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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 26, 1997
Commission File Number 0-23828
Labor Ready, Inc.
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(Exact Name of Registrant as specified in its charter)
Washington 91-1287341
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(State of Incorporation) (Federal I.R.S. No.)
1016 S. 28th Street, Tacoma, Washington 98409
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(Address of Principal Executive Offices) (Zip Code)
(253) 383-9101
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(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
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The aggregate market value of the voting stock held by non-affiliates
of the Registrant, on November 13, 1997 was $451,300,854.
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As of November 13, 1997, the Registrant had 18,420,443 shares of
Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: None.
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LABOR READY, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets
September 26, 1997 and December 31, 1996 . . . . . . . 2
Consolidated Statements of Income
for the Nine Months and the Three Months Ended
September 26, 1997 and September 27, 1996. . . . . . . 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 26, 1997
and September 27, 1996. . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 8
PART II. OTHER INFORMATION
Item 4 Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 12
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 26, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 31,
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1997 1996
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 980,462 $17,597,821
Accounts receivable, less allowance for doubtful
accounts of $2,406,750 and $1,236,776 ................ 43,883,266 21,010,653
Workers' compensation deposits and credits ............. 6,980,149 4,746,752
Prepaid expenses and other ............................. 1,867,379 1,983,961
Income taxes receivable ................................ -- 1,194,633
Deferred income taxes .................................. 5,187,179 1,668,474
------------------- -------------------
Total current assets ................................. 58,898,435 48,202,294
------------------- -------------------
PROPERTY AND EQUIPMENT:
Buildings and land ..................................... 4,115,128 3,733,202
Computers and software ................................. 7,861,705 5,398,310
Furniture and equipment ................................ 608,604 124,624
------------------- -------------------
12,585,437 9,256,136
Less accumulated depreciation .......................... (2,525,998) (1,431,562)
------------------- -------------------
Property and equipment, net ............................ 10,059,439 7,824,574
------------------- -------------------
OTHER ASSETS:
Intangible assets and other, less
amortization of $3,076,850 and $979,572 .............. 3,920,157 3,071,933
Workers' compensation deposits and credits, less
current portion ..................................... 6,481,679 3,517,818
Restricted cash ........................................ 2,493,762 1,714,744
------------------- -------------------
Total other assets ................................... 12,895,598 8,304,495
------------------- -------------------
Total assets ........................................... $81,853,472 $64,331,363
------------------- -------------------
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</TABLE>
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 26, 1997 AND DECEMBER 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 31,
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1997 1996
------------------- -------------------
<S> <C> <C>
CURRENT LIABILITIES:
Checks issued against future deposits ................. $ 2,438,829 $ 1,139,555
Accounts payable ....................................... 2,736,323 2,230,721
Accrued wages and benefits ............................. 4,352,437 3,046,084
Reserve for workers' compensation claims ............... 6,831,166 4,537,886
Income taxes payable ................................... 4,039,930 --
Current maturities of long-term debt ................... 12,724 11,905
------------------- -------------------
Total current liabilities ............................ 20,411,409 10,966,151
------------------- -------------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities ................ 79,680 90,352
Reserve for workers' compensation claims................ 4,679,911 538,800
Deferred income taxes .................................. 1,712,125 1,144,144
------------------- -------------------
Total long-term liabilities .......................... 6,471,716 1,773,296
------------------- -------------------
Total liabilities .................................... 26,883,125 12,739,447
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.296 par value 5,000,000
shares authorized; issued and outstanding
2,882,531 shares ..................................... 854,082 854,082
Common stock, no par value 25,000,000 shares
authorized; 18,391,790 and 18,560,364 shares
issued and outstanding ............................... 49,244,483 49,516,834
Cumulative foreign currency translation adjustment ..... (69,699) (50,126)
Retained earnings ...................................... 4,941,481 1,271,126
------------------- -------------------
Total shareholders' equity ........................... 54,970,347 51,591,916
------------------- -------------------
Total liabilities and shareholders' equity ........... $81,853,472 $64,331,363
------------------- -------------------
------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS AND THREE MONTHS ENDED
