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 March 31, 1996 Commission File number 0-23828 Labor Ready, Inc. (Exact Name of Registrant as specified in its charter) Washington 91-1287341 (State of Incorporation) (Federal I.R.S. No.) 2156 Pacific Avenue, Tacoma, Washington 98402 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number 206-383-9101 Securities registered pursuant to Section 12(b) or 12(g) of the Act: Common Stock, No Par Value 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 ( ) The aggregate market value of the voting stock held by non- affiliates of the registrant, on May 1, 1996 was $113,007,504. As of May 1, 1996, the Registrant had 6,066,633 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I - FINANCIAL INFORMATION Item 1. Financial Statements LABOR READY INC. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) INDEX Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 3-4 Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 6-7 LABOR READY, INC. Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 (Unaudited) ASSETS March 31, December 31, 1996 1995 CURRENT ASSETS: Cash and equivalents $ 2,959,779 $ 5,359,113 Workers' compensation deposits and credits 2,206,644 1,886,644 Accounts receivable, net of allowance for doubtful accounts of $587,512 and $365,927, respectively 11,636,043 12,182,806 Prepaid expenses and other 875,753 602,052 Deferred income tax 542,000 698,930 ---------- ---------- Total Current Assets 18,220,219 20,729,545 ---------- ---------- PROPERTY AND EQUIPMENT: Cost 4,394,241 3,542,071 Accumulated depreciation 839,018 690,648 --------- --------- Total Property and Equipment 3,555,223 2,851,423 --------- --------- OTHER ASSETS: Intangible assets, less amortization of $114,588 and $124,483 952,737 962,632 Workers' compensation deposits and credits, less current portion 2,091,000 1,427,905 Deferred income tax 99,000 16,477 Other 193,723 193,653 ---------- ---------- Total Other Assets 3,336,460 2,600,667 ---------- ---------- TOTAL ASSETS $25,111,902 $26,181,635 ========== ========== LABOR READY, INC. Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 1996 1995 CURRENT LIABILITIES: Checks issued against future deposits 886,833 514,842 Accounts payable 1,313,375 1,118,081 Accrued wages and related expenses 1,458,105 1,588,147 Workers' compensation claims 2,051,769 1,943,338 Income taxes payable - - 1,161,000 Note payable 1,428,158 1,591,206 Current maturities of long-term debt 41,318 39,117 --------- --------- Total current liabilities 7,179,588 7,955,731 --------- --------- LONG-TERM LIABILITIES Long-term debt, less current maturities 942,227 953,937 Subordinated debt, less unamortized discount of $1,213,303 and $1,259,377 8,786,697 8,740,623 --------- --------- Total long-term liabilities 9,728,924 9,694,560 --------- --------- Total liabilities 16,908,482 17,650,291 ---------- ---------- SHAREHOLDERS' EQUITY Preferred stock, $0.667 par value, 5,000,000 shares authorized ; issued and outstanding 1,281,123 854,082 854,082 Common stock, no par value, 25,000,000 shares authorized, issued and outstanding 6,030,633 and 5,879,133 shares 7,489,635 7,116,422 Cumulative foreign currency translation adjustment (33,844) (28,707) Retained earnings (accumulated deficit) (106,453) 589,547 --------- --------- Total shareholders' equity 8,203,420 8,531,344 --------- --------- Total liabilities and shareholders' equity $25,111,902 $26,181,635 ========== ========== LABOR READY, INC. Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1995 (Unaudited) Three Months Ended March 31, 1996 1995 Revenues from services $26,093,924 $12,617,752 Cost of services 22,207,458 10,494,339 Selling, general & administrative 4,500,319 2,495,051 Interest and other, net 435,471 164,386 ---------- ---------- Income (loss) before taxes on income (1,049,324) (536,025) Taxes on income (364,000) (182,249) ---------- ---------- Net income (loss) $ (685,324) $ (353,776) ========== ========== Earnings (loss) per common share: Net income (loss) $ (.12) $ (.07) ========== ========== Weighted average shares outstanding 5,948,628 5,097,358 ========== ========== LABOR READY, INC. Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 (Unaudited) Three Months Ended March 31, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss: $ (685,324) $ (353,776) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation & amortization 204,329 80,424 Provision for doubtful accounts 1,020,544 258,541 Deferred income taxes 74,407 (100,000) Changes in Assets & Liabilities: Accounts receivable (473,781) (869,908) Worker compensation deposits and credits (983,095) (311,374) Prepaid expenses and other (273,771) (281,264) Accounts payable 195,294 705,236 Accrued wages and benefits (130,042) 511,908 Accrued workers' compensation claims 108,431 231,182 Income taxes payable (1,161,000) (332,248) --------- -------- Net cash used in operating activities (2,103,998) (461,279) --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (852,170) (396,744) --------- -------- Net cash used in investing activities (852,170) (396,744) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on note payable (163,048) (140,015) Checks issued against future deposits 371,991 - - Proceeds from warrants exercised - - 514,295 Proceeds from options exercised 373,213 - - Payments on long-term debt (9,509) (20,532) Dividends (10,676) (10,676) --------- -------- Net cash provided by financing activities 561,971 343,072 Effect of exchange rates (5,137) (11,669) --------- -------- Net increase (decrease) in cash & equivalents: (2,399,334) (526,620) Cash and cash equivalents, beginning of period 5,359,113 603,977 --------- -------- Cash and cash equivalents, end of period $ 2,959,779 $ 77,357 ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest Paid $ 506,436 $ 151,653 Income Taxes Paid $ 983,315 $ 250,000 NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock for conversion of promissory notes - - $ 40,000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995. Dispatch Offices. The Company opened 21 dispatch offices during the first quarter of 1996 compared to 17 dispatch offices during the first quarter of 1995. Revenues from Services. The Company's revenues from services increased to $26.1 million for the three months ended March 31, 1996 compared to $12.6 million for the three months ended March 31, 1995, an increase of $13.5 million or 107%. This increase resulted from increases in revenues from dispatch offices open for the full period. Cost of Services. Cost of services increased to $22.2 million for the three months ended March 31, 1996 compared to $10.5 million for the three months ended March 31, 1995, an increase of $11.7 million or 111.4%, reflecting the additional wages and salaries paid to temporary workers and additional management personnel and related payroll expenses. As a percentage of revenues, cost of services increased to 85.1% for the three months ended March 31, 1996 from 83.2% for the three months ended March 31, 1995, an increase of 1.9%. Cost of services increased due to several factors, including higher worker compensation costs, increased salary costs for branch managers in training, longer training periods for new management personnel and for additional supervisory personnel hired under new management organizational structures. The Company expects significant continuing fluctuations in cost of services as the Company pursues further aggressive growth. Selling, General and Administrative Expenses. Selling, general, and administrative expenses increased to $4.5 million for the three months ended March 31, 1996 compared to $2.5 million for the year earlier period, an increase of $2.0 million or 80.0%. As a percentage of revenues from services, selling, general, and administrative expenses decreased to 17.2% for the three months ended March 31, 1996 from 19.8% for the three months ended March 31, 1995, a decrease of 2.6%. This decrease is primarily the result of selling, general and administrative expenses increasing at a slower rate than the increase in revenues from services. Interest and Other Expenses. Interest and other expenses increased to approximately $435,000 for the three months ended March 31, 1996 compared to approximately $164,000 for the three month period ended March 31, 1995, an increase of approximately $271,000 or 165%, reflecting primarily higher borrowing amounts, the relatively higher interest costs of the $10 million principal amount of subordinated debt issued in October 1995 and certain prepayment penalties incurred in paying off the Company's prior lender. As a percentage of revenues, interest and other expenses increased to 1.7% for the three months ended March 31, 1996 from 1.3% for the three months ended March 31, 1995. Taxes on Income. The Company recorded a tax benefit from its loss on operations of $364,000 for the three months ended March 31, 1996, compared to a tax benefit of approximately $182,000 for the three months ended March 31, 1995. Net Loss. The Company incurred a net loss from operations of approximately $685,000 for the three months ended March 31, 1996 compared to approximately $354,000 for the three months ended March 31, 1995, an increase of approximately $332,000 or 93.7%. As a percentage of revenues, the net loss remained relatively constant. Liquidity and Capital Resources. During the first quarter of 1996, the Company utilized significant amounts of cash to open 21 dispatch offices during the first quarter and in advance of opening 19 dispatch offices in April. During the first quarter of 1995 and 1996, the Company used net cash in operating activities of approximately $461,000 and $2.1 million, respectively, an increase of 356%, reflecting primarily increases in workers compensation deposits and a reduction in accounts payable. Management anticipates that cash flow deficits from operating and investing activities will continue while the Company adds substantial numbers of new dispatch offices. Management expects to finance such cash flow deficits with the proceeds from equity or debt financings. The Company financed its operations and growth in 1995 primarily through the sale of debt and equity securities. In early 1995, warrants to purchase 712,440 shares of the Company's Common Stock were exercised for aggregate consideration of approximately $1.8 million. In October 1995, the Company completed a private financing of $10.0 million principal amount of 13.0% Senior Subordinated Notes (the "Notes"). Under the terms of the Notes, which require principal payments to begin in 1998 and which mature in 2002, the Company pledged its remaining assets as collateral and issued warrants (the "Financing Warrants") to the purchasers of the Notes. The Financing Warrants entitle the holders thereof to purchase 682,368 shares of Common Stock of the Company at an exercise price of $11.67 per share, and are exercisable at any time prior to their expiration on the earlier of the seventh anniversary of the Notes and six years from the date the Notes are paid in full. If the Notes are retired by the Company prior to November 1997 and before the Financing Warrants are exercised, the number of shares subject to purchase under the Financing Warrants is reduced to 546,374 shares. In March 1996, the Company obtained a new revolving credit facility from U.S. Bank of Washington which provides for borrowing of up to $10.0 million secured by eligible accounts receivable. As of March 31, 1996, the Company had borrowed $4.4 million against this line. The U.S. Bank revolving credit facility bears interest at a rate of prime plus 1/4% (currently 8.5%). In 1995, the Company incurred costs of $2.0 million to open 57 new dispatch offices (an average of approximately $35,000 per dispatch offices). Further, the Company invested significant amounts of additional cash into the operations of new offices until they begin to generate sufficient revenue to cover their operating costs, generally in two to six months. Further, the Company pays its temporary personnel on a daily basis, and bills its customers on a weekly basis. The average collection cycle for 1995 was approximately 37 days. Since the Company plans to open 94 dispatch offices in 1996, the Company expects to experience cash flow deficits from operations and investing activities in 1996. The Company intends to finance opening and operating costs of new dispatch offices with the proceeds from equity or debt financing. To the extent that the Company's resources are not sufficient to finance new dispatch offices, or are not sufficient to open all currently targeted dispatch offices, the Company would either seek additional capital through equity or debt financing or scale back its expansion plans. PART II - OTHER INFORMATION: Not applicable. SIGNATURES The unaudited interim financial statements furnished by management reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of financial position and results of operation. 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 5/10/96 Glenn A. Welstad Date Principal Executive Officer By: /s/ Ralph Peterson 5/10/96 Ralph Peterson Date Principal Financial Officer