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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14243
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RAGEN MACKENZIE GROUP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
WASHINGTON 91-1898738
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
999 THIRD AVENUE, SUITE 4300, SEATTLE, WASHINGTON 98104
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (206) 343-5000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
-------------------- ------------------------------------------
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Common Stock, $.01 Par Value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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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 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 [_]
Indicate 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 definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of December 7, 1998, there were 13,307,340 shares of Common Stock, par
value $.01 per share, of Ragen MacKenzie Group Incorporated (the "Company")
issued and outstanding of which 11,397,339 shares were held by non-affiliates.
The aggregate market value of such Common Stock held by non-affiliates, based
on the closing market price of $12.00 on December 7, 1998, was approximately
$136,768,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement filed with the Securities and
Exchange Commission ("SEC") in connection with the Company's Annual Meeting of
Shareholders to be held January 28, 1999 (the "Company's 1999 Proxy
Statement") are incorporated by reference into Part III hereof. Other
documents incorporated by reference in this report are listed in the Exhibit
Index beginning on page 39 of this Form 10-K.
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RAGEN MACKENZIE GROUP INCORPORATED
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1998
TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business............................................................................... 3
2. Properties............................................................................. 22
3. Legal Proceedings...................................................................... 22
4. Submission of Matters to a Vote of Security Holders.................................... 22
PART II
5. Market for Registrant's Common Stock and Related Shareholder Matters................... 24
6. Selected Financial Data................................................................ 25
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 27
7A. Quantitative and Qualitative Disclosures about Market Risk............................. 35
8. Financial Statements and Supplementary Data............................................ 38
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure... 38
PART III
10. Directors and Executive Officers of the Registrant..................................... 38
11. Executive Compensation................................................................. 38
12. Security Ownership of Certain Beneficial Owners and Management......................... 38
13. Certain Relationships and Related Transactions......................................... 38
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 39
SIGNATURES................................................................................... 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.................. 42
EXHIBIT INDEX................................................................................ 65
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PART I
ITEM 1. BUSINESS:
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs
and certain assumptions made by management. The words "believe", "expect",
"intend", "anticipate", variations of such words, and similar expressions
identify forward-looking statements, but their absence does not mean that the
statement is not forward-looking. These forward-looking statements are not
guarantees of future performance and are subject to certain risks,
uncertainties and assumptions that are difficult to predict. Accordingly,
actual results may differ materially from those anticipated or expressed in
such statements. Potential risks and uncertainties include, among other
things, the general risks of the securities industry, risks of reduced revenue
during periods of lower prices or reduced trading volume; dependence on, and
ability to retain and recruit, key personnel; recent changes in management;
risks relating to the departure of Brooks G. Ragen; dependence on proprietary
research; significant fluctuations in quarterly results; regional
concentration; competition; management of growth of new and existing
businesses; and the risks relating to proprietary trading and correspondent
brokerage services; risks of extension of credit; risks relating to
regulation; risks relating to litigation and potential securities law
liability; market, credit and liquidity risks associated with market-making,
principal trading and underwriting activities, as well as other risks and
uncertainties set forth in "--Additional Factors That May Affect Future
Results."
GENERAL
Ragen MacKenzie Group Incorporated ("RMGI"), a Washington corporation, was
incorporated in April 1998 to serve as a holding company for all of the
operations of Ragen MacKenzie Incorporated ("RMI"). RMI was incorporated as a
Washington corporation in 1987, the year in which it succeeded to the business
of Cable, Howse & Ragen, a Washington limited partnership formed in 1982. RMI
is registered with the SEC as a broker/dealer and is a member firm of the New
York Stock Exchange (the "NYSE"). On June 22, 1998, RMI merged with a wholly
owned subsidiary of RMGI (the "Reorganization"). As a result of the
Reorganization, RMGI operates as a holding company and is the sole shareholder
of RMI, its sole subsidiary. On June 26, 1998, RMGI completed an initial
public offering of its common stock. Unless the context otherwise requires,
all references in this report to "Ragen MacKenzie" and the "Company" refer to
RMGI and its predecessor and subsidiary, RMI.
The Company's primary business is retail securities brokerage, which it
conducts in its Seattle headquarters and 10 additional offices in Washington,
Oregon and Alaska, which include four offices operated by independent
contractors. This business is directly supported by the Company's proprietary
research efforts, which are based on a value-oriented, contrarian approach to
investing. The Company's research department covers approximately 100 publicly
traded companies headquartered in the Pacific Northwest and maintains a
recommended list of selected regional and national stocks (the "Recommended
List"). Other aspects of the Company's business include proprietary trading of
certain fixed income securities, institutional brokerage services,
correspondent brokerage services and investment banking services. Revenues
generated from the Company's retail securities brokerage services (excluding
interest earned on retail brokerage customer account balances), proprietary
trading of certain fixed income securities (excluding interest income on the
related securities inventory), institutional brokerage services and
correspondent brokerage services constituted 38.6%, 9.1%, 6.4% and 3.1%,
respectively, of the Company's total revenues in fiscal 1998; revenues from
investment banking services in fiscal 1998 were insignificant. The remaining
percentage of total revenues in fiscal 1998 consists primarily of interest
income earned on retail brokerage customer account balances.
BROKERAGE SERVICES
Retail Brokerage
The Company's approach to the retail brokerage business is to attract and
retain highly productive, experienced brokers in selected cities throughout
the Pacific Northwest. The Company's retail brokerage business has developed
by establishing and maintaining relationships with high net worth individuals.
RMI, a full-service
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brokerage firm, offers its customers brokerage services relating to corporate
equity and debt securities and U.S. government and municipal securities,
including stocks followed by RMI's research analysts and underwritings in
which RMI participates in the underwriting syndicate. The Company's retail
brokers focus on recommending the purchase and sale of stocks and bonds,
particularly based on current purchase and sale recommendations on the
Recommended List. The Company has not historically offered its customers
proprietary products, such as mutual funds or other types of products created
by other investment banks. Commissions are charged on agency transactions in
listed securities and securities traded on the Nasdaq National Market
("Nasdaq"). In addition to retail commissions, RMI generates fee revenue from
asset-based investment advisory services paid by retail clients in lieu of
commissions or sales credits on each transaction. When RMI executes
transactions as a principal, it charges markups or markdowns in lieu of
commissions. See "--Principal Transactions--Market-Making and Other
Transactions." During fiscal 1996, 1997 and 1998, revenues from RMI's retail
brokerage activities, excluding interest earned on retail brokerage customer
balances, constituted approximately 43.8%, 42.1% and 38.6%, respectively, of
the Company's total revenues.
The Company has been able to recruit and retain experienced and productive
brokers who seek to establish and maintain personal relationships with high
net worth individuals. The Company generally does not hire inexperienced
brokers or trainees to work as retail brokers. The Company believes that its
performance-based equity incentive compensation has been a key component in
its ability to recruit new brokers. The Company believes that continuing to
add experienced, highly productive brokers is an integral part of its growth
strategy.
In addition to executing transactions, Ragen MacKenzie provides services to
individual investors, including portfolio strategy, research services and
investment advice, as well as other services such as sales of restricted
securities. Certain of Ragen MacKenzie's retail brokers exercise discretionary
authority over investment decisions in certain customer accounts. Trades in
these accounts are generally based on the Recommended List.
The Company conducts its retail brokerage operations through seven offices
in Washington and Oregon. Most of the Company's retail clients are located in
the Pacific Northwest. The following table sets forth as of September 25,
1998, the location of the Company's retail offices, the fiscal year each
office opened and the number of retail brokers in each office:
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FISCAL YEAR NUMBER OF
LOCATION OF RETAIL OFFICE OFFICE OPENED RETAIL BROKERS
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Seattle, Washington............................. 1982 36
Bellevue, Washington............................ 1990 13
Portland, Oregon 1991 11
Tacoma, Washington.............................. 1991 4
Walla Walla, Washington......................... 1991 6
Bend, Oregon.................................... 1995 5
Eugene, Oregon.................................. 1996 4
</TABLE>
The Company has contractual arrangements with 11 independent contractors
that operate offices located in Fairbanks, Alaska, and Mt. Vernon, Anacortes
and Mill Creek, Washington using the Ragen MacKenzie name. These offices were
established in the late 1980s, prior to the expansion of the Company's retail
operations through Company-owned offices. The Company provides research,
management, compliance and clearing services for these offices in return for a
portion of gross retail revenues. These offices, in turn, are responsible for
their own operating expenses. All of the brokers in these offices are
registered as associated persons of RMI, and RMI is responsible for
supervising their securities activities.
Institutional Brokerage
The Company's institutional brokerage strategy is to leverage the research
department's coverage of companies headquartered in the Pacific Northwest to
provide value-added, niche-oriented brokerage service to a variety of
institutional customers throughout the United States. The Company provides
institutional customers with research, trading and sales services in Nasdaq
and exchange-listed equity securities, and distributes equity
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securities in connection with offerings underwritten by RMI. The Company's
institutional customers include banks, retirement funds, mutual funds,
investment advisors and insurance companies. The Company provides services to
a nationwide institutional client base, as well as several institutional
customers located in Europe. The Company currently has six institutional
brokers. The Company employs a NYSE floor broker and two listed equity traders
who work with other broker-dealers, institutions and the Company's floor
broker to facilitate institutional trades and retail customer block trades.
The Company generally seeks to hire professionals with relevant experience and
develop them into successful institutional brokers rather than relying on
institutional brokers trained by other firms. During fiscal 1998, revenues
from RMI's institutional brokerage activities constituted approximately 6.4%
of the Company's total revenues.
The Company believes that a significant portion of its institutional
brokerage commissions are received as a consequence of providing institutions
with research reports and services regarding specific corporations and
industries, particularly in the Pacific Northwest, and securities market
information. The Company utilizes its trading knowledge and expertise, and
active trading focus on Pacific Northwest stocks, to provide institutional
clients with value-added service. The Company's total institutional commission
revenues are ultimately dependent on institutional clients' assessment of the
value of the research services and trading expertise provided by the Company.
PRINCIPAL TRANSACTIONS
Market-Making and Other Transactions
The Company engages in trading as a principal when it executes trades in
Nasdaq equity securities or other over-the-counter ("OTC") securities as a
market-maker, and in municipal bonds, corporate debt and U.S. government and
agency securities. The Company receives, in lieu of commissions, markups or
markdowns that constitute revenues from principal transactions when it
executes transactions on a principal basis. Principal transactions with
customers are generally effected at a net price within or equal to the current
interdealer price plus or minus a markup or markdown. The Company generally
does not take a significant inventory position in any single equity, municipal
or corporate debt security, as the trading department's objective is to
facilitate sales to customers and to other dealers, not to generate profits
based on trading for the Company's own account.
Revenues from principal transactions depend on the general trend of prices
and the level of activity in the securities market, employee skill in market-
making activities and inventory size. Trading activities carried out as a
principal require a commitment of capital, and create an opportunity for
profit and risk of loss due to market fluctuations. As of September 25, 1998,
the Company made markets in the common stock or equity securities of
approximately 93 companies that were traded on Nasdaq, and approximately 16
companies that were traded otherwise in the OTC market. The Company's market-
making activities are concentrated in Pacific Northwest stocks that are
followed by Ragen MacKenzie's research department. See "--Additional Factors
That May Affect Future Results--General Risks of the Securities Industry."
Proprietary Trading
Ragen MacKenzie maintains a dealer-to-dealer zero coupon trading desk that
makes markets and maintains inventory in odd-lot U.S. government and agency
zero coupon bonds and related securities. The Company also has a trading desk
that trades collateralized mortgage obligations ("CMOs") with other broker-
dealers or banks. Rather than trading a wide variety of securities in direct
competition with Wall Street firms, the Company has developed a niche strategy
in the proprietary trading of fixed-income securities traded by these two
desks. In its trading activities, Ragen MacKenzie generally acts as a
wholesaler, buying round-lot and odd-lot positions, selling odd-lot positions,
and acting as a market-maker in odd-lot positions. The majority of the
Company's counterparties in these transactions are other broker-dealers or
banks. The Company's proprietary trading operations seek to generate profits
based on trading spreads, rather than through the facilitation of sales to
customers or speculation on the direction of the market. During fiscal 1998,
revenues from RMI's proprietary trading activities constituted approximately
9.1% of the Company's total revenues, excluding interest income on the related
securities inventory.
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The level of positions carried in Ragen MacKenzie's trading accounts
fluctuates significantly. The size of the securities positions on any one date
may not be representative of the Company's exposure on another date because
the securities positions vary substantially depending on economic and market
conditions, the allocation of capital among types of inventories, underwriting
commitments, customer demands and trading volume. The aggregate value of
inventories that the Company may carry is limited by certain requirements of
the Net Capital Rule (as hereinafter defined). See "--Net Capital
Requirements."
The Company has established procedures designed to reduce the risks of its
proprietary trading activities. In particular, it employs a hedging strategy
for both its CMO and zero coupon trading desks that is designed to insulate
the net value of its trading inventory from fluctuations in the general level
of interest rates. However, it is not possible to hedge completely the risks
associated with interest rate fluctuations for some of the fixed income
securities that the Company trades, primarily because the price movements of
financial instruments typically used to hedge long positions in such
securities may not precisely mirror the price movements of the hedged
securities under all market conditions. In addition to its hedging procedures,
the Company seeks to mitigate the various risks associated with its
proprietary trading activities by avoiding positions in those CMOs that are
most sensitive to changes in interest rates and by subjecting its trading
inventory positions and profit and loss statements to daily review by senior
management of RMI. Senior management reviews the profit and loss and inventory
positions of the CMO and zero coupon trading desks daily. There can be no
assurance, however, that such procedures will prevent any such loss, and any
such loss could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows. See "Item 7A.
Quantitative And Qualitative Disclosures About Market Risk" and "--Additional
Factors That May Affect Future Results--Risks of Proprietary Trading."
CORRESPONDENT BROKERAGE SERVICES
The Company provides clearing services on a fully disclosed basis to 17
correspondent firms principally located in the Pacific Northwest. In a fully
disclosed clearing transaction, the identity of the correspondent's client is
known to Ragen MacKenzie, and Ragen MacKenzie performs a variety of services
for the correspondent, including integrated trade execution, clearing,
maintaining custody of certain assets of the correspondent's clients, mailing
confirmation and monthly statements and other customized services.
Correspondents also receive information and recommendations provided by Ragen
MacKenzie's research department, including the Recommended List. Although
revenues from correspondent brokerage services comprise a relatively small
percentage of total revenues from year to year, a substantial portion of the
expenses associated with correspondent brokerage services are fixed, and
therefore changes in revenues associated with these services may have a
disproportionate effect on net income. During fiscal 1998, revenues from RMI's
correspondent brokerage services constituted approximately 3.1% of the
Company's total revenues. The Company believes that its competitive strengths
in this business are its ability to perform the physical trade execution and
clearing functions that are typical in such relationships, and its provision
of its market-making capabilities and proprietary research products to its
correspondent clients.
INVESTMENT BANKING AND UNDERWRITING
The Company's investment banking strategy is directed at building a balanced
mix of corporate security underwriting, private financings and financial
advisory services with a geographical focus on the Pacific Northwest. During
fiscal 1998, investment banking services constituted an insignificant
percentage of the Company's total revenues.
Underwriting
Ragen MacKenzie participates in corporate securities distributions as a
member of an underwriting syndicate or of a selling group and, from time to
time, acts as a co-manager of an underwriting syndicate. The
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Company's syndicate department coordinates the distribution of co-managed
equity underwritings, accepts invitations to participate in underwritings
managed by other investment banking firms and allocates Ragen MacKenzie's
selling allotments to its retail offices and institutional clients.
Participation in an underwriting syndicate or selling group involves both
economic and regulatory risks. An underwriter or selling group member may
incur losses if it is forced to resell the securities it is committed to
purchase at less than the agreed purchase price. In addition, under the
federal securities laws, other statutes and court decisions with respect to
underwriters' liabilities and limitations on indemnification of underwriters
by issuers, an underwriter is subject to substantial potential liability for
material misstatements or omissions in prospectuses and other communications
with respect to underwritten offerings.
Financial Advisory Services
Ragen MacKenzie also assists in arranging mergers, acquisitions and
divestitures and on occasion engages in structuring, managing and marketing
private offerings of corporate securities. The Company also has the capability
to provide fairness opinions, valuations and financial consulting services.
INTEREST INCOME AND CUSTOMER FINANCING
A significant portion of the Company's revenues are derived from net
interest income, the major portion of which relates to customer account
balances. Customer transactions are effected on either a cash or a margin
basis. Cash-basis purchases require full payment by the designated settlement
date, generally the third business day following the transaction date. The
Company is at risk if a customer fails to settle a trade and the value of the
securities declines on a purchase transaction or increases on a sales
transaction subsequent to the transaction date.
In margin transactions, the Company extends credit to the customer, which is
collateralized by securities and cash in the customer's account, and receives
income from interest charged on the extension of credit. The customer is
charged for such margin financing at interest rates based on the broker's call
rate (the prevailing interest rate charged by banks on secured loans to
broker-dealers), plus an additional amount, depending on the average net debit
balance in the customer's accounts, the activity level in the accounts and the
applicable cost of funds. The Company's interest revenues are affected by the
volume of customer borrowing and prevailing interest rates.
Margin lending by the Company is subject to the margin regulations
("Regulation T") of the Board of Governors of the Federal Reserve System, NYSE
margin requirements and the Company's internal policies, which in many
instances are more stringent than Regulation T and the NYSE requirements. In
most transactions, Regulation T limits the amount loaned to a customer for the
purchase of a particular security to a percentage of the purchase price
(generally 50% for equity securities). Furthermore, in the event of a decline
in the value of the collateral, the NYSE regulates the percentage of customer
cash or securities that must be on deposit at all times as collateral for the
loans. The Company is subject to the risk of a market decline, which could
reduce the value of its collateral below the customer's indebtedness before
the collateral could be sold. Agreements with margin account customers permit
the Company to liquidate customers' securities with or without prior notice in
the event of an insufficient amount of margin collateral. Despite such
agreements, the Company may be unable to liquidate customers' securities for
various reasons, including that the pledged securities may not be actively
traded, there is an undue concentration of certain securities pledged, or a
stop order is issued with regard to pledged securities. See "--Additional
Factors That May Affect Future Results--General Risks of the Securities
Industry."
Customers will at times accumulate credit balances in their accounts as a
result of dividend payments, interest or principal on securities held, funds
received in connection with sales of securities and cash deposits made by
customers pending investment. Ragen MacKenzie pays interest on such credit
balances pending investment of such funds. The Company uses available credit
balances to lend funds to customers purchasing securities on margin. Excess
customer credit balances are invested in securities purchased under agreements
to
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resell ("reverse repurchase agreements"), all of which were obligations of the
U.S. government and its agencies, held in a segregated cash account for the
benefit of customers in accordance with applicable regulations or invested on
behalf of customers in a cash management account. The Company generates net
interest income from the positive interest rate spread between the rate earned
from margin lending and alternative short-term investments and the rate paid
on customer credit balances.
RMI is a member of the Securities Investor Protection Corporation ("SIPC"),
which protects customer accounts held by RMI of up to $500,000 each (limited
to $100,000 for claims for cash) in the event of the Company's liquidation.
Additionally, RMI maintains insurance coverage in order to insure customer
accounts up to $14.5 million in excess of SIPC coverage per customer. There is
no SIPC coverage for the accounts of officers, directors or beneficial owners
of 5% or more of any class of equity security of the Company.
Security Repurchase Activities
Repurchase agreements are used to finance the Company's securities
inventory, while reverse repurchase agreements are used to invest monies for
the exclusive benefit of customers and to cover short positions in the
Company's trading of debt securities. The Company is at risk to the extent
that it does not properly match the contracts, or its counterparties are
unable to meet their obligations, especially during periods of rapidly
changing interest rates and fluctuations in market conditions. The Company
generally takes physical possession of securities purchased under agreements
to resell, which agreements provide the Company with the right to maintain the
relationship between the market value of the collateral and the securities
sold under repurchase agreements as a means of financing portions of its
trading inventories and facilitating hedging transactions. See "Item 7A.
Quantitative And Qualitative Disclosures About Market Risk."
RESEARCH
The Company uses its proprietary equity research products to support a large
portion of its business. Ragen MacKenzie's research department, which
currently consists of nine professional research analysts, embraces a value-
oriented, contrarian approach to investing. This approach is based on an
analysis of economic fundamentals, using among other tools price-to-earnings
multiples and price-to-book value comparisons relative to historic valuations
and the research department's own earnings forecasts. The Company relies
primarily on proprietary research products, rather than on research products
purchased from independent research organizations. The Company's research
analysts generally provide coverage for companies in more than one industry,
but apply similar criteria to each company they follow. The Company believes
that the services provided by the research department have a significant
impact on virtually all of Ragen MacKenzie's revenue-generating activities,
including retail and institutional brokerage, market-making and investment
banking.
Recommended List
The Company's value-oriented Recommended List is national in scope and
principally serves the Company's retail brokerage customers. The Recommended
List focuses on stocks that are out of favor due to reduced or below average
consensus expectations of a company's prospects and attempts to maintain a
disciplined approach by establishing purchase price limits and making sell
recommendations when target prices are achieved. This investment philosophy is
based on the premise that depressed stocks may offer a lower risk profile upon
a negative outcome, yet offer superior return opportunities to investors if
future prospects are brighter than earlier thought. The Recommended List is
not distributed publicly but is made available only to the Company's retail
brokers, independent contractors, retail customers and correspondents.
The Company's management believes that its research philosophy and
Recommended List have been a significant element in the growth and
profitability of its retail equity business since being adopted by the Company
in 1988, and have contributed to Ragen MacKenzie's ability to attract and
retain retail brokers. The Recommended List contains buy, hold or sell
recommendations for a limited number of stocks and generally does not include
ongoing recommendations of Pacific Northwest stocks covered by the Company's
analysts.
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Pacific Northwest Regional Equity Research
The Company believes that a significant portion of its institutional equity
brokerage business is attributable to its Pacific Northwest regional equity
research. Ragen MacKenzie analysts closely track approximately 100 publicly
traded companies headquartered in the Pacific Northwest and work to provide
investors with up-to-date, value-added analysis and advice. The Company
believes that its proximity to and niche focus on Pacific Northwest companies
in many cases provides it with a competitive advantage over broker-dealers
headquartered outside the region. The Company makes its analysts' reports on
Pacific Northwest companies publicly available. The Company's analysts work
closely with sales and trading professionals to provide its institutional
investor customers with current company and industry analysis.
In addition to publishing its written research, Ragen MacKenzie hosts
frequent research forums where Pacific Northwest companies make presentations,
and in 1998 hosted its 17th Annual Pacific Northwest Conference. These annual
conferences highlight selected publicly traded companies in the region, and
have been held in Seattle, Washington and Portland, Oregon.
ACCOUNTING, ADMINISTRATION AND OPERATIONS
The Company's accounting, administration and operations personnel are
responsible for financial controls, internal and external financial reporting,
compliance with regulatory and legal requirements, office and personnel
services, the Company's information and telecommunications systems and
processing the Company's securities transactions. Operations department
managers have worked on average more than 20 years in the securities industry.
The Company utilizes its own facilities and management information systems
department, and the services of an outside software provider under a servicing
contract, for the electronic processing relating to recording all data
pertinent to securities transactions and general accounting. The Company
believes that its communications and information systems are sufficient to
accommodate its growth in the near term; however, the Company believes
anticipated future growth may require implementation of new and enhanced
communications and information systems and training of personnel to operate
such systems. Any difficulty or significant delay in the implementation or
operation of existing or new systems, the integration of management and other
personnel or the training of personnel could adversely affect the Company's
ability to manage growth. See "--Additional Factors That May Affect Future
Results--Dependence on Systems."
COMPETITION
The securities industry is intensely competitive. Ragen MacKenzie competes
directly with national and regional full-service broker-dealers and a broad
range of other financial service firms. Many of the Company's competitors have
substantially greater capital and financial and other resources, and greater
name recognition, than the Company. In addition, the Company competes for
assets with a variety of broker-dealers and financial entities, including
mutual funds, which have enjoyed significant growth in recent years as many
retail investors have sought the diversification and other perceived benefits
available from such investment vehicles.
Competition has intensified as numerous securities firms have either ceased
operations or have been acquired by or merged into other firms. Such mergers
and acquisitions have increased competition from these firms, many of which
have significantly greater equity capital and financial and other resources
than the Company. Many of these firms, because of their significantly greater
financial capital and scope of operations, are able to offer their customers
more product offerings, broader research capabilities, access to international
markets and other products and services not offered by the Company, which may
provide such firms with competitive advantages over the Company. The
increasing competition and consolidation in the Company's principal businesses
could strengthen the Company's competitors and adversely affect the Company's
business.
The Company also faces competition from companies offering discount and/or
electronic brokerage services, including brokerage services provided over the
Internet. These services represent a rapidly expanding segment of the
securities industry. These competitors may have lower costs or provide fewer
services, and may offer their customers more favorable commissions, fees or
other terms than those offered by the Company.
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Commissions charged to customers of discount and electronic brokerage services
have steadily decreased over the past several years, and the Company expects
such decreases to continue. There can be no assurance that the rapid
development of discount and/or electronic brokerages and the decrease of
commissions at such brokerages will not have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
The Company believes that the principal competitive factors in the
securities industry are the quality and ability of professional personnel, and
relative prices of services and products offered. The Company and many of its
competitors use direct solicitation of potential customers as a means of
increasing business and furnish investment research publications in an effort
to attract existing and potential clients. Many of the Company's competitors
also engage in advertising programs, which the Company does not use to any
significant degree.
The Company believes that its ability to compete for retail customers
depends largely upon the skill, reputation and experience of its retail
brokers and the perceived value of its research product. The Company believes
that these assets will continue to prove attractive to a segment of the
investing public which prefers the advice and personal relationship available
from a full-service broker-dealer, and which is comfortable dealing with an
established regional firm. However, there can be no assurance that these
factors will continue to enable the Company to remain competitive.
REGULATION
The Company's business and the securities industry in general are subject to
extensive regulation in the United States at both the federal and state
levels, as well as by self-regulatory organizations ("SROs").
In the United States, the SEC is the federal agency primarily responsible
for the regulation of broker-dealers and investment advisers doing business in
the United States, and the Board of Governors of the Federal Reserve System
promulgates regulations applicable to securities credit transactions involving
broker-dealers and certain other United States institutions. RMI is registered
as a broker-dealer and investment adviser with the SEC. Certain aspects of
broker-dealer regulation has been delegated to securities-industry SROs,
principally the NASD and as the NYSE. The NYSE has been designated by the SEC
as RMI's primary regulator. These SROs adopt rules (subject to SEC approval)
that govern the industry, and, along with the SEC, conduct periodic
examinations of RMI's operations. Securities firms are also subject to
regulation by state securities administrators in those states in which they
conduct business. RMI is registered as a broker-dealer in all states and the
District of Columbia.
Broker-dealers are subject to regulations covering all aspects of the
securities industry, including sales practices, trade practices among broker-
dealers, capital requirements, the use and safekeeping of customers' funds and
securities, record-keeping and reporting requirements, supervisory and
organizational procedures intended to ensure compliance with securities laws
and to prevent unlawful trading on material nonpublic information, employee-
related matters, including qualification, and licensing of supervisory and
sales personnel, limitations on extensions of credit in securities
transactions, clearance and settlement procedures, requirements for the
registration, underwriting, sale and distribution of securities and rules of
the SROs designed to promote high standards of commercial honor and just and
equitable principles of trade. A particular focus of the applicable
regulations concerns the relationship between broker-dealers and their
customers. As a result, many aspects of the relationship between broker-
dealers and customers are subject to regulation, including, in some instances,
"suitability" determinations as to certain customer transactions, limitations
on the amounts that may be charged to customers, timing of proprietary trading
in relation to customers' trades and disclosures to customers.
As an investment adviser registered with the SEC, RMI is subject to the
requirements of the Investment Advisers Act of 1940, as amended, and the SEC's
regulations thereunder, as well as state securities laws and regulations. Such
requirements relate to, among other things, limitations on the ability of
investment advisers to charge performance-based or nonrefundable fees to
clients, record-keeping and reporting requirements,
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disclosure requirements and limitations on principal transactions between an
adviser or its affiliates and advisory clients, as well as general antifraud
prohibitions. Pursuant to the National Securities Markets Improvement Act of
1996 and the Investment Advisors Supervision Coordination Act, and the
provisions thereunder, investment advisors such as RMI with more than $25
million of assets under management are regulated solely by the SEC and are no
longer regulated by the states.
RMI also is subject to "Risk Assessment Rules" imposed by the SEC. These
rules require, among other things, that certain broker-dealers maintain and
preserve certain information, describe risk management policies, procedures
and systems and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have a material
impact on the broker-dealers' financial and operational condition.
Additional legislation, changes in rules promulgated by the SEC, state
regulatory authorities or SROs, or changes in the interpretation or
enforcement of existing laws and rules may directly affect the mode of
operation and profitability of broker-dealers. The SEC, SROs and state
securities commissions may conduct administrative proceedings, which can
result in censure, fines, the issuance of cease-and-desist orders or the
suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulating and disciplining broker-dealers is the
protection of customers and the securities markets, rather than the protection
of creditors and shareholders of broker-dealers.
As a registered broker-dealer, RMI is required to establish and maintain a
system to supervise the activities of its retail brokers, including its
independent contractor offices, and other securities professionals. The
supervisory system must be reasonably designed to achieve compliance with
applicable securities laws and regulations, as well as SRO rules. The SROs
have established minimum requirements for such supervisory systems; however,
each broker-dealer must establish procedures that are appropriate for the
nature of its business operations. Failure to establish and maintain an
adequate supervisory system may result in sanctions imposed by the SEC or an
SRO that could limit RMI's ability to conduct its securities business.
Moreover, under federal law, and certain state securities laws, RMI may be
held liable for damages resulting from the unauthorized conduct of its account
executives to the extent that RMI has failed to establish and maintain an
appropriate supervisory system.
As part of its regular examination cycle, the NYSE and the NASD Regulation
(the "NASDR") inspected RMI in 1997. Following these inspections, various
issues primarily regarding registration and bookkeeping requirements, order
execution procedures and supervision relating to such requirements and
procedures were referred to the NYSE and the NASDR enforcement divisions for
further consideration. In addition, the SEC is also aware of the issues raised
by these inspections. The NYSE and the NASDR enforcement divisions are
considering what further steps, if any, to take. Those steps could include a
determination that no enforcement proceeding is appropriate, undertaking
further inquiries, or commencing an enforcement proceeding. Although the
Company believes that there are defenses in connection with these issues,
based on communications with the NYSE and the NASDR enforcement divisions, the
Company believes that NASDR and NYSE enforcement proceedings will be
commenced. If one or more enforcement proceedings were commenced and one or
more proceedings were to result in a conclusion that RMI or its employees,
including executives with ultimate supervisory responsibility, violated or
failed to enforce securities rules or regulations, sanctions for such
violations could range from a letter of caution or censure, to financial costs
and penalties or various limitations on firm or employee activity, including
individual suspensions. There can be no assurance that such sanctions,
including suspensions of the Company's employees or executives, would not have
a material adverse effect on the Company's business, financial condition,
results of operations or cash flows. Although the Company believes that there
are defenses in connection with these issues, the Company has held settlement
discussions with the NYSE and the NASDR enforcement divisions. A settlement
would involve the simultaneous initiation and resolution of enforcement
proceedings. There can be no assurance that these discussions will result in a
settlement, or that, if a settlement is reached, the settlement would not have
a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.
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NET CAPITAL REQUIREMENTS
As a registered broker-dealer and member of the NYSE, RMI is subject to Rule
15c3-1 (the "Net Capital Rule") under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which has also been adopted through
incorporation by reference in NYSE Rule 325. The Net Capital Rule, which
specifies minimum net capital requirements for registered brokers and dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept
in relatively liquid form.
Net capital is essentially defined as net worth (assets minus liabilities,
as determined under generally accepted accounting principals), plus qualifying
subordinated borrowings, less the value of all of a broker-dealer's assets
that are not readily convertible into cash (such as goodwill, furniture,
prepaid expenses, exchange seats and unsecured receivables), and further
reduced by certain percentages (referred to as "haircuts") of the market value
of a firm's securities to reflect the possibility of a market decline prior to
disposition.
RMI has elected to compute net capital under the alternative method of
calculation permitted by the Net Capital Rule. Under this alternative method,
RMI is required to maintain minimum net capital, as defined in the Net Capital
Rule, equal to the greater of $1,000,000 and 2% of the amount of "aggregate
debit items" computed in accordance with the Formula for Determination of
Reserve Requirements for Brokers and Dealers (Exhibit A to Rule 15c3-3 under
the Exchange Act). Generally, aggregate debit items are assets that have as
their source customer transactions, and consist primarily of margin loans.
Failure to maintain the required net capital may subject a firm to suspension
or revocation of registration by the SEC and suspension or expulsion by the
NYSE and other regulatory bodies, and ultimately may require its liquidation.
Further, the decline in a broker-dealer's net capital below certain "early
warning levels," even though above minimum capital requirements, could cause
material adverse consequences to the broker-dealer. For example, the Net
Capital Rule prohibits payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness and payments in respect of
subordinated indebtedness principal if thereafter net capital would be less
than 5% of aggregate debit items. Under NYSE Rule 326, a member firm is
required to reduce its business if its net capital (after giving effect to
scheduled maturities of subordinated indebtedness or other planned withdrawals
of regulatory capital in the following six months) is less than $312,500 or 4%
of aggregate debit items. NYSE Rule 326 also prohibits the expansion of
business if net capital (after giving effect to scheduled maturities of
subordinated indebtedness or other planned withdrawals of regulatory capital
in the following six months) is less than $375,000 or 5% of aggregate debit
items for 15 consecutive days.
The SEC's capital rules also (i) require that broker-dealers notify it and
the NYSE, in writing, two business days prior to making withdrawals or other
distributions of equity capital or lending money to certain related persons if
such withdrawals would exceed, in any 30-day period, 30% of the broker-
dealer's excess net capital and that they provide such notice within two
business days after any such withdrawal or loan that would exceed, in any 30-
day period, 20% of the broker-dealer's excess net capital, (ii) prohibit a
broker-dealer from withdrawing or otherwise distributing equity capital or
making related-party loans if after such distribution or loan the broker-
dealer has net capital of less than $300,000 or 5% of aggregate debit items
and certain other circumstances, and (iii) provide that the SEC may, by order,
prohibit withdrawals of capital from a broker-dealer for a period of up to 20
business days if the withdrawals would exceed, in any 30-day period, 30% of
the broker-dealer's excess net capital and the SEC believes such withdrawals
would be detrimental to the financial integrity of the firm or would unduly
jeopardize the broker-dealer's ability to pay its customer claims or other
liabilities.
Compliance with the Net Capital Rule could limit those operations of RMI
that require the intensive use of capital, such as underwriting and trading
activities and the financing of customer account balances, and also could
restrict the Company's ability to withdraw capital, which, in turn, could
limit the Company's ability to pay dividends, and redeem or purchase shares of
its outstanding common stock.
RMI has been in compliance at all times with all aspects of the Net Capital
Rule. As of September 25, 1998, RMI was required to maintain minimum net
capital, in accordance with SEC rules, of approximately $2.3 million and had
total net capital (as so computed) of approximately $94.8 million, or
approximately $92.5 million in excess of 2% of aggregate debit items and $89.2
million in excess of 5% of aggregate debit items.
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EMPLOYEES
As of September 25, 1998, the Company had approximately 295 full-time and
part-time employees, of whom 79 were retail brokers. None of the Company's
employees is covered by a collective bargaining arrangement. The Company
believes that relations with its employees are good.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K, the
following important factors should be carefully considered in evaluating the
Company and its business because such factors currently have a significant
impact or may have a significant impact on the Company's business, financial
condition, results of operations and cash flows.
General Risks of the Securities Industry
The securities industry, by its nature, is subject to numerous and
substantial risks, including the risk of declines in price level and volume of
transactions, losses resulting from the ownership, trading or underwriting of
securities, risks associated with principal activities, the failure of
counterparties to meet commitments, customer, employee or issuer fraud risk,
litigation, customer claims alleging improper sales practices, errors and
misconduct by brokers, traders and other employees and agents (including
unauthorized transactions by brokers), and errors and failure in connection
with the processing of securities transactions. Many of these risks may
increase in periods of market volatility or reduced liquidity. In addition,
the amount and profitability of activities in the securities industry are
affected by many national and international factors, including economic,
political and market conditions; broad trends in industry and finance; level
and volatility of interest rates; legislative and regulatory changes; currency
values; inflation; and availability of short-term and long-term funding and
capital, all of which are beyond the control of the Company.
Several current trends are also affecting the securities industry, including
increasing consolidation, increasing use of technology, increasing use of
discount and online electronic brokerage services, greater self reliance of
individual investors and greater investment in mutual funds. These trends
could result in the Company's facing increased competition from larger broker-
dealers, a need for increased investment in technology, or potential loss of
customers or reduction in commission income. There can be no assurance that
these trends or future changes will not have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
Risk of Reduced Revenue During Periods of Lower Stock Prices or Reduced
Trading Volume
The Company's revenue and profitability may be adversely affected by
declines in the volume of securities transactions and in market liquidity,
which generally result in lower revenues from trading activities and
commissions. Lower securities price levels may also result in a reduced volume
of transactions, as well as losses from declines in the market value of
securities held in trading, investment and underwriting positions. In periods
of low volume, the fixed nature of certain expenses, including salaries and
benefits, computer hardware and software costs, communications expenses and
office leases, will adversely affect profitability. Sudden sharp declines in
market values of securities and the failure of issuers and counterparties to
perform their obligations can result in illiquid markets in which the Company
may incur losses in its principal trading and market-making activities.
Dependence on, and Ability to Retain and Recruit, Key Personnel
The Company's business depends on the highly skilled, and often highly
specialized, individuals it employs. Retention of research, sales and trading,
management, investment banking and administrative professionals is
particularly important to the Company's prospects. Highly skilled employees of
brokerage firms, particularly traders, research analysts and retail and
institutional brokers, are currently heavily recruited. The level of
competition for key personnel has increased recently. The loss of a research
or sales and trading professional or
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key manager, particularly a senior professional or manager with a broad range
of contacts or clients, could materially adversely affect the Company's
results of operations or cash flows.
The Company believes that it will need to increase the number of its
personnel to meet its growth objectives. Competition for employees with the
qualifications desired by the Company is intense, especially with respect to
research analysts and highly productive sales and trading professionals. The
Company believes that continuing competition may cause its compensation costs
to increase. The failure to recruit and retain new employees in a timely
manner could materially adversely affect the Company's results of operations
or cash flows.
The Company depends on a number of key employees, including Lesa A. Sroufe,
Chief Executive Officer, Robert J. Mortell, Jr., President and Chief Operating
Officer, Mark A. McClure, Executive Vice President, V. Lawrence Bensussen,
Chief Financial Officer, and John L. MacKenzie, an employee and a director.
Although these employees, together with a number of other significant
employees, have entered into limited noncompetition and nonsolicitation
agreements, the majority of the Company's employees are not subject to
noncompetition or nonsolicitation agreements that would prevent them from
leaving and competing with the Company and soliciting clients of the Company.
Prior to the IPO, the Company attempted to attract and retain employees by
offering equity-based incentive compensation arrangements that were tied to
the book value of the Company's common stock. Since the IPO, the value of
stock options granted by the Company has been tied to the market value of the
Company's common stock, which may fluctuate for a variety of reasons,
including reasons unrelated to the Company's performance. There can be no
assurance that the incentive compensation offered by the Company since the IPO
will be as effective in recruiting and retaining personnel as were the
Company's equity-based incentive compensation arrangements prior to the IPO,
particularly if the market price of the Company's common stock declines or
fails to appreciate sufficiently.
The Company believes that the structure of its equity-based incentive
compensation arrangements had, prior to the IPO, provided employees with
disincentives to terminate employment, due to the Company's rights to
repurchase, at book value, common stock of the Company held by employees,
which has accounted in part for the Company's low historic turnover rate.
Termination of the Company's repurchase rights, and increased liquidity for
employees' shares of common stock of the Company, as a result of consummation
of the IPO, may have substantially reduced the effectiveness of the Company's
compensation arrangements in providing employees additional incentives to
remain with the Company.
Recent Changes to Management
Although the Company's senior executives worked together at RMI for several
years, RMI changed its Chief Executive Officer twice in the past two and one-
half years. Brooks G. Ragen served as RMI's Chief Executive Officer from June
1987 to September 1996, at which time he resigned from that position as part
of a succession of management. Mr. Ragen remained as a director of RMI until
May 1998. Upon Mr. Ragen's resignation as Chief Executive Officer in 1996,
Stanley G. Freimuth, one of the Company's most productive brokers and the
manager of the Company's second largest office, in Bellevue, Washington, was
named Chief Executive Officer. Mr. Freimuth oversaw the Company's evaluation
of its strategic alternatives and, upon completion of this process and the
decision to pursue the IPO, Mr. Freimuth chose to resign and to continue
servicing his brokerage clients and managing the Company's Bellevue office;
Mr. Freimuth worked with management to determine his successor. Lesa A. Sroufe
was named Chief Executive Officer in February 1998 in order to oversee the
Company's transition toward becoming a public company. There can be no
assurance that these changes in management will not have a material adverse
effect on the Company's business, financial condition, results of operations
or cash flows. In addition, there can be no assurance that management will be
able to successfully implement the Company's growth strategy or that such
strategy will be effective. The inability of management to succeed in such
efforts could have an adverse effect on the Company's business, financial
condition, results of operations or cash flows.
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Risks Relating to the Departure of Brooks G. Ragen
Brooks G. Ragen, a founder of RMI's predecessor, RMI's former Chairman and
Chief Executive Officer, a senior, highly productive retail broker with RMI
and a large shareholder of the Company, has entered into a 36-month agreement
that commenced upon effectiveness of the IPO pursuant to which he intends to
establish and be employed by a newly formed company that will serve as a
correspondent of RMI. A correspondent is an independent broker-dealer that
contracts with RMI to clear and execute securities transactions on behalf of
the correspondent's customers on a fully disclosed basis, and to maintain
possession or control of all account assets of the correspondent's customers.
Mr. Ragen will leave the employ of the Company on December 31, 1998. The
Company believes that in connection with Mr. Ragen's departure, Mr. Ragen or
his new company intends to hire in addition to Mr. Ragen seven current or
former employees of RMI, one of whom is a registered broker. Mr. Ragen and his
current client service team's production accounted for approximately $2.9
million (2.9%) and $2.8 million (3.2%) of RMI's total revenues in fiscal years
1998 and 1997, respectively, and it is estimated that Mr. Ragen's activities
accounted for a similar percentage of net income during those periods. Most of
Mr. Ragen's customers, several of which have historically been significant
customers of RMI, have provided notice to RMI that they will become customers
of Mr. Ragen's new company, a correspondent of RMI. Accordingly, the Company
expects the departure of Mr. Ragen to result in the loss of current customers,
and it may result in the loss of potential new customers. There can be no
assurance that a change in the nature of Mr. Ragen's relationship with the
Company will not, by reason of the loss of retail brokerage clients, corporate
finance referrals, or otherwise, have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
Dependence on Proprietary Research
A significant portion of the Company's retail and institutional brokerage
and correspondent business is derived from recommendations made by the
Company's research department. If an investment strategy derived from the buy
and sell recommendations made by the Company's research department were to
underperform key market indices, if clients or brokers otherwise perceived
less value in the Company's research or if the Company's research department
decreased the number of buy and sell recommendations, the volume of the
Company's business could decline, resulting in a loss of clients or brokers or
difficulties in attracting new clients or brokers. In addition, there can be
no assurance that the Company will be able to retain the services of key
members of its research department. Any decline in the perceived value of the
Company's research or in the number of recommendations or the loss of key
members of the Company's research department could have a material adverse
effect on the Company's business, financial condition, results of operations
or cash flows.
Significant Fluctuations in Quarterly Operating Results
The Company's revenues and operating results may fluctuate from quarter to
quarter and from year to year due to a variety of factors, including the
volume of retail and institutional brokerage transactions (as affected in part
by the number of buy and sell recommendations made by the Company's research
department), market conditions, the performance of stocks recommended by the
Company to retail and institutional clients, results of proprietary trading,
variations in expenditures for personnel, litigation expenses and the expenses
of expanding existing, and entering new, businesses. The Company could
experience declines in net income or losses if demand for its services
declines more quickly than the Company's ability to change its cost structure.
The Company's selective approach to the expansion of its retail brokerage
business may also result in a lack of predictability in revenues and income
growth. Due to the foregoing and other factors, there can be no assurance that
the Company will be able to sustain profitability on a quarterly or annual
basis.
Regional Concentration
Most of the Company's customers, in particular in the retail brokerage and
correspondent businesses, are located in the Pacific Northwest. In addition,
the Company's research covers approximately 100 Northwest
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companies, many of which are in the software, high-technology, biotechnology,
retail, aerospace or natural resources industries. Any significant business
disruption or economic downturn that particularly affects clients or companies
in the Pacific Northwest or the health of the industries concentrated in that
region could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows.
Competition
The securities industry is intensely competitive. Ragen MacKenzie competes
directly with national and regional full-service broker-dealers and a broad
range of other financial service firms. Many of the Company's competitors have
substantially greater capital and financial and other resources, and greater
name recognition, than the Company. In addition, the Company competes for
assets with a variety of broker-dealers and financial entities, including
mutual funds which have enjoyed significant growth in recent years as many
retail investors have sought the diversification and other perceived benefits
available from such investment vehicles.
Competition has intensified as numerous securities firms have either ceased
operations or have been acquired by or merged into other firms. Such mergers
and acquisitions have increased competition from these firms, many of which
have significantly greater equity capital and financial and other resources
than the Company. Many of these firms, because of their significantly greater
financial capital and scope of operations, are able to offer their customers
more product offerings, broader research capabilities, access to international
markets and other products and services not offered by the Company, which may
provide such firms with competitive advantages over the Company. The
increasing competition and consolidation in the Company's principal businesses
could strengthen the Company's competitors and adversely affect the Company's
business.
The Company also faces competition from companies offering discount and/or
electronic brokerage services, including brokerage services provided over the
Internet. These services represent a rapidly expanding segment of the
securities industry. These competitors may have lower costs or provide fewer
services, and may offer their customers more favorable commissions, fees or
other terms than those offered by the Company. Commissions charged to
customers of discount and electronic brokerage services have steadily
decreased over the past several years, and the Company expects such decreases
to continue. There can be no assurance that the rapid development of discount
and/or electronic brokerages and the decrease of commissions at such
brokerages will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows. See "--Competition."
Management of Growth of New and Existing Businesses
The Company plans to expand through internal growth and, when the
opportunity arises, may expand through acquisitions into related businesses,
which may include businesses in which the Company may not have prior
experience. Any such expansion could require significant capital resources and
divert management's attention from the Company's existing businesses. There
can be no assurance that the Company will be able to attract the personnel or
expertise necessary for any such expansion, or that any such expansion will be
successful. The failure of any such expansion could have a material adverse
effect on the Company's business, financial condition, results of operations
or cash flows. Over the past several years, the Company has experienced growth
in its business activities and the number of its employees. Ongoing growth
will require the addition of new personnel, particularly retail brokers. There
can be no assurance that management will be able to manage the Company's
growth effectively, and any such failure could have an adverse effect on the
Company's business, financial condition, results of operations or cash flows.
The Company's growth has required and will continue to require increased
investment in management personnel, financial and management systems and
controls, and facilities, which, in the absence of continued revenue growth,
would cause the Company's operating margins to decline from current levels. In
addition, as is common in the securities industry, the Company is and will
continue to be highly dependent on the effective and reliable operation of its
communications and information systems. The Company believes that significant
future growth may require implementation of new and enhanced communications
and information systems and training
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of its personnel to operate such systems. In addition, the scope of procedures
for ensuring compliance with applicable regulations and NASD rules have
changed as the size and complexity of the Company's business has changed.
Further growth may require the Company to implement additional compliance
procedures. Any difficulty or significant delay in the implementation or
operation of existing or new systems, or compliance procedures, or the
training of personnel, could adversely affect the Company's ability to manage
growth. See "--Accounting, Administration and Operations."
Risks of Proprietary Trading
The Company engages in proprietary trading of certain fixed income
securities, including U.S. government and agency zero coupon bonds and certain
types of CMOs. In its trading activities, the Company generally acts as a
wholesaler, buying round-lot and odd-lot positions, selling round-lot and odd-
lot positions, and acting as a market-maker in odd-lot positions. In such
transactions, the Company acts as a principal, undertaking the risk of a
change in the price of such securities or being unable to resell such
securities or cover short positions. These risks are exacerbated by the
relative illiquidity of many of the securities that the Company trades, and by
the Company's trading of CMOs, which can be more volatile than other
securities as a result of the uncertainty of the timing of the cash flows from
the residential mortgages that underlie such securities. Any losses from the
Company's proprietary trading activities, including as a result of
unauthorized trading by employees of the Company, could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
It is not possible to hedge completely the risks associated with interest
rate fluctuations for many of the fixed income securities that the Company
trades, primarily because the price movements of financial instruments
typically used to hedge long positions in such securities may not precisely
mirror the price movements of the hedged securities under all market
conditions. Consequently, there can be no assurance that any procedures to
prevent such loss will be successful. Any such loss could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows. See "--Principal Transactions--Proprietary Trading"
and "Item 7A. Quantitative and Qualitative Disclosures About Market Risk.'
Risk Relating to Correspondent Brokerage Services
RMI acts as a clearing broker for 17 correspondent firms. These
correspondents, also known as "introducing brokers," are licensed broker-
dealers which operate sales offices and depend on RMI for back-office
operations, including the execution and clearance of all trades. RMI does not
supervise the sales practices of introducing brokers. The Company's clearing
agreement with its correspondents requires the introducing brokers to
indemnify and hold RMI harmless against any claims that may result from the
sales practices of the introducing brokers. However, there can be no assurance
that the Company will be adequately protected by virtue of such indemnity
obligations against damages that may result from misconduct by introducing
brokers.
In addition, all accounts introduced by correspondents are carried on the
books of RMI. RMI is responsible to such customers for any errors it may
commit in executing trades on their behalf. Errors in performing clearing
functions or reporting could lead to civil penalties imposed by the SEC, NASD,
NYSE and other regulatory bodies. Errors in the clearing process also may lead
to civil liability for actions in negligence brought by parties who are
financially harmed as a result of clerical errors related to the handling of
customer funds and securities. There can be no assurance that any of such
errors will not have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows. Any extensions of
credit to such customers are the responsibility of RMI and expose the Company
to risk of loss. See "--Risks of Extension of Credit." The term "customers,"
as used in this Annual Report on Form 10-K, refers to clients of RMI, or to
clients of correspondents, depending on the context.
The expenses associated with correspondent brokerage services are generally
fixed, and therefore any loss of revenues associated with these services may
have a disproportionate effect on net income. A small number of correspondents
account for a significant portion of the Company's correspondent business, and
the Company has
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not entered into long-term contracts with its correspondents. The loss of any
of these significant correspondents could have a material adverse effect on
the Company's business, financial condition, results of operations or cash
flows.
Potential Losses Due to Fraud or Mistakes
The Company is exposed to the risk of significant losses as a result of
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders) and failures in connection with the processing of
securities transactions. There can be no assurance that the Company's risk
management procedures and internal controls will prevent such losses from
occurring.
Risks of Extension of Credit
In connection with its clearing and execution services, the Company makes
margin loans to its customers and correspondents' customers that are
collateralized by securities of the recipients of such margin loans, and
periodically borrows securities to cover trades. By permitting the purchase of
securities on margin, the Company is subject to risks inherent in extending
credit, especially during periods of rapidly declining markets in which the
value of the collateral held by the Company could fall below the amount of a
customer's indebtedness secured by such collateral. The Company also from time
to time extends credit to its correspondents to support their trading
activities. Correspondents may not have sufficient capital to repay their
obligations to the Company. In the normal course of business, the Company's
customer and correspondent clearing activities also obligate the Company to
settle transactions with brokers and other financial institutions even if its
customers fail to meet their obligations to the Company. Although customers
are required to complete their transactions on a specified settlement date
(generally three business days after the trade date), the Company may incur
losses if such obligations are not met. In addition, in accordance with
regulatory guidelines, the Company collateralizes borrowings of securities by
depositing cash or securities with lending institutions. Failure to maintain
cash deposit levels at all times at least equal to the value of the related
securities can subject the Company to risk of loss should there be sharp
changes in market values of substantial amounts of securities or parties to
the borrowing transactions fail to honor their commitments. See "--Interest
Income and Customer Financing."
Regulation
The SEC, the NYSE and various other regulatory agencies have stringent rules
with respect to the protection of customers and maintenance of specified
levels of net capital by broker-dealers. See "--Regulation" and "--Net Capital
Requirements." The regulatory environment in which the Company operates is
subject to change. The Company may be adversely affected as a result of new or
revised legislation or regulations imposed by the SEC, other U.S. governmental
regulators or SROs. The Company also may be adversely affected by changes in
the interpretation or enforcement of existing laws and rules by the SEC, other
federal and state governmental authorities and SROs.
RMI is subject to periodic examination by the SEC, SROs and various state
authorities. RMI's sales practice operations, record-keeping, supervisory
procedures and financial position may be reviewed during such examinations to
determine if they comply with the rules and regulations designed to protect
customers and protect the solvency of broker-dealers. Examinations may result
in the issuance of a letter to RMI noting perceived deficiencies and
requesting RMI to take corrective action. Deficiencies could lead to further
investigation and the possible institution of administrative proceedings,
which may result in the issuance of an order imposing sanctions upon RMI
and/or its personnel.
The Company's business may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations
of general application. For example, the volume and profitability of the
Company's or its customers' trading activities in a specific period could be
affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including
18
<PAGE>
the interest rate policies of the Federal Reserve Board) and changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities. See "--Regulation."
Risk of Potential NYSE and NASD Enforcement Proceedings
As part of its regular examination cycle, the NYSE and NASDR inspected RMI
in 1997. Following these inspections, various issues primarily regarding
registration and bookkeeping requirements, order execution procedures and
supervision relating to such requirements and procedures were referred to the
NYSE and the NASDR enforcement divisions. In addition, the SEC is also aware
of the issues raised by these inspections. The NYSE and the NASDR enforcement
divisions are considering what further steps, if any, to take. Those steps
could include a determination that no enforcement proceeding is appropriate,
undertaking further inquiries, or commencing an enforcement proceeding.
Although the Company believes that there are defenses in connection with these
issues, based on communications with the NYSE and the NASDR enforcement
divisions, the Company believes that NASDR and NYSE enforcement proceedings
will be commenced. If one or more enforcement proceedings were commenced and
one or more proceedings were to result in a conclusion that RMI or its
employees, including executives with ultimate supervisory responsibility,
violated or failed to enforce securities rules or regulations, sanctions for
such violations could range from a letter of caution or censure, to financial
costs and penalties or various limitations on firm or employee activity,
including individual suspensions. There can be no assurance that such
sanctions, including suspensions of the Company's employees or executives,
would not have a material adverse effect on the Company's business financial
condition, results of operations, or cash flows. Although the Company believes
that there are defenses in connection with these issues, the Company has held
settlement discussions with the NYSE and the NASDR enforcement divisions. A
settlement would involve the simultaneous initiation and resolution of
enforcement proceedings. There can be no assurance that these discussions will
result in a settlement, or that, if a settlement is reached, the settlement
would not have a material adverse effect on the Company's business, financial
condition, results of operations or cash flows. See "--Regulation."
Litigation and Potential Securities Law Liability
Many aspects of the Company's business involve substantial risks of
liability. There has been an increase in litigation and arbitration within the
securities industry in recent years, including class action suits seeking
substantial damages. Broker-dealers such as RMI are subject to claims by
dissatisfied customers, including claims alleging they were damaged by
improper sales practices such as unauthorized trading, churning, sale of
unsuitable securities, use of false or misleading statements in the sale of
securities, mismanagement and breach of fiduciary duty. RMI may be liable for
the unauthorized acts of its retail brokers and independent contractors if it
fails to adequately supervise their conduct. As an underwriter, the Company
may be subject to substantial potential liability under federal and state law
and court decisions, including liability for material misstatements and
omissions in prospectuses or otherwise with respect to securities offerings.
The Company may be required to contribute to a settlement, defense costs or a
final judgment in certain legal proceedings or arbitrations involving past
underwriting and in actions that may arise in the future. As is common in the
securities industry, the Company does not carry insurance that would cover any
such payments. From time to time, in connection with hiring retail brokers,
the Company is subject to litigation by a broker's former employer. In
addition, the charter documents of RMGI and of RMI provide for indemnification
of RMGI's and RMI's officers and directors. The adverse resolution of any
legal proceedings involving the Company could have a material adverse effect
on its business, financial condition, results of operations or cash flows. See
"Item 3.--Legal Proceedings."
Market, Credit and Liquidity Risks Associated With Market-Making, Principal
Trading and Underwriting Activities
The Company's market-making, principal trading and underwriting activities
often involve the purchase, sale or short sale of securities as principal.
Such activities subject the Company's capital to significant risks from
markets that may be characterized by relative illiquidity or that may be
particularly susceptible to rapid fluctuations in liquidity. Such market
conditions could limit the Company's ability to resell securities purchased or
to repurchase securities sold short. Such activities subject the Company's
capital to significant risks, including market, credit, counterparty and
liquidity risks. Market risk relates to the risk of fluctuating values based
on market prices without any action on the part of the Company. Credit risk
relates generally to the ability of third
19
<PAGE>
parties to whom the Company has extended credit to repay amounts owed to the
Company. Counterparty risk relates to whether a financial counterparty will
fulfill its contractual obligations, which may include delivery of securities
or payment of funds. Liquidity risk relates to the Company's inability to
liquidate assets or redirect the deployment of assets contained in illiquid
investments. In addition, the Company tends to concentrate its trading
positions in a more limited number of portfolio companies than many other
national securities brokerages, which might result in higher trading losses
than would occur if the Company's positions were less concentrated.
Dependence on Systems
The Company's business is highly dependent on communications and information
systems, primarily systems provided by nationally recognized third-party
vendors. Any failure or interruption of the Company's systems or systems
provided by third-party vendors could cause delays or other problems in the
Company's securities trading activities, which could have a material adverse
effect on the Company's business, financial condition, results of operations
or cash flows. In addition, there can be no assurance that the Company, or
companies that have systems on which the Company's systems rely, will not
suffer any systems failures or interruptions, whether caused by an earthquake,
fire, other natural disaster, power or telecommunications failure, act of God,
act of war or otherwise, or that the Company's backup procedures and
capabilities in the event of any such failure or interruption will be
adequate.
Year 2000 Compliance
Failures and interruptions of the Company's computer systems or systems used
by third parties on whom the Company depends may result from the inability of
certain systems (including those of the Company and, in particular, those of
third-party vendors or service providers to the Company) to recognize and
process date information beginning in the Year 2000. The Company has
undertaken a project to identify and take appropriate actions with respect to
systems that are non-Year 2000 compliant, but there can be no assurance that
any Year 2000 problems relating to the Company's systems or those of third-
parties will be resolved prior to the turn of the century or that the costs
incurred by the Company in addressing the issue will not exceed its current
expectations.
Nearly every aspect of the Company's business depends on the accurate
processing of date-related information. As a result, failure by the Company or
one or more of the third-parties with which the Company has a relationship to
successfully remediate systems for Year 2000 issues poses the risk of material
disruption to operations and material financial loss. A failure on the part of
the Company to identify and implement solutions to all aspects of the Year
2000 problem could result in systems failures or outages, inaccuracies in
processing trades or other transactions affecting customer or proprietary
accounts, an inability to reconcile to and settle with counterparties and
other business disruptions. In addition, third parties with which the Company
has a relationship could fail in some element of their Year 2000 efforts. The
Company's operations are highly dependent on the services of the securities
exchanges, depositories, its core brokerage software provider, certain banking
relationships, electric utilities and telecommunications networks, and a
failure by one of these institutions could disrupt the operations of the
Company as well as the securities industry as a whole. The scope of Company's
relationship with individual customers, broker-dealer counterparties and
vendors varies widely, as does the resulting risk should any one of them fail
to achieve Year 2000 compliance. The Company has ongoing communications with
third-parties with which it has important relationships, including its core
brokerage software provider, regarding third party Year 2000 risks. The
likelihood of such third parties achieving Year 2000 compliance cannot be
adequately gauged at this time.
The Company is in the process of developing contingency plans to be executed
should a Year 2000 failure affect the Company's operations or those of a
significant third party. There can be no assurance that alternative
arrangements will be identified for every material risk or contingency, or
that these contingency plans will be effective. The Company has not sought or
obtained insurance coverage for possible losses or damages as a result of Year
2000 problems. See "Item 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Year 2000 Compliance."
20
<PAGE>
Constraints Imposed by Net Capital Requirements
The SEC, the NYSE, and various other securities exchanges and other
regulatory bodies in the United States have rules with respect to net capital
requirements that affect RMI as a broker-dealer. These Net Capital Requirement
Rules are designed to ensure that broker-dealers maintain adequate regulatory
capital in relation to their liabilities and their business activities. These
Net Capital Requirement Rules have the effect of requiring that a substantial
portion of a broker-dealer's assets be kept in cash or highly liquid
investments. Failure to maintain the required net capital may subject a firm
to suspension or revocation of its registration by the SEC and suspension or
expulsion by the NASD and other regulatory bodies, and ultimately may require
its liquidation. Compliance by RMI with such Net Capital Requirement Rules
could limit certain operations that require intensive use of capital, such as
underwriting or trading activities. A significant operating loss or any
unusually large charge against net capital could curtail the Company's ability
to expand or even continue its existing level of business. The Net Capital
Requirement Rules could also restrict the ability of the Company to withdraw
capital, even in circumstances where RMI has more than the minimum amount of
required capital, which, in turn, could limit the ability of the Company to
pay dividends, implement its strategies, pay interest on and repay the
principal of its debt and redeem or repurchase shares of outstanding capital
stock. In addition, a change in such Net Capital Requirement Rules or the
imposition of new rules affecting the scope, coverage, calculation or amount
of such net capital requirements, or a significant operating loss or any large
charge against net capital, could have similar adverse effects.
Risks of Underwritten Transactions
RMI from time to time participates in corporate and, to a lesser extent,
municipal securities distributions as a co-manager of an underwriting
syndicate or as a member thereof, or as a member of a selling group.
Underwriting syndicate or selling group participation involves economic and
regulatory risks. Underwriting syndicates agree to purchase securities at a
discount from the public offering price. If the securities are sold below the
syndicate cost, an underwriter is exposed to losses on the securities it has
committed to purchase. In some cases, as a result of illiquid markets, an
underwriter may be unable to resell securities it has committed to purchase.
In the past several years, investment banking firms have increasingly
underwritten offerings with fewer syndicate participants or, in some cases,
without an underwriting syndicate. In addition, under federal securities laws,
other laws and court decisions, an underwriter is exposed to substantial
potential liability for material misstatements or omissions of fact in the
prospectus used to describe the securities being offered. Losses resulting
from underwritten transactions, particularly as a result of securities
litigation, could have a material adverse effect on the Company's business,
financial condition, results of operations or cash flows. See "--Investment
Banking and Underwriting."
Control by Directors, Executive Officers and Employees
The Company's directors and executive officers, in the aggregate, and the
Company's employees, in the aggregate, beneficially owned, as of December 7,
1998, approximately 14.3% and 60.8%, respectively, of the outstanding shares
of the Company's common stock. As a result, the Company's directors, executive
officers and employees, acting together, would be able to significantly
influence or control many matters requiring approval by the shareholders of
the Company, including, without limitation, the election of directors and
approval of significant corporate transactions, and will have power to prevent
shareholder action or approvals requiring a majority vote. In addition, this
concentration of ownership and voting power may have the effect of
accelerating, delaying or preventing a change in control of the Company or
otherwise affect the ability of any shareholder to influence the policies of
the Company.
Risks to Company of Regulated Subsidiary
Substantially all of the Company's revenues are generated by RMI. RMGI
relies exclusively on distributions from RMI for funds to pay dividends,
implement its strategies and redeem or repurchase shares of outstanding
capital stock. RMGI's ability to receive distributions from RMI may be limited
by the Net Capital Requirement Rules, restrictions that may be imposed by any
borrowing arrangements, or by the earnings, financial condition and cash
requirements of RMI. Additionally, there can be no assurance that RMI will be
able to obtain funds
21
<PAGE>
through financing activities. These factors may impose limitations on or
prevent RMGI from paying dividends, implementing its strategies or
repurchasing shares of its capital stock.
Antitakeover Considerations
RMGI's Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock, $.01 par value per share (the "Preferred Stock"), in one
or more series and to fix the designations, preferences, limitations and
relative rights with respect to such shares without any further vote or action
by RMGI's shareholders. The rights of the holders of common stock of RMGI will
be subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. This authority, together
with certain provisions of RMGI's Amended and Restated Articles of
Incorporation (the "Articles") and Bylaws, may have the effect of making it
more difficult for a third party to acquire, or discouraging a third party
from attempting to acquire, control of RMGI, even if shareholders may consider
such a change in control to be in their best interests. In addition,
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a hostile takeover of RMGI.
ITEM 2. PROPERTIES:
The Company presently leases all of its office space. The headquarters and
administrative offices of the Company are located in approximately 35,285
square feet of space in Seattle, Washington, under a lease substantially
expiring on February 28, 2002. The Company also leases space for its branch
offices located in Bellevue, Tacoma, Kirkland and Walla Walla, Washington, and
Portland, Eugene and Bend, Oregon.
ITEM 3. LEGAL PROCEEDINGS:
Many aspects of the Company's business involve substantial risks of
liability. There has been an increase in litigation and arbitration within the
securities industry in recent years, including class action suits seeking
substantial damages. Broker-dealers such as RMI are subject to claims by
dissatisfied customers, including claims alleging they were damaged by
improper sales practices such as unauthorized trading, churning, sale of
unsuitable securities, use of false or misleading statements in the sale of
securities, mismanagement and breach of fiduciary duty. RMI may be liable for
the unauthorized acts of its retail brokers and independent contractors if it
fails to adequately supervise their conduct. As an underwriter, the Company
may be subject to substantial potential liability under federal and state law
and court decisions, including liability for material misstatements and
omissions in prospectuses or otherwise with respect to securities offerings.
The Company may be required to contribute to a settlement, defense costs or a
final judgment in certain legal proceedings or arbitrations involving past
underwriting and in actions that may arise in the future. As is common in the
securities industry, the Company does not carry insurance that would cover any
such payments. In addition, the charter documents of RMGI and of RMI provide
for indemnification of RMGI's and RMI's officers and directors. The adverse
resolution of any legal proceedings involving the Company could have a
material adverse effect on its business, financial condition, results of
operations or cash flows.
From time to time the Company has been, and may become, a party to legal
proceedings related to its retail brokerage operations, its participation in
underwriting syndicates or other aspects of the securities business. In
addition, the Company may from time to time contribute to certain adverse
final judgments, defense costs or settlements in actions arising out of its
participation in underwriting syndicates. The Company is not currently a party
to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
In the third quarter of fiscal 1998, RMI, which was then the Company's sole
shareholder, approved by written consent dated April 22, 1998 an amendment and
restatement of the Company's Articles of Incorporation and an amendment to the
Company's Bylaws to provide the directors and officers of the Company with the
maximum indemnification protections permitted by law. In addition, on June 21,
1998, by written consent of
22
<PAGE>
RMI as the Company's sole shareholder, the following actions were taken: (1)
the election of the Company's nonemployee directors, (2) appoval and adoption
of the Agreement and Plan of Merger (the "Merger Agreement") by and among the
Company, RMI and RMGI Merger Corp., a wholly-owned subsidiary of the Company
formed for the purpose of effecting the reorganization of the Company prior to
the IPO, and the related agreements and transactions contemplated by the
Merger Agreement; (3) approval and adoption of the Company's 1998 Employee
Stock Purchase Plan; and (4) approval and adoption of the Company's 1998 Stock
Incentive Compensation Plan.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 25, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the executive officers of the Company and
their ages and positions as of September 25, 1998. Officers are elected by and
serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Lesa A. Sroufe............ 40 Chief Executive Officer and Chairman of the
Board
Robert J. Mortell, Jr. ... 53 President, Chief Operating Officer,
Treasurer and Director
Mark A. McClure........... 46 Executive Vice President and Director
V. Lawrence Bensussen..... 40 Senior Vice President, Chief Financial
Officer and Secretary
</TABLE>
Lesa A. Sroufe has served as Chief Executive Officer and Chairman of the
Board of the Company since April 1998. She has served as a director of RMI
since joining RMI in November 1988. Since February 1998, Ms. Sroufe has served
as RMI's Chief Executive Officer. Prior to such time, she served as RMI's
Director of Research. Ms. Sroufe also served as Senior Vice President of RMI
from November 1988 until November 1996 and as Executive Vice President from
November 1996 until February 1998. Ms. Sroufe holds a bachelor's degree in
business from the University of Washington and is a Chartered Financial
Analyst.
Robert J. Mortell, Jr. has served as President, Chief Operating Officer,
Treasurer and a director of the Company since April 1998. He has served as a
director of RMI since RMI's incorporation in 1987, and as President and Chief
Operating Officer of RMI since April 1996. Mr. Mortell served as RMI's Co-
Chief Operating Officer from 1990 to April 1996 and as Chief Financial Officer
from 1987 until July 1996. Mr. Mortell holds a bachelor's degree in finance
from Seattle University.
Mark A. McClure has served as Executive Vice President and a director of the
Company since April 1998. He has served as the Executive Vice President and as
a director of RMI since November 1996. Mr. McClure has been a retail account
executive since joining RMI in June 1994, and has served as the director of
the Regional Branch Offices since June 1996. Mr. McClure served as Senior Vice
President of RMI from June 1994 to November 1996. Mr. McClure was a Vice
President and retail account executive with Kidder, Peabody and Co., a stock
brokerage firm, from 1976 to 1994, and served as an Assistant Manager from
January 1987 to June 1994. Mr. McClure holds a bachelor's degree in business
from Washington State University.
V. Lawrence Bensussen became Senior Vice President, Chief Financial Officer
and Secretary of the Company in April 1998. He has served as Chief Financial
Officer of RMI since July 1996 and as a director of RMI since November 1996.
Mr. Bensussen joined RMI as assistant controller in 1986, becoming Vice
President and Controller in 1987 and Senior Vice President in 1990. From 1984
to 1986, he was an accountant at Laventhol & Horwarth CPAs. Mr. Bensussen
holds a bachelor's degree in accounting from the University of Washington and
is a Certified Public Accountant.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS:
The Company's common stock is traded on the NYSE under the symbol "RMG." The
Company completed its IPO on June 26, 1998. Set forth below are the high and
low sales prices for the Company's common stock for each full fiscal quarter
since its IPO.
<TABLE>
<CAPTION>
HIGH LOW
------- ---------
<S> <C> <C>
FISCAL 1998
Fourth Quarter (6/27/98-9/25/98).......................... $15 1/2 $ 9 13/16
Third Quarter (6/23/98-6/26/98)........................... 15 3/8 14
</TABLE>
According to records of the Company's transfer agent, the Company had
approximately 282 shareholders of record as of December 7, 1998. Based on the
number of proxy statements requested by brokers and other institutions, the
Company estimates that its common stock is held in street name by
approximately 4,000 beneficial owners.
The Company has not previously paid dividends and has no present intention
to pay dividends in the future. The timing and amount of future cash
dividends, if any, will be determined by the Board of Directors of RMGI and
will depend on, among other factors, the Company's earnings, financial
condition and cash requirements at the time such payment is considered and
availability of funds from the Company's subsidiary, which may be subject to
restrictions under the Net Capital Requirement Rules of the SEC and the NYSE.
(See Note 9 of the Company's Notes to Consolidated Financial Statements and
"Item 1. Business--Net Capital Requirements.")
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA:
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
SEPT. 25, SEPT. 26, SEPT. 27, SEPT. 29, SEPT. 30,
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Principal transactions, net........... $24,239 $23,566 $23,526 $21,683 $20,412
Commissions........................... 32,672 30,758 28,516 19,553 18,275
Other................................. 6,024 4,078 3,569 2,524 3,814
------- ------- ------- ------- -------
Total operating revenues.......... 62,935 58,402 55,611 43,760 42,501
Interest Income....................... 36,434 30,179 24,210 18,641 11,316
------- ------- ------- ------- -------
Total revenues.................... 99,369 88,581 79,821 62,401 53,817
Interest expense...................... 23,334 19,694 16,230 13,052 6,978
------- ------- ------- ------- -------
Net revenues...................... 76,035 68,887 63,591 49,349 46,839
------- ------- ------- ------- -------
Noninterest expenses:
Compensation and benefits(1)(2)..... 37,802 35,176 33,924 25,925 25,419
Compensation charges related to
IPO(1)(2).......................... 3,480 -- -- -- --
Key person death benefits plan(3)... -- (5,000) -- 2,450 800
Occupancy and equipment............. 4,916 4,714 3,938 3,949 3,921
Communications...................... 3,572 3,276 2,776 2,588 2,620
Clearing and exchange fees.......... 2,650 2,338 2,344 2,282 1,963
Other............................... 3,917 3,534 3,854 2,381 2,359
------- ------- ------- ------- -------
Total noninterest expenses........ 56,337 44,038 46,836 39,575 37,082
------- ------- ------- ------- -------
Income before taxes on income......... 19,698 24,849 16,755 9,774 9,757
Taxes on income....................... 7,824 9,460 6,254 3,672 3,752
------- ------- ------- ------- -------
Net income........................ $11,874 $15,389 $10,501 $ 6,102 $ 6,005
======= ======= ======= ======= =======
Basic earnings per share(4)........... $ 1.05 $ 1.54 $ 1.10 $ 0.73 $ 0.79
Diluted earnings per share(4)......... 1.01 1.44 1.04 0.68 0.72
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE FISCAL YEAR ENDED
------------------------------------------------------
SEPT. 25, SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30,
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Pre-tax income as a percent-
age of net revenues........ 25.9% 36.1% 26.3% 19.8% 20.8%
Annual return on average eq-
uity....................... 13.3% 25.1% 23.3% 18.5% 25.0%
Assets in retail brokerage
accounts (in millions)(5).. $ 9,257 $ 8,806 $ 5,862 $ 4,629 N/A
Number of employees (5)..... 295 271 245 232 221
Number of retail brokers
(5)........................ 79 74 65 65 62
BALANCE SHEETS DATA (IN
THOUSANDS)(5):
Total assets................ $781,849 $665,877 $483,968 $436,068 $300,868
Subordinated debentures..... -- -- -- -- 815
Shareholders' equity........ 108,939 70,248 52,523 37,776 28,096
</TABLE>
25
<PAGE>
- --------
(1) Compensation and benefits includes a nondeductible expense recorded for
the appreciation in book value between the option grant date and the
option exercise date for the stock options granted under the Company's
stock option plans of $1,150,000, $2,223,000, $3,125,000, $955,000 and
$1,471,000 during fiscal years 1998 through 1994, respectively. Upon
consummation of the IPO, the Company recorded nondeductible stock option
expense of $1,782,000 as a component of compensation charges related to
IPO for the conversion of the existing variable-award, book-value-based
stock option plans to fixed-award, fair-value-based plans. Accordingly,
changes in the market value of the Company's Common Stock after the
consummation of the IPO will generally not result in ongoing charges to
compensation expense. See Note 11 of the Company's Notes to Consolidated
Financial Statements.
(2) Compensation and benefits includes an expense recorded for the
appreciation in book value between the grant date and the exercise date
for stock appreciation rights ("Repurchase SARs") granted under the Ragen
MacKenzie Incorporated 1997 Share Repurchase Plan (the "Share Repurchase
Plan") of $135,000 and $66,000 during fiscal 1998 period prior to the IPO
and fiscal 1997, respectively. Upon consummation of the IPO, the Company
recorded compensation expense of $1,698,000 as a component of nonrecurring
compensation charges related to IPO for the difference between the market
value of the Common Stock, based on the initial public offering price, and
the book value of the Common Stock immediately preceding the IPO, for all
book-value-based Repurchase SARs outstanding on the date of consummation
of the IPO. The Share Repurchase Plan was terminated upon consummation of
the IPO. No expenses were incurred during any other periods since no
Repurchase SARs under the Share Repurchase Plan were outstanding during
such periods. See Note 11 of the Company's Notes to Consolidated Financial
Statements.
(3) Reflects amounts recorded for benefits under the Key Person Death Benefits
Plan (the "Death Benefits Plan"). The Death Benefits Plan provided for
certain payments to the estates of certain key employee-shareholders upon
their deaths. The Death Benefits Plan was unfunded, but the Company had
accrued amounts totaling $5,000,000 through the end of fiscal 1996 that
were deemed necessary to pay plan benefits. In February 1997, the Board of
Directors of RMI approved the termination of the Death Benefits Plan and
the Company recorded a nonrecurring benefit of $5,000,000, which reflects
the reversal of the amount previously accrued for plan benefits. The
Company had no outstanding obligations or any future obligations under the
Death Benefits Plan at termination date. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Death Benefits Plan."
(4) Basic earnings per share ("Basic EPS") is calculated by dividing net
income by the weighted average number of shares outstanding. Diluted
earnings per share ("Diluted EPS") also includes the dilutive effect of
the issuance of stock options. For the purpose of calculating the dilutive
effect of stock options in Diluted EPS for periods prior to the Company's
IPO, the Company utilizes the per-share book value at the end of each
corresponding period, as the Share Repurchase Plan permitted selling
shareholders to offer their shares to the Company for redemption at book
value as calculated in accordance with the terms of the Share Repurchase
Plan.
(5) Shown as of end of period.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Consolidated Financial Statements
and the related Notes included elsewhere herein. In addition to historical
information, this Form 10-K contains and may incorporate by reference
statements which may constitute forward-looking statements that involve risks
and uncertainties. The words "believe", "expect", "intend", "anticipate",
variations of such words, and similar expressions identify forward-looking
statements, but their absence does not mean that the statement is not forward-
looking. These forward-looking statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions
that are difficult to predict. Accordingly, actual results may differ
materially from those anticipated or expressed in such statements. Potential
risks and uncertainties include, among other things, the general risks of the
securities industry, risks of reduced revenue during periods of lower stock
prices or reduced trading volume; dependence on, and ability to retain and
recruit, key personnel; recent changes in management; risks relating to the
departure of Brooks G. Ragen; dependence on proprietary research; significant
fluctuations in quarterly results; regional concentration; competition;
management of growth of new and existing businesses; and the risks relating to
proprietary trading and correspondent brokerage services; risks of extension
of credit; risks relating to regulation; risks relating to litigation and
potential securities law liability; market, credit and liquidity risks
associated with market-making, principal trading and underwriting activities,
as well as other risks and uncertainties set forth in "Item 1. Business--
Additional Factors That May Affect Future Results." Except as required by law,
the Company undertakes no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise. Readers,
however, should carefully review the factors set forth in other reports or
documents that the Company files from time to time with the SEC.
The Company's discussion of the issues surrounding the Year 2000 contain
forward-looking statements. These forward-looking statements include, but are
not limited to, discussions concerning (1) the financial impact of the Year
2000 project; (2) the Company's estimated timetables for completion of each
phase of the project; (3) the readiness of third-party service providers,
including the functioning of the Company's core brokerage software provided by
an outside software provider; and (4) contingency plans. Many factors,
including those outside of the control of the Company and those that are
difficult or impossible to predict at this time, could cause actual results to
be materially different than those anticipated and expressed in these forward-
looking statements.
Business Environment
The Company is primarily engaged in securities brokerage and related
investment services that include retail and institutional brokerage of
securities, investment research, market making, trading, underwriting, and
distribution of corporate securities and correspondent clearing. The Company's
profitability is affected by many factors, including retail brokerage
activities, which generate revenues from customer trading activity and
interest on customer assets held by the Company pending investment, changes in
the number and productivity of the retail brokers, the level of securities
trading volume, the volatility of securities prices and interest rates,
economic conditions nationally and in the Pacific Northwest, income tax
legislation and the general level of market prices for securities. While
revenues are dependent upon many factors, which may fluctuate significantly,
many of the Company's activities have fixed operating costs that do not
decrease with reduced levels of activity.
Declining interest rates and an improving economic environment contributed
to a significant increase in activity in the equity markets in the United
States during the last three years. The Company's financial results have been
and may continue to be subject to fluctuations due to the factors described
above, or other factors. Consequently, the results of operations for a
particular period may not be indicative of results to be expected for other
periods.
Death Benefits Plan
In 1992, the Company adopted the Death Benefits Plan, which provided for the
payment of supplemental benefits to the heirs of certain employee-shareholders
in the event of their deaths. Benefits to be paid under the
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<PAGE>
provisions of the Death Benefits Plan were determined as a function of the
employee-shareholder's ownership of Common Stock of the Company and were to be
provided to the heirs as a supplement to payments made by the Company in
conjunction with the redemption of the book-value-based Common Stock of the
Company. Provisions in the aggregate amount of $5,000,000 were made in fiscal
1992 through 1996 to record the obligation under the Death Benefits Plan.
In February 1997, the Company adopted the Share Repurchase Plan pursuant to
which certain employees were allowed to elect to receive a right to a
Repurchase SAR upon the redemption of the shareholder's Common Stock of the
Company. The amount to be paid to the Repurchase SAR holder was generally
determined as the appreciation in the Common Stock of the Company over the
two-year period subsequent to the Repurchase SAR grant date. As the Share
Repurchase Plan served to provide additional liquidity in the Company's Common
Stock, the Company elected to terminate the Death Benefits Plan. Accordingly,
the previously established accruals under the Death Benefits Plan were
reversed, resulting in a reduction of noninterest expenses of $5,000,000 in
the second quarter of fiscal 1997. The Share Repurchase Plan terminated upon
consummation of the IPO.
Earnings Charges in Third Fiscal Quarter in which IPO was Consummated
In connection with certain events relating to the IPO and upon consummation
of the IPO, the Company recorded nonrecurring charges to earnings, resulting
in a net charge to earnings of $2,886,000 in the quarter in which the IPO was
completed. Upon consummation of the IPO, the Company's stock option plans,
which had been variable-award, book-value-based plans, became fixed-award,
fair-value-based plans. Accordingly, the Company was required to record
compensation expense of $1,782,000 based on the difference between the book
value of the Company's Common Stock immediately preceding the IPO and the fair
market value of the Common Stock for all variable-award, book-value-based
stock options outstanding on the date of consummation of the IPO. Upon
consummation of the IPO, the Company also recorded compensation expense (net
of tax) in the amount of $1,104,000, which reflected the increase in the value
of the Repurchase SARs outstanding under the Share Repurchase Plan. The Share
Repurchase Plan was terminated upon consummation of the IPO. See Note 11 of
the Company's Notes to Consolidated Financial Statements.
Components Of Revenues And Expenses
Operating Revenues. The Company's revenues are derived primarily from
principal transactions, commissions and interest income. Principal
transactions revenues include net revenues from the trading of securities by
RMI as a principal, including sales credits and trading profits or losses, and
are primarily derived from RMI's activities as a market-maker on Nasdaq and
facilitating sales to customers and other dealers. Additionally, RMI derives
principal transactions revenues from trading debt securities, primarily as
part of its wholesale trading activity and for the benefit of its retail
customers. Principal transactions revenues are affected primarily by
fluctuations in transaction volume as well as by changes in the market value
of securities for which RMI acts as principal. Commissions revenues include
revenues resulting from executing transactions in securities as an agent and
selling concessions on underwriting transactions. Other revenues include
primarily fees from investment advisory services and investment banking
revenues (other than selling concessions).
Interest. Interest income is derived principally from investing customer
credit balances, administrative fees earned on customer money-market accounts,
lending to customers on margin and trading inventories. Interest expense
reflects interest paid on customer credit balances and interest paid on bank
loans and security repurchase agreements used to finance U.S. government,
agency and CMO securities inventory.
Noninterest Expenses. Compensation and benefits expenses include sales
commissions, trading and incentive compensation, which are primarily variable
and are based on revenue production, and salaries, payroll taxes, employee
benefits and temporary employee costs, which are relatively fixed in nature,
and stock option expense. Occupancy and equipment expenses include rent and
utility charges paid for the Company's facilities, expenditures for facilities
repairs and upgrades, and depreciation of computer, telecommunications and
office equipment. Communications expenses include charges from third-party
providers of telecommunications
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<PAGE>
services, printing and mailing costs for customer communications and news and
market data services. Clearing and exchange fees include the cost of
securities clearance, floor brokerage and exchange fees. Other expenses
include state and local taxes, professional fees and miscellaneous expenses.
Results of Operations
During fiscal 1998, net income totaled $11,874,000, or $1.01 per diluted
share, on net revenues of $76,035,000, compared with fiscal 1997 net income of
$15,389,000, or $1.44 per diluted share, on net revenues of $68,887,000. Net
income for fiscal 1998 includes the effect of a nonrecurring after-tax charge
of $2,886,000 that was recorded for stock options and stock appreciation
rights that were outstanding at the time of the Company's June 1998 IPO. Net
income for fiscal 1997 includes the effect of a one-time after-tax benefit of
$3,250,000 that the Company realized in conjunction with the reversal of
amounts previously accrued for the Death Benefits Plan.
The following table sets forth for the periods indicated certain financial
data stated as a percentage of net revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------
SEPT. 25, SEPT. 26, SEPT. 27,
1998 1997 1996
--------- --------- ---------
STATEMENTS OF INCOME DATA:
<S> <C> <C> <C>
Principal transactions, net..................... 31.9% 34.2% 37.0%
Commissions..................................... 43.0 44.7 44.8
Other........................................... 7.9 5.9 5.6
----- ----- -----
Total operating revenues...................... 82.8 84.8 87.4
Interest income................................. 47.9 43.8 38.1
----- ----- -----
Total revenues................................ 130.7 128.6 125.5
Interest expense................................ 30.7 28.6 25.5
----- ----- -----
Net revenues.................................. 100.0 100.0 100.0
----- ----- -----
Noninterest expenses:
Compensation and benefits(1).................... 49.7 51.1 53.3
Compensation charges related to IPO(1).......... 4.6 -- --
Key person death benefits plan(2)............... -- (7.3) --
Occupancy and equipment......................... 6.5 6.8 6.2
Communications.................................. 4.7 4.8 4.4
Clearing and exchange fees...................... 3.5 3.4 3.7
Other........................................... 5.1 5.1 6.1
----- ----- -----
Total noninterest expenses.................... 74.1 63.9 73.7
----- ----- -----
Income before taxes on income................... 25.9 36.1 26.3
Taxes on income................................. 10.3 13.7 9.8
----- ----- -----
Net income...................................... 15.6% 22.4% 16.5%
===== ===== =====
</TABLE>
- --------
(1) See footnote 1 and 2 to the table set forth in "Selected Financial Data."
(2) See footnote 3 to the table set forth in "Selected Financial Data."
29
<PAGE>
Comparison of Fiscal Years Ended September 25, 1998 and September 26, 1997
Net revenues increased by $7,148,000, or 10.4%, to $76,035,000 for fiscal
1998 as compared to fiscal 1997. Revenues increased in virtually all of the
Company's major areas of activity during fiscal 1998 as compared to fiscal
1997.
Revenues from principal transactions increased by $673,000, or 2.9%, to
$24,239,000 for fiscal 1998 as compared to fiscal 1997. Revenues from trading
debt securities increased by $2,145,000, or 17.5%, to $14,400,000, due
primarily to increased trading volume in U.S. government and agency zero
coupon bonds, resulting in part from continued improvements to trading
systems, including adding new features to an existing automatic order system,
and to the opportunistic reconstitution of certain U.S. government and agency
zero coupon bonds. Similar opportunities for growth in the trading of U.S.
government and agency zero coupon bonds may not recur in future periods.
Revenues from principal transactions in equity securities decreased by
$1,472,000, or 13.0%, to $9,839,000 for fiscal 1998 as compared fiscal 1997.
The decrease reflects narrowing margins due to increased competition and
greater regulatory supervision of these markets, which was partially offset by
increased equity trading volumes.
Commissions revenues increased by $1,914,000, or 6.2%, to $32,672,000 for
fiscal 1998 as compared to fiscal 1997. The increase was primarily due to an
increase in trading volume and growth in the number of retail brokers in the
later period. The increase in trading volume generally resulted from sharp
market fluctuations during the quarter ended December 1997. Successful
recruiting efforts during the second half of fiscal 1997 contributed to the
overall growth in the number of brokers during fiscal 1998. The Company's
research typically focuses on value-oriented stocks. If the stock market's
recent volatility continues and value-oriented stocks under-perform the
broader market, it could have a material adverse affect on the Company's
commission business.
Other income increased by $1,946,000, or 47.7%, to $6,024,000 for fiscal
1998 compared fiscal 1997, primarily due to an increase in fees from
investment advisory services and investment banking activities.
Net interest income increased by $2,615,000, or 24.9%, to $13,100,000 for
fiscal 1998 as compared to fiscal 1997. Interest income increased by
$6,255,000, or 20.7%, to $36,434,000 due primarily to increased average
customer credits, margin, and money-market balances. Interest expense
increased by $3,640,000, or 18.5%, to $23,334,000 primarily due to an increase
in average customer credit balances, which was partially offset by the
application of $18,634,000 net proceeds from the Company's June 1998 IPO to
pay down current short-term borrowings.
Noninterest expenses increased by $12,299,000 or 27.9% to $56,337,000 for
fiscal 1998 as compared to fiscal 1997. This increase consists primarily of
increases in compensation and benefits expenses, a nonrecurring $5,000,000
benefit related to reversal of amounts previously accrued under the Death
Benefits Plan in fiscal 1997 and a nonrecurring $3,480,000 compensation charge
related to the IPO during fiscal 1998.
Compensation and benefits expenses increased by $2,626,000, or 7.5%, to
$37,802,000 for fiscal 1998 as compared to fiscal 1997. Commission and other
sales compensation expenses increased by $966,000, or 5.9%, to $17,472,000 for
fiscal 1998, primarily as a result of the increase in commission revenues and
principal transactions, and, to a lesser extent, an increase in guaranteed
broker salary payments for recently hired brokers. The remaining increase in
employee compensation and benefits was due to increased staffing to support
the Company's expanding retail brokerage business and higher incentive bonus
compensation paid to trading-related personnel generally resulting from
increased trading revenue.
The Death Benefits Plan was terminated during fiscal 1997, which resulted in
the Company's recording a benefit of $5,000,000 during the 1997 period. No
expense or benefit was recorded during fiscal 1998, as this plan had been
terminated.
The $3,480,000 compensation charges related to the IPO reflect nonrecurring
noncash stock option expense of $1,782,000 for the conversion of the Company's
variable-award, book-value-based stock option plans to fixed-award, fair-
value-based stock option plans and $1,698,000 in compensation expense related
to stock appreciation rights that were outstanding at the time of the IPO.
Both charges were recorded in the third quarter of fiscal 1998 upon
consummation of the IPO.
30
<PAGE>
Occupancy and equipment expenses increased $202,000, or 4.3%, to $4,916,000,
due to expansion of the Company's retail sales force. Communications expenses
increased by $296,000, or 9.0%, to $3,572,000, primarily reflecting higher
printing and mailing costs due to higher trading volume and growth in the
number of customer accounts. Clearing and exchange fees increased by $312,000,
or 13.3%, to $2,650,000, due to higher trading volume in retail and
correspondent brokerage services. Other expenses increased by $383,000, or
10.8%, to $3,917,000, due to higher professional fees, which were partially
offset by refunds obtained from the State of Washington and the City of
Seattle for overpayment of taxes in prior years.
The Company's effective income tax rate was 39.7% in fiscal 1998 and 38.1%
in fiscal 1997. The Company's effective income tax rate was higher than the
federal statutory rate primarily due to nondeductible stock option plan
expenses which had the effect of increasing the effective tax rate by 5.2% and
3.1% in fiscal 1998 and 1997, respectively. As a result of the conversion of
the variable-award, book-value-based stock option plans to fixed-award, fair-
value-based stock option plans upon consummation of the IPO, the Company
expects that its effective income tax rate will be lower in future periods.
Comparison of Fiscal Years Ended September 26, 1997 and September 27, 1996
Net revenues increased by $5,296,000, or 8.3%, to $68,887,000 for fiscal
1997 as compared to fiscal 1996. The increase in net revenues was due
primarily to the Company's retail brokerage business, including a significant
increase in net interest income earned on retail customer balances and
increases in retail brokerage commissions.
Revenues from principal transactions did not change significantly from
fiscal 1996 to fiscal 1997. Revenues of the Company from principal
transactions in equity securities decreased by $318,000, or 2.7%, to
$11,312,000. The decrease reflects narrowing margins due to increased
competition and greater regulatory supervision of these markets, which was
partially offset by increased equity trading volumes. Revenues from trading
debt securities increased by $358,000, or 3.0%, to $12,254,000 primarily due
to increased trading volumes in municipal bonds and corporate bonds, which was
partially offset by a decrease in revenues from trading mortgage-backed
securities as a result of the Company's reduction of its activities in the CMO
market.
Commissions revenues increased by $2,242,000, or 7.9%, to $30,758,000 for
fiscal 1997 as compared to fiscal 1996. The increase in commissions revenues
reflects higher volume resulting from strong equity markets, an increase in
the average retail gross revenue per broker, and the continued expansion of
the Company's retail sales force, which was partially offset by a decrease in
selling concessions on underwriting transactions.
Other income increased by $509,000, or 14.3%, to $4,078,000 for fiscal 1997
as compared to fiscal 1996, primarily due to an increase in fees from
investment advisory services.
Net interest income increased by $2,505,000, or 31.4%, to $10,485,000 for
fiscal 1997 as compared to fiscal 1996. Interest income increased by
$5,969,000, or 24.7%, to $30,179,000 due to significant growth in customer
credit, margin and money-market balances. Interest expense increased by
$3,464,000, or 21.3%, to $19,694,000 for fiscal 1997 as compared to fiscal
1996, primarily due to increased customer credit balances.
Noninterest expenses decreased by $2,798,000, or 6.0%, to $44,038,000 for
fiscal 1997 as compared to fiscal 1996, primarily as a result of the reversal
of amounts previously accrued for the Death Benefits Plan, which was partially
offset by increases in compensation and benefits.
Compensation and benefits expenses increased by $1,252,000, or 3.7%, to
$35,176,000 for fiscal 1997 as compared to fiscal 1996. Commission and other
sales compensation expenses increased by $1,023,000, or 6.6%, to $16,506,000
for fiscal 1997 as a result of the increase in commission and principal
transaction revenues. The remaining increase in employee compensation was
primarily due to increased staffing to support the Company's expanding retail
brokerage business, partially offset by a decrease in stock option expense.
See footnote 1 to the table set forth in "Selected Financial Data" for a
discussion of the stock option expense.
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<PAGE>
Death Benefits Plan expense in 1997 reflects the Company's decision to
terminate the plan and reverse all amounts previously accrued but unpaid under
the plan. As a result of this decision, the Company recorded a benefit of
$5,000,000 upon the termination of the plan. There were no expenses accrued
for benefits under the plan in fiscal 1996 as a liability for the maximum
amount of benefits that could be paid under the plan had been accrued in prior
years. See footnote 3 to the table set forth in "Selected Financial Data" and
Note 10 of the Company's Notes to Consolidated Financial Statements and "Death
Benefits Plan."
Occupancy and equipment expenses increased $776,000, or 19.7%, to
$4,714,000, due to the Company's investment in technology and expansion of the
retail sales force. Communications expenses increased by $500,000, or 18.0%,
to $3,276,000, reflecting higher telecommunications, printing and mailing
costs due to increased trading volume and growth in the number of customer
accounts. Other expenses decreased by $320,000, or 8.3%, to $3,534,000,
primarily due to lower professional fees.
The Company's effective income tax rate was 38.1% in fiscal 1997 and 37.3%
in fiscal 1996. The Company's effective income tax rate was higher than the
federal statutory rate primarily due to nondeductible stock option plan
expense.
Departure of Brooks G. Ragen
Brooks G. Ragen entered into a 36-month agreement commencing on the closing
of the IPO pursuant to which he has indicated that he intends to establish and
be employed by a newly-formed company that will serve as a correspondent of
RMI. See "Item 1. Business--Additional Factors That May Affect Future
Results--Risks Relating to the Departure of Brooks G. Ragen." Mr. Ragen and
his current client service team's production accounted for approximately
$2.9 million (2.9%) and $2.8 million (3.2%) of RMI's total revenues in fiscal
years 1998 and 1997, respectively, and it is estimated that Mr. Ragen's team
accounted for a similar percentage of net income during those periods. The
Company believes that, during the term of the agreement, the effect on net
income of Mr. Ragen's customers moving their business from RMI to the new
company will be negligible, as the Company believes the resulting net
reduction in revenues will be offset by the resulting reduction in expenses.
For a discussion of other risks associated with Mr. Ragen's departure and
other changes in management, see "Item 1. Business--Additional Factors That
May Affect Future Results--Recent Changes to Management."
Liquidity and Capital Resources
The Company has historically satisfied a large portion of its funding needs
with its own capital resources, consisting largely of internally generated
retained earnings and funds received upon exercise of employee stock options.
A majority of the Company's assets are highly liquid and short term in nature.
The Company's cash, cash equivalents and liquid assets, consisting of
receivables from customers, brokers and dealers, securities purchased under
agreements to resell, securities owned, securities borrowed and deposits with
clearing organizations, represented in excess of 99% of the Company's assets
as of September 25, 1998 and September 26, 1997. Substantially all of the
Company's receivables are secured by customer securities or security
transactions in the process of settlement.
On June 26, 1998, the Company completed the IPO, which included the sale of
1,562,500 shares of Common Stock by the Company. The IPO raised approximately
$18.6 million for the Company after deducting underwriting discounts,
commissions and estimated expenses. On July 27, 1998 the underwriters
exercised their over-allotment option and purchased 347,100 additional shares,
including 9,600 shares sold by the Company (the "Over-Allotment Option"). The
Company used the net proceeds and available cash from the IPO and the Over-
Allotment Option to pay down current short-term borrowings.
The majority of the Company's assets are financed through daily operations
by securities sold under repurchase agreements, securities sold but not yet
purchased, bank loans, securities loaned, and payables to customers, brokers
and dealers. Short-term funding is generally obtained at rates relating to
daily federal funds rates. Other borrowing costs are negotiated depending on
prevailing market conditions. The Company monitors
32
<PAGE>
overall liquidity by tracking the extent to which unencumbered marketable
assets exceed short-term unsecured borrowings. The Company maintains borrowing
arrangements with two financial institutions, which funds are used primarily
to finance U.S. government and agency zero coupon bond inventories. As of
September 25, 1998, the Company had a secured bank line of credit with a
borrowing limit of $85,000,000 with $47,225,000 outstanding, and a security
repurchase arrangement with $45,900,000 outstanding. The ratio of assets to
equity as of September 25, 1998 was approximately 7.2:1.
On August 25, 1998, the Board of Directors authorized the repurchase of up
to 1,000,000 shares of the Company's common stock over the following twelve
months. Purchases of the common stock may be made from time to time at
prevailing prices in the open market, by block purchases, or in privately
negotiated transactions. The repurchased shares are to be held as treasury
stock and used for the Company's employee stock option and other benefit
plans. During fiscal 1998, the Company repurchased 50,600 shares at a total
cost of $511,000.
Certain minimum amounts of capital must be maintained by RMI, the Company's
broker-dealer subsidiary, to satisfy the regulatory requirements of the SEC
and the NYSE. RMI's regulatory net capital has historically exceeded these
minimum requirements. See "Item 1. Business--Net Capital Requirements."
The Company believes that its current level of liquid assets, combined with
funds anticipated to be generated from operations, will be adequate to fund
its operations for at least 18 to 24 months.
Year 2000 Compliance
The Company uses, and depends on third-parties who use, a wide variety of
computer programs and devices, some of which have used only the last two
digits of each year to represent the calendar year portion of dates. As a
result, calculations performed with these abbreviated date fields could
misinterpret the year 2000 resulting in erroneous calculations or program
failures that could cause significant disruptions in the Company's operations
(the "Year 2000 Problem").
In 1996, the Company established a Year 2000 Committee to address the risks
associated with the Year 2000 Problem. The Committee is comprised of key
personnel from information technology, finance and operations departments
within the Company. With the direction of the Year 2000 Committee, the Company
is executing a project plan in an attempt to achieve Year 2000 compliance. In
developing the project plan, the Year 2000 Committee used an enterprisewide
approach and grouped all of the Company's operations into the following five
broad areas: Business Partners, Computers and Technology (including hardware
and software associated with mainframe, distributed and desktop computer
systems operated by the Company, as well as the Company's core brokerage
software obtained from an unaffiliated software provider), Information Data
Feeds (including all data interfaces with external parties), Facilities and
Work Environments, and Customers and Correspondents. Within each of these
areas, the Year 2000 Committee has organized its activities to include the
following steps or phases: inventory, assessment, remediation, testing and
contingency planning.
To date, the Company has completed the inventory phase within all areas of
the project plan and is currently working to complete the assessment and
remediation steps. The remediation phase of the Company's plan specifies a
remediation strategy for each area of the Company's project plan. Certain
technology used by the Company may be replaced or retired as part of the
Company's remediation strategy. Assessment and remediation of assets included
in the Computers and Technology, Facilities and Work Environments and
Customers and Correspondents groups are scheduled for completion in June 1999,
with many elements of assessment and remediation of Computers and Technology
expected to be completed in December 1998. The remaining two categories,
Business Partners and Information Data Feeds, involve an extensive network of
third-party relationships and external providers of products and services that
include the major securities exchanges, self-regulatory organizations,
industry clearing and depository institutions, other broker-dealers, and
hardware and software technology providers. The Company has inquired of all of
these parties whether they are making the necessary efforts to correct their
own Year 2000 problems. For crucial relationships, the Company's procedures
may include joint testing of systems.
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<PAGE>
A significant aspect of the Company's Year 2000 project within the Business
Partners area relates to the functioning of the Company's core brokerage
software. This software, which is provided by an outside software provider
under a servicing contract, is used by the Company for the electronic
processing and recording of all data pertinent to securities transactions and
general accounting. While the Company is not directly responsible for the work
or costs associated with making this system Year 2000 ready, the Year 2000
Committee closely monitors the remediation work performed by the software
provider through regular progress updates and reviews. To date, remediation
has been completed on twenty-three of twenty-six software subsystems, of which
twenty-one have already been tested and are currently in use by the Company.
Based on discussions with the software provider, remediation and testing of
the remaining five subsystems is anticipated to be completed in December 1998
at which time they will be moved into production.
The testing phase of the plan will begin in December 1998. Integrated,
system-wide internal testing is scheduled to begin upon the completion of
remediation and testing of the Company's core brokerage software in December
1998. This internal testing is anticipated to be completed in the first
calendar quarter of 1999. Testing of Information Data Feeds will begin in
December 1998 and is expected to continue through 1999. This testing will
include securities industry-wide testing scheduled for March and April 1999.
Nearly every aspect of the Company's business depends on the accurate
processing of date-related information. As a result, failure by the Company or
one or more of the third parties with which the Company has a relationship to
successfully remediate systems for Year 2000 issues poses the risk of material
disruption to operations and material financial loss. A failure on the part of
the Company to identify and implement solutions to all aspects of the Year
2000 Problem could result in systems failures or outages, inaccuracies in
processing trades or other transactions affecting customer or proprietary
accounts, an inability to reconcile and to settle with counterparties and
other business disruptions. In addition, third parties with which the Company
has a relationship could fail in some element of their Year 2000 efforts. The
Company's operations are highly dependent on the services of the securities
exchanges, depositories, its core brokerage software provider, certain banking
relationships, electric utilities and telecommunications networks, and a
failure by one of these institutions could disrupt the operations of the
Company as well as the securities industry as a whole. The scope of Company's
relationship with individual customers, broker-dealer counterparties and
vendors varies widely as does the resulting risk should any one of them fail
to achieve Year 2000 compliance. The Company has on going communications with
third-parties with which it has important relationships, including its core
brokerage software provider, regarding third party Year 2000 risks. The
likelihood of such third parties achieving Year 2000 compliance can not be
adequately gauged at this time.
The Company is in the process of developing contingency plans to be executed
should a Year 2000 failure affect the Company's operations or those of a
significant third party. The contingency planning effort is scheduled to be
completed by the end of April 1999. There can be no assurance that alternative
arrangements will be identified for every material risk or contingency, or
that these contingency plans will be effective.
Based on information currently available, including information provided by
third party vendors, the Company expects that the total cost of addressing the
Year 2000 Problem for its internal systems will not be material. Costs related
to the Year 2000 Problem are expensed as incurred. A significant portion of
these costs will not be incremental costs to the Company, but rather will
represent the redeployment of existing information technology and operations
personnel, primarily to test the remediation efforts of the Company's third
party vendors. The Company expects to fund all Year 2000 related costs through
operating cash flows and a reallocation of the Company's overall information
technology developmental spending. The costs of the Company's Year 2000
project and the date on which the Company plans to complete the Year 2000
modifications are based on management's best current estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party compliance plans and
other factors. However, there can be no assurance that these estimates will
prove correct and actual results could differ materially from those plans.
34
<PAGE>
Effects of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is the total of net income and all
other nonowner changes in shareholders' equity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 is effective for fiscal years beginning after December 15, 1997. SFAS
No. 131 requires an enterprise to report certain additional financial and
descriptive information about its reportable operating segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that an entity recognize
all derivatives in the statement of financial condition and measure those
instruments at fair value.
The Company will adopt SFAS No. 130 and No. 131 during fiscal 1999.
Management has not yet determined what reportable operating segments will be
provided upon adoption of SFAS No. 131. As both pronouncements are disclosure
and presentation related, implementation of SFAS No. 130 and No. 131 will not
have an impact on the Company's financial condition, results of operations, or
cash flows.
The Company will adopt SFAS No. 133 during fiscal 2000. The Company is in
the process of evaluating the impact of the new accounting standard.
Effects of Inflation
Historically, inflation has not had a material effect on the Company's
financial condition, results of operations or cash flows. The rate of
inflation, however, affects the Company's expenses, such as employee
compensation, rent and communications. Increases in these expenses may not be
readily recoverable in the price the Company charges for its services.
Inflation can have significant effects on interest rates, which in turn can
affect prices and activities in the securities markets. These fluctuations may
have an adverse effect on the Company's operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments
A derivative financial instrument represents a contractual agreement between
counterparties and has value that is derived from changes in the value of some
other underlying asset such as the price of another security, interest rates,
currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P
500), or the value referenced in the contract.
The Company does not act as dealer, trader or end-user of complex
derivatives such as swaps, collars and caps. From time to time, the Company
enters into exchange-listed financial futures contracts for the purpose of
hedging certain dealing activities. As such, any futures contract commitments
are considered held for trading purposes and are carried at market value.
Financial futures contracts are transactions in which one party agrees to
deliver a financial instrument to a counterparty at a specified price on a
specified date. The Company's exposure to market risk arises from the
possibility of unfavorable changes in the market price of the underlying
financial instrument. The Company's exposure to credit risk at any point is
represented by the fair value or replacement cost on contracts in which the
Company has recorded an unrealized gain. The risks inherent in derivative
financial instruments are managed consistent with the Company's overall risk
management policies. See "--Risk Management".
35
<PAGE>
At September 25, 1998 the contract value of the Company's financial futures
commitments was $100,000. The contract amounts of these instruments reflect
the Company's extent of involvement in the particular class of financial
instrument. They do not include positions which may substantially reduce any
potential market risk and do not represent the Company's risk of loss due to
counterparty nonperformance.
Risk Management
Exposure to risk and the ways the Company manages the various types of risks
on a day-to-day basis are critical to the Company's survival and financial
success. The Company monitors its market, credit and correspondent risks on a
daily basis through a number of control procedures designed to identify and
evaluate the various risks to which the Company is exposed. There can be no
assurance, however, that the Company's risk management procedures and internal
controls will prevent losses from occurring as a result of such risks.
The Company's primary market risk relates to the fact that it owns a variety
of investments that are subject to changes in value and could result in the
Company's incurring material gains or losses. The Company also engages in
proprietary trading and makes dealer markets in equity securities, investment-
grade corporate debt, U.S. government and agency securities and CMO
securities. As such, Ragen MacKenzie may be required to maintain certain
amounts of inventories in order to facilitate customer order flow. The Company
seeks to cover its exposure to market risk by limiting its net long or short
positions, by selling or buying similar instruments and by utilizing various
financial instruments such as financial futures. The Company also often acts
as a principal in customer-related transactions in financial instruments,
which exposes it to risks of default by customers and counterparties.
Trading activities generally result in the creation of inventory positions.
Trading and inventory accounts are monitored on an ongoing basis, and Ragen
MacKenzie has established written position limits. Position and exposure
reports are prepared at the end of each trading day by operations staff in
each of the business groups engaged in trading activities for traders, trading
managers, department managers and management personnel. Such reports are
reviewed independently on a daily basis by Ragen MacKenzie's corporate
accounting group. In addition, on a daily basis, the corporate accounting
group prepares a consolidated summarized position report indicating both long
and short exposure, which is distributed to various levels of management
throughout RMI and enables senior management to review inventory levels and
monitor results of the trading groups. The Company also reviews and monitors,
at various levels of management, inventory pricing, concentration and
securities ratings.
In addition to position and exposure reports, the Company produces a daily
revenue report that summarizes the trading, interest, commissions, fees,
underwriting and other revenue items for each of its business groups. The
daily revenue report is distributed to various levels of senior management
and, together with the position and exposure report, assists senior management
in monitoring and reviewing overall activity of the trading groups.
Credit risk represents the amount of accounting loss the Company would incur
should counterparties to its proprietary transactions fail to perform and the
value of any collateral prove inadequate. Credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral until commitments are settled. The Company monitors its
exposure to counterparty risk on a daily basis by using credit exposure
information and monitoring collateral values. Senior management approves
various actions, including setting higher margin requirements for large or
concentrated accounts, requiring a reduction of either the level of margin
debt or investment in high-risk securities or, in some cases, requiring the
transfer of the account to another broker-dealer. The Company actively manages
the credit exposure relating to its trading activities entering into master
agreements that permit netting, when feasible, monitoring the creditworthiness
of counterparties and their related trading limits on an ongoing basis,
requesting additional collateral when deemed necessary and limiting the amount
and duration of exposure to individual counterparties.
36
<PAGE>
Management of risk relating to clearing activities for the Company's
correspondent firms begins with a review by certain members of senior
management of each prospective correspondent firm prior to commencing the
relationship. This review includes an examination of the firm's employees,
trading history and finances. Each new correspondent is required to maintain a
security deposit. The amount required is based upon the volume and type of
business to be done. The correspondent agreement requires each correspondent
to submit to RMI copies of all financial information they are required to file
with the SEC and the NASD monthly or quarterly, including Financial and
Operational Combined Uniform Single Reports ("FOCUS Reports"). Correspondent
FOCUS Reports and other financial statements are reviewed by management.
Additionally, each correspondent's settlements are reviewed daily.
Market Risk
Market risk represents the potential loss the Company may incur as a result
of absolute and relative price movements in financial instruments due to
changes in interest rates, foreign exchange rates, equity prices, and other
political factors. The Company is not subject to direct market risk due to
changes in foreign exchange rates. However, the Company is subject to market
risk as a result of changes in interest rates and equity prices, which are
affected by global economic conditions. The principal source of this risk
arises from maintaining securities inventory positions and trading and market-
making in these securities. The Company carries inventories of marketable
securities including equities and municipal, U.S. government and agency zero
coupon, corporate, and CMO fixed income securities for resale to its retail
and institutional brokerage customers and other broker-dealers. All of the
Company's securities inventories are held for trading purposes.
In connection with the Company's dealing activities, the Company is exposed
to interest rate risk due to changes in the level or volatility of interest
rates, changes in the yield curve, mortgage prepayments and credit spreads.
The Company is exposed to equity price risk due to changes in the level and
volatility of equity prices primarily in the Nasdaq and over-the-counter
markets. The Company controls its market risk primarily through notional
limits on trading inventories. In addition, the Company attempts to mitigate
its exposure to interest rate risk on its long CMO and U.S. government and
agency inventories by entering into hedging transactions through the use of
short cash positions in U.S. government obligations and, to a lesser extent,
financial futures contracts.
The following table shows the quoted market values of the Company's
securities owned ("long"), securities sold but not yet purchased ("short"),
net positions and overall position limits as of September 25, 1998:
<TABLE>
<CAPTION>
LONG SHORT NET LIMIT
------------ ------------- ----------- -----------------
<S> <C> <C> <C> <C>
Fixed income securities:
Corporate bonds, deben-
tures, and notes...... $ 2,212,000 $ (14,000) $ 2,198,000 Long $ 7,000,000
U.S. Government and
government
agency obligations.... 158,471,000 (163,764,000) (5,293,000) Long $180,000,000(1)
Collateralized mortgage
obligations........... 4,001,000 (8,000) 3,993,000 Long $ 30,000,000(2)
State and municipal ob-
ligations............. 4,112,000 4,112,000 Long $ 5,000,000
Equity securities:
Corporate stocks....... 614,000 (309,000) 305,000 Long $ 2,500,000
Short $ 2,500,000
</TABLE>
- --------
(1) $175,000,000 of total long position limit must be adequately hedged.
(2) Unless approval is given, long inventory must be adequately hedged.
The information regarding the Company's market risk included above does not
consider other factors that may influence the Company's market risk, such as
credit spread risk, prepayment risk on CMOs, or changes in the shape of the
yield curve. Information with regard to the Company's securities borrowed,
securities loaned, borrowings, and securities sold under agreements to
repurchase is not included, as the interest rates for such instruments are
generally reset on a daily basis.
37
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, financial statement schedule and supplementary
financial information required by this item are listed in the index appearing
on page 42 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item is included under the captions
"Proposal: Election of Directors," "Executive Compensation," "Certain
Transactions" and "Section 16(A) Beneficial Ownership Reporting Compliance" in
the Company's 1999 Proxy Statement and in Part I of this Form 10-K under the
caption "Executive Officers of the Company." Such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item is included under the captions
"Compensation of Directors," "Executive Compensation," and "Employment
Contracts, Termination of Employment and Change of Control Arrangements" in
the Company's 1999 Proxy Statement and is incorporated herein by reference,
except that, pursuant to Item 402(a)(8) of Regulation S-K, the information to
be contained in the Company's 1999 Proxy Statement in response to paragraphs
(k) and (l) of Item 402 is not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is included under the caption
"Beneficial Ownership of Shares" in the Company's 1999 Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by this item is included under the caption "Certain
Transactions" in the Company's 1999 Proxy Statement and is incorporated herein
by reference.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K:
(a) Documents filed as part of this Report:
1. FINANCIAL STATEMENTS:
The financial statements required to be filed hereunder are listed on
page 42 hereof.
2. FINANCIAL STATEMENT SCHEDULES:
The financial statements required to be filed hereunder are listed on
page 42 hereof.
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
3.1+ Amended and Restated Articles of Incorporation of Ragen MacKenzie
Group Incorporated.
3.2+ Bylaws of Ragen MacKenzie Group Incorporated.
10.1+ Master Note of RMI in favor of Bank America National Trust and Savings
Association, dated July 9, 1997.
10.2+ Security Agreement between RMI and Bank America National Trust and
Savings Association, dated October 14, 1995.
10.3+ Lease Agreement between Wright-Carlyle Seattle and RMI, dated November
8, 1983, as amended December 19, 1988, August 24, 1992, June 1, 1993,
July 20, 1995, April 30, 1997 and June 6, 1997.
10.4+ Form of Noncompetition and Nonsolicitation Agreement executed as of
April 14, 1998, by RMGI and each of Lesa A. Sroufe, Robert J.
Mortell, Jr., Mark A. McClure, V. Lawrence Bensussen and John L.
MacKenzie.
10.5+ Severance and Correspondent Clearing Agreement between RMI and Brooks
G. Ragen, executed April 17, 1998.
10.6+ Agreement and Release between RMI and Scott McAdams, dated March 22,
1998.
10.7+ RMI 1989 Stock Option Plan.
10.8+ RMI 1993 Stock Option Plan.
10.9+ RMI 1996 Stock Incentive Compensation Plan.
10.10+ RMI 1997 Share Repurchase Plan.
10.11+ RMGI 1998 Stock Incentive Compensation Plan.
10.12+ ABC Brokerage Accounting System Agreement between Pershing Division of
Donaldson, Lufkin & Jenrette Securities Corporation and RMI, dated
April 1, 1997.
10.13+ Agreement and Plan of Merger dated as of May 29, 1998, as amended June
8, 1998.
10.14+ Employment Agreement between RMI and Mark A. McClure, dated June 16,
1994, as amended by an addendum dated June 3, 1997.
10.15+ RMGI Employee Stock Purchase Plan.
10.16+ RMI Agreement to Grant Stock Option to Mark A. McClure dated
June 16, 1994.
10.17+ RMI Agreement to Grant Stock Option to Mark A. McClure dated February
25, 1997.
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
10.18+ RMI Agreement to Grant Stock Option to Stan Freimuth dated April 29, 1996.
10.19+ RMI Agreement to Grant Stock Option to Stan Freimuth dated June 11, 1996.
10.20+ Executive Performance Bonus Plan.
10.21* RMGI Deferred Compensation Plan.
10.22* First Amendment to Severance and Correspondent Clearing Agreement, dated June 19, 1998, between
RMI and Brooks G. Ragen.
10.23* Second Amendment to Severance and Correspondent Clearing Agreement, between RMI and
Brooks G. Ragen, dated September 21, 1998.
10.24* Amendments to Lease Agreement between EOP Northwest Properties, L.L.C (as successor in interest
to Wright-Carlyle Seattle) and RMI, dated September 26, 1997, September 21, 1998 and
November 6, 1998.
21.1+ Subsidiaries of the Registrant
23.1* Consent of Deloitte & Touche LLP
27.1* Financial Data Schedule. (This Financial Data Schedule is only required to be submitted with the
Registrant's Annual Report on 10-K as filed electronically to the SEC's EDGAR database.)
</TABLE>
- --------
* Filed herewith.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-50735).
(b) Reports on Form 8-K:
None.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated below on the 15th day of December,
1998:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ LESA A. SROUFE Chairman of the Board and
____________________________________ Chief Executive Officer
Lesa A. Sroufe (Principal Executive
Officer)
/s/ ROBERT J. MORTELL, Jr. President, Chief Operating
____________________________________ Officer, Treasurer and
Robert J. Mortell, Jr. Director
/s/ V. LAWRENCE BENSUSSEN Senior Vice President, Chief
____________________________________ Financial Officer and
V. Lawrence Bensussen Secretary (Principal
Financial and Accounting
Officer)
/s/ MARK A. MCCLURE Executive Vice President and
____________________________________ Director
Mark A. McClure
/s/ KIRBY L. CRAMER Director
____________________________________
Kirby L. Cramer
/s/ ARTHUR W. HARRIGAN, JR. Director
____________________________________
Arthur W. Harrigan, Jr.
/s/ PETER B. MADOFF Director
____________________________________
Peter B. Madoff
/s/ JOHN L. MACKENZIE Director
____________________________________
John L. MacKenzie
/s/ GREGORY B. MAFFEI Director
____________________________________
Gregory B. Maffei
</TABLE>
41
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
AS OF SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997, AND FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 25, 1998
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... 43
Consolidated Financial Statements:
Consolidated statements of financial condition........................... 44
Consolidated statements of income........................................ 45
Consolidated statements of cash flows.................................... 46
Consolidated statements of shareholders' equity.......................... 47
Notes to consolidated financial statements............................... 48
Financial Statement Schedule:
I--Condensed financial information of the registrant
Independent Auditors' Report......................................... 61
Condensed Financial Statements:
Condensed statement of financial condition....................... 62
Condensed statement of income and shareholders' equity........... 63
Condensed statement of cash flows................................ 64
</TABLE>
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedules, or because
the information required is included in the respective consolidated financial
statements or notes thereto.
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Ragen MacKenzie Group Incorporated and Subsidiary
Seattle, Washington
We have audited the accompanying consolidated statements of financial
condition of Ragen MacKenzie Group Incorporated and subsidiary (the Company)
as of September 25, 1998, and September 26, 1997, and the related consolidated
statements of income, cash flows, and changes in shareholders' equity for each
of the three years in the period ended September 25, 1998. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Ragen MacKenzie Group
Incorporated and subsidiary as of September 25, 1998, and September 26, 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended September 25, 1998, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
November 20, 1998
Seattle, Washington
43
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
------
CASH.................................................................... $ 2,143 $ 4,980
CASH AND MARKET VALUE OF SECURITIES SEGREGATED FOR THE EXCLUSIVE BENEFIT
OF CUSTOMERS........................................................... 315,997 306,704
DEPOSITS WITH CLEARING ORGANIZATIONS.................................... 1,207 1,007
RECEIVABLE FROM:
Brokers, dealers, and clearing organizations.......................... 2,661 1,399
Customers............................................................. 110,428 105,378
SECURITIES OWNED, at market value....................................... 169,410 122,778
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL......................... 172,384 111,917
SECURITIES BORROWED..................................................... 2,144 8,097
FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, at cost, less accumu-
lated depreciation and amortization of $4,178 and $3,629............... 1,293 888
OTHER ASSETS............................................................ 4,182 2,729
-------- --------
TOTAL............................................................... $781,849 $665,877
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Borrowings............................................................ $ 47,225 $ 17,750
Payable to:
Brokers, dealers, and clearing organizations........................ 11,986 10,300
Customers, including free credit balances of $381,375 and $391,602.. 390,697 406,017
Securities sold but not yet purchased, at market value................ 164,095 106,629
Securities sold under agreements to repurchase........................ 45,900 41,600
Accrued compensation and related benefits............................. 8,300 8,139
Other liabilities and accrued expenses................................ 4,707 5,194
-------- --------
Total liabilities................................................... 672,910 595,629
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value--Authorized, 10,000,000 shares; no
shares issued and outstanding........................................
Common stock, $.01 par value--Authorized, 50,000,000 shares; issued
and outstanding, 13,457,390 and 10,242,889 shares.................... 135 102
Additional paid-in capital............................................ 47,872 20,577
Treasury stock--50,600 shares, at cost................................ (511)
Retained earnings..................................................... 61,443 49,569
-------- --------
Total shareholders' equity.......................................... 108,939 70,248
-------- --------
TOTAL............................................................... $781,849 $665,877
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
44
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Principal transactions, net........ $24,239 $23,566 $23,526
Commissions........................ 32,672 30,758 28,516
Other.............................. 6,024 4,078 3,569
------- ------- -------
Total operating revenues......... 62,935 58,402 55,611
Interest income.................... 36,434 30,179 24,210
------- ------- -------
Total revenues................... 99,369 88,581 79,821
Interest expense................... 23,334 19,694 16,230
------- ------- -------
Net revenues..................... 76,035 68,887 63,591
------- ------- -------
NONINTEREST EXPENSES:
Compensation and benefits.......... 37,802 35,176 33,924
Compensation charges related to
IPO............................... 3,480
Key person death benefits plan..... (5,000)
Occupancy and equipment............ 4,916 4,714 3,938
Communications..................... 3,572 3,276 2,776
Clearing and exchange fees......... 2,650 2,338 2,344
Other.............................. 3,917 3,534 3,854
------- ------- -------
Total noninterest expenses....... 56,337 44,038 46,836
------- ------- -------
INCOME BEFORE TAXES ON INCOME........ 19,698 24,849 16,755
TAXES ON INCOME...................... 7,824 9,460 6,254
------- ------- -------
NET INCOME........................... $11,874 $15,389 $10,501
======= ======= =======
EARNINGS PER COMMON SHARE:
Basic.............................. $ 1.05 $ 1.54 $ 1.10
Diluted............................ 1.01 1.44 1.04
</TABLE>
See Notes to Consolidated Financial Statements
45
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................... $ 11,874 $ 15,389 $ 10,501
Adjustments to reconcile net income
to net cash provided (used) by op-
erating activities:
Depreciation and amortization.... 549 425 377
Key person death benefits plan
reversal........................ (5,000)
Stock option expense............. 2,932 2,223 3,125
Deferred tax expense (benefit)... (503) 2,476 (716)
Gain on sale of Pacific Stock Ex-
change seat..................... (290)
Cash provided (used) by changes
in operating assets and liabili-
ties:
Cash and market value of
securities segregated for the
exclusive benefit of
customers..................... (9,293) (79,938) (25,961)
Deposits with clearing organi-
zations....................... (200) 10
Receivable from:
Brokers, dealers, and clearing
organizations................ (1,262) 67 1,539
Customers..................... (5,050) (18,669) (27,101)
Securities owned............... (46,632) (44,097) 2,634
Securities purchased under
agreements to resell.......... (60,467) (36,574) 1,996
Securities borrowed............ 5,953 (2,316) 862
Other assets................... (977) 396 (791)
Payable to:
Brokers, dealers, and clearing
organizations................ 1,686 5,926 (887)
Customers..................... (15,320) 116,791 38,297
Securities sold but not yet
purchased..................... 57,466 37,029 (9,930)
Securities sold under agreement
to repurchase................. 4,300 6,912 31,836
Accrued compensation and re-
lated benefits................ 161 4,122 988
Other liabilities and accrued
expenses...................... (487) 979 405
-------- -------- --------
Net cash provided (used) by operat-
ing activities.................... (55,560) 6,141 27,184
INVESTING ACTIVITIES:
Proceeds from sale of Pacific Stock
Exchange seat..................... 317
Purchases of furniture, equipment,
and leasehold improvements........ (954) (469) (246)
-------- -------- --------
Net cash used by investing activi-
ties.............................. (637) (469) (246)
FINANCING ACTIVITIES:
Proceeds from (repayment of)
borrowings, net................... 29,475 (2,575) (27,557)
Proceeds from initial public offer-
ing, net of issuance costs........ 18,634
Proceeds from issuance of common
stock............................. 7,343 1,830 2,233
Repurchases of common stock........ (2,092) (1,717) (1,112)
-------- -------- --------
Net cash provided (used) by financ-
ing activities.................... 53,360 (2,462) (26,436)
-------- -------- --------
INCREASE (DECREASE) IN CASH......... (2,837) 3,210 502
CASH:
Beginning of fiscal year........... 4,980 1,770 1,268
-------- -------- --------
End of fiscal year................. $ 2,143 $ 4,980 $ 1,770
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the fiscal year
for:
Interest......................... $ 22,977 $ 19,797 $ 15,959
Federal income taxes............. 8,400 6,000 7,700
</TABLE>
See Notes to Consolidated Financial Statements
46
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ADDITIONAL ---------------
PAID-IN RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS TOTAL
---------- ------ ---------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, September 29,
1995................... 9,306,493 $ 93 $14,004 -- $ -- $23,679 $ 37,776
Stock options exer-
cised................ 879,032 9 2,224 2,233
Repurchase and retire-
ment of common
stock................ (292,425) (3) (1,109) (1,112)
Noncash compensation--
Stock options........ 3,125 3,125
Net income............ 10,501 10,501
---------- ---- ------- ------- ----- ------- --------
BALANCE, September 27,
1996................... 9,893,100 99 18,244 34,180 52,523
Stock options exer-
cised................ 670,425 7 1,812 1,819
Repurchase and retire-
ment of common
stock................ (322,770) (4) (1,713) (1,717)
Issuance of common
stock................ 2,134 11 11
Noncash compensation--
Stock options........ 2,223 2,223
Net income............ 15,389 15,389
---------- ---- ------- ------- ----- ------- --------
BALANCE, September 26,
1997................... 10,242,889 102 20,577 49,569 70,248
Stock options exer-
cised................ 1,871,563 19 7,291 7,310
Repurchase and retire-
ment of common
stock................ (234,127) (2) (1,579) (1,581)
Issuance of common
stock................ 4,965 33 33
Issuance of common
stock in conjunction
with initial public
offering............. 1,572,100 16 18,618 18,634
Purchase of treasury
stock................ (50,600) (511) (511)
Noncash compensation--
Stock options........ 2,932 2,932
Net income............ 11,874 11,874
---------- ---- ------- ------- ----- ------- --------
BALANCE, September 25,
1998................... 13,457,390 $135 $47,872 (50,600) $(511) $61,443 $108,939
========== ==== ======= ======= ===== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
47
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION: Ragen MacKenzie Group Incorporated (RMGI), a Washington
corporation, was formed for the purpose of becoming the holding company and
sole shareholder of Ragen MacKenzie Incorporated (RMI). In June 1998, the
shareholders of RMI approved the Agreement and Plan of Merger pursuant to
which their shares of RMI were exchanged for an equal number of shares of
RMGI, and under which RMI became a wholly owned subsidiary of RMGI. At the
same time, RMGI assumed the obligations of RMI with respect to RMI's
outstanding options to purchase or acquire shares of common stock of RMI
granted pursuant to RMI's option plans and other arrangements entitling
persons to receive stock options.
As RMI and RMGI were entities under common control, the accompanying
financial statements give effect to the share exchange and merger as if it
were a pooling-of-interest. Accordingly, the financial statements reflect the
transaction as if it had occurred as of the beginning of the earliest period
presented, and the assets, liabilities and shareholders' equity are recorded
based upon their historical carrying amounts. No intangible assets were
created and recorded as a result of this transaction.
NATURE OF OPERATIONS: RMGI, through its subsidiary, operates predominantly
in a single business segment, that of the securities industry. Within this
segment, RMI is engaged in securities brokerage and related investment
services that include retail and institutional brokerage of securities,
investment research, market making, trading, underwriting, and distribution of
corporate securities and correspondent clearing. RMI is registered with the
Securities and Exchange Commission (the SEC) as a broker/dealer, is a member
firm of the New York Stock Exchange (the NYSE) and has retail offices located
in Washington, Oregon, and Alaska.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of RMGI and its subsidiary, RMI (collectively, the Company). All
significant intercompany accounts and transactions have been eliminated upon
consolidation.
REPORTING PERIOD: The Company utilizes fiscal periods to report its results
of operations. The Company's fiscal year ends on the Friday on or immediately
prior to September 30. Results of operations for the fiscal years ended
September 25, 1998, September 26, 1997, and September 27, 1996, consist of 52-
week periods.
REVENUE RECOGNITION: Principal transactions and commission revenue and
expense are recorded primarily on a settlement-date basis, which is not
materially different from recording such transactions at trade date.
Securities owned and securities sold but not yet purchased are recorded at
quoted fair values, with resulting unrealized appreciation and depreciation
included in revenues from principal transactions.
FAIR VALUE OF FINANCIAL INSTRUMENTS: All of the Company's financial
instruments are carried at fair value or contracted amounts which approximate
fair value.
Assets, which are recorded at contracted amounts approximating fair value,
consist primarily of short-term secured receivables, including securities
purchased under agreements to resell, securities borrowed, and certain other
receivables. Similarly, the Company's short-term liabilities, including
borrowings, securities sold under agreements to repurchase, and certain other
payables, are recorded at contracted amounts approximating fair value. These
instruments generally have variable interest rates and short-term maturities,
in many cases overnight, and accordingly, are not materially affected by
changes in interest rates.
48
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CASH: Cash as reflected in the consolidated statements of cash flows
consists of balances in bank accounts used in operations and excludes amounts
held for the exclusive benefit of customers pursuant to SEC Rule 15c3-3.
RECEIVABLE FROM AND PAYABLE TO BROKERS/DEALERS: Amounts receivable from and
payable to brokers/dealers consist primarily of the contract value of
securities which have not been delivered or received as of the date of the
consolidated statements of financial condition.
RECEIVABLE FROM AND PAYABLE TO CUSTOMERS: Amounts receivable from and
payable to customers arise from normal securities margin and cash
transactions. Securities owned by customers and either held as collateral for
these transactions or held in safekeeping are not reflected in the
consolidated statements of financial condition. Management considers the
receivables adequately collateralized. As such, no allowances for credit
losses have been provided for the receivables. Receivables from and payable to
customers are recorded on a settlement-date basis, which is not materially
different from recording such transactions at trade date.
SECURITIES UNDER AGREEMENT TO RESELL AND REPURCHASE: Repurchase and resale
agreements are treated as financing arrangements and are carried at contract
amounts reflective of the amounts at which the securities will be subsequently
reacquired or resold as specified in the respective agreements. Resale
agreements are collateralized by U.S. Government and government agency
obligations. The Company's policy is to take physical possession or control of
securities purchased under agreements to resell. The Company monitors the
market value of the underlying securities as compared to the related
receivable, including accrued interest, and requires additional collateral
where deemed appropriate.
FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS: Furniture and equipment
are stated at cost, and are depreciated using the straight-line method over
the estimated useful life of the asset, generally three to five years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the respective lease term or the estimated life of the improvement.
Management periodically evaluates furniture, equipment, and leasehold
improvements for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable.
SECURITIES-LENDING ACTIVITIES: Securities borrowed and securities loaned are
financing arrangements which are recorded at the amount of cash collateral
advanced or received. Securities-borrowed transactions require the Company to
deposit cash, letters of credit, or other collateral with the lender. With
respect to securities loaned, the Company receives collateral in the form of
cash or other collateral in an amount generally in excess of the market value
of securities loaned. The Company monitors the market value of securities
borrowed and loaned on a daily basis, with additional collateral obtained or
refunded as necessary.
INCOME TAXES: The Company accounts for income taxes under the asset and
liability method. Under this method, deferred income taxes are recorded for
the temporary differences between the financial reporting and tax bases of the
Company's assets and liabilities. These deferred taxes are measured by the
provisions of currently enacted tax laws.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income is the total of net income and all other nonowner changes
in shareholders' equity.
49
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 requires an enterprise to
report certain additional financial and descriptive information about its
reportable operating segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that an entity recognize
all derivatives in the statement of financial condition and measure those
instruments at fair value.
The Company will adopt SFAS No. 130 and No. 131 during fiscal 1999.
Management has not yet determined what reportable operating segments will be
provided upon adoption of SFAS No. 131. As both pronouncements are disclosure
and presentation related, implementation of SFAS No. 130 and No. 131 will not
have an impact on the Company's financial condition, results of operations, or
cash flows.
The Company will adopt SFAS No. 133 during fiscal 2000. The Company is in
the process of evaluating the impact of the new accounting standard.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the period. Such estimates relate to the fair value of certain financial
instruments. Actual results could differ from such estimates.
NOTE 3: CASH AND MARKET VALUE OF SECURITIES SEGREGATED FOR THE EXCLUSIVE
BENEFIT OF CUSTOMERS
Cash and market value of securities segregated for the exclusive benefit of
customers under Rule 15c3-3 of the SEC consists primarily of securities
purchased under agreements to resell. Such agreements, which are accounted for
as collateralized financing transactions, are recorded at their contractual
amounts and totalled $315,365,000 and $306,222,000 at September 25, 1998, and
September 26, 1997, respectively.
Securities purchased under agreements to resell were delivered by
appropriate entry into the Company's account for the exclusive benefit of
customers maintained at a custodian bank under written custodial agreements
that explicitly recognize the Company's interest in the securities. At
September 25, 1998, these securities, all of which were U.S. Government and
government agency obligations, had a market value of $318,520,000. The
agreements to resell securities purchased were with one counterparty and have
a stated maturity of one day.
50
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: MARKETABLE SECURITIES OWNED AND MARKETABLE SECURITIES SOLD BUT NOT YET
PURCHASED
Marketable securities owned and marketable securities sold but not yet
purchased consist of trading securities at quoted market values as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
------------------ ------------------
SOLD BUT SOLD BUT
NOT YET NOT YET
OWNED PURCHASED OWNED PURCHASED
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Corporate bonds, debentures, and notes.. $ 2,212 $ 14 $ 1,710 $ 447
U.S. Government and government agency
obligations............................ 158,471 163,764 107,925 105,411
Collateralized mortgage obligations..... 4,001 8 9,461 86
State and municipal obligations......... 4,112 2,311 11
Corporate stocks........................ 614 309 1,371 674
-------- -------- -------- --------
$169,410 $164,095 $122,778 $106,629
======== ======== ======== ========
</TABLE>
Securities sold but not yet purchased represent obligations of the Company
to deliver the specified security, and thereby create a liability to purchase
the security in the market at prevailing prices. Accordingly, these
transactions result in off-balance-sheet risk, as the Company's ultimate
obligation to satisfy the sale of securities sold but not yet purchased may
exceed the amount recognized in the consolidated statements of financial
condition.
NOTE 5: BORROWINGS
Borrowings under a secured credit facility authorized up to $85,000,000 are
callable on demand, collateralized by 90% of the value of certain securities
pledged ($107,043,000 and $74,835,000 at September 25, 1998, and September 26,
1997, respectively), and bear interest at the prevailing broker rate (5.9% at
September 25, 1998, and September 26, 1997).
NOTE 6: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At September 25, 1998, and September 26, 1997, the market value of the
securities sold subject to repurchase was $46,819,000 and $42,434,000,
respectively, and the average effective interest rate at these dates on the
transactions was 6.0%.
NOTE 7: INCOME TAXES
Taxes on income included in the consolidated statements of income consist of
the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal current tax expense........................... $8,327 $6,984 $6,970
Federal deferred tax expense (benefit)................ (503) 2,476 (716)
------ ------ ------
Total taxes on income................................. $7,824 $9,460 $6,254
====== ====== ======
</TABLE>
51
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the provision (benefit) for deferred income taxes consist
of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------
1998 1997 1996
----- ------ -----
<S> <C> <C> <C>
Deferred compensation and benefit plans................ $(185) $1,727 $ --
Other liabilities and accrued expenses................. (217) 245 (245)
Other.................................................. (101) 504 (471)
----- ------ -----
Total deferred tax expense (benefit)................... $(503) $2,476 $(716)
===== ====== =====
</TABLE>
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate................................................ 35% 35% 35%
Nondeductible stock option plan expense....................... 5 3 2
--- --- ---
Effective tax rate............................................ 40% 38% 37%
=== === ===
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets, included in other assets, are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------- -------------
<S> <C> <C>
Deferred compensation and benefit plans.......... $ 208 $ 23
Other liabilities and accrued expenses........... 1,107 890
Other............................................ 329 228
------ ------
Total deferred tax asset......................... $1,644 $1,141
====== ======
</TABLE>
There were no deferred tax liabilities at September 25, 1998, or September
26, 1997. The Company has determined that no valuation allowance against
deferred tax assets at September 25, 1998, or September 26, 1997, was
necessary since it is more likely than not that the Company will generate
sufficient taxable income to provide for realization of the deferred tax
asset.
NOTE 8: LEASES, COMMITMENTS, AND CONTINGENT LIABILITIES
The Company leases certain office space under noncancellable operating
leases which expire through 2006. Certain of these leases contain escalation
clauses based upon increased costs incurred by the lessor. Future minimum
rentals under the terms of the lease agreements are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
SEPTEMBER
------------------
<S> <C>
1999........................................................... $1,197
2000........................................................... 1,154
2001........................................................... 935
2002........................................................... 376
2003........................................................... 96
Thereafter...................................................... 289
------
$4,047
======
</TABLE>
52
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rental expense under the leases for fiscal 1998, 1997, and 1996 was
$1,286,000, $990,000, and $916,000, respectively.
In the normal course of business, there are various lawsuits, claims, and
contingencies pending against the Company, which in the opinion of management,
will be resolved with no material impact on the Company's financial position
or results of operations.
NOTE 9: NET CAPITAL REQUIREMENTS
RMI is subject to the Uniform Net Capital Rule 15c3-1 (the Rule) under the
Securities Exchange Act of 1934. RMI has elected to compute net capital under
the alternative provisions of the Rule, which require RMI to maintain net
capital, as defined, equal to the greater of $1,000,000 or 2% of aggregate
debit items arising from customer transactions, as defined. At September 25,
1998, RMI's net capital was $94,816,000, which was 84% of aggregate debit
items, and which exceeded the minimum net capital requirement of $2,251,000
by $92,565,000.
The net capital rules of the NYSE also provide that equity capital of RMI
may not be withdrawn or cash dividends paid without notification if resulting
net capital would be less than 5% of aggregate debit items.
NOTE 10: EMPLOYEE BENEFITS
The Company maintains a voluntary defined contribution 401(k) plan available
to all full-time employees of the Company. Employees may defer a portion of
their compensation limited by overall maximums, subject to antidiscrimination
tests as set forth in the Internal Revenue Code (IRC). The Company provides a
discretionary matching contribution (100% of the participant's contribution)
up to a maximum of 4% of the participant's total earnings. The Company does
not match the contribution for participants with total earnings greater than a
specified limit. The Company's accrual for matching contributions was $120,000
in 1998, $110,000 in 1997, and $115,000 in 1996.
In 1992, the Company adopted a key person death benefits plan, an unfunded
plan under which certain payments would have been made to the estates of key
employees upon their deaths. In February 1997, the Company's Board of
Directors approved the termination of the key person death benefits plan. Upon
termination, the Company recorded a benefit of $5,000,000, which constitutes
reversal of the amount previously accrued for plan benefits. The Company had
no outstanding obligations nor any future obligations under the key person
death benefits plan at termination date.
NOTE 11: SHAREHOLDERS' EQUITY
REORGANIZATION AND INITIAL PUBLIC OFFERING: In June 1998, the Company
effected a reorganization (the Reorganization), under which holders of common
stock of RMI exchanged their shares for shares of RMGI, RMI became a wholly
owned subsidiary of RMGI, and the initial public offering (IPO) of common
stock of RMGI was completed. Upon the successful completion of the IPO, the
Company's variable-award, book-value-based stock option plans, which were
assumed by RMGI in the Reorganization, were converted to fixed-award, fair-
value-based stock option plans. These plans are to be operated and accounted
for as fixed-award plans under the provisions of Accounting Principles Board
Opinion (APB) No. 25. This conversion resulted in a new measurement date for
all then outstanding options and in a compensation charge based upon the
difference between the initial public offering price of the Company's common
stock and the book value established at the most recent period immediately
preceding the IPO. Accordingly, the Company recorded compensation expense of
$1,782,000 based on the difference between the book value of the Company's
common stock immediately preceding the IPO and the fair market value of the
stock (based on the initial public offering price of $14.00 per
53
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
share) for all variable-award, book-value-based stock options outstanding on
the date of consummation of the IPO. As a result of the conversion of the
Company's stock option plans, changes in the market value of the Company's
common stock will not result in future compensation expense for these options.
Additionally, the Company recorded compensation expense of $1,698,000 (based
on the initial public offering price of $14.00 per share), which reflects the
increase in the value of certain stock appreciation rights outstanding under
the Share Repurchase Plan, as discussed below. The expenses recorded as a
result of the new measurement date for the outstanding options and increase in
the value of the stock appreciation rights (Repurchase SARs) outstanding on
the date of the IPO are classified as compensation charges related to IPO in
the accompanying consolidated statements of income.
TREASURY STOCK: In August 1998, the Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock over the
following 12 months. Purchases of the common stock may be made from time to
time at prevailing prices in the open market, by block purchases, or in
privately negotiated transactions. The repurchased shares are to be held as
treasury stock and used for the Company's employee stock option and other
benefit plans. During fiscal 1998, the Company repurchased 50,600 shares at a
total cost of $511,000.
STOCK OPTIONS: In June 1998, the Company adopted the 1998 Stock Incentive
Compensation Plan (the 1998 Plan) pursuant to which an aggregate of 2,000,000
shares of common stock are authorized for issuance to employees, officers,
directors, and independent contractors of the Company. The 1998 Plan includes
stock option (incentive and nonqualified), stock appreciation right, stock
award (including restricted stock), performance award and other stock-based
award features. No instruments other than stock options have been granted.
Options to purchase shares of common stock granted to nondirectors are
generally nonqualified options that vest over a three-year term and expire
three and one-half years from the date of grant. Initial options granted to
nonemployee directors are nonqualified options that vest after one year and
expire ten years from the date of grant. Subsequent annual options granted to
nonemployee directors are immediately exercisable on the date of grant and
expire ten years after grant date. Options are generally granted at 100% of
the fair market value of the share at the date of grant but are not required
to be.
The 1998 Plan became effective immediately prior to the effective date of
the Reorganization, at which time all preexisting plans of RMI were suspended.
No additional options will be granted under the suspended plans.
54
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 25, 1998, there were 2,645,700 shares of unissued common stock
reserved for issuance under the 1998 Plan and the suspended plans, of which
options for the purchase of 1,865,000 shares were available for future grants.
The price ranges of options exercised were $2.98 to $7.05 in 1998, $2.45 to
$6.00 in 1997, and $1.14 to $3.75 in 1996. A summary of stock option activity
under the stock option plans follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding, September 29, 1995...................... 2,185,225 $2.92
Granted............................................ 854,980 3.61
Exercised.......................................... (970,550) 2.59
Expired and canceled............................... (155,925) 3.36
----------
Outstanding, September 27, 1996...................... 1,913,730 3.36
Granted............................................ 436,490 5.68
Exercised.......................................... (670,425) 2.71
Expired and canceled............................... (86,975) 3.74
----------
Outstanding, September 26, 1997...................... 1,592,820 4.18
Granted............................................ 698,528 8.22
Exercised.......................................... (1,871,563) 4.62
Expired and canceled............................... (39,820) 5.37
----------
Outstanding, September 25, 1998...................... 379,965 9.32
==========
</TABLE>
Additional information regarding options outstanding as of September 25,
1998, is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$5.72-$6.74 158,266 1.27 $6.57 158,266 $6.57
7.05 86,699 1.78 7.05 71,649 7.05
14.00-14.13 135,000 8.08 14.03
------- -------
5.72-14.13 379,965 3.81 9.32 229,915 6.72
======= =======
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the variable plan accounting prescribed in SFAS No. 123,
the Company's net income for each of the fiscal years would have been
increased to the pro forma amounts indicated below (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Net income:
As reported......................................... $11,874 $15,389 10,501
Pro forma........................................... 13,836 17,418 13,365
</TABLE>
55
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share:
As reported.................... $1.05 $1.01 $1.54 $1.44 $1.10 $1.04
Pro forma...................... 1.22 1.18 1.74 1.63 1.40 1.32
</TABLE>
In the table above, pro forma compensation expense associated with option
grants is recognized over the vesting period. The impact of applying SFAS No.
123 on pro forma disclosure is not representative of the potential impact on
pro forma net earnings for future years, which will include the cumulative
effect of expense related to vesting of 1996 and subsequent grants.
Additionally, these pro forma amounts are not expected to be representative of
future disclosures due to the conversion of the Company's variable-award,
book-value-based stock option plans to fixed-award, fair-value-based stock
option plans that occurred in conjunction with the Company's IPO. As a result
of the conversion, changes in the market value of the Company's common stock
will not result in future compensation expense.
The per share weighted average fair value of stock options granted during
the years ended September 25, 1998, September 26, 1997, and September 27,
1996, was $2.34, $0.51, and $0.31, respectively, on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for stock option grants in 1998, 1997, and 1996, respectively:
expected dividend yield of -0-% for all three years; risk-free interest rates
of 5.5%, 5.9% and 5.8%; expected volatility of 37% in 1998; and expected lives
of 2.4, 1.8 and 1.8 years. Under the provisions of SFAS No. 123 for nonpublic
entities, no assumptions have been made for expected volatility in the
calculations related to fiscal years 1997 and 1996.
PERFORMANCE-BASED ARRANGEMENTS: Prior to consummation of the Reorganization
and IPO, RMI entered into arrangements with certain employees, entitling the
employees to receive fully vested options subject to attainment of specific
performance goals, generally related to commission volume. Performance-based
arrangements outstanding at the time of the Reorganization were assumed by
RMGI. Under the performance-based arrangements, 400,735 and 579,325 options to
receive shares or rights to receive options to purchase shares of common stock
have been committed to employees at September 25, 1998, and September 26,
1997, respectively. Rights to receive options will convert into outstanding
stock options at such time as performance measures are met. Performance-based
arrangements typically terminate two to five years from the date of grant if
performance has not been achieved. Such arrangements may require the Company
to make a cash payment to the option award recipient to the extent that the
maximum option price in the contractual arrangement is below the fair market
value of the common stock at the date the performance measures are met. Per
share exercise amounts related to the 400,735 outstanding commitments at
September 25, 1998, range from $1.36 to $9.50. Compensation expense for fiscal
1998, 1997, and 1996 included $349,000, $250,000, and $171,000, respectively,
under such arrangements.
Generally unvested options under the Company's stock option plans, and
deferred compensation under the Deferred Compensation Plan, as well as unmet
performance-based arrangements, become exercisable in full immediately prior
to the occurrence of a "Corporate Transaction" or "Change in Control" as
defined in the plan documents. Management does not believe these definitions
include an initial public offering transaction.
DEFERRED COMPENSATION PLAN: In June 1998, the Company adopted a nonqualified
and unfunded deferred compensation plan (the Deferred Compensation Plan) for
the executive officers and other highly compensated employees, as defined in
the plan. Eligible employees may elect to defer a portion of their
compensation during two six-month deferral periods that begin each January 1
and July 1 based upon the level of their prior calendar-year compensation.
Eligible participants elect to have their deferred balances measured as if
they were invested in short-term U.S. Treasury securities or common stock of
the Company. Investment elections are measured and credited to each
participant account at the end of each deferral period at a price ranging from
75% to 85% of the
56
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
average fair market value during the last five trading days of the deferral
period based upon the level of the participant's prior calendar-year
compensation. Participants vest in the deferred compensation accounts two
years after the end of the corresponding deferral period, and generally
forfeit their unvested account balance if they terminate their employment
during the vesting period. Deferred compensation amounts allocated as if they
were invested in common stock of the Company will be settled in shares
authorized under the Company's 1998 Plan while all other deferred amounts will
be settled in cash. Compensation cost is based on the difference between the
amounts deferred and the fair market value of the investment instrument
selected at the end of the deferral period. The total amount of discount
determined at the end of the deferral period is amortized over the two-year
vesting period. In addition, for investment elections that require cash
settlement, changes in value of the underlying security will also be recorded
currently as a component of compensation expense until such time that the
obligation is settled. The initial deferral period of the plan began July 15,
1998. At September 25, 1998, participant amounts deferred under this plan
amounted to $412,000, which is included in accrued compensation and related
benefits in the accompanying consolidated statements of financial condition.
EMPLOYEE STOCK PURCHASE PLAN: In June 1998 the Company adopted an employee
stock purchase plan (the ESPP) which allows eligible employees of the Company
to acquire shares of the Company's common stock through payroll deductions of
up to 15% of their compensation at a price equal to 85% of the fair market
value as defined in the plan. Purchases are effected at the completion of six-
month offering periods that begin each January 1 and July 1 and are limited
for each participant to an aggregate market value of $15,000 in any calendar
year. Employees who are eligible to participate in the Company's Deferred
Compensation Plan are not eligible to participate in the ESPP. The initial
offering period of the plan began July 1, 1998. An aggregate of 200,000 shares
of common stock are authorized for issuance under the ESPP. As of September
25, 1998, no shares have been issued under the ESPP. The plan is intended to
operate in accordance with Section 423 of the IRC and, accordingly, is
considered to be noncompensatory under APB No. 25 and related interpretations.
SHARE REPURCHASE PLAN: In February 1997, the Company's Board of Directors
approved the adoption of the 1997 Share Repurchase Plan (the Share Repurchase
Plan). Under terms of the Share Repurchase Plan, an eligible shareholder was
entitled to elect to receive a Repurchase SAR upon the redemption of the
shareholder's stock in the Company. Upon satisfactory election, and subject to
certain limitations regarding maximum number of Repurchase SAR shares to be
issued to an individual within any 12-month period, a Repurchase SAR was
granted as of the date of share redemption for each share redeemed by the
Company. The amount to be paid to the Repurchase SAR holder was generally
determined as the appreciation, if any, in the Company's book value from the
grant date through the close of the eighth fiscal quarter thereafter times the
number of Repurchase SAR shares. Under the Share Repurchase Plan, the Company
granted 160,159 and 124,500 Repurchase SARs during fiscal year 1998 and 1997,
respectively, and accrued compensation expense of $1,833,000 and $66,000,
respectively, during these periods for the outstanding rights. The 1998
expense includes $1,698,000 which reflects the increase in the value of the
Repurchase SARs outstanding on the date of the IPO as discussed above.
The Company's Board of Directors suspended the Share Repurchase Plan in
February 1998 in connection with the planned Reorganization and terminated the
Share Repurchase Plan concurrent with the successful completion of the IPO.
NOTE 12: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company's customer and correspondent
clearance activities obligate the Company to settle transactions with brokers
and other financial institutions even if its customers fail to meet their
obligations to the Company. Customers are required to complete their
transactions on settlement date, generally three business days after trade
date. If customers do not fulfill their contractual obligations, the
57
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company may incur losses. The Company has established procedures to reduce
this risk by requiring deposits from customers for certain types of trades.
The Company also buys and sells collateralized mortgage obligations. The
settlement dates for these transactions may be longer than other transactions,
occasionally up to 30 days. Due to this longer settlement period, the risk
that the Company may incur losses if customers do not fulfill their
contractual obligations is greater. The Company has established procedures to
reduce this risk and believes it is unlikely there will be a material impact
on the financial statements.
As customers write option contracts or sell securities short, the Company
may incur losses in the event customers do not fulfill their obligations and
the collateral in the customer's account is not sufficient to fully cover
losses which customers may incur from these strategies. To control this risk,
the Company monitors required margin levels daily, and customers are required
to deposit additional collateral, or reduce positions, when necessary.
From time to time, the Company also enters into financial futures contracts
for the purpose of hedging certain dealing activities. As such, any futures
contract commitments are considered held for trading purposes and are carried
at market value. Financial futures contracts are transactions in which one
party agrees to deliver a financial instrument to a counterparty at a
specified price on a specified date. Risk arises from the possibility of
unfavorable changes in the market price of the underlying financial
instrument.
At September 25, 1998, and September 26, 1997, the contract value of the
Company's financial futures commitments was $100,000 and $6,600,000,
respectively. The contract amounts of these instruments reflect the Company's
extent of involvement in the particular class of financial instrument. They do
not include positions which may substantially reduce any potential market risk
and do not represent the Company's risk of loss due to counterparty
nonperformance.
The fair value of the financial futures contracts, based upon the net
unrealized gain or loss in the market value of the contracts at September 25,
1998, and September 26, 1997, was not material. The average fair value of such
financial instruments for the years ended September 25, 1998, and September
26, 1997, and the total net gain or loss arising from such trading activities
during these periods, was not material.
58
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13: EARNINGS PER COMMON SHARE
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS
are required to be computed using the methods specified in SFAS No. 128,
Earnings per Share. Basic EPS is calculated using the weighted average number
of common shares outstanding for the period and diluted EPS is computed using
the weighted average number of shares and dilutive common equivalent shares
outstanding. For the purpose of calculating the dilutive effect of stock
options in diluted EPS for periods prior to the completion of the Company's
IPO, the Company utilizes the per-share book value at the end of each
corresponding period as the Company's Share Repurchase Plan permitted selling
shareholders to offer their shares to the Company for redemption at book value
as calculated in accordance with the terms of the Share Repurchase Plan. The
following table sets forth the computations for historical basic and diluted
earnings per common share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NUMERATOR:
Net income.................. $11,874 $11,874 $15,389 $15,389 $10,501 $10,501
DENOMINATOR:
Weighted average shares out-
standing................... 11,346 11,346 10,014 10,014 9,546 9,546
Dilutive effect of stock op-
tions...................... 407 657 570
------- ------- ------- ------- ------- -------
Adjusted weighted average
shares outstanding........... 11,346 11,753 10,014 10,671 9,546 10,116
------- ------- ------- ------- ------- -------
Earning per common share...... $ 1.05 $ 1.01 $ 1.54 $ 1.44 $ 1.10 $ 1.04
------- ------- ------- ------- ------- -------
</TABLE>
Options to purchase 135,000 shares for 1998 were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares for the
period.
59
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following information represents the Company's unaudited quarterly
results of operations for fiscal years 1998 and 1997. These quarterly results
reflect all normal recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1998
-------------------------------
FISCAL QUARTER
-------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total operating revenues.................... $18,516 $15,251 $14,844 $14,324
Interest income............................. 9,412 8,953 8,863 9,206
------- ------- ------- -------
Total revenues.............................. 27,928 24,204 23,707 23,530
Interest expense............................ 6,244 5,910 5,645 5,535
------- ------- ------- -------
Net revenues................................ 21,684 18,294 18,062 17,995
Total noninterest expenses(A)............... 15,321 12,884 16,196 11,936
------- ------- ------- -------
Income before taxes on income............... 6,363 5,410 1,866 6,059
Taxes on income............................. 2,463 2,055 1,266 2,040
------- ------- ------- -------
Net income.................................. $ 3,900 $ 3,355 $ 600 $ 4,019
------- ------- ------- -------
Earnings per common share(C):
Basic..................................... $ 0.38 $ 0.32 $ 0.05 $ 0.30
Diluted................................... 0.36 0.31 0.05 0.30
<CAPTION>
1997
-------------------------------
FISCAL QUARTER
-------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total operating revenues.................... $14,279 $13,768 $13,894 $16,461
Interest income............................. 6,608 7,324 7,414 8,833
------- ------- ------- -------
Total revenues.............................. 20,887 21,092 21,308 25,294
Interest expense............................ 4,441 4,697 4,810 5,746
------- ------- ------- -------
Net revenues................................ 16,446 16,395 16,498 19,548
Total noninterest expenses(B)............... 11,829 6,672 11,952 13,585
------- ------- ------- -------
Income before taxes on income............... 4,617 9,723 4,546 5,963
Taxes on income............................. 1,738 3,610 1,745 2,367
------- ------- ------- -------
Net income.................................. $ 2,879 $ 6,113 $ 2,801 $ 3,596
======= ======= ======= =======
Earnings per common share(C):
Basic..................................... $ 0.29 $ 0.61 $ 0.28 $ 0.35
Diluted................................... 0.28 0.58 0.26 0.34
</TABLE>
- --------
(A) Third quarter noninterest expense includes compensation charges related to
the Company's IPO of $3,480,000 for the conversion of the Company's
variable-award, book-value-based stock option plans to fixed-award, fair-
value-based stock options plans and compensation expense related to then
outstanding Repurchase SARs (Note 11).
(B) Second quarter noninterest expense includes a benefit of $5,000,000 that
the Company realized in conjunction with the reversal of the amount
previously accrued for plan benefits under the key person death benefits
plan (Note 10).
(C) Summation of quarters' earnings per common share may not equal the annual
amounts due to the averaging effect of the number of shares and share
equivalents throughout the year.
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Ragen MacKenzie Group Incorporated and Subsidiary
Seattle, Washington
We have audited the consolidated financial statements of Ragen MacKenzie
Group Incorporated and subsidiary (the Company) as of September 25, 1998, and
September 26, 1997, and for each of the three years in the period ended
September 25, 1998, and have issued our report thereon dated November 20,
1998; such consolidated financial statements and report appear on pages 43
through 60 of this Annual Report on Form 10-K. Our audits also included the
financial statement schedule of the Company listed in the index on page 42 and
appearing on pages 62 through 64. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
Seattle, Washington
November 20, 1998
61
<PAGE>
SCHEDULE 1--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
RAGEN MACKENZIE GROUP INCORPORATED (PARENT ONLY)
CONDENSED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 25, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CASH................................................................. $ 1
INVESTMENT IN SUBSIDIARY, AT EQUITY(a)............................... 111,101
--------
TOTAL............................................................ $111,102
========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
LIABILITIES:
Payable to subsidiary(a)........................................... $ 2,163
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value--Authorized 10,000,000 shares; no
shares issued and outstanding.....................................
Common stock, $.01 par value--Authorized 50,000,000 shares; issued
and outstanding, 13,457,390 shares................................ 135
Additional paid-in capital......................................... 47,872
Treasury stock--50,600 shares, at cost............................. (511)
Retained earnings.................................................. 61,443
--------
Total shareholders' equity....................................... 108,939
--------
TOTAL............................................................ $111,102
========
</TABLE>
- --------
(a) Eliminated in consolidation.
This condensed financial information should be read in connection with the
Notes to Consolidated Financial Statements contained in the 1998 Annual Report
on Form 10-K and incorporated herein by reference.
62
<PAGE>
SCHEDULE 1--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)
RAGEN MACKENZIE GROUP INCORPORATED (PARENT ONLY)
CONDENSED STATEMENT OF INCOME AND SHAREHOLDERS' EQUITY
PERIOD FROM APRIL 16, 1998 (INCEPTION) TO SEPTEMBER 25, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
INCOME:
Equity in undistributed net income from subsidiary(a)(b)........... $ 4,019
--------
Net income....................................................... 4,019
SHAREHOLDERS' EQUITY:
Initial capitalization............................................. 1
Effect of reorganization in June 1998.............................. 84,968
Issuance of common stock in conjunction with initial public stock
offering.......................................................... 18,634
Stock options exercised............................................ 46
Noncash compensation--Stock options................................ 1,782
Purchase of treasury stock......................................... (511)
--------
End of year........................................................ $108,939
========
</TABLE>
- --------
(a) Eliminated in consolidation.
(b) Represents equity in undistributed net income from Ragen MacKenzie
Incorporated after the merger between Ragen MacKenzie Group Incorporated
and Ragen MacKenzie Incorporated effective June 22, 1998.
This condensed financial information should be read in connection with the
Notes to Consolidated Financial Statements contained in the 1998 Annual Report
on Form 10-K and incorporated herein by reference.
63
<PAGE>
SCHEDULE 1--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (CONTINUED)
RAGEN MACKENZIE GROUP INCORPORATED (PARENT ONLY)
CONDENSED STATEMENT OF CASH FLOWS
PERIOD FROM APRIL 16, 1998 (INCEPTION) TO SEPTEMBER 25, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income.......................................................... $ 4,019
Adjustments to reconcile net income to net cash provided by operat-
ing activities:
Undistributed equity in earnings of subsidiary.................... (4,019)
Stock appreciation rights expense funded by Parent................ (1,698)
--------
Net cash used by operating activities............................... (1,698)
INVESTING ACTIVITIES:
Contributions to subsidiary......................................... (18,634)
FINANCING ACTIVITIES:
Initial capitalization.............................................. 1
Proceeds from initial public offering, net of issuance costs........ 18,634
Advances from subsidiary, net....................................... 2,163
Proceeds from exercise of stock options............................. 46
Purchase of treasury stock.......................................... (511)
--------
Net cash provided by financing activities........................... 20,333
--------
NET INCREASE IN CASH.................................................. 1
CASH:
Beginning of period
--------
End of period....................................................... $ 1
========
</TABLE>
This condensed financial information should be read in connection with the
Notes to Consolidated Financial Statements contained in the 1998 Annual Report
on Form 10-K and incorporated herein by reference.
64
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
3.1+ Amended and Restated Articles of Incorporation of Ragen MacKenzie
Group Incorporated.
3.2+ Bylaws of Ragen MacKenzie Group Incorporated.
10.1+ Master Note of RMI in favor of Bank America National Trust and Savings
Association, dated July 9, 1997.
10.2+ Security Agreement between RMI and Bank America National Trust and
Savings Association, dated October 14, 1995.
10.3+ Lease Agreement between Wright-Carlyle Seattle and RMI, dated November
8, 1983, as amended December 19, 1988, August 24, 1992, June 1, 1993,
July 20, 1995, April 30, 1997 and June 6, 1997.
10.4+ Form of Noncompetition and Nonsolicitation Agreement executed as of
April 14, 1998, by RMGI and each of Lesa A. Sroufe, Robert J.
Mortell, Jr., Mark A. McClure, V. Lawrence Bensussen and John L.
MacKenzie.
10.5+ Severance and Correspondent Clearing Agreement between RMI and Brooks
G. Ragen, executed April 17, 1998.
10.6+ Agreement and Release between RMI and Scott McAdams, dated March 22,
1998.
10.7+ RMI 1989 Stock Option Plan.
10.8+ RMI 1993 Stock Option Plan.
10.9+ RMI 1996 Stock Incentive Compensation Plan.
10.10+ RMI 1997 Share Repurchase Plan.
10.11+ RMGI 1998 Stock Incentive Compensation Plan.
10.12+ ABC Brokerage Accounting System Agreement between Pershing Division of
Donaldson, Lufkin & Jenrette Securities Corporation and RMI, dated
April 1, 1997.
10.13+ Agreement and Plan of Merger dated as of May 29, 1998, as amended June
8, 1998.
10.14+ Employment Agreement between RMI and Mark A. McClure, dated June 16,
1994, as amended by an addendum dated June 3, 1997.
10.15+ RMGI Employee Stock Purchase Plan.
10.16+ RMI Agreement to Grant Stock Option to Mark A. McClure dated June 16, 1994.
10.17+ RMI Agreement to Grant Stock Option to Mark A. McClure dated February
25, 1997.
10.18+ RMI Agreement to Grant Stock Option to Stan Freimuth dated April 29, 1996.
10.19+ RMI Agreement to Grant Stock Option to Stan Freimuth dated June 11, 1996.
10.20+ Executive Performance Bonus Plan.
10.21* RMGI Deferred Compensation Plan.
10.22* First Amendment to Severance and Correspondent Clearing Agreement,
dated June 19, 1998, between RMI and Brooks G. Ragen.
10.23* Second Amendment to Severance and Correspondent Clearing Agreement,
between RMI and Brooks G. Ragen, dated September 21, 1998.
10.24* Amendments to Lease Agreement between EOP Northwest Properties, L.L.C
(as successor in interest to Wright-Carlyle Seattle) and RMI, dated
September 26, 1997, September 21, 1998 and November 6, 1998.
21.1+ Subsidiaries of the Registrant
23.1* Consent of Deloitte & Touche LLP
27.1* Financial Data Schedule. (This Financial Data Schedule is only required
to be submitted with the Registrant's Annual Report on 10-K as filed
electronically to the SEC's EDGAR database.)
</TABLE>
- --------
* Filed herewith.
+ Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-50735).
65
<PAGE>
EXHIBIT 10.21
RAGEN MACKENZIE GROUP INCORPORATED
DEFERRED COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I PURPOSE 1
ARTICLE II DEFINITIONS 1
2.1 Account Earnings 1
2.2 Beneficiary 1
2.3 Cause 1
2.4 Committee 1
2.5 Common Stock 1
2.6 Company 2
2.7 Compensation 2
2.8 Corporate Transaction 2
2.9 Deferral Commitment 2
2.10 Deferral Period 3
2.11 Determination Date 3
2.12 Disability 3
2.13 Earnings Index 3
2.14 Elective Deferral Account 3
2.15 Elective Deferred Compensation 4
2.16 Participant 4
2.17 Participation Agreement 4
2.18 Plan Benefit 4
ARTICLE III PARTICIPATION AND DEFERRAL COMMITMENTS 4
3.1 Eligibility and Participation 4
3.2 Form of Deferral 5
3.3 Limitations on Deferral Commitments 5
3.4 Modification of Deferral Commitment 5
ARTICLE IV DEFERRED COMPENSATION ACCOUNTS 5
4.1 Accounts 5
4.2 Elective Deferred Compensation 6
4.3 Allocation of Elective Deferred Compensation 6
4.4 Crediting of Earnings 7
4.5 Determination of Accounts 7
4.6 Vesting of Accounts 7
4.7 Statement of Accounts 8
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE V PLAN BENEFITS 8
5.1 Distributions Prior to Termination of Employment 8
5.2 Distributions Following Termination of Employment 8
5.3 Form of Benefit Payment 8
5.4 Method of Benefit Payment 8
5.5 Commencement of Deferral Payment 9
5.6 Changing Pay-out Election 9
5.7 Withholding for Taxes 9
5.8 Valuation and Settlement 9
5.9 Payment to Guardian 10
ARTICLE VI BENEFICIARY DESIGNATION 10
6.1 Beneficiary Designation 10
6.2 Changing Beneficiary 10
6.3 Community Property 10
6.4 No Beneficiary Designation 11
ARTICLE VII ADMINISTRATION 12
7.1 Committee; Duties 12
7.2 Agents 12
7.3 Binding Effect of Decisions 12
7.4 Indemnity of Committee 12
ARTICLE VIII CLAIMS PROCEDURE 12
8.1 Claim 12
8.2 Review of Claim 13
8.3 Notice of Denial of Claim 13
8.4 Reconsideration of Denied Claim 13
8.5 Company to Supply Information 14
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 14
9.1 Amendment 14
9.2 Company's Right to Terminate 14
ARTICLE X MISCELLANEOUS 15
10.1 Unfunded Plan 15
10.2 Unsecured General Creditor 15
10.3 Trust Fund 15
10.4 Nonassignability 16
10.5 Not a Contract of Employment 16
10.6 Protective Provisions 16
10.7 Governing Law 16
10.8 Validity 17
10.9 Notice 17
10.10 Successors 17
</TABLE>
iii
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED
DEFERRED COMPENSATION PLAN
ARTICLE I
PURPOSE
The purpose of this Deferred Compensation Plan (the "Plan") is to provide
current tax planning opportunities as well as supplemental funds for the
retirement of certain select key employees of Ragen MacKenzie Group Incorporated
(the "Company"). The Plan shall be in addition to existing deferred
compensation plans and arrangements maintained by the Company. It is intended
that the Plan will aid in retaining and attracting employees of exceptional
ability. This Plan shall be effective as of July 15, 1998.
ARTICLE II
DEFINITIONS
For purposes of this Plan, the following terms shall have the meanings
indicated, unless the context clearly indicates otherwise:
2.1 Account Earnings. "Account Earnings" means the amount to be credited
----------------
to the Participant's Elective Deferral Account pursuant to Section 4.4.
2.2 Beneficiary. "Beneficiary" means the person, persons or entity
-----------
entitled under Article VI to receive any Plan benefits payable after a
Participant's death.
2.3 Cause. "Cause" means a reportable matter under Section 13, 14, or 15
-----
of Form U-5 Uniform Termination Notice (or equivalent sections of its successor
notice) or other misconduct or disclosure of confidential information.
2.4 Committee. " Committee" means the Compensation Committee of the
---------
Company's Board of Directors (the Board). The Committee shall be responsible
for the administration of the Plan.
2.5 Common Stock. "Common Stock" means the Common Stock, par value $.01
------------
per share, of the Company.
Deferred Compensation Plan Page 1
<PAGE>
2.6 Company. "Company" means Ragen MacKenzie Group Incorporated or any
-------
successor to the business thereof, and any affiliated or subsidiary corporations
designated by the Committee.
2.7 Compensation. "Compensation" means regular cash compensation,
------------
including cash bonuses and commissions, but excluding severance pay, relocation
bonuses, payments in lieu of vacation, sick leave, or any other special
payments.
2.8 Corporate Transaction. "Corporate Transaction" means any of the
---------------------
following events:
(a) Consummation of any merger or consolidation of the Company in which
the Company is not the continuing or surviving corporation, or pursuant to which
shares of the Common Stock are converted into cash, securities or other
property, if following such merger or consolidation the holders of the Company's
outstanding voting securities immediately prior to such merger or consolidation
own less than 66-2/3% of the outstanding voting securities of the surviving
corporation;
(b) Consummation of any sale, lease, exchange or other transfer in one
transaction or a series of related transactions of all or substantially all of
the Company's assets other than a transfer of the Company's assets to a
majority-owned subsidiary corporation (as the term "subsidiary corporation" is
defined in Section 424(f) of the Internal Revenue Code of 1986, as amended) of
the Company;
(c) Approval by the holders of the Common Stock of any plan or proposal
for the liquidation or dissolution of the Company; or
(d) Acquisition by a person, within the meaning of Section 3(a)(9) or of
Section 13(d)(3) (as in effect on the date of adoption of the Plan) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), of a majority
or more of the Company's outstanding voting securities (whether directly or
indirectly, beneficially or of record). Ownership of voting securities shall
take into account and shall include ownership as determined by applying Rule
13d-3(d)(1)(i) (as in effect on the date of adoption of the Plan) under the
Exchange Act.
2.9 Deferral Commitment. "Deferral Commitment" means an election to defer
-------------------
Compensation made by a Participant pursuant to Article III and for which a
separate Participation Agreement has been submitted by the Participant to the
Committee.
Deferred Compensation Plan Page 2
<PAGE>
2.10 Deferral Period. "Deferral Period" means the period over which a
---------------
Participant has elected to defer a portion of his or her Compensation. The
periods from January 1 through June 30 and July 1 through December 31 of each
year shall be separate Deferral Periods; provided, however, that the Initial
Deferral Period shall begin on the later of the closing date of the Company's
initial public offering, or on an administratively feasible date to be
determined by the Company.
2.11 Determination Date. "Determination date" means the last business day
------------------
of each Deferral Period.
2.12 Disability. "Disability" means a mental or physical impairment of
----------
the Participant which is expected to result in death or which has lasted or is
expected to last for a continuous period of 12 months or more and which causes
the Participant to be unable, in the opinion of the Company and two independent
physicians, to perform his or her duties for the Company and to be engaged in
any substantial gainful activity. Disability shall be deemed to have occurred
on the first day after the Company and the two independent physicians have
furnished their opinion of Disability to the Committee.
2.13 Earnings Index. "Earnings Index" means the portfolio, fund, or
--------------
security selected by the Committee to be used as an index in calculating Account
Earnings. Each Earnings Index shall be a phantom investment fund which shall be
credited with earnings (whether gain or loss), dividends, and interest according
to the performance of the actual fund, portfolio, or security. The Committee
shall initially offer two Earnings Indices under the Plan: Ragen MacKenzie Group
Incorporated common stock (the "Company Stock Index") and short-term U.S.
Treasury securities (the "Treasury Index"). The Company Stock Indices shall be
denominated in units, each unit representing one share of Common Stock. The
Treasury Index shall be denominated in units, where each unit represents $1 par
value of short-term U.S. Treasury Notes.
2.14 Elective Deferral Account (or "Account"). "Elective Deferral
----------------------------------------
Account" (or "Account") means the Account maintained by the Company in
accordance with Article IV with respect to any elective deferral of Compensation
pursuant to Section 4.2 of the Plan. A
Deferred Compensation Plan Page 3
<PAGE>
Participant's Elective Deferral Account shall be utilized solely as a device for
the determination and measurement of the amounts to be paid to the Participant
pursuant to the Plan. A Participant's Elective Deferral Account shall not
constitute or be treated as a trust fund of any kind.
2.15 Elective Deferred Compensation. "Elective Deferred Compensation"
------------------------------
means the amount of Compensation that a Participant elects to defer pursuant to
a Deferral Commitment.
2.16 Participant. "Participant" means any individual who is participating
-----------
or has participated in this Plan as provided in Article III.
2.17 Participation Agreement. "Participation Agreement" means the
-----------------------
agreement submitted by a Participant to the Committee prior to the beginning of
the Deferral Period, with respect to a Deferral Commitment made for such
Deferral Period.
2.18 Plan Benefit. "Plan Benefit" means the benefit payable to a
------------
Participant as calculated in Article V.
ARTICLE III
PARTICIPATION AND DEFERRAL COMMITMENTS
3.1 Eligibility and Participation.
-----------------------------
(a) Eligibility. An employee of the Company shall be eligible to
-----------
participate in this Plan if the employee earned Compensation greater than
or equal to $100,000 in the immediately preceding calendar year.
Employee's who are employed for less than a full calendar year shall have
their Compensation annualized when determining their eligibility to
participate for the following year. New employees and other key employees
shall be eligible to participate at the discretion of the Committee.
(b) Participation. An eligible employee may elect to participate in
-------------
the Plan with respect to a Deferral Period by submitting a Participation
Agreement to the Committee by the June 15 and December 15 immediately
preceding the next Deferral Period; provided, however, that Participants,
may submit a Participation Agreement with respect to the Initial Deferral
Period by a date to be established by the Company.
Deferred Compensation Plan Page 4
<PAGE>
Failure to timely submit a separate Participation Agreement with respect to
a Deferral Period will preclude participation in the Plan for that Deferral
Period.
(c) Part-Year Participation. In the event that an employee first
-----------------------
becomes eligible to participate during a Deferral Period, the Participant
shall be allowed to enter the Plan at the beginning of the following
Deferral Period by submitting a Participation Agreement as required by
Section 3.1(b).
3.2 Form of Deferral. Deferral Commitments shall be stated in the
----------------
Participation Agreement as a percentage of Compensation to be paid to the
Participant during a Deferral Period.
3.3 Limitations on Deferral Commitments. The minimum Deferral Commitment
-----------------------------------
shall be two percent (2%). The maximum Deferral Commitment shall be determined
by reference to the following table:
<TABLE>
<CAPTION>
Prior Calendar Year Compensation Maximum Deferral Percentage
------------------------------------ ---------------------------
<S> <C>
greater than, or equal to, $500,000 25.0%
$400,000 - 499,999 22.5%
$300,000 - 399,999 20.0%
$200,000 - 299,999 17.5%
less than, or equal to, 199,999 15.0%
</TABLE>
The Committee may change the minimum or maximum deferral amounts from time to
time by giving written notice to all Participants. No such change may affect a
Deferral Commitment entered into prior to the Committee's action.
3.4 Modification of Deferral Commitment. A Deferral Commitment shall be
-----------------------------------
irrevocable for the Deferral Period to which it applies.
ARTICLE IV
DEFERRED COMPENSATION ACCOUNTS
4.1 Accounts. Separate Accounts shall be maintained for each Participant
--------
to reflect their Elective Deferral Account. Separate sub-accounts shall be
maintained to the
Deferred Compensation Plan Page 5
<PAGE>
extent necessary to properly reflect investment elections, total vested or
nonvested Account balances, or elections regarding time and form of payment.
4.2 Elective Deferred Compensation. A Participant's Elective Deferred
------------------------------
Compensation shall be credited to the Participant's Elective Deferral Account as
the corresponding nondeferred portion of the Participant's Compensation becomes
or would have become payable. Any withholding of taxes or other amounts with
respect to deferred Compensation which is required by state, federal or local
law shall be withheld from the Participant's nondeferred Compensation to the
maximum extent possible with any excess reducing the Elective Deferred
Compensation.
4.3 Allocation of Elective Deferred Compensation. A Participant shall
--------------------------------------------
allocate the Elective Deferred Compensