<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
Commission File Number 0-23828
Labor Ready, Inc.
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(Exact Name of Registrant as specified in its charter)
Washington 91-1287341
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(State of Incorporation) (Federal I.R.S. No.)
1016 S. 28th Street, Tacoma, Washington 98409
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(Address of Principal Executive Offices) (Zip Code)
(206) 383-9101
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(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant, on August 4, 1997 was $123,446,161.
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As of August 4, 1997, the Registrant had 12,267,289 shares of Common
Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
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LABOR READY, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 ........................................ 2
Consolidated Statements of Income
for the Six Months and the Three Months Ended June 30, 1997 and 1996 ....... 4
Consolidated Statements of Shareholders
Equity for the Six Months Ended June 30, 1997 and for the
Years Ended December 31, 1996 and 1995 ...................................... 5
Consolidated Statements of Cash Flow
for the Six Months Ended June 30, 1997 and 1996 ............................. 6
Notes to Consolidated Financial Statements .................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................... 9
SIGNATURES ............................................................................ 12
</TABLE>
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LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . $ 4,145,115 $ 17,597,821
Accounts receivable, less allowance for
doubtful accounts of $1,558,274 and $1,236,776. . . . 33,324,398 21,010,653
Workers' compensation deposits and credits (Note 2) . . 5,240,937 5,285,552
Prepaid expenses and other. . . . . . . . . . . . . . . 1,838,085 1,983,961
Income taxes receivable . . . . . . . . . . . . . . . . -- 1,194,633
Deferred income taxes . . . . . . . . . . . . . . . . . 3,486,970 1,668,474
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . 48,035,505 48,741,094
------------ ------------
PROPERTY AND EQUIPMENT:
Buildings and land. . . . . . . . . . . . . . . . . . . 4,031,214 3,733,202
Computers and software . . . . . . . . . . . . . . . . 8,105,288 5,522,934
------------ ------------
12,136,502 9,256,136
Less accumulated depreciation . . . . . . . . . . . . . . (2,220,062) (1,431,562)
------------ ------------
Property and equipment, net . . . . . . . . . . . . . . 9,916,440 7,824,574
------------ ------------
OTHER ASSETS:
Intangible assets and other, less amortization of
$2,273,990 and $979,572 . . . . . . . . . . . . . . . 4,449,802 3,071,933
Workers' compensation deposits and credits, less
current portion (Note 2). . . . . . . . . . . . . . . 4,075,053 2,979,018
Restricted cash in captive insurance subsidiary (Note 2) 2,464,170 1,714,744
------------ ------------
Total other assets. . . . . . . . . . . . . . . . . . 10,989,025 7,765,695
------------ ------------
Total assets. . . . . . . . . . . . . . . . . . . . . . $68,940,970 $64,331,363
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Checks issued against future deposits . . . . . . . . . $ 131,924 $ 1,139,555
Accounts payable . . . . . . . . . . . . . . . . . . . . 2,218,142 2,230,721
Accrued wages and benefits . . . . . . . . . . . . . . . 3,083,091 3,046,084
Workers' compensation claims (Note 2) . . . . . . . . . 8,983,717 5,076,686
Income taxes payable . . . . . . . . . . . . . . . . . . 1,562,930 --
Current maturities of long-term debt . . . . . . . . . . 12,491 11,905
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . 15,992,295 11,504,951
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities. . . . . . . . . 82,950 90,352
Deferred income taxes . . . . . . . . . . . . . . . . . 1,629,297 1,144,144
------------ ------------
Total long-term liabilities. . . . . . . . . . . . . . 1,712,247 1,234,496
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . 17,704,542 12,739,447
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $0.444 par value 5,000,000 shares
authorized; issued and outstanding 1,921,687 shares. . 854,082 854,082
Common stock, no par value 25,000,000 shares authorized;
issued and outstanding, 12,267,289 and 12,373,576
shares (Note 3). . . . . . . . . . . . . . . . . . . . 49,214,863 49,516,834
Cumulative foreign currency translation adjustment . . . (56,443) (50,126)
Retained earnings. . . . . . . . . . . . . . . . . . . . 1,223,926 1,271,126
------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . 51,236,428 51,591,916
------------ ------------
Total liabilities and shareholders' equity . . . . . . $68,940,970 $64,331,363
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS AND THE THREE MONTHS ENDED JUNE 30, 1997, AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues from services . . . . . . . . . . . . $129,333,940 $62,124,854 $77,619,740 $36,030,930
Costs and expenses:
Cost of services . . . . . . . . . . . . . . 109,530,314 51,417,371 64,887,458 29,209,913
Selling, general and administrative . . . . . 19,082,054 9,784,610 10,455,994 5,284,291
Interest and other, net . . . . . . . . . . . (310,308) 762,053 (113,333) 326,582
------------ ------------ ------------ ------------
Income before taxes on income . . . . . . . . . 1,031,880 160,820 2,389,621 1,210,144
Taxes on income . . . . . . . . . . . . . . . . 446,377 60,000 1,011,243 424,000
------------ ------------ ------------ ------------
Net income. . . . . . . . . . . . . . . . . . . $ 585,503 $ 100,820 $ 1,378,378 $ 786,144
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings per common share:
Net income. . . . . . . . . . . . . . . . . . $ 0.05 $ 0.01 $0.11 $ 0.08
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares
outstanding . . . . . . . . . . . . . . . . . 12,376,231 9,731,778 12,314,120 10,078,452
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<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, 1995 . . . . . . . . . 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. . . . . . . . . . . . . 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)
Net income for the year to date. . . . . -- -- -- -- 585,503 --
Common stock issued for 401(k) Plan. . . 6,036 81,485 -- -- -- --
Common stock issued for Employee Stock
Purchase Plan. . . . . . . . . . . . . 19,626 144,992 -- -- -- --
Common stock issued on exercise
of options . . . . . . . . . . . . . . 4,051 15,675 -- -- -- --
Common stock purchased and retired . . . (136,000) (544,123) -- -- (611,351) --
Preferred stock dividend . . . . . . . . -- -- -- -- (21,352) --
Foreign currency translation . . . . . . -- -- -- -- -- (6,317)
----------- ----------- ----------- ----------- ------------- -------------
BALANCE, June 30, 1997 . . . . . . . . . . 12,267,289 $49,214,863 1,921,687 $854,082 $1,223,926 $(56,443)
----------- ----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ----------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
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LABOR READY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . $ 585,503 $ 100,820
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . 2,082,918 395,766
Provision for doubtful accounts . . . . . . . . . . 1,555,666 435,245
Deferred income taxes . . . . . . . . . . . . . . . (1,333,343) (413,593)
Gain on restricted fund investments . . . . . . . . (22,107) --
Changes in assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . (13,869,411) (4,912,988)
Workers' compensation deposits and credits. . . . . (1,051,420) (3,735,143)
Prepaid expenses and other. . . . . . . . . . . . . 173,589 (280,367)
Accounts payable. . . . . . . . . . . . . . . . . . 68,906 529,233
Accrued wages and benefits . . . . . . . . . . . . 37,007 750,723
Workers' compensation claims . . .. . . . . . . . . 3,907,031 1,478,010
Income taxes payable (receivable) . . . . . . . . . 2,757,563 (1,078,828)
------------ ------------
Net cash used in operating activities . . . . . . . . (5,108,098) (6,731,122)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . (2,880,366) (1,743,299)
Captive insurance subsidiary deposits . . . . . . . (727,319) --
Additions to intangible assets and other. . . . . . (2,700,000) --
------------ ------------
Net cash used in investing activities . . . . . . . . (6,307,685) (1,743,299)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on note payable. . . . . . . . . . . . -- (1,591,206)
Checks issued against future deposits . . . . . . . (1,007,631) 616,092
Proceeds from options exercised . . . . . . . . . . 15,675 373,213
Purchases for Employee Stock Purchase Plan. . . . . 144,992 --
Purchase and retirement of Treasury Stock . . . . . (1,155,474) --
Payments on long-term debt. . . . . . . . . . . . . (6,816) (19,376)
Dividends paid. . . . . . . . . . . . . . . . . . . (21,352) (21,352)
Proceeds from issuance of common stock. . . . . . . -- 33,713,478
Proceeds from warrants exercised. . . . . . . . . . -- 420,120
Debt issue costs. . . . . . . . . . . . . . . . . . -- 31,641
------------ ------------
Net cash (used in) provided by financing
activities. . . . . . . . . . . . . . . . . . . . (2,030,606) 33,522,610
Effect of exchange rates. . . . . . . . . . . . . . (6,317) 183
------------ ------------
Net (decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . (13,452,706) 25,048,372
CASH AND CASH EQUIVALENTS, beginning of year. . . . . 17,597,821 5,359,113
------------ ------------
CASH AND CASH EQUIVALENTS, end of the six
month period . . . . . . . . . . . . . . . . . . . 4,145,115 30,407,485
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1996 Form 10-K. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six month period
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
NOTE 2. WORKERS' COMPENSATION
In January 1997, the Company increased the capitalization of its wholly
owned foreign subsidiary, Labor Ready Assurance Company, by $727,319, net of
expenses. As of June 30, 1997, $2,464,170 net of expenses is on deposit and
is recorded as restricted cash.
