UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 [FEE REQUIRED]
For the year ended December 31, 1997.
-----------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------- ----------
Commission File Number 0-23828
LABOR READY, INC.
-----------------
(Exact name of registration as specified in its Charter)
Washington 91-1287341
- ---------------------------------------- ---------------------------------------
(State of Incorporation of Organization) (I.R.S. Employer Identification Number)
1016 S. 28th Street, Tacoma, Washington 98409
- ------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(253) 383-9101
-------------------------------
(Registrant's Telephone Number)
Securities Registered Under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
- ----------------------------------------------------------------------------------------
Securities Registered Under Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, No Par Value The Nasdaq Stock Market
- -----------------------------------------------------------------------------------------
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
---
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the last ninety days. YES x NO .
--- ---
The aggregate market value (based on the Nasdaq quoted closing price) of the
common stock held by non-affiliates (15,250,459 shares) of the Registrant at
March 18, 1998 was approximately $514,702,991. As of March 18, 1997, there were
18,461,072 shares of the Registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Form 10 filed on July 5, 1994 and the Current Reports on
Form 8-K filed on September 25, 1997 and January 6, 1998 are incorporated by
reference into Parts II and IV.
LABOR READY, INC.
FORM 10-K
PART I.
ITEM 1. BUSINESS
Information in this Annual Report on Form 10-K includes forward-looking
statements, which are often identified by the words "believes", "anticipates"
and similar expressions. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Factors which could affect the Company's financial results are
described below and in Item 7 of this report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrences of unanticipated events.
INTRODUCTION
Labor Ready, Inc. (the "Company"), incorporated in Washington in 1985, is
a leading, national provider of temporary workers for manual labor jobs. The
Company's customers are primarily businesses in the construction, freight
handling, warehousing, landscaping and light manufacturing industries. These
businesses require workers for lifting, hauling, cleaning, assembling,
digging, painting and other types of manual or unskilled work. The Company
has rapidly grown from eight dispatch offices in 1991 to 316 dispatch offices
at December 31, 1997. All of the growth in dispatch offices was achieved by
opening Company-owned locations rather than through acquisitions. The
Company's revenues have grown from $6.0 million in 1991 to $335.4 million in
1997. This revenue growth has been generated both by opening new dispatch
offices and by continuing to increase sales at existing dispatch offices. In
1997, the average cost to open a new dispatch office was approximately
$33,000 and dispatch offices opened in 1997 typically generated revenues
sufficient to cover their operating costs in two to six months. In 1997, the
average revenue per dispatch office open for more than one full year was
approximately $1.4 million ($1.3 million in 1996).
INDUSTRY OVERVIEW
The temporary staffing industry has grown rapidly in recent years as
companies have used temporary employees to control personnel costs and to
meet fluctuating personnel needs. According to the Staffing Industry Report
(May 1997), the United States' market for the industrial segment of the
temporary staffing marketplace (which includes the short-term, light
industrial market that the Company serves) grew at a compound annual growth
rate of approximately 18% from approximately $5.0 billion in 1991 to
approximately $13 billion in 1997. The Company believes the short-term light
industrial segment of the temporary staffing industry is highly fragmented
and presents opportunities for larger, well capitalized companies to
effectively compete, mainly through the development of information systems
which efficiently process a high volume of transactions and coordinate
multi-location activities, and the management of workers' compensation costs.
Historically, the demand for temporary workers has been driven primarily by
the need to satisfy peak production requirements and to temporarily replace
full-time employees absent due to illness, vacation or abrupt termination. More
recently, competitive pressures have forced businesses to focus on reducing
costs, including converting fixed, permanent labor costs to variable or flexible
costs. The use of temporary workers typically shifts employment costs and risks,
such as workers' compensation and unemployment insurance and the possible
adverse effects of changing employment regulations, to temporary staffing
companies, which can allocate those costs and risks over a larger pool of
employees and customers. In addition, through the use of temporary employees,
businesses avoid the inconvenience and expense of hiring and firing regular
employees.
COMPANY STRATEGY
The Company's goal is to maintain and enhance its status as a leading,
national provider of temporary workers for manual labor jobs. Key elements of
the Company's strategy to achieve this objective are as follows:
- Aggressively Open New Dispatch Offices. The Company's strategy is to
increase revenues by rapidly expanding its network of dispatch offices.
The Company plans to open approximately 167 additional dispatch offices
prior to the end of 1998, and an additional 200 dispatch offices in
1999.
2
- Increase Revenues from Exsisting Dispatch Offices. As each dispatch
office matures, the Company attempts to increase its revenues by
expanding sales to existing customers and by aggressively expanding the
number and mix of customers served. More experienced area directors
and district managers assist the dispatch office general manager in
this process. The Company is also developing and implementing
coordinated sales and marketing strategies designed to complement
these efforts, including the development of national accounts, and
targeted direct mail campaigns.
- Improve Operating Efficiencies and Reduce Operating Costs. Due to the
short-term temporary labor market's extensive fragmentation, the
Company believes its national presence provides it with key operating
efficiencies, competitive advantages (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 its dispatch offices. In addition, the
Company has designed and implemented a proprietary management
information system that efficiently manages an extensive, Company-wide
employee, payroll, sales and customer database and provides management
with valuable real-time management reporting.
- Provide Superior Service. The Company emphasizes customer
responsiveness and maintains a commitment to providing a superior
quality of service through policies such as opening offices no later
than 5:30 a.m., 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. With the introduction of an automated Cash Dispensing
Machine ("CDM") at each dispatch office in 1998, workers' will find the
Company's policy of "Work Today, Cash Today" even more appealing.
- Aggressively Recruit Temporary Workers. Beginning in 1998, the Company
will offer cash dispensing machines at all of its dispatch offices.
With the CDMs in operation, workers will have a choice of a daily
paycheck or cash payment through the CDM. The Company retains the
change on each worker's daily pay plus $1 for the service. Management
believes the CDM program will enhance the Company's ability to attract
temporary workers. In 1997, the Company wrote approximately 3.8 million
payroll checks for its temporary workers. Implementation of the CDMs is
expected to significantly reduce the number of payroll checks processed
by the Company.
The Company intends to continue to focus on the short-term, light
industrial manual labor 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 other operating efficiencies not available to its smaller
competitors and by rapidly expanding through opening new dispatch offices and
increasing revenue at existing dispatch offices.
DISPATCH OFFICE EXPANSION
The Company has rapidly grown from 17 dispatch offices in 1993 to 316
dispatch offices at December 31, 1997. The Company's expansion has been
achieved primarily by opening Company-owned dispatch offices. 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. The information below
does not include four Labor Ready franchised dispatch offices located in the
Minneapolis/St. Paul, Minnesota metropolitan area and one franchised dispatch
office located in Fargo, North Dakota.
Labor Ready Dispatch Offices
by Geographic Region
AT DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
Central............ 4 12 28 45 64
Midwest............ -- 9 17 47 74
Northeast.......... -- -- 1 10 27
Southeast.......... -- 1 11 34 56
West............... 13 25 45 60 87
Canada............. -- 4 4 4 8
----- ----- ----- ----- -----
Total.......... 17 51 106 200 316
----- ----- ----- ----- -----
----- ----- ----- ----- -----
3
The Company currently anticipates opening 167 dispatch offices during
1998, and 200 dispatch offices in 1999. Dispatch office openings will be
primarily in the Northeast, Southeast, Midwest and California. The Company
analyzes acquisition opportunities, and from time to time, may pursue
acquisitions in certain circumstances and may also accelerate expansion based
on future developments.
In 1994, the Company licensed one franchisee in Minnesota, who now
operates five locations, four in Minneapolis/St. Paul and one in Fargo, North
Dakota. The Company has not pursued, and does not intend to grant, any
additional franchises. Revenues generated from franchised dispatch offices
have not been significant during the periods presented herein.
ECONOMICS OF DISPATCH OFFICES. The Company has standardized the process
of opening dispatch offices. In 1997, the average aggregate cost of opening a
new dispatch office was approximately $33,000. Approximately $18,000 of these
costs includes salaries, recruiting, testing, training, lease and other
related costs, which are capitalized as dispatch office pre-opening costs and
amortized using the straight-line method over two years. The remaining
approximately $15,000 of the cost of opening a dispatch office includes
computer systems and other equipment related costs and leasehold
improvements. These costs are expected to increase in 1998 to approximately
$50,000 per dispatch office as the Company adds a CDM to each dispatch
office, purchases more sophisticated computer and other office systems, and
leases larger dispatch offices. 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 1997, dispatch offices open for at least one full year
generated average annual revenue of approximately $1.4 million ($1.3 million
in 1996) or approximately $27,000 per dispatch office, per week ($25,000 per
dispatch office, per week in 1996).
CRITERIA FOR NEW DISPATCH OFFICES. Labor Ready identifies desirable
areas for locating new dispatch offices with an economic model that analyzes
the potential supply of temporary workers and customer demand based on a zip
code resolution of employment figures, demographics and the relative distance
to the nearest Labor Ready dispatch office. In addition, the Company locates
dispatch offices in areas convenient for its temporary workers, which are on
or near public transportation, and have parking available. After the Company
establishes a dispatch office in a metropolitan area, the Company usually
clusters additional locations within the same area. Multiple locations in a
market reduce both opening costs and operating risk for new dispatch offices
because direct mail and other advertising costs are spread among more
dispatch offices and because the new dispatch office benefits from existing
customer relationships and established Labor Ready brand recognition.
DISPATCH OFFICE MANAGEMENT. The Company believes that the key factor
determining the success of a new dispatch office is identifying and retaining
an effective dispatch office general manager. Each general manager has
primary responsibility for managing the operations of the dispatch office,
including the recruiting and daily dispatch of temporary workers, sales and
accounts receivable collection. The Company pays monthly bonuses to its
general managers based on accounts receivable collections 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 a profiling system to screen, test,
and qualify prospective general managers. The Company commits substantial
resources to the training, development, and operational support 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 job site, on time, and ready to work.
During the early morning hours, the general manager and an assistant
coordinate incoming customer work orders, assign the available workers to the
job openings for the day, and arrange transportation to the job site. Prior
to dispatch, a branch employee checks to make sure workers have the basic
safety equipment required for the job, such as boots, back braces, hard hats,
or safety goggles, all of which are provided at no charge to the worker and
the customer. The customer provides additional safety and other equipment, if
required. New assignments are filled from a daily sign-in sheet, considering
customer requests for specific temporary workers on repeat work orders or new
engagements.
4
Workers who pass on a particular job are moved to the bottom of the list.
Most work assignments have been scheduled in advance; a majority of which are
repeat work orders from customers. However, a significant portion of job
openings are requested on short notice, often the same day as the workers are
needed at the job site.
The workers are provided with a work order, which is endorsed by the
customer to confirm work performance, and which must be presented at the
dispatch office in order to receive payment for the hours worked. Workers are
generally paid daily by check, and with the addition of a CDM at each
dispatch office, workers will have the choice of being paid each day in cash.
Computer systems at each dispatch office perform the calculations necessary
to determine the wages, less taxes and applicable withholdings, and print
security-controlled checks, which are distributed to each worker.
Alternatively, the system will enable a disbursement from the CDM for the
worker's net pay, less the change and $1 for the CDM service.
Dispatch offices generally open early, usually by 5:30 a.m., with some
open 24 hours (depending on volume), 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 a work-related illness or injury, to
obtain a signed "Condition of Employment" statement, and to comply with
applicable immigration requirements.
CUSTOMERS. The Company's customers are primarily businesses that require
workers for lifting, hauling, cleaning, assembling, digging, painting and
other types of manual or unskilled work. The Company's customers are
primarily businesses in the construction, freight handling, warehousing,
landscaping and light manufacturing industries. Over the past several years,
the Company has been diversifying its customer base to include more customers
in the retail, wholesale, sanitation, printing, and hospitality industries.
New dispatch offices initially target virtually all businesses in its
market area with a direct mail campaign. Dispatch general managers, and the
regional and national sales force are responsible for following up the direct
mail campaign with telephone or personal calls. Frequently, a new dispatch
office will have a high concentration of customers in the construction
industry. As dispatch offices mature, the customer base broadens and the mix
of work diversifies. Many customers have elements of seasonality in their
workflow, especially customers in the construction and landscaping
industries. The Company currently derives its business from a large number of
customers, and is not dependent on any single large customer for more than 2%
of its revenues. During 1997, the Company's ten largest customers accounted
for sales of $20.9 million, or 6.2% of total revenues ($10.3 million, or 6.3%
of total revenues in 1996). 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 1997, the Company provided temporary workers to in excess of 70,000
customers. Labor Ready filled more than 2.8 million work orders in 1997 (1.4
million in 1996).
Many customers use Labor Ready to screen prospective employees for future
permanent hires. Because Labor Ready does not charge a fee if a customer
hires a Company worker, customers on occasion send prospective employees to
the Company with a specific request for temporary assignment to their
business. Customers thereby have the opportunity to observe the prospective
employee in an actual working situation, minimizing the expense of employee
turnover and personnel agency fees.
BILLING AND COLLECTIONS. The Company has implemented an automated credit
and collections system that allows each dispatch office to establish a credit
limit for new customers by telephonically accessing a computer based credit
system. Initial credit limits are based on a credit-scoring matrix developed
by the Company. No workers are dispatched without using this system. Credit
limits range from COD to $100,000. The credit department, using other credit
reporting agencies, bank/trade references and balance sheet analysis, reviews
and approves additional credit extensions beyond those recommended by this
system. Once a customer has reached 75% of its credit limit, the customer
screen on the Company's information system has a red warning to alert the
dispatch office to more closely monitor the activity of the customer.
5
SALES AND MARKETING. Each dispatch office is responsible for its own
sales and marketing efforts in its local market area. The dispatch office
general manager is primarily responsible for sales and customer service, with
all branch employees being involved in sales and customer relations. The
Company purchases a direct marketing database, and from a centralized direct
mail department, conducts an intensive direct-mail campaign in the local
market area of each dispatch office. For new dispatch offices, the
direct-mail campaign targets virtually all businesses in its local market
area. Follow-up mailings target business in the Company's traditional market
niche. Follow-up telephone and personal calls on qualified leads are made by
the dispatch office general manager and the Company's sales force. To support
new branch openings, the direct-mail department processes an initial mailing
of virtually all businesses in the each new dispatch office's market area.
During 1997, the Company has placed more emphasis on recruiting and
retaining professional sales personnel. The primary focus of these
individuals is to increase sales for offices that are in the more mature
phase of their marketing life cycles. The Company currently employs
approximately 105 sales personnel at the dispatch offices and 6 sales
professionals who focus exclusively on sales to customers whose operations
are national in scope and who therefore need workers in multiple locations
throughout the United States and Canada. Additionally, the Company employs
one sales professional whose efforts are devoted to developing new customers
in the marine industry.