SEPTEMBER 26, 1997 AND SEPTEMBER 27, 1996
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------------------ ------------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues from services ..................... $231,047,124 $109,371,091 $101,713,184 $47,246,237
Cost of services ........................... 191,022,169 89,006,985 81,491,855 37,589,614
---------------- ---------------- ---------------- ----------------
Gross profit ............................... 40,024,955 20,364,106 20,221,329 9,656,623
Selling, general and
administrative ......................... 32,211,594 16,972,039 13,129,540 7,187,429
---------------- ---------------- ---------------- ----------------
Income from operations ..................... 7,813,361 3,392,067 7,091,789 2,469,194
Interest and other, net .................... (459,716) 632,812 (149,408) (129,241)
---------------- ---------------- ---------------- ----------------
Income before taxes on income and
extraordinary item ....................... 8,273,077 2,759,255 7,241,197 2,598,435
Taxes on income ............................ 3,786,579 1,020,200 3,340,202 960,200
---------------- ---------------- ---------------- ----------------
Net income before
extraordinary item ....................... 4,486,498 1,739,055 3,900,995 1,638,235
Extraordinary item, net of
income taxes ............................. - 1,197,400 - 1,197,400
---------------- ---------------- ---------------- ----------------
Net income ................................. $ 4,486,498 $ 541,655 $ 3,900,995 $ 440,835
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Earnings per common share:
Net income before
extraordinary item ..................... $ .24 $ .11 $ .21 $ .09
Extraordinary item, net .................. - (.08) - (.07)
---------------- ---------------- ---------------- ----------------
Net income ............................... $ .24 $ .03 $ .21 $ .02
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Weighted average shares
Outstanding - primary .................... 18,718,535 15,948,666 18,860,345 18,394,034
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 26, 1997 AND SEPTEMBER 27, 1996
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTVITIES:
Net income ................................... $ 4,486,498 $ 541,655
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization ................ 3,191,714 574,157
Extraordinary loss on retirement of debt ..... -- 1,900,601
Provision for doubtful accounts .............. 3,873,357 1,148,520
Deferred income taxes ........................ (2,950,724) (413,593)
Gain on restricted fund investments .......... (29,018) --
Changes in assets and liabilities
Accounts receivable .......................... (26,745,970) (10,417,096)
Workers' compensation deposits and credits ... (5,197,258) (4,066,245)
Prepaid expenses and other ................... 116,582 (844,411)
Accounts payable ............................. 587,087 (221,083)
Accrued wages and benefits ................... 1,306,353 530,270
Reserve for workers' compensation claims ..... 6,434,391 1,830,945
Income taxes payable ......................... 5,234,563 (871,098)
------------------- -------------------
Net cash used in operating activities .......... (9,692,425) (10,307,378)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ......................... (6,274,803) (4,789,929)
Restricted cash .............................. (750,00) --
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Net cash used in investing activities .......... (7,024,803) (4,789,929)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on note payable ................. -- (1,591,206)
Checks issued against future deposits ........ 1,299,274 1,330,747
Proceeds from options exercised .............. 20,152 380,183
Proceeds from Employee Stock Purchase Plan ... 237,483 --
Purchase and retirement of common stock ...... (1,395,586) --
Payments on long-term debt ................... (9,853) (2,927,831)
Dividends paid ............................... (32,028) (32,028)
Proceeds from issuance of common stock ....... -- 33,636,259
Proceeds from warrants exercised ............. -- 420,120
Debt issue costs ............................. -- 31,641
------------------- -------------------
Net cash provided by financing activities ...... 119,442 31,247,885
Effect of exchange rates ..................... (19,573) (11,207)
------------------- -------------------
Net (decrease) increase in cash and
cash equivalents ............................. (16,617,359) 16,139,371
CASH AND CASH EQUIVALENTS, beginning of
period ....................................... 17,597,821 5,359,113
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CASH AND CASH EQUIVALENTS, end of period........ $ 980,462 $ 21,498,484
------------------- -------------------
------------------- -------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote
disclosures usually found in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1996 annual report on Form 10-K. Certain amounts in the consolidated balance
sheet at December 31, 1996 have been reclassified to conform to the 1997
presentation. The accompanying consolidated financial statements reflect all
adjustments, including normal recurring adjustments, which in the opinion of
management, are necessary to present fairly the financial position, results
of operations and cash flows for the interim periods presented. Operating
results for the three and nine month periods ended September 26, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
NOTE 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 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
September 26, 1997 and December 31, 1996, the Company recorded workers'
compensation credit receivables of $655,149 and $835,566 and workers'
compensation liabilities of $866,166 and $587,411 related to the monopolistic
states.
