INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Subject to Completion, Dated May 17, 1996
1,000,000 SHARES
[LABOR READY LOGO]
COMMON STOCK
All of the 1,000,000 shares of Common Stock offered hereby are being sold by
Labor Ready, Inc. ("Labor Ready" or the "Company"). The Common Stock is
currently traded on the OTC Bulletin Board under the symbol LBOR. On May 16,
1996, the closing bid price of the Common Stock was $23.50 per share. See "Price
Range of Common Stock and Dividend Policy." The Common Stock has been approved
for quotation on the Nasdaq National Market upon commencement of this offering
under the symbol "LBOR."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
-----------------------------------------------------------------
Per Share........... $ $ $
-----------------------------------------------------------------
Total(3)............ $ $ $
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several
underwriters.
(2) Before deducting expenses payable by the Company, estimated at $564,000.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
an additional 150,000 shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , Underwriting Discount will total
$ , and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them and subject to their rights to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefore at
the office of Van Kasper & Company, San Francisco, California on or about June
, 1996.
VAN KASPER & COMPANY
JUNE , 1996
[LOGO]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET OR OTHERWISE. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
[MAP OF LABOR READY DISPATCH OFFICES]
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE
NOTED, (I) ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND HAS BEEN ADJUSTED TO REFLECT ALL STOCK
SPLITS DURING THE PERIODS PRESENTED AND (II) REFERENCES TO THE "COMPANY" OR
"LABOR READY" ARE TO THE CONSOLIDATED OPERATIONS OF LABOR READY, INC. AND ITS
SUBSIDIARIES.
THE COMPANY
Labor Ready, Inc. ("Labor Ready" or the "Company") 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 businesses. These businesses require
workers for lifting, hauling, cleaning, assembling, digging, painting and other
types of manual work. The Company has rapidly grown from eight Company-owned
dispatch offices in 1991 to 146 Company-owned dispatch offices at May 1, 1996.
Substantially all of the growth in dispatch offices was achieved by opening
locations rather than through acquisitions. The Company's revenues grew from
$6.0 million to $94.4 million from 1991 through 1995. This revenue growth has
been generated both by opening new dispatch offices and by continuing to
increase sales at existing dispatch offices. In 1995, the average cost to open a
new dispatch office was approximately $35,000 and dispatch offices opened in
1995 typically generated revenues sufficient to cover their operating costs in
two to six months. In 1995, the average annual revenue per dispatch office open
for more than a full year was $1.3 million.
The Company's expansion strategy is to open dispatch offices in every
metropolitan area in the United States and to continue to increase its market
penetration in markets it presently serves. The Company currently anticipates
opening approximately 94 dispatch offices in 1996, of which 40 have already been
opened, and 100 dispatch offices in 1997. The Company uses its branch locations
as traditional "dispatch offices" where workers (and prospective workers) meet
to complete required documentation, receive work assignments, arrange
transportation to and from the job site, and are paid at the end of each work
day. The Company has standardized the operation, general design, staffing and
equipment of the dispatch offices and has typically opened new dispatch offices
in four to six weeks after identifying and securing a lease for a specific site.
Dispatch office leases generally permit the Company to terminate on 30 days
notice and upon payment of three months rent.
The Company's objective is to become the leading provider of temporary
workers for manual labor in the United States by emphasizing responsiveness and
overall quality of service to customers. To achieve that objective, the Company
opens its offices no later than 5:30 a.m., provides workers on short notice
(often the same day as requested), and offers a "satisfaction guaranteed"
policy. The Company attracts its workers by treating them with respect and
through attractive employment policies. Most workers find the Company's "Work
Today, Paid Today" policy appealing and arrive at the dispatch office early in
the morning motivated to put in a good day's work and receive a paycheck at the
end of the day.
The Company relies on its general managers to conduct the overall operations
and sales and marketing at its dispatch offices. In addition to managing the
recruitment and daily dispatch of temporary workers, each general manager is
responsible for customer service and managing the dispatch office's sales
efforts, including identifying and soliciting local businesses likely to have a
need for temporary manual workers. At the corporate level, the Company is
currently developing and implementing coordinated sales and marketing
strategies, which include the development of national accounts, the
dissemination of information on local construction activity and the
implementation of advertising campaigns in targeted markets prior to new
dispatch office openings.
The temporary staffing industry has grown rapidly in recent years as
companies have used temporary employees to control personnel costs and to meet
fluctuating personnel needs. According to the National Association of Temporary
Staffing Services ("NATSS"), the United States market for the industrial segment
of the temporary staffing marketplace (which includes the light industrial
market that the Company serves) grew at a compound annual growth rate of
approximately 25% from approximately $5.0 billion in 1991 to approximately $12.3
billion in 1995. The Company believes the temporary staffing industry is highly
fragmented and presents opportunities for larger, well capitalized companies
that can effectively manage workers' compensation costs and develop information
systems to efficiently process the high volume of transactions and accurately
coordinate multi-location activities.
3
The Company is a Washington corporation which was incorporated in 1985. The
Company's principal executive offices are located at 2156 Pacific Avenue,
Tacoma, Washington 98402, and its telephone number is (206) 383-9101.
THE OFFERING
Common Stock offered.............. 1,000,000 Shares
Common Stock to be outstanding
after the offering (1)............ 7,066,633 Shares
Use of proceeds................... To fund the opening of new dispatch offices through
1997, purchase of an office building in Tacoma,
Washington, payment of short-term debt and for working
capital and other general corporate purposes. See "Use
of Proceeds."
Nasdaq National
Market symbol..................... LBOR
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 (2) 1996 (2)
--------- --------- --------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues from services..................... $ 6,020 $ 8,424 $ 15,659 $ 38,951 $ 94,362 $ 12,618 $ 26,094
Gross profit............................... 1,189 1,939 3,258 8,238 17,719 2,123 3,886
Income (loss) before taxes on income....... (715) 86 253 1,188 3,214 (536) (1,049)
Net income (loss).......................... (715) 159 269 852 2,062 (354) (685)
Earnings per common share:
Income (loss) before extraordinary item.. $ (0.26) $ 0.06 $ 0.06 $ 0.19 $ 0.35 $ (.07) $ (.12)
Extraordinary item....................... -- -- 0.01 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)........................ $ (0.26) $ 0.06 $ 0.07 $ 0.19 $ 0.35 $ (.07) $ (.12)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares outstanding........ 2,721 2,702 3,668 4,363 5,795 5,097 5,949
OPERATING DATA:
Revenues from dispatch offices open for
full period............................... $ 4,614 $ 8,230 $ 12,960 $ 27,311 $ 65,798 $ 11,966 $ 25,585
Revenues from dispatch offices opened
during period............................. $ 963 $ 194 $ 2,699 $ 11,640 $ 28,310 $ 652 $ 509
Dispatch offices open at period end........ 8 10 17 51 106 68 127
------------------------
(1) Excludes (i) 831,768 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants as of May 1, 1996 at a weighted
average exercise price of $11.44 per share and (ii) 500,000 shares reserved
for future grants under the Company's stock option and purchase plans.
(2) The information for the quarters ended March 31, 1995 and 1996 is unaudited
but includes all adjustments, consisting only of normal recurring
adjustments, that management considers necessary to fairly present such
information. The results for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the full year
ending December 31, 1996.
4
The following tables present the Company's revenues from services, net
income (loss) and certain operating data for each calendar quarter since March
31, 1994. The information for each of the quarterly periods is unaudited but
includes all adjustments, consisting only of normal recurring adjustments, that
managment considers necessary to fairly present such information.
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- --------- ------------- ------------
Revenues from services....................................... $ 5,217 $ 8,318 $ 12,100 $ 13,316
Net income (loss)............................................ (135) 327 422 238
Dispatch offices open at period end.......................... 27 34 44 51
Earnings (loss) per common share............................. $ (0.04) $ 0.09 $ 0.10 $ 0.04
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- --------- ------------- ------------
Revenues from services....................................... $ 12,618 $ 19,750 $ 30,873 $ 31,121
Net income (loss)............................................ (354) 391 1,471 554
Dispatch offices open at period end.......................... 68 96 104 106
Earnings (loss) per common share............................. $ (0.07) $ 0.07 $ 0.24 $ 0.09
MARCH 31,
1996
-----------
Revenues from services....................................... $ 26,094
Net income (loss)............................................ (685)
Dispatch offices open at period end.......................... 127
Earnings (loss) per common share............................. $ (0.12)
MARCH 31,
1996(1)
DECEMBER ----------------------
31, AS
CONSOLIDATED BALANCE SHEET DATA: 1995 ACTUAL ADJUSTED(2)
----------- --------- -----------
Current assets............................................ $ 20,730 $ 18,220 $ 39,511
Total assets.............................................. 26,182 25,112 46,403
Current liabilities....................................... 7,956 7,180 7,180
Long-term liabilities..................................... 9,695 9,729 9,729
Total liabilities......................................... 17,650 16,908 16,908
Shareholders' equity...................................... 8,532 8,204 29,495
Working capital........................................... 12,774 11,040 32,331
------------------------
(1) The information at March 31, 1996 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that management considers
necessary to fairly present such information.
(2) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $23.50
per share, and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
5
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW,
IN ADDITION TO THE OTHER INFORMATION CONTAINED AND INCORPORATED IN THIS
PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
ABILITY TO ACHIEVE AND MANAGE GROWTH
The Company's ambitious growth plans are subject to numerous and substantial
risks. The Company's ability to continue its growth and profitability will
depend on a number of factors, including the ability of the Company to attract
and retain sufficient qualified managerial personnel to supervise multiple
dispatch offices and to manage individual dispatch offices, the availability of
temporary workers in each new location to fill the needs of customers, existing
and emerging competition, collection of accounts receivable, and the
availability of working capital to support anticipated growth. Labor Ready must
continually adapt its management structure and internal control systems as the
Company continues its rapid growth. There can be no assurances that the Company
will be able to enter new markets through the opening of new dispatch offices or
successfully manage the costs of opening and operating new dispatch offices. Any
inability to achieve and manage the Company's ambitious growth plans could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Company Strategy" and "--
Dispatch Office Expansion."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a significant extent upon the continued
service of Glenn A. Welstad, its Chairman, President and Chief Executive
Officer, and other members of the Company's executive management. The loss of
any key executive could have a material adverse effect upon the Company's
business, financial condition, and results of operations. Furthermore, the
Company's future performance depends on its ability to identify, recruit,
motivate, and retain key management personnel, including general managers,
district managers, area directors, and other personnel. The failure to attract
and retain key management personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management."
GOVERNMENT REGULATIONS, INCREASED EMPLOYEE COSTS AND WORKERS' COMPENSATION
The Company is required to comply with all applicable federal and state laws
and regulations relating to employment, including occupational safety and health
provisions, wage and hour requirements, including payment of state and federal
minimum wages, and workers' compensation and unemployment insurance. Costs and
expenses related to these requirements are the Company's second largest expense
and may increase as a result of, among other things, changes in federal or state
laws or regulations requiring employers to provide specified benefits to
employees (such as medical insurance), or increases in the minimum wage or the
level of existing benefits, increased levels of unemployment, or the lengthening
of periods for which unemployment benefits are available. Furthermore, workers'
compensation expenses and the related liability accrual are based on the
Company's actual claims experience in each respective state. The Company's
management and safety programs attempt to minimize workers' compensation claims,
but significant claims could require payment of substantial benefits. There can
be no assurance that the Company will be able to increase fees charged to its
customers to offset any increased costs and expenses, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Operations" and "-- Government
Regulations."
ADEQUACY OF WORKERS' COMPENSATION ARRANGEMENTS
The Company maintains workers' compensation insurance, as required by state
laws. The Company is required to pay premiums or contributions based on its
business classification, and actual workers' compensation claims experience over
time. In those states where private insurance is not allowed, the Company
purchases its insurance through state workers' compensation funds. In all other
states the Company provides coverage through an insurance company licensed to do
business in those states. The Company's insurance policy provides for deductible
amounts of $250,000 per claim and for 1995 a deductible for aggregate claims
6
of $5.4 million. The Company deposits amounts based on its claims experience for
those deductible amounts with an off-shore insurance company to pay claims not
covered by its insurance policy. There can be no assurance that the Company's
premiums will not increase substantially or that actual workers' compensation
obligations will not substantially exceed the premium deposited with the
off-shore insurance company. See "Business -- Operations."
RELIANCE ON AND ABILITY TO ATTRACT, DEVELOP AND RETAIN QUALIFIED DISPATCH OFFICE
MANAGERS
The Company relies significantly on the performance and productivity of its
dispatch office general managers. Each general manager has primary
responsibility for managing the operations of the dispatch office, including
recruiting temporary workers, daily dispatch of temporary workers and collecting
accounts receivable. In addition, each general manager has primary
responsibility for customer service and the dispatch office's sales efforts
including identifying and soliciting area businesses likely to have a need for
temporary manual workers. The Company is highly dependent on its ability to
hire, train and retain qualified general managers and the available pool of
qualified candidates is limited. Prior to joining the Company, the typical
general manager has little or no prior experience in the temporary employment
industry. The Company commits substantial resources to the training, development
and operational support of its general managers. In 1995, due to turnover,
attrition or termination, the Company replaced approximately 26% of its general
managers. There can be no assurance that the Company will be able to continue to
recruit, train and retain qualified general managers; any failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Dispatch Office Expansion" and "--
Operations."
COMPETITIVE MARKET
The temporary services industry is highly fragmented and highly competitive,
with limited barriers to entry. A large percentage of temporary staffing
companies are local operations with fewer than five offices. Within local or
regional markets, these firms actively compete with the Company for business.
There are several very large full-service and specialized temporary labor
companies competing in national, regional and local markets, many of which have
not aggressively expanded into the Company's market segment. Many of these
competitors have substantially greater financial and marketing resources than
those of the Company and may decide to expand their existing activities into the
Company's market segment at any time. Price competition in the staffing industry
is intense, particularly for provision of light industrial personnel, and
pricing pressure from both competitors and customers is increasing. The Company
expects that the level of competition will remain high or increase in the
future. Competition, particularly from companies with greater financial and
marketing resources than the Company, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Competition."
RELIANCE ON INFORMATION PROCESSING SYSTEMS
The Company's business depends upon its ability to store, retrieve, process
and manage significant amounts of information. The Company's management
information systems, including servers, networks, databases, backup and other
systems essential for communication with dispatch offices, are located and
maintained in the Company's Tacoma, Washington headquarters. Interruption,
impairment of data integrity, loss of stored data, breakdown or malfunction of
the Company's information processing systems caused by telecommunications
failure, conversion difficulties, undetected data input and transfer errors,
unauthorized access, viruses, natural disasters, electrical power outage or
disruption, or other events could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
-- Operations."
INDUSTRY RISKS
Temporary staffing companies employ and place people in the workplaces of
their customers. Attendant risks of the industry include possible claims of
discrimination and harassment, employment of illegal aliens, violations of
occupational, health and safety, or wage and hour laws and regulations, errors
and omissions of its temporary employees, misappropriation of funds or property,
other criminal activity or torts and other similar claims. Temporary staffing
companies also are affected by fluctuations and interruptions in the business of
their customers which could have a material adverse effect on their business,
financial condition
7
and results of operations. The temporary staffing industry may be adversely
affected if Congress or state legislatures mandate specified benefits for
temporary employees or otherwise impose costs and expenses on employers that
increase the cost or lessen the attraction of using temporary workers. See
"Business -- Operations" and "-- Government Regulations."
LIABILITY FOR ACTS OF TEMPORARY WORKERS
The Company may be held responsible for the actions at a jobsite of workers
not under the Company's direct control. Although the Company historically has
not experienced significant claims or losses due to these issues, there can be
no assurance that the Company will not experience such claims or losses in the
future or that the Company's insurance, if any, will provide coverage or be
sufficient in amount or scope to cover any such liability. The Company seeks to
reduce any liability for the acts or omissions of its temporary workers by
specifying in its contracts with customers that the customers are responsible
for all actions or omissions of the temporary workers. There can be no assurance
that the terms of the contracts will be enforceable or that, if enforceable,
they would be sufficient to preclude Company liability as a result of the
actions of its temporary personnel or that insurance coverage will be available
or adequate in amount to cover any such liability. If the Company is found
liable for the actions or omissions of its temporary workers and adequate
insurance coverage is not available, the Company's business, financial condition
and results of operations could be materially and adversely affected. See
"Business -- Operations."