When entering new markets, the Company allows for an initial advertising
budget to generate an awareness of the new dispatch office. When opening
additional offices as warranted, based on area demographics, the Company can
also expand and coordinate its marketing efforts to the benefit of other
established offices in the local area. Marketing is accomplished primarily
through direct-mail campaigns, yellow-page advertising, personal sales
contacts, word of mouth, and billboard advertising.
TEMPORARY WORKERS. Most workers find the Company's "Work Today, Paid
Today" policy appealing and arrive at the dispatch office early in the
morning motivated to put in a good day's work and receive a paycheck at the
end of the day. Labor Ready's temporary workers are frequently persons who
are unemployed or in between jobs. The majority of the workers are male and
most are between the ages of 18 and 40 and live in low-income neighborhoods.
Most temporary workers have phone numbers, and own cars.
The Company's daily pool of temporary workers at each dispatch office
generally numbers between 40 and 200, depending upon the time of year.
Because of increasing diversification of the Company's customer base and a
wider dispersion of dispatch offices in different geographic areas of the
United States, the Company is less dependent on weather than in its early
years. Good weather, nevertheless, brings incrementally more job orders and
workers. Consequently, the Company is busiest in the late spring, summer and
early fall.
After reviewing work orders for that day's customer requests, the
dispatch office general manager pre-screens the qualifications of the
available temporary workers to assure that they can perform the work
required. Additionally, the individual must be at least 18 years old,
physically capable and in apparent good health. The main objective is to
dispatch the most suitable workers for the positions available. Dispatch
office employees over time come to know most workers at the dispatch office
and their capabilities. The Company is an equal opportunity employer.
Under the Company's "satisfaction guaranteed" policy, replacements for
all unsatisfactory workers are promptly provided if the customer notifies the
Company within the first two hours of work. Employees who receive two
complaints from customers are generally reprimanded or terminated. The
Company will immediately terminate any employee who agrees to take a work
order and does not report at the customer's jobsite. Any use of obscene
language, alcohol or drugs on the dispatch office premises or at the
customers' jobsites are grounds for immediate dismissal. The Company lists
workers who were terminated in a central database to prevent rehire by other
dispatch offices.
The Company withholds FICA and federal, state, and, where applicable,
city and county income taxes from its temporary workers' wages for
disbursement to governmental agencies. Additionally, the Company pays federal
and state unemployment insurance premiums, and workers' compensation expenses
for its temporary employees.
6
RECRUITMENT OF TEMPORARY WORKERS. The Company attracts its pool of
temporary workers through billboard advertisements, flyers, newspaper
advertisements, dispatch office displays, and word of mouth. The Company
believes its strategy of locating dispatch offices in 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. With the addition of a CDM at each
dispatch office, management believes that the Company's "Work Today, Cash
Today" policy will be an added incentive for temporary workers. Workers also
find other Company policies attractive, such as the emphasis on worker
safety, including Company provided safety training and equipment, and modest
cash advances for lunch or gas to workers short on cash. Temporary workers
are also aware of the Company's no-fee policy toward customers who offer
temporary workers a regular position. The possibility of landing a regular
position serves as an added incentive to the Company's workers.
Management believes that Labor Ready has earned a good reputation with
its temporary laborers because the Company consistently has jobs available
and treats its workers with respect. The Company believes this also helps
attract a motivated and responsive workforce. As a result, the Company
believes referrals by current or former temporary workers who have had good
experience with the Company account for a significant percentage of its
recruiting successes.
The Company experiences from time to time, during peak periods, shortages
of available temporary workers. Dispatch offices with a shortage of workers
attempt to fill work orders by asking temporary workers to inform friends,
relatives and neighbors of job openings and by identifying prospective
workers from the Company's employee data base. On occasion, work orders
requiring large numbers of temporary workers will be filled through
coordination with other local dispatch offices.
MANAGEMENT, EMPLOYEES AND TRAINING. At December 31, 1997, the Company
employed a total of 76 administrative and executive staff in the corporate
office, and 1,162 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's recruiting focus is on hiring additional management and
supervisory personnel with experience in managing multi-location operations.
After extensive interviews and tests, prospective general managers and
customer service representatives undergo four weeks of training at an
existing, high-volume dispatch office which has been certified as a Labor
Ready Training Center. Currently, the Company has 20 such Training Centers
across the United States. The Company has developed a curriculum, training
manuals, and instruction modules for the four-week training program, which
include rigorous sessions on topics such as marketing and direct mail, credit
and collections, payroll and personnel policies, workers' compensation
management and safety. By operating the Training Center as part of an ongoing
dispatch office, the managers and customer service representatives receive
training under both actual and simulated dispatch office conditions.
MANAGEMENT INFORMATION SYSTEMS. The Company has developed its own
proprietary system to process all required credit, billing, collection,
payroll and related payroll tax returns, together with other management
information and reporting necessary for the management of hundreds of
thousands of workers and staff in multiple locations. The Company plans to
complete the installation of the next generation, client server version of
this software in all dispatch offices in 1998. The upgrade of hardware at all
dispatch offices, to dedicated servers running Microsoft's Windows NT Server
Version 3.51 and multiple stations running Microsoft's Windows '95, was
completed in 1996 in preparation of the new client server software. During
1997, the Company added a third workstation to most dispatch offices and
provided laptop computers to all its area and district managers.
Additionally, during 1997, the Company successfully implemented a new client
server based financial reporting and management information system which
includes general ledger and accounts payable modules, and budget/actual
comparison reporting by dispatch office. Further add-on systems and programs
are planned and in process to enhance property and equipment accounting,
enable real-time management reporting and transition to electronic data
interchange with the Company's largest vendors.
During 1997, the Company increased its MIS department to eleven full-time
professionals who continually upgrade the systems and add features and
enhance operations and reliability. The operations and financial reporting
systems 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.
7
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 all point of sale information between the
corporate headquarters and the dispatch offices, including customer credit
information and outstanding receivable balances. Dispatch offices can run a
variety of reports on demand, such as receivables aging, margin reports, and
customer activity reports. Area directors and district managers 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. The
Company has developed a proprietary system, which beginning in 1998 will
allow the payroll software to generate either a payroll check, or at the
workers' option, a cash withdrawal from the dispatch office's CDM. The
Company has filed a patent application for this system of controlling the
CDMs for the disbursement of payroll funds. All cash receipts are received in
lockbox accounts and are matched to customers' receivable records using an
automated data capture system, implemented in 1997.
WORKERS' COMPENSATION PROGRAM. The Company provides workers' compensation
insurance to its temporary workers and regular employees. In Washington, Ohio
and West Virginia, (the monopolistic states), the Company is required to make
payments into state administered programs, at rates established by each state
based upon the job classification of the insured workers and the previous
claims experience of the Company. The Washington program provides for a
retroactive adjustment of workers' compensation payments based upon actual
claims experience. Upon adjustment, overpayments to the program are returned
to the Company and underpayments, if any are assessed. At December 31, 1996
and 1997, the Company recorded workers' compensation credit receivables of
$835,566 and $1,081,813 and workers' compensation liabilities of $587,411 and
$606,354 related to the monopolistic states.
For workers' compensation claims originating in the remaining states (the
non-monopolistic states), the Company self-insures the deductible amount per
claim to a maximum aggregate stop loss limit and has engaged a third party
administrator to manage the claims and an off-shore captive insurance company
for the payment of claims and related expenses. The deductible amount was
$250,000 per claim to an aggregate maximum of approximately $5.0 million,
$6.5 million and $19.0 million in 1995, 1996 and 1997. In January 1998, the
Company renewed its insurance program, the terms of which included a
reduction of the 1995 and 1996 aggregate maximums to $4.5 million and $5.2
million, respectively.
During 1997, the Company deposited $13.9 million with the offshore
company for the payment of workers' compensation claims and related expenses
originating in the non-monopolistic states and $7.4 million was paid on these
claims. As discussed further in Note 3 to the consolidated financial
statements, the Company replaced these deposits with letters of credit as
collateral to the offshore company for the payment of future non-monopolistic
claims and related expenses.
The Company establishes provisions for future claim liabilities based
upon actuarial estimates of the future cost of claims and related expenses
that have been reported but not settled, and that have been incurred but not
reported. Adjustments to the claim reserve are charged or credited to expense
in the periods in which they occur. At December 31, 1996 and 1997, the
Company had recorded a reserve for claims and claim related expenses arising
in non-monopolistic states of $4,449,986 and $12,686,860. The reserve for
workers' compensation claims was computed using a discount rate of 7.5% and
6.0% at December 31, 1996 and 1997.
Workers' compensation expense totaling $5,907,771, $9,981,411 and
$19,245,733 was recorded as a component of cost of services for the years
ended December 31, 1995, 1996 and 1997, respectively.
The Company has formed a wholly-owned, offshore captive, Labor Ready
Assurance Company for the management and payment of workers' compensation
claims and claim related expenses. During 1996, the Company deposited
$1,714,744 for the statutory capitalization of Labor Ready Assurance and
during 1997, increased that capitalization by $750,000. As discussed further
in Note 3 to the consolidated financial statements, during 1997 the Company
replaced these deposits with letters of credit as collateral for the
statutory capitalization of Labor Ready Assurance. At December 31, 1997,
$135,929 remains on deposit with Labor Ready Assurance and is recorded as
restricted cash in the accompanying consolidated balance sheets.
8
The Company has established a risk management department at its corporate
headquarters to manage its insurers, third party administrators, and the
medical service providers. To reduce wage-loss compensation claims, the
Company has established a "light duty" transitional return to work program.
Workers in the program are employed within the Company in the local dispatch
office or on customer assignments that require minimal physical exertion. The
Company's information system generates weekly workers' compensation loss
minimization reports for both corporate and dispatch office use. The Company
has an on-line connection with its third party administrator that allows the
Company to maintain visibility of all claims, manage their progress and
generate required management information.
GOVERNMENT REGULATIONS.
SAFETY PROGRAMS. As an employer, the Company is subject to applicable
state and/or federal statutes and administrative regulations pertaining to
jobsite safety. Where states do not have a safety program certified by the
federal Occupational Safety & Health Administration ("OSHA"), the Company is
subject to the standards prescribed by the federal Occupational Safety &
Health Act and rules promulgated by OSHA. However, the Company's temporary
workers are generally considered the customer's employees while on the
customer's jobsite for the purpose of applicable safety standards compliance.
In 1997, the Company's accident rate was approximately one incident per
7,764 man hours worked, an improvement over the Company's accident rate of
approximately one incident per 7,400 per man hours worked in 1996. The
Company continues to emphasize safety awareness, which helps control workers'
compensation costs, through training of its management employees and office
staff, safety sessions with temporary workers, issuing safety equipment,
monitoring job sites, and communicating with customers to assure that job
orders 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.
Additionally, "Tailgate" safety training sessions are conducted at the
manager's and regional safety director's discretion.
The Company maintains its own inventory of safety equipment at each
dispatch office. Standard equipment includes hard hats, metal-toed boots,
gloves, back braces, earplugs, and safety goggles. Equipment is checked out
to workers as appropriate. All construction jobs require steel-toed boots and
a hard hat. The dispatch office general manager ensures that workers take
basic safety equipment to job sites.
Dispatch office personnel are trained to discuss job safety parameters
with customers on incoming work order requests. Managers conduct jobsite
visits for new customer job orders and periodic "spot checks" of existing
customers to review safety conditions at job sites. Workers are encouraged to
report unsafe working conditions to the Company.
WAGE AND HOUR REGULATION. Labor Ready is required to comply with
applicable state and federal wage and hour laws. These laws require that the
Company pay its employees minimum wage and overtime at applicable rates when
the employee works more than forty hours in a workweek. In some states,
overtime pay may be required after eight or ten hours of work in a single day.
COMPETITION
The short-term, light industrial manual labor sector of the temporary
services industry is highly fragmented and highly competitive, with limited
barriers to entry. A large percentage of temporary staffing companies serving
this sector of the industry are local operations with fewer than five
offices. Within local or regional markets, these firms actively compete with
the Company for business. The primary basis of competition among local firms
is service and the ability to provide the requested amount of workers on
time, and to a lesser extent, price. While entry into the market has limited
barriers, lack of working capital frequently limits growth of smaller
competitors.
9
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. However, many of these competitors have
substantially greater financial and marketing resources than those of the
Company. One or more of these competitors may decide at any time to enter or
expand their existing activities in the short-term, light industrial market
and provide new and increased competition to Labor Ready. The Company
believes that, among the larger competitors, the primary competitive factors
in obtaining and retaining customers are the cost of temporary labor, the
quality of the temporary workers provided, the responsiveness of the
temporary labor company, and the number and location of offices. The
availability to the Company's customers of multiple temporary service
providers can create significant pricing pressure as competitors compete for
the available customers, and this pricing pressure could adversely impact
profit margins.
TRADEMARKS
The Company's business is not presently dependent on any patents,
licenses, franchises, or concessions. "Labor Ready," and the service mark
"Work Today, Paid Today" are registered with the U.S. Patent and Trademark
Office. The Company has filed with the U.S. Patent and Trademark Office, for
registration of the service mark "Work Today, Cash Today" and has commenced a
patent application for the system of controlling a network of CDMs for the
disbursement of payroll.
ITEM 2. PROPERTIES
The company leases virtually all of its dispatch offices. Dispatch office
leases generally permit the Company to terminate the lease 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 that
also serves as a warehouse facility for supplies and storage in Tacoma,
Washington. The Company also owns a 24,000 square foot facility in Tacoma,
Washington that is currently listed as available for lease or sale. In August
1996, the Company purchased 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 building currently serves as Labor
Ready's headquarters and administrative offices. Additionally, the Company
owns a dispatch office in Kansas City, Missouri. During 1997, the Company
sold a building formerly used as a dispatch office in Kent, Washington for
proceeds of $120,000. Management believes all of the Company's facilities are
currently suitable for their intended use. At present growth rates,
management believes that its headquarters facility will be adequate through
the year 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings.
The Company may from time to time become a party to various legal proceedings
arising in the normal course of its business. These actions could include
employee-related issues and disputes with customers. The Company carries
insurance for actions or omissions of its temporary employees. Since the
temporary workers are under the supervision of the customer or its employees,
the Company believes the terms of its contracts with its customers, which
provide that the customers are responsible for all actions or omissions of
the temporary workers, limit the Company's liability. Nevertheless, any
future claims are subject to the uncertainties related to litigation and the
ultimate outcome of any such proceedings or claims cannot be predicted. See
"Risk Factors -Liability for Acts of Temporary Workers."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1997.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock commenced trading on the Nasdaq National Market
on June 12, 1996. Prior to that date, the Company's common stock was traded
over-the-counter. The high and low bids for the last two years were as follows:
QUARTER ENDED HIGH* LOW*
- ----------------------------------------------------- --------- ---------
March 31, 1996....................................... 9.77 6.00
June 30, 1996........................................ 12.45 12.00
September 30, 1996................................... 16.67 11.00
December 31, 1996.................................... 11.83 7.17
March 31, 1997....................................... 9.25 5.04
June 30, 1997........................................ 6.83 4.71
September 30, 1997................................... 15.50 7.08
December 31, 1997.................................... 25.38 14.75
- ------------------------
* Dollar amounts are adjusted to reflect the three-for-two stock splits which
were effective on July 7, 1996 and October 24, 1997.
The Company had 631 shareholders of record as of December 31, 1997. The
quotation information has been derived from the Nasdaq Stock Market and does not
include retail markups or markdowns or commissions. No cash dividends have been
declared on the Company's common stock to date and the Company does not intend
to pay a cash dividend on common stock in the foreseeable future. Future
earnings will be used to finance the growth and development of the Company.
11
ITEM 6. SELECTED FINANCIAL INFORMATION.
The following selected consolidated financial information of the Company has
been derived from the Company's audited Consolidated Financial Statements. The
Consolidated Balance Sheet as of December 31, 1997, and the Consolidated
Statements of Income, Shareholders' Equity, and Cash Flows for the year then
ended were audited by Arthur Andersen LLP, whose report thereon appears
elsewhere herein. The Consolidated Balance Sheet as of December 31, 1996, and
the Consolidated Statements of Income, Shareholders' Equity, and Cash Flows for
the years ended December 31, 1995 and 1996 were audited by BDO Seidman, LLP,
whose report thereon appears elsewhere herein. The Statement of Operations Data
for the years ended December 31, 1993 and 1994, and the balance Sheet Data at
December 31, 1993, 1994 and 1995 are derived from the Company's audited
financial statements which do not appear herein. The data should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere herein.
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
Statement of Operations Data:
Revenues from services.................................. $ 15,659 $ 38,951 $ 94,362 $ 163,450 $ 335,409
Gross profit............................................ 4,917 12,095 29,479 47,919 98,742
Income before taxes and extraordinary item.............. 253 1,188 3,214 3,507 12,522
Extraordinary item, net of income tax................... 48 -- -- (1,197) --
Net income.............................................. 269 852 2,062 724 6,963
Earnings per common share
Basic................................................. $ 0.03 $ 0.08 $ 0.16 $ 0.04 $ 0.38
Diluted............................................... $ 0.03 $ 0.08 $ 0.15 $ 0.04 $ 0.37
Weighted average shares outstanding (1)
Basic................................................. 8,255 9,818 12,433 15,865 18,446
Diluted............................................... 8,255 9,818 13,039 16,288 18,778
AT DECEMBER 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- ---------- ----------
(IN THOUSANDS)
Balance Sheet Data:
Current assets.......................................... $ 2,313 $ 7,572 $ 20,730 $ 48,534 $ 65,617
Total assets............................................ 3,153 8,912 26,182 64,125 80,367
Current liabilities..................................... 1,706 5,631 7,956 10,961 15,788
Long-term liabilities................................... 777 319 9,695 1,572 6,538
Total liabilities....................................... 2,483 5,950 17,650 12,533 22,326
Shareholders' equity.................................... 670 2,962 8,532 51,592 58,041
Cash dividends declared (2)............................. 50 43 43 43 43
Working capital......................................... 607 1,941 12,774 37,573 49,829
Operating Data: (unaudited)
Revenues from dispatch offices open for full year....... $ 12,960 $ 27,311 $ 65,798 $ 133,156 $ 280,538
Revenues from dispatch offices opened during year....... $ 2,699 $ 11,640 $ 28,564 $ 30,294 $ 54,871
Dispatch offices open at period end..................... 17 51 106 200 316
- ------------------------
(1) The weighted average shares outstanding have been adjusted to reflect the
three for two stock splits which were each effective on November 22, 1995,
July 7, 1996 and October 24, 1997.
(2) Represents cash dividends on the Preferred Stock. The Company has never paid
cash dividends on its Common Stock and does not anticipate that it will do
so in the foreseeable future. See "Price Range of Common Stock and Dividend
Policy."
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in connection with the
Company's Consolidated Financial Statements and the notes thereto and other
financial information included elsewhere in this document.
OVERVIEW
Labor Ready is a leading, national provider of temporary workers for manual
labor jobs. The Company's customers are primarily in construction, freight
handling, warehousing, landscaping, light manufacturing, and other light
industrial businesses. The Company has rapidly grown from 17 dispatch offices in
1993 to 316 dispatch offices at December 31, 1997. 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 $15.6 million in
1993 to $335.4 million in 1997. This revenue growth has been generated both by
opening new dispatch offices and by continuing to increase sales at existing
dispatch offices. In 1997, the average annual revenue per dispatch office open
for more than a full year was approximately $1.4 million (approximately $1.3
million in 1996).
The Company expects to open 167 new dispatch offices in 1998 and 200
dispatch offices in 1999. In 1997, the Company incurred costs of approximately
$3.8 million to open 116 new dispatch offices, an average of approximately
$33,000 per dispatch office. Approximately $18,000 of these costs includes
salaries, recruiting, testing, training, lease and other related costs, which
are capitalized as dispatch office pre-opening costs and amortized using the
straight-line method over two years. The remaining approximately $15,000 of the
cost of opening a dispatch office includes computer systems and other equipment
related costs and leasehold improvements. The Company expects the average cost
of opening a dispatch office in 1998 to increase to approximately $50,000 due
primarily to the addition of a CDM to each dispatch office. 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 1997 was approximately 40 days. Consequently,
the Company historically has experienced significant negative cash flow from
operations and investment activities during periods of high growth. The Company
may continue to experience periods of negative cash flow from operations and
investment activities while it rapidly opens dispatch offices and may require
additional sources of working capital in order to continue to grow. See
"Liquidity and Capital Resources" and "Outlook: Issues and Uncertainties --
Working Capital Requirements."
Construction and landscaping businesses and, to a lesser degree, other
customer businesses typically increase activity in spring, summer and early fall
months and decrease activity in late fall and winter months. Inclement weather
can slow construction and landscaping activities in such periods. As a result,
the Company has generally experienced a significant increase in temporary labor
demand in the spring, summer and early fall months, and lower demand in the late
fall and winter months.
Depending upon location, new dispatch offices initially target the
construction industry for potential customers. As dispatch offices mature, the
customer base broadens and the mix of work diversifies. From time to time during
peak periods, the Company experiences shortages of available temporary workers.
See "Outlook: Issues and Uncertainties--Dependence on Availability of Temporary
Workers."
Cost of services includes the wages and related payroll taxes of temporary
workers, workers' compensation expense, unemployment compensation insurance, and
transportation. Cost of services as a percentage of revenues has historically
been affected by numerous factors, including the use of lower introductory rates
to attract new customers at new dispatch offices.
Temporary workers assigned to customers remain labor ready employees.
Labor Ready is responsible for employee-related expenses of its temporary
workers, including workers' compensation, unemployment compensation
insurance, and Medicare and Social Security taxes. The Company does not
provide health, dental, disability or life insurance to its temporary
workers. Generally, the Company bills its customers for the hours worked by
the temporary workers assigned to the customer. Because the Company pays its
temporary workers only for the hours actually worked, wages for the Company's
temporary workers are a variable cost that increases or decreases directly in
proportion to revenue. The Company has one franchisee which operates five
dispatch offices. The Company does not intend to grant additional franchises.
Royalty revenues from the franchised dispatch offices are included in
interest income and other in the consolidated financial statements and were
not material during any period presented herein.
13
The typical customer order is for two temporary workers and the typical
payroll check paid by the Company is less than $50. The Company is not
dependent on any individual customer for more than 2% of its annual revenues.
During 1997, the Company provided temporary workers to in excess of 70,000
customers and filled more than 2.8 million 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.
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Revenues from services............................................. 100.0% 100.0% 100.0%
Cost of services................................................... 68.8 70.7 70.6
Selling, general and administrative expenses....................... 26.4 26.3 25.1
Depreciation and amortization...................................... .6 1.1 1.2
Interest (income) expense and other, net........................... .9 (.2) (.6)
Income before taxes on income and extraordinary item............... 3.4 2.1 3.7
Net income......................................................... 2.2 .4 2.1
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
DISPATCH OFFICES. The number of offices grew to 316 at December 31, 1997
from 200 locations at December 31, 1996, a net increase of 116 dispatch offices,
or 58.0%. The Company estimates that its aggregate costs of opening 116 new
dispatch offices in 1997 was $3.8 million, an average of approximately $33,000
per dispatch office, compared to aggregate costs of approximately $5.6 million,
an average of approximately $60,000 per dispatch office, to open 94 new stores
in 1996. The decrease in per-store costs in 1997 was primarily the result of a
shorter manager training period and the use of regional training centers.
Approximately $18,000 of 1997 pre-opening costs includes salaries, recruiting,
testing, training, lease and other related costs, which are capitalized and
amortized using the straight-line method over two years. The remaining
approximately $15,000 of pre-opening costs includes computer systems and other
equipment related costs and leasehold improvements. The number of dispatch
offices grew to 200 at December 31, 1996 from 106 locations at December 31,
1995, a net increase of 94 dispatch offices, or 88.7%. The Company estimates
that its aggregate costs of opening 94 new dispatch offices in 1996 was
approximately $5.6 million (an average of approximately $60,000 per dispatch
office) compared to aggregate costs of approximately $2.0 million (an average of
approximately $35,000 per dispatch office) to open 57 new stores in 1995. The
increases in 1996 were primarily the result of a longer manager training period,
the establishment of Labor Ready University and the added opening costs related
to the use of more sophisticated computer and other office systems.
REVENUES FROM SERVICES. Revenues from services increased to $335.4 million
in 1997 as compared to $163.5 million in 1996, an increase of $171.9 million or
105.2%. The increase in revenues is primarily due to continued increases in
revenues from mature dispatch offices as the Company consolidates its position
in the marketplace and builds brand awareness. Additionally, the Company opened
116 new dispatch offices in 1997 and increased its average revenues per new
dispatch office from approximately $322,000 in 1996 to approximately $473,000 in
1997. In 1997, the Company opened 97 of its 116 new dispatch offices in the
first half of the year, compared to 45 dispatch offices opened in the first half
and 49 opened in the second half of 1996. Opening dispatch offices in the first
half of the year enables each new dispatch office to realize higher revenues
during the Company's busiest time of the year. Additionally, the minimum wage
rate was increased from $4.75 per hour to $5.15 per hour in October 1997.
Revenues from services increased to $163.5 million for 1996 from $94.4
million for 1995, an increase of $69.1 million, or 73.2%. This increase in
revenues from services resulted primarily from increases in revenues from
dispatch offices open for the full period, as indicated below, and to a lesser
extent from revenues from dispatch offices open for less than a year. This
difference from prior years was the result of the timing of dispatch office
openings in 1996 as 45 dispatch offices were opened in the first half of 1996.
The Company opened 94 offices in 1996 as compared to 55 new dispatch offices
opened in 1995. Additionally, the minimum wage rate was increased from $4.25 per
hour to $4.75 per hour in October 1996.
14
1995 1996 1997
--------- --------- ----------
(IN THOUSANDS)
Increase in revenues from dispatch offices open for full year................... $ 26,847 $ 38,794 $ 117,088
Revenues from new dispatch offices opened during year........................... $ 28,564 $ 30,294 $ 54,871
--------- --------- ----------
Total increase over prior year.................................................. $ 55,411 $ 69,088 $ 171,959
--------- --------- ----------
--------- --------- ----------
COST OF SERVICES. Cost of services increased to $236.7 million in 1997 from
$115.5 million in 1996, an increase of $121.2 million or 104.9%. The increase in
cost of services was due largely to the 105.2% increase in revenue from 1996 to
1997. Cost of services was 70.6% of revenue in 1997 compared to 70.7% of revenue
in 1996. Cost of services as a percentage of revenues remained approximately
constant as compared to 1996 levels as the Company is generally no longer
required to use introductory lower rates to attract new customers in new
dispatch offices. Additionally, cost increases including minimum wage increases,
workers' compensation and unemployment insurance rate increases are passed
through to customers as higher billing rates.
Cost of services increased to $115.5 million in 1996 from $64.9 million in
1995, an increase of $50.6 million, or 78.1%. Cost of services as a percentage
of revenues increased to 70.7% in 1996 as compared to 68.8% in 1995, an increase
of 1.9%. This increase in costs as a percentage of revenues reflected the use of
lower introductory rates to attract new customers at new dispatch offices.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $84.1 million in 1997 as compared to $42.9
million in 1996, an increase of $41.2 million or 95.7%. The increase was
largely due to a 105.2% increase in revenue from 1996 to 1997. Selling,
general and administrative expenses were 25.1% of revenues in 1997 as
compared to 26.3% of revenues in 1996. The decrease in selling, general and
administrative expenses as a percentage of revenue is due mainly to economies
of scale on fixed and semi-fixed administrative costs. The Company expects
that selling, general and administrative expenses as a percentage of revenues
may fluctuate in future periods as the Company from time to time upgrades its
administrative capabilities to accommodate anticipated revenue growth.
Selling, general, and administrative expenses increased to $42.9 million in
1996 from $24.9 million in 1995, an increase of $18.0 million, or 72.7%. The
increase was largely due to a 73.2% increase in revenue from 1995 to 1996. As a
percentage of revenues, selling, general, and administrative expenses decreased
to 26.3% in 1996 from 26.4% in 1995. The relatively small decrease was primarily
the result of economies of scale on fixed and semi-fixed administrative costs
offset by new management, operational and sales personnel hired to effectively
manage the Company's anticipated growth over the next several years.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expenses were $4.0 million in 1997 and $1.8 million in 1996, an increase of $2.2
or 123.2%. The increase in depreciation and amortization expense is the result
of amortization of dispatch office pre-opening costs as the Company continued
its rapid expansion by adding 116 stores in 1997. Additionally, the Company
added approximately $4.0 million in property and equipment during the year
including information systems and equipment for the new stores and enhanced
management information systems hardware and software.