The Company deposited $1,692,767, in 1997, with a foreign off-shore
company for the payment of workers' compensation claims and related expenses
on claims originating in the non-monopolistic states. As of June 30, 1997,
$9,315,990 remained on deposit for the payment of future non-monopolistic
claims and related expenses and is recorded as workers' compensation deposits
and credits. Estimated incurred losses and the related settlement and
administration expenses to be paid from those deposits of $8,142,605 are
recorded as current workers' compensation claims payable at June 30, 1997.
In the monopolistic states the Company has recorded a retro-payable of
$74,851, which is included in the current workers' compensation claims
payable. Additional workers' compensation liabilities for estimated amounts
owed as of June 30, 1997, in the monopolistic states was $766,261.
Workers' compensation expense of $6,893,800 and $3,421,340 was recorded
as a component of cost of services for the six month period ended June 30,
1997 and 1996, respectively.
NOTE 3. COMMON STOCK
In February 1997, the Company's Board of Directors approved a stock
repurchase plan whereby the Company's management is authorized to purchase up
to 200,000 shares of the outstanding common stock. In the first six months of
June 30, 1997, the Company has purchased 136,000 shares, which became
authorized but unissued shares, in accordance with the Washington State
incorporation laws, at a cost of $1,155,474.
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the six months ended June 30, 1997 and
1996 are summarized as follows:
For the Six Months Ended June 30, 1997 1996
- ---------------------------------------------------- ---------- ----------
Interest paid . . . . . . . . . . . . . . . . . $ 4,259 $965,097
---------- ----------
---------- ----------
Income taxes paid . . . . . . . . . . . . . . 174,468 552,420
---------- ----------
---------- ----------
Noncash investing and financing activities:
Issuance of common stock as the Company's
contribution to the 401(K) Plan $ 81,485 $ 48,250
---------- ----------
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NOTE 5. PROPOSED STATEMENT OF POSITION
In April 1997, the Accounting Standards Executive Committee (the
"AcSEC") issued an exposure draft of a Proposed Statement of Position,
"Reporting on the Costs of Start-up Activities" (the "Proposed Statement").
The Proposed Statement would establish new rules for the financial reporting
of start-up costs, and if the Proposed Statement is adopted, there could be
significant changes in the way the Company records new office dispatch
start-up costs. Among those changes, the costs of start-up activities would
be expensed as incurred. The AcSEC expects to issue a final statement or a
revised draft in 1997.
NOTE 6. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board, (the
"FASB"), issued Statement of Financial Accounting Standards No. 128 ("SFAS
128") Earnings Per Share. SFAS 128 establishes standards for computing and
presenting earnings per share ("EPS") and has the effect of simplifying the
standards for computing the EPS, and makes them comparable with international
standards. SFAS 128 replaces presentation of primary EPS with a basic
presentation of EPS. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
shares outstanding. Further, this statement requires dual presentation for
all entities with complex capital structures, which includes the effect of
common stock equivalents such as options or warrants. SFAS 128 is effective
for periods ending after December 15, 1997 (earlier adoption is not
permitted) and requires restatement of all prior period EPS data presented.
It is expected that the adoption of SFAS 128 will not have a significant, if
any, effect on reported EPS data.
NOTE 7. SUBSEQUENT EVENT
On July 25, 1997, the Company executed a Memorandum of Agreement with a
Manufacturing Company to provide 450 automated teller machines for
installation and use within the Company's dispatch office locations. The
designated dispatch offices and the timing of the delivery of this equipment
are stated as being upon the request and direction of the Company. The
financing arrangement for this purchase commitment is currently in
negotiation, with the only terms established and agreed upon as of the filing
of this document, being the total purchase price of $5.5 million
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements, within the meaning of Section 21E of the
Securities and Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes", "anticipates", "plans",
"expects", "estimates" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that
could cause the results of the Company to differ materially from those
indicated herein. These factors include, but are not limited to, those set
forth in Item 7 entitled Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's Form 10-K for the year
ended December 31, 1996.
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 300 dispatch offices at June 30, 1997.
Substantially all of the growth in dispatch offices was achieved by opening
Company-owned locations rather than through acquisitions. The Company's
annual 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.
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 has opened 100 dispatch offices to date and
expects to open at least 100 additional dispatch offices in 1998. 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. 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.
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
discounts 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.
Cost of services primarily includes wages and related payroll expenses
of temporary workers and dispatch office employees, general managers,
district managers and area directors, including workers' compensation,
unemployment compensation insurance, Medicare and Social Security taxes, but
does not include dispatch offices lease expenses. The Company's cost of
services as a percentage of revenues has fluctuated significantly in recent
periods and it expects significant fluctuations to continue in future periods
as the Company continues its rapid growth. Cost of services as a percentage
of revenues is affected by numerous factors, including salaries of new
supervisory personnel hired under new management organizational 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.
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Temporary workers assigned to customers remain Labor Ready employees.
Labor Ready is responsible for employee-related expenses of its temporary
workers, including workers' compensation coverage, unemployment compensation
insurance, Medicare and Social Security taxes and general payroll expenses.
The Company does not provide health, dental, disability or life insurance to
its temporary workers. Generally, the Company bills its customers for the
hours worked by the temporary workers assigned to the customer. Because the
Company pays its temporary workers only for the hours actually worked, wages
for the Company's temporary workers are a variable cost that increases or
decreases directly in proportion to revenue. The Company has one franchisee
which operates five dispatch offices. The Company does not intend to grant
additional franchises. Royalty revenues from the franchised dispatch offices
are included in revenues from services and were not material during any
period presented herein.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues represented by
certain items in the Company's Consolidated Statements of Income for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues from services . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of services . . . . . . . . . . . . . . . . . 84.7 82.8 83.6 81.1
Selling, general and administrative expenses . . . 14.8 15.8 13.6 14.7
Interest and other, net. . . . . . . . . . . . . . (0.2) 1.2 (0.1) 0.9
---------- ---------- ---------- ----------
Income before taxes on income. . . . . . . . . . . 0.7 0.2 2.9 3.3
Taxes on income. . . . . . . . . . . . . . . . . . 0.3 0.1 1.3 1.2
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . 0.4 0.1 1.6 2.1
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
DISPATCH OFFICES
The number of dispatch office grew to 300 at June 30, 1997 as compared
to 169 dispatch office open as of June 30, 1996 an increase of 131 offices of
77.5%. The Company opened 100 dispatch offices in the six months ended June
30, 1997 as compared to 69 dispatch offices for the same period of the prior
year and in the second quarter of 1997 and 1996, the Company opened 56
dispatch offices and 42 dispatch offices, respectively.
REVENUES FROM SERVICES
The Company's revenues from services increased to $129.3 million for the
six months ended June 30, 1997, as compared to $62.1 million for the six
months ended June 30, 1996, an increase of $67.2 million or 108%. This
increase resulted primarily from those dispatch offices that have been open
for a full year, and to a lesser extent from revenues from dispatch offices
that have been open for less than year. This increase is also attributed to
both the Company's continuing development of high volume national accounts,
and the penetration into new markets through increased name brand awareness.
COST OF SERVICES
Cost of services increased to $109.5 million for the six months ended
June 30, 1997 as compared to $51.4 million for the six months ended June 30,
1996, an increase of $58.1 million or 113%. This increase is directly
related to the additional wages and salaries paid to temporary workers and
the corresponding increase in revenues. Cost of services as a percentage of
revenues increased to 84.7% for the six months ended June 30, 1997 from 82.8%
for the six months ended June 30, 1996, which represents an increase of 1.9%.
This increase in cost of services as a percentage of revenues is
attributable to the salaries and wages paid to Company personnel operating
the new dispatch offices opened during the period, for which initial break
even revenues have not yet been achieved (historically, a new office achieves
break even in two to six months) and the use of a special introductory rates
by the Company to initially penetrate new markets. The Company expects
significant continuing fluctuations in cost of services as the Company
pursues further aggressive growth.
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<PAGE>
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $19.1 million
as of the six month period ended June 30, 1997, as compared to $9.8 million
for the six month period ended June 30, 1996, an increase of $9.3 million or
94.9%. As a percentage of revenues from services, selling, general and
administrative expenses decreased to 14.8% from 15.8% for the same period in
the prior year, representing a 1.0% decrease. This decrease was due to the
economy of scale generated on administrative services as revenues from
services increased at an accelerated rate and the capitalization of dispatch
office start-up costs exceeding the associated amortization expense.