LIMITED WORKING CAPITAL; ACCOUNTS RECEIVABLE
In 1995, the Company incurred costs of approximately $2.0 million to open 57
new dispatch offices (an average of approximately $35,000 per dispatch office).
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. 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. Consequently, the Company experiences significant
negative cash flow from operations and investment activities during periods of
high growth which also adversely impacts the Company's overall profitability. At
March 31, 1996, the Company had $2.2 million accounts receivable more than 90
days past due. The Company expects to continue to experience periods of negative
cash flow from operations and investment activities, and expects to require
additional sources of capital in order to continue to grow. No assurances can be
given that such capital will be available on acceptable terms. If adequate
sources of working capital are not available, the Company's anticipated growth
may not be realized, thereby adversely impacting the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
EFFECT OF ECONOMIC FLUCTUATIONS
Demand for the Company's services may be significantly affected by the
general level of economic activity and unemployment in the United States and
specifically within the construction and light industrial trades. However, as
economic activity increases, such as in recent years, temporary employees are
often added to the work force before regular employees are hired. As economic
activity slows, many companies reduce their use of temporary employees before
laying off regular employees. In addition, the Company may experience heightened
levels of competitive pricing pressure during such periods of economic downturn.
World-wide economic conditions and U.S. trade policies also impact demand for
the Company's services. No assurances can be given that the Company will benefit
from increases in general economic activity in the U.S. or that the Company's
rapid expansion will continue. A slow-down in general economic activity within
the construction and light industrial trades could have a material adverse
effect on the Company's business, financial condition and results of operations.
Depending upon location, new dispatch offices initially target the construction
industry for potential customers. As dispatch offices mature, the customer base
broadens and the mix of work diversifies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Operating
Results."
8
SEASONALITY OF BUSINESS OPERATIONS; INCLEMENT WEATHER
Many of the Company's customers are construction and landscaping businesses
that 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. Inclement weather can slow construction and landscaping
activities during such periods. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Operating Results" and "-- Liquidity and Capital
Resources."
LIMITED OPERATING HISTORY FOR DISPATCH OFFICES
The Company has experienced significant growth over the past few years,
primarily as result of opening new dispatch offices. Over half of the Company's
dispatch offices have been open for less than one year. As a result, there is no
assurance that the newer dispatch offices will grow at the rates achieved at
other dispatch offices or that newer dispatch offices will achieve
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview" and "-- Liquidity and Capital Resources."
DEPENDENCE ON AVAILABILITY OF TEMPORARY WORKERS
The Company must continually attract reliable temporary workers in order to
meet customer needs. The Company competes for such workers with other temporary
personnel companies, as well as actual and potential customers, some of which
seek to fill positions with either regular or temporary employees. In addition,
the Company's temporary workers sometimes become regular employees of the
Company's customers. From time to time, during peak periods, the Company
experiences shortages of available temporary workers. The failure to attract
reliable temporary workers would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview" and "Business -- Operations."
CONTROL BY OFFICERS AND DIRECTORS
The Company's officers and directors and their affiliates will, in the
aggregate, control 18.7% of the Common Stock and 68.1% of the Company's Series A
Preferred Stock, $0.667 par value (the "Preferred Stock"), which represent in
the aggregate 26.2% of the voting power of the capital stock of the Company,
upon completion of this offering. As a result, in certain circumstances, these
shareholders, acting together, may be able to determine matters requiring
approval of the shareholders of the Company, including the election of the
Company's directors, or, voting as a separate class, they may delay, defer, or
prevent a change in control of the Company. In addition, holders of the
Company's subordinated debt have the contractual right to nominate one person
for election as a director. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Management," "Principal Shareholders" and "Description of
Securities."
VOLATILITY OF STOCK PRICE
The price of the Company's Common Stock has been, and is likely to continue
to be, highly volatile. The market price of the Common Stock has fluctuated
substantially in recent periods. Future announcements concerning the Company or
its competitors, quarterly variations in operating results, introduction or
changes in pricing policies by the Company or its competitors, changes in market
demand, weather patterns and other acts of nature that may affect or be
perceived to affect demand for the Company's services, or changes in sales
growth or earnings estimates by analysts, among other factors, could cause the
market price of the Common Stock to fluctuate substantially. In addition, stock
markets have experienced extreme price and volume volatility in recent years.
This volatility has had a substantial effect on the market prices of securities
for reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations may materially and adversely affect
the market price of the Common Stock. For the foregoing reasons, there can be no
assurance that the market price of the Common Stock will not decline below the
public offering price or experience extreme volatility. See "Price Range of
Common Stock and Dividend Policy."
9
NO CASH DIVIDENDS ON COMMON STOCK
The Company has never paid dividends on its Common Stock. The Company
anticipates that for the foreseeable future, it will continue to retain its
earnings for the operation and expansion of its business, and that it will not
pay cash dividends on its Common Stock. In addition, the Company's credit
agreements restrict the Company's ability to pay common stock dividends unless
certain financial covenants are satisfied. See "Price Range of Common Stock and
Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
following the offering could have an adverse impact on the market price of the
Common Stock. Upon completion of this offering, the Company will have
outstanding approximately 7.1 million shares of Common Stock (assuming no
exercise of outstanding options or warrants to purchase Common Stock).
Substantially all of these shares have been registered under the Securities Act
or are otherwise freely tradeable. See "Description of Capital Stock."
The Company, all of its executive officers and directors who own Common
Stock and certain beneficial owners of the Common Stock have agreed, subject to
certain exceptions, not to offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock, now
owned or hereafter acquired, for a period of up to 180 days after the date of
this Prospectus without the prior written consent of Van Kasper & Company, the
representative of the Underwriters (the "Representative"). See "Underwriting."
The Company has reserved 500,000 shares of Common Stock available for grants
under its 1996 Stock Purchase Plan and Stock Option Plan. The Company has
options outstanding to purchase 125,400 shares and warrants outstanding to
purchase 706,368 shares of Common Stock. The Company has filed and intends (and
is required in the case of the warrants) to file registration statements under
the Securities Act covering the shares of Common Stock issuable under the
warrants and the Company's Stock Purchase Plan and Stock Option Plan. Upon
effectiveness of such registration, shares issued upon the exercise of options
covered thereby generally will be freely tradeable in the open market (subject
to Rule 144 limitations applicable to affiliates). No predictions can be made as
to the effect, if any, that future sales of Common Stock or the availability of
Common Stock for sale will have on the market price prevailing from time to
time.
10
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, at an assumed public offering price of $23.50 per share and
after deducting the underwriting discount and expenses payable by the Company,
are estimated to be approximately $21,291,000. The Company intends to use $7.7
million of the proceeds to fund the opening of new dispatch offices through
1997, $10.0 million for working capital, $1.35 million for purchase of an office
building in Tacoma, Washington and the remainder for payment of short-term debt
and general corporate purposes. Pending such use, the Company intends to invest
the net proceeds from this offering in short-term, interest-bearing instruments,
including government obligations and money market instruments. The Company
continually evaluates acquisition opportunities. If the Company identifies an
attractive acquisition opportunity, the Company may use a portion of the
proceeds to fund such acquisition. The Company currently has no commitments with
respect to any acquisition.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth the range of high and low bid quotation per
share for the Common Stock on the OTC Bulletin Board operated by the National
Association of Securities Dealers, Inc. for the periods indicated, as adjusted
to reflect stock splits.
HIGH LOW
--------- ---------
Year Ended December 31, 1994
First Quarter......................................................... $ 2.67 $ 1.34
Second Quarter........................................................ 2.50 2.00
Third Quarter......................................................... 3.50 2.50
Fourth Quarter........................................................ 6.25 3.50
Year Ended December 31, 1995
First Quarter......................................................... 7.17 6.00
Second Quarter........................................................ 13.67 6.42
Third Quarter......................................................... 13.67 10.83
Fourth Quarter........................................................ 17.00 10.17
Year Ended December 31, 1996
First Quarter......................................................... 22.00 13.50
Second Quarter (through May 16, 1996)................................. 27.00 19.00
The Company had 639 shareholders of record as of May 1, 1996. The bid price
reflects inter-dealer prices and does not include retail markup, markdown or
commission. The bid price does not reflect prices in actual transactions. As of
May 16, 1996 the closing bid price for the Common Stock was $23.50 per share.
The present policy of the Company is to retain earnings for the operation
and expansion of its business. The Company has never paid cash dividends on its
Common Stock and does not anticipate that it will do so in the foreseeable
future. In addition, the Company's credit agreements restrict the payment of
cash dividends. The Company pays a 5% cumulative dividend on its outstanding
Preferred Stock. See "Selected Consolidated Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
11
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996, and as adjusted to reflect the sale by the Company of 1,000,000 shares
of Common Stock offered hereby and the receipt and application of the estimated
net proceeds to be received by the Company therefrom, at an assumed public
offering price of $23.50 per share and after deducting the underwriting discount
and estimated offering expenses payable by the Company. The capitalization
information set forth in the table below is qualified by and should be read in
conjunction with the Company's more detailed Consolidated Financial Statements
and notes thereto included elsewhere in this Prospectus.
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
Current maturities of long term debt...................................................... $ 41 $ 41
--------- -----------
--------- -----------
Long-term liabilities (1):
Long term debt, less current maturities................................................. $ 942 $ 942
Subordinated debt, less unamortized discount............................................ 8,787 8,787
--------- -----------
Total long-term liabilities........................................................... 9,729 9,729
--------- -----------
Shareholders' equity:
Preferred stock, $0.667 par value, 5,000,000 shares authorized; 1,281,123 shares issued
and outstanding........................................................................ 854 854
Common stock, no par value, 25,000,000 shares authorized; 6,030,633 shares issued and
outstanding and 7,030,633 shares as adjusted (2)....................................... 7,490 28,781
Accumulated deficit..................................................................... (140) (140)
--------- -----------
Total shareholders' equity.............................................................. 8,204 29,495
--------- -----------
Total capitalization.................................................................. $ 17,933 $ 39,224
--------- -----------
--------- -----------
------------------------
(1) See Notes 4, 5 and 6 to the Company's Consolidated Financial Statements.
(2) Excludes (i) 831,768 shares of Common Stock issuable upon exercise of
outstanding stock options and warrants as of May 1, 1996 at a weighted
average exercise price of $11.44 per share and (ii) 500,000 shares reserved
for future grants under the Company's stock option and purchase plans.
12
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information of the Company has
been derived from the Company's audited Consolidated Financial Statements. The
Consolidated Balance Sheets as of December 31, 1994 and 1995, and the
Consolidated Statements of Operations, Changes in Shareholders' Equity, and Cash
Flows for the years ended December 31, 1993, 1994 and 1995 were audited by BDO
Seidman, LLP, whose report thereon appears elsewhere herein. The Balance Sheet
Data at December 31, 1991, 1992 and 1993 and the Statement of Operations Data
for the years ended December 31, 1991 and 1992, are derived from the Company's
audited financial statements which do not appear herein. The quarterly data at
and for the three months ended March 31, 1995 and 1996 are derived from the
Company's unaudited financial statements but includes all adjustments,
consisting only of normal recurring adjustments, that management considers
necessary to fairly present such data. The results for the three months ended
March 31, 1996 are not necessarily indicative of the results to be expected for
the full year ending December 31, 1996. The data should be read in conjunction
with the Company's Consolidated Financial Statements and the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues from services............................. $ 6,020 $ 8,424 $ 15,659 $ 38,951 $ 94,362 $ 12,618 26,094
Cost of services................................... 4,831 6,485 12,401 30,713 76,643 10,495 22,207
Selling, general, and administrative expenses...... 1,717 1,482 2,652 6,593 13,639 2,495 4,500
Interest and other expenses, net................... 187 277 353 457 866 164 436
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income tax and extraordinary
item.............................................. (715) 180 253 1,188 3,214 (536) (1,049)
Taxes on income.................................... -- 21 32 336 1,152 (182) (364)
Extraordinary item, net of tax..................... -- -- 48 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................................. $ (715) $ 159 $ 269 $ 852 $ 2,062 $ (354) $ (685)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per common share:
Income (loss) before extraordinary items........... $(0.26) $0.06 $0.06 $0.19 $0.35 $(0.07) $(0.12)
Extraordinary item................................. -- -- $0.01 -- -- -- --
Net income (loss).................................. $(0.26) $0.06 $0.07 $0.19 $0.35 $(0.07) $(0.12)
Weighted average shares outstanding................ 2,721,069 2,702,271 3,668,585 4,363,303 5,794,912 5,097,358 5,948,628
OPERATING DATA:
Revenues from dispatch offices open for full
period............................................ 4,614 8,230 12,960 27,311 65,798 11,966 25,585
Revenues from dispatch offices opened during
period............................................ 963 194 2,699 11,640 28,310 652 509
Dispatch offices open at period end................ 8 10 17 51 106 68 127
DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets...................................... $ 812 $ 1,454 $ 2,313 $ 7,572 $ 20,730 $ 8,314 $ 18,220
Total assets........................................ 1,149 1,880 3,153 8,912 26,182 10,226 25,112
Current liabilities................................. 436 1,086 1,706 5,631 7,956 6,664 7,180
Long-term liabilities............................... 732 578 777 319 9,695 422 9,729
Total liabilities................................... 1,168 1,664 2,483 5,950 17,651 7,086 16,908
Shareholders' equity (deficit)...................... (19) 216 670 2,962 8,531 3,140 8,204
Cash dividends declared (1)......................... -- -- 50 43 43 11 11
Working capital..................................... 376 368 607 1,941 12,774 1,650 11,040
------------------------------
(1) Represents cash dividends on the Preferred Stock. The Company has never paid
cash dividends on its Common Stock and does not anticipate that it will do
so in the foreseeable future. See "Price Range of Common Stock and Dividend
Policy."
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in connection with the
Company's Consolidated Financial Statements and the notes thereto and other
financial information included elsewhere in this Prospectus.
OVERVIEW
Labor Ready is a leading, national provider of temporary workers for manual
labor jobs. The Company's customers are primarily in construction, freight
handling, warehousing, landscaping, light manufacturing, and other light
industrial businesses. The Company has rapidly grown from eight dispatch offices
in 1991 to 146 dispatch offices at May 1, 1996. Substantially all of the growth
in dispatch offices was achieved by opening Company-owned locations rather than
through acquisitions. The Company's revenues grew from approximately $6.0
million to $94.4 million from 1991 to 1995. This revenue growth has been
generated both by opening new dispatch offices and by continuing to increase
sales at existing dispatch offices. In 1995, the average annual revenue per
dispatch office open for more than a full year was $1.3 million.
During the remainder of 1996 and 1997, the Company expects to open 54 and
100 new dispatch offices, respectively. In 1995, the Company incurred costs of
approximately $2.0 million to open 57 new dispatch offices (an average of
approximately $35,000 per dispatch office). The Company expects the average cost
of opening new dispatch offices to continue to increase due to more extensive
management training and the installation of more sophisticated computer and
other office systems. 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
bills its customers on a weekly basis. The average collection cycle for 1995 was
approximately 37 days. Consequently, the Company experiences significant
negative cash flow from operations and investment activities during periods of
high growth, which also adversely impacts the Company's overall profitability.
The Company expects to continue to experience periods of negative cash flow from
operations and investment activities while it rapidly opens dispatch offices and
expects to require additional sources of working capital in order to continue to
grow. See "-- Results of Operations" and "-- Liquidity and Capital Resources."
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. Inclement weather can slow construction and landscaping
activities in such periods. As a result, the Company has generally experienced a
significant increase in temporary labor demand in the spring, summer and early
fall months, and lower demand in the late fall and winter months.
Depending upon location, new dispatch offices initially target the
construction industry for potential customers. As dispatch offices mature, the
customer base broadens and the mix of work diversifies. The Company may discount
its rates when it enters a new market to attract customers. From time to time
during peak periods, the Company experiences shortages of available temporary
workers. See "Risk Factors -- Dependence on Availability of Temporary Workers."
Cost of services primarily includes wages and related payroll expenses of
temporary workers and dispatch office employees, general managers, district
managers and area directors, including workers' compensation, unemployment
compensation insurance, Medicare and Social Security taxes, but does not include
dispatch offices lease expenses. The Company's cost of services as a percentage
of revenues has fluctuated significantly in recent periods and it expects
significant fluctuations to continue in future periods as the Company continues
its rapid growth. Cost of services as a percentage of revenues is affected by
numerous factors, including salaries of new supervisory personnel hired under
new management organizational structure, the hiring of large numbers of general
managers prior to dispatch office openings, the use of lower introductory rates
to attract new customers at new dispatch offices, and the relatively lower
revenues generated by new dispatch offices prior to reaching maturity.