In April 1997, the Accounting Standards Executive Committee (the "AcSEC")
issued an exposure draft of a Proposed Statement of Position, "Reporting on the
Costs of Start-up Activities". The proposed statement would establish new rules
for the financial reporting of start-up costs, and if adopted, would require the
Company to expense dispatch office pre-opening costs as incurred and write off
any capitalized pre-opening costs in the first quarter of the year adopted. The
AcSEC expects to issue a final statement in 1998, which will likely be effective
for the Company's 1999 year. As of December 31, 1997 the Company had recorded
pre-opening costs of $2.6 million, net of accumulated amortization.
Depreciation and amortization expenses were $1,796,618 in 1996 and $522,436
in 1995, an increase of $1,274,182 or 243.9%. The increase in depreciation and
amortization expense is the result of amortization of dispatch pre-opening costs
as the Company began its rapid expansion by adding 94 stores in 1996, and the
addition of approximately $5.7 million in property and equipment during the year
including equipment for the new stores and the Company's headquarters building
in Tacoma, Washington.
INTEREST AND OTHER, NET. Interest income and other, net was $1,871,066 in
1997 compared to $339,769 in 1996, an increase of $1,531,297 or 450.7%.
Approximately $1.2 million of the increase was due to investment income
earned during 1997 on the Company's workers' compensation deposits. Because
the Company has replaced its workers' compensation deposits with letters of
credit, investment income is likely to decrease significantly in future
years.
15
Interest income and other, net, was a positive contribution to income of
$339,769 in 1996, compared to an expense of $866,113 in 1995, an increase of
$1,205,882 or 354.9%. This reversal resulted from the Company's completion of
the public offering in June 1996, the subsequent prepayment of substantially
all debt, including the subordinated debentures, the investment of surplus
funds in short-term corporate debt obligations, and investment income on the
Company's workers' compensation deposits. As a percentage of revenues,
interest income and other expenses, net, increased from an expense of 0.9% in
1995 to a positive contribution to income of 0.2% in 1996.
TAXES ON INCOME. Taxes on income increased to $5,558,890 in 1997 from
$881,828 in 1996, an increase of $4,677,062 or 530.3%. The increase in taxes was
largely due to the increase in pretax income to $12.5 million in 1997 from $3.5
million in 1996. The Company's effective tax rate was 44.4% in 1997 as compared
to 54.9% in 1996. The decrease in the effective income tax rate was due
primarily to the decrease in prior period amounts as a percentage of total tax
provision. The principal difference between the effective income tax rate and
the statutory rate are adjustments to taxes resulting from prior years. Prior
year amounts primarily represent corrections of state tax rates and results of
revenue agent reviews of the 1995 and 1996 federal income tax returns.
Taxes on income increased to $1,585,028 in 1996 (before adjustment for the
tax effect of the 1996 extraordinary item) from $1,151,713 in 1995, an increase
of approximately $433,315, or 37.6%. This increase was the direct result of the
corresponding increase in the Company's pretax income in 1996, the expense
incurred related to a change in the prior year's estimated deferred tax asset
and the higher overall effective tax rates as the Company expanded into more
states and cities which impose a local income tax.
The Company had a net deferred tax asset of approximately $4.4 million at
December 31, 1997, resulting primarily from workers' compensation deposits,
credits and reserves. The Company has not established a valuation allowance
against this net deferred tax asset as management believes that it is more
likely than not that the tax benefits will be realized in the future based on
the historical levels of pre-tax income and expected future taxable income.
NET INCOME. Net income in 1997 increased to $6,963,021 from 1996 net income
of $724,283, an increase of $6,238,738 or 861.4%. The increase was largely due
to a 105.2% increase in revenues in 1997 to $335.4 million from 1996 revenues of
$163.5 million. Contributing to the increase in net income was a decrease in
selling, general and administrative costs as a percentage of revenues to 25.1%
of revenues in 1997 from 26.3% of revenues in 1996, and recognition of $1.2
million of investment interest on the Company's workers' compensation deposits.
Additionally, in 1996, the Company incurred an extraordinary charge of
$1,197,400 related to the retirement of its subordinated debt.
Net income for 1996 decreased to $724,283 from $2,061,807 in 1995, a
decrease of $1,337,524 or 64.9%. The decrease was primarily the result of an
increase in cost of services as a percentage of revenue to 70.7% of revenue in
1996 from 68.7% of revenue in 1995, an increase in depreciation and amortization
as a percentage of revenue to 1.1% of revenue in 1996 from .6% of revenue in
1995 and the recognition of an extraordinary loss on retirement of the Company's
subordinated debt in 1996. Retirement of the debt required that the deferred
financing costs and the debt discount, which were previously being amortized
over the original life of the debt, be immediately charged to expense.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operating activities was ($3.7) million,
($7.1) million and $11.3 million, in 1995, 1996 and 1997, respectively. The
increase in cash flows from operations in 1997 as compared to 1996 is largely
due to net income for the year, increases in non-cash expenses including
depreciation and amortization and the provision for doubtful accounts, offset by
an increase in the Company's net deferred tax asset during the year.
Additionally, the reserve for workers' compensation claims grew by $8.5 million,
due mainly to the increase in revenues over 1996, and workers' compensation
deposits and credits declined by $7.2 million when the Company replaced its cash
deposits with letters of credits (see Note 2 to the consolidated financial
statements). Finally, income taxes payable, net of income taxes receivable,
increased by $2.1 million as a result of the Company's increased profitability
over 1996. These increases were offset by the increase in accounts receivable of
$21.3 million over 1996. The increase in accounts receivable is a result of the
Company's growth and because of seasonal fluctuations, accounts receivable
balances are historically higher in the fourth quarter. Net cash used in
operating activities in 1996 increased as compared to 1995, principally due to
the significant growth in the Company's revenues and accounts receivable, an
increase in workers' compensation deposits, and an increase in income taxes
receivable.
16
The Company used net cash in investing activities of $2.5 million in 1995,
$11.0 million in 1996 and $4.9 million in 1997. The decrease in cash used in
investing activities in 1997 as compared to 1996 is due primarily to the
purchase and improvement of the corporate office building in 1996 and the
replacement of $1.6 million of restricted cash held by the Company's captive
insurance subsidiary with a letter of credit in 1997 (see Note 2 to the
consolidated financial statements). Additionally, the Company's expenditures for
new dispatch office pre-opening costs declined to $2.6 million in 1997 compared
to $3.6 million in 1996. Net cash used in investing activities increased in 1996
as compared to 1995 due mainly to the acquisition and improvement of the
Company's corporate office building, an increase in restricted cash held by the
captive insurance subsidiary and expenditures for new dispatch office
pre-opening costs.
Net cash provided by (used in) financing activities was $11.0 million, $30.4
million and ($1.9) million in 1995, 1996 and 1997 respectively. The decrease in
cash provided by financing activities in 1997 as compared to 1996 is due mainly
to the Company's sale of common stock for net proceeds of $33.6 million in 1996.
Additionally, in 1997, checks issued against future deposits decreased by $1.1
million and the Company used cash of $1.4 million to repurchase 229,256 shares
of its common stock on the open market. Net cash provided by financing
activities increased in 1996 compared to 1995 principally due to the Company's
common stock offering completed in 1996 for net proceeds of $33.6 million. This
increase was offset in part by the repayment of a note payable and the
subordinated debt.
During 1997, the Company entered into a line-of-credit agreement with U.S.
Bank with interest at the bank's prime rate (8.5% at December 31, 1997). The
agreement allows the company to borrow up to the lesser of $30 million or 80% of
eligible accounts receivable, as defined by the bank. The line-of-credit is
secured primarily by the Company's accounts receivable and expires in June 1999.
The line-of-credit agreement requires that the Company maintain minimum net
worth and working capital amounts. The Company was in compliance with the
requirements at December 31, 1997.
As discussed further in Note 2 to the consolidated financial statements,
the Company replaced the cash deposits required by its workers' compensation
program with irrevocable letters of credit totaling $15.9 million. The
letters of credit bear fees of .75% and are supported by an equal amount of
available borrowings on the line-of-credit. Accordingly, at December 31,
1997, no borrowings were outstanding on the line-of-credit, $15.9 million was
committed by the letters of credit and $14.1 million was available for
borrowing.
Historically, the Company has financed its operations through cash generated
by external financing including term loans, lines-of-credit and the common stock
offering. The principal use of cash is to finance the growth in receivables and
the cost of opening new dispatch offices. The Company may experience cash flow
deficits from operations and investing activities while the Company expands its
operations, including the acceleration of opening new dispatch offices.
Management expects cash flow deficits to be financed by profitable operations,
the use of the Company's line of credit, and may consider other equity or debt
financings as necessary. The Company analyzes acquisition opportunities from
time to time and may pursue acquisitions in certain circumstances. Any
acquisitions the Company enters into may require additional equity or debt
financing.
OUTLOOK: ISSUES AND UNCERTAINTIES
Labor Ready does not provide forecasts of future financial performance.
While Labor Ready's management is optimistic about the Company's long-term
prospects, the following issues and uncertainties, among others, should be
considered in evaluating its growth outlook.
MANAGE GROWTH. The Company's growth is dependent upon such factors as its
ability to attract and retain sufficient qualified management personnel to
manage multiple and individual dispatch offices, the availability of sufficient
temporary workers to meet customer needs, workers' compensation costs,
collection of accounts receivable and availability of working capital, all of
which are subject to uncertainties. The Company must continually adapt its
management structure and internal control systems as it continues its rapid
growth.
KEY PERSONNEL. The Company's success depends to a significant extent upon
the continued service of its Chief Executive Officer and other members of the
Company's executive management. Future performance depends on its ability to
recruit, motivate and retain key management personnel.
17
GOVERNMENT REGULATIONS AND WORKERS' COMPENSATION. The Company incurs
significant costs to comply with all applicable federal and state laws and
regulations relating to employment, including occupational safety and health
provisions, wage and hour requirements (including minimum wages), workers'
compensation and unemployment insurance. The Company attempts to increase fees
charged to its customers to offset increased costs relating to these laws and
regulations, but may be unable to do so. If Congress or state legislatures adopt
laws specifying benefits for temporary workers, demand for the Company's
services may be adversely affected. In addition, workers' compensation expenses
are based on the Company's actual claims experiences in each state and the
actual aggregate workers' compensation costs may exceed estimates.
QUALIFIED MANAGERS. The Company relies heavily on the performance and
productivity of its dispatch office general managers, who manage the operation
of the dispatch offices, including recruitment and daily dispatch of temporary
workers, marketing and providing quality customer service. The Company opened
116 dispatch offices in 1997 and plans to open 167 new offices in 1998 and 200
in 1999. The Company must therefore recruit a sufficient number of managers to
staff each new office and to replace managers lost through turnover, attrition
or termination. The Company's future growth and performance depends on its
ability to hire, train and retain qualified managers from a limited pool of
qualified candidates who frequently have no prior experience in the temporary
employment industry.
COMPETITION. The short-term, light industrial niche of the temporary
services industry is highly fragmented and highly competitive, with limited
barriers to entry. Several very large full-service and specialized temporary
labor companies, as well as small local operations, compete with the Company
in the staffing industry. Competition in some markets is intense,
particularly for provision of light industrial personnel, and price pressure
from both competitors and customers is increasing.
WORKING CAPITAL REQUIREMENTS. The Company has historically experienced
significant negative cash flow from operations and investment activities
resulting from the rapid growth in dispatch offices. In 1997, the Company
incurred costs of approximately $3.8 million to open 116 new dispatch offices,
an average of approximately $33,000 per dispatch office. The Company expects the
cost of opening a dispatch office in 1998 to increase to approximately $50,000,
due primarily to the addition of a CDM in each office. Once open, the Company
invests significant additional cash into the operations of new dispatch offices
until they begin to generate sufficient revenue to cover their operating costs.
In addition, the Company pays its temporary personnel on a daily basis and bills
its customers on a weekly basis. The Company expects to require additional
sources of capital in order to continue to grow especially during seasonal peaks
in revenue experienced in the third and fourth quarter of the year.
INDUSTRY RISKS. Temporary staffing companies employ people in the workplace
of their customers. Attendant risks include potential litigation based on claims
of discrimination and harassment, violations of health and safety and wage and
hour laws, criminal activity, and other claims. While the Company tries to limit
its liability by contract, it may be held responsible for the actions at a
jobsite of workers not under the Company's direct control. Temporary staffing
companies are also affected by fluctuations and interruptions in the business of
their customers.
ECONOMIC FLUCTUATIONS. The general level of economic activity, interest
rates and unemployment in the U.S. and specifically within the construction,
landscaping and light industrial trades may significantly affect demand for the
Company's services.
SEASONALITY. Many of the Company's customers are in the construction and
landscaping industries, which are significantly affected by seasonal factors
such as the weather. The Company generally experiences increased demand in the
spring, summer and early fall, while inclement weather is generally coupled with
lower demand for the Company's services.
AVAILABILITY OF TEMPORARY WORKERS. The Company competes with other
temporary personnel companies to meet its customer needs. The Company must
continually attract reliable temporary workers to fill positions and may from
time to time experience shortages of available temporary workers.
18
INFORMATION PROCESSING. The Company's management information systems,
located at its headquarters, are essential for communication with dispatch
offices throughout the country. Any interruption, impairment or loss of data
integrity or malfunction of these systems could severely hamper the Company's
business.
As the year 2000 approaches, there are uncertainties concerning whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail. Management believes that the year 2000
does not pose a significant operational problem for the Company's computer
systems. The Company has completed its assessment of its significant systems and
believes them to be year 2000 compliant. Management has not completed its
assessment of the systems of third parties with which it deals. While it is not
possible at this time to assess the effect of a third party's inability to
adequately address year 2000 issues, management does not believe the potential
problems associated with year 2000 will have a material effect on its financial
condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in the Annual Report as set forth in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company filed a report on Form 8-K on September 25, 1997 that
reported a change in the Company's independent auditor to Arthur Andersen
LLP, replacing BDO Seidman, LLP which is hereby incorporated by reference.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
TENURE OF DIRECTORS AND OFFICERS
The names, ages and positions of the directors, executive officers and
certain key employees of the Company as of March 1, 1998 are listed below along
with their business experience during the past five years. No family
relationships exist among any of the directors or executive officers of the
Company, except that Todd A. Welstad is the son of Glenn A. Welstad.
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Glenn A. Welstad..................................... 54 Chairman of the Board, Chief Executive Officer and
President
Ralph E. Peterson.................................... 63 Director and Executive Vice President -- Corporate
and Business Development
Ronald L. Junck...................................... 49 Director, General Counsel and Secretary
Richard W. Gasten.................................... 60 Director and Vice President and Secretary of Labour
Ready Temporary Services, Ltd.
