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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 1943
(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, 1996.
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
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Commission File Number 0-23828
LABOR READY, INC.
(Exact name of registration as specified in its Charter)
Washington 91-1287341
- ----------------------------------- -----------------------------------
(State of Incorporation (I.R.S. Employer Identification
of Organization) Number)
1016 S. 28th Street, Tacoma, Washington 98409
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(Address of Principal Executive Offices) (Zip Code)
(206) 383-9101
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(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
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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
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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. / /
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 last ninety days. YES X NO .
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The aggregate market value (based on the NASDAQ quoted closing price) of the
common stock held by non-affiliates (10,254,869 shares) of the Registrant at
March 11, 1997 was approximately $92,293,821. As of March 11, 1997, there were
12,360,301 shares of the Registrant's common stock outstanding.
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LABOR READY, INC.
FORM 10-K
PART I.
ITEM 1. BUSINESS.
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, light manufacturing, and other light
industrial markets. These businesses require workers for lifting, hauling,
cleaning, assembling, digging, painting and other types of manual work. The
Company has rapidly grown from eight dispatch offices in 1991 to 200 dispatch
offices at December 31, 1996. Substantially all of the growth in dispatch
offices was achieved by opening Company-owned locations rather than through
acquisitions. The Company's revenues grew from $6.0 million to $163.5 million
from 1991 through 1996. This revenue growth has been generated both by opening
new dispatch offices and by continuing to increase sales at existing dispatch
offices. In 1996, the average cost to open a new dispatch office was
approximately $60,000 and dispatch offices opened in 1996 typically generated
revenues sufficient to cover their operating costs in two to six months. In
1996, the average revenue per dispatch office open for more than one full year
was $1.3 million.
INDUSTRY OVERVIEW
The temporary staffing industry has grown rapidly in recent years as
companies have used temporary employees to control personnel costs and to meet
fluctuating personnel needs. According to the National Association of Temporary
Staffing Services ("NATSS"), the United States market for the industrial segment
of the temporary staffing marketplace (which includes the light industrial
market that the Company serves) grew at a compound annual growth rate of
approximately 21% from approximately $5.0 billion in 1991 to approximately $15
billion in 1996. The Company believes the temporary staffing industry is
highly fragmented and presents opportunities for larger, well capitalized
companies to effectively compete through management of workers' compensation
costs and development of information systems which efficiently process a high
volume of transactions and coordinate multi-location activities.
Historically, the demand for temporary workers has been driven primarily
by a need to satisfy peak production needs and to temporarily replace full-time
employees due to illness, vacation or abrupt termination. More recently,
competitive pressures have forced businesses to focus on reducing costs,
including converting fixed, permanent labor costs to variable or flexible costs.
The use of temporary workers typically shifts employment costs and risks, such
as workers' compensation and unemployment insurance and possible adverse effects
of changing employment regulations, to temporary staffing companies, which can
allocate the costs and risks over a larger pool of employees and customers. In
addition, the use of temporary employees avoids the inconvenience, expense and
other effects of hiring and firing regular employees.
COMPANY STRATEGY
The Company's goal is to maintain and enhance its status as a leading,
national provider of temporary workers for manual labor jobs. Key elements of
the Company's strategy to achieve this objective are as follows:
- - AGGRESSIVELY OPEN NEW DISPATCH OFFICES. The Company's strategy is to
increase revenues by rapidly expanding its network of dispatch offices.
The Company plans to open approximately 100 additional dispatch offices
prior to the end of 1997, and an additional 100 dispatch offices in 1998.
- - INCREASE REVENUES FROM EXISTING DISPATCH OFFICES. As a dispatch office
matures, the Company attempts to increase its revenues by expanding sales
to existing customers and by aggressively expanding the number and mix of
customers served. More experienced area directors and district managers
assist the general manager in this process. The Company is also developing
and implementing at the corporate level coordinated sales and marketing
strategies designed to complement these efforts, including the development
of national accounts, electronic order entry from the customer's location,
centralized dispatch via an 800 number, dissemination of information on
local construction activity, and implementation of a centralized customer
service hotline.
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- - IMPROVE OPERATING EFFICIENCIES AND REDUCE OPERATING COSTS. Due to the
temporary labor market's extensive fragmentation, the Company believes its
national presence provides it with key operating efficiencies, competitive
advantages (including an ability to target national accounts and to
effectively administer workers' compensation programs) and access to
capital markets to provide needed working capital. The Company has
standardized the operation, general design, staffing and equipment of the
dispatch offices. In addition, the Company has designed and implemented a
proprietary management information system that efficiently manages an
extensive Company-wide employee and payroll database as well as delivering
valuable management reports.
- - PROVIDE SUPERIOR SERVICE. The Company emphasizes customer responsiveness
and maintains a commitment to providing a superior quality of service
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.
The Company intends to continue to focus on the manual labor, short notice,
light industrial niche of the temporary labor market. The Company believes
other national and international temporary labor businesses have not
aggressively pursued this market. Management believes that it can gain
significant advantages by capturing market share, achieving economies of scale
and operating efficiencies not available to its smaller competitors, and
rapidly expanding through opening new dispatch offices and increasing revenue at
existing dispatch offices.
DISPATCH OFFICE EXPANSION
The Company has rapidly grown from eight dispatch offices in 1991 to 200
dispatch offices at December 31, 1996. The Company's expansion has been
achieved primarily by opening Company-owned dispatch offices. Of the 200
dispatch offices open at December 31, 1996, 194 dispatch offices have been owned
and operated by the Company from inception. The following table sets forth the
number and location of dispatch offices by geographic region open at the end of
each of the last five years. The information below does not include four Labor
Ready franchised dispatch offices located in the Minneapolis, Minnesota
metropolitan area and one franchised dispatch office located in Fargo, North
Dakota.
LABOR READY DISPATCH OFFICES
BY GEOGRAPHIC REGION
AT DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
West ................. 9 12 23 38 51
Southwest/Mountain ... 0 2 8 15 21
Upper Midwest ........ 0 0 8 16 44
Midwest .............. 1 3 7 20 37
South ................ 0 0 1 12 32
Eastern .............. 0 0 0 1 11
Canada ............... 0 0 4 4 4
---- ---- ---- ---- ----
Total.......... 10 17 51 106 200
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---- ---- ---- ---- ----
The Company currently anticipates opening 100 dispatch offices during 1997, and
expects to open approximately 100 dispatch offices in 1998. Dispatch office
openings will be primarily in California, midwestern states, southern states and
eastern states. The Company analyzes acquisition opportunities from time to
time, may pursue acquisitions in certain circumstances and may also accelerate
expansion based on future developments.
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In 1994, the Company licensed one franchisee in Minnesota, who now operates
five locations, four in Minneapolis and one in Fargo, North Dakota. The Company
has not pursued, and does not intend to grant, any additional franchises.
Revenues generated from franchised dispatch offices have not been material
during the periods presented herein.
ECONOMICS OF DISPATCH OFFICES. The Company has standardized the process of
opening dispatch offices. In 1996, the average aggregate cost of opening a new
dispatch office was approximately $60,000, including salaries, recruiting,
testing, training, lease expenses, computer systems, advertising and other
related expenses. These costs are expected to increase as the Company purchases
more sophisticated computer and other office systems, expands training time and
programs, leases larger dispatch offices and expands into the northeastern
United States. New dispatch offices are expected to generate revenue sufficient
to cover their operating costs within two to six months. On average, the volume
necessary for profitable operations is approximately $15,000 per week. In 1996,
dispatch offices open for at least one full year generated average annual
revenue of approximately $1.3 million, or approximately $25,000 per dispatch
office per week.
CRITERIA FOR NEW DISPATCH OFFICES. Labor Ready identifies desirable areas
for locating new dispatch offices with an economic model that analyzes the
potential supply of temporary workers and customer demand based on a zip code
resolution of employment figures and the relative distance to the nearest Labor
Ready dispatch office. In addition, the Company locates dispatch offices in
areas convenient for its temporary workers, that are on or near public
transportation, and have parking available. The Company will generally avoid
downtown locations since such areas are usually inconvenient for workers and
dispatch office rental space is often more expensive. After the Company
establishes a dispatch office in a metropolitan area, the Company usually
clusters additional locations within the same area. Multiple locations in a
market reduce both opening costs and operating risk for new dispatch offices
because advertising costs are spread among more dispatch offices and because the
new dispatch office benefits from existing customer relationships with the other
dispatch offices and established Labor Ready name recognition.
DISPATCH OFFICE MANAGEMENT. The Company believes that the key factor
determining the success of a new dispatch office is identifying and retaining an
effective dispatch office general manager. Each general manager has primary
responsibility for managing the operations of the dispatch office, including
recruiting temporary workers, daily dispatch of temporary workers, and
collecting accounts receivable. The Company pays monthly bonuses to its general
managers based on accounts receivable collections during the month.
Each general manager has primary responsibility for customer service and
the dispatch office's sales efforts, including identifying and soliciting local
businesses likely to have a need for temporary manual workers. The Company's
experience is that certain types of individuals are better suited to perform the
critical management functions necessary for the dispatch office to generate the
revenues required to achieve profitability, regardless of the size of the
metropolitan area. The Company has refined its criteria for selecting general
managers and uses a profiling system to screen, test, and qualify prospective
general managers. Prior to joining the Company, the typical general manager has
little or no prior experience in the temporary employment industry. The Company
commits substantial resources to the training, development, and operational
support of its general managers. In 1996, due to turnover, attrition, or
termination, the Company replaced approximately 28% of its general managers.
OPERATIONS
DISPATCH OFFICES. Dispatch offices are locations where workers (and
prospective workers) report prior to being assigned to jobs, including those
being called back to the same employer. Workers are required to report to the
dispatch office in order to minimize "no-shows" to the customer's job site. If
a worker fails to report to the dispatch office as scheduled, the Company
identifies a replacement so that the customer has the number of workers expected
at the jobsite, on time, and ready to work.
During the early morning hours, the general manager and an assistant
coordinate incoming customer work orders, assign the available workers to the
job openings for the day, and arrange transportation to the job site. Prior to
dispatch, a branch employee checks to make sure workers have the basic safety
equipment required for the job, such as boots, back braces, hard hats, or safety
goggles, all of which are provided at no charge to the worker or the customer.
The customer provides additional safety and other equipment, if required. New
assignments are generally filled from a first come, first served daily sign-in
sheet, except for return requests.
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Workers who pass on a particular job are moved to the bottom of the list.
Most work assignments have been scheduled in advance, a majority of which are
repeat work orders from customers. However, a significant portion of the job
openings are requested on short notice, often the same day as requested.
The workers are provided with a work order (which is endorsed by
the customer to confirm work performance) that each worker must present at
the dispatch office in order to receive payment for the hours worked. Workers
are generally paid daily by check. Computer systems at each dispatch office
perform the calculations necessary to determine the wages, less taxes and
applicable withholdings, and print security controlled checks, which are
distributed to each worker.
Dispatch offices generally open early, usually by 5:30 a.m., with some
open 24 hours (depending on volume or activity), and generally remain open
until the last temporary laborer is paid. Dispatch offices are generally
staffed with at least two full-time employees, including the general
manager and a customer service representative. General managers manage the
daily dispatch of temporary workers, and are responsible for monitoring and
collecting receivables, managing the credit application process for each
customer, inspecting customer job sites for site safety, as necessary, and
managing the sales and marketing efforts of the dispatch office.
Employment applications are taken throughout the day for potential
new temporary employees. Applications are used to facilitate workers
compensation safeguards and quality control systems by permitting the
Company to test for alcohol or drugs in case of work-related illness or
injury, to obtain a signed "Condition of Employment" statement, and to
comply with applicable immigration requirements.
CUSTOMERS. The Company's customers are primarily businesses and,
less frequently, government agencies, that require workers for lifting,
hauling, cleaning, assembling, digging, painting and other types of
manual work. The Company's customers are typically engaged in construction,
landscaping, freight handling, warehousing, or other light
manufacturing. Customers also include retail and wholesale operations,
sanitation, machine shops, printers, hotels and restaurants.
New dispatch offices initially target the construction industry
for potential customers, except for those new dispatch offices that are
located in metropolitan areas where there is little new construction. In
addition, as dispatch offices mature, the customer base broadens and
the mix of work diversifies. Many of the businesses have elements of
seasonality or cyclicality in their work flow and have a need for one
or more workers. The Company currently derives its business from a large
number of customers, and is not dependent on any large customer for more
than 2% of its revenues. During 1996, the Company's ten largest customers
accounted for $10.3 million, or 6% of total sales. While a single dispatch
office may derive a substantial percentage of its revenues from a single
customer, the loss of that customer would not have a significant impact
on the Company's revenues. During 1996, the Company provided temporary
workers to in excess of 35,000 customers. Labor Ready filled more than 1.4
million work orders in 1996.
Many customers use Labor Ready as a screening device for future
hires. Because Labor Ready does not charge a fee if a customer hires a
Company worker, customers on occasion send prospective employees to the
Company with a specific request for temporary assignment to their business.
Customers thereby have the opportunity to observe the prospective employee in
an actual working situation, and minimize expenses involved in employee
turnover and personnel agency fees.
BILLING AND COLLECTIONS. The Company has implemented a credit policy
which allows new customers to establish a credit limit by the branch office
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. Additional credit extensions beyond those approved by this
system are reviewed by the credit department using other credit reporting
agencies, bank/trade references and balance sheet analysis. 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.
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SALES AND MARKETING. Generally, each branch office is responsible for
its own sales and marketing efforts. The Branch Manager is primarily
responsible for sales and customer service with all branch employees being
involved in sales and customer relations. Every office maintains a database
of area businesses for telemarketing and direct mail. The Company's goal is
for each office to mail 500 to 1,000 pieces of direct mail a week with
follow-up calls on qualified leads to be made by the Branch Manager or
Customer Service Representative. To support new branch openings, the
corporate office does an initial mailing of 15,000 to 25,000 pieces to the
businesses in the branch's geographic area.
Over the past six months, the Company has placed more emphasis on
recruiting and retaining professional field sales personnel. The primary
focus of these individuals is to generate same store sales for offices that
are in the more mature phase of their marketing life cycles.
At the corporate level, the Company is developing accounts that are
national in scope and need workers at multiple locations. The Company is
working on coordinated marketing strategies to enhance national and target
account management in established as well as new markets throughout the
United States and Canada. The Company is continuing to implement marketing
strategies for national and target account customers and has expanded its
staffing sales and support group.
Field support for national and target account sales and marketing
includes centralized account management, dispatch via an 800 number,
advertising campaigns for target industries and new markets prior to opening
dispatch offices, electronic order entry from the customer's location, and a
centralized customer service hotline which promotes prompt and professional
resolution to customer issues as they arise. The strategies are designed to
improve customer development, loyalty, and retention.
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 personal sales contacts, word
of mouth, direct mail campaigns, and yellow pages advertising. Marketing
strategy calls for an increased use of media public relations to heighten
name recognition and advertising in key target industries publications and
local newspapers.
TEMPORARY WORKERS. Most workers find the Company's "Work Today, Paid
Today" policy appealing and arrive at the dispatch office early in
the morning motivated to put in a good day's work and receive a paycheck at
the end of the day. Labor Ready's temporary workers are typically persons who
are unemployed or in between jobs. Nearly all are male and most are between
the ages of 18 and 40 and live in low income neighborhoods. Most temporary
workers have phone numbers, and approximately 50% own cars. The average
temporary worker works for Labor Ready approximately 90 hours per year.
The Company's daily pool of temporary workers at each dispatch
office generally numbers between 40 and 200, depending upon the time of
year. Although the Company is less dependent on weather than in its early
years because of a wider dispersion of dispatch offices in different
geographic areas of the United States, good weather, nevertheless, brings
incrementally more job orders and workers.