14
Temporary workers assigned to customers remain Labor Ready employees. Labor
Ready is responsible for employee-related expenses of its temporary workers,
including workers' compensation, unemployment compensation insurance, Medicare
and Social Security taxes and general payroll expenses. The Company does not
provide health, dental, disability or life insurance to its temporary workers.
Generally, the Company bills its customers for the hours worked by the temporary
workers assigned to the customer. Because the Company pays its temporary workers
only for the hours actually worked, wages for the Company's temporary workers
are a variable cost that increases or decreases directly in proportion to
revenue. The Company has one franchisee which operates five dispatch offices.
The Company does not intend to grant additional franchises. Royalty revenues
from the franchised dispatch offices are included in revenues from services and
were not material during any period presented herein. See "Selected Consolidated
Financial Information."
The typical customer order is for two temporary workers and the typical
payroll check paid by the Company is less than $50.00. The Company is not
dependent on any individual customer for more than 2% of its annual revenues.
During 1995, the Company had in excess of 29,000 customers and filled more than
800,000 work orders.
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.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
Revenues from services................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services....................................... 79.2 78.9 81.2 83.2 85.1
Selling, general and administrative expenses........... 16.9 16.9 14.5 19.8 17.2
Interest and other expenses, net....................... 2.3 1.2 0.9 1.3 1.7
Income (loss) before taxes on income and extraordinary
item.................................................. 1.6 3.0 3.4 (4.3) (4.0)
Net income (loss)...................................... 1.7 2.2 2.2 (2.8) (2.6)
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 substantially from increases in revenues from
dispatch offices open for the full period. Average store sales, however, were
slightly lower in the first quarter of 1996 than in the first quarter of 1995
because of the impact of weather on the concentration of dispatch offices in the
midwest and upper midwest regions.
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 1.8%. Cost
of services increased due to several factors, including higher workers
compensation costs, increased salary costs for branch managers in training,
longer training periods for new management personnel and for additional
supervisory personnel hired to implement 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
15
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 approximately $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 $353,776 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.
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
DISPATCH OFFICES. The number of dispatch offices grew to 106 at December
31, 1995 from 51 locations at December 31, 1994, a net increase (after closings
and consolidations) of 55 dispatch offices, or 108%. The Company estimates that
its aggregate costs of opening 57 new dispatch offices in 1995 was $2.0 million
(an average of approximately $35,000 per dispatch office) compared to aggregate
costs of approximately $850,000 (an average of approximately $25,000 per
dispatch office) to open 34 new dispatch offices in 1994. Management believes
that the costs of opening new dispatch offices will continue to increase. The
increases in 1995 were primarily the result of a longer manager training period,
establishment of Labor Ready University, and the added opening costs related to
the use of more sophisticated computer and other office systems. Dispatch office
locations grew to 51 locations at December 31, 1994 from 17 locations at
December 31, 1993, a net increase of 34 dispatch offices, or 200%. The Company
estimates that its aggregate costs of opening 34 new dispatch offices in 1994
was $850,000 compared to $160,000 (an average of $20,000 per dispatch office) to
open eight new dispatch offices in 1993. The increases were primarily the result
of expanded manager training and the installation of more sophisticated computer
and other office systems at the dispatch offices.
REVENUES FROM SERVICES. The Company's revenues from services increased to
$94.4 million for 1995 from $39.0 million for 1994, an increase of $55.4
million, or 142%. This increase in revenues from services resulted from
essentially equal increases in revenues from dispatch offices open for the full
period and revenues generated from dispatch offices opened during the period, as
indicated below. The Company's revenues from services increased to $39.0 million
for 1994 from $15.7 million for 1993, an increase of $23.3 million, or 148%. As
in 1995, this increase resulted from essentially equal increases in revenues
from dispatch offices open for the full period and from revenues generated from
dispatch offices opened during the period, as indicated below.
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
Increase in revenues from dispatch offices open for full year..................... $ 4,536 $ 11,652 $ 27,101
Revenues from new dispatch offices opened during year............................. $ 2,699 11,640 28,310
--------- --------- ---------
Total increase over prior year.................................................... $ 7,235 $ 23,292 $ 55,411
--------- --------- ---------
--------- --------- ---------
COST OF SERVICES. Cost of services increased to $76.6 million for 1995 from
$30.7 million for 1994, an increase of $45.9 million, or 150%, reflecting the
additional wages and salaries paid to temporary workers and additional
management personnel and related payroll expenses. Cost of services as a
percentage of
16
revenues from services increased to 81.2% for 1995 from 78.9% for 1994, an
increase of 2.3%. This increase in costs as a percentage of revenues reflects
salaries of new supervisory personnel hired under new management organizational
structures, the hiring of large numbers of general managers prior to dispatch
office openings, the use of lower introductory rates to attract new customers at
new dispatch offices, and the relatively lower revenues generated by new
dispatch offices prior to reaching maturity. The Company expects to experience
significant fluctuations in such percentage in future periods as the Company
continues its rapid addition of new dispatch offices. Costs of services
increased to $30.7 million for 1994 from $12.4 million for 1993, an increase of
$18.3 million, or 148%. Costs of services as a percentage of revenues from
services were essentially unchanged from 1993 to 1994, decreasing to 78.9% for
1994 from 79.2% for 1993.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased to $13.6 million in 1995 from $6.6 million in
1994, an increase of $7.0 million, or 106%. As a percentage of revenues,
selling, general, and administrative expenses decreased to 14.5% for 1995 from
16.9% for 1994. This percentage decrease resulted primarily from selling,
general and administrative expenses increasing at a slower rate than the
increase in revenues. Selling, general, and administrative expenses increased to
$6.6 million in 1994 from $2.7 million in 1993, an increase of $3.9 million, or
144%. As a percentage of revenues, selling, general, and administrative expenses
were 16.9% in both 1994 and 1993. The increases in selling, general, and
administrative expenses are primarily the result of increased overhead,
including management information systems, workers compensation administration,
administrative personnel and other expenses related to the growth of the
Company.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased to
approximately $866,000 in 1995 from approximately $457,000 in 1994, an increase
of 89.5%, reflecting primarily higher borrowing amounts and the additional
interest costs of the $10 million principal amount of subordinated debt issued
in October 1995. As a percentage of revenues, interest expense decreased from
1.2% to 0.9%, reflecting the increased revenues of the Company. In 1994,
interest expense increased to approximately $457,000 from $353,000 in 1993,
reflecting primarily higher borrowed amounts. As a percentage of revenues,
interest expense decreased from 2.3% to 1.2%, reflecting the Company's increased
revenues. The increase in borrowings is mainly the result of the Company
financing its accounts receivable which increased from $1,907,000 in 1993, to
$5,163,000 in 1994 and to $12,183,000 in 1995, corresponding to the significant
increase in revenues each year. The average effective interest rate on the
Company's borrowings was 16.5%, 15.3% and 29.0% for 1995, 1994 and 1993,
respectively. In March 1996, the Company activated its new $10 million revolving
line of credit with U.S. Bank of Washington which bears interest at a rate equal
to prime plus 1/4% (currently 8.5%) and replaces the Company's former credit
line with Concord Growth Corporation.
TAXES ON INCOME. The Company's taxes on income increased to $1.2 million in
1995 from approximately $336,000 in 1994, an increase of approximately $816,000,
or 243%. This increase was the direct result of the corresponding increase in
the Company's income before taxes for such period. The Company had a net
deferred tax asset of approximately $715,000 at December 31, 1995, resulting
primarily from workers' compensation deposits, credits and reserves which will
reverse in 1996. 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. See Note 10 to
Consolidated Financial Statements. The Company's taxes on income increased to
$336,000 in 1994 from approximately $32,000 in 1993, an increase of
approximately $304,000, or 950%. This increase was the result of an increase in
the Company's income before taxes for such period and higher overall effective
tax rates as the Company expanded into more states with state income taxes.
NET INCOME. The increase in revenues from services also resulted in an
increase in net income to $2.1 million for 1995 from approximately $852,000 for
1994. This represents an increase of $1.2 million, or 142%. The increase in net
income corresponds to the growth in revenues. In 1994, the increase in revenues
from services also resulted in an increase in net income to approximately
$852,000 from approximately $269,000 for 1993, an increase of approximately
$583,000, or 216%. The increase in net income in 1994 is primarily the result of
increased revenues and lower interest costs.
17
QUARTERLY OPERATING RESULTS
The following tables set forth certain consolidated statements of income
data (dollars in thousands, except per share amounts) for each of the Company's
last nine quarters. The quarterly information is unaudited but includes all
adjustments, consisting only of normal recurring adjustments, that management
considers necessary to present fairly this information. The results of
operations for any quarter, and quarter-to-quarter trends, are not necessarily
indicative of the results to be expected for any future period.
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- ----------- ------------- ------------
Revenues from services........................................ $ 5,217 $ 8,318 $ 12,100 $ 13,316
Net income (loss)............................................. (135) 327 422 237
Dispatch offices open at period end........................... 27 34 44 51
Earnings (loss) per common share.............................. $ (0.04) $ 0.09 $ 0.10 $ 0.04
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- --------- ------------- ------------
Revenues from services....................................... $ 12,618 $ 19,750 $ 30,873 $ 31,121
Net income (loss)............................................ (354) 391 1,471 554
Dispatch offices open at period end.......................... 68 96 104 106
Earnings (loss) per common share............................. $ (0.07) $ 0.07 $ 0.24 $ 0.09
MARCH 31,
1996
-----------
Revenues from services........................................ $ 26,094
Net income (loss)............................................. (685)
Dispatch offices open at period end........................... 127
Earnings (loss) per common share.............................. $ (0.12)
The following table indicates, for each of the quarters presented, cost of
services and net income as a percentage of revenues from services.
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
------------ ----------- --------------- --------------
Revenues from services....................................... 100.0% 100.0% 100.0% 100.0%
Cost of services............................................. 80.6 80.3 77.8 78.2
Net income (loss)............................................ (2.6) 3.9 3.5 1.8
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
------------ ----------- --------------- --------------
Revenues from services....................................... 100.0% 100.0% 100.0% 100.0%
Cost of services............................................. 83.2 80.4 80.0 82.2
Net income (loss)............................................ (2.8) 2.0 4.8 1.8
MARCH 31,
1996
------------
Revenues from services....................................... 100.0%
Cost of services............................................. 85.1
Net income (loss)............................................ (2.6)
The Company's quarter-to-quarter operating results have been subject to
significant variability based on a number of factors, including seasonality, but
primarily due to the number of new dispatch offices opened during the period and
preceding periods. As newly opened dispatch offices mature, revenues have
historically increased significantly, although expenses of opening and operating
new dispatch offices continues to increase as the number of new dispatch offices
increases.
18
SEASONAL AND CYCLICAL CUSTOMER DEMAND; ECONOMIC CYCLES. Many of the
Company's customers are construction and landscaping businesses that 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. Inclement weather can slow construction and landscaping
activities during such periods. 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.
Demand for the Company's services may be significantly affected by the
general level of economic activity and unemployment in the United States. As
economic activity increases, such as in recent years, temporary employees are
often added to the work force before regular employees are hired. As economic
activity slows, many companies reduce their use of temporary employees before
laying off regular employees. In addition, the Company may experience heightened
levels of competitive pricing pressure during such periods of economic downturn.
World-wide economic conditions and U.S. trade policies also impact demand for
the Company's services.
Depending upon location, new dispatch offices initially target the
construction industry for potential customers. As dispatch offices mature, the
customer base broadens and the mix of work diversifies. A slow-down in general
economic activity within the construction industry, however, could lengthen the
time period for new dispatch offices to generate sufficient revenues to cover
operating costs and thereby increase the cash necessary to fund the operations
of new dispatch offices until they begin to generate sufficient revenue to cover
their operating costs.
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 1996. 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 ongoing 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 this offering and other equity or debt
financings.
During 1995 and 1994, the Company used net cash in operating activities of
$3.7 million and $2.3 million, an increase of 64.8%, reflecting the significant
growth in the Company's revenues and accounts receivable, increased workers'
compensation deposits, and the opening of 57 new dispatch offices in 1995 and 34
new dispatch offices in 1994. The Company incurred capital expenditures of $2.5
million and approximately $550,000 in 1995 and 1994 in connection with openings
of dispatch offices and improvements to the corporate offices. Management
anticipates continuing cash flow deficits from operations while the number of
dispatch offices continues to grow at a rapid rate. Management expects such cash
flow deficits will be financed by the proceeds of this offering and other equity
and 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 1998 and before the
Financing Warrants are exercised, the number of shares subject to purchase under
the Financing Warrants is reduced to 545,894 shares.
19
In March 1996, the Company obtained a new revolving credit facility from
U.S. Bank of Washington which provides for borrowings 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 office). Further, the
Company invested 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. 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 54 dispatch offices in the remainder of 1996, for a
total of 94 in 1996, and 100 dispatch offices in 1997, the Company expects to
experience cash flow deficits from operations and investing activities in 1996
and 1997. The Company intends to finance opening and operating costs of new
dispatch offices with the proceeds from this offering and other equity or debt
financings. With such funds, and depending on its results of operations and
other factors described herein, the Company expects to have the financial
resources necessary to open at least 154 dispatch offices through 1997. 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
financings or scale back its expansion plans. See "Risk Factors -- Ability to
Achieve and Manage Growth," and "-- Liquidity and Capital Resources."
INFLATION
The effects of inflation on the Company's operations were not significant
during the periods presented herein. Generally, throughout the periods discussed
above, the increases in revenues have resulted primarily from increasing sales
at existing dispatch offices and adding new dispatch office locations rather
than price increases. In the event, however, that Congress passes legislation
currently being considered to increase the federal minimum wage, the Company
would attempt to increase the rates it charges customers.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board ("FASB"), issued a
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. The value of the stock
based award is determined using the intrinsic method whereby compensation cost
is the excess of the quoted market price of the stock at the date of grant or
other measurement date over the amount an employee must pay to acquire the
stock. SFAS No. 123 is effective for financial statements issued for fiscal
years beginning after December 15, 1995, and is not expected to have a
significant impact on the Company's financial statements.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995, and is not
expected to have a significant impact on the Company's financial statements.
20
BUSINESS
INTRODUCTION
Labor Ready is a leading, national provider of temporary workers for manual
labor jobs. The Company's customers are primarily businesses in the
construction, freight handling, warehousing, landscaping, light manufacturing,
and other light industrial markets. These businesses require workers for
lifting, hauling, cleaning, assembling, digging, painting and other types of
manual work. The Company has rapidly grown from eight dispatch offices in 1991
to 146 dispatch offices at May 1, 1996. Substantially all of the growth in
dispatch offices was achieved by opening Company-owned locations rather than
through acquisitions. The Company's revenues grew from $6.0 million to $94.4
million from 1991 through 1995. This revenue growth has been generated both by
opening new dispatch offices and by continuing to increase sales at existing
dispatch offices. In 1995, the average cost to open a new dispatch office was
approximately $35,000 and dispatch offices opened in 1995 typically generated
revenues sufficient to cover their operating costs in two to six months. In
1995, the average revenue per dispatch office open for more than one full year
was $1.3 million.
INDUSTRY OVERVIEW
The temporary staffing industry has grown rapidly in recent years as
companies have used temporary employees to control personnel costs and to meet
fluctuating personnel needs. According to the NATSS, the United States market
for the industrial segment of the temporary staffing marketplace (which includes
the light industrial market that the Company serves) grew at a compound annual
growth rate of approximately 25% from approximately $5.0 billion in 1991 to
approximately $12.3 billion in 1995. The Company believes the temporary staffing
industry is highly fragmented and presents opportunities for larger, well
capitalized companies to effectively compete through management of workers'
compensation costs and development of information systems which efficiently
process a high volume of transactions and coordinate multi-location activities.
Historically, the demand for temporary workers has been driven primarily by
a need to satisfy peak production needs and to temporarily replace full-time
employees due to illness, vacation or abrupt termination. More recently,
competitive pressures have forced businesses to focus on reducing costs,
including converting fixed, permanent labor costs to variable or flexible costs.
The use of temporary workers typically shifts employment costs and risks, such
as workers' compensation and unemployment insurance and possible adverse effects
of changing employment regulations, to temporary staffing companies, which can
allocate the costs and risks over a larger pool of employees and customers. In
addition, the use of temporary employees avoids the inconvenience, expense and
other effects of hiring and firing regular employees.