Thomas E. McChesney.................................. 51 Director
Robert J. Sullivan................................... 67 Director
Joseph P. Sambataro, Jr.............................. 47 Executive Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Dennis Diamond....................................... 37 Executive Vice President of Operations
Robert H. Sovern..................................... 49 Assistant Treasurer
Robert F. Groen...................................... 47 Director of Risk Management
Todd A. Welstad...................................... 28 Chief Information Officer
Joseph L. Havlin..................................... 43 Corporate Controller
BUSINESS EXPERIENCE
The business experience and brief resumes on each of the Directors,
Executive Officers, and significant employees are as follows:
Glenn A. Welstad has served as the Company's Chairman of the Board of
Directors, Chief Executive Officer and President since February 1988. Prior to
joining the Company, Mr. Welstad was an officer of Body Toning, Inc., W.I.T.
Enterprises, and Money Mailer from February 1987 to March 1989. In 1969 Mr.
Welstad founded Northwest Management Corporation, a holding company for
restaurant operations. Over the course of 15 years, Mr. Welstad expanded the
operations to twenty-two locations in five states, which included eight Hardee's
Hamburger Restaurants as well as pizza and Mexican restaurants. In March 1984,
Mr. Welstad sold his ownership interest in Northwest Management Corporation.
Ralph E. Peterson has served the Company as Executive Vice President
- -Corporate and Business Development since August 1997 and has served as a
Director of the Company since January 1996. From January 1996 through September
1996, Mr. Peterson served as Chief Financial Officer, Treasurer and Assistant
Secretary. From September 1996 until August 1997, Mr. Peterson was Executive
Vice President and Chief Operating Officer. Prior to joining Labor Ready, from
December 1991 through August 1995, Mr. Peterson was Executive Vice President and
Chief Financial Officer of Rax Restaurants, Inc. From March 1974 to February
1979 and from April 1983 through 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 locations throughout the United States and abroad.
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. Additionally, Mr. Junck
serves as general counsel to the Company.
20
Richard W. Gasten has served as a Director of the Company since August 1996.
Mr. Gasten has also served as a Director of Labour Ready Temporary Services,
Ltd., the Company's Canadian subsidiary and as a consultant to the Company since
September 1995. In June 1997, Mr. Gasten was appointed to the position of Vice
President and Secretary of Labour Ready. With this appointment, the consulting
agreement with Mr. Gasten terminated. Mr. Gasten has over 25 years experience as
a member of executive management with Western Capital Trust Company, Vancouver,
B.C., Unity Bank of Canada and The Bank of Nova Scotia.
Thomas E. McChesney has served as a director of the Company since July 1995.
In September 1996, Mr. McChesney became associated with Blackwell Donaldson and
Company, as director of investment banking. Mr. McChesney was associated with
Bathgate and McColley Capital, L.L.C, from January 1996 to September 1996. Mr.
McChesney is also a director of 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.
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. Additionally, Mr. Sullivan has an extensive career of over 33 years in
financial management, as both a CPA and audit manager with Price Waterhouse &
Co. and as a member of executive management with companies listed on NYSE and
AMEX such as American Express Company, Bush Universal, Inc., Cablevision
Systems, Inc. and Micron Products, Inc.
Joseph P. Sambataro, Jr. has served as Executive Vice President, Treasurer,
Chief Financial Officer and Assistant Secretary of the Company since August
1997. Prior to joining the Company, he served as the Managing Partner of the
Seattle office of BDO Seidman, LLP an accounting and consulting firm from 1990
to 1997. In 1985 Mr. Sambataro was co-founder, and served as Director and
Officer of Ecova Corporation, an on-site toxic waste remediation company until
1989. From 1972 until 1985 Mr. Sambataro was a Partner with KPMG Peat Marwick in
the New York, Miami and Seattle offices.
Dennis Diamond has served as executive Vice President of Operations since
March 10, 1998. Since joining the Company in 1993, Mr. Diamond has served in a
variety of positions of increasing responsibility, most recently, as Vice
President of Operations for the Western Division (since October 1997). Mr.
Diamond started with Labor Ready in 1993 as a dispatch office general manager
and has served as a District Manager and Area Director in various locations with
the Company. Mr. Diamond received his Masters of Business Administration from
Kansas State University in 1991 and his Bachelor's Degree in Political Science
from Clemson University in 1982.
Robert H. Sovern has served as Assistant Treasurer of the Company since June
1996. Mr. Sovern joined the Company in March 1996 as Director of Accounts
Receivable, Credit and Collection. Prior to joining the Company he was an
entrepreneur operating Hallmark gift shops. Mr. Sovern was President and Chief
Executive Officer of Heritage Savings and Loan Association, Olympia, Washington
from December 1984 to July 1989 and served as an executive with Great Northwest
Federal Savings, Bremerton and Poulsbo, Washington from July 1977 to December
1984. Mr. Sovern also served as a banking officer for three years with Federal
Home Loan Bank and University Federal Savings.
Robert F. Groen has served the Company as Director of Risk Management since
March 1998. From March 1989 to August 1997, Mr. Groen was employed by Humana,
Inc. as Director of Corporate Insurance and Risk Management. Mr. Groen also
served as Chief Operating Officer of Illinois Providence Trust and Illinois
Compensation Trust from October 1980 to March 1989.
Todd A. Welstad has served as Chief Information Officer of the Company since
August 1997. Mr. Welstad joined the Company in January 1994 as the manager of
the Tacoma dispatch office and in August 1994 was promoted to Systems Analyst in
the MIS Department. From October 1994 until August 1997, Mr. Welstad served as
Director of the MIS Department. From February 1989 to December 1994, Mr. Welstad
was employed as a Technical Supervisor at Micro-Rel, a division of Medtronics.
Joseph L. Havlin has served as Corporate Controller of the Company since
September 1997. Prior to joining the Company he served as Chief Financial
Officer for West 175 Enterprises, Inc. from July 1996 to September 1997 and as
Audit Partner in the Seattle office of BDO Seidman, LLP from October 1993 to
July 1996. Mr. Havlin served as Chief Financial Officer of the United States
operations of a large Chinese trading company from 1989 to 1991 and from 1984 to
1989 he served as audit manager in the Seattle office of Arthur Young & Co. Mr.
Havlin obtained a degree in accounting from Western Washington University in
1984 and is a member of the American Institute of Certified Public Accountants.
21
Item 11. Executive Compensation
The following table sets forth the compensation earned by the Chief
Executive Officer and the next four most highly compensated executive officers
of the Company. None of the other executive officers of the Company received
compensation in excess of $100,000 in 1997.
SUMMARY COMPENSATION TABLE (1)
LONG -TERM
COMPENSATION AWARDS
--------------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING OPTIONS/
NAME AND POSITION YEAR SALARY ($) SARS(#)
- ------------------------------------------------------------------------ --------- ----------- --------------------
Glenn A. Welstad 1997 452,958 --
Chairman of the Board, Chief 1996 401,486 --
Executive Officer and President 1995 375,000 --
Ralph E. Peterson 1997 265,026 337,500
Executive Vice President--Corporate 1996 154,772 --
And Business Development 1995 -- --
Dennis D. Diamond 1997 172,917 60,225
Executive Vice President of Operations 1996 170,233 --
1995 88,481 --
Ralph A. Peterson 1997 172,739 62,250
Executive Vice President of Operations 1996 94,402 --
Eastern Division 1995 -- --
Todd A. Welstad 1997 102,211 78,950
Chief Information Officer 1996 78,105 --
1995 52,456 --
- ------------------------
(1) None of the named executives received compensation reportable under the
Restricted Stock Awards or Long-Term Incentive Plan Payouts columns.
22
Option Grants During 1997 Fiscal Year
The following table provides information related to options granted to the
named executive officers during 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS/ SARS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (1)
OPTIONS/ SARS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED (2) FISCAL YEAR ($/ SH)(3) DATE 5% 10%
- ---- -------------- -------------- ---------- ---------- ----------- ------------
Dennis D. Diamond 750 -- 6.58 3/11/02 $ 1,363 $ 3,013
Executive Vice President of 15,000 2% 6.00 5/13/02 $ 24,900 $ 54,900
Operations 37,500 4% 13.33 9/16/02 $ 137,888 $ 796,388
Ralph A. Peterson 750 -- 6.58 3/11/02 $ 1,363 $ 3,013
Executive Vice President of 15,000 2% 6.00 5/13/02 $ 24,900 $ 54,900
Operations--Eastern Division 37,500 4% 13.33 9/16/02 $ 137,888 796,388
Todd A. Welstad 225 -- 6.58 3/11/02 $ 409 $ 904
Chief Information Officer 15,000 2% 6.00 5/13/02 $ 24,900 $ 54,900
50,000 6% 19.56 12/19/02 $ 270,350 $ 597,350
(1) The potential realizable value portion of the table illustrates value that
might be realized upon exercise of the options immediately prior to the
expiration of their term, assuming the specified compounded rates of
appreciation on the Company's Common Stock over the term of the options.
These numbers do not take into account certain provisions of the options
providing for cancellation of the option following termination of
employment.
(2) Options to acquire shares of Common Stock. The options expiring on 5/13/02
vest 25% on date of grant and 25% annually over the next three years. All
other options vest 25% per year over four years.
(3) The option exercise price may be paid in shares of Common Stock owned by the
executive officer, in cash, or in any other form of valid consideration or a
combination of any of the foregoing, as determined by the Compensation
Committee in its discretion.
23
Option Exercises During 1997 and Year End Option Values
The following table provides information related to options exercised by
the named executive officers during 1997 and the number and value of options
held at year-end. The Company does not have any outstanding stock
appreciation rights ("SARs").
(AGGREGATE)OPTION/SAR EXERCISES IN 1997 AND
YEAR END OPTION/SAR VALUE
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($) (1)
ACQUIRED ON VALUE -------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- -------------- ------------ ----------- ------------- ------------ -------------
Ralph E. Peterson Executive Vice
President Corporate and Business
Development.......................... -- -- 135,000 202,500 $ 1,558,215 $ 2,337,323
Dennis D. Diamond Executive Vice
President of Operations.............. -- -- 8,081 52,144 $ 118,205 $ 420,105
Ralph A. Peterson Executive Vice
President of Operations-- Eastern
Division............................. -- -- 6,000 56,250 $ 65,001 $ 426,391
Todd A. Welstad Chief Information
Officer.............................. -- -- 13,144 65,806 $ 211,048 $ 222,503
- ------------------------
(1) The closing price for the Company's common stock as reported by Nasdaq on
December 31, 1997, was $19.25.
Compensation Committee:
The Company's executive compensation is determined by a compensation
committee comprised of two outside members of the Board of Directors. Messrs.
Sullivan and McChesney (who serves as the Committee's Chairman) are members
of the Compensation Committee. Compensation is determined by the Directors
using comparative statistics from other temporary labor service businesses.
Employment Agreements:
On October 31, 1995, the Company entered into an
employment agreement with Glenn Welstad, the Company's Chairman and Chief
Executive Officer, which provides for annual compensation of $31,250 per
month at inception of the agreement, subject to annual increases on the
anniversary date of the agreement of 10% of the prior period's base salary.
In addition, the employment agreement provides for a bonus, as determined by
the compensation committee, based on Mr. Welstad's performance, and the
overall performance of the Company. The term of Mr. Welstad's employment
agreement runs from October 31, 1995 through December 31, 1998.
In March 1997, the Company entered into an employment agreement with
Ralph E. Peterson, the Company's Executive Vice President -- Corporate and
Business Development, which provides for annual compensation of $20,000 per
month at inception of the agreement, subject to annual increases on the
anniversary date of the agreement at the discretion of the Board of
Directors. In addition, the employment agreement provides for a bonus, as
determined by the compensation committee, based on Mr. Peterson's
performance, and the overall performance of the Company. The agreement
provides Mr. Peterson with options to purchase 225,000 of the Company's
common stock at its fair market value at date of grant of $8.92. 45,000 of
the options vest on the date of grant and the balance in equal annual amounts
to 2000. The agreement expires in 2000 unless extended by mutual agreement
between Mr. Peterson and the Board of Directors or is terminated pursuant to
its terms.
24
In August 1997, the Company entered into an employment agreement with
Joseph P. Sambataro, Jr., the Company's Executive Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary, which provides for
annual compensation of $13,500 per month, subject to annual increases on the
anniversary date of the agreement at the discretion of the Board of
Directors. In addition, the employment agreement provides for a bonus, as
determined by the compensation committee, based on Mr. Sambataro's
performance, and the overall performance of the Company. The agreement
provides Mr. Sambataro with options to purchase 180,000 of the Company's
common stock at its fair market value at date of grant of $8.33. 45,000 of
the options vest on the date of grant and 22,500 options vest semi-annually
to 2000. The agreement expires in 2001 unless extended by mutual agreement
between Mr. Sambataro and the Board of Directors or is terminated pursuant to
its terms.
Item 12. Principal Shareholders
The following table sets forth certain information regarding the
beneficial ownership of each class of equity securities of the Company as of
December 31, 1997 for (i) each person known to the Company to own
beneficially 5% or more of any such class as of December 31, 1997, (ii) each
director of the Company, (iii) each executive officer of the Company required
to be identified as a Named Executive Officer pursuant to Item 402 of
Regulation S-K and (iv) all officers and directors of the Company as a group.
Except as otherwise noted, the named beneficial owner has sole voting and
investment power. See "Management" for a description of each individual's
position with the Company, if any.
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP
NAME & ADDRESS (NUMBER OF PERCENT
OF BENEFICIAL OWNER TITLE OF CLASS SHARES)(1) OF CLASS
- -------------------------------------------- -------------------------------------------- ----------- -----------
Glenn A. Welstad (2)........................ Common Stock 2,633,808 14.0%
............................................ Preferred Stock 1,962,732 68.1%
Ralph E. Peterson (3)....................... Common Stock 135,000 *
Ronald L. Junck (4)......................... Common Stock 107,206 *
Richard W. Gasten (4)....................... Common Stock 2,850 *
Thomas E. McChesney (5)..................... Common Stock 60,950 *
Robert J. Sullivan (6)...................... Common Stock 30,950 *
All Officers and Directors as............... Common Stock 3,210,613 17.3%
Group (10 Individuals)...................... Preferred Stock 1,962,732 68.1%
- ------------------------
* Less then 1%
(1) Beneficial ownership is calculated in accordance with Rule 13d-3(d)(1) of
the Securities Exchange Act of 1934, as amended and includes shares of
Common Stock issuable upon exercise of options, warrants, and other
securities convertible into or exchangeable for Common Stock currently
exercisable or exercisable within 60 days of December 31, 1997.
(2) The business address of Mr. Welstad is 1016 S. 28th Street, Tacoma, WA.,
98409.
(3) Includes currently exercisable options to purchase 45,000 shares of Common
Stock at $5.29 per share and 90,000 shares of Common Stock at $8.92 per
share.
(4) Includes currently exercisable options to purchase 1,350 shares of Common
Stock at $6.05 per share and 1,500 shares of Common Stock at $8.67 per
share.
(5) Includes currently exercisable options to purchase 1,350 shares of Common
Stock at $3.32 per share, 12,500 shares of Common Stock at $19.56 per share
and 1,500 shares of Common Stock at $6.00 per share.
(6) Includes currently exercisable options to purchase 12,500 shares of Common
Stock at $19.56 per share and 1,500 shares of Common Stock at $8.67 per
share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Junck is a member of the board of directors, and is also a shareholder
in a law firm that received approximately $176,000, $337,000 and $587,000 in
payment for legal services performed for the Company in 1995, 1996 and 1997,
respectively.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Financial Statements are found on pages F-1 through F-20 of this Form
10-K. The Financial Statement Table of Contents is on Page F-1. The Exhibit
Index is found on Page 27 of this Form 10-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LABOR READY, INC.
/S/ GLENN A. WELSTAD 3/30/98
--------------------------------------
Signature Date
BY: Glenn A. Welstad, Chairman of The
Board, Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/ Glenn A. Welstad 3/30/98
- -------------------------------------
Signature Date
Glenn A. Welstad, Chairman of the
Board, Chief Executive Officer and
President
/s/ Ralph E. Peterson 3/30/98
- -------------------------------------
Signature Date
Ralph E. Peterson, Executive Vice
President--Corporate and Business
Development and Director
/s/ Joseph P. Sambataro, Jr. 3/30/98
- -------------------------------------
Signature Date
Joseph P. Sambataro, Jr., Executive
Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
/s/ Ronald L. Junck 3/30/98
- -------------------------------------
Signature Date
Ronald L. Junck, Secretary, General
Counsel and Director
/s/ Robert J. Sullivan 3/30/98
- -------------------------------------
Signature Date
Robert J. Sullivan, Director
/s/ Richard W. Gasten 3/30/98
- -------------------------------------
Signature Date
Richard W. Gasten, Vice President and
Secretary, Labour Ready Temporary
Services, Ltd. and Director
/s/ Thomas E. McChesney 3/30/98
- -------------------------------------
Signature Date
Thomas E. McChesney, Director
26
EXHIBIT INDEX
FORM 10-K
LABOR READY, INC.
EXHIBIT NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------------------------------------
3 Articles of Incorporation (1)
3.1 Articles of Amendment to Articles of Incorporation (1)
3.2 Bylaws (1)
4 Instruments Defining Rights of Security Holders (1)
4.1 Rights Agreement Dated January 6, 1998 (2)
10 Material Contracts
10.1 Warrant Purchase Agreements (1)
10.2 Executive Employment Agreement between Labor Ready, Inc. And Glenn A. Welstad (1)
10.3 Employment Agreement between Labor Ready, Inc. and Joseph P. Sambataro, Jr. dated August 1,
1997
10.4 Business Loan Agreement between Labor Ready, Inc. and U.S. Bank of Washington, N.A., dated
November 10, 1997
10.5 Form of Lease for Labor Ready, Inc. dispatch office (1)
10.6 1996 Employee Stock Option and Incentive Plan (1)
10.7 1996 Employee Stock Purchase Plan (1)
10.8 Employment Agreement between Labor Ready, Inc. and Ralph E. Peterson dated March 19, 1997
16 Letter re change in certifying accountant (3)
23 Consents of Independent Certified Public Accountants
23.1 Consent of Arthur Andersen LLP -- Independent Public Accountants
23.2 Consent of BDO Seidman, LLP -- Independent Certified Public Accountants
27 Financial Data Schedules
27.1 December 31, 1997 and for the year then ended
27.2 December 31, 1995 and 1996, for each of the two years in the period ended December 31, 1996
27.3 March 31, June 30 and September 26, 1997 and for each of the three, six and nine month
periods then ended
- ------------------------
(1) Incorporated by reference to the Company's Form 10 Registration Statement,
SEC File No. 0-2382.
(2) Incorporated by reference to the Company's Current Report on Form 8-K Filed
on January 16, 1998.
(3) Incorporated by reference to the Company's Current Report on Form 8-K filed
on September 26, 1997.
COPIES OF EXHIBITS MAY BE OBTAINED UPON REQUEST DIRECTED TO MR. JOSEPH P.
SAMBATARO, JR., LABOR READY, INC., 1016 S. 28TH STREET, TACOMA, WASHINGTON,
98409.
27
LABOR READY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
---------
Reports of Independent Certified Public Accountants........................................................ F-2
Consolidated Balance Sheets December 31, 1996 and 1997..................................................... F-4
Consolidated Statements of Income Years Ended December 31, 1995, 1996 and 1997............................. F-6
Consolidated Statements of Shareholders' Equity Years Ended December 31, 1995, 1996 and 1997............... F-7
Consolidated Statements of Cash Flows Years Ended December 31, 1995, 1996 and 1997......................... F-8
Notes to Consolidated Financial Statements................................................................. F-10
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Labor Ready, Inc.
We have audited the accompanying consolidated balance sheet of Labor Ready,
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended. 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 audit. The financial statements of Labor Ready, Inc. as
of December 31, 1996, were audited by other auditors whose report dated February
24, 1997, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides 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 as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington
February 24, 1998
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Labor Ready, Inc.
We have audited the accompanying consolidated balance sheet of Labor Ready,
Inc. and subsidiaries as of December 31, 1996 and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
years in the period ended December 31, 1996. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Labor Ready, Inc. and subsidiaries as of December 31, 1996 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Spokane, Washington
February 24, 1997
F-3
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
ASSETS
1996 1997
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 17,597,821 $ 22,116,633
Accounts receivable, less allowance for doubtful accounts of $1,236,776 and
$2,851,226....................................................................... 21,010,653 36,614,156
Workers' compensation deposits and credits......................................... 5,285,552 1,081,813
Prepaid expenses and other......................................................... 1,983,961 2,659,789
Income taxes receivable............................................................ 1,194,633 --
Deferred income taxes.............................................................. 1,461,731 3,144,202
------------- -------------
Total current assets............................................................... 48,534,351 65,616,593
------------- -------------
PROPERTY AND EQUIPMENT:
Buildings and land................................................................. 3,733,202 4,448,135
Computers and software............................................................. 5,036,410 8,219,832
Furniture and equipment............................................................ 486,524 497,516
------------- -------------
9,256,136 13,165,483
Less accumulated depreciation...................................................... 1,431,562 2,839,004
------------- -------------
Property and equipment, net........................................................ 7,824,574 10,326,479
------------- -------------
OTHER ASSETS:
Intangible assets and other, less accumulated amortization of $979,572 and
$3,568,849....................................................................... 3,071,933 3,076,638
Workers' compensation deposits and credits, less current portion................... 2,979,018 --
Deferred income taxes.............................................................. -- 1,211,747
Restricted cash in captive insurance subsidiary.................................... 1,714,744 135,929
------------- -------------
Total other assets................................................................. 7,765,695 4,424,314
------------- -------------
Total assets....................................................................... $ 64,124,620 $ 80,367,386
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
F-4
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1997
------------- -------------
CURRENT LIABILITIES:
Checks issued against future deposits.............................................. $ 1,139,555 $ --
Accounts payable................................................................... 2,230,721 3,711,141
Accrued wages and benefits......................................................... 3,046,084 4,080,366
Workers' compensation claims reserve, current portion.............................. 4,532,625 7,108,723
Income taxes payable............................................................... -- 874,948
Current maturities of long-term debt............................................... 11,905 12,979
------------- -------------
Total current liabilities.......................................................... 10,960,890 15,788,157
------------- -------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities............................................ 90,352 76,337
Workers' compensation claims reserve, less current portion......................... 544,061 6,461,780
Deferred income taxes.............................................................. 937,401 --
------------- -------------
Total long-term liabilities........................................................ 1,571,814 6,538,117
------------- -------------
Total liabilities.................................................................. 12,532,704 22,326,274
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.296 par value 5,000,000 shares authorized; 2,882,530 shares
issued and outstanding........................................................... 854,082 854,082
Common stock, no par value 25,000,000 shares authorized; 18,560,364 and 18,441,530
shares issued and outstanding.................................................... 49,516,834 49,693,433
Cumulative foreign currency translation adjustment................................. (50,126) 86,221
Retained earnings.................................................................. 1,271,126 7,407,376
------------- -------------
Total shareholders' equity......................................................... 51,591,916 58,041,112
------------- -------------
Total liabilities and shareholders' equity......................................... $ 64,124,620 $ 80,367,386
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
F-5
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1996 and 1997
1995 1996 1997
------------- -------------- --------------
Revenues from services........................................... $ 94,361,629 $ 163,449,620 $ 335,408,832
Cost of services................................................. 64,881,955 115,531,110 236,666,368
------------- -------------- --------------
Gross profit..................................................... 29,479,674 47,918,510 98,742,464
Selling, general and administrative expense...................... 24,877,605 42,954,950 84,080,568
Depreciation and amortization.................................... 522,436 1,796,618 4,011,051
------------- -------------- --------------
Income from operations........................................... 4,079,633 3,166,942 10,650,845
Interest (income) expense and other, net......................... 866,113 (339,769) (1,871,066)
------------- -------------- --------------
Income before taxes on income and extraordinary item............. 3,213,520 3,506,711 12,521,911
Taxes on income.................................................. 1,151,713 1,585,028 5,558,890
------------- -------------- --------------
Income before extraordinary item................................. 2,061,807 1,921,683 6,963,021
Extraordinary item, net of income tax benefit of $703,200........ -- (1,197,400) --
------------- -------------- --------------
Net income....................................................... $ 2,061,807 $ 724,283 $ 6,963,021
------------- -------------- --------------
------------- -------------- --------------
Basic income per common share:
Income before extraordinary item................................. $ 0.16 $ 0.12 $ 0.38
Extraordinary item, net.......................................... -- (0.08) --
------------- -------------- --------------
Net income....................................................... $ 0.16 $ 0.04 $ 0.38
Diluted income per common share:
Income before extraordinary item................................. $ 0.15 $ 0.12 $ 0.37
Extraordinary item, net.......................................... -- (0.08) --
------------- -------------- --------------
Net income....................................................... $ 0.15 $ 0.04 $ 0.37
------------- -------------- --------------
------------- -------------- --------------
Weighted average shares outstanding
Basic............................................................ 12,432,540 15,865,221 18,446,113
------------- -------------- --------------
------------- -------------- --------------
Diluted.......................................................... 13,038,540 16,288,613 18,778,202
------------- -------------- --------------
------------- -------------- --------------
See accompanying notes to consolidated financial statements.
F-6
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31, 1995, 1996 and 1997
CUMULATIVE
RETAINED FOREIGN
COMMON STOCK PREFERRED STOCK EARNINGS CURRENCY
--------------------------- ---------------------- (ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT DEFICIT) ADJUSTMENT
------------ ------------- ---------- ---------- ------------- -----------
BALANCE, January 1, 1995................ 11,187,435 $ 3,540,187 2,882,530 $ 854,082 $ (1,429,556) $ (2,853)
Net income for the year................. -- -- -- -- 2,061,807
Common stock issued on conversionof
debt.................................. 336,154 382,364 -- -- -- --
Common stock issued for 401(k) Plan..... 2,693 7,679 -- -- -- --
Common stock issued from private
placement............................. 31,500 69,998 -- -- -- --
Common stock issued on the exercise of
warrants.............................. 1,602,990 1,781,100 -- -- -- --
Common stock issued on the exercise of
options............................... 67,500 45,000 -- -- -- --
Detachable stock warrants issued........ -- 1,290,094 -- -- -- --
Preferred stock dividend................ -- -- -- -- (42,704) --
Foreign currency translation............ -- -- -- -- -- (25,854)
------------ ------------- ---------- ---------- ------------- -----------
BALANCE, January 1, 1996................ 13,228,272 7,116,422 2,882,530 854,082 589,547 (28,707)
Net income for the year................. -- -- -- -- 724,283 --
Common stock issued for 401(k) Plan..... 7,707 48,250 -- -- -- --
Common stock issued from public stock
offering.............................. 3,363,750 33,586,259 -- -- -- --
Common stock issued on debt
extinguishment and warrants
exercised............................. 1,535,328 7,961,074 -- -- -- --
Common stock issued on the exercise of
options............................... 425,307 804,829 -- -- -- --
Preferred stock dividend................ -- -- -- -- (42,704) --
Foreign currency translation............ -- -- -- -- -- (21,419)
------------ ------------- ---------- ---------- ------------- -----------
BALANCE, January 1, 1997................ 18,560,364 49,516,834 2,882,530 854,082 1,271,126 (50,126)
Net income for the year................. -- -- -- -- 6,963,021 --
Common stock repurchased................ (229,256) (611,454) (784,067)
Common stock issued for 401(k)Plan...... 9,054 81,485 -- -- -- --
Common stock acquired through Employee
Stock Purchase Plan................... 52,899 375,032 -- -- -- --
Common stock issued on the exercise of
warrants.............................. 21,300 110,460 -- -- -- --
Common stock issued on theexercise of
options............................... 27,169 221,076 -- -- -- --
Preferred stock dividend................ -- -- -- -- (42,704) --
Foreign currency translation............ -- -- -- -- -- 136,347
------------ ------------- ---------- ---------- ------------- -----------
BALANCE, December 31, 1997.............. 18,441,530 $ 49,693,433 2,882,530 $ 854,082 $ 7,407,376 $ 86,221
------------ ------------- ---------- ---------- ------------- -----------
------------ ------------- ---------- ---------- ------------- -----------
See accompanying notes to consolidated financial statements.