For workers' compensation claims originating in the remaining states (the
non-monopolistic states), the Company has engaged a third party administrator
to manage the claims and an off-shore company for the payment of claims and
related expenses. During 1997, the Company deposited $10,459,494 with the
off-shore company for the payment of workers' compensation claims and related
expenses originating in the non-monopolistic states and $5,081,789 was paid
on these claims. As of September 26, 1997, $12,806,679 remained on deposit
with the off-shore company for the payment of future non-monopolistic claims
and related expenses and is recorded as workers' compensation deposits and
credits on the accompanying consolidated balance sheet.
The Company establishes provisions for future claim liabilities based upon
estimates of the future cost of claims and related expenses that have been
reported but not settled, and losses 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 September 26, 1997 and
December 31, 1996, the Company had recorded a reserve for claims and claim
related expenses arising in non-monopolistic states of $10,644,911 and
$4,449,986.
Workers' compensation expense totaling $13,519,673 and $3,421,340 was
recorded as a component of cost of services for the nine month periods ended
September 26, 1997 and 1996, respectively.
The Company has formed a wholly-owned, off-shore captive, Labor Ready
Assurance Company for the payment of workers' compensation claims. In
January 1997, the Company increased the capitalization of the captive by
$750,000. As of September 26, 1997, $2,493,762, is on deposit and is
recorded as restricted cash.
NOTE 3. COMMON STOCK
In February 1997, the Company's Board of Directors approved a stock
repurchase plan whereby the Company's management is authorized to purchase up
to 200,000 shares of the outstanding common stock. During the nine months
ended September 26, 1997, the Company purchased 152,837 shares at a cost of
$1,395,586. In accordance with Washington State incorporation laws, the
shares repurchased were retired and are included in authorized but unissued
shares.
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NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the nine months ended September 26,
1997 and September 27, 1996 are summarized as follows:
1997 1996
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Interest paid ................................ $ 6,837 $1,164,102
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Income taxes paid ............................ $2,205,632 $1,601,690
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Noncash investing and financing activities:
Issuance of common stock as the Company's
contribution to the 401(k) plan ............ $ 81,485 $ -
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Issuance of common stock for payment of
accounts payable ............................. $ - $ 48,250
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Issuance of common stock for warrants exercised
on debt retirement ........................... $ - $7,961,074
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NOTE 5. PROPOSED STATEMENT OF POSITION
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 September 26, 1997 the Company had recorded pre-opening costs of
$3,620,510, net of accumulated amortization.
NOTE 6. EARNINGS PER SHARE
All share and per share data for 1997 and 1996 have been restated to reflect
the Company's 3-for-2 stock split which was effective on October 24, 1997.
In February 1997, the Financial Accounting Standards Board, issued Statement
of Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share".
SFAS 128 is effective for years beginning after December 15, 1997 (earlier
adoption is not permitted) and requires restatement of all prior period EPS
data presented. It is expected that the adoption of SFAS 128 will not have a
significant effect on reported EPS data.