COMPANY STRATEGY
The Company's goal is to maintain and enhance its status as a leading,
national provider of temporary workers for manual labor jobs. Key elements of
the Company's strategy to achieve this objective are as follows:
- AGGRESSIVELY OPEN NEW DISPATCH OFFICES. The Company's strategy is to
increase revenues by rapidly expanding its network of dispatch offices.
The Company plans to open approximately 54 additional dispatch offices
prior to the end of 1996, for a total of 94 in 1996, and an additional 100
dispatch offices in 1997.
- INCREASE REVENUES FROM EXISTING DISPATCH OFFICES. As a dispatch office
matures, the Company attempts to increase its revenues by expanding sales
to existing customers and by aggressively expanding the number and mix of
customers served. More experienced area directors and district managers
assist the general manager in this process. The Company is also developing
and implementing at the corporate level coordinated sales and marketing
strategies designed to complement these efforts, including the development
of national accounts, electronic order entry from the customer's location,
centralized dispatch via an 800 number, dissemination of information on
local construction activity, and implementation of a centralized customer
service hotline.
21
- IMPROVE OPERATING EFFICIENCIES AND REDUCE OPERATING COSTS. Due to the
temporary labor market's extensive fragmentation, the Company believes its
national presence provides it with key operating efficiencies, competitive
advantages (including an ability to target national accounts and to
effectively administer workers' compensation programs) and access to
capital markets to provide needed working capital. The Company has
standardized the operation, general design, staffing and equipment of the
dispatch offices. In addition, the Company has designed and implemented a
proprietary management information system that efficiently manages an
extensive Company-wide employee and payroll database as well as delivering
valuable management reports.
- PROVIDE SUPERIOR SERVICE. The Company emphasizes customer responsiveness
and maintains a commitment to providing a superior quality of service
though policies such as opening offices no later than 5:30 a.m., providing
workers on short notice (often the same day as requested) and offering a
"satisfaction guaranteed" policy. The Company is committed to supplying
motivated workers to its customers. Most workers find the Company's "Work
Today, Paid Today" policy appealing and arrive at the dispatch office
early in the morning motivated to put in a good day's work and receive a
paycheck at the end of the day.
The Company intends to continue to focus on the manual labor, short notice,
light industrial niche of the temporary labor market. The Company believes other
national and international temporary labor businesses have not aggressively
pursued this market. Management believes that it can gain significant advantages
by capturing market share, achieving economies of scale and operating
efficiencies not available to its smaller competitors, and rapidly expanding
through opening new dispatch offices and increasing revenue at existing dispatch
offices.
DISPATCH OFFICE EXPANSION
The Company has rapidly grown from eight dispatch offices in 1991 to 146
dispatch offices at May 1, 1996. The Company's expansion has been achieved
primarily by opening Company-owned dispatch offices. Of the 146 dispatch offices
open at May 1, 1996, 140 dispatch offices have been owned and operated by the
Company from inception. The following table sets forth the number and location
of dispatch offices by geographic region open at the end of each of the last
five years and at May 1, 1996. The information below does not include four Labor
Ready franchised dispatch offices located in the Minneapolis, Minnesota
metropolitan area and one franchised dispatch office located in Fargo, North
Dakota.
LABOR READY DISPATCH OFFICES
BY GEOGRAPHIC REGION
AT DECEMBER 31, AT MAY 1,
---------------------------- ---------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---------
West................ 8 9 12 23 38 42
Southwest/Mountain... 0 0 2 8 15 20
Upper Midwest....... 0 0 0 8 16 29
Midwest............. 0 1 3 7 20 25
South............... 0 0 0 1 12 24
Eastern............. 0 0 0 0 1 2
Canada.............. 0 0 0 4 4 4
-
---- ---- ---- ---- ---
Total........... 8 10 17 51 106 146
-
-
---- ---- ---- ---- ---
---- ---- ---- ---- ---
The Company currently anticipates opening 54 dispatch offices during the
remainder of 1996 for a total of 94 new dispatch offices in 1996, and expects to
open approximately 100 dispatch offices in 1997. Dispatch office openings will
be primarily in California, midwestern states, southern states, and, over time,
eastern states. The Company analyzes acquisition opportunities from time to
time, may pursue acquisitions in certain circumstances and may also accelerate
expansion based on future developments.
22
In 1994, the Company licensed one franchisee in Minnesota, who now operates
five locations, four in Minneapolis and one in Fargo, North Dakota. The Company
has not pursued, and does not intend to grant, any additional franchises.
Revenues generated from franchised dispatch offices have not been material
during the periods presented herein.
ECONOMICS OF DISPATCH OFFICES. The Company has standardized the process of
opening dispatch offices. In 1995, the average aggregate cost of opening a new
dispatch office was approximately $35,000, including salaries, training, lease
expenses, computer systems, advertising and other related expenses. These costs
are expected to increase as the Company purchases more sophisticated computer
and other office systems, expands training time and programs, leases larger
dispatch offices and expands into the northeastern United States. New dispatch
offices are expected to generate revenue sufficient to cover their operating
costs within two to six months. On average, the volume necessary for profitable
operations is approximately $12,000 per week. In 1995, dispatch offices open for
at least one full year generated average annual revenue of approximately $1.3
million, or approximately $25,000 per dispatch office per week.
CRITERIA FOR NEW DISPATCH OFFICES. Labor Ready identifies desirable areas
for locating new dispatch offices with an economic model that analyzes the
potential supply of temporary workers and customer demand based on a zip code
resolution of employment figures and the relative distance to the nearest Labor
Ready dispatch office. In addition, the Company locates dispatch offices in
areas convenient for its temporary workers, that are on or near public
transportation, and have parking available. The Company will generally avoid
downtown locations since such areas are usually inconvenient for workers and
dispatch office rental space is often more expensive. After the Company
establishes a dispatch office in a metropolitan area, the Company usually
clusters additional locations within the same area. Multiple locations in a
market reduce both opening costs and operating risk for new dispatch offices
because advertising costs are spread among more dispatch offices and because the
new dispatch office benefits from existing customer relationships with the other
dispatch offices and established Labor Ready name recognition.
DISPATCH OFFICE MANAGEMENT. The Company believes that the key factor
determining the success of a new dispatch office is identifying and retaining an
effective dispatch office general manager. Each general manager has primary
responsibility for managing the operations of the dispatch office, including
recruiting temporary workers, daily dispatch of temporary workders, and
collecting accounts receivable. The Company pays monthly bonuses to its general
managers based on accounts receivable collections during the month.
Each general manager has primary responsibility for customer service and the
dispatch office's sales efforts, including identifying and soliciting local
businesses likely to have a need for temporary manual workers. The Company's
experience is that certain types of individuals are better suited to perform the
critical management functions necessary for the dispatch office to generate the
revenues required to achieve profitability, regardless of the size of the
metropolitan area. The Company has refined its criteria for selecting general
managers and uses The Gallup Organization to screen, test, and qualify
prospective general managers. Prior to joining the Company, the typical general
manager has little or no prior experience in the temporary employment industry.
The Company commits substantial resources to the training, development, and
operational support of its general managers. In 1995, due to turnover,
attrition, or termination, the Company replaced approximately 26% of its general
managers.
OPERATIONS
DISPATCH OFFICES. Dispatch offices are locations where workers (and
prospective workers) report prior to being assigned to jobs, including those
being called back to the same employer. Workers are required to report to the
dispatch office in order to minimize "no-shows" to the customer's job site. If a
worker fails to report to the dispatch office as scheduled, the Company
identifies a replacement so that the customer has the number of workers expected
at the jobsite, on time, and ready to work.
During the early morning hours, the general manager and an assistant
coordinate incoming customer work orders, assign the available workers to the
job openings for the day, and arrange transportation to the job site. Prior to
dispatch, a branch employee checks to make sure workers have the basic safety
equipment required for the job, such as boots, back braces, hard hats, or safety
goggles, all of which are provided at no
23
charge to the worker or the customer. The customer provides additional safety
and other equipment, if required. New assignments are generally filled from a
first come, first served daily sign-in sheet, except for return requests.
Workers who pass on a particular job are moved to the bottom of the list. Most
work assignments have been scheduled in advance, a majority of which are repeat
work orders from customers. However, a significant portion of the job openings
are requested on short notice, often the same day as requested.
The workers are provided with a work order (which is endorsed by the
customer to confirm work performance) that each worker must present at the
dispatch office in order to receive payment for the hours worked. Workers are
generally paid daily by check. Computer systems at each dispatch office perform
the calculations necessary to determine the wages, less taxes and applicable
withholdings, and print security controlled checks, which are distributed to
each worker.
Dispatch offices generally open early, usually by 5:30 a.m., with some open
24 hours (depending on volume or activity), and generally remain open until the
last temporary laborer is paid. Dispatch offices are generally staffed with at
least two full-time employees, including the general manager and a customer
service representative. General managers manage the daily dispatch of temporary
workers, and are responsible for monitoring and collecting receivables, managing
the credit application process for each customer, inspecting customer job sites
for site safety, as necessary, and managing the sales and marketing efforts of
the dispatch office.
Employment applications are taken throughout the day for potential new
temporary employees. Applications are used to facilitate workers compensation
safeguards and quality control systems by permitting the Company to test for
alcohol or drugs in case of work-related illness or injury, to obtain a signed
"Condition of Employment" statement, and to comply with applicable immigration
requirements.
CUSTOMERS. The Company's customers are primarily businesses and, less
frequently, government agencies, that require workers for lifting, hauling,
cleaning, assembling, digging, painting and other types of manual work. The
Company's customers are typically engaged in construction, landscaping, freight
handling, warehousing, or other light manufacturing. Customers also include
retail and wholesale operations, sanitation, machine shops, printers, hotels and
restaurants.
New dispatch offices initially target the construction industry for
potential customers, except for those new dispatch offices that are located in
metropolitan areas where there is little new construction. In addition, as
dispatch offices mature, the customer base broadens and the mix of work
diversifies. Many of the businesses have elements of seasonality or cyclicality
in their work flow and have a need for one or more workers. The Company
currently derives its business from a large number of customers, and is not
dependent on any large customer for more than 2% of its revenues. During 1995,
the Company's ten largest customers accounted for $6.4 million, or 6.8% of total
sales. While a single dispatch office may derive a substantial percentage of its
revenues from a single customer, the loss of that customer would not have a
significant impact on the Company's revenues. During 1995, the Company provided
temporary workers to in excess of 29,000 customers. Labor Ready filled more than
800,000 work orders in 1995.
Many customers use Labor Ready as a screening device for future hires.
Because Labor Ready does not charge a fee if a customer hires a Company worker,
customers on occasion send prospective employees to the Company with a specific
request for temporary assignment to their business. Customers thereby have the
opportunity to observe the prospective employee in an actual working situation,
and minimize expenses involved in employee turnover and personnel agency fees.
BILLING AND COLLECTIONS. The Company has implemented a credit policy which
allows new customers to establish an account with a $2,500 initial credit limit.
Workers may be dispatched to a new customer's job site when a credit application
is completed and signed. Thereafter, the Company obtains credit reports and bank
references to evaluate whether additional credit is justified. The credit
department processes applications within 24 hours and if information indicates
credit risk, the account will be placed on a "hold" status and no further
business can be conducted until the credit risk is resolved. This policy is
designed to limit the Company's exposure to $2,500 for a new account. When the
credit risk is resolved, the account will be
24
granted a credit line up to $5,000. If the account requires higher credit
limits, the credit department will expand its credit investigation to justify
such increase by completing trade reference verification, analysis of financial
statements and tax returns. Once a customer has reached 75% of its credit limit,
the customer screen on the Company's information system has a red warning to
alert dispatch office personnel to more closely monitor the activity of the
customer.
SALES AND MARKETING. Generally, each dispatch office is responsible for its
own sales and marketing efforts. The general manager is primarily responsible
for customer service and sales, but most branch employees are also involved in
customer sales and marketing. Each dispatch office maintains databases for area
businesses for telemarketing and direct mail. The Company expects each dispatch
office to mail 300 to 500 pieces of direct mail a week with follow-up to be made
by the general manager or the customer service representative. The corporate
office will conduct an initial mailing of 5,000 to 10,000 pieces to the
geographic area to support the new dispatch office opening.
At the corporate level, the Company is developing coordinated marketing
strategies, including the development of national accounts with electronic order
entry from the customer's location, centralized dispatch via an 800 number,
dissemination of information on local construction activity, advertising
campaigns in targeted markets prior to new dispatch office openings, and
implementation of a centralized customer service hotline which promotes prompt
and professional resolution to customer issues as they arise. In late 1995, the
Company hired a national sales manager to develop business with large employers
on a national and regional basis. The Company also employs several salespeople
who facilitate sales and marketing activities to specific dispatch offices or
for specific industries.
When entering new markets, the Company allows for an initial advertising
budget to generate an awareness of the new dispatch office. By opening
additional dispatch offices as warranted based on area demographics, the Company
can expand and coordinate its marketing efforts and benefit all the dispatch
offices in the local area. Marketing is accomplished primarily through personal
contacts, direct mail campaigns, and yellow pages advertising. Word of mouth
also provides a significant source of new business for the Company. General
managers are encouraged to work with other dispatch offices in the same
metropolitan area.
TEMPORARY WORKERS. Most workers find the Company's "Work Today, Paid Today"
policy appealing and arrive at the dispatch office early in the morning
motivated to put in a good day's work and receive a paycheck at the end of the
day. Labor Ready's temporary workers are typically persons who are unemployed or
in between jobs. Nearly all are male and most are between the ages of 18 and 40
and live in low income neighborhoods. Most temporary workers have phone numbers,
but do not own cars. The average temporary worker works for Labor Ready
approximately 90 hours per year.
The Company's daily pool of temporary workers at each dispatch office
generally numbers between 40 and 200, depending upon the time of year. Although
the Company is less dependent on weather than in its early years because of a
wider dispersion of dispatch offices in different geographic areas of the United
States, good weather, nevertheless, brings incrementally more job orders and
workers.
After reviewing work orders for the day, the general manager pre-screens the
qualifications of the temporary workers to assure they can perform the work
required. Additionally, the individual must be at least 18 years old, physically
capable and in apparent good health. The main objective is to dispatch the most
suitable workers for the positions available. Dispatch office employees over
time come to know most workers at the dispatch office and their capabilities.
The Company is an equal opportunity employer.
Under the Company's "satisfaction guaranteed" policy, replacements for all
unsatisfactory workers are promptly provided if the customer notifies the
Company within the first two hours of work. Employees who receive two concurrent
complaints from customers are generally terminated or reprimanded. The Company
will immediately terminate any employee who agrees to take a work order and does
not report at the customer's job site. Any use of obscene language, alcohol or
drugs on the dispatch office premises or at the job site are grounds for
immediate dismissal. In addition, an employee found to be engaging in dishonest
acts or filing a false workers' compensation claim will be terminated.
25
The Company is responsible for withholding of FICA, Medicare, and federal,
state, and, where applicable, city and county payroll taxes from its temporary
workers for disbursement to governmental agencies. Additionally, the Company
pays federal and state unemployment insurance premiums, and workers'
compensation expenses for its temporary employees. See "-- Workers'
Compensation."
RECRUITMENT OF TEMPORARY WORKERS. The Company attracts its pool of
temporary workers through flyers, newspaper advertisments, dispatch office
displays, and word of mouth. The Company believes its strategy of locating
dispatch offices in lower income neighborhoods, with ready access to public
transportation, is particularly important in attracting workers.
The Company's "Work Today, Paid Today" policy is prominently displayed at
most dispatch offices and, in the Company's experience, is a highly effective
method of attracting temporary workers. Workers also find other Company policies
attractive, such as the emphasis on worker safety, Company provided safety
equipment, and modest advances for lunch or gas for workers short on cash.
Temporary workers are also aware of the Company's no-fee policy toward temporary
workers who receive regular position offers from the Company's customers. The
possibility of landing a regular position serves as an added incentive to its
workers. Finally, dispatch offices generally remain open to ensure workers get
paid the same day.
Management believes that Labor Ready has earned a good reputation with its
temporary labor pool because the Company consistently has jobs available and
treats these workers with respect, which the Company believes helps attract a
motivated and responsive worker pool. As a result, the Company believes
referrals by current or former employees who have had good experiences with the
Company account for a significant percentage of its temporary workers.