F-7
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1996 and 1997
1995 1996 1997
------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................................ $ 2,061,807 $ 724,283 $ 6,963,021
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization......................................... 522,436 1,796,618 4,011,051
Loss (gain) on capital assets sold.................................... -- 3,729 (75,577)
Provision for doubtful accounts....................................... 1,084,526 2,078,489 5,761,610
Extinguishment of debt, extraordinary item............................ -- 1,900,601 --
Deferred income taxes................................................. (502,451) 191,077 (3,831,619)
Changes in assets and liabilities
Accounts receivable................................................... (8,104,502) (10,906,336) (21,279,041)
Workers' compensation deposits and credits............................ (1,871,348) (4,950,021) 7,182,757
Prepaid expenses and other............................................ (324,697) (1,381,909) (675,828)
Accounts payable...................................................... 753,442 1,160,890 1,605,274
Accrued wages and benefits............................................ 774,339 1,457,937 1,034,284
Workers' compensation claims reserve.................................. 1,234,469 3,133,348 8,493,817
Income taxes payable (receivable)..................................... 664,000 (2,355,633) 2,120,669
------------ ------------- -------------
Net cash (used in) provided by operating activities................... (3,707,979) (7,146,927) 11,310,418
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (2,471,001) (5,749,935) (3,967,448)
Proceeds from sale of capital assets.................................. -- 8,891 120,000
(Increase) decrease in restricted cash................................ -- (1,714,744) 1,578,815
Additions to intangible assets and other.............................. -- (3,558,609) (2,594,638)
------------ ------------- -------------
Net cash used in investing activities................................. (2,471,001) (11,014,397) (4,863,271)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on note payable.......................................... (1,569,374) (1,591,206) --
Checks issued against future deposits................................. 514,842 624,713 (1,139,555)
Proceeds from issuance of common stock................................ 69,998 -- --
Net proceeds from public offering..................................... -- 33,586,259 --
Proceeds from warrants exercised...................................... 1,781,100 -- 110,460
Proceeds from options exercised....................................... 45,000 804,829 169,988
Proceeds from sale of stock through employee stock purchase plan...... -- -- 375,032
Purchase and retirement of treasury stock............................. -- -- (1,395,521)
Debt issue costs...................................................... (816,769) -- --
Repayment of subordinated debt........................................ -- (2,069,643) --
Borrowings on long-term debt.......................................... 11,529,951 -- --
Payments on long-term debt............................................ (552,074) (890,797) (12,941)
Preferred stock dividends paid........................................ (42,704) (42,704) --
------------ ------------- -------------
Net cash provided by financing activities............................. 10,959,970 30,421,451 (1,892,537)
Effect of exchange rates on cash...................................... (25,854) (21,419) (35,798)
------------ ------------- -------------
Net increase in cash and cash equivalents............................. 4,755,136 12,238,708 4,518,812
CASH AND CASH EQUIVALENTS, beginning of year.......................... 603,977 5,359,113 17,597,821
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of year................................ $ 5,359,113 $ 17,597,821 $ 22,116,633
------------ ------------- -------------
------------ ------------- -------------
See accompanying notes to consolidated financial statements.
F-8
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1996 and 1997
1995 1996 1997
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest................................................................ $ 1,302,929 $ 332,479 $ 30,387
Income taxes............................................................ $ 990,164 $ 2,858,941 $ 7,972,732
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Contribution of common stock to 401(k) Plan............................. $ 7,679 $ 48,250 $ 81,485
Debentures converted to common stock.................................... $ 75,000 -- --
Issuance of a note receivable on the sale of capital assets............. -- $ 23,250 --
Issuance of common stock on debt retirement............................. -- $ 7,961,074 --
Preferred stock dividends accrued....................................... -- -- $ 42,704
Tax effect of disqualifying dispositions on options exercised........... -- -- $ 51,088
See accompanying notes to consolidated financial statements.
F-9
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1996 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
Labor Ready, Inc. and its wholly-owned subsidiaries Labour Ready Temporary
Services Ltd. and Labor Ready Assurance Company (together, "the Company")
provide temporary staffing for manual labor jobs to customers primarily in the
construction, landscaping and light manufacturing industries from 316 offices
located throughout the United States and Canada. The Company provides services
to a wide variety of customers, none of which individually comprise a
significant portion of revenues within a geographic region or for the Company
as a whole. The consolidated financial statements include the accounts of
Labor Ready, Inc. and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
B. REVENUE RECOGNITION
Revenue from the sale of services is recognized at the time the service is
performed. A portion of the Company's income is derived from franchise fees,
which are insignificant for all years presented.
C. COST OF SERVICES
Cost of services includes the wages of temporary workers, related payroll
taxes, workers' compensation expenses and transportation.
D. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a
maturity of three months or less at date of purchase to be cash equivalents.
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, which are 31 to 39 years for buildings and improvements, 3 to 5 years
for computers and software and 5 to 7 years for furniture and equipment.
F. INTANGIBLE ASSETS AND OTHER
Intangible and other assets consist primarily of dispatch office pre-opening
costs and acquired customer lists and non-compete agreements. Dispatch office
pre-opening costs are capitalized until such facilities become operational and
are amortized using the straight-line method over an estimated useful life of 2
years. Other intangible assets are stated at cost and are amortized using the
straight-line method over periods not exceeding ten years. Management evaluates,
on an ongoing basis, the carrying value of intangible assets and makes a
specific provision against the asset when an impairment is identified.
G. INCOME TAXES
Deferred income taxes are provided for temporary differences between the
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the temporary differences are expected
to reverse. If it is more likely than not that some portion of a deferred tax
asset will not be realized, a valuation allowance is recorded.
F-10
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. FOREIGN CURRENCY TRANSLATION
Cumulative foreign currency translation adjustment relates to the Company's
consolidated foreign subsidiary, Labour Ready Temporary Services, Ltd. Foreign
currency translation is calculated by application of the current rate method and
is included in the determination of consolidated shareholders' equity at the
respective balance sheet dates.
I. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
J. NEW ACCOUNTING STANDARDS
The Company is required to adopt SFAS No. 130, "Reporting Comprehensive
Income" effective January 1, 1998. Comprehensive income and its components will
be required to be to be presented for each year for which an income statement is
presented. It is expected that the adoption of SFAS No. 130 will not have a
significant impact on the Company's consolidated results of operations or
financial condition.
In April 1997, the Accounting Standards Executive Committee (the "AcSEC")
issued an exposure draft of a Proposed Statement of Position, "Reporting on the
Costs of Start-up Activities". The proposed statement would establish new rules
for the financial reporting of start-up costs, and if adopted, would require the
Company to expense the cost of establishing new dispatch offices as incurred and
write off any capitalized pre-opening costs in the first quarter of the year
adopted. The AcSEC expects to issue a final statement in 1998, which will likely
be effective for the Company's 1999 year. Currently, the Company capitalizes
certain dispatch office pre-opening costs, and amortizes them using the
straight-line method over two years. As of December 31, 1997 the Company had
recorded pre-opening costs of $2,643,641, net of accumulated amortization.
K. RECLASSIFICATION
Certain items in the 1996 and 1995 consolidated financial statements have
been reclassified to conform to the 1997 presentation.
F-11
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
2. WORKERS' COMPENSATION
The Company provides workers' compensation insurance to its temporary workers
and office staff. In Washington, Ohio and West Virginia, (the monopolistic
states), the Company is required to make payments into state administered
programs, at rates established by each state based upon the job classification
of the insured workers and the previous claims experience of the Company. The
Washington program provides for a retroactive adjustment of workers'
compensation payments based upon actual claims experience. Upon adjustment,
overpayments to the program are returned to the Company and underpayments, if
any, are assessed. At December 31, 1996 and 1997, the Company recorded
workers' compensation credit receivables of $835,566 and $1,081,813 and
workers' compensation liabilities of $587,411 and $606,354 related to the
monopolistic states.
For workers' compensation claims originating in the remaining states (the
non-monopolistic states), the Company self-insures the deductible amount per
claim to a maximum aggregate stop loss limit and has engaged a third party
administrator to manage the claims and an off-shore company for the payment of
claims and related expenses. The deductible amount was $250,000 per claim to an
aggregate maximum of approximately $5.0 million, $6.5 million and $19.0 million
in 1995, 1996 and 1997. In January 1998, the Company renewed its insurance
program, the terms of which included a reduction of the 1995 and 1996 aggregate
maximums to $4.5 million and $5.2 million, respectively.
During 1997, the Company deposited $13.9 million with the off-shore company
for the payment of workers' compensation claims and related expenses originating
in the non-monopolistic states and $7.4 million was paid on these claims. As
discussed further in Note 3, the Company replaced these deposits with letters of
credit as collateral to the off-shore company for the payment of future
non-monopolistic claims and related expenses.
The Company establishes provisions for future claim liabilities based upon
actuarial estimates of the future cost of claims and related expenses that have
been reported but not settled, and that have been incurred but not reported.
Adjustments to the claim reserve are charged or credited to expense in the
periods in which they occur. At December 31, 1996 and 1997, the Company had
recorded a reserve for claims and claim related expenses arising in
non-monopolistic states of $4,449,986 and $12,686,860. The reserve for workers'
compensation claims was computed using a discount rate of 7.5% and 6.0% at
December 31, 1996 and 1997.
Workers' compensation expense totaling $5,907,771, $9,981,411 and
$19,245,733 was recorded as a component of cost of services for the years ended
December 31, 1995, 1996 and 1997, respectively.
The Company has formed a wholly-owned, off-shore captive, Labor Ready
Assurance Company for the management and payment of workers' compensation claims
and claim related expenses. During 1996, the Company deposited $1,714,744 for
the statutory capitalization of Labor Ready Assurance and during 1997, increased
that capitalization by $750,000. As discussed further in Note 3, during 1997,
the Company replaced these deposits with letters of credit as collateral for the
statutory capitalization of Labor Ready Assurance Company. At December 31, 1997,
$135,929 remains on deposit with Labor Ready Assurance and is recorded as
restricted cash in the accompanying consolidated balance sheets.
F-12
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
3. NOTE PAYABLE
In 1996, the Company had a line-of-credit agreement with a bank with
interest at the bank's prime rate (8.25% at December 31, 1996). The agreement
allowed the Company to borrow up to the lesser of $20 million or 80% of eligible
accounts receivable as defined by the bank. At December 31, 1996, no borrowings
were outstanding and $20 million was available for borrowing. The line-of-credit
was secured primarily by the Company's accounts receivable.
During 1997, the Company entered into a line-of-credit agreement with the
bank with interest at the bank's prime rate (8.5% at December 31, 1997). The
agreement allows the company to borrow up to the lesser of $30 million or 80% of
eligible receivables as defined by the bank. The line-of-credit is secured
primarily by the Company's accounts receivable and expires in June 1999. The
line-of-credit agreement requires that the Company maintain minimum net worth
and working capital amounts. The Company was in compliance with the requirements
at December 31, 1997.
As discussed further in Note 2, the Company replaced its cash deposits
required by the workers' compensation program with irrevocable letters of credit
totaling $15.9 million. The letters of credit bear fees of .75% per year and are
supported by an equal amount of available borrowings on the line-of-credit.
Accordingly, at December 31, 1997, no borrowings were outstanding on the
line-of-credit, $15.9 million was committed by the letters of credit and $14.1
million was available for borrowing.
During the years ended December 31, 1996 and 1997, short-term borrowing
activity was as follows:
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
Balance outstanding at year-end....................................................... $ -- $ --
Stated interest rate at year-end, including applicable fees........................... 8.63% 8.63%
Maximum amount outstanding during the year............................................ $ 8,018,974 $ 1,700,000
Average amount outstanding............................................................ $ 2,387,188 $ 1,200,000
Weighted average interest rate during the year, including applicable fees............. 10.87% 11.50%
The average amount outstanding and the weighted average interest rate during
the year were computed based upon the average daily balances and rates.
4. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" which replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share is computed by dividing net income less preferred stock
dividends by the weighted average number of common shares outstanding during the
year. Diluted earnings per share is computed by dividing net income less
preferred stock dividends by the weighted average number of common shares and
common stock equivalents outstanding during the year. Common stock equivalents
for the Company include the dilutive effect of outstanding options. In November
1995, July 1996 and October 1997, the Company declared three-for-two stock
splits which have each been retroactively applied in the determination of
weighted average shares outstanding. All earnings per share amounts for all
years presented have been restated to conform to the provisions of SFAS No. 128.
F-13
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
Basic and diluted earnings per share were calculated as follows:
1995 1996 1997
------------ ------------ ------------
Basic:
Income before extraordinary item........................................ $ 2,061,807 $ 1,921,683 $ 6,963,021
Less preferred stock dividends.......................................... 42,704 42,704 42,704
------------ ------------ ------------
Income before extraordinary item available to common shareholders....... $ 2,019,103 $ 1,878,979 $ 6,920,317
------------ ------------ ------------
Weighted average shares outstanding..................................... 12,432,540 15,865,221 18,446,113
------------ ------------ ------------
Income before extraordinary item per share.............................. $ .16 $ .12 $ .38
------------ ------------ ------------
------------ ------------ ------------
Diluted:
Income before extraordinary item available to common shareholders....... $ 2,019,103 $ 1,878,979 $ 6,920,317
Weighted average shares outstanding..................................... 12,432,540 15,865,221 18,446,113
Plus options to purchase common stock outstanding at end of year........ 2,266,803 624,711 1,355,170
Less shares assumed repurchased......................................... (1,660,803) (201,319) (1,023,081)
------------ ------------ ------------
Weighted average shares outstanding, including dilutive effect of
options............................................................... 13,038,540 16,288,613 18,778,202
------------ ------------ ------------
Income before extraordinary item per share.............................. $ .15 $ .12 $ .37
------------ ------------ ------------
------------ ------------ ------------
5. SUBORDINATED DEBT
In October 1995, the Company issued subordinated debt with detachable stock
warrants for the purchase of 1,670,328 shares at an exercise price of $5.19 per
share, in exchange for $10,000,000. The debt had a stated interest rate of 13%,
was secured by substantially all assets of the Company, and was to be repaid in
17 quarterly installments commencing in October 1998. The Company recorded a
debt discount and allocated $1,290,094 of the proceeds to the value of the
detachable stock warrants. In connection with arranging the debt agreement, the
Company incurred costs of approximately $800,000 which were capitalized as
intangible assets and other, for amortization over the life of the debt.
In September 1996, the Company repaid the outstanding balance of the
subordinated debt and accelerated the exercise date of the detachable stock
warrants to allow immediate exercise at a price of $5.19 per share. Upon
pre-payment, 1,535,328 shares of common stock were purchased through the
exercise of detachable stock warrants and the cancellation of $7,961,073 of
subordinated debt. The remaining $2,038,927 of debt was paid by the Company in
cash. An extraordinary loss of $1,197,400 (net of the related income tax benefit
of $703,200) was recorded on the write-off of the unamortized debt discount and
debt issue costs. As of December 31, 1997, warrants to purchase 32,700 shares of
common stock at an exercise price of $5.19 per share remained outstanding.
6. RELATED PARTY TRANSACTIONS
A member of the board of directors, is also a shareholder in a law firm that
received approximately $176,000, $337,000 and $587,000 in payment for legal
services performed for the Company in 1995, 1996 and 1997, respectively.
F-14
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
7. PREFERRED STOCK
The Company has authorized 5,000,000 shares of blank check preferred stock.
The blank check preferred stock is issuable in one or more series, each with
such designations, preferences, rights, qualifications, limitations and
restrictions as the board of directors of the Company may determine and set
forth in supplemental resolutions at the time of issuance, without further
shareholder action.