NOTE 7. COMMITMENT
In July 1997, the Company executed an agreement to purchase 450 automated
teller machines for installation and use in dispatch offices. The Company
expects to complete testing of the machines and related software and take
delivery of 377 of the machines by April 1998. The total purchase price of
the teller machines is approximately $5.5 million. The Company will lease
the machines using a capital lease with a seven-year term and an implicit
interest rate of approximately 8.8%.
NOTE 8. SUBSEQUENT EVENT
In October 1997, the Company renewed its line-of-credit with a bank. The
agreement allows the Company to borrow, at the prime lending rate, 80% of
eligible receivables to a maximum of $30 million. The agreement contains
restrictive covenants and provides the bank with a security interest in the
Company's receivables. As of September 26, 1997, the Company had no
outstanding borrowings on its existing $20 million line-of-credit with the
bank and upon renewing the agreement, borrowings of approximately $30 million
were available.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain matters discussed in this Form 10-Q are forward-looking statements
within the meaning of the Private Litigation Reform Act of 1995, and as such,
may involve known and unknown risks, uncertainties and other factors which
may cause the actual results, performance or achievements of the Company to
be different from any future results, performance or achievements expressed
or implied by such forward-looking statements. These factors include, but
are not limited to, those set forth in Item 7 entitled Management's
Discussion of Financial Condition and Results of Operations in the Company's
Form 10-K for the year ended December 31, 1996. Although the Company
believes the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be attained.
OVERVIEW
Labor Ready is a leading, national provider of temporary workers for manual
labor jobs. The Company's customers are primarily in the construction,
freight handling, warehousing, landscaping, light manufacturing, and other
light industrial industries. The Company has rapidly grown from eight
dispatch offices in 1991 to 312 dispatch offices at September 26, 1997.
Substantially all of the growth in dispatch offices was achieved by opening
Company-owned locations rather than through acquisitions or franchising. The
Company's annual revenues grew from approximately $6 million in 1991 to $231
million for the nine months ended September 26, 1997. This revenue growth
has been generated both by opening new dispatch offices in markets throughout
the U.S. and Canada and by continuing to increase sales at existing dispatch
offices.
The Company has opened 114 dispatch offices during 1997 and expects to open
at least 120 additional dispatch offices in 1998. The Company expects the
average cost of opening each new dispatch office in 1998 to be approximately
$60,000. The cost of opening a new dispatch office includes extensive
management training and the installation of sophisticated computer and other
office systems. Further, once open, the Company invests significant amounts
of additional cash into the operations of new dispatch offices until they
begin to generate sufficient revenue to cover their operating costs,
generally in two to six months. The Company pays its temporary workers on a
daily basis, and bills its customers on a weekly basis. Consequently, the
Company experiences significant negative cash flow from operations and
investment activities during periods of high growth. The Company expects to
continue to experience periods of negative cash flow from operations and
investment activities while it rapidly opens dispatch offices and expects to
require additional sources of working capital in order to continue to grow.
Many of the Company's customers are construction and landscaping businesses,
which are significantly affected by the weather. Construction and
landscaping businesses and, to a lesser degree, other customer businesses
typically increase activity in spring, summer and early fall months and
decrease activity in late fall and winter months. Further, inclement weather
can slow construction and landscaping activities in such periods. As a
result, the Company has generally experienced a significant increase in
temporary labor demand in the spring, summer and early fall months, and lower
demand in the late fall and winter months.
Depending upon location, new dispatch offices initially target the
construction industry for potential customers. As dispatch offices mature,
the customer base broadens and the customer mix diversifies. From time to
time during peak periods, the Company experiences shortages of available
temporary workers. By April 1998, the Company expects to have completed the
installation of automated teller machines (the ATMs) in all of its dispatch
offices. The ATMs provide the Company's temporary workers with the option of
receiving cash payment instead of a payroll check. This additional feature,
which the Company believes is unique among its direct competitors should
increase the Company's ability to attract available temporary workers.
Cost of services primarily includes the wages and related payroll expenses of
temporary workers and the Company's permanent staff including dispatch office
employees and managers and district managers. Payroll related expenses
include workers' compensation, unemployment compensation insurance, and
Medicare and Social Security taxes. The Company's cost of services as a
percentage of revenues has fluctuated significantly in recent periods and it
expects significant fluctuations to continue in future periods as the Company
continues its rapid growth. Cost of services as a percentage of revenues is
affected by numerous factors, including salaries of new district supervisory
personnel and dispatch office managers and employees and the relatively lower
revenues generated by new dispatch offices prior to reaching maturity.
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Temporary workers assigned to customers remain Labor Ready employees. Labor
Ready is responsible for the employee-related expenses of its temporary
workers, including workers' compensation coverage, unemployment compensation
insurance, Medicare and Social Security taxes and general payroll expenses.
The Company does not provide health, dental, disability or life insurance to
its temporary workers. Generally, the Company bills its customers based upon
an hourly rate for the hours worked by the temporary workers assigned to the
customer. Because the Company pays its temporary workers only for the hours
actually worked, wages for the Company's temporary workers are a variable
cost that increases or decreases directly in proportion to revenue. The
Company has one franchisee which operates five dispatch offices. The Company
does not intend to grant additional franchises. Royalty revenues from the
franchised dispatch offices are included in revenues from services and were
not material during any period presented herein.
RESULTS OF OPERATIONS
The following table compares the operating results of the Company for the
nine months and three months ended September 26, 1997 and September 27, 1996
(amounts in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 26 AND 27 SEPTEMBER 26 AND 27
------------------------- -------------------------
PERCENT PERCENT
1997 CHANGE 1996 1997 CHANGE 1996
------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from services............... $231,047 111 $109,371 $101,713 115 $47,246
Cost of services..................... 191,022 115 89,007 81,492 117 37,590
------------------------- -------------------------
Gross profit......................... 40,025 97 20,364 20,221 109 9,656
Selling, general and administrative
expenses........................... 32,212 90 16,972 13,129 83 7,187
------------------------- -------------------------
Income from operations............... 7,813 130 3,392 7,092 187 2,469
Interest and other, net.............. (460) (173) 633 (149) 15 (129)
------------------------- -------------------------
Income before taxes on income........ 8,273 200 2,759 7,241 179 2,598
Taxes on income...................... 3,787 271 1,020 3,340 248 960
------------------------- -------------------------
Income before extraordinary item..... 4,486 158 1,739 3,901 138 1,638
Extraordinary item, net of income
taxes.............................. - (100) 1,197 - (100) 1,197
------------------------- -------------------------
Net income........................... $ 4,486 728 $ 542 $ 3,901 785 $ 441
------------------------- -------------------------
------------------------- -------------------------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 26, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 27, 1996
DISPATCH OFFICES
The Company opened 27 dispatch offices during the three months ended September
26, 1997 as compared to 9 dispatch offices opened during the same period of
the prior year. The total number of dispatch offices grew from 182 at
September 27, 1996 to 312 at September 26, 1997.
REVENUES FROM SERVICES
The Company's revenues from services increased to $101.7 million for the three
months ended September 26, 1997, as compared to $47.2 million for the three
months ended September 27, 1996, an increase of $54.5 million or 115%. This
increase resulted primarily from the growth in total number of offices open
and to a lesser extent from an increase in revenues from dispatch offices that
have been open for more than one year.
COST OF SERVICES
Cost of services increased to $81.5 million for the three months ended
September 26, 1997 as compared to $37.6 million for the three months ended
September 27, 1996, an increase of $43.9 million or 117%. This increase is
directly related to the corresponding increase in revenues during the period.
Cost of services as a percentage of revenues increased to 80.1% for the three
months ended September 26, 1997 from 79.6% for the three months ended
September 27, 1996, which represents an increase of .5%. This increase in cost
of services as a percentage of revenues is attributable to an adjustment to
1996 workers' compensation expense not recorded until the fourth quarter and
the salaries and wages paid to Company personnel operating the new dispatch
offices opened during the period, for which initial break even revenues have
not yet been achieved. The Company expects significant continuing
fluctuations in cost of services as the Company pursues further aggressive
growth.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $13.1 million for
the three months ended September 26, 1997, as compared to $7.2 million for the
three months ended September 27, 1996, an increase of $5.9 million or 83%. As
a percentage of revenues from services, selling, general and administrative
expenses decreased to 12.9% from 15.2% for the same period in the prior year,
representing a 2.3% decrease. This decrease was due primarily to the
economies of scale generated on administrative services as revenues from
services increased at an accelerated rate, offset by the increase in
amortization of store pre-opening costs.
INTEREST AND OTHER, NET
Interest and other, net represented a positive contribution to income of
$149,408 for the three months ended September 26, 1997, as compared to
$129,241 for the three months ended September 27, 1996, an increase of $20,167
or 15%. This increase results primarily from interest earned on restricted
cash and recovery of certain previously expensed insured losses, offset by
interest earned in the quarter ended September 27, 1996 on the net proceeds of
the Company's common stock offering. The Company expects to incur interest
expense in the fourth quarter of 1997 and first quarter of 1998 as the cash
demands of establishing new dispatch offices and installing the ATMs in all
dispatch offices will require borrowing on the Company's revolving line of
credit.
TAXES ON INCOME
The Company's taxes on income were $3,340,202 for the three months ended
September 26, 1997, as compared to $960,200 for the three months ended
September 27, 1996, an increase of $2,380,002 or 248%. Income taxes as a
percentage of pretax income increased to 46.1% for the three months ended
September 26, 1997 from 37.0% for the three months ended September 27, 1996,
an increase of 9.1%. This increase was the result of the continued increase
in the Company's effective tax rate related to expansion into those states
and cities which impose an income tax and an increase in certain
non-deductible expenses. The Company recorded a net deferred tax asset of
approximately $3.5 million at September 26, 1997, resulting primarily from
the reserve for workers' compensation claims and the reserve for bad debts.
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 historical levels of
pre-tax income and expected future taxable income.
EXTRAORDINARY ITEM, NET OF INCOME TAXES
During the three months ended September 27, 1996, a portion of the net
proceeds from the Company's common stock offering were used to retire its
senior subordinated debt. In conjunction with retiring the debt and issuing
warrants attached to the debt, the Company expensed the remaining unamortized
debt issuance costs and debt discount. The amounts written off are stated on
the accompanying consolidated income statement net of the applicable income
tax benefits of deducting the expense.
NET INCOME
The Company reported net income of $3,900,995 for the three months ended
September 26, 1997, as compared to net income of $440,835, for the three
months ended September 27, 1996, an increase of $3,460,160 or 785%. As a
percentage of revenues from services, net income increased to 3.8% for the
three months ended September 26, 1997, which compares to 0.9%, for the three
months ended September 27, 1996, an increase of 2.9%. This increase in net
income is primarily the result of the one-time charge to income taken in 1996
resulting from the retirement of the Company's senior subordinated debt,
increased revenues and economies of scale realized on selling general and
administrative expenses.
NINE MONTHS ENDED SEPTEMBER 26, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 27, 1996
DISPATCH OFFICES
The Company opened 114 dispatch offices during the nine months ended September
26, 1997 as compared to 76 dispatch offices opened during the same period of
the prior year. The total number of dispatch offices grew from 182 at
September 27, 1996 to 312 at September 26, 1997, an increase of 71.4%.
REVENUES FROM SERVICES
The Company's revenues from services increased to $231.0 million for the nine
months ended September 26, 1997, as compared to $109.4 million for the nine
months ended September 27, 1996, an increase of $121.6 million or 111%. This
increase resulted primarily from the increase in total number of dispatch
offices opened, and increases in sales in those dispatch offices that have
been open for a full year.