The Company experiences from time to time during peak periods shortages of
available temporary workers. Dispatch offices with a shortage of workers attempt
to fill work orders by asking temporary workers to inform friends, relatives and
neighbors of the job openings and by identifying prospective workers from the
Company's employee data base. On occasion, work orders requiring large numbers
of temporary workers will be filled by general managers coordinating with other
local dispatch offices.
MANAGEMENT, EMPLOYEES AND TRAINING. The Company currently employs a total
of 62 administrative and executive staff in the corporate office, and 431 people
as supervisors, general managers, customer service representatives, district
managers, area directors and support staff. General managers report to district
managers who in turn report to area directors. The Company is hiring additional
supervisory management personnel with experience in managing multilocation
operations.
After extensive interviews and tests, prospective general managers and
customer service representatives generally undergo four weeks of training at an
existing high-volume dispatch office. The employees then attend Labor Ready
University, the Company's training division, located at the dispatch office in
Tacoma, Washington. Labor Ready University, formed in 1995 with the mission of
training managers and customer service representatives on the skills necessary
for operating a dispatch office, is staffed by an experienced training
professional. The Company has developed a curriculum, training manuals, and
instruction modules for the six-day, rigorous sessions, which include sessions
on topics such as marketing, direct mail, credit and collections, workers'
compensation and safety. By operating the training center as part of an ongoing
dispatch office, the managers and customer service representatives receive
training under actual and simulated dispatch conditions. The Company is
currently establishing ten certified field training centers located in current
dispatch offices where all prospective general managers will attend their
initial four weeks training. Department heads from the Company's corporate
offices teach topics based on their area of expertise. The Company usually
arranges to have an experienced manager participate in the classes to share
experiences encountered in operating a dispatch office.
MANAGEMENT INFORMATION SYSTEMS. The Company has internally developed its
own proprietary software system to process all required payroll information and
related payroll tax returns, together with other information important to
managing thousands of workers and staff in multiple locations. The Company
completed the installation in all dispatch offices of the most recent version of
this software in 1995. Labor Ready employs five full-time professionals that
continually upgrade the systems to add features and
26
enhance operations and reliability. The system will continue to require
additional hardware and software to accommodate the Company's operating and
information needs while the Company conducts its rapid expansion program.
The system maintains all of the Company's key databases, from the tracking
of work orders to payroll processing to maintaining worker records. The system
regularly exchanges key database information between corporate headquarters and
dispatch offices, including customer credit information and the tracking of
workers' compensation safety claims. Dispatch offices can run a variety of
reports on demand, including receivables aging. The Company can also conduct
keyword searches in its employee database for certain types of work experience.
Regional and area directors can also call into the system and monitor their
territories from their laptops. The Company believes its proprietary software
system provides Labor Ready with significant competitive advantages over
competitors that utilize less sophisticated systems.
The Company's information system also provides the Company with its key
internal controls. All work order tickets are entered into the system at the
dispatch office level. No payroll check can be issued at a dispatch office
without a corresponding work ticket on the computer system. When a payroll check
is issued, the customer's weekly bill and the dispatch office receivables are
automatically updated. Printed checks have watermarks and computer-generated
signatures that are extremely difficult to duplicate.
WORKERS' COMPENSATION PROGRAM. The Company maintains workers' compensation
insurance, as required by state laws. The Company operates in three states
(Washington, Nevada and Ohio) in which the state provides and administers the
insurance and the Company is required to pay premiums based on its experience
ratings. Other states permit the Company to obtain insurance coverage through a
private fronting insurance carrier licensed to do business in those states. In
1995, the Company deposited $4.6 million with a foreign off-shore company for
the payment of workers' compensation claims and related claims settlement
expenses on claims originating in these states. Through March 31, 1996 an
additional $1.5 million was deposited with the foreign offshore company. Claims
are administered by a third party administrator retained by the Company. At
March 31, 1996, approximately $3.3 million remained on deposit for the payment
of future claims and claims settlement expenses which were estimated by the
Company at $1.3 million.
The Company has established a separate department at its corporate
headquarters to manage its insurers, third party administrators, and the medical
service providers. The Company attempts to resolve claims promptly and generally
closes claims within 120 days. To reduce the wage-loss compensation claims, the
Company has established a "light duty" return to work program that requires
minimal physical exertion within the Company (dispatch office work) or outside
assignments (e.g., cafeteria help) to customers. The Company's information
system generates weekly workers' compensation loss minimization reports for both
corporate and branch location use.
GOVERNMENT REGULATIONS.
SAFETY PROGRAMS. As an employer, the Company is subject to applicable state
and/or federal statutes and administrative regulations pertaining to job site
safety. Where states do not have a safety program certified by the federal
Occupational Safety & Health Administration ("OSHA"), the Company is subject to
the standards prescribed by the federal Occupational Safety & Health Act and
rules promulgated by OSHA. However, the temporary employees are generally
considered the customer's employees while on the customer's job site for the
purpose of applicable safety standards compliance liability.
In 1995, the Company's accident rate was approximately one incident per
6,000 man hours worked. The Company continues to emphasize safety awareness,
which helps control workers' compensation costs, through training of its
management employees and office staff, safety sessions with employees, issuing
of safety equipment, monitoring of job sites, and communicating with customers
to assure that the job request order is one that can be safely accomplished.
Temporary workers are trained in safety procedures primarily by showing safety
tapes at the beginning of each day. Bulletin boards with safety-related posters
are prominently displayed. "Tailgate" safety training sessions are conducted at
the manager's and regional safety director's discretion.
27
The Company maintains its own inventory of safety equipment at each dispatch
office. Standard equipment includes hard hats, metal tipped boots, gloves, back
braces, ear plugs, and safety goggles. Equipment is checked out to workers as
appropriate. All construction jobs require steel-toed boots and a hard hat. The
manager ensures that workers take basic safety equipment to job sites.
Office personnel are trained to discuss job safety parameters with customers
on incoming work order calls. Managers conduct job site visits for new customer
job orders and periodic "spot checks" for existing customers to review safety
conditions at job sites. Workers are encouraged to report unsafe working
conditions to the Company.
WAGE AND HOUR REGULATION. Labor Ready is required to comply with applicable
state and federal wage and hour laws. These laws require the Company to pay its
employees minimum wage and to pay overtime at applicable rates of pay when the
employee works more than forty hours in a work week. In some states, overtime
pay may be required after eight or ten hours of work in a day.
COMPETITION
The temporary services industry is highly fragmented and highly competitive,
with limited barriers to entry. A large percentage of temporary staffing
companies are local operations with fewer than five offices. Within local or
regional markets, these firms actively compete with the Company for business.
The primary basis of competition among local firms is price and, to a lesser
extent, service. While entry into the market has limited barriers, lack of
working capital frequently limits growth of smaller competitors.
Although there are several very large full-service and specialized temporary
labor companies competing in national, regional and local markets, to date,
those companies have not aggressively expanded in the Company's targeted market
segment. Many of these competitors have substantially greater financial and
marketing resources than those of the Company. One or more of these competitors
may decide at any time to enter or expand their existing activities in the light
industrial market and provide new and increased competition to the Company. The
Company believes that, among the larger competitors, the primary competitive
factors in obtaining and retaining customers are the cost of the temporary
labor, the quality of the temporary workers provided, the responsiveness of the
temporary labor company, and the number and location of offices. The
availability to the Company's customers of multiple temporary service providers
creates significant pricing pressure as competitors compete for the available
demand, and this pricing pressure adversely impacts operating margins.
TRADEMARKS
The Company's business is not presently dependent on any patents, licenses,
franchises, or concessions. "Labor Ready," the "LR" logo and the service mark
"Work Today, Paid Today" are registered with the U.S. Patent and Trademark
Office.
PROPERTIES
The Company leases virtually all of its dispatch offices. Dispatch office
leases generally generally permit the Company to terminate on 30 days notice and
upon payment of three months rent. Certain leases have a minimum one year term
and require additional payments for taxes, insurance, maintenance and renewal
options.
In February 1995, the Company purchased a labor dispatch building which also
serves as a training center and warehouse facility for supplies and storage in
Tacoma, Washington. The Company also owns a 24,000 square foot facility in
Tacoma, Washington which serves as its headquarters and administrative office
building. In early May 1996, the Company agreed, subject to approval of the
Board of Directors and certain of the Company's lenders, to purchase a 44,000
square foot office building and adjoining 10,000 square foot print shop in
Tacoma, Washington to accommodate the Company's continuing expansion. The
Company's prior facility in Tacoma is for sale and is not currently in use. The
Company also owns dispatch buildings in Kent, Washington, and Kansas City,
Missouri. Management believes all of the Company's facilities are currently
suitable for their intended use.
28
LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
employee-related issues and disputes with customers. The Company carries
insurance for actions or omissions of its temporary employees. Since the
temporary workers are under the supervision of the customer or its employees,
the Company believes the terms of its contracts with its customers, which
provide that the customers are responsible for all actions or omissions of the
temporary workers, limit the Company's liability. Nevertheless, any future
claims are subject to the uncertainties related to litigation and the ultimate
outcome of any such proceedings or claims cannot be predicted. See "Risk Factors
-- Liability for Acts of Temporary Workers."
29
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The names, ages and positions of the directors, executive officers and
certain key employees of the Company are listed below along with their business
experience during the past five years. The business address of all executive
officers of the Company is 2156 Pacific Avenue, Tacoma, Washington 98402. All of
these individuals are citizens of the United States. The Company's Board of
Directors currently consists of five directors. Directors are elected at the
annual meeting of shareholders to serve until they resign or are removed, or are
otherwise disqualified to serve, or until their successors are elected and
qualified. Executive officers of the Company are appointed at the Board's first
meeting after each annual meeting of the shareholders. No family relationships
exist among any of the directors or executive officers of the Company, except
that Todd A. Welstad is the son of Glenn A. Welstad.
NAME AGE POSITION
----------------------------------------------------- --------- -----------------------------------------------------
Glenn A. Welstad..................................... 52 Chairman of the Board, Chief Executive Officer and
President
Ralph E. Peterson.................................... 62 Director, Chief Financial Officer, and Assistant
Secretary
Robert J. Sullivan................................... 65 Director
Thomas E. McChesney.................................. 49 Director
Ronald L. Junck...................................... 48 Director and Secretary
Scott J. Sabo........................................ 35 Director of Operations
Todd A. Welstad...................................... 27 Director of Management Information Systems
Keith T. Terrano..................................... 40 Director of Risk Management
GLENN A. WELSTAD has served as the Company's Chairman of the Board of
Directors, Chief Executive Officer and President since February 1988. Prior to
joining the Company, Mr. Welstad was an officer of Body Toning, Inc., W.I.T.
Enterprises, and Money Mailer from February 1987 to March 1989. In 1969 Mr.
Welstad founded Northwest Management Corporation, a holding company for
restaurant operations. Over the course of 15 years, Mr. Welstad expanded the
operations to twenty-two locations in five states, which included eight Hardee's
Hamburger Restaurants as well as pizza and Mexican restaurants. In March 1984,
Mr. Welstad sold his ownership interest in Northwest Management Corporation.
RALPH E. PETERSON has served as a director and Chief Financial Officer and
Assistant Secretary of the Company since January 1996. Prior to joining the
Company he served as Executive Vice President and Chief Financial Officer of Rax
Restaurants, Inc. from December 1991 until August 1995. Rax Restaurants, Inc.
entered Chapter 11 bankruptcy on November 23, 1992 and emerged from bankruptcy
pursuant to a plan of reorganization on November 8, 1993. From April 1983 to his
retirement in December 1991, Mr. Peterson was Executive Vice President and Chief
Financial Officer and a director of Hardee's Food Systems, Inc., a restaurant
company operating and franchising over 4,000 restaurants located throughout the
United States and abroad.
ROBERT J. SULLIVAN has served as a director of the Company since November
1994. Prior to joining the Company he served as a financial consultant of the
Company from July 1993 to June 1994. Mr. Sullivan served as Chief Financial
Officer of Unifast Industries, Inc. from June 1990 to November 1991, and General
Manager of Reserve Supply Company of Long Island from July 1992 to December
1993.
THOMAS E. MCCHESNEY has served as a director of the Company since July 1995.
In January 1996, Mr. McChesney became associated with Bathgate and McColley
Capital, L.L.C. Mr. McChesney is also a director of Ciclo Sports Shop, Inc.,
Firstlink Communications, Inc. and THISoftware Co., Inc. Previously, Mr.
McChesney was an officer and director of Paulson Investment Co. and Paulson
Capital Corporation from March 1977 to June 1995.
RONALD L. JUNCK has served as a director and Secretary of the Company since
November 1995. He is an attorney in Phoenix, Arizona where he has specialized in
business law and commercial transactions since 1974. Mr. Junck serves as legal
counsel to the Company and received $184,269 for legal services during 1995.
30
SCOTT J. SABO has served as Director of Operations of the Company since
February 1995. Mr. Sabo joined the Company June 1990 and held positions within
the Company as a customer service representative, sales manager, branch manager
and area director before being promoted to Regional Director, Eastern Region in
June 1994. Prior to joining the Company he was employed by Labor World, a
national temporary labor service company, from April 1987 to May 1990, as a
branch manager.
TODD A. WELSTAD has served as Director of Management Information Systems of
the Company since October 1994. Mr. Welstad joined the Company in January 1994
as the manager of the Tacoma branch office and in August 1994 was promoted to a
Systems Analyst in the MIS Department. Prior to joining the Company he was
employed as a Technical Supervisor at Micro-Rel, a division of Medtronics from
February 1989 to December 1994.
KEITH T. TERRANO has served as Director of Risk Management of the Company
since April 1996. Prior to joining the Company he was Vice President of
Cornerstone Insurance Company and Senior Director of Risk Management of
Hillhaven Corporation from October 1987 to March 1996.
APPOINTMENT OF DIRECTORS
Pursuant to the terms of the Shareholders Agreement (the "Shareholders
Agreement") entered into as of October 31, 1995, between Allied Investment
Corporation, Allied Investment Corporation II, Allied Capital Corporation II
(collectively referred to herein as "Allied"), Seacoast Capital Partners Limited
Partnership ("Seacoast"), Glenn A. Welstad, John R. Coghlan, Coghlan Family
Corporation, and the Company, Allied and Seacoast may collectively appoint one
of the Company's directors. To date they have not appointed a director.
The Company has established a Compensation Committee and an Audit Committee,
the majority of members of which are independent, outside directors. Messrs.
Junck (Chairman), Sullivan and Welstad are members of the Compensation
Committee, and Messrs. Sullivan, Peterson and McChesney are members of Audit
Committee.
INDEMNIFICATION OF DIRECTORS
The Washington Business Corporation Act (the "Washington Business Act")
provides that a company may indemnify its directors and officers as to certain
liabilities. The Company's Articles of Incorporation and By-laws provide for the
indemnification of its directors and officers to the fullest extent permitted by
law. The effect of such provisions is to indemnify the directors and officers of
the Company against all costs, expenses and liabilities incurred by them in
connection with any action, suit or proceeding in which they are involved by
reason of their affiliation with the Company, to the fullest extent permitted by
law.
31
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock, Preferred Stock, and total voting stock (which
includes the Common Stock and Preferred Stock, the "Voting Stock") as of May 1,
1996, and as adjusted to reflect the sale of the shares of Common Stock offered
hereby, for (i) each person known to the Company to own beneficially 5% or more
of each class of the Company's outstanding Voting Stock, as of May 1, 1996, (ii)
each director of the Company, (iii) each executive officer of the Company
required to be identified as a Named Executive Officer pursuant to Item 402 of
Regulation S-K and (iv) all officers and directors of the Company as a group.
Except as otherwise noted, the named beneficial owner has sole voting and
investment power. See "Management" for a description of each individual's
position with the Company, if any.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1) OFFERING(1)
NAME & ADDRESS (IF APPLICABLE) ----------------------- -----------------------
OF BENEFICIAL OWNER TITLE OF CLASS NUMBER PERCENT NUMBER PERCENT
------------------------------------------- ------------------ ---------- ----------- ---------- -----------
Glenn A. Welstad .......................... Common Stock 1,214,171 20.0% 1,214,171 17.1%
2342 Tacoma Ave. S. Preferred Stock 872,325 68.1 872,325 68.1
Tacoma, WA 98402 Voting Stock 2,086,496 28.4 2,086,496 25.0
Robert J. Sullivan ........................ Common Stock 9,000 * 9,000 *
Preferred Stock 0 0.0 0 0.0
Voting Stock 9,000 * 9,000 *
Thomas E. McChesney (2).................... Common Stock 29,158 * 29,158 *
Preferred Stock 0 0.0 0 0.0
Voting Stock 29,158 * 29,158 *
Ronald L. Junck............................ Common Stock 46,158 * 46,158 *
Preferred Stock 0 0.0 0 0.0
Voting Stock 46,158 * 46,158 *
Ralph E. Peterson (3)...................... Common Stock 20,000 * 20,000 *
Preferred Stock 0 0.0 0 0.0
Voting Stock 20,000 * 20,000 *
John R. Coghlan (4) ....................... Common Stock 530,794 8.7 405,794 5.7
5102 S. Morrill Lane Preferred Stock 0 0.0 0 0.0
Spokane, WA 99223 Voting Stock 530,794 7.2 405,794 4.9
Seacoast Capital Partners (5) ............. Common Stock 341,184 5.3 341,184 0 4.6
Limited Partnership Preferred Stock 0 0.0 341,184 0.0
55 Ferncroft Rd. Voting Stock 341,184 4.4 3.9
Danvers, Massachusetts 01923
Allied Investment Corporation (6) ......... Common Stock 341,184 5.3 341,184 4.6
1666 K St., N.W., Suite 901 Preferred Stock 0 0.0 0 0.0
Washington D.C. 20006 Voting Stock 341,184 4.4 341,184 3.9
Pauline L. Ferrell ........................ Common Stock 118,302 2.0 118,302 1.7
6736 N. 58th Preferred Stock 165,033 12.9 165,033 12.9
Scottsdale, AZ 85253 Voting Stock 283,334 3.9 283,334 3.4
Sandra F. Jacques, Trustee ................ Common Stock 0 0.0 0 0.0
M. Jack Ferrell Trust Preferred Stock 165,032 12.9 165,032 12.9
c/o David Hega Voting Stock 165,032 2.2 165,032 1.2
2800 North Central, #1100
Phoenix, AZ 85004
32
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1) OFFERING(1)
NAME & ADDRESS (IF APPLICABLE) ----------------------- -----------------------
OF BENEFICIAL OWNER TITLE OF CLASS NUMBER PERCENT NUMBER PERCENT
------------------------------------------- ------------------ ---------- ----------- ---------- -----------
Dwight G. Enget ........................... Common Stock 23,900 * 23,900 *
3400 S. Mill Ave., Suite 128 Preferred Stock 78,734 6.1% 78,734 6.1%
Tempe, Arizona 85286 Voting Stock 102,634 1.4 102,634 1.2
All Officers and Directors as a Group (5 Common Stock 1,318,487 21.7 1,318,487 18.7
individuals).............................. Preferred Stock 872,325 68.1 872,325 68.1
Voting Stock 2,190,812 29.8 2,190,812 26.2
------------------------
* Less than 1%.
(1) Beneficial ownership is calculated in accordance with Rule 13d-3(d)(1) of
the Exchange Act of 1934, as amended (the "Exchange Act") and includes
shares of Common Stock issuable upon exercise of options, warrants, and
other securities convertible into or exchangeable for Common Stock
("Convertible Securities") currently exercisable or exercisable within 60
days of May 1, 1996.
(2) Includes 19,158 shares of Common Stock held individually by Thomas E.
McChesney and 10,000 shares of Common Stock held by his wife, Elizabeth R.
McChesney.
(3) Includes currently exercisable options to purchase 10,000 shares of Common
Stock at $11.90 per share.
(4) Includes 75,294 shares of Common Stock held individually by John Coghlan and
455,500 shares of Common Stock held by the Coghlan Family Corporation, a
Washington corporation, of which John Coghlan is President. 125,000 shares
of Common Stock will be sold by the Coghlan Family Corporation under Rule
144 prior to consummation of the offering.
(5) Represents shares of Common Stock issuable upon exercise of a warrant that
is currently exercisable. The exercise price of the warrant is $11.67 per
share and the warrant expires on October 31, 2002.
(6) Represents shares of Common Stock issuable upon exercise of warrants held by
Allied Investment Corporation for 180,828 shares, Allied Investment
Corporation II for 88,707 shares, and Allied Capital Corporation II for
71,649 shares, a family of investment companies whose investments are
managed by Allied Capital Corporation. The exercise price of the warrants is
$11.67 per share and the warrants expire on October 31, 2002.
CERTAIN TRANSACTIONS
In December 1992, two Washington corporations, P.N.L.F., Inc. ("PNLF") and
Labor Ready of So. Calif., Inc. ("LRSC") merged with and into the Company, which
was the surviving corporation. As a result of the merger with PNLF, the Company
acquired the remaining outstanding securities of Labor Ready Franchise
Development Corp., Inc. ("LRFD") with the result that LRFD became a wholly-owned
subsidiary of the Company. Each of PNLF, LRSC and LRFD were owned in part by
Messrs. Glenn A. Welstad, John R. Coghlan, then an officer and director and
beneficial owner of greater than 5% of the Company's Common Stock, and M. Jack
Ferrell (deceased), then a director and owner of more than 5% of the Company's
Common Stock. Consideration for the mergers and the stock purchase was shares of
the Company's Common Stock and shares of the Company's Preferred Stock. Mr.
Ferrell's wife, Pauline Ferrell, owns 118,302 shares of Common Stock and 165,032
shares of Preferred Stock. The M. Jack Ferrell Trust owns 165,032 shares of
Preferred Stock. As a result of these transactions, Mr. Welstad received 361,507
shares of the Company's Preferred Stock and 375,000 shares of the Company's
Common Stock, and Mr. Coghlan and Mr. Ferrell each received 220,043 shares of
the Company's Preferred Stock and 375,000 shares of the Company's Common Stock.
In March 1994, the Company's franchise subsidiary, LRFD, entered into a
franchise agreement with Labor Force of Minnesota, Inc. ("Labor Force"), a
company owned by Glenn A. Welstad's brother-in-law, Myron D. Thompson. LRFD
granted Labor Force a limited, nonassignable license to use the Company's
33
proprietary software and to employ the Company's methods and techniques of doing
business in Minnesota's Hennepin and Ramsey counties. In exchange for these
rights Labor Force paid LRFD royalties, equal to 2.0% of its gross receipts, of
$50,976 and $42,896 for 1994 and 1995.
In 1995, Glenn A. Welstad loaned the Company $70,000 for 20 days at 12.0%
interest and $195,686 for 42 days at 12.0% interest, and John R. Coghlan loaned
the Company $74,000 for 20 days at 12.0% interest and $65,000 for 7 days at
12.0% interest. The loans were unsecured and believed by management to be on
comparable or more favorable terms than those available from unrelated third
parties.
As the Company's Director of Management Information Systems, in 1994, Mr.
Todd A. Welstad was granted options to purchase 4,500 shares of Common Stock at
an exercise price of $2.98 per share. In 1995, Mr. Welstad was granted options
to purchase 1,200 shares at an exercise price of $11.19 per share and 400 shares
at an exercise price of $13.60 per share.
Upon appointment as the Company's Chief Financial Officer, Mr. Ralph E.
Peterson was granted options to purchase 50,000 shares of Common Stock at $11.90
per share.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of preferred stock.
COMMON STOCK
As of May 1, 1996, the Company had 6,066,633 outstanding shares of Common
Stock held by 639 holders of record. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of the shareholders and have
no cumulative voting rights. Holders of Common Stock are not entitled to
preemptive, subscription or sinking fund rights. Subject to preferences that may
be applicable to any then outstanding preferred stock, holders of Common Stock
will be entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. See "Price Range of
Common Stock and Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock will be entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference to any then outstanding preferred stock.
PREFERRED STOCK
The preferred stock is issuable in one or more series, each with such
designations, preferences, rights, qualifications, limitations and restrictions
as the Board of Directors of the Company may determine and set forth in
supplemental resolutions at the time of issuance, without further shareholder
action.
In accordance with the Company's Articles of Incorporation, the Board of
Directors has authorized one series of preferred stock designated as Series A
Preferred Stock, $0.667 par value (the "Preferred Stock"). At May 1, 1996, the
Company had 1,281,123 outstanding shares of the Preferred Stock held by 6
holders of record.
Each share of Preferred Stock entitles the holder thereof to one vote in all
matters submitted to a vote of the shareholders of the Company. The Preferred
Stock votes with the Common Stock as a single class unless the action being
considered involves a change in the rights of the Preferred Stock. The Preferred
Stock bears a cumulative annual dividend rate of 5% accrued on December 31 of
each year, is redeemable at any time at par value plus accumulated dividends at
the option of the Company, and contains a preferential liquidation distribution
equivalent to the par value plus all accumulated but unpaid dividends.
CERTAIN ARTICLES OF INCORPORATION, BYLAWS AND STATUTORY PROVISIONS AFFECTING
SHAREHOLDERS
SPECIAL MEETINGS OF SHAREHOLDERS; SHAREHOLDER ACTION BY WRITTEN CONSENT
The Company's Articles of Incorporation permit any action required or
permitted to be taken by the Company's shareholders to be effected at a duly
called annual or special meeting of shareholders or by unanimous consent in
writing. Additionally, the Articles of Incorporation and Bylaws authorize
special
34
meetings of the shareholders of the Company to be called by any officer, the
Board of Directors or one or more shareholders holding at least 10% of the
shares entitled to vote on any issued proposed to be considered.
REGISTRATION RIGHTS
The Company is obligated to register under the Securities Act of 1933, as
amended, shares of Common Stock underlying outstanding warrants and shares of
Common Stock sold by the Company in prior private placements. In connection with
such obligation, the Company currently has an effective registration statement
covering approximately 2.0 million shares of Common Stock for resale by the
holders thereof. The Company plans to terminate such registration statement in
June 1996 and to file a new registration statement covering such shares after
completion of this offering. See "Risk Factors -- Shares Eligible for Future
Sale."
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for its Common Stock is
TranSecurities International, Inc., located in Spokane, Washington.
35
UNDERWRITING
The underwriters named below (the "Underwriters") acting through their
Representative, Van Kasper & Company, have severally agreed on the terms and
subject to the conditions of an Underwriting Agreement with the Company to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names:
NUMBER OF
NAME OF UNDERWRITER SHARES
----------------------------------------------------------------------------- ----------
Van Kasper & Company.........................................................
----------
Total........................................................................
----------
----------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to receipt and acceptance by them, to their right to reject any
order in whole or in part, and to certain other conditions. The Underwriters are
committed to purchase all of the above shares of Common Stock if any are
purchased.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public initially at the offering price
set forth on the cover page of this Prospectus and to certain dealers at that
price less a concession not in excess of $ per share, and that the Underwriters
and such dealers may reallow to certain dealers, including any Underwriters, a
discount not in excess of $ per share. After the initial offering, the public
offering price, concessions and reallowance to dealers may be changed by the
Representatives as a result of market conditions or other factors.
The Company has granted an option to the Underwriters, exercisable by the
Representative within 45 days after the date of this Prospectus, to purchase up
to 150,000 additional shares of Common Stock at the initial offering price, less
underwriting discounts and commissions. The Representative may exercise the
over-allotment option solely for the purpose of covering over-allotments, if
any, incurred in the sale of the shares of Common Stock offered hereby. To the
extent that the over-allotment option is exercised, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage of the
additional shares as the number of shares to be purchased and offered by that
Underwriter in the above table bears to the total.
The Company, all of its executive officers and directors who own Common
Stock and certain beneficial owners of the Common Stock have agreed, subject to
certain exceptions, not to offer to sell, contract to sell, or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock or
any securities convertible into or exchangeable for shares of Common Stock, now
owned or hereafter acquired, for a period of up to 180 days after the date of
this Prospectus without the prior written consent of the Representative.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Preston Gates & Ellis, Seattle, Washington. Certain legal matters
arising in connection with this offering will be passed upon for the
Underwriters by Ryan Swanson & Cleveland, Seattle, Washington.
36
EXPERTS
The financial statements included in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports and other information with the
Securities and Exchange Commission ("Commission"). Reports, proxy statements,
and other information filed by the Company can be inspected at the public
reference facilities of the SEC, Judiciary Plaza, 450 Fifth Street Northwest,
Washington, D.C. 20549, as well as the following Regional Offices: 7 World Trade
Center, Suite 1300, New York, New York 10048; and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies can be obtained
by mail at prescribed rates. Requests should be directed to the SEC's Public
Reference Section, Judiciary Plaza, 450 Fifth Street Northwest, Washington, D.C.
20549.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto filed with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. The
Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies may be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal office in Washington, D.C. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such reference
to the exhibit for a more complete description of the matter involved.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Securities Exchange Act of 1934, as amended, with the Commission and are
incorporated herein by reference:
1. Annual Report on Form 10-K for the fiscal year ended December 31, 1995;
and
2. All documents filed by the Company pursuant to Sections 13(a), 13(c),
14, and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Common
Stock; such documents shall be deemed to be incorporated by reference in
this Prospectus and to be part hereof from the date of filing such
documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Copies of all documents that are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates) will be provided without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
requests. Requests should be directed to the Assistant Secretary of the Company,
2156 Pacific Avenue, Tacoma, WA 98402, telephone (206) 383-9101.
37
LABOR READY, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and March 31, 1996............................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and for the
Three Months Ended March 31, 1995 and 1996................................................................ F-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and
for the Three Months Ended March 31, 1995 and 1996........................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and for the
Three Months Ended March 31, 1995 and 1996................................................................ F-7
Notes to Consolidated Financial Statements................................................................. F-9
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Labor Ready, Inc.
We have audited the accompanying consolidated balance sheets of Labor Ready,
Inc. and subsidiaries as of December 31, 1994 and 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Labor Ready, Inc. and subsidiaries at December 31, 1994 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
Spokane, Washington BDO Seidman, LLP
May 1, 1996
F-2
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
ASSETS (NOTES 3 AND 5)
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 603,977 $ 5,359,113 $ 2,959,779
Accounts receivable, less allowance for doubtful accounts of $365,927,
$868,607 and $1,100,304 (Notes 3 and 13)............................... 5,162,830 12,182,806 11,636,043
Workers' compensation deposits and credits (Note 2)..................... 1,337,369 1,886,644 2,206,644
Prepaid expenses and other.............................................. 348,814 602,052 875,753
Deferred income taxes (Note 10)......................................... 118,590 698,930 542,000
------------- ------------- -------------
Total current assets.................................................. 7,571,580 20,729,545 18,220,219
------------- ------------- -------------
PROPERTY AND EQUIPMENT (Note 4):
Buildings and land...................................................... 366,920 1,536,086 1,623,321
Computers and software.................................................. 704,150 2,005,985 2,770,920
------------- ------------- -------------
1,071,070 3,542,071 4,394,241
Less accumulated depreciation........................................... 244,497 690,648 839,018
------------- ------------- -------------
Property and equipment, net........................................... 826,573 2,851,423 3,555,223
------------- ------------- -------------
OTHER ASSETS:
Intangible assets, less amortization of $69,020, $114,588 and
$124,483............................................................... 191,431 962,632 952,737
Workers' compensation deposits and credits, less current portion (Note
2)..................................................................... 105,832 1,427,905 2,091,000
Deferred income taxes (Note 10)......................................... 94,366 16,477 99,000
Other................................................................... 122,194 193,653 193,723
------------- ------------- -------------
Total other assets.................................................... 513,823 2,600,667 3,336,460
------------- ------------- -------------
Total assets (Notes 3 and 5).............................................. $ 8,911,976 $ 26,181,635 $ 25,111,902
------------- ------------- -------------
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
F-3
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
----------------------------
1994 1995
------------- ------------- MARCH 31,
1996
-------------
(UNAUDITED)
CURRENT LIABILITIES:
Checks issued against future deposits................................... $ -- $ 514,842 $ 886,833
Accounts payable........................................................ 364,639 1,118,081 1,313,375
Accrued wages and related expenses...................................... 821,487 1,588,147 1,458,105
Workers' compensation claims (Note 2)................................... 708,869 1,943,338 2,051,769
Income taxes payable (Note 10).......................................... 497,000 1,161,000 --
Note payable (Note 3)................................................... 3,160,580 1,591,206 1,428,158
Current maturities of long-term debt (Note 4)........................... 78,291 39,117 41,318
------------- ------------- -------------
Total current liabilities............................................. 5,630,866 7,955,731 7,179,558
------------- ------------- -------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities (Note 4)........................ 244,250 953,937 942,227
Subordinated debt, less unamortized discount of $1,259,377 and
$1,213,303 (Note 5).................................................... -- 8,740,623 8,786,697
Convertible debentures (Note 7)......................................... 75,000 -- --
------------- ------------- -------------
Total long-term liabilities........................................... 319,250 9,694,560 9,728,924
------------- ------------- -------------
Total liabilities..................................................... 5,950,116 17,650,291 16,908,482
------------- ------------- -------------
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.667 par value (Note 8): 5,000,000 shares authorized;
issued and outstanding 1,281,123 shares................................ 854,082 854,082 854,082
Common stock, no par value (Note 9) 25,000,000 shares authorized;
issued and outstanding, 4,971,594, 5,879,133 and 6,030,633 shares.... 3,540,187 7,116,422 7,489,635
Cumulative foreign currency translation adjustment.................... (2,853) (28,707) (33,844)
Retained earnings (accumulated deficit)................................. (1,429,556) 589,547 (106,453)
------------- ------------- -------------
Total shareholders' equity............................................ 2,961,860 8,531,344 8,203,420
------------- ------------- -------------
Total liabilities and shareholders' equity............................ $ 8,911,976 $ 26,181,635 $ 25,111,902
------------- ------------- -------------
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
F-4
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
Revenues from services............... $ 15,658,832 $ 38,950,683 $ 94,361,629 $ 12,617,752 $ 26,093,924
Costs and expenses:
Cost of services................... 12,400,599 30,712,945 76,642,962 10,494,339 22,207,458
Selling, general and
administrative.................... 2,651,702 6,592,555 13,639,034 2,495,051 4,500,319
Interest and other, net.............. 353,569 457,378 866,113 164,386 435,471
------------- ------------- ------------- ------------- -------------
Income (loss) before taxes on income
and extraordinary item.............. 252,962 1,187,805 3,213,520 (536,025) (1,049,324)
Taxes on income (Note 10)............ 31,775 336,000 1,151,713 (182,249) (364,000)
------------- ------------- ------------- ------------- -------------
Income (loss) before extraordinary
item................................ 221,187 851,805 2,061,807 (353,776) (685,324)
Extraordinary item -- forgiveness of
debt (net of income tax effect of
$24,635)............................ 47,821 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss).................... $ 269,008 $ 851,805 $ 2,061,807 $ (353,776) $ (685,324)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Earnings per common share:
Income (loss) before extraordinary
item.............................. $ 0.06 $ 0.19 $ 0.35 $ (.07) $ (.12)
Extraordinary item................. 0.01 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income (loss).................. $ 0.07 $ 0.19 $ 0.35 $ (.07) $ (.12)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average shares
outstanding....................... 3,668,585 4,363,303 5,794,912 5,097,358 5,948,628
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
See notes to consolidated financial statements.