INTEREST AND OTHER EXPENSES
Interest and other expenses was a positive contribution to income of
$310,000 for the six months ended June 30, 1997, as compared to an expense of
$762,000 for the six months ended June 30, 1996, an increase of $1,072,000 or
140.7%. This reversal of expense to income was the result of the Company's
completion of a public offering and subsequent prepayment of substantially
all outstanding debt during the third and fourth quarters of 1996, which
permitted surplus funds to be invested in interest bearing short-term debt
obligations. Interest and other expenses as a percentage of revenue from
services was a positive contribution of 0.2% for the six months ended June
30, 1997, as compared to an expense of 1.2% for the six months ended June 30,
1996. The Company expects interest and other, net, will become interest
expense in the third quarter as the cash demands from operations and a
continued aggressive growth strategy will necessitate the use of the
Company's revolving line of credit.
TAXES ON INCOME
The Company's taxes on income were $446,000 for the six months ended
June 30, 1997, as compared to $60,000 for the six months ended June 30, 1996,
an increase of $386,000 or 643.3%. This increase was the direct result of
both the increase in Company's income before the calculated tax effect, and
the continued increase in the Company's effective tax rate related to the
expansion of the Company into those states and cities which impose an income
tax. The Company recorded a net deferred tax asset of approximately $3.5
million at June 30, 1997, resulting primarily from workers' compensation
deposits for unpaid claims and the reserve for bad debts. The Company has
not established a valuation allowance against this net deferred tax asset as
management believes that it is more likely than not that the tax benefits
will be realized in the future based on historical levels of pre-tax income
and expected future taxable income.
NET INCOME
The Company recorded net income of $585,000 for the six months ended
June 30, 1997, as compared to net income of $101,000, for the six months
ended June 30, 1996, an increase of $484,000 or 479.2%. As a percentage of
revenues from services, net income increased to 0.4% for the six months ended
June 30, 1997, which compares to 0.1%, for the six months ended June 30,
1996, an increase of 0.3%. This increase in net income as a percentage of
revenues is primarily the result of the economies of scale generated on
selling, general and administrative services, as a result of increased
revenues over the same infrastructure, the capitalization of new dispatch
office start-up costs and the benefit of realizing interest income rather
than interest expense offset in part by higher cost of services.
LIQUIDITY AND CAPITAL RESOURCES
The Company used net cash in operating activities of $5.1 million and
$6.7 million during the six months ended June 30, 1997 and 1996, reflecting
the significant growth in the Company's revenues, accounts receivable and
the opening of new dispatch offices. The net cash used in investing
activities through June 30, 1997 was $6.3 million as compared to $1.7 million
for the same period in 1996, and was primarily associated with capital
expenditures for the new dispatch offices opened and the capitalization of
certain new dispatch office start-up costs. Management anticipates that cash
flow deficits from operating and investing activities will continue while the
Company continues to increase the number of dispatch office locations. This
cash flow deficit will be funded through the balance of the funds obtained in
the 1996 public offering and it is expected that the Company will begin use
of the $20.0 million revolving line of credit with US Bank of Washington,
N.A. in the third quarter.
In December 1996, the Company used $1.7 million in cash to finance the
original capitalization of Labor Ready Assurance Company, a wholly owned foreign
subsidiary. In January 1997, the Company used an additional $0.7 million in
cash to further capitalize this subsidiary. These funds remain on deposit as
restricted cash, and are expected to provide the Company a more cost efficient
method of administering, paying and finally settling its workers' compensation
claims and liabilities in the future.
As of June 30, 1997, the Company has used $1.2 million to purchase and
retire 136,000 shares of the Company's common stock, under the stock repurchase
plan approved by the Board of Directors in February, 1997.
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<PAGE>
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PART II. OTHER INFORMATION -- NOT APPLICABLE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT: LABOR READY, INC.
By: /s/ Glenn A. Welstad August 4, 1997
----------------------- --------------
Glenn A. Welstad Date
Chairman of the Board, Chief Executive
Officer and President
By: /s/ Ralph E. Peterson August 4, 1997
----------------------- --------------
Ralph E. Peterson Date
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
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Page 12
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,145,115
<SECURITIES> 0
<RECEIVABLES> 33,324,398
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854,082
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