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<PAGE>
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COST OF SERVICES
Cost of services increased to $191.0 million for the nine months ended
September 26, 1997 as compared to $89.0 million for the nine months ended
September 27, 1996, an increase of $102.0 million or 115%. This increase is
directly related to the corresponding increase in revenues. Cost of services
as a percentage of revenues increased to 82.7% for nine months ended September
26, 1997 from 81.4% for the nine months ended September 27, 1996, an increase
of 1.3%. This increase in cost of services as a percentage of revenues is
attributable to an adjustment to 1996 workers' compensation expense not
recorded until the fourth quarter and the salaries and wages paid to Company
personnel operating the new dispatch offices opened during the period, for
which initial break even revenues have not yet been achieved. The Company
expects significant continuing fluctuations in cost of services as the
Company pursues further aggressive growth.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $32.2 million for
the nine months ended September 26, 1997, as compared to $17.0 million for
the nine months ended September 27, 1996, an increase of $15.2 million or 90%.
As a percentage of revenues from services, selling, general and administrative
expenses decreased to 13.9% from 15.5% for the same period in the prior year,
representing a 1.6% decrease. This decrease was due to the economies of scale
generated on administrative services as revenues from services increased at an
accelerated rate, offset by the increase in amortization of store pre-opening
costs.
INTEREST AND OTHER, NET
Interest and other, net was a positive contribution to income of $459,716 for
the nine months ended September 26, 1997, as compared to an expense of
$632,812 for the nine months ended September 27, 1996 an increase of
$1,092,528 or 173%. This reversal of expense to income was the result of the
Company's completion of a public offering and subsequent prepayment of
substantially all outstanding debt during the second and third quarter of
1996, which permitted surplus funds to be invested in interest bearing
short-term debt obligations. The Company expects to incur interest expense in
the fourth quarter of 1997 and first quarter of 1998 as the cash demands of
establishing new dispatch offices and installing the ATMs in all dispatch
offices will require borrowing on the Company's revolving line of credit.
TAXES ON INCOME
The Company's taxes on income were $3.8 million for the nine months ended
September 26, 1997, as compared to $1.0 million for the nine months ended
September 27, 1996, an increase of $2.8 million or 271%. Income taxes as a
percentage of pretax income increased to 45.8% for the nine months ended
September 26, 1997 from 37.0% for the nine months ended September 27, 1996, an
increase of 8.8%. This increase was the result of the continued increase in
the Company's effective tax rate related to expansion into those states and
cities which impose an income tax and an increase in certain non-deductible
expenses. The Company recorded a net deferred tax asset of approximately $3.5
million at September 26, 1997, resulting primarily from workers' compensation
deposits for unpaid claims and the reserve for bad debts. 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 historical levels of pre-tax income and
expected future taxable income.
NET INCOME
The Company recorded net income of $4,486,498 for the nine months ended
September 26, 1997, as compared to net income of $541,655, for the nine months
ended September 27, 1996, an increase of $3.9 million or 728%. As a
percentage of revenues from services, net income increased to 1.9% for the
nine months ended September 26, 1997, which compares to 0.5%, for the nine
months ended September 27, 1996, an increase of 1.4%. This increase in net
income is primarily the result of the one-time charge to income taken in 1996
resulting from the retirement of the Company's senior subordinated debt,
increased revenues and economies of scale realized on selling general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $9.7 million for the nine months
ended September 26, 1997 compared to $10.3 million during the nine months
ended September 27, 1996. The change reflects the increase in working capital
requirements of opening new dispatch offices, offset by the increase in net
income. Net cash used in investing activities through September 26, 1997 was
$7.0 million as compared to $4.8 million for the same period in 1996, an
increase of $2.2 million. The increase in cash used in investing activities
was primarily associated with capital expenditures incurred for new dispatch
offices opened during the period as compared to the same period for 1996.
Management anticipates that cash flow deficits from operating and investing
activities will continue while the Company continues to increase the number of
dispatch offices. This cash flow deficit will be funded by cash flows from
increased revenues and borrowings on the Company's $30.0 million revolving
line of credit. No borrowings are outstanding on the Company's line-of-credit
and upon renewal of the agreement, borrowings of approximately $30 million are
available. Net cash provided by financing activities was $119,442 for the
nine months ended September 26, 1997 compared to $31.2 million for the nine
months ended September 27, 1996, a decrease of $31.1 million.
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<PAGE>
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The decrease is due primarily to the proceeds received during 1996 from the
Company's common stock offering offset by the Company's retirement of
substantially all of its debt out of the proceeds of the offering.
In December 1996, the Company used $1.7 million in cash to finance the
original capitalization of Labor Ready Assurance Company, a wholly owned
foreign subsidiary. In January 1997, the Company used an additional $750,000
in cash to further capitalize this subsidiary. These funds remain on deposit
as restricted cash, and are expected to provide the Company a more cost
efficient method of administering, paying and finally settling its workers'
compensation claims and liabilities in the future.
During the nine months ended September 26, 1997, the Company used $1.4 million
to purchase and retire 152,837 shares of the Company's common stock.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 13, 1997, at the Company's Annual Meeting of Shareholders ("the
Annual Meeting") the shareholders of the Company voted to: (1) elect 6
directors, and (2) to appoint BDO Seidman, LLP as the Company's independent
accountants for the year ended December 31, 1997. The results of the
proposals voted upon at the Annual Meeting are as follows:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD ABSTAIN
---------- --------- -------- -------
<S> <C> <C> <C> <C>
1. a) Election of
Glenn A. Welstad 10,797,852 - 44,390 -
b) Election of
Robert J. Sullivan 10,823,835 - 18,407 -
c) Election of
Thomas E. McChesney 10,824,585 - 17,657 -
d) Election of
Ralph E. Peterson 10,800,960 - 41,282 -
e) Election of
Ronald J. Junck 10,824,085 - 18,157 -
f) Election of
Richard W. Gasten 10,810,409 - 31,833 -
2. Ratification of BDO Seidman, LLP
LLP as the Company's independent
auditors and accountants 10,799,759 4,710 - 37,773
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
The Company filed a report on Form 8-K on September 25, 1997 which
reported a change in the Company's independent auditor to Arthur
Andersen LLP.
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<PAGE>
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT: LABOR READY, INC.
By: /s/ Glenn A. Welstad November 13, 1997
-------------------------------- -----------------
Glenn A. Welstad Date
Chairman of the Board, Chief
Executive Officer and President
By: /s/ Joseph P. Sambataro Jr. November 13, 1997
-------------------------------- -----------------
Joseph P. Sambataro, Jr. Date
Executive Vice President,
Chief Financial Officer
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Page 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-26-1997
<CASH> 980,462
<SECURITIES> 0
<RECEIVABLES> 46,290,016
<ALLOWANCES> (2,406,750)
<INVENTORY> 0
<CURRENT-ASSETS> 58,898,435
<PP&E> 12,585,437
<DEPRECIATION> (2,525,998)
<TOTAL-ASSETS> 81,853,472
<CURRENT-LIABILITIES> 20,411,409
<BONDS> 0
0
854,082
<COMMON> 49,244,483
<OTHER-SE> 4,871,782
<TOTAL-LIABILITY-AND-EQUITY> 81,853,472
<SALES> 0
<TOTAL-REVENUES> 231,047,124
<CGS> 0
<TOTAL-COSTS> 191,022,169
<OTHER-EXPENSES> 32,211,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (459,716)
<INCOME-PRETAX> 8,273,077
<INCOME-TAX> 3,786,579
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,486,498
<EPS-PRIMARY> .24
<EPS-DILUTED> 0
</TABLE>