F-5
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
CUMULATIVE
RETAINED FOREIGN
COMMON STOCK PREFERRED STOCK EARNINGS CURRENCY
------------------------ ------------------------ (ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT DEFICIT) ADJUSTMENT
---------- ------------ ---------- ------------ -------------- -----------
BALANCE, January 1, 1993................. 2,524,902 $ 1,819,756 1,504,632 $ 1,003,088 $ (2,606,516) $ --
Net income for the year................ -- -- -- -- 269,008 --
Common Stock exchanged for:
Equipment from related party......... 60,000 8,000 -- -- -- --
Notes................................ 142,500 95,000 -- -- -- --
Services............................. 8,100 2,850 -- -- -- --
Real estate.......................... 49,341 37,500 -- -- -- --
Software............................. 4,500 7,500 -- -- -- --
Common Stock sold for cash............. 22,500 11,250 -- -- -- --
Common Stock options exercised......... 1,079,310 143,908 -- -- -- --
Debentures converted................... 13,158 10,000 -- -- -- --
Preferred Stock dividend............... -- -- -- -- (50,154) --
---------- ------------ ---------- ------------ -------------- -----------
BALANCE, December 31, 1993............... 3,904,311 2,135,764 1,504,632 1,003,088 (2,387,662) --
Net income for the year................ -- -- -- -- 851,805 --
Debentures converted................... 356,843 271,200 -- -- -- --
Common Stock issued from private
placement............................. 712,440 1,130,223 -- -- -- --
Preferred Stock canceled............... -- -- (223,509) (149,006) 149,006 --
Common Stock canceled on lapsing
subscriptions......................... (3,000) (2,000) -- -- -- --
Common Stock issued for services....... 1,500 5,000 -- -- -- --
Foreign currency translation
(unaudited)........................... -- -- -- -- -- (2,853)
Preferred Stock dividend............... -- -- -- -- (42,705) --
---------- ------------ ---------- ------------ -------------- -----------
BALANCE, December 31, 1994............... 4,972,094 3,540,187 1,281,123 854,082 (1,429,556) (2,853)
Net income for the year................ -- -- -- -- 2,061,807 --
Common Stock issued on conversion of
debt.................................. 149,402 382,364 -- -- -- --
Common Stock issued for 401(k) Plan.... 1,197 7,679 -- -- -- --
Common Stock issued from private
placement............................. 14,000 69,998 -- -- -- --
Common Stock issued on warrants
exercised............................. 712,440 1,781,100 -- -- -- --
Common Stock issued on the exercise of
options............................... 30,000 45,000 -- -- -- --
Detachable stock warrants.............. -- 1,290,094 -- -- -- --
Preferred Stock dividend............... -- -- -- -- (42,704) --
Foreign currency translation........... -- -- -- -- -- (25,854)
---------- ------------ ---------- ------------ -------------- -----------
BALANCE, December 31, 1995............... 5,879,133 7,116,422 1,281,123 854,082 589,547 (28,707)
Net loss for the period (unaudited)...... -- -- -- -- (685,324) --
Common Stock issued on the exercise of
options (unaudited)..................... 151,500 373,213 -- -- -- --
Preferred Stock dividend (unaudited)..... -- -- -- -- (10,676) --
Foreign currency translation
(unaudited)............................. -- -- -- -- -- (5,137)
---------- ------------ ---------- ------------ -------------- -----------
BALANCE, March 31, 1996 (unaudited)...... 6,030,633 $ 7,489,635 1,281,123 $ 854,082 $ (106,453) $ (33,844)
---------- ------------ ---------- ------------ -------------- -----------
---------- ------------ ---------- ------------ -------------- -----------
See notes to consolidated financial statements.
F-6
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss):..................................... $269,008 $851,805 $2,061,807 $(353,776) $(685,324)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................ 65,135 178,416 522,436 80,424 204,329
Common stock issued for services..................... 2,850 5,000 -- -- --
Provision for doubtful accounts...................... 119,049 341,799 1,084,526 258,541 1,020,544
Forgiveness of debt, extraordinary................... (72,456) -- -- -- --
Deferred income taxes................................ 47,044 (260,000) (502,451) (100,000) 74,407
Changes in assets and liabilities:
Accounts receivable.................................... (1,045,788) (3,597,793) (8,104,502) (869,908) (473,781)
Workers' compensation deposits and credits............. (177,239) (1,265,962) (1,871,348) (311,374) (983,095)
Prepaid expenses and other............................. (44,224) (234,221) (324,697) (281,264) (273,771)
Accounts payable....................................... 46,353 239,186 753,442 705,236 195,294
Accrued wages and benefits............................. 188,021 535,281 774,339 511,908 (130,042)
Accrued workers' compensation claims................... 173,038 458,938 1,234,469 231,182 108,431
Income taxes payable................................... (20,717) 497,000 664,000 (332,248) (1,161,000)
------------ ------------ ------------ ----------- -------------
Net cash used in operating activities.................... (449,926) (2,250,551) (3,707,979) (461,279) (2,103,998)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (176,383) (549,959) (2,471,001) (396,744) (852,170)
Intangible assets acquired............................. -- (43,501) -- -- --
------------ ------------ ------------ ----------- -------------
Net cash used in investing activities.................... (176,383) (593,460) (2,471,001) (396,744) (852,170)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on note payable......................... 163,771 2,177,409 (1,569,374) (140,015) (163,048)
Checks issued against future deposits.................. -- 514,842 -- 371,991
Proceeds from issuance of common stock................. 11,250 1,130,223 69,998 -- --
Proceeds from warrants exercised....................... -- -- 1,781,100 514,295 --
Proceeds from options exercised........................ -- -- 45,000 -- 373,213
Debt issue costs....................................... -- -- (816,769) -- --
Proceeds from stock subscriptions...................... 13,675 79,325 -- -- --
Proceeds from issuance of convertible debentures....... 356,200 -- -- -- --
Borrowings on long-term debt........................... 10,000 74,000 11,529,951 -- --
Payments on long-term debt............................. (103,075) (189,221) (552,074) (20,532) (9,509)
Dividends.............................................. -- (50,154) (42,704) (10,676) (10,676)
------------ ------------ ------------ ----------- -------------
Net cash provided by financing activities.............. 451,821 3,221,582 10,959,970 343,072 561,971
Effect of exchange rates............................... -- (2,853) (25,854) (11,669) (5,137)
------------ ------------ ------------ ----------- -------------
Net increase (decrease) in cash and cash equivalents... (174,488) 374,718 4,755,136 (526,620) (2,399,334)
Cash and cash equivalents, beginning of period........... 403,747 229,259 603,977 603,977 5,359,113
------------ ------------ ------------ ----------- -------------
Cash and cash equivalents, end of period................. $ 229,259 $ 603,977 $ 5,359,113 $ 77,357 $ 2,959,779
------------ ------------ ------------ ----------- -------------
------------ ------------ ------------ ----------- -------------
See notes to consolidated financial statements.
F-7
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid...................................... $ 344,302 $ 513,497 $ 1,302,929 $ 151,653 $ 506,436
Income taxes paid.................................. $ 46,552 $ 99,000 $ 990,164 $ 250,000 $ 983,315
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for subscriptions, assets
and debt.......................................... $ 278,233 $ -- $ -- $ -- $ --
Issuance of common stock for conversion of
promissory notes.................................. -- -- $ 307,364 $ 40,000 $ --
Contribution of common stock to employer 401(k)
plan.............................................. -- -- $ 7,679 $ -- $ --
Assets acquired in exchange for note............... $ 35,000 -- -- -- --
Debt forgiven...................................... $ 2,456 -- -- -- --
Cancellation of preferred stock.................... -- $ 149,006 -- -- --
Issuance of common stock for conversion of
convertible debentures............................ $ 10,000 $ 271,200 $ 75,000 -- --
Refinance of note payable, net..................... -- $ 2,000 -- -- --
See notes to consolidated financial statements.
F-8
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Labor Ready,
Inc. and its wholly-owned subsidiary Labour Ready Temporary Services Limited
(collectively referred to as "the Company"). The Company's principal business
activity involves providing temporary help services to construction and small
manufacturing companies in the United States and Canada. The Company was
incorporated under the laws of the State of Washington on March 19, 1985.
All intercompany balances and transactions have been eliminated in
consolidation.
B. INTERIM FINANCIAL INFORMATION
The consolidated financial statements at March 31, 1995 and 1996 and for the
three months ended March 31, 1995 and 1996 are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
dates and the operating results and cash flows for those periods. Results for
interim periods are not necessarily indicative of results to be expected for the
entire year.
C. REVENUE RECOGNITION
Revenues from services and the related cost of services are recorded in the
period in which the services are performed. Franchise activity and fees are
minimal.
D. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
remaining maturity of three months or less to be cash equivalents.
E. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets.
F. INTANGIBLE ASSETS
The intangible assets primarily consist of deferred financing costs,
customer lists, and non-compete agreements. Deferred financing costs resulted
from the issuance of subordinated debt, and are being amortized over the life of
the subordinated debt. Amortization of the other intangible assets is computed
using the straight line method over periods not exceeding ten years. Management
evaluates, on an ongoing basis, the carrying value of the intangible assets and
makes a specific provision against the asset when an impairment is identified.
G. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". Deferred income taxes are provided for temporary differences
between the financial reporting and tax basis of assets and liabilities.
Deferred taxes are measured using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse. Tax credits are
accounted for as a reduction of income taxes in the year in which the credit
originates.
H. EARNINGS PER SHARE
The primary earnings per common share was computed by dividing the net
income less preferred stock dividends by the weighted average number of shares
of common stock and common stock equivalents outstanding for all periods
presented. Fully diluted earnings per share does not differ materially from
primary earnings per share. In 1995, the Company declared a three-for-two Common
Stock split, which has been retroactively applied for 1993 and 1994, in the
determination of the weighted average number of shares of Common Stock and
Common Stock equivalents outstanding.
F-9
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Labour Ready Temporary Services Limited are
translated at the rate of exchange in effect on the balance sheet date; income
and expenses are translated at the weighted average rates of exchange prevailing
during the year. The related translation adjustments are reflected in the
accumulated translation adjustment section of the stockholders' equity.
J. WORKERS' COMPENSATION
The Company established provisions for future claim liabilities based on
estimates of the future cost of claims and claim losses (including future claim
adjustment expenses) that have been reported but not settled, and of losses that
have been incurred but not reported. Adjustments to the claims reserve are
charged or credited to expense in the periods in which they are made.
K. MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
L. ADVERTISING COSTS
The Company adopted Statement of Position 93-7, "Reporting on Advertising
Costs" in 1995. This statement was issued by the American Institute of Certified
Public Accountants and requires the costs of advertising to be expensed as
incurred or the first time that the advertising takes place. The adoption of
this standard did not have a significant effect on the financial statements of
the Company.
M. STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which requires that companies measure the cost of stock-based
employee compensation at the grant date based on the value of the award and
recognize this cost over the service period. The value of the stock based award
is determined using the intrinsic value method whereby compensation cost is the
excess of the quoted market prices of the stock at grant date or other
measurement date over the amount an employee must pay to acquire the stock. SFAS
No. 123 is effective for financial statements issued for fiscal years beginning
after December 15, 1995, and is not expected to have a significant impact on the
Company's financial statements.
N. ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This
statement requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995, and is not
expected to have a significant impact on the Company's financial statements.
O. RECLASSIFICATION
Certain items in the 1994 and 1993 consolidated financial statements have
been reclassified to conform to the classifications used in 1995.
F-10
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended December 31, 1993, 1994, and 1995 and
For the Three Months Ended March 31, 1996
Information at March 31, 1996 and
For the Three Months Ended March 31, 1996 is Unaudited
2. WORKERS' COMPENSATION CREDITS RECEIVABLE
As required by the laws of the various states in which Labor Ready does
business, the Company provides workers' compensation insurance to its temporary
workers and office staff. Each state has specific workers' compensation programs
and requirements regarding the deposit of funds for the payment of workers'
compensation claims and related claim settlement and administrative expenses. In
Washington, Nevada and Ohio (the "Monopolistic States"), the Company is required
to make payments at rates established by each state based on the job
classification of the insured workers and previous claims experience of the
Company. These payments are made directly to a workers' compensation
administrator employed by the State, who in turn disburses funds for the
settlement of claims and related expenses. Amounts paid to these state
administered programs which are not disbursed for claims and related claim
settlement and administrative expenses are returned to the Company. At December
31, 1994 and 1995, the Company recorded workers' compensation deposits and
credits receivables from the Monopolistic States of $312,626 and $967,644.
Workers' compensation claims in the remaining states (the "Non-Monopolistic
States") are managed by a third party administrator engaged by the Company.
These Non-Monopolistic States allow a fronting insurance company licensed to do
business in those states to guarantee Labor Ready's ability to pay these claims
and related expenses as they occur, and allow the claims to be managed by the
Company or selected claims administrators. For Non-Monopolistic State workers'
compensation, the Company purchased "stop loss" insurance coverage for most
individual claims in excess of $250,000 and for 1995 aggregate losses in excess
of $5.4 million.
In 1995, the Company deposited $4.6 million with a foreign off-shore company
for the payment of workers' compensation claims and related expenses on claims
originating in the Non-Monopolistic States. At December 31, 1995, $2.3 million
remained on deposit for the payment of future claims and is recorded as workers'
compensation deposits and credits. Estimated incurred losses and related
settlement and administrative expenses to be paid from those deposits of
$1,063,000 are recorded as current workers' compensation claims payable at
December 31, 1995. Through March 31, 1996, an additional $1.5 million was
deposited with the foreign insurance company and at March 31, 1996,
approximately $3.3 million remained on deposit for the payment of future claims
and claims settlement expenses which were estimated by the Company at $1.3
million.
