . . . . . . . . . . . (12) (42)
------- -------
Net increase in cash and cash equivalents. . . . . . . (4,237) (9,215)
CASH AND CASH EQUIVALENTS, beginning of period . . . . 22,117 17,598
------- -------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . $17,880 $ 8,383
------- -------
------- -------
See accompanying notes to consolidated financial statements.
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ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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 the Company's 1997 annual report on
Form 10-K. 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 April 3, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
NOTE 2. WORKERS' COMPENSATION
The Company provides workers' compensation insurance to its temporary
workers and regular employees. In Washington, Ohio and West Virginia, (the
monopolistic states), the Company is required to make payments into state
administered programs, at rates established by each state, 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 April 3, 1998 and December 31, 1997,
the Company recorded workers' compensation credit receivables of $1.4 million
and $1.1 million and workers' compensation liabilities of $0.4 million and
$0.6 million related to the monopolistic states.
For workers' compensation claims originating in the remaining states (the
non-monopolistic states), the Company self-insures the deductible amount per
claim to a maximum aggregate stop-loss limit and has engaged a third party
administrator to manage the claims and related claims expense. The deductible
amount was $250,000 per claim to an aggregate maximum of approximately $5.0
million, $6.5 million and $19.0 million in 1995, 1996 and 1997, respectively.
In January 1998, the Company renewed its insurance program, the terms of which
included a reduction of the 1995 and 1996 aggregate maximums to $4.5 million and
$5.2 million, respectively. Additionally, for claims arising in 1998, the per
claim deductible was increased to $350,000 and the maximum aggregate stop-loss
limit was reduced from $11.60 to $10.41 per $100 of temporary worker payroll.
In 1997, the Company replaced its cash deposits required by the workers'
compensation program with irrevocable letters of credit totaling $15.9 million.
The letters of credit bear fees of .75% per year and are supported by an equal
amount of available borrowings on the Company's $30 million line-of-credit.
Accordingly, at December 31, 1997 and April 3, 1998, no borrowings were
outstanding on the line-of-credit, and $15.9 million was committed by the
letters of credit. During April 1998, the Company increased the letters of
credit to $18.1 million and has agreed to increase the letters of credit by a
further $3.7 million through June 1998.
The Company establishes provisions for future claim liabilities based upon
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
sheet as of April 3, 1998 and December 31, 1997, are reserves for claims and
claim related expenses arising in non-monopolistic states of $13.9 million and
$12.9 million. The reserve for workers' compensation claims was computed using
a discount rate of 6.0% at April 3, 1998 and December 31, 1997.
Workers' compensation expense totaling $4.8 million and $3.0 million was
recorded as a component of cost of services in each of the quarters ended April
3, 1998 and March 31, 1997, respectively.
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NOTE 2. WORKERS' COMPENSATION, CONTD.
The Company has formed a wholly-owned, off-shore captive, Labor Ready
Assurance Company ("Labor Ready Assurance"), for the management and payment of
workers' compensation claims and claim related expenses. Labor Ready Assurance
reinsures levels of coverage for losses in excess of the aggregate stop-loss
limits with unrelated insurance carriers. Funds are deposited with Labor Ready
Assurance for the payment of claims and claim related expenses, and annual
premiums are paid to Labor Ready Assurance based principally upon the cost of
reinsurance and other operating expenses. At April 3, 1998 and December 31,
1997, $122,000 and $136,000 remained on deposit with Labor Ready Assurance and
was recorded as restricted cash in the accompanying consolidated balance sheets.
The Company has established a risk management department at its corporate
headquarters to manage its insurers, third party administrators, and medical
service providers. To reduce wage-loss compensation claims, the Company has
established a "light duty", transitional return to work program. Workers in the
program are employed within the Company in the local dispatch office or on
customer assignments that require minimal physical exertion. The Company's
information system generates weekly workers' compensation loss minimization
reports for both corporate and dispatch office use. The Company has an on-line
connection with its third party administrator that allows the Company to
maintain visibility of all claims, manage their progress and generate required
management information.
NOTE 3. RECENTLY ISSUED ACCOUNTING STANDARD
Certain pre-opening costs incurred to open new dispatch offices, including
salaries, recruiting, testing, training, lease and other related costs, are
capitalized and amortized using the straight-line method over two years. In
March 1998, the Accounting Standards Executive Committee (the "AcSEC") issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("the Statement"). The Statement establishes new rules for the financial
reporting of start-up costs, and will require the Company to expense the cost of
establishing new dispatch offices as incurred and write off, as a cumulative
effect of adopting the Statement, any capitalized pre-opening costs in the first
quarter of the year adopted. The Statement is effective for years beginning
after December 31, 1998 and the Company will adopt it in the first quarter of
1999. The effect of adopting the Statement will be to recognize a non-operating
expense, net of tax, of approximately $1.8 million, plus any additional
pre-opening costs capitalized during the next three quarters ended December 31,
1998, net of amortization expense recognized during the period.
NOTE 4. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
--------------------
THIRTEEN WEEKS ENDED
--------------------
APRIL 3, MARCH 31,
1998 1997
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Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . $ 125 $23
Income taxes. . . . . . . . . . . . . . . . . . . . . $ 815 $31
Non-cash investing and financing activities:
Tax effect of disqualifying dispositions on
options exercised . . . . . . . . . . . . . . . . . $ 287 --
Preferred stock dividends accrued . . . . . . . . . . $ 11 $11
Contribution of common stock to 401(k) plan . . . . . $ 116 --
Assets acquired with capital lease obligations. . . . $4,208 --
NOTE 5. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", which replaced the calculation of primary and fully
diluted earnings per share with basic and diluted 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 year. 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 stock equivalents outstanding during the year. Common stock
equivalents for the Company include the dilutive effect of outstanding options,
except where their inclusion would be anti-dilutive.
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Page 8
NOTE 5. EARNINGS PER SHARE, CONTD.
Basic and diluted earnings per share were calculated as follows (amounts in
thousands, except per share data):
--------------------
THIRTEEN WEEKS ENDED
--------------------
APRIL 3, MARCH 31,
1998 1997
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Basic:
Net income (loss) . . . . . . . . . . . . . . . . . . . $145 $(793)
Less preferred stock dividends. . . . . . . . . . . . . (11) (11)
------ ------
Income (loss) allocable to common shareholders. . . . . $134 $(804)
------ ------
Weighted average shares outstanding . . . . . . . . . . 18,459 18,549
------ ------
Net income (loss) per share . . . . . . . . . . . . . . $0.01 $(0.04)
------ ------
Diluted:
Income (loss) allocable to common shareholders. . . $134 $(804)
------ ------
Weighted average shares outstanding . . . . . . . . 18,459 18,549
Plus options to purchase common stock outstanding
at end of period. . . . . . . . . . . . . . . . . 1,364 --
Less shares assumed repurchased . . . . . . . . . . (822) --
------ ------
Weighted average shares outstanding, including
dilutive effect of options. . . . . . . . . . . . 19,001 18,549
------ ------
Net income (loss) per share . . . . . . . . . . . . $0.01 $(0.04)
------ ------
------ ------
NOTE 6. COMPREHENSIVE INCOME
The Company's comprehensive income is as follows (amounts in thousands):
--------------------
THIRTEEN WEEKS ENDED
--------------------
APRIL 3, MARCH 31,
1998 1997
-------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 145 $(793)
Other comprehensive income (expense), net of
income taxes of $93 and $17:
Foreign currency translation . . . . . . . . . . . (138) (25)
----- -----
Comprehensive income (loss) . . . . . . . . . . . . $ 7 $(818)
----- -----
----- -----
NOTE 7. COMMITMENT
In December 1997, the Company entered into an agreement to lease 450
automated Cash Dispensing Machines ("CDMs") for installation in all of the
Company's dispatch offices. The fair market value of the CDMs at inception of
the lease is approximately $6.2 million. The lease is payable over 84 months
with an imputed interest rate of 9.0% and is secured by the CDMs. During the
three months ended April 3, 1998, the Company installed 302 CDMs in its dispatch
offices throughout the United States. Accordingly, the Company recorded assets
under capital lease and capital lease obligations totaling $4.2 million with
future minimum lease payments over the next 5 years of approximately $0.4
million per year. The Company anticipates installing CDMs at all of its
dispatch offices in the United States during 1998. Included as an exhibit to
this Form 10-Q is an example of a CDM lease, all such leases having
substantially identical terms and conditions.
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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 are forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995, and as such,
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, those set forth in Item 7 entitled Management's Discussion of
Financial Condition and Results of Operations in the Company's Form 10-K for the
year ended December 31, 1997. 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 a leading, national provider of temporary workers for manual
labor jobs. The Company's customers are primarily in the construction, freight
handling, warehousing, landscaping, light manufacturing, and other light
industrial industries. The Company has rapidly grown from eight dispatch
offices in 1991 to 420 dispatch offices at April 3, 1998. The Company's annual
revenues grew from approximately $6 million in 1991 to $335 million for the year
ended December 31, 1997. This revenue growth has been generated both by opening
new dispatch offices in markets throughout the U.S. and Canada and by continuing
to increase sales at existing dispatch offices.
The Company opened 104 dispatch offices during the first quarter of 1998
and expects to open at least 63 additional dispatch offices by June 30, 1998.
The Company expects the average cost of opening each new dispatch office in
1998 to be approximately $50,000. The cost of opening a new dispatch office
includes extensive management training, the installation of sophisticated
computer and other office systems and a Cash Dispensing Machine ("CDM").
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 in two to six
months. The Company pays its temporary workers on a daily basis, and
generally bills its customers weekly. Consequently, the Company experiences
significant negative cash flow from operations and investment activities
during periods of high growth. The Company may continue to experience periods
of negative cash flow from operations and investment activities while it
rapidly opens dispatch offices and may require additional sources of working
capital in order to continue to grow.
Many 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. By July 1998, the Company expects to have completed the installation
of the CDMs in all of its dispatch offices. 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.
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.
Temporary workers assigned to customers remain Labor Ready employees. Labor
Ready is responsible for the employee-related expenses of its temporary workers,
including workers' compensation coverage, 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 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.
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Page 10
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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:
THIRTEEN WEEKS ENDED
--------------------
APRIL 3, MARCH 31,
-------- ---------
1998 1997
-------- ---------
Revenues from services . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of services . . . . . . . . . . . . . . . . . . . . (69.9) (71.4)
Selling, general and administrative expenses . . . . . . (28.6) (29.7)
Depreciation and amortization. . . . . . . . . . . . . . (1.5) (1.8)
Interest income, net . . . . . . . . . . . . . . . . . . 0.2 0.3
Income (loss) before tax (provision) benefit . . . . . . 0.3 (2.6)
Net income (loss). . . . . . . . . . . . . . . . . . . . 0.2 (1.5)
THIRTEEN WEEKS ENDED APRIL 3, 1998 COMPARED TO THIRTEEN WEEKS ENDED
MARCH 31, 1997
DISPATCH OFFICES. The number of offices grew to 420 at April 3, 1998 from
316 locations at December 31, 1997, a net increase of 104 dispatch offices, or
32.9%. During the quarter ended March 31, 1997, the number of offices grew to
256 from 200 locations at December 31, 1996, a net increase of 56 dispatch
offices, or 28.0%. The Company estimates that its aggregate costs of opening
104 new dispatch offices in the first quarter of 1998 was approximately $5.2
million, an average of approximately $50,000 per dispatch office, compared to
aggregate costs of approximately $1.8 million, an average of approximately
$33,000 per dispatch office, to open 56 new stores in the first quarter of 1997.
The increase in per-store costs in 1998 was primarily the result of the addition
of a CDM to each dispatch office. Approximately $1.1 million of 1998 costs
includes dispatch office pre-opening costs such as salaries, recruiting,
testing, training, lease and other related costs, which are capitalized and
amortized using the straight-line method over two years. The remaining
approximately $4.1 million includes computer systems and other equipment related
costs, CDMs, and leasehold improvements.
REVENUES FROM SERVICES. Revenues from services increased to $94.0
million in the first quarter of 1998 as compared to $51.7 million in the first
quarter of 1997, an increase of $42.3 million or 81.8%. The increase in
revenues is due primarily to the increase in the number of dispatch offices
and continued increases in revenues from mature dispatch offices.
Additionally, the Company continues to consolidate its position in the
marketplace and build brand awareness, eliminating the need to discount
billing rates to attract new customers at new dispatch offices.
COST OF SERVICES. Cost of services increased to $65.7 million in the first
quarter of 1998 from $36.9 million in the first quarter of 1997, an increase of
$28.8 million or 77.9%. The increase in cost of services was due largely to the
81.8% increase in revenue from 1997 to 1998. Cost of services was 69.9% of
revenue in the first quarter of 1998 compared to 71.4% of revenue in the first
quarter of 1997. Cost of services as a percentage of revenues improved 1.5% as
compared to the first quarter of 1997 because the Company is generally no longer
required to use introductory lower rates to attract new customers in new
dispatch offices. Additionally, the Company's workers' compensation claims
experience continued to improve. Workers' compensation expense as a percentage
of sales improved from 5.8% in the first quarter of 1997 to 5.1% in the first
quarter of 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $26.9 million in the first quarter of 1998 as
compared to $15.4 million in the first quarter of 1997, an increase of $11.5
million or 74.7%. The increase was largely due to an 81.8% increase in revenue
from 1997 to 1998. Selling, general and administrative expenses were 28.6% of
revenues in the first quarter of 1998 as compared to 29.7% of revenues in the
first quarter of 1997. The decrease in selling, general and administrative
expenses as a percentage of revenue in the first quarter of 1998 is due mainly
to economies of scale on fixed and semi-fixed dispatch office operating and
corporate administrative costs. 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 operating and
administrative capabilities to accommodate anticipated revenue and dispatch
office growth.
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DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense was $1.4 million in the first quarter of 1998 and $0.9 million in the
first quarter of 1997, an increase of $0.5 million or 48.5%. The increase in
depreciation and amortization expense is primarily the result of amortization
of dispatch office pre-opening costs as the Company continued its rapid
expansion by adding 116 stores in 1997 and 104 stores during the first quarter
of 1998. Additionally, the Company added approximately $4.0 million in
property and equipment during 1997 and $5.9 million in the first quarter of
1998. These additions primarily include information systems, CDMs and other
equipment for new dispatch offices and enhanced management information systems
hardware and software.
In March 1998, the Accounting Standards Executive Committee (the "AcSEC")
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" ("the Statement"). The Statement establishes new rules for the
financial reporting of start-up costs, and will require the Company to expense
the cost of establishing new dispatch offices as incurred and write off, as a
cumulative effect of adopting the Statement, any capitalized pre-opening costs
in the first quarter of the year adopted. The Statement is effective for years
beginning after December 31, 1998 and the Company will adopt it in the first
quarter of 1999. The effect of adopting the Statement will be to recognize a
non-operating expense, net of tax, of approximately $1.8 million, plus any
additional pre-opening costs capitalized during the next three quarters ended
December 31, 1998, net of amortization expense recognized during the period.
INTEREST INCOME, NET. Interest income, net of interest expense was $208,000
in the first quarter of 1998 compared to $162,000 in the first quarter of 1997,
an increase of $46,000 or 28.4%. The increase was the result of higher invested
cash balances in the first quarter of 1998 as compared to the first quarter of
1997. The increase was offset in part by an increase in interest expense from
$22,627 in 1997 to $104,348 in 1998 as the Company has recorded the acquisition
of the CDMs as a capital lease.
TAXES ON INCOME. Taxes on income increased to a provision of $0.1 million
in the first quarter of 1998 from a tax benefit of $0.6 million in the first
quarter of 1997, an increase of $0.7 million. The increase in taxes was due
to the increase in pretax income to $0.1 million in the first quarter of 1998
from a pretax loss of $1.4 million in the first quarter of 1997. The
Company's effective tax rate was 42.0% in the first quarter of 1998 as
compared to 41.6% in the first quarter of 1997. The principal difference
between the statutory income tax rate and the Company's effective income tax
rate result from state income taxes, certain non-deductible expenses and
non-taxable interest income.
The Company had a net deferred tax asset of approximately $4.5 million at
April 3, 1998, 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. Net income for the quarter ended April 3, 1998 increased to
$0.1 million from a 1997 first quarter net loss of $0.8 million, an increase
of $0.9 million. The increase was largely due to an 81.8% increase in
revenues in first quarter 1998 to $94.0 million from first quarter 1997
revenues of $51.7 million. Contributing to the increase in net income was a
decrease in cost of services as a percentage of revenues from 71.4% in first
quarter 1997 to 69.9% in the first quarter of 1998 and a decrease in selling,
general and administrative costs as a percentage of revenues from 29.7% in the
first quarter of 1997 to 28.6% in first quarter 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.8 million in the first quarter
of 1998 and $5.6 million in the first quarter of 1997. The decrease in cash
used in operations in 1998 as compared to 1997 is largely due to net income for
the quarter ended April 3, 1998, increases in non-cash expenses including
depreciation and amortization and the provision for doubtful accounts, and a
smaller increase in the Company's net deferred tax asset. Additionally, the net
change in assets and liabilities including accounts receivable, accounts
payable, accrued wages and benefits and workers' compensation deposits and
credits was smaller than in the first quarter of 1997. These changes were
offset by a decrease in income taxes payable and an increase in prepaid expenses
and other in first quarter 1998 as compared to first quarter 1997.