After reviewing work orders for the day, the manager pre-screens the
qualifications of the temporary workers to assure they can perform the
work required. Additionally, the individual must be at least 18 years old,
physically capable and in apparent good health. The main objective is to
dispatch the most suitable workers for the positions available. Dispatch
office employees over time come to know most workers at the dispatch
office and their capabilities. The Company is an equal opportunity employer.
Under the Company's "satisfaction guaranteed" policy, replacements for
all unsatisfactory workers are promptly provided if the customer
notifies the Company within the first two hours of work. Employees who
receive two concurrent complaints from customers are generally terminated or
reprimanded. The Company will immediately terminate any employee who agrees
to take a work order and does not report at the customer's job site. Any
use of obscene language, alcohol or drugs on the dispatch office premises
or at the job site are grounds for immediate dismissal. In addition, an
employee found to be engaging in dishonest acts or filing a false workers'
compensation claim will be terminated. A database is maintained which lists
workers who were terminated to prevent rehire by other dispatch offices.
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The Company is responsible for withholding of FICA, Medicare, and
federal, state, and, where applicable, city and county payroll taxes from
its temporary workers for disbursement to governmental agencies.
Additionally, the Company pays federal and state unemployment
insurance premiums, and workers' compensation expenses for its
temporary employees. See "-- Workers' Compensation."
RECRUITMENT OF TEMPORARY WORKERS. The Company attracts its pool
of temporary workers through flyers, newspaper 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. Workers also find other
Company policies attractive, such as the emphasis on worker safety,
Company provided safety equipment, and modest advances for lunch or gas
for workers short on cash. Temporary workers are also aware of the Company's
no-fee policy toward temporary workers who receive regular position offers
from the Company's customers. The possibility of landing a regular position
serves as an added incentive to its workers. Finally, dispatch offices
generally remain open to ensure workers get paid the same day.
Management believes that Labor Ready has earned a good reputation with
its temporary labor pool because the Company consistently has jobs
available and treats these workers with respect, which the Company believes
helps attract a motivated and responsive worker pool. As a result,
the Company believes referrals by current or former employees who have had
good experiences with the Company account for a significant percentage of
its temporary workers.
The Company experiences from time to time, during peak periods,
shortages of available temporary workers. Dispatch offices with a shortage of
workers attempt to fill work orders by asking temporary workers to inform
friends, relatives and neighbors of the job openings and by identifying
prospective workers from the Company's employee data base. On occasion,
work orders requiring large numbers of temporary workers will be filled by
general managers coordinating with other local dispatch offices.
MANAGEMENT, EMPLOYEES AND TRAINING. The Company currently employs a
total of 92 administrative and executive staff in the corporate office, and
771 people as supervisors, general managers, customer service
representatives, district managers, area directors and support staff.
General managers report to district managers who in turn report to area
directors. The Company is hiring additional supervisory management
personnel with experience in managing multi-location operations.
After extensive interviews and tests, prospective general managers
and customer service representatives generally undergo four weeks of
training at an existing high-volume dispatch office. The employees then
attend Labor Ready University, the Company's training division, located at
the corporate office in Tacoma, Washington. Labor Ready University, formed
in 1995 with the mission of training district managers, dispatch office
managers and customer service representatives on the skills necessary for
operating a dispatch office, is staffed by experienced training
professionals. The Company has developed a curriculum, training manuals,
and instruction modules for the six-day, rigorous sessions, which include
sessions on topics such as marketing, direct mail, credit and
collections, workers' compensation and safety. By operating the training
center as part of an ongoing dispatch office, the managers and customer
service representatives receive training under actual and simulated
dispatch conditions. The Company is currently establishing eighteen
certified field training centers located in current dispatch offices where
all prospective general managers will attend their initial four weeks
training. Department heads from the Company's corporate offices teach
topics based on their area of expertise. The Company usually arranges
to have an experienced manager participate in the classes to share
experiences encountered in operating a dispatch office.
MANAGEMENT INFORMATION SYSTEMS. The Company has developed its own
proprietary software system to process all required payroll information and
related payroll tax returns, together with other information important to
managing hundreds of thousands of workers and staff in multiple states and
countries. The Company plans to complete the installation of the next
generation client server version of this software in all dispatch offices in
1997. The upgrade of hardware at the branch offices, to dedicated servers
running Microsofts' 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. Labor Ready employs eight full-time
professionals that continually upgrade the systems and add features and
enhance operations and reliability. The 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.
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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 balances. Dispatch offices can run a variety of
reports on demand, such as receivables aging, margin reports, and customer
activity reports. The Company can also conduct keyword searches on its
employee database for certain types of work experience. Regional and area
directors can also call into the system and monitor their territories from
their laptops. The Company believes its proprietary software system provides
Labor Ready with significant competitive advantages over competitors that
utilize less sophisticated systems.
The Company's information system also provides the Company with its key
internal controls. All work order tickets are entered into the system at the
dispatch office level. No payroll check can be issued at a dispatch office
without a corresponding work ticket on the computer system. When a payroll
check is issued, the customer's weekly bill and the dispatch office receivables
are automatically updated. Printed checks have watermarks and
computer-generated signatures that are extremely difficult to duplicate.
WORKERS' COMPENSATION PROGRAM. The Company maintains workers'
compensation insurance, as required by state laws. The Company operates in
three states (Washington, West Virginia and Ohio) in which the state provides
and administers the insurance and the Company is required to pay premiums
based on the job classifications of the workers and the Company's previous
claims experience. Other states permit the Company to obtain insurance coverage
through fronting insurance carrier licensed to do business in those states. The
Company had deposited $15.2 million as of December 31, 1996, with a foreign
off-shore company for the payment of workers' compensation claims and
related claims settlement expenses on claims originating in these states.
Claims are administered by a third party administrator retained by the
Company. At December 31, 1996, approximately $7.4 million remained on deposit
for the payment of future claims and claims settlement expenses which were
estimated by the Company at $3.9 million.
The Company has established a separate department at its corporate
headquarters to manage its insurers, third party administrators, and the medical
service providers. The Company attempts to resolve claims promptly and generally
closes claims within 120 days. To reduce the wage-loss compensation claims, the
Company has established a "light duty" (transitional) return to work
program that requires minimal physical exertion within the Company (dispatch
office work) or outside assignments (e.g., cafeteria help) to customers.
The Company's information system generates weekly workers' compensation loss
minimization reports for both corporate and branch location use.
GOVERNMENT REGULATIONS.
SAFETY PROGRAMS. As an employer, the Company is subject to applicable
state and/or federal statutes and administrative regulations pertaining to job
site safety. Where states do not have a safety program certified by the
federal Occupational Safety & Health Administration ("OSHA"), the Company is
subject to the standards prescribed by the federal Occupational Safety &
Health Act and rules promulgated by OSHA. However, the temporary employees
are generally considered the customer's employees while on the customer's
job site for the purpose of applicable safety standards compliance liability.
In 1996, the Company's accident rate was approximately one incident
per 7,400 man hours worked. The Company continues to emphasize safety
awareness, which helps control workers' compensation costs, through
training of its management employees and office staff, safety sessions with
employees, issuing of safety equipment, monitoring of job sites, and
communicating with customers to assure that the job request order is one
that can be safely accomplished. Temporary workers are trained in safety
procedures primarily by showing safety tapes at the beginning of each day.
Bulletin boards with safety-related posters are prominently displayed.
"Tailgate" safety training sessions are conducted at the manager's and regional
safety director's discretion.
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The Company maintains its own inventory of safety equipment at each
dispatch office. Standard equipment includes hard hats, metal tipped boots,
gloves, back braces, ear plugs, and safety goggles. Equipment is checked out
to workers as appropriate. All construction jobs require steel-toed boots and
a hard hat. The manager ensures that workers take basic safety equipment to job
sites.
Office personnel are trained to discuss job safety parameters with
customers on incoming work order calls. Managers conduct job site visits for new
customer job orders and periodic "spot checks" for existing customers to
review safety conditions at job sites. Workers are encouraged to report
unsafe working conditions to the Company.
WAGE AND HOUR REGULATION. Labor Ready is required to comply with
applicable state and federal wage and hour laws. These laws require the Company
to pay its employees minimum wage and to pay overtime at applicable rates of
pay when the employee works more than forty hours in a work week. In some
states, overtime pay may be required after eight or ten hours of work in a day.
COMPETITION
The temporary services industry is highly fragmented and highly
competitive, with limited barriers to entry. A large percentage of
temporary staffing companies are local operations with fewer than five
offices. Within local or regional markets, these firms actively compete with
the Company for business. The primary basis of competition among local firms
is price and, to a lesser extent, service. While entry into the market has
limited barriers, lack of working capital frequently limits growth of smaller
competitors.
Although there are several very large full-service and specialized
temporary labor companies competing in national, regional and local markets,
to date, those companies have not aggressively expanded in the Company's
targeted market segment. Many of these competitors have substantially
greater financial and marketing resources than those of the Company. One or
more of these competitors may decide at any time to enter or expand their
existing activities in the light industrial market and provide new and
increased competition to the Company. The Company believes that, among the
larger competitors, the primary competitive factors in obtaining and
retaining customers are the cost of the temporary labor, the quality of the
temporary workers provided, the responsiveness of the temporary labor
company, and the number and location of offices. The availability to
the Company's customers of multiple temporary service providers creates
significant pricing pressure as competitors compete for the available demand,
and this pricing pressure adversely impacts operating margins.
TRADEMARKS
The Company's business is not presently dependent on any patents,
licenses, franchises, or concessions. "Labor Ready," the "LR" logo and the
service mark "Work Today, Paid Today" are registered with the U.S. Patent
and Trademark Office.
ITEM 2. PROPERTIES
The Company leases virtually all of its dispatch offices. Dispatch
office leases generally permit the Company to terminate on 30 days notice and
upon payment of three months rent. Certain leases have a minimum one year term
and require additional payments for taxes, insurance, maintenance and renewal
options.
In February 1995, the Company purchased a labor dispatch building which
also serves as a warehouse facility for supplies and storage in Tacoma,
Washington. The Company also owns a 24,000 square foot facility in Tacoma,
Washington which is currently listed as available for lease and/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 and currently serves as its headquarters
and administrative office building. The Company also owns dispatch buildings
in Kent, Washington, and Kansas City, Missouri. Management believes all of
the Company's facilities are currently suitable for their intended use. At
present growth rates, management believes the new building will be adequate for
administrative offices through the year 1998.
Page-9
<PAGE>
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, 1996.
Page-10
<PAGE>
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 this point, 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, 1995 $5.00 $4.00
June 30, 1995 10.22 4.45
September 30, 1995 9.55 7.72
December 31, 1995 12.67 8.33
March 31, 1996 14.66 9.00
June 30, 1996 18.67 18.00
September 30, 1996 25.00 16.50
December 31, 1996 17.75 10.75
*Dollar amounts are adjusted to reflect the three for two forward
stock splits which were effective on November 22, 1995, and July 7,
1996.
The Company had 605 shareholders of record as of December 31, 1996. The
quotation information has been derived from the Electronic Bulletin Board
Quotation System operated by broker/dealers and does not include retail markups
or markdowns or commissions. The bid price does not reflect prices in actual
transactions. 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.
Page-11
<PAGE>
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 Sheets as of December 31, 1995 and 1996, and the
Consolidated Statements of Operations, Changes in Shareholders' Equity, and Cash
Flows for the years ended December 31, 1994, 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, 1992 and 1993, 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)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ---------- ---------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues from services............................. $8,424 $15,659 $38,951 $94,362 $163,450
Gross profit....................................... 1,939 3,258 8,238 17,719 28,474
Income before taxes and extraordinary item......... 86 253 1,188 3,232 3,506
Extraordinary item, net of tax..................... -- 48 -- -- (1,197)
Net income......................................... 159 269 852 2,062 724
Earnings per common share.......................... $0.04 $0.04 $0.13 $0.23 $0.06
Weighted average shares outstanding (1)............ 4,053 5,502 6,545 8,692 10,859
OPERATING DATA:
Revenues from dispatch offices open for full period $8,230 $12,960 $27,311 $65,798 $133,156
Revenues from dispatch offices opened during period $194 $2,699 $11,640 $28,310 $30,294
Dispatch offices open at period end................ 10 17 51 106 200
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ---------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Current assets..................................... $1,454 $2,313 $7,572 $20,730 $48,741
Total assets....................................... 1,880 3,153 8,912 26,182 64,331
Current liabilities................................ 1,086 1,706 5,631 7,956 11,505
Long-term liabilities.............................. 578 777 319 9,695 1,234
Total liabilities.................................. 1,664 2,483 5,950 17,650 12,739
Shareholders' equity............................... 216 670 2,962 8,532 51,592
Cash dividends declared (2)........................ -- 50 43 43 43
Working capital.................................... 368 607 1,941 12,774 37,236
</TABLE>
(1) The weighted average shares outstanding have been adjusted to reflect the
three for two forward stock splits which were effective on November 22,
1995, and July 7, 1996.
(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."
Page-12
<PAGE>
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 eight dispatch offices
in 1991 to 200 dispatch offices at December 31, 1996. Substantially all of the
growth in dispatch offices was achieved by opening Company-owned locations
rather than through acquisitions. The Company's revenues grew from
approximately $6.0 million to $163.5 million from 1991 to 1996. This
revenue growth has been generated both by opening new dispatch offices and
by continuing to increase sales at existing dispatch offices. In 1996, the
average annual revenue per dispatch office open for more than a full year was
$1.3 million.
The Company expects to open 100 new dispatch offices in each of 1997 and
1998. In 1996, the Company incurred costs of approximately $5.6 million to
open 94 new dispatch offices (an average of approximately $60,000 per
dispatch office). The Company expects the average cost of opening new dispatch
offices to continue to increase due to more extensive management training and
the installation of more sophisticated computer and other office systems.
Further, once open the Company invests significant amounts of additional cash
into the operations of new dispatch offices until they begin to generate
sufficient revenue to cover their operating costs, generally in two to six
months. The Company pays its temporary workers on a daily basis, and bills
its customers on a weekly basis. The average collection cycle for 1996 was
approximately 38 days. Consequently, the Company experiences significant
negative cash flow from operations and investment activities during periods of
high growth, which also adversely impacts the Company's overall profitability.
The Company expects to continue to experience periods of negative cash flow from
operations and investment activities while it rapidly opens dispatch offices and
expects to require additional sources of working capital in order to continue to
grow. See "-- Results of Operations" and "--Liquidity and Capital Resources."
Many of the Company's customers are construction and landscaping
businesses, which are significantly affected by the weather. Construction and
landscaping businesses and, to a lesser degree, other customer businesses
typically increase activity in spring, summer and early fall months and
decrease activity in late fall and winter months. Inclement weather can slow
construction and landscaping activities in such periods. As a result, the
Company has generally experienced a significant increase in temporary labor
demand in the spring, summer and early fall months, and lower demand in the
late fall and winter months.
Depending upon location, new dispatch offices initially target the
construction industry for potential customers. As dispatch offices mature, the
customer base broadens and the mix of work diversifies. The Company may discount
its rates when it enters a new market to attract customers. From time to time
during peak periods, the Company experiences shortages of available temporary
workers. See "Risk Factors -- Dependence on Availability of Temporary Workers."
Cost of services primarily includes wages and related payroll expenses
of temporary workers and dispatch office employees, general managers,
district managers and area directors, including workers' compensation,
unemployment compensation insurance, Medicare and Social Security taxes, but
does not include dispatch offices lease expenses. The Company's cost of services
as a percentage of revenues has fluctuated significantly in recent periods
and is expected to continue to fluctuate significantly in future periods as the
Company continues its rapid growth. Cost of services as a percentage of
revenues is affected by numerous factors, including salaries of new
supervisory personnel hired under new management organizational structures,
the hiring of large numbers of general managers, the use of lower introductory
rates to attract new customers at new dispatch offices, and the relatively
lower revenues generated by new dispatch offices prior to reaching maturity.
Page-13
<PAGE>
Temporary workers assigned to customers remain Labor Ready employees.
Labor Ready is responsible for employee-related expenses of its temporary
workers, including workers' compensation, unemployment compensation insurance,
Medicare and Social Security taxes and general payroll expenses. The Company
does not provide health, dental, disability or life insurance to its temporary
workers. Generally, the Company bills its customers for the hours worked by the
temporary workers assigned to the customer. Because the Company pays its
temporary workers only for the hours actually worked, wages for the Company's
temporary workers are a variable cost that increases or decreases directly
in proportion to revenue. The Company has one franchisee which operates
five dispatch offices. The Company does not intend to grant additional
franchises. Royalty revenues from the franchised dispatch offices are included
in revenues from services and were not material during any period presented
herein. See "Selected Consolidated Financial Information."
The typical customer order is for two temporary workers and the
typical payroll check paid by the Company is less than $50.00. The Company
is not dependent on any individual customer for more than 2% of its annual
revenues. During 1996, the Company had in excess of 35,000 customers and
filled more than 1.4 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,
------------------------------------------
1994 1995 1996
------------ ----------- -----------
Revenues from services............. 100.0% 100.0% 100.0%
Cost of services................... 78.9 81.2 82.6
Selling, general and
administrative expenses.......... 16.9 14.5 15.3
Interest and other expenses, net... 1.2 0.9 (0.1)
Income before taxes on income and
extraordinary item............... 3.0 3.4 2.1
Net income......................... 2.2 2.2 0.4
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
DISPATCH OFFICES. The number of offices grew to 200 at December 31, 1996
from 106 locations at December 31, 1995, a net increase (after closings and
consolidations) of 94 dispatch offices, or 89%. The Company estimates that its
aggregate costs of opening 94 new dispatch offices in 1996 was $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. Management believes that the
costs of opening new dispatch offices will continue to increase. The increases
in 1996 were primarily the result of a longer manager training period, increased
pre-hire and screening costs and the added opening costs related to the use of
more sophisticated computer and other office systems. The number of dispatch
offices grew to 106 at December 31, 1995 from 51 locations at December 31, 1994,
a net increase (after closings and consolidations) of 55 dispatch offices, or
108%. The Company estimates that its aggregate costs of opening 34 new dispatch
offices in 1994 was approximately $850,000 (an average of approximately $25,000
per dispatch office). The increases in 1995 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. The Company's revenues from services increased to
$163.5 million for 1996 from $94.4 million for 1995, an increase of $69.1
million, or 73%. 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 second half of the year. The Company's revenues from services
increased to $94.4 million for 1995 from $39.0 million for 1994, an increase of
$55.4 million, or 142%. This increase in revenues from services resulted from
essentially equal increases in revenues from dispatch offices open for the full
period and revenues generated from dispatch offices opened during the period, as
indicated below.
Page-14
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Increase in revenues from dispatch offices open for full year.. $11,652 $27,823 $39,161
Revenues from new dispatch offices opened during year.......... $11,640 $27,588 $29,927
-------- -------- --------
Total increase over prior year................................. $23,292 $55,411 $69,088
-------- -------- --------
-------- -------- --------
</TABLE>
COST OF SERVICES. Cost of services increased to $135.0 million for 1996
from $76.6 million for 1995, an increase of $58.4 million, or 76.2%, reflecting
the additional wages and salaries paid to temporary workers and
additional management personnel and related payroll expenses. Cost of
services as a percentage of revenues from services increased to 82.6% for
1996 from 81.2% for 1995, an increase of 1.4%. This increase in costs as a
percentage of revenues reflects salaries of new supervisory and sales
personnel hired under new management organizational structures, the adverse
effect of loss development for workers' compensation, the use of lower
introductory rates to attract new customers at new dispatch offices, and the
relatively lower revenues generated by new dispatch offices prior to
reaching maturity. Cost of services increased to $76.6 million for 1995 from
$30.7 million for 1994, an increase of $45.9 million, or 150%, reflecting the
additional wages and salaries paid to temporary workers and the related payroll
expenses. Cost of services as a percentage of revenues from services increased
to 81.2% for 1995 from 78.9% for 1994, an increase of 2.3%. The Company expects
to experience significant fluctuations in such percentage in future periods
as the Company continues its rapid addition of new dispatch offices
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses increased to $25.1 million in 1996 from $13.6 million
in 1995, an increase of $11.5 million, or 84.6%. As a percentage of
revenues, selling, general, and administrative expenses increased to 15.3% for
1996 from 14.5% for 1995, or 0.8%. This increase was the result of the new
management personnel hired to provide the necessary organizational
infrastructure to effectively manage the Company's anticipated growth over the
next several years and new and enhanced information systems designed to improve
both workers' compensation administration and the credit and collection
processes. Selling, general, and administrative expenses increased to $13.6
million in 1995 from $6.6 million in 1994, an increase of $7.0 million, or 106%.
As a percentage of revenues, selling, general, and administrative expenses
decreased to 14.5% for 1995 from 16.9% for 1994. This percentage decrease
resulted primarily from selling, general and administrative expenses increasing
at a slower rate than the increase in revenues.
INTEREST AND OTHER EXPENSES. Interest income and other expenses, net, was
a positive contribution to income of $93,000 in 1996, compared to an expense of
$866,000 in 1995. 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) and investment of surplus funds in
short-term corporate debt obligations. 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 0.1% in 1996. Interest expense and other
expenses, net, increased to an expense of approximately $866,000 in 1995 from an
expense of approximately $457,000 in 1994, an increase of 89.5%, reflecting
primarily higher borrowing amounts and the additional interest costs of the $10
million principal amount of subordinated debt issued in October 1995. As a
percentage of revenues, interest expense decreased from 1.2% in 1994, to 0.9% in
1995, reflecting the increased revenues of the Company.
TAXES ON INCOME. The Company's taxes on income increased to $1.6 million
in 1996 from approximately $1.2 million in 1995, an increase of approximately
$0.4 million, or 33%. This increase was the direct result of the corresponding
increase in the Company's income before taxes for such period, the expense
incurred related to a change in the prior year 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 $1.7 million at December 31, 1996, 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. See Note 10 to
Consolidated Financial Statements. The Company's taxes on income increased to
$1.2 million in 1995 from approximately $336,000 in 1994, an increase of
approximately $816,000, or 243%. This increase was the direct result of the
corresponding increase in the Company's income before taxes for such period.
NET INCOME. Net income for 1996 decreased to $725,000 from $2,061,000 in
1995. This represents a $1,338,000 decrease or 65%. The decrease was primarily
the result of the adverse effect of losses from workers' compensation claims and
an extraordinary loss. An extraordinary loss of approximately $1,900,000 was
the result of the prepayment of the entire outstanding balance of the
subordinated debt. This prepayment 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. In 1995, the increase in
Page-15
<PAGE>
revenues from services also resulted in an increase in net income to $2,100,000
from $852,000 for 1994. This represents an increase of $1,200,000 or 142%, and
corresponds to the increase in revenues in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1996 and 1995, the Company used net cash in operating activities of
$7.1 million and $3.7 million, respectively, reflecting the significant growth
in the Company's revenues and accounts receivable, increased workers'
compensation deposits, and the opening of 94 new dispatch offices in 1996, and
57 new dispatch offices in 1995. The Company used net cash in investing
activities of $11.0 million in 1996, and $2.5 million in 1995 in connection with
the opening of dispatch offices, improvements to and the purchase of new
corporate offices and investments in cash restricted for workers' compensation
claims. Management anticipates continuing cash flow deficits from operations
and investing activities while the number of dispatch offices continues to grow
at rapid rate. Management expects the cash flow deficit to be financed by the
use of the Company's revolving line of credit, and may consider other equity or
debt financings as necessary.
The Company financed its operations in 1996 and 1995 primarily through the
sale of debt and equity securities, as discussed below.
On June 12, 1996, the Company successfully completed the sale of 1,950,000
shares of the Company's common stock, through a public offering, at a price of
$16.33 per share ($15.23 net of underwriting costs). An additional 295,000
shares of common stock were sold pursuant to an underwriters over-allotment
option, at the same price per share. In connection with this offering, the
Company incurred costs of approximately $574,000 which have been applied against
the proceeds received. The cash proceeds have been used to fund the growth in
dispatch offices, pay-off substantially all long-term debt, fund required
workers' compensation deposits and provide for significant cash necessary to
support operating and financing opportunities. As of March 7, 1997, the Company
had surplus funds of approximately $9.7 million invested in cash equivalents and
short-term debt instruments.
In October 1995, the Company completed a private financing of $10.0 million
in 13% Senior Subordinated Notes (the "Notes"). Under the terms of the Notes,
holders thereof were granted warrants to purchase 1,113,552 shares of common
stock, and such warrants are exercisable any time prior to the expiration of the
seven year term or upon the early payment of the Notes at an established price
of $7.78 per share. In August 1996, the Company notified the holders of the
Notes of its intention to prepay the entire outstanding amount as of September
5, 1996. The holders of the Notes exercised the remaining outstanding 1,023,552
warrants, effected in the form of a non-cash transaction, and the balance of
the Notes, $2,038,927, was paid in cash by the Company. An extraordinary loss
of $1,197,400 (net of the associated tax benefit of $703,200) was incurred on
the write-off of the balance of both the debt discount and debt issuance costs.
In August 1996, the Company obtained a new revolving credit facility from
U.S. Bank of Washington, N.A. which provides for borrowings of up to $20,000,000
and is secured by the accounts receivable of the Company. The credit line has
an established interest rate equal to the bank's prime rate. As of December 31,
1996, the Company did not have any borrowings outstanding under this agreement.
In December, 1996, the Company used $1,714,744 in cash to finance the
original capitalization of Labor Ready Assurance Company, a wholly owned foreign
subsidiary. This subsidiary was created to provide the Company with a more cost
efficient method of administering, paying and settling the claims incurred
relative to workers' compensation. Operation of this subsidiary began January
1, 1997. Additional investments of restricted cash will be required as the
Company expands its operation.
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.
Page-16
<PAGE>
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.
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, daily dispatch of temporary
workers and interfacing with customers. Since the Company opened 94 dispatch
offices in 1996 and has plans to open 100 new offices in each of 1997 and 1998,
the Company needs to hire managers for each new office, plus 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 generally have no prior
experience in the temporary employment industry.
COMPETITION. 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. Price
competition is intense, particularly for provision of light industrial
personnel, and price pressure from both competitors and customers is increasing.
WORKING CAPITAL REQUIREMENTS. The Company experiences significant negative
cash flow from operations and investment activities (approximately $17.6 million
and $5.4 million in 1996 and 1995, respectively). In 1996, the Company incurred
costs of approximately $5.6 million to open 94 new dispatch offices (an average
of approximately $60,000 per dispatch 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.
INDUSTRY RISKS. Temporary staffing companies employ and place 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. Demand for the Company's services may be
significantly affected by the general level of economic activity and
unemployment in the U.S. and specifically within the construction and light
industrial trades.
SEASONALITY. Many of the businesses served by the Company, particularly
construction and landscaping businesses, are seasonal or cyclical in their work
flow. 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.
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.
Page-17
<PAGE>
LABOR READY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants....... F-2
Consolidated Balance Sheets
at December 31, 1995 and 1996.......................... F-3
Consolidated Statements of Income
for the Years Ended December 31, 1994, 1995 and 1996.. F-5
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1994, 1995 and 1996... F-6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1994, 1995 and 1996... F-7
Notes to Consolidated Financial Statements............... F-9
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders of
Labor Ready, Inc.
We have audited the accompanying consolidated balance sheets of Labor
Ready, Inc. and subsidiaries as of December 31, 1995 and 1996 and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three 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 audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Labor Ready, Inc. and subsidiaries as of December 31, 1995 and
1996 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Spokane, Washington /s/ BDO Seidman, LLP
February 24, 1997
F-2
<PAGE>
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
ASSETS
DECEMBER 31,
1995 1996
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents............... $ 5,359,113 $ 17,597,821
Accounts receivable, less allowance
for doubtful accounts of $868,607 and
$1,236,776 (Notes 3 and 13)............ 12,182,806 21,010,653
Workers' compensation deposits
and credits (Note 2)................... 1,886,644 5,285,552
Prepaid expenses and other.............. 602,052 1,983,961
Income taxes receivable................. -- 1,194,633
Deferred income taxes (Note 10)......... 698,930 1,668,474
------------ ------------
Total current assets................... 20,729,545 48,741,094
------------ ------------
PROPERTY AND EQUIPMENT (Note 4):
Buildings and land...................... 1,536,086 3,733,202
Computers and software.................. 2,005,985 5,522,934
------------ ------------
3,542,071 9,256,136
Less accumulated depreciation........... 690,648 1,431,562
------------ ------------
Property and equipment, net............. 2,851,423 7,824,574
------------ ------------
OTHER ASSETS:
Intangible assets and other, less
amortization of $114,588 and
$979,572 (Note 17)..................... 1,156,285 3,071,933
Workers' compensation deposits and
credits, less current portion (Note 2). 1,427,905 2,979,018
Deferred income taxes (Note 10)......... 16,477 --
Restricted cash in captive insurance
subsidiary (Note 2).................... -- 1,714,744
------------ ------------
Total other assets..................... 2,600,667 7,765,695
------------ ------------
Total assets (Notes 3 and 5)............ $ 26,181,635 $ 64,331,363
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
CURRENT LIABILITIES:
Checks issued against future deposits..... $ 514,842 $ 1,139,555
Accounts payable.......................... 1,118,081 2,230,721
Accrued wages and benefits................ 1,588,147 3,046,084
Workers' compensation claims
(Note 2) (Note 17)....................... 1,943,338 5,076,686
Income taxes payable...................... 1,161,000 --
Note payable (Note 3)..................... 1,591,206 --
Current maturities of long-term
debt (Note 4)............................ 39,117 11,905
------------- -------------
Total current liabilities................. 7,955,731 11,504,951
------------- -------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities
(Notes 4 and 6).......................... 953,937 90,352
Deferred income taxes (Note 10)........... -- 1,144,144
Subordinated debt, less unamortized
discount of $1,213,303 and $0 (Note 5)... 8,740,623 --
------------- -------------
Total long-term liabilities............... 9,694,560 1,234,496
------------- -------------
Total liabilities......................... 17,650,291 12,739,447
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.444 par value
5,000,000 shares authorized;
issued and outstanding 1,921,687
shares (Note 8).......................... 854,082 854,082
Common stock, no par value 25,000,000
shares authorized; issued and
outstanding, 8,818,848 and 12,373,576
shares (Note 5,7 and 9).................. 7,116,422 49,516,834
Cumulative foreign currency translation
adjustment............................... (28,707) (50,126)
Retained earnings......................... 589,547 1,271,126
------------- -------------
Total shareholders' equity 8,531,344 51,591,916
------------- -------------
Total liabilities and shareholders'
equity................................... $ 26,181,635 $ 64,331,363
------------- -------------
------------- -------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues from services.................. $38,950,683 $94,361,629 $163,449,620
Costs and expenses:
Cost of services....................... 30,712,945 76,642,962 134,975,798
Selling, general and
administrative......................... 6,592,555 13,639,034 25,060,587
Interest and other, net................ 457,378 866,113 (93,476)
------------- ------------- -------------
Income before taxes on income
and extraordinary item................. 1,187,805 3,231,520 3,506,711
Taxes on income (Note 10)............... 336,000 1,151,713 1,585,028
------------- ------------- -------------
Income before extraordinary
item................................... 851,805 2,061,807 1,921,683
Extraordinary item, net of income tax
benefit of $703,200 (Note 5)........... -- -- (1,197,400)
------------- ------------- -------------
Net income.............................. $851,805 $2,061,807 $724,283
------------- ------------- -------------
------------- ------------- -------------
Earnings per common share:
Income before extraordinary
item (Note 8)......................... $0.13 $0.23 $0.17
Extraordinary item, net................. -- -- (0.11)
------------- ------------- -------------
Net income.............................. $0.13 $0.23 $0.06
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares
outstanding (Note 9)................... 6,544,955 8,692,368 10,859,075
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
CUMULATIVE
RETAINED FOREIGN
COMMON STOCK PREFERRED STOCK EARNINGS CURRENCY
-------------------------- -------------------------- (ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT DEFICIT) ADJUSTMENT
----------- ------------ ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 . . . . . . 5,856,615 $ 2,135,764 2,256,951 $ 1,003,088 $ (2,387,662) $ --
Net income for the year. . . . . . -- -- -- -- 851,805
Debentures converted . . . . . . . 535,265 271,200 -- -- -- --
Common stock issued from private
placement. . . . . . . . . . . . 1,068,660 1,130,223 -- -- -- --
Preferred stock canceled . . . . . -- -- (335,264) (149,006) 149,006 --
Common stock canceled on lapsing
subscriptions. . . . . . . . . . (4,500) (2,000) -- -- -- --
Common stock issued for services . 2,250 5,000 -- -- -- --
Foreign currency translation . . . -- -- -- -- -- (2,853)
Preferred stock dividend . . . . . -- -- -- -- (42,705) --
----------- ------------ ---------- ------------ ------------ ----------
BALANCE, December 31, 1994 . . . . . 7,458,290 3,540,187 1,921,687 854,082 (1,429,556) (2,853)
Net income for the year. . . . . . -- -- -- -- 2,061,807 --
Common stock issued on conversion
of debt. . . . . . . . . . . . . 224,103 382,364 -- -- -- --
Common stock issued for 401(k)
Plan . . . . . . . . . . . . . . 1,795 7,679 -- -- -- --
Common stock issued from private
placement. . . . . . . . . . . . 21,000 69,998 -- -- -- --
Common stock issued on warrants
exercised. . . . . . . . . . . . 1,068,660 1,781,100 -- -- -- --
Common stock issued on the exercise
of options . . . . . . . . . . . 45,000 45,000 -- -- -- --
Detachable stock warrants issued . -- 1,290,094 -- -- -- --
Preferred stock dividend . . . . . -- -- -- -- (42,704) --
Foreign currency translation . . . -- -- -- -- -- (25,854)
----------- ------------ ---------- ------------ ------------ ----------
BALANCE, December 31, 1995 . . . . . 8,818,848 7,116,422 1,921,687 854,082 589,547 (28,707)
Net income for the year. . . -- -- -- -- -- 724,283 --
Common stock issued for 401(k)
Plan . . . . . . . . . . . . . . 5,138 48,250 -- -- -- --
Common stock issued from public
stock offering, net (note 9) . . 2,242,500 33,586,259 -- -- -- --
Common stock issued on debt
extinguishment and warrants
exercised. . . . . . . . . . . . 1,023,552 7,961,074 -- -- -- --
Common stock issued on the exercise
of options . . . . . . . . . . . 283,538 804,829 -- -- -- --
Preferred stock dividend . . . . . -- -- -- -- (42,704) --
Foreign currency translation . . . -- -- -- -- -- (21,419)
----------- ------------ ---------- ------------ ------------ ----------
BALANCE, December 31, 1996 . . . . . 12,373,576 $49,516,834 1,921,687 $ 854,082 $1,271,126 $(50,126)
----------- ------------ ---------- ------------ ------------ ----------
----------- ------------ ---------- ------------ ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
---------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . $ 851,805 $ 2,061,807 $ 724,283
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . 178,416 522,436 1,796,618
Common stock issued for services . . . . . . 5,000 -- --
Loss on assets sold. . . . . . . . . . . . . -- -- 3,729
Provision for doubtful accounts. . . . . . . 341,799 1,084,526 2,078,489
Extinguishment of debt, extraordinary item . -- -- 1,900,601
Deferred income taxes. . . . . . . . . . . . (260,000) (502,451) 191,077
Changes in assets and liabilities
Accounts receivable. . . . . . . . . . . . . (3,597,793) (8,104,502) (10,906,336)
Workers' compensation deposits and credits . (1,265,962) (1,871,348) (4,950,021)
Prepaid expenses and other . . . . . . . . . (234,221) (324,697) (1,381,909)
Accounts payable . . . . . . . . . . . . . . 239,186 753,442 1,160,890
Accrued wages and benefits . . . . . . . . . 535,281 774,339 1,457,937
Workers' compensation claims . . . . . . . . 458,938 1,234,469 3,133,348
Income taxes payable (receivable). . . . . . 497,000 664,000 (2,355,633)
---------- ----------- ------------
Net cash used in operating activities. . . . . (2,250,551) (3,707,979) (7,146,927)
---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . (549,959) (2,471,001) (5,749,935)
Proceeds from sale of capital assets . . . . -- -- 8,891
Investments in cash restricted for workers
compensation claims. . . . . . . . . . . . -- -- (1,714,744)
Additions to intangible assets and other . . (43,501) -- (3,558,609)
---------- ----------- ------------
Net cash used in investing activities. . . . (593,460) (2,471,001) (11,014,397)
---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments (borrowings) on note payable. . 2,177,409 (1,569,374) (1,591,206)
Checks issued against future deposits. . . . -- 514,842 624,713
Proceeds from issuance of common stock . . . 1,130,223 69,998 --
Net proceeds from public offering. . . . . . -- -- 33,586,259
Proceeds from warrants exercised . . . . . . -- 1,781,100 --
Proceeds from options exercised. . . . . . . -- 45,000 804,829
Debt issue costs . . . . . . . . . . . . . . -- (816,769) --
Proceeds from stock subscriptions. . . . . . 79,325 -- --
Repayment of subordinated debt . . . . . . . -- -- (2,069,643)
Borrowings on long-term debt . . . . . . . . 74,000 11,529,951 --
Payments on long-term debt . . . . . . . . . (189,221) (552,074) (890,797)
Dividends paid . . . . . . . . . . . . . . . (50,154) (42,704) (42,704)
---------- ----------- ------------
Net cash provided by financing activities. . 3,221,582 10,959,970 30,421,451
Effect of exchange rates . . . . . . . . . . (2,853) (25,854) (21,419)
---------- ----------- ------------
Net increase in cash and cash equivalents. . 374,718 4,755,136 12,238,708
CASH AND CASH EQUIVALENTS, beginning of
year . . . . . . . . . . . . . . . . . . . . 229,259 603,977 5,359,113
---------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year . . . . $ 603,977 $ 5,359,113 $ 17,597,821
---------- ----------- ------------
---------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
--------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . $ 513,497 $ 1,302,929 $ 332,479
Income taxes paid. . . . . . . . . . . . . . . $ 99,000 $ 990,164 $ 2,858,941
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Contribution of Common stock contributed to
employer 401(k) Plan . . . . . . . . . . . . -- $ 7,679 $ 48,250
Cancellation of preferred stock. . . . . . . . $ 149,006 -- --
Debentures converted to Common stock . . . . . $ 271,200 $ 75,000 --
Issuance of a note receivable on the sale of
capital assets . . . . . . . . . . . . . . . -- -- $ 23,250
Issuance of common stock for the warrants
exercised on debt retirement . . . . . . . . -- -- $ 7,961,074
Refinance of note payable, net . . . . . . . . $ 2,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Labor Ready,
Inc. and its wholly-owned subsidiaries Labour Ready Temporary Services Limited
and Labor Ready Assurance Company (collectively referred to as "the Company").
The Company's principal business activity involves providing temporary
workers for manual labor jobs to construction and small manufacturing companies
in the United States and Canada. The Company's customers are primarily
businesses in the construction, freight handling, warehousing, landscaping,
light manufacturing, and other light industrial markets. These businesses
require workers for lifting, hauling, cleaning, assembling, digging, painting
and other types of manual work. The Company was incorporated under the laws
of the State of Washington on March 19, 1985. All inter-company balances and
transactions between these entities have been eliminated on consolidation.
B. REVENUE RECOGNITION
Revenues from services and the related cost of services are recorded in the
period in which the services are performed. Franchise activity and fees are
minimal.
C. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
D. 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, ranging from five to thirty nine and one-half years.
E. INTANGIBLE ASSETS AND OTHER
The intangible assets primarily consist of pre-opening costs, customer
lists and non-compete agreements. Pre-opening and start-up costs incurred in
connection with the establishment of a new dispatch office are capitalized until
such facilities become operational. These costs are then amortized on a
straight line basis over a period of two years. Amortization of the other
intangible assets is computed using the straight line method over periods not
exceeding ten years. Management evaluates, on an ongoing basis, the carrying
value of intangible assets and makes a specific provision against the asset when
an impairment is identified.
F. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes". Deferred income taxes are provided for temporary differences
between the financial reporting and tax basis of assets and liabilities.
Deferred taxes are measured using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse. Tax credits are
accounted for as a reduction of income taxes in the year in which the credit
originates.
G. EARNINGS PER SHARE
The primary earnings per common share was computed by dividing the net
income less preferred stock dividends ($42,700 for each year presented) by the
weighted average number of shares of common stock and common stock
equivalents outstanding for all periods presented. Fully diluted earnings
per share does not differ materially from primary earnings per share. In
February, 1995 and July, 1996, the Company declared a three-for-two Common Stock
split, which has been retroactively applied for 1994 and 1995 in the
determination of the weighted average number of shares of Common Stock and
Common Stock equivalents outstanding.
F-9
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. FOREIGN CURRENCY TRANSLATION
Assets and liabilities of Labour Ready Temporary Services Limited are
translated at the rate of exchange in effect on the balance sheet date. Income
and expenses are translated at the weighted average rates of exchange prevailing
during the year. The related translation adjustments are reflected as an
accumulated translation adjustment as a component of shareholders' equity.
I. WORKERS' COMPENSATION
The Company established provisions for future claim liabilities based on
estimates of the future cost of claims and claim losses (including future claim
adjustment expenses) that have been reported but not settled, and of losses that
have been incurred but not reported. Adjustments to the claims reserve are
charged or credited to expense in the periods in which they are made.
J. MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
K. ADVERTISING COSTS
Costs incurred for designing, producing and communicating advertising are
generally expensed when incurred. Costs incurred under the Company's new
dispatch office development program are capitalized and the expense is
recognized upon opening of the dispatch office.
L. STOCK-BASED COMPENSATION
In 1996, the Company adopted for footnote disclosure purposes only, SFAS No.
123, "Accounting for Stock-Based Compensation," which requires that companies
measure the cost of stock-based employee compensation at the grant date
based on the value of the award and recognize this cost over the service
period. The value of the stock based award is determined using the intrinsic
value method whereby compensation cost is the excess of the quoted market
prices of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock.
M. ACCOUNTING FOR LONG-LIVED ASSETS
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This
statement requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. The adoption of this standard did not have
a significant impact on the Company's financial statements.
N. RECLASSIFICATION
Certain items in the 1995 and 1994 consolidated financial statements have
been reclassified to conform to the classifications used in 1996.
F-10
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
2. WORKERS' COMPENSATION
As required by the laws of the various states in which Labor Ready does
business, the Company provides workers' compensation insurance to its temporary
workers and office staff. Each state has specific workers' compensation programs
and requirements regarding the deposit of funds for the payment of workers'
compensation claims and related claim settlement and administrative expenses. In
Washington, West Virginia and Ohio (the "Monopolistic States"), the Company is
required to make payments at rates established by each state based on
the job classification of the insured workers and previous claims
experience of the Company. These payments are made directly to a
workers' compensation administrator employed by the State, who in turn
disburses funds for the settlement of claims and related expenses.
Amounts paid to these state administered programs which are not disbursed
for claims and related claim settlement and administrative expenses are
returned to the Company. At December 31, 1995 and 1996, the Company
recorded workers' compensation deposits and credits receivables from the
Monopolistic States of $967,644 and $835,566, and workers' compensation
liabilities of $536,165 and $587,411.
Workers' compensation claims in the remaining states (the "Non-Monopolistic
States") are managed by a third party administrator engaged by the Company.
These Non-Monopolistic States allow a fronting insurance company licensed to do
business in those states to guarantee Labor Ready's ability to pay these claims
and related expenses as they occur, and allow the claims to be managed by the
Company or selected claims administrators. For Non-Monopolistic States
workers' compensation, the Company purchased "stop loss" insurance coverage
for most individual claims in excess of $250,000 and for 1995 and 1996
aggregate losses in excess of $5.0 million and $7.6 million, in 1995 and 1996
respectively.
In 1995 and 1996, the Company deposited $4.6 million and $10.6 million,
respectively, with a foreign off-shore company for the payment of workers'
compensation claims and related expenses on claims originating in the
Non-Monopolistic States. At December 31, 1995 and 1996, $2.3 million and $7.4
million, remained on deposit for the payment of future claims and is included in
workers' compensation deposits and credits. Estimated incurred losses and
related settlement and administrative expenses of $1.1 million and $3.9
million are included in current workers' compensation claims payable at
December 31, 1995 and 1996, and will be paid from those deposits. Additional
workers' compensation claims payable of $600,000 related to claims incurred
prior to 1995, are also included in workers' compensation claims liabilities at
December 31, 1996.
Workers' compensation expense of $3,126,601, $5,907,771 and $9,735,118 is
included in cost of services in 1994, 1995 and 1996. In December, 1996, the
Company used $1,714,744 in cash to finance the original capitalization of Labor
Ready Assurance Company, a wholly owned foreign subsidiary Company. This
subsidiary, was created to provide the Company with a more cost efficient method
of administering, paying and settling the claims incurred relative to workers
compensation. Operation of this subsidiary began during the Company's first
quarter of 1997.
3. NOTE PAYABLE
As of January 1, 1995, the Company's accounts receivable were pledged to a
private financing company for an accounts receivable revolving credit line.
On October 31, 1995, the Company re-negotiated its loan agreement which
changed the nature of the borrowings to an asset based loan limited to the
lesser of 80% of eligible receivables (as defined in the credit agreement) or
$5,000,000. Borrowings under the line, which were set to expire on April 30,
1996, were secured by the Company's accounts receivable. Interest on
borrowings was charged at prime plus two percent plus a facility fee of
one percent per annum and an administrative fee equal to one-fifth of one
percent per month. The agreement required compliance with certain financial
covenants principally relating to working capital, debt to equity, and
dividend payment restrictions. As of December 31, 1995, the Company was in
compliance with the covenants except for the dividend payment restrictions,
for which a waiver was obtained.
F-11
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994,1995 AND 1996
3. NOTE PAYABLE (CONTINUED)
On February 15, 1996, the Company entered into an agreement with US Bank to
provide the Company with a $10,000,000 revolving line of credit at prime plus
1/4% and a maturity date of September 30, 1996. This agreement replaced the
Company's former revolving line of credit, which was repaid in February 1996.
The US Bank revolving line of credit was collateralized by all the
Company's accounts, chattel paper and contract rights.
In August 1996, the Company entered into an agreement with US Bank to provide
the Company with a $20,000,000 revolving line of credit at the bank's prime rate
(8.25% at December 31, 1996), an origination fee of $25,000, and a maturity date
of June 30, 1998. The line of credit is secured by the accounts receivable of
the Company. This line of credit replaced the Company's former $10,000,000 line
of credit which was repaid in June, 1996, and contains certain financial
covenants principally relating to tangible net worth, working capital and cash
flow. As of December 31, 1996 the Company was in compliance with all covenants.