In 1994, the workers' compensation claims for Non-Monopolistic States were
managed by a domestic third party administrator and insured by the various
states in which the Company employed workers. Workers' compensation expense of
$3,126,601 and $5,907,771 was recorded as a component of cost of services in
1994 and 1995.
3. NOTE PAYABLE
The Company pledged its accounts receivable to a private financing company
for an accounts receivable revolving credit line. On October 31, 1995, the
Company renegotiated its loan agreement which changed the nature of the
borrowings to an asset based loan limited to the lesser of 80% of eligible
receivables (as defined in the credit agreement) or $5,000,000. Borrowings under
the line, which expired on April 30, 1996, were secured by the Company's
accounts receivable. Interest on borrowings was charged at prime plus two
percent plus a facility fee of one percent per annum and an administrative fee
equal to one-fifth of one percent per month. The agreement required compliance
with certain financial covenants principally relating to working capital, debt
to equity, and dividend payment restrictions. As of December 31, 1995, the
Company was in compliance with the covenants except for the dividend payment
restrictions, for which a waiver was obtained.
F-11
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
3. NOTE PAYABLE (CONTINUED)
On February 15, 1996, the Company entered into an agreement with US Bank to
provide the Company with a $10,000,000 revolving line of credit that carries an
interest rate of prime plus 1/4% (8.5% at March 31, 1996), and a maturity date
of September 30, 1996. At the option of the Company, the interest rate can be
fixed at the rate in effect as of the date this option is exercised. This
agreement replaced the Company's former line of credit which was repaid in
February 1996. The line of credit is collateralized by all the Company's
accounts, chattel paper, contract rights and general intangibles.
Short-term borrowing activity was as follows:
DECEMBER 31,
------------------------
1994 1995
----------- -----------
Balance outstanding at year-end............................................. $ 3,160,580 $ 1,591,206
Stated interest rate at year-end, including applicable fees................. 11.25% 11.95%
Maximum amount outstanding at any month end................................. $ 4,483,762 $ 7,731,789
Average amount outstanding.................................................. $ 2,898,549 $ 5,907,364
Weighted average interest rate during the year, including applicable fees... 15.27% 16.49%
The average amount outstanding and the weighted average interest rate during
the year were computed based upon the average daily balances and rates.
4. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1994 and 1995:
DECEMBER 31,
--------------------
1994 1995
--------- ---------
Mortgage note payable -- secured by a building in Tacoma, Washington, payable at
$4,721 per month through May 2005, including interest at 9.71%.................. $ -- $ 523,124
Mortgage note payable -- secured by a building in Tacoma, Washington, payable at
$1,736 per month through January 2015, including interest at 8.5%............... -- 196,707
Mortgage note payable -- secured by a building in Tacoma, Washington, payable at
$1,637 per month through February 2004, including interest at 8%................ 122,589 112,366
Mortgage note payable -- secured by a building in Kansas City, Missouri, payable
at $988 per month through June 2005 including interest at 10.5%................. -- 70,757
Mortgage note payable -- secured by a building in Kent, Washington, payable at
$1,142 per month through January 2000, including interest at 9%................. 55,000 46,671
Mortgage note payable -- secured by a building in Kansas City, Missouri, payable
at $601 per month through March 2004, including interest at 8%.................. 46,999 43,429
Other notes payable.............................................................. 97,953 --
--------- ---------
Long-term debt................................................................... 322,541 993,054
Less current maturities.......................................................... 78,291 39,117
--------- ---------
Long-term debt, less current maturities.......................................... $ 244,250 $ 953,937
--------- ---------
--------- ---------
F-12
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
4. LONG-TERM DEBT (CONTINUED)
Scheduled long-term debt maturities at December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
-------------------------------------------------------------------------- ---------
1996...................................................................... $ 39,117
1997...................................................................... 45,360
1998...................................................................... 47,690
1999...................................................................... 52,097
2000...................................................................... 43,881
Thereafter................................................................ 764,909
---------
Total............................................................... $ 993,054
---------
---------
5. SUBORDINATED DEBT
On October 31, 1995, the Company issued subordinated debt with detachable
stock warrants in exchange for $10,000,000. The debt, which is secured by
substantially all assets of the Company including a key man life insurance
policy, bears interest at 13% and is to be repaid in 17 quarterly installments
of $588,235 commencing in October 1998. The Company recorded a debt discount and
allocated $1,259,377 of the proceeds to the value of the detachable stock
warrants (see note 9). In connection with arranging the debt agreement, the
Company incurred costs of approximately $800,000 which is included in other
assets and is being amortized over the life of the debt. The debt agreement
contains various financial covenants, primarily related to minimum net worth,
capital additions and cash flow requirements, with which the Company was in
compliance at December 31, 1995 and March 31, 1996.
Scheduled maturities of the subordinated debentures at December 31, 1995 are
as follows:
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------------------- ------------
1996................................................................... $ 0
1997................................................................... 0
1998................................................................... 588,235
1999................................................................... 2,352,940
2000................................................................... 2,352,940
Thereafter............................................................. 4,705,885
------------
Total............................................................ 10,000,000
Less unamortized discount.............................................. 1,259,377
------------
Subordinated debt, net of discount..................................... $ 8,740,623
------------
------------
6. RELATED PARTY DEBT
In 1995, officers of the Company provided cash to the Company in exchange
for short term notes payable. These notes payable aggregated $424,687 and
carried an interest rate of 12%. These notes payable were paid in full during
1995.
In January 1993, officers of the Company used $143,908 of the related
long-term debt due related parties outstanding at December 31, 1992 to exercise
Common Stock options. The officers forgave $72,456 of this debt which is
reflected as an extraordinary item in 1993.
F-13
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
7. CONVERTIBLE DEBENTURES
In 1993, the Company sold $356,200 of convertible debentures. The debentures
were convertible into Common Stock at a price of $.76 per share through June 30,
1994 with the conversion price increasing $.09 on June 30 of each subsequent
year through 1998. In 1994, $271,200 of the debentures was converted into
356,843 shares at $.76 per share. In 1995, the remaining $75,000 of convertible
debentures was converted into 87,893 shares of Common Stock at $.85 per share.
8. PREFERRED STOCK
The Company has authorized 5,000,000 shares of blank check Preferred Stock.
The Preferred Stock is issuable in one or more series, each with such
designations, preferences, rights, qualifications, limitations and restrictions
as the Board of Directors of the Company may determine and set forth in
supplemental resolutions at the time of issuance, without further shareholder
action.
The initial series of Preferred Stock of the corporation authorized by the
Board of Directors in accordance with the Articles of Incorporation, was
designated as Series A Preferred Stock. At December 31, 1994 and 1995, the
Company had 1,281,123 outstanding shares of the Series A Preferred Stock with
the following terms:
Par value $0.667, with each share of Series A Preferred Stock entitled to
one vote in all matters submitted to a vote of the shareholders of the Company.
The Series A Preferred stock will vote on par with the Common Shares as a single
class unless the action being considered involves a change in the rights of the
Series A Preferred Stock. The Series A Preferred Stock bears a cumulative annual
dividend rate of five percent accrued on December 31 of each year, is redeemable
at par value plus accumulated dividends at the option of the Company at any time
after December 31, 1994, and contains an involuntary preferential liquidation
distribution equivalent to the par value plus all accumulated dividends
remaining unpaid.
In February 1996, the Board of Directors authorized a three-for-two
Preferred Stock split. This Preferred Stock split was effected in the form of
three shares of Preferred Stock issued for every two shares of Preferred Stock
outstanding as of the date of declaration. All applicable share and per share
data have been adjusted for the stock split.
During 1994, 223,509 shares of Preferred Stock outstanding were canceled as
a result of settlement of litigation. There is no established market for the
Company's Preferred Stock and management estimated the value of these canceled
shares to be insignificant.
A Preferred Stock dividend in the amount of $42,704 was accrued December 31,
1994 and 1995, and paid in January 1995 and 1996. At March 31, 1996, the accrued
Preferred Stock dividend was $10,676.
9. COMMON STOCK
In 1995, the Board of Directors granted options to purchase 54,900 shares of
the Company's Common Stock at a price equal to 85% of the Common Stock's bid
price at the date of grant ($5.45 to $13.60 per share) and in February 1996, the
Board of Directors granted additional options to purchase 50,000 shares of
Common Stock under the same terms previously described. These options are 20%
vested on the date of grant and the remainder will vest evenly over a four year
period beginning one year from the date of grant and generally expire five years
from the date of grant.
F-14
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
9. COMMON STOCK (CONTINUED)
In November 1995, the Board of Directors declared a three-for-two Common
Stock split. This Common Stock split was effected in the form of three shares of
Common Stock issued for every two shares of Common Stock outstanding, as of the
date of declaration. All applicable share and per share data have been adjusted
for the stock split.
In 1994, the Board of Directors granted options to purchase 226,500 shares
of the Company's Common Stock. Of these options, 46,500 are exercisable at 85%
of the Common Stock's bid price at the date of grant ($2.27 to $4.82 per share).
The options will vest evenly over a four year period beginning one year from the
date of grant and generally expire five years from the date of grant. The
remaining 180,000 of stock options outstanding at December 31, 1994 are
exercisable at prices at or above the Common Stock's market price at the date of
grant ($1.83 to $5.00 per share). These options were fully vested upon grant and
expire two years from the date of grant.
On September 30, 1994 and October 31, 1994, the Company issued 287,700 and
424,740 shares of Common Stock, respectively, for $1.67 per share in a private
placement. Each share of Common Stock issued included a detachable warrant for
one share of Common Stock. All of these warrants were exercised in March 1995 at
a price of $2.50 per share.
In connection with the issuance of $10,000,000 of subordinated debt in 1995
(see Note 5), the Company issued warrants to purchase 742,368 shares of Common
Stock at an exercise price of $11.67 per share. The warrants expire in October
2002.
10. INCOME TAXES
Temporary differences which gave rise to the deferred tax assets
(liabilities) consisted of the following at December 31, 1994 and 1995:
DECEMBER 31,
------------------------
1994 1995
----------- -----------
Allowance for doubtful accounts............................................... $ 143,635 $ 323,990
Prepaid expenses.............................................................. (114,277) (161,385)
Workers' compensation credits receivable...................................... (125,050) (360,931)
Workers' compensation claims.................................................. 153,475 721,895
Net operating loss carryforwards.............................................. 146,653 126,985
Vacation accrual.............................................................. -- 20,515
Foreign net operating loss carryforwards...................................... -- 75,166
Other, net.................................................................... 8,520 (30,828)
----------- -----------
Total deferred tax assets, net................................................ 212,956 715,407
Less non-current deferred tax assets, net..................................... 94,366 16,477
----------- -----------
Current deferred tax assets, net.............................................. $ 118,590 $ 698,930
----------- -----------
----------- -----------
The Company has assessed its past earnings history and trends, budgeted
sales, expiration dates of loss carryforwards, and its ability to implement tax
planning strategies which are designed to accelerate or increase taxable income.
Based on the results of this analysis, no valuation allowance has been
established as management believes that it is more likely than not that the
deferred tax asset will be realized.
F-15
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
10. INCOME TAXES (CONTINUED)
As of December 31, 1995, the Company has net operating loss carryforwards
totaling $340,444, limited to use of $26,188 per year, the majority of which
expire in 2006.
The provision (benefit) for income taxes consists of:
DECEMBER 31,
------------------------------------
1993 1994 1995
--------- ----------- ------------
Current:
Federal................................................................... $ -- $ 506,919 $ 1,419,728
State..................................................................... 9,366 89,081 234,436
--------- ----------- ------------
Total current............................................................... 9,366 596,000 1,654,164
--------- ----------- ------------
Deferred:
Federal................................................................... 47,044 (221,074) (482,051)
State..................................................................... -- (38,926) (20,400)
--------- ----------- ------------
Total deferred.............................................................. 47,044 (260,000) (502,451)
--------- ----------- ------------
Total taxes on income....................................................... $ 56,410 $ 336,000 $ 1,151,713
--------- ----------- ------------
--------- ----------- ------------
A reconciliation between taxes computed at the United States federal
statutory tax rate, and the consolidated effective tax rate is as follows:
DECEMBER 31,
----------------------------------------------------------------------
1995
1993 1994 -----------------------
--------------------- ---------------------- %
AMOUNT % AMOUNT % AMOUNT --
---------- --- ----------- --- ------------
Income tax expense based on statutory rate.............. $ 110,642 34 $ 403,853 34 $ 1,092,597 34
Increase (decrease) resulting from:
State income taxes, net of federal benefit............ 71,268 6 106,046 3
Change in valuation allowance......................... (157,128) (13) --
Utilization of net operating losses not previously
benefited.............................................. (58,794) (18) -- (46,930) (1)
Other, net.............................................. 4,562 1 18,007 1 --
-- -- --
---------- ----------- ------------
Total taxes on income................................... $ 56,410 17 $ 336,000 28 $ 1,151,713 36
-- -- --
-- -- --
---------- ----------- ------------
---------- ----------- ------------
11. COMMITMENTS AND CONTINGENCIES
The Company rents certain properties for temporary labor dispatch
operations. The leases generally provide for termination on 30 days notice and
upon payment of three months rent. Certain of these leases have 1 year minimum
terms and require additional payments for taxes, insurance, maintenance and
renewal options. Lease commitments for 1996 at December 31, 1995 total $358,000.
Lease expenses for the years ended December 31, 1993, 1994 and 1995 and the
three months ended March 31, 1995 (unaudited) and 1996 totaled $162,000,
$380,000, $1,113,000, $198,000, and $396,000, respectively.
The Company is, from time to time, involved in various lawsuits arising in
the ordinary course of business which will not, in the opinion of management,
have a material effect on the Company's results of operations.
F-16
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Board of Directors entered into an executive employment agreement with a
key officer of the Company. The agreement is for a period of time commencing on
October 31, 1995, and ending December 31, 1998, and which contains certain
restrictions on the covered employee. Officer compensation under this agreement
has been set by the Board at $375,000 per year and shall be increased annually
on the first of each calendar year to 110% of the preceding years' salary.
12. RETIREMENT PLAN
Effective October 1, 1994, the Company established a 401(k) savings plan for
qualifying employees. Employee contributions to the 401(k) plan are matched by
the Company $0.25 for every $1 up to the legal maximum eligible employee's gross
earnings. Employees are eligible the calendar quarter following the completion
of one year of service and are fully vested in the 401(k) plan after five years
of service. The amount charged to expense under the 401(k) plan totaled $7,800
and $48,150 for the years ended December 31, 1994 and 1995.
13. VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts activity was as follows:
DECEMBER 31,
-------------------------
1994 1995
----------- ------------
Balance at beginning of year................................................. $ 149,361 $ 365,927
Charged to expense........................................................... 341,799 1,084,526
Write-offs, net of recoveries................................................ (125,233) (581,846)
----------- ------------
Balance at end of year....................................................... $ 365,927 $ 868,607
----------- ------------
----------- ------------
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
were as follows:
DECEMBER 31,
------------------------------------------------------
1994 1995
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Cash and cash equivalents................................ $ 603,977 $ 603,977 $ 5,359,113 $ 5,359,113
Short-term borrowings.................................... 3,160,580 3,160,580 1,591,206 1,591,206
Long-term debt........................................... 322,541 304,248 993,054 1,012,248
Subordinated debt........................................ -- -- 8,740,623 8,709,000
Warrants................................................. -- -- -- 1,290,000
The following methods and assumptions were used by the Company in estimating
fair values for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Short-term borrowings: The carrying amounts of the short-term borrowings
approximates fair value due to the short-term maturity of the debt.
F-17
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996
INFORMATION AT MARCH 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Long-term debt: The fair value of the Company's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same maturities.
Subordinated debt: The fair value of the subordinated debt, representing the
amount at which the debt could be exchanged on the open market, are determined
based on the Company's current incremental borrowing rate for similar types of
borrowing arrangements.
Warrants: The fair value of the warrants is based on the difference between
the face value of the related debt and the present value of the future stream of
debt payments.
F-18
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 11
Price Range of Common Stock and Dividend
Policy........................................ 11
Capitalization................................. 12
Selected Consolidated Financial Information.... 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 14
Business....................................... 21
Management..................................... 30
Principal Shareholders......................... 32
Certain Transactions........................... 33
Description of Capital Stock................... 34
Underwriting................................... 36
Legal Matters.................................. 36
Experts........................................ 37
Available Information.......................... 37
Incorporation of Certain Documents By
Reference..................................... 37
Index to Consolidated Financial Statements..... F-1
1,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
VAN KASPER & COMPANY
JUNE , 1996
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