The Company used net cash in investing activities of $2.8 million in first
quarter 1998, and $3.5 million in the first quarter of 1997. The decrease in
cash used in investing activities in 1998 as compared to 1997 is due primarily
to the replacement of restricted cash held by the Company's captive insurance
subsidiary with letters of credit in December 1997. The Company's expenditures
for new dispatch office pre-opening costs declined to $1.1 million in first
quarter 1998 compared to $1.4 million in the first quarter of 1997 and was
approximately offset by an increase in the Company's capital expenditures from
$1.4 million in first quarter 1997 to $1.7 million in the first quarter of 1998.
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Net cash provided by (used in) financing activities was $348,000 in first
quarter 1998 and $(127,000) in first quarter 1997. The increase in cash
provided by financing activities in 1998 as compared to 1997 is due mainly to
the Company's sale of common stock on exercise of options and warrants and
through the Employee Stock Purchase Plan. Additionally, in the first quarter of
1997 the Company used cash of $529,000 to repurchase shares of its common stock
on the open market, a use of cash which was partially offset by an increase in
checks issued against future deposits of $381,000.
During 1997, the Company entered into a line-of-credit agreement with U.S.
Bank with interest at the bank's prime rate (8.5% at April 3, 1998). The
agreement allows the company to borrow up to the lesser of $30 million or 80% of
eligible accounts receivable, as defined by the bank. The line-of-credit is
secured primarily by the Company's accounts receivable and expires in June 1999.
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 April 3, 1998.
As discussed further in Note 2 to the consolidated financial statements, in
1997 the Company replaced the cash deposits required by its workers'
compensation program with irrevocable letters of credit totaling $15.9 million.
The letters of credit bear fees of .75% and are supported by an equal amount of
available borrowings on the line-of-credit. Accordingly, at April 3, 1998, no
borrowings were outstanding on the line-of-credit, $15.9 million was committed
by the letters of credit and $14.1 million was available for borrowing. During
April 1998, the Company increased the letters of credit to $18.1 million and has
agreed to increase the letters of credit by a further $3.7 million through June
1998. During 1998, the Company expects to complete negotiations with its lender
to increase its line-of-credit to approximately $60 million on substantially the
same terms as its existing line-of-credit.
In December 1997, the Company entered into an agreement to lease 450
automated CDMs for installation in all of the Company's dispatch offices. The
fair market value of the CDMs at inception of the lease is approximately $6.2
million. The lease is payable over 84 months with an imputed interest rate of
9.0% and is secured by the CDMs. During the three months ended April 3, 1998,
the Company installed 302 CDMs in its dispatch offices throughout the United
States. Accordingly, the Company recorded assets under capital lease and
capital lease obligations totaling $4.2 million with future minimum lease
payments over the next 5 years of approximately $0.4 million per year. The
Company anticipates installing CDMs at all of its dispatch offices in the United
States during 1998. Included as an exhibit to this Form 10-Q is an example of a
CDM lease, all such leases having substantially identical terms and conditions.
Historically, the Company has financed its operations through cash
generated by external financing including term loans, lines-of-credit and a
common stock offering completed in 1996. 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.
INFORMATION PROCESSING SYSTEMS AND THE YEAR 2000
As the year 2000 approaches, there are uncertainties concerning whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail. Management believes that the year 2000
does not pose a significant operational problem for the Company's computer
systems. The Company has completed its assessment of its significant systems
and believes them to be year 2000 compliant. Management has not completed its
assessment of the systems of third parties with which it deals. While it is not
possible at this time to assess the effect of a third party's inability to
adequately address year 2000 issues, management does not believe the potential
problems associated with year 2000 will have a material effect on its financial
condition or results of operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
THE FOLLOWING EXHIBITS ARE BEING FILED AS A PART OF THIS REPORT:
EXHIBIT NO. DESCRIPTION
10.9 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.
27 Financial Data Schedule as of April 3, 1998 and March
31, 1997 and for each of the thirteen week periods
then ended.
(b) REPORTS ON FORM 8-K
On January 6, 1998, the Company filed a Report on Form 8-K, reporting
under Item 5, disclosing that the Company had declared a dividend of
one preferred share purchase right for each outstanding share of
common stock of the Company. The dividend was payable to shareholders
of record on February 2, 1998.
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.
REGISTRANT: LABOR READY, INC.
By: /s/ Glenn A. Welstad May 8, 1998
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Glenn A. Welstad Date
Chairman of the Board, Chief Executive
Officer and President
By: /s/ Joseph P. Sambataro, Jr. May 8, 1998
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Joseph P. Sambataro, Jr. Date
Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
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