The initial series of blank check preferred stock of the corporation
authorized by the board of directors in accordance with the articles of
incorporation, was designated as Series A preferred stock. At December 31, 1996
and 1997, the Company had 2,882,530 outstanding shares of $0.296 par value
Series A preferred stock.
Each share of Series A preferred stock is entitled to one vote in all
matters submitted to a vote of the shareholders of the Company. The Series A
preferred stock will vote on par with the Common Shares as a single class unless
the action being considered involves a change in the rights of the Series A
preferred stock. The Series A preferred stock bears a cumulative annual dividend
rate of five percent accrued on December 31 of each year, is redeemable at par
value plus accumulated dividends at the option of the Company at any time after
December 31, 1994, and contains an involuntary preferential liquidation
distribution equivalent to the par value plus all accumulated dividends
remaining unpaid.
In November 1995, July 1996 and October 1997, the board of directors
authorized three-for-two preferred stock splits. These preferred stock splits
were effected in the form of three shares of preferred stock issued for every
two shares of preferred stock outstanding as of each date of declaration. All
applicable share and per share data have been adjusted for the effect of the
stock splits.
Pursuant to the Rights Plan discussed further in Note 8, 250,000 shares of
preferred stock have been reserved for issuance under terms of the Plan.
A preferred stock dividend in the amount of $42,704 was accrued and paid at
December 31, 1995 and 1996. The 1997 preferred stock dividend in the amount of
$42,704 was accrued at December 31, 1997 and paid in January 1998.
8. COMMON STOCK
In November 1995, July 1996 and October 1997, the Board of Directors
authorized three-for-two common stock splits. These common stock splits were
effected in the form of three shares of common stock issued for every two shares
of common stock outstanding as of the date of declaration. All applicable share
and per share data have been adjusted for the effect of each of these stock
splits.
In connection with the issuance of the $10,000,000 subordinated debt in
1995, the Company issued options and warrants to purchase 1,670,328 shares of
Common Stock at an exercise price of $5.19 per share. 1,535,328 of these
warrants were exercised as a result of the Company's prepayment of the
subordinated debt in September 1996 (see Note 5).
In June 1996, the Company successfully completed the sale of 2,925,000
shares of common stock, through an underwritten public offering, at a price of
$10.89 per share ($10.15 net of underwriting costs). An additional 438,750
shares of common stock were sold pursuant to an underwriters over-allotment
option, also at the same price per share. Upon the commencement of this
offering, the Company's common stock was approved for quotation on the Nasdaq
National Market. In connection with the public offering, the Company incurred
costs of approximately $574,000 which were offset against the common stock sale
proceeds. These net proceeds were used to prepay debt, purchase of an office
building in Tacoma, Washington, fund workers' compensation deposits, and fund
the opening of new dispatch offices.
F-15
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
8. COMMON STOCK (CONTINUED)
During 1997, the Company repurchased 229,256 shares of common stock on the
open market for cash consideration of $1,395,521. The repurchased shares were
retired and are not available for reissuance. Excess acquisition cost over the
average per share carrying value of common stock is charged to retained
earnings.
In 1998, the board of directors adopted a Shareholders Rights Plan ("the
Rights Plan") and declared a dividend distribution of one right for each
outstanding share of the Company's common stock. Under the terms of the Rights
Plan, each Right entitles the holder to purchase one one-hundredth of a share of
the Series A preferred stock at an exercise price of $113.06. The rights are
exerciseable a specified number of days following (1) the acquisition by a
person or group of persons of 15% or more of the Company's common stock, or (2)
the commencement of a tender or exchange offer for 15% or more of the Company's
common stock. The Company has reserved 250,000 shares of the Series A Preferred
stock for issuance upon exercise of the rights. The rights may be redeemed by
the Company, subject to the approval of the board of directors, for $.01 cents
per right in accordance with the provisions of the Rights Plan. If any group or
person acquires 50% or more of the Company's common stock, the holders of the
unredeemed rights (except for the acquiring group or person) may purchase for
the exercise price, the number of common shares having a market value equal to
two times the exercise price. The rights expire in January 2008, unless redeemed
earlier by the Company.
9. INCOME TAXES
Temporary differences, which give rise to deferred tax assets (liabilities)
consist of the following:
DECEMBER 31,
-------------------------
1996 1997
----------- ------------
Allowance for doubtful accounts....................................................... $ 469,975 $ 1,071,624
Prepaid expenses...................................................................... (272,595) (216,337)
Workers' compensation credits receivable.............................................. (317,515) (432,725)
Workers' compensation claims reserve.................................................. 1,690,995 5,074,744
Net operating loss carry-forwards, net of valuation allowances of $690,833 and
$682,268............................................................................ 119,417 115,227
Depreciation and amortization expenses................................................ (1,126,603) (1,477,717)
Vacation accrual...................................................................... 69,160 228,141
Other, net............................................................................ (108,504) (7,008)
----------- ------------
Net tax deferrals..................................................................... 524,330 4,355,949
Non-current deferred tax (liabilities) assets net..................................... (937,401) 1,211,747
----------- ------------
Current deferred tax assets, net...................................................... $ 1,461,731 $ 3,144,202
----------- ------------
----------- ------------
The Company has assessed its past earnings history and trends, budgeted
sales, expiration dates of loss carry-forwards, and its ability to implement tax
planning strategies which are designed to accelerate or increase taxable income.
Based on the results of this analysis, no valuation allowance on net deferred
tax assets has been established for Labor Ready, Inc. as management believes
that it is more likely than not that the net deferred tax assets will be
realized.
F-16
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
9. INCOME TAXES (CONTINUED)
At December 31, 1997, Labour Ready Temporary Services, Limited has federal
net operating loss carryforwards of approximately $182,400 with expiration dates
through 2010. The Company has recognized a valuation allowance on the entire
related deferred tax asset due to the uncertainty of realizing the benefits
thereof.
As of December 31, 1997, Labor Ready, Inc. has net operating loss
carry-forwards of approximately $620,000, the majority of which expire in 2006
as applicable federal tax regulations limit the Company to an annual deduction
of approximately $26,000. The company has recognized a valuation allowance on
the portion expiring in 2006.
Taxes on income consists of:
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
------------ ---------- ------------
Current:
Federal................................................................... $ 1,419,728 $ 602,942 $ 7,602,257
State..................................................................... 234,436 87,809 1,788,252
------------ ---------- ------------
Total Current............................................................... 1,654,164 690,751 9,390,509
------------ ---------- ------------
Deferred
Federal................................................................... (482,051) 166,579 (3,258,890)
State..................................................................... (20,400) 24,498 (572,729)
------------ ---------- ------------
Total deferred.............................................................. (502,451) 191,077 (3,831,619)
------------ ---------- ------------
Total taxes on income, including $703,200 tax benefit of extraordinary
item in 1996.............................................................. $ 1,151,713 $ 881,828 $ 5,558,890
------------ ---------- ------------
------------ ---------- ------------
The differences between income taxes at the statutory federal income tax
rate and income taxes reported in the consolidated income statement are as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997
------------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------------ --- ---------- --- ------------ ---
Income tax expense based on statutory rate........................ $ 1,092,597 34 $ 546,078 34 $ 4,382,669 35
Increase (decrease) resulting from:
State income taxes, net of federal benefit........................ 106,046 3 59,089 4 696,808 6
Utilization of net operating losses not previously benefited...... (46,930) (1) (9,768) (1) -- --
Prior year amounts................................................ -- -- 169,129 11 487,255 4
Other, net........................................................ -- -- 117,300 7 (7,842) (1)
------------ --- ---------- --- ------------ ---
Total taxes on income............................................. $ 1,151,713 36 $ 881,828 55 $ 5,558,890 44
------------ --- ---------- --- ------------ ---
------------ --- ---------- --- ------------ ---
Prior year amounts primarily represent corrections of state tax rates and
results of revenue agent reviews of the 1995 and 1996 federal income tax
returns.
F-17
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
10. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its dispatch offices. These 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 are
cancelable thereafter upon 30 days notice and the payment of three months rent.
Most leases require additional payments for taxes, insurance, maintenance and
renewal options. Minimum lease commitments under terms of the leases at December
31, 1997 total approximately $3.3 million, substantially all of which would be
payable in 1998. Rent expense for the years ended December 31, 1995, 1996 and
1997 was $1,113,000, $2,347,000 and $5,025,697, respectively.
The Company is, from time to time, involved in various lawsuits arising in
the ordinary course of business. Although there can be no absolute assurance, in
the opinion of management, these will not have a material effect on the
Company's consolidated results of operations or financial condition.
In 1995, the Company entered into an employment agreement with a key officer
of the Company, which provides for annual compensation of $31,250 per month at
inception of the agreement, subject to annual increases on the anniversary date
of the agreement of 10% of the prior period's base salary. In addition, the
employment agreement provides for a bonus, as determined by the compensation
committee, based on the officer's performance, and the overall performance of
the Company. The employment agreement expires in 1998.
In December 1997, the Company entered into a lease agreement for 450
automated Cash Dispensing Machines ("CDM") for installation in all of the
Company's dispatch offices. The fair market value of the CDMs at inception of
the lease is approximately $6.2 million. The lease is payable over 84 months
with an imputed interest rate of 9.6% and is secured by the CDMs. At December
31, 1997, the Company had not installed any of the CDMs.
11. RETIREMENT PLAN
In 1994, the Company established a 401(k) savings plan ("the Plan").
Qualifying employees can elect to contribute up to 15% of their annual
compensation to the Plan. Profit sharing contributions are made at the
discretion of the Company's Board of Directors and have been made in the form of
the Company's common stock. Employees are eligible to participate in the Plan
the calendar quarter following the completion of one year of service. Employees
are fully vested in matching contributions made to the Plan after completing
five years of service. The amount charged to expense under the Plan was $48,250,
$81,700 and $118,145 for the years ended December 31, 1995, 1996 and 1997,
respectively.
12. VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts activity was as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ----------- ------------
Balance, beginning of year............................................... $ 365,927 $ 868,607 $ 1,236,776
Charged to expense....................................................... 1,084,526 2,078,489 5,761,610
Write-offs, net of recoveries............................................ (581,846) (1,710,320) (4,147,160)
---------- ----------- ------------
Balance, end of year..................................................... $ 868,607 $ 1,236,776 $ 2,851,226
---------- ----------- ------------
---------- ----------- ------------
F-18
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and long term debt. The book
values of cash and cash equivalents, trade receivables and trade payables are
considered to approximate their respective fair values. None of the Company's
long term debt instruments outstanding at December 31, 1996 and 1997 have
readily ascertainable market values, however, the carrying values are considered
to approximate their respective fair values.
14. EMPLOYEE STOCK PURCHASE PLAN
In November, 1996, the Company adopted an
Employee Stock Purchase Plan (the "ESPP") to provide substantially all
employees who have completed six months of service and meet certain limited
qualifications, relative to weekly total hours and calendar months worked, an
opportunity to purchase shares of its common stock through payroll deductions.
The ESPP permits payroll deductions up to 10% of eligible after-tax
compensation. On January 1 and July1, participant account balances are used to
purchase shares of common stock at the lesser of 85% of the fair market value
of shares on either the first day or the last day of the six-month period. The
ESPP provides that no participant shall purchase stock that the aggregate fair
market value exceeds $25,000 during any calendar year. The ESPP expires on
June 30, 2001. 225,000 shares of common stock have been reserved for purchase
under the ESPP. During 1997, 52,899 shares were purchased by participants in
the plan for cash proceeds of $375,032.
15. STOCK COMPENSATION PLANS
In June, 1996, the Company adopted the 1996 Employee Stock Option and
Incentive Plan (the "Plan"). In accounting for the Plan, the Company applied APB
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. Under APB Opinion No. 25, because the exercise price of the
Company's employee stock options is not less than the market price of the
underlying stock at the date of grant, no compensation cost is recognized.
The Plan states that the exercise price of each option may or may not be
granted at an amount that equals the market value at the date of grant. The
majority of the options vest evenly over a four year period from the date of
grant and then expire if not exercised within five years from the date of grant.
525,000 shares of common stock have been reserved for issuance under terms of
the Plan.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The fair value of option grants
is estimated on the date of grant utilizing the Black-Scholes option pricing
model with the following weighted average assumptions for grants in 1995, 1996
and 1997, respectively: expected life of options of 5 years, expected volatility
of 11.6%, 11.2% and 66.7%, risk-free interest rates of 6.1%, 6.0% and 6.0%, and
a 0% dividend yield. The weighted average fair value at date of grant for
options granted during 1995, 1996 and 1997 approximated $5.13, $9.72 and
$7.86 per option.
F-19
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended December 31, 1995, 1996 and 1997
15. STOCK COMPENSATION PLANS (CONTINUED)
Under the provisions of SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
1995 1996 1997
------------ ---------- ------------
Net Income
As reported............................................................... $ 2,061,807 $ 724,283 $ 6,963,021
Pro forma................................................................. $ 1,957,946 $ 352,222 $ 6,159,194
Pro forma earnings per share
Basic..................................................................... $ 0.15 $ 0.02 $ 0.33
Diluted................................................................... $ 0.15 $ 0.02 $ 0.33
The following table summarizes stock option activity:
WEIGHTED-AVERAGE
STOCK OPTIONS PRICE PER SHARE
------------- -----------------
Outstanding at January 1, 1995................................................... 509,625 $ 1.05
Granted.......................................................................... 1,794,303 5.13
Expired or canceled.............................................................. (37,125) 1.39
Exercised........................................................................ -- --
------------- ------
Outstanding at January 1, 1996................................................... 2,266,803 4.78
Granted.......................................................................... 418,500 9.73
Expired or canceled.............................................................. (100,125) 1.95
Exercised........................................................................ (1,960,467) 4.41
------------- ------
Outstanding at January 1, 1997................................................... 624,711 8.15
Granted.......................................................................... 850,664 12.46
Expired or canceled.............................................................. (71,736) 7.55
Exercised........................................................................ (48,469) 5.79
------------- ------
Outstanding at December 31, 1997................................................. 1,355,170 $ 10.46
------------- ------
------------- ------
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------- ----------- -------------- ----------- ----------- -----------
$1.32--5.29.... 257,196 2.87 4.43 108,686 4.05
6.00--10.08... 654,224 4.23 8.25 200,579 8.34
12.44--13.33... 213,750 4.55 13.99 8,438 12.44
19.56--25.13... 230,000 4.99 21.83 -- --
--------- -------
$1.32--25.13... 1,355,170 4.19 $ 10.46 317,703 $ 6.98
--------- -------
--------- -------
F-20