Short-term borrowing activity was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
Balance outstanding at year-end . . . . . . . . . . . . . . . . . . . . . . $ 1,591,206 $ --
Stated interest rate at year-end, including applicable fees . . . . . . . . 11.95% 8.63%
Maximum amount outstanding at any month end . . . . . . . . . . . . . . . . $ 7,731,789 $ 8,018,974
Average amount outstanding. . . . . . . . . . . . . . . . . . . . . . . . . $ 5,907,364 $ 2,387,188
Weighted average interest rate during the year, including applicable fees . 16.49% 10.87%
</TABLE>
The average amount outstanding and the weighted average interest rate during
the year were computed based upon the average daily balances and rates.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Mortgage note payable - secured by a building in Tacoma, Washington,
payable at $1,637 per month through February, 2004, including interest
at 8% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,366 $102,257
Other notes payable, repaid in 1996 (Note 6). . . . . . . . . . . . . . . . 880,688 --
-------- --------
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993,054 102,257
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . 39,117 11,905
-------- --------
Long-term debt, less current maturities . . . . . . . . . . . . . . . . . . $953,937 $ 90,352
-------- --------
-------- --------
</TABLE>
F-12
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Scheduled long-term debt maturities as of December 31, 1996 are as follows:
Year Ending December 31, Amount
------------------------ ------
1997 $11,905
1998 12,893
1999 13,963
2000 15,123
2001 15,230
Thereafter 33,143
--------
$ 102,257
--------
--------
5. SUBORDINATED DEBT
In October 1995, the Company issued subordinated debt with detachable stock
warrants for the purchase of 1,113,552 shares at an exercise price of $7.78 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 $1,259,377 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. The debt agreement contained various financial covenants, with which
the Company was in compliance with as of December 31, 1995.
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 $7.78 per share. Upon
pre-payment, 1,023,552 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.
1. RELATED PARTY DEBT
In 1995, officers of the Company provided cash to the Company in exchange for
short-term notes payable. These notes payable aggregated $424,687 and carried
an interest rate of 12%. These notes payable were paid in full during 1995.
The Company's legal counsel, who is also a member of the board of directors,
received $337,000 in payment for legal services performed for the Company in
1996.
F-13
<PAGE>
LABOR READY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
7. CONVERTIBLE DEBENTURES
In 1993, the Company sold $356,200 of convertible debentures. The debentures
were convertible into Common Stock at a price of $0.51 per share through June
30, 1994 with the conversion price increasing $0.06 on June 30 of each
subsequent year through 1998. In 1994, $271,200 of the debentures were
converted into 535,265 shares at $0.51 per share. In 1995, the remaining
$75,000 of convertible debentures were converted into 131,840 shares of Common
Stock at $0.57 per share.
8. 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,
1994, 1995 and 1996, the Company had 1,921,687 outstanding shares of the
Series A Preferred Stock with the following terms:
Par value $0.444, with each share of Series A Preferred Stock entitled to
one vote in all matters submitted to a vote of the shareholders of the Company.
The Series A Preferred stock will vote on par with the Common Shares as a single
class unless the action being considered involves a change in the rights of the
Series A Preferred Stock. The Series A Preferred Stock bears a cumulative annual
dividend rate of five percent accrued on December 31 of each year, is redeemable
at par value plus accumulated dividends at the option of the Company at any time
after December 31, 1994, and contains an involuntary preferential liquidation
distribution equivalent to the par value plus all accumulated dividends
remaining unpaid.
In both February and July of 1996, the Board of Directors authorized a
three-for-two Preferred Stock split. 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
two separate stock splits.
During 1994, 223,509 shares of Preferred Stock outstanding were canceled as a
result of settlement of litigation. There is no established market for the
Company's Preferred Stock and management estimated the value of these canceled
shares to be insignificant.
A Preferred Stock dividend in the amount of $42,704 was accrued December 31,
1994, 1995, and 1996, and paid in January 1995, 1996, and 1997.
9. COMMON STOCK
In both July, 1996 and November, 1995, the Board of Directors authorized a
three-for-two Common Stock split. These two 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 these stock splits.
F-14
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
9. COMMON STOCK (CONTINUED)
In September and October of 1994, the Company issued 431,550 and 636,110
shares of Common Stock, respectively, in a private placement for $0.95 per
share. Each share of Common Stock issued included a detachable stock warrant
for one share of Common Stock. All of these warrants were exercised in March
1995, at a price of $1.67 per share.
In connection with the issuance of the $10,000,000 of subordinated debt in 1995
(see Note 5) the Company issued options and warrants to purchase 1,113,552
shares of Common Stock at an exercise price of $7.78 per share. The remaining
and outstanding warrants as of September 1996, 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 1,950,000 shares
of common stock, through an underwritten public offering, at a price of $16.33
per share ( $15.23 net of underwriting costs). An additional 292,500 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.
10. INCOME TAXES
Temporary differences which give rise to the deferred tax assets
(liabilities) consist of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Allowance for doubtful accounts. . . . . . . . . . . . $323,990 $469,975
Prepaid expenses . . . . . . . . . . . . . . . . . . . (161,385) (272,595)
Workers' compensation credits receivable . . . . . . . (360,931) (317,515)
Workers' compensation claims . . . . . . . . . . . . . 721,895 1,690,995
Net operating loss carry-forwards. . . . . . . . . . . 126,985 119,417
Depreciation and amortization expenses . . . . . . . . (30,828) (1,126,603)
Vacation accrual . . . . . . . . . . . . . . . . . . . 20,515 69,160
Other, net . . . . . . . . . . . . . . . . . . . . . . 75,166 (108,504)
---------- ----------
Net tax deferrals. . . . . . . . . . . . . . . . . . . 715,407 524,330
Non-current deferred tax assets (liabilities), net . . 16,477 (1,144,144)
---------- ----------
Current deferred tax assets, net . . . . . . . . . . . $698,930 $1,668,474
---------- ----------
---------- ----------
</TABLE>
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 the Company's net deferred tax assets has been established as management
believes that it is more likely than not that the net deferred tax assets
will be realized.
F-15
<PAGE>
LABOR READY, INC,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
10. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company has net operating loss carry-forwards
totaling $314,256, limited to use of $26,188 per year, the majority of which
expire in 2006.
Taxes on income consists of:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . . . . . . . . $506,919 $1,419,728 $602,942
State. . . . . . . . . . . . . . . . . . . 89,081 234,436 87,809
---------- ---------- ----------
Total Current. . . . . . . . . . . . . . . . 596,000 1,654,164 690,751
---------- ---------- ----------
Deferred
Federal. . . . . . . . . . . . . . . . . . (221,074) (482,051) 166,579
State. . . . . . . . . . . . . . . . . . . (38,926) (20,400) 24,498
---------- ---------- ----------
Total deferred:. . . . . . . . . . . . . . . (260,000) (502,451) 191,077
---------- ---------- ----------
Total taxes on income, including $703,200 tax
benefit of extraordinary item. . . . . . . . $336,000 $1,151,713 $881,828
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A reconciliation between taxes computed at the United States federal
statutory tax rate, and the consolidated effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Income tax expense based on statutory rate . . . $403,853 34 $1,092,597 34 $546,078 34
Increase (decrease) resulting from:. . . . . . .
State income taxes, net of federal benefit . . . 71,268 6 106,046 3 59,089 4
Change in valuation allowance. . . . . . . . . . (157,128) (13) -- -- -- --
Utilization of net operating losses not
previously benefited . . . . . . . . . . . . . -- (46,930) (1) (9,768) (1)
Prior year over accrual. . . . . . . . . . . . . -- -- -- -- 169,129 11
Other, net . . . . . . . . . . . . . . . . . . . 18,007 1 -- -- 117,300 7
---------- ---- ---------- ---- ---------- ----
Total taxes on income. . . . . . . . . . . . . . $336,000 28 $1,151,713 36 $ 881,828 55
---------- ---- ---------- ---- ---------- ----
---------- ---- ---------- ---- ---------- ----
</TABLE>
F-16
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
11. COMMITMENTS AND CONTINGENCIES
The Company rents certain properties for temporary labor dispatch
offices. The leases generally provide for termination on 30 days notice and
upon payment of three months rent. Certain of these leases have 1 year minimum
terms and require additional payments for taxes, insurance, maintenance and
renewal options. Lease commitments for 1997 at December 31, 1996 total
approximately $885,000. Lease expenses for the years ended December 31,
1994, 1995 and 1996 totaled $380,000, $1,113,000, and $2,347,000,
respectively.
The Company is, from time to time, involved in various lawsuits arising in
the ordinary course of business which will not, in the opinion of management,
have a material effect on the Company's results of operations.
The Board of Directors entered into an executive employment agreement with a
key officer of the Company. The agreement is for a period of time commencing on
October 31, 1995 and ending December 31, 1998, and contains certain
restrictions on the covered employee. Officer compensation under this agreement
has been set by the Board at $375,000 per year and shall be increased annually
on the first of each calendar year to 110% of the preceding years' salary.
12. RETIREMENT PLAN
Effective October 1, 1994, the Company established a 401(k) savings plan for
qualifying employees. Employees can voluntarily 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. Employees are eligible
the calendar quarter following the completion of one year of service and are
fully vested in the 401(k) plan after five years of service. The amount charged
to expense under the 401(k) plan totaled $48,250 and $81,700 for the years
ended December 31, 1995 and 1996.
13. VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts activity was as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
---------- ----------
Balance, beginning of year . . . . . . . . . . $ 365,927 $ 868,607
Charged expense. . . . . . . . . . . . . . . . 1,084,526 2,078,489
Write-offs, net of recoveries. . . . . . . . . (581,846) (1,710,320)
---------- ----------
Balance, end of year . . . . . . . . . . . . . $ 868,607 $1,236,776
---------- ----------
---------- ----------
F-17
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1995 1996
--------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents. . . $5,359,113 $5,359,113 $17,597,821 $17,597,821
Short-term borrowings. . . . . $1,591,206 $1,591,206 -- --
Long-term debt . . . . . . . . $ 993,054 $1,012,248 $ 102,257 $ 99,768
Subordinated debt. . . . . . . $8,740,623 $8,709,000 -- --
Warrants . . . . . . . . . . . -- $1,290,000 -- --
</TABLE>
The following methods and assumptions were used by the Company in estimating
fair values for financial instruments:
Cash and cash equivalents: The carrying amount reported in the
balance sheets for cash and cash equivalents approximates fair value.
Short-term borrowings: The carrying amounts of the short-term
borrowings approximates fair value due to the short-term maturity of the
debt.
Long-term debt: The fair value of the Company's long-term debt is
estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
maturities.
Subordinated debt: The fair value of the subordinated debt, representing
the amount at which the debt could be exchanged on the open market, are
determined based on the Company's then current incremental borrowing rate
for similar types of borrowing arrangements.
Warrants: The fair value of the warrants is based on the difference
between the face value of the related debt and the present value of the
future stream of debt payments.
15. EMPLOYEE STOCK PURCHASE PLAN
Effective November 20, 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 July 1, 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 purchase date 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. A total of 150,000 shares
are available for purchase under the ESPP. There were no shares issued under
the ESPP during the year ended December 31, 1996.
F-18
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
16. STOCK COMPENSATION PLANS
In November, 1996, the Company filed Form S-8 with the Securities and Exchange
Commission registering 350,000 shares of the Company's Common Stock under the
1996 Employee Stock Option and Incentive Plans (collectively the "Plans"). In
accounting for these Plans, the Company applied APB Opinion #25, Accounting for
Stock Issued to Employees, and related Interpretations. Under APB Opinion #25,
because the exercise price of the Company's employee stock options approximates
the market price of the underlying stock at the date of grant, no compensation
cost is recognized.
The Plans state 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. All
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.
Statement of Financial Accounting Standards No. 123 ("SFAS 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 and 1996, respectively: expected life of options of 5 years and 5 years,
expected volatility of 11.6% and 11.2% risk-free interest rates of 6.1% and
6.0%, and a 0% dividend yield. The weighted average fair value at date of grant
for options granted during 1995 and 1996 approximated $7.69 and $14.59 per
option.
Under the provisions of SFAS 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1995 1996
---------- ----------
Net Income
As reported $2,061,807 $724,283
Pro forma $1,957,946 $352,222
Primary earnings per share
As reported $ 0.23 $ 0.06
Pro forma $ 0.22 $ 0.03
The following table summarizes stock option activity:
WEIGHTED-AVERAGE
STOCK OPTIONS PRICE PER SHARE
------------- ----------------
Outstanding at January 1, 1995 . . . . . . . 339,750 $1.57
Granted. . . . . . . . . . . . . . . . . . . 1,196,202 7.69
Expired or canceled. . . . . . . . . . . . . (24,750) 2.09
Exercised. . . . . . . . . . . . . . . . . . -- --
------------- ----------------
Outstanding at December 31, 1995 . . . . . . 1,511,202 7.17
Granted. . . . . . . . . . . . . . . . . . . 279,000 14.59
Expired or canceled. . . . . . . . . . . . . (66,750) 2.92
Exercised. . . . . . . . . . . . . . . . . . (1,306,978) 6.62
------------- ----------------
Outstanding at December 31, 1996 . . . . . . 416,474 $12.22
------------- ----------------
------------- ----------------
F-19
<PAGE>
LABOR READY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
16. STOCK COMPENSATION PLANS (CONTINUED)
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE CONTRACTUAL AVERAGE EXERCISE NUMBER AVERAGE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE EXERCISE PRICE
- ------------- ----------- ------------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.98 22,500 2.83 Years $1.98 11,250 $1.98
3.21 - 4.97 22,724 3.21 3.69 9,337 3.69
5.19 - 7.93 134,400 3.98 7.29 14,850 7.29
9.07 32,850 4.33 9.07 8,213 9.07
13.38 168,000 4.83 13.38 - -
18.67 36,000 4.50 18.67 - -
----------- -----------
$1.98 - 18.67 416,474 4.38 $ 10.39 43,650 $ 5.49
----------- -----------
----------- -----------
</TABLE>
17. SIGNIFICANT CHANGES IN THE FOURTH QUARTER
In December 1996, the Company recognized the effect of adverse loss development
on worker's compensation claims by recording a $1.9 million charge to 1996
fourth quarter earnings. The Company also recorded $2.7 million of net
capitalized pre-opening costs related to dispatch offices opened in 1996 by
reducing fourth quarter cost of services and selling, general and administrative
expenses. The net after tax effect of these adjustments on the first three
quarters of 1996 was not considered material to the quarterly financial
statements taken as a whole.
F-20
<PAGE>
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 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.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glenn A. Welstad . . . . . . 52 Chairman of the Board, Chief Executive Officer and
President
Ralph E. Peterson. . . . . . 62 Director, Executive Vice President, and Chief Operating
Officer
Ronald L. Junck. . . . . . . 48 Director and Secretary
Richard W. Gasten. . . . . . 59 Director
Thomas E. McChesney. . . . . 50 Director
Robert J. Sullivan . . . . . 66 Director
Charles B. Russell . . . . . 38 Chief Financial Officer, Treasurer and Assistant
Secretary
Scott J. Sabo. . . . . . . . 35 Director of Operations
Robert H. Sovern . . . . . . 48 Assistant Treasurer
Keith T. Terrano . . . . . . 40 Director of Risk Management
Todd A. Welstad. . . . . . . 27 Director of Information Systems
Paul A. Rieckers . . . . . . 28 Corporate Controller
</TABLE>
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 as a director of the Company since January
1996, and as Executive Vice President and Chief Operating Officer since
September 1996. Prior to that, he served as Chief Financial Officer and
Assistant Secretary of the Company from January 1996 and as Treasurer from June
1996 until November 1996. Prior to joining the Company he served as Executive
Vice President and Chief Financial Officer of Rax Restaurants, Inc. from
December 1991 until August 1995. Rax Restaurants, Inc. entered Chapter 11
bankruptcy on November 23, 1992 and emerged from bankruptcy pursuant to a plan
of reorganization on November 8, 1993. From April 1983 to his retirement in
December 1991, Mr. Peterson was Executive Vice President and Chief Financial
Officer and a director of Hardee's Food Systems, Inc., a restaurant company
operating and franchising over 4,000 restaurants located throughout the United
States and abroad.
Page-18
<PAGE>
RONALD L. JUNCK has served as a director and Secretary of the Company since
November 1995. He is an attorney in Phoenix, Arizona where he has specialized in
business law and commercial transactions since 1974. Mr. Junck serves as legal
counsel to the Company and received $337,000 for legal services during 1996.
RICHARD W. GASTEN has served as a director of the Company since August 1996.
Mr. Gasten also has served as a director of the Company's Canadian subsidiary
and as a consultant to the Company since September 1995. Since May 1985 to
March 1997, Mr. Gasten has served as a management consultant for several
companies. Additionally, 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.
CHARLES B. RUSSELL , CPA, has served as Chief Financial Officer, Treasurer
and Assistant Secretary of the Company since November 1996. Prior to joining
the Company he served as Vice President Finance of DAKA Restaurants, Inc., a
$300 million diversified food service company, from October 1995. From June
1992 to October 1995, Mr. Russell served as Corporate Controller and Vice
President Finance and Treasurer of Rax Restaurants, Inc. Rax Restaurants, Inc.
entered Chapter 11 bankruptcy on November 23, 1992 and emerged from bankruptcy
pursuant to a plan of reorganization on November 8, 1993. Mr. Russell was a
financial manager with Limited Express, Inc. from June 1990 to June 1992. Prior
to joining Limited Express, Inc. Mr. Russell served eight years in public
accounting with Laventhal & Horwath and Deloitte Haskins and Sells.
SCOTT J. SABO has served as Director of Operations of the Company since
February 1995. Mr. Sabo joined the Company June 1990 and held positions within
the Company as a customer service representative, sales manager, branch manager
and area director before being promoted to Regional Director, Eastern Region in
June 1994. Prior to joining the Company he was employed by Labor World, a
national temporary labor service company, from April 1987 to May 1990, as a
branch manager.
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 since August 1989. Mr. Sovern was
President and Chief Executive Officer of Heritage Savings and Loan Association,
Olympia, WA from December 1984 to July 1989 and served as an executive with
Great Northwest Federal Savings, Bremerton and Poulsbo, WA 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.
KEITH T. TERRANO has served as Director of Risk Management of the Company
since April 1996. Prior to joining the Company he was Vice President of
Cornerstone Insurance Company and Senior Director of Risk Management of
Hillhaven Corporation from October 1987 to March 1996.
TODD A. WELSTAD has served as Director of Management Information Systems of
the Company since October 1994. Mr. Welstad joined the Company in January 1994
as the manager of the Tacoma branch office and in August 1994 was promoted to a
Systems Analyst in the MIS Department. Prior to joining the Company he was
employed as a Technical Supervisor at Micro-Rel, a division of Medtronics,
from February 1989 to December 1994.
PAUL A. RIECKERS, CPA, has served as Corporate Controller since December
1996. Prior to joining the Company, Mr. Rieckers served four years in public
accounting with BDO Seidman, LLP.
Page-19
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The Company's Chief Executive Officer and Executive Vice President each
received the compensation set forth below in 1996. None of the other executive
officers of the Company received compensation in excess of $100,000 in 1996.
SUMMARY COMPENSATION TABLE (1)
-----------------------------------------
LONG -TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
- --------------------------------------------------------------------------------
Securities
Underlying Options/
Name and Position Year Salary ($) SARs(#)
- --------------------------------------------------------------------------------
Glenn A. Welstad 1996 401,486 -
Chairman of the Board, Chief 1995 375,000 -
Executive Officer and President 1994 216,653 -
Ralph E. Peterson 1996 154,772 225,000
Executive Vice President and 1995 -- -
Chief Operating Officer 1994 -- -
- --------------------------------------------------------------------------------
(1) None of the named executives received compensation reportable under
the Restricted Stock Awards or Long-Term Incentive Plan Payouts
columns.
OPTION GRANTS DURING 1996 FISCAL YEAR
The following table provides information related to options granted to the
named executive officers during 1996.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
- ----------------------------------------------------------------------------------------------------------------------------------
Number of % of total
Securities Options/SARS Exercise
Underlying Granted to or Base
Options/SARS Employees in Price Expiration
Name Granted (2) Fiscal Year ($/Sh)(3) Date 0% 5% 10%
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ralph E. Peterson
Executive Vice President and 75,000 27% 7.93 2/26/01 $105,002 $342,982 $644,900
Chief Operating Officer 150,000 54% 13.38 10/30/01 $ -- $1,500,072 $2,366,023
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The potential realizable value portion of the table illustrates value
that might be realized upon exercise of the options immediately prior
to the expiration of their term, assuming the specified compounded
rates of appreciation on the Company's Common Stock over the term of
the options. These numbers do not take into account certain
provisions of the options providing for cancellation of the option
following termination of employment.
(2) Options to acquire shares of Common Stock, each of which vest 1/4
annually, beginning October 30, 1997.
(3) The option exercise price may be paid in shares of Common Stock owned
by the executive officer, in cash, or in any other form of valid
consideration or a combination of any of the foregoing, as determined
by the Compensation Committee in its discretion.
Page-20
<PAGE>
OPTION EXERCISES DURING 1996 AND YEAR END OPTION VALUES
The following table provides information related to options exercised by the
named executive officers during 1996 and the number and value of options held at
year end. The Company does not have any outstanding stock appreciation rights
("SARs").
<TABLE>
<CAPTION>
AGGREGATE OPTION/SAR EXERCISES IN 1996 AND
YEAR END OPTION/SAR VALUE
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT DECEMBER OPTIONS/SARS
AT DECEMBER 31, 1996 (#) 31, 1996 (#) AT DECEMBER 31, 1996 ($) (1)
------------------------------ ---------------------------- ----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ralph E. Peterson
Executive Vice President
and Chief Operating
Officer -- -- 45,000 180,000 $ 74,175 $ 296,700
</TABLE>
- ----------------------------
(1) The closing price for the Company's common stock as reported by Nasdaq
on December 31, 1996, was $12.88.
COMPENSATION COMMITTEE:
The Company's executive compensation is determined by a compensation
committee comprised of three members of the Board of Directors. Messrs. Junck,
Welstad and Sullivan (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, 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.
The Company and Scott Sabo, Director of Operations, are parties to an
employment agreement dated December 19, 1994, whereby Mr. Sabo agreed to serve
as Regional Director or in such other capacity as the Company shall direct.
The agreement provides for both salary plus commissions. Mr. Sabo's employment
with the Company is on an "at will" basis and may be terminated by either party
at any time.
Page-21
<PAGE>
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,
1996 for (i) each person known to the Company to own beneficially 5% or more of
any such class as of December 31, 1996, (ii) each director of the Company,
(iii) each executive officer of the Company required to be identified as a
Named Executive Officer pursuant to Item 402 of Regulation S-K and (iv) all
officers and directors of the Company as a group. Except as otherwise noted,
the named beneficial owner has sole voting and investment power. See
"Management" for a description of each individual's position with the
Company, if any.
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 1,771,257 14.3%
Preferred Stock 1,308,488 66.1%
Ralph E. Peterson (3) . . . . Common Stock 60,000 0.5%
Ronald L. Junck (4) . . . . . Common Stock 65,187 0.5%
Richard W. Gasten (4) . . . . Common Stock 450 *
Thomas E. McChesney (5). . . . Common Stock 39,187 0.3%
Robert J. Sullivan (5) . . . . Common Stock 10,950 5.2%
All Officers and Directors as Common Stock 2,027,432 16.7%
Group (12 Individuals) Preferred Stock 1,308,488 66.1%
- ----------------------
* Less than 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, 1996.
(2) The business address of Mr. Welstad is 1016 S. 28th Street, Tacoma, WA.,
98409.
(3) Includes currently exercisable options to purchase 15,000 shares of Common
Stock at $7.93 per share and 30,000 shares of Common Stock at $13.375 per
share.
(4) Includes currently exercisable options to purchase 450 shares of Common
Stock at $9.07 per share.
(5) Includes currently exercisable options to purchase 450 shares of Common
Stock at $4.97 per share.
Page-22
<PAGE>
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 24 of this Form 10-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
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 Welstad 3/11/97
-------------------------------
Signature Date
By: Glenn 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 3/11/97
- ----------------------------------------------------------
Signature Date
Glenn A. Welstad, Chairman of the Board, Chief Executive
Officer and President
/s/ Ralph E. Peterson 3/11/97
- ----------------------------------------------------------
Signature Date
Ralph E. Peterson, Chief Operating Officer and Director
/s/ Charles B. Russell 3/11/97
- ----------------------------------------------------------
Signature Date
Charles B. Russell, Chief Financial Officer, Treasurer
and Assistant Secretary
Ronald L. Junck 3/11/97
- ----------------------------------------------------------
Signature Date
Ronald L. Junck, Secretary and Director
Robert J. Sullivan 3/11/97
- ----------------------------------------------------------
Signature Date
Robert J. Sullivan, Director
Thomas E. McChesney 3/11/97
- ----------------------------------------------------------
Signature Date
Thomas E. McChesney, Director
Page-23
<PAGE>
EXHIBIT INDEX
FORM 10-K
LABOR READY, INC
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
3 Articles of Incorporation *
3.1 Articles of Amendment to Articles of Incorporation *
3.2 Bylaws *
4 Instruments Defining Rights of Security Holders *
10 Material Contracts
1.1 Warrant Purchase Agreements *
1.2 Executive Employment Agreement between LR and
Glenn A.Welstad *
1.3 Employment Agreement between LR and Scott Sabo *
10.4 Business Loan Agreement between LR and
U.S. Bank of Washington, N.A., dated September 10, 1996.
10.5 Form of Lease for LR dispatch office *
10.6 1996 Labor Ready Employee Stock Option and Incentive Plan *
10.7 1996 Employee Stock Purchase Plan *
11 Computation of Earnings Per Share
27 Financial Data Schedule
* As previously filed in the Company's Form 10 Registration Statement, SEC
File No. 0-23828.
COPIES OF EXHIBITS MAY BE OBTAINED UPON REQUEST DIRECTED TO MR. CHARLES B.
RUSSELL, LABOR READY, INC., 1016 S. 28TH STREET, TACOMA, WASHINGTON, 98409.
<PAGE>
EXHIBIT 10.4
BUSINESS LOAN AGREEMENT BETWEEN LABOR READY, INC. AND U.S. BANK OF
WASHINGTON, N.A., DATED SEPTEMBER 10, 1996.
<PAGE>
EXHIBIT 10.4
[U.S. BANK LOGO]
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$20,000,000.00 08-10-1996 06-30-1998 397 - 83 36522 365 4919402202 55640
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: LABOR READY, INC. LENDER: U.S. BANK OF WASHINGTON,
2156 PACIFIC AVE. NATIONAL ASSOCIATION
TACOMA, WA 98402 Tacoma Corporate Banking
1145 Broadway, Suite 1100
Tacoma, WA 98402
THIS BUSINESS LOAN AGREEMENT between LABOR READY, INC. ("Borrower") and U.S.
BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement;
(b) the granting, renewing, or extending of any Loan by Lender at all times
shall be subject to Lender's sole judgment and discretion; and (c) all such
Loans shall be and shall remain subject to the following terms and conditions of
this Agreement.
TERM. This Agreement shall be effective as of September 10, 1996, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 2
- --------------------------------------------------------------------------------
Borrower. The word "Borrower" means LABOR READY, INC. The word "Borrower"
also includes, as applicable, all subsidiaries and affiliates of Borrower
as provided below in the paragraph titled "Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may be
liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
indebtedness may be or hereafter may be or hereafter may become barred by
any statute of limitations; and whether such indebtedness may be or
hereafter may become otherwise unenforceable.
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 3
- --------------------------------------------------------------------------------
Lender. The word "Lender" means U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION, its successors and assigns.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d) purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f) these liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to
the net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 4
- --------------------------------------------------------------------------------
intended as a security device, or any other security or lien interest
whatsoever, whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral,
(c) Financing Statements perfecting Lender's Security Interests;
(d) evidence of insurance as required below; and (e) any other documents
required under this Agreement or by Lender or its counsel.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 5
- --------------------------------------------------------------------------------
REPRESENTATION AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal; extension or modification of any Loan,
and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Washington
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified
as a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under
(a) any provision of its articles of incorporation or organization, or
bylaws, or any agreement or other instrument binding upon Borrower or
(b) any law, governmental regulation, court decree, or order applicable to
Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or financing statements relating to such
properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 6
- --------------------------------------------------------------------------------
Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. Except as disclosed to and acknowledged by Lender in
writing, Borrower represents and warrants that: (a) During the period of
Borrower's ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release of
any hazardous waste or substance by any person on, under, about or from any
of the properties. (b) Borrower has no knowledge of, or reason to believe
that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste
or substance on, under, about or from the properties by any prior owners or
occupants of any of the properties, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such matters.
(c) Neither Borrower nor any tenant, contractor, agent or other authorized
user of any of the properties shall use, generate, manufacture, store,
treat, dispose of, or release any hazardous waste or substance on, under,
about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and
its agents to enter upon the properties to make such inspections and tests
as Lender may deem appropriate to determine compliance of the properties
with this section of the Agreement. Any inspections or tests made by
Lender shall be at Borrower's expense and for Lender's purposes only and
shall not be construed to create any responsibility or liability on the
part of Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender
for indemnity or contribution in the event Borrower becomes liable for
cleanup or other costs under any such laws, and (b) agrees to indemnify and
hold harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or indirectly
sustain or suffer resulting from a breach of this section of the Agreement
or as a consequence of any use, generation, manufacture, storage, disposal,
release or threatened release occurring prior to Borrower's ownership or
interest in the properties, whether or not the same was or should have been
known to Borrower. The provisions of this section of the Agreement,
including the obligation to indemnify, shall survive the payment of the
Indebtedness and the termination or expiration of this Agreement and shall
not be affected by Lender's acquisition of any interest in any of the
properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 7
- --------------------------------------------------------------------------------
governmental charges have been paid in full, except those presently being
or to be contested by Borrower in good faith in the ordinary course of
business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business of commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 2156 PACIFIC AVE., TACOMA, WA 98402. Unless
borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purpose of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force and
effect until such time as Borrower's Indebtedness shall be paid in full, or
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 8
- --------------------------------------------------------------------------------
until this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event later than forty five (45) days after
the end of each fiscal quarter, Borrower's balance sheet and profit and
loss statement for the period ended, prepared and certified as correct to
the best knowledge and belief by Borrower's chief financial officer or
other officer or person acceptable to Lender. All financial reports
required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivable and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less
than $35,000,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible
Net Worth of less than 1.00 to 1.00.
Working Capital. Maintain Working Capital in excess of
$20,000,000.00.
Cash Flow Requirements. Maintain Cash Flow at not less than the
following level: 2.50 to 1.00; THE CASH FLOW COVERAGE RATIO WILL BE
MEASURED AT THE FISCAL YEAR END ONLY, DEFINED AS NET PROFIT AFTER
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 9
- --------------------------------------------------------------------------------
TAX PLUS NON-CASH CHARGES PLUS INTEREST EXPENSE DIVIDED BY INTEREST
EXPENSE. Except as provided above, all computations made to determine
compliance with the requirements contained in this paragraph shall be
made in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified by Borrower as being true
and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
Borrower, upon request of Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person.
In connection with all policies covering assets in which Lender holds
or is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 10
- --------------------------------------------------------------------------------
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will
furnish to Lender evidence of payment of the assessments, taxes, charges,
levies, liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against Borrower's
properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the American With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
NOT REQUIRED and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part or
on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 11
- --------------------------------------------------------------------------------
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume Indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 12
- --------------------------------------------------------------------------------
occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in the
Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends
on its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income tax
payments to satisfy their liabilities under federal and state law which
arise solely from their status as Shareholders of a Subchapter S
Corporation because of their ownership of shares of stock of Borrower, or
(d) purchase or retire any of Borrower's outstanding shares or alter or
amend Borrower's capital structure.
Loans, Acquisitions and guaranties. (a) Loan, invest or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ACCESS LAWS. Without limiting the generality of any provision of this agreement
requiring Borrower to comply with applicable laws, rules, and regulations,
Borrower agrees that it will at all times comply with applicable laws relating
to disabled access including, but not limited, to, all applicable titles of the
Americans with Disabilities Act of 1990.
STATUE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY,
EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 13
- --------------------------------------------------------------------------------
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on
or of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.
Change in Ownership. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 14
- --------------------------------------------------------------------------------
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's
rights and remedies shall be cumulative and may be exercise singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender in the State of Washington. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts of
Pierce County, the State of Washington. Subject to the provisions on
arbitration, this Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
Arbitration. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 15
- --------------------------------------------------------------------------------
lawfulness or reasonableness of any act, or exercise of any right,
concerning any Collateral, including any claim to rescind, reform, or
otherwise modify any agreement relating to the Collateral, shall also be
arbitrated, provided however that no arbitrator shall have the right or the
power to enjoin or restrain any act of any party. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction.
Nothing in this Agreement shall preclude any party from seeking equitable
relief from a court of competent jurisdiction. The statute of limitations,
estoppel, waiver, laches, and similar doctrines which would otherwise be
applicable in an action brought by a party shall be applicable in any
arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation,
and enforcement of this arbitration provision.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the Borrowers
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether, now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any rights to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests as well as
all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such interests in the Loans and will
have all the rights granted under the participation agreement or agreements
governing the sale of such participation interests. Borrower further
waives all rights of offset or counterclaim that it may have now or later
against Lender or against any purchaser of such a participation interest
and unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount.
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 16
- --------------------------------------------------------------------------------
This includes, subject to any limits under applicable law, Lender's
attorneys' fees and lender's legal expenses, whether or not there is a
lawsuit, including attorneys' fees for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals, and
any anticipated post-judgment collection services. Borrower also will pay
any court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Borrower, notice to any Borrower will constitute notice to all Borrowers.
For notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such findings shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the
<PAGE>
09-10-1996 BUSINESS LOAN AGREEMENT
Loan No. 397-83 (Continued) Page 17
- --------------------------------------------------------------------------------
part of Lender in exercising any right shall operate as a waiver of such
right or any other right. A waiver by Lender of a provision of this
Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other
provision of this Agreement. No prior waiver by Lender, nor any course of
dealing between Lender and Borrower, or between Lender and any Grantor,
shall constitute a waiver of any of Lender's rights or of any obligations
of Borrower or of any; Grantor as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of such
consent by Lender in any instance shall not constitute continuing consent
in subsequent instances where such consent is required, and in all cases
such consent may be granted or withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
SEPTEMBER 10, 1996.
BORROWER:
LABOR READY, INC.
By /s/ Ralph E. Peterson
Its: Chief Financial Officer
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
By /s/ Bruce H. Marley
Authorized Officer
<PAGE>
ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE, IBOR)
$20,000,000.00 Date: September 10, 1996
LABOR READY, INC. ("Borrower")
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
/ / single disbursement loan. Amounts loaned to Borrower hereunder will
be disbursed in a single Advance in the amount shown in Section 2.
/X/ revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be
borrowed, repaid and reborrowed, and the aggregate Advances loaned
hereunder from time to time may exceed such maximum amount.
/ / non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section
2. Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principal Balance") at one time shall not exceed
$20,000,000.00.
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender or
order at 1420 5th Avenue, Seattle, WA 98101, the Principal Balance of this
note, with interest thereon at the rate(s) specified in Sections 4 and 11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding may
vary from time to time pursuant to the provisions of this note. Subject to the
provisions of this note, Borrower shall have the option from time to time of
choosing to pay interest at the rate or rates and for the applicable periods of
time based on the rate options provided herein; PROVIDED, however, that once
Borrower notifies Lender of the rate option chosen in accordance with the
provisions of this note, such notice shall constitute Borrower's irrevocable
request for an Advance hereunder at the rate option specified in such notice.
The rate options are the Prime Borrowing Rate and the IBOR Borrowing Rate, each
as defined herein.
(a) The Prime Borrowing Rate.
(i) The Prime Borrowing Rate is a per annum rate equal to Lender's prime
rate plus 0.000% per annum.
<PAGE>
(ii) Whenever Borrower desires to use the Prime Borrowing Rate option,
Borrower shall give Lender notice orally or in writing in accordance with
Section 15 of this note, which notice shall specify the requested disbursement
date and principal amount of the Advance, and that Borrower has chosen the Prime
Borrowing Rate option.
(iii) Prepayments of all or any part of the Principal Balance bearing
interest at the Prime Borrowing Rate may be made at any time without penalty.
Upon prepayment of any such principal amount, Borrower also must pay all accrued
interest thereon to the date of prepayment.
(iv) Subject to Section 11 of this note, interest shall accrue on the
unpaid Principal Balance at the Prime Borrowing Rate unless and except to the
extent that the IBOR Borrowing Rate is in effect.
(b) The IBOR Borrowing Rate.
(i) The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or other day
that commercial banks in Portland, Oregon or New York City are authorized or
required by law to close.
"IBOR Amount" means each principal amount for which Borrower chooses to
have the IBOR Borrowing Rate apply for any specified IBOR Interest Period.
"IBOR Interest Period" means as to any IBOR Amount, a period of 1, 2, 3 or
6 months commencing on the date the IBOR Borrowing Rate becomes applicable
thereto; PROVIDED, however, that: (A) no IBOR Interest Period shall be selected
which would extend beyond June 30, 1998; (B) no IBOR Interest Period shall
extend beyond the date of any principal payment required under Section 8 of this
note, unless the sum of the principal amounts bearing interest at the Prime
Borrowing Rate, plus IBOR Amounts with IBOR Interest Periods ending on or before
the scheduled date of such principal payment, plus principal amounts remaining
unborrowed under a line of credit, equals or exceeds the amount of such
principal payment; (C) any IBOR Interest Period which would otherwise expire on
a day which is not a Business Day, shall be extended to the next succeeding
Business Day, unless the result of such extension would be to extend such IBOR
Interest Period into another calendar month, in which event the IBOR Interest
Period shall end on the immediately preceding Business Day; and (D) any IBOR
Interest Period that begins on the last Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the calendar month
at the end of such IBOR Interest Period) shall end on the last Business Day of a
calendar month.
(ii) The IBOR Borrowing Rate is Lender's IBOR Rate plus 1.500% per annum.
Lender's IBOR Rate for any IBOR Interest Period is the rate per annum (computed
on the basis of a 360-day year and the actual number of days elapsed) equal to
the arithmetic average (rounded upward to the nearest 1/16 of 1%) of the rates
per annum determined by Lender as of the times specified in Section 4(b)(iii) on
the date two (2) Business Days prior to the first day of
-2-
<PAGE>
such IBOR Interest Period as the rates offered to Lender by three Eurodollar
money market dealers in such Eurodollar market as may be selected by Lender for
U.S. dollar deposits to be delivered on the first day of such IBOR Interest
Period for the number of months therein; PROVIDED, however, that Lender's IBOR
Rate shall be adjusted to take into account the maximum reserves required to be
maintained for Eurocurrency liabilities by banks during each such IBOR Interest
Period as specified in Regulation D of the Board of Governors of the Federal
Reserve System or any successor regulation.
(iii) Borrower may obtain IBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 12:00 noon (Portland, Oregon time) on any Business Day.
Any IBOR Borrowing Rate quoted (A) before 10:00 a.m. shall be based on Lender's
IBOR Rate determined as of approximately 8:00 a.m. on such day, and Borrower may
request an Advance at such rate only by giving Lender notice in accordance with
Section 4(b)(iv) before 10:00 a.m. on such day; and (B) between 10:00 a.m. and
12:00 noon shall be based on Lender's IBOR Rate determined as of approximately
10:00 a.m. on such day, and Borrower may request an Advance at such rate only by
giving Lender notice in accordance with Section 4(b)(iv) not later than 12:00
noon on such day.
(iv) Whenever Borrower desires to use the IBOR Borrowing Rate option,
Borrower shall give Lender irrevocable notice (either in writing or orally and
promptly confirmed in writing) between 8:00 a.m. and 12:00 noon (Portland,
Oregon time) two (2) Business Days in advance of the desired effective date of
such rate. Any oral notice shall be given by, and any written notice or
confirmation of an oral notice shall be signed by, the person(s) authorized in
Section 15 of this note, and shall specify the requested effective date of the
rate, IBOR Interest Period and IBOR Amount, and whether Borrower is requesting a
new Advance at the IBOR Borrowing Rate under a line of credit, conversion of any
portion of the Principal Balance bearing interest at the Prime Borrowing Rate to
an IBOR Amount, or a new IBOR Interest Period for an outstanding IBOR Amount.
Notwithstanding any other term of this note, Borrower may elect the IBOR
Borrowing Rate in the minimum principal amount of $20,000,000.00 and in integral
multiples of $1,000,000.00; PROVIDED, however, that no more than 1 separate IBOR
Interest Periods may be in effect at any one time.
(v) Borrower may not prepay all or any part of any IBOR Amount(s).
(vi) If at any time Lender's IBOR Rate is unascertainable or unavailable to
Lender or if IBOR Rate loans become unlawful, the option to select the IBOR
Borrowing Rate shall terminate immediately. If the IBOR Borrowing Rate is then
in effect (A) it shall terminate automatically with respect to all IBOR Amounts
(i) on the last of each then applicable IBOR Interest Period, if Lender may
lawfully continue to maintain such loans, or (ii) immediately if Lender may not
lawfully continue to maintain such loans through such day, and (B) subject to
Section 11, the Prime Borrowing Rate automatically shall become effective as to
such amounts upon such termination.
(vii) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation or
administration thereof (i) shall subject Lender or its Eurodollar lending office
to any tax, duty, or other charge, or change the basis of taxation of
-3-
<PAGE>
payments to Lender with respect to any loans bearing interest based on Lender's
IBOR Rate, or (ii) shall impose or modify and reserve, insurance, special
deposit, or similar requirements against assets of, deposits with or for the
account of, or credit extended by Lender or its Eurodollar lending office, or
impose on Lender or its Eurodollar lending office any other condition affecting
any such loans, and (B) the result of any of the foregoing is (i) to increase
the cost to Lender of making or maintaining any such loans or (ii) to reduce the
amount of any sum receivable under this not by Lender or its Eurodollar lending
office, Borrower shall pay Lender within 15 days after demand by Lender such
additional amount as will compensate Lender for such increased cost or
reduction. The determination hereunder by Lender of such additional amount
shall be conclusive in the absence of manifest error. If Lender demands
compensation under this Section 4(b)(vii), Borrower may upon three (3) Business
Days' notice to Lender pay the accrued interest on all IBOR Amounts, together
with any additional amounts payable under Section 4(b)(viii). Subject to
Section 11, upon Borrower's paying such accrued interest and additional costs,
the Prime Borrowing Rate immediately shall be effective with respect to the
unpaid principal balance of such IBOR Amounts.
(viii) Upon any termination of any IBOR Borrowing Rate (including but
not limited to conversion to another rate) or payment of all or any portion of
any IBOR Amount on a date other than the last day of the than applicable IBOR
Interest Period, including without limitation (A) acceleration under Section 11
or (B) repayment in response to a notice under Section 4(b)(vii), Borrower shall
pay to Lender on demand such amount as Lender reasonably determines (determined
as though 100% of the applicable IBOR Amount had been funded in the applicable
Eurodollar market) is equivalent to all direct or indirect losses, expenses,
liabilities, or reductions in yield to Lender resulting therefrom, whether
incurred in connection with liquidation or reemployment of funds or otherwise.
(ix) If Borrower chooses the IBOR Borrowing Rate, Borrower shall pay
interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the applicable Eurodollar market. Lender's
determination of the IBOR Borrowing Rate and any such taxes or charges shall be
conclusive in the absence of manifest error.
(x) Notwithstanding any other term of this note, Borrower may not select
the IBOR Borrowing Rate if an event of default hereunder has occurred and is
continuing.
(xi) Nothing contained in this note, including, without limitation, the
determination of any IBOR Interest Period or Lender's quotation of any IBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any, to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section 11 will
be computed at the applicable rate based on a 360-day year and applied to the
actual number of days elapsed.
-4-
<PAGE>
6. PAYMENT SCHEDULE.
(a) Principal. Principal shall be paid:
/ / on demand.
/X/ on demand, or if no demand, on one payment of all outstanding
principal plus all accrued unpaid interest on June 30, 1998.
/ / on .
/ / subject to Section 7, in installments of
/ / each, plus accrued interest
/ / each including accrued interest
beginning on and on the same day of each
thereafter until when the entire Principal Balance plus
interest thereon shall be due and payable.
/ /
(b) Interest.
(i) Interest on all amounts bearing interest at the Prime Borrowing Rate
shall be paid:
/X/ on the 15th day of September and on the same day of each month
thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at maturity.
/ / -----
(ii) Interest on all IBOR Borrowing Rate Amounts shall be paid:
/ / on the last day of the applicable IBOR Interest Period, and if
such IBOR Interest Period is longer than three months, on the
last day of each three month period occurring during such IBOR
Interest Period, and at maturity.
/X/ on the 15th day of September and on the same day of each month
thereafter prior to maturity and at maturity.
/ / at maturity.
/ / at the time each principal installment is due and at maturity.
/ / -----
7. CHANGE IN PAYMENT AMOUNT. If the interest rate on this note is subject to
change in accordance with Section 4, the holder of this note may, from time to
time, in holder's sole discretion, increase or decrease the amount of each of
the installments remaining unpaid at the time of each change in rate to an
amount holder in its sole discretion deems necessary to continue amortizing the
Principal Balance at the same rate established by the installment amounts
specified in Section 6(a), whether or not a "balloon" payment may also be due
upon maturity of this note. Holder shall notify the undersigned of each such
change in writing. Whether or not the installment amount is increased under
this Section 7, Borrower understands that, as a result of increases in the rate
of interest in accordance with Section 4, the final payment due, whether or
-5-
<PAGE>
not a "balloon" payment, shall include the entire Principal Balance and interest
thereon then outstanding, and may be substantially more than the installment
specified in Section 6.
8. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note, if in
any month there is no day on which a scheduled payment would otherwise be due
(e.g. February 31), such payment shall be paid on the last banking day of that
month.
9. PAYMENT BY AUTOMATIC CHARGE.
/X/ Please automatically deduct the amount of all principal and interest
payments from account number 0547-517821. If there are insufficient funds in
the account to pay the automatic deduction in full, Lender may allow the account
to become overdrawn, or Lender may reverse the automatic deduction. Borrower
will pay all the fees on the account which result from the automatic deductions,
including any overdraft/NSF charges. If for any reason Lender does not charge
the account for a payment, or if an automatic payment is reversed, the payment
is still due according to this note. If the account is a Money Market Account,
the number of withdrawals from that account is limited as set out in the
agreement. Lender may cancel the automatic deduction at any time in its
discretion.
Provided, however, if no account number is entered above, Borrower does not want
to make payments by automatic charge.
10. LENDER'S PRIME RATE. Lender's prime rate is the rate of interest which
Lender from time to time establishes as its prime rate and is not, for example,
the lowest rate of interest which Lender collects from any borrower or class of
borrowers. When Lender's prime rate is applicable under Section 4(a) or 11(b),
the interest rate hereunder shall be adjusted without notice effective on the
day Lender's prime rate changes, but in no event shall the rate of interest be
higher than allowed by law.
11. DEFAULT.
(a) Without prejudice to any right of Lender to require payment on demand or to
decline to make any requested Advance, each of the following shall be an event
of default: (i) Borrower fails to make any payment when due, (ii) Borrower
fails to perform or comply with any term, covenant or obligation in this note or
any agreement related to this note, or in any other agreement or loan Borrower
has with Lender, (iii) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this note or perform
Borrower's obligations under this note or any related documents, (iv) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect, (v) Borrower
becomes insolvent, a receiver is appointed for any part of borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against borrower under any bankruptcy or
insolvency laws, (vi) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender, (vii) Any of the events described in
this default section
-6-
<PAGE>
occurs with respect to any guarantor of this note or any guaranty of Borrower's
indebtedness to Lender ceases to be, or is asserted not to be, in full force and
effect, (vii) Lender in good faith deems itself insecure. If this note is
payable on demand, the inclusion of specific events of default shall not
prejudice Lender's right to require payment on demand or to decline to make any
requested Advance.
(b) Without prejudice to any right of Lender to require payment on demand, upon
the occurrence of an event of default, Lender may declare the entire unpaid
Principal Balance on this note and all accrued unpaid interest immediately due
and payable, without notice. Upon default, including failure to pay upon final
maturity, Lender, at its option, may also, if permitted under applicable law,
increase the interest rate on this note to a rate equal to the Prime Borrowing
Rate plus 5%. The interest rate will not exceed the maximum rate permitted by
applicable law. In addition, if any payment of principal or interest is 15 or
more days past due, Borrower will be charged a late charge of 5% of the
delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records shall,
at any time, be conclusive evidence of the unpaid Principal Balance and interest
owing on this note. Notwithstanding any other provisions of this note, in the
event holder makes Advances hereunder which result in an unpaid Principal
Balance on this note which at any time exceeds the maximum amount specified in
Section 2, Borrower agrees that all such Advances, with interest, shall be
payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section 1 is
a revolving line of credit or a non-revolving line of credit, Borrower agrees
that Lender is under no obligation and has not committed to make any Advances
hereunder. Each Advance hereunder shall be made at the sole option of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges and
agrees that (a) Lender is entitled to demand Borrower's immediate payment in
full of all amounts owing hereunder and (b) neither anything to the contrary
contained herein or in any another loan documents (including but not limited to,
provisions relating to defaults, rights of cure, default rate of interest,
installment payments, late charges, periodic review of Borrower's financial
condition, and covenants) nor any act of Lender pursuant to any such provisions
shall limit or impair Lender's right or ability to require Borrower's payment in
full of all amounts owing hereunder immediately upon Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Any Advance may be made or interest rate option selected upon the request
of Borrower (if an individual), any of the undersigned (if Borrower consists of
more than one individual), any person or persons authorized in subsection (b) of
this Section 15, and any person or persons otherwise authorized to execute and
deliver promissory notes to Lender on behalf of Borrower.
(b) Borrower hereby authorizes any 1 of the following individuals to request
Advances and to select interest rate options:
GLENN A. WELSTAD AND RALPH E. PETERSON
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<PAGE>
unless Lender is otherwise instructed in writing.
(c) All Advances made pursuant to this Section 15 shall be disbursed by deposit
directly to Borrower's account number 0547-517821 at Pacific Avenue (Tacoma)
branch of Lender, or by cashier's check issued to Borrower.
(d) Borrower agrees that Lender shall have no obligation to verify the identity
of any person making any request pursuant to Section 15, and Borrower assumes
all risks of the validity and authorization of such requests. In consideration
of Lender agreeing, at its sole discretion, to make Advances upon such requests,
Borrower promises to pay holder, in accordance with the provisions of this note,
the Principal Balance together with interest thereon and other sums due
hereunder, although any Advances may have been requested by a person or persons
not authorized to do so.
16. PERIODIC REVIEW. Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with any
additional information regarding Borrower's financial condition and business
operations that Lender requests. This information may include but is not
limited to, financial statements, tax returns, lists of assets and liabilities,
agings of receivables and payables, inventory schedules, budgets and forecasts.
If upon review, Lender, in its sole discretion, determines that there has been a
material adverse change in Borrower's financial condition, Borrower will be in
default. Upon default, Lender shall have all rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage paid
and addressed to Borrower at the last known address of Borrower as shown on
holder's records. If Borrower consists of more than one person, notification of
any of said persons shall be complete notification of all. Notice may be given
either before or reasonably soon after the effective date of the change.
18. ATTORNEYS FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney regarding
the enforcement of any of its rights under this note or any document securing
the same, or if this note is placed in the hands of an attorney for collection
or if suit or litigation is brought to enforce this note or any document
securing the same, Borrower promises to pay all costs thereof including such
additional sums as the court of arbitrator(s) may adjudge reasonable as attorney
fees, including without limitation, costs and attorney fees incurred in any
appellate court, in any proceeding under the bankruptcy code, or in any
receivership and post-judgment attorney fees incurred in enforcing any judgment.
19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker, guarantor or
otherwise, waivers diligence, demand, presentment for payment, notice of
non-payment, protest and notice of protest and waives all defenses based on
suretyship or impairment of collateral. Without notice to Borrower and without
diminishing or affecting Lender's rights or Borrower's obligations hereunder,
Lender may deal in any manner with any person who at any time is liable for, or
provides any real or personal property collateral for, any indebtedness of
Borrower to Lender, including the indebtedness evidenced by this note. Without
limiting the foregoing, Lender
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<PAGE>
may, in its sole discretion: (a) make secured or unsecured loans to Borrower
and agree to any number of waivers, modifications, extensions and renewals of
any length of such loans, including the loan evidenced by this note; (b) impair,
release (with or without substitution of new collateral), fail to perfect a
security interest in, fail to preserve the value of, fail to dispose of in
accordance with applicable law, any collateral provided by any person; (c) sue,
fail to sue, agree not to sue, release, and settle or compromise with, any
person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned Borrowers
are joint and several and are binding upon any marital community of which any of
the undersigned are members. Holder's rights and remedies under this note shall
be cumulative.
21. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any alleged
tort ("Claims") relating in any way to this note or any transaction of which
this note is a part (the "Loan"), be settled by binding arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and Title 9 of the U.S. Code. All Claims will be subject to the
statutes of limitation applicable if they were litigated. This provision is
void if the Loan, at the time of the proposed submission to arbitration, is
secured by real property located outside of Oregon or Washington, or if the
effect of the arbitration procedure (as opposed to any Claims of Borrower) would
be to materially impair Lender's ability to realize on any collateral securing
the Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if any party's Claim is $100,000 or
more, three neutral arbitrators will decide all issues. All arbitrators will be
active Washington State Bar members in good standing. All arbitration hearings
will be held in Seattle, Washington. In addition to all other powers, the
arbitrator(s) shall have the exclusive right to determine all issues of
arbitrability. Judgment on any arbitration award may be entered in any court
with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the Loan,
such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and
(iv) provisional remedies, including injunction, appointment of receiver,
attachment, claim and delivery and replevin.
22. GOVERNING LAW.
This note shall be governed by and construed and enforced in accordance with the
laws of the State of Washington without regard to conflicts of law principles;
PROVIDED, however, that to the extent that Lender has greater rights or remedies
under Federal law, this provision shall not be deemed to deprive Lender of such
rights and remedies as may be available under Federal law.
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<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$20,000,000.00 08-10-1996 06-30-1998 397 - 83 36522 365 4919402202 55640
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: LABOR READY, INC. LENDER: U.S. BANK OF WASHINGTON,
2156 PACIFIC AVE. NATIONAL ASSOCIATION
TACOMA, WA 98402 Tacoma Corporate Banking
1145 Broadway, Suite 1100
Tacoma, WA 98402
23. DISCLOSURE.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NON ENFORCEABLE UNDER WASHINGTON LAW.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS
DOCUMENT.
LABOR READY, INC. Signature of Individual Borrower
Borrower Name (Corporation,
Partnership or other Entity)
----------------------------------------
Signature of Individual Borrower
By /s/ Ralph E. Peterson
Title Chief Financial Officer
----------------------------------------
Signature of Individual Borrower
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender name: U.S. Bank of Washington, N.A.
By: /s Bruce H. Marley
Title: Vice President
Date: September 12, 1996
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<PAGE>
[U.S. BANK LOGO]
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$20,000,000.00 08-10-1996 06-30-1998 397 - 83 36522 365 4919402202 55640
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: LABOR READY, INC. LENDER: U.S. BANK OF WASHINGTON,
2156 PACIFIC AVE. NATIONAL ASSOCIATION
TACOMA, WA 98402 Tacoma Corporate Banking
1145 Broadway, Suite 1100
Tacoma, WA 98402
LOAN TYPE. This is a Variable Rate (at LENDER'S PRIME RATE. THIS IS THE RATE
OF INTEREST WHICH LENDER FROM TIME TO TIME ESTABLISHES AS ITS PRIME RATE AND IS
NOT, FOR EXAMPLE, THE LOWEST RATE OF INTEREST WHICH LENDER COLLECTS FROM ANY
BORROWER OR CLASSES OF BORROWERS), Revolving Line of Credit Loan to a
Corporation for $20,000,000.00 due on June 30, 1998. This is a secured renewal
loan.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
/ / Personal, Family or Household Purposes or Personal Investment.
/X/ Business (including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: TO FUND RECEIVABLES
AND GENERAL WORKING CAPITAL REQUIREMENTS, AND FOR THE ISSUANCE OF STANDBY LC's
UNDER A $10MM SUB-LIMIT.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $20,000,000.00 as follows:
AMOUNT PAID ON BORROWER'S ACCOUNT: $20,000,000.00
$20,000,000.00 Payment on Loan # 83 - RENEWAL LINE
--------------
NOTE PRINCIPAL: $20,000,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
<PAGE>
PREPAID FINANCE CHARGES PAID IN CASH
$25,000.00 Loan Fees (0.125%) payable quarterly in arrears
on the unused portion of the
loan. /s/BHM /s/REF
--------------
TOTAL CHARGES PAID IN CASH: $25,000.00
PAYMENT BY AUTOMATIC DEDUCTION. Borrower hereby authorizes Lender to
automatically deduct the amount of all principal and/or interest payments on
this Note from Borrower's account number 0547-517821 with Lender or such other
account as Borrower may designate in writing. If there are insufficient funds
in the account to pay the automatic deduction in full, Lender may allow the
account to become overdrawn, or Lender may reverse the automatic deduction.
Borrower will pay all fees on the account which result from the automatic
deductions, including any overdraft/NSF charges. If for any reason Lender does
not charge the account for a payment, or if an automatic payment is reversed,
the payment is still due according to this Note. If the account is a Money
Market Account, the number of withdrawals from that account is limited as set
out in the account agreement. Lender may cancel the automatic deduction at any
time in its discretion.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECEIVING FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED SEPTEMBER 10, 1996.
BORROWER:
LABOR READY, INC.
By: /s/ Ralph E. Peterson
Its: Chief Financial Officer
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U.S. Bank [logo] Attachment - Revolving Credit
Account Receivable/Inventory Collateral
- --------------------------------------------------------------------------------
Certification of accounts will be periodically verified by the National Audit
Company.
U.S. BANK OF WASHINGTON, NAME
NATIONAL ASSOCIATION
Borrower
By /s/ Bruce H. Marley By /s/ Ralph E. Peterson
Its Vice President Its Chief Financial Officer
Date September 12, 1996
U.S. Bank [logo] Attachment - Revolving Credit
Account Receivable/Inventory Collateral
- --------------------------------------------------------------------------------
BORROWER: Labor Ready, Inc. ATTACHMENT TO LOAN AGREEMENT DATED 8/27/96
U.S. Bank of Washington, National Association will grant credit to the Borrower
under the following provisions:
COLLATERAL
ACCOUNTS RECEIVABLE:
Advance Rate 80% of Eligible Accounts
Eligible Accounts: / / Current - 60 Days Past Due
/X/ 90 Days past Date of Invoice
/ / Concentration Accounts over 10% of Total
Accounts Receivable with prior Bank approval
only.
Ineligible Accounts/Amounts:
/ / Accounts with ___% of outstanding amount over _____ past due invoice.
/X/ Accounts due form officers, employees, affiliated companies and
individuals.
/X/ Accounts subject to set off.
/X/ Amounts resulting from COD's, finance charges and consignment.
/X/ Amounts due from foreign entities or individuals. EXCEPT FOR CANADIAN
ACCOUNTS
/ / Accounts due from federal government or agencies.
/X/ Retainages
/X/ Dated billings
/X/ Progress Billings on contract receivables
/ / Accounts subject to other Security Interest
/ / Other:
INVENTORY
Advance rate N/A %
Eligible Inventory:
/ / Raw material
/ / Work in Process
/ / Finished Goods
OPERATING PARAMETERS:
/X/ Borrower's Certificate Month End (frequency)
/X/ Bank Control Account 0546 000 001 .
/X/ Account Receivable Aging Monthly (frequency)
/ / Accounts Payable Aging N/A (frequency)
/ / Inventory Certification N/A (frequency)
-1-
<PAGE>
U.S. Bank [logo] Attachment - Revolving Credit
Account Receivable/Inventory Collateral
- --------------------------------------------------------------------------------
Certification of accounts will be periodically verified by the National Audit
Company.
U.S. BANK OF WASHINGTON, NAME
NATIONAL ASSOCIATION
Borrower
By /s/ Bruce H. Marley By /s/ Ralph E. Peterson
Its Vice President Its Chief Financial Officer
Date September 12, 1996
-2-
<PAGE>
EXHIBIT 11.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<PAGE>
EXHIBIT 11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C>
Primary earnings per share:
Common stock equivalents
Options granted and unexercised (Note 3) 282,261 404,008 212,127
Total weighted average shares issued (Note 1) 10,576,814 8,288,360 6,332,828
--------------------------------------------------
Weighted average shares outstanding 10,859,075 8,692,368 6,544,955
--------------------------------------------------
Net Income 724,283 2,061,807 851,805
Less: Preferred stock dividends (42,704) (42,704) (42,705)
--------------------------------------------------
Net Income after preferred stock dividends 681,579 2,019,103 809,100
--------------------------------------------------
PRIMARY EARNINGS PER SHARE $ 0.06 $ 0.23 $ 0.13
--------------------------------------------------
--------------------------------------------------
Fully diluted earnings per share (Note 2):
Common stock equivalents
Options granted and unexercised (Note 3) 282,261 404,008 212,127
Total weighted average shares issued (Note 1) 10,576,814 8,288,360 6,332,828
--------------------------------------------------
Weighted average shares outstanding 10,859,075 8,692,368 6,544,955
--------------------------------------------------
Net Income 724,283 2,061,807 851,805
Less: Preferred stock dividends (42,704) (42,704) (42,705)
--------------------------------------------------
Net Income after preferred stock dividends 681,579 2,019,103 809,100
FULLY DILUTED EARNINGS PER SHARE $ 0.06 $ 0.23 $ 0.13
--------------------------------------------------
--------------------------------------------------
NOTE 1:
Total weighted average shares issued:
Shares outstanding at beginning of year 8,818,848 7,458,141 5,856,467
Total weighted average shares issued (retired)
during the year 1,757,966 830,219 476,361
--------------------------------------------------
Total weighted average shares issued - primary EPS 10,576,814 8,288,360 6,332,828
--------------------------------------------------
--------------------------------------------------
NOTE 2:
The amount of weighted average shares outstanding
for fully diluted is calculated in the same manner
as the primary earnings per share. No other
potentially dillutive securities exist
NOTE 3:
Total weighted average options granted and unexercised:
Options outstanding at the beginning of the year 1,511,202 239,866 --
Total weighted average options issued (retired)
during the year (1,228,941) 164,142 212,127
--------------------------------------------------
Total weighted average options granted and unexercised 282,261 404,008 212,127
--------------------------------------------------
--------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 1996 AND FOR THE YEAR THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,598
<SECURITIES> 0
<RECEIVABLES> 21,011
<ALLOWANCES> 1,237
<INVENTORY> 0
<CURRENT-ASSETS> 48,741
<PP&E> 7,825
<DEPRECIATION> 1,432
<TOTAL-ASSETS> 64,331
<CURRENT-LIABILITIES> 11,505
<BONDS> 0
0
854
<COMMON> 49,517
<OTHER-SE> 1,221
<TOTAL-LIABILITY-AND-EQUITY> 64,331
<SALES> 0
<TOTAL-REVENUES> 163,450
<CGS> 0
<TOTAL-COSTS> 134,976
<OTHER-EXPENSES> 25,061
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,507
<INCOME-TAX> 1,585
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 1,197
<CHANGES> 0
<NET-INCOME> 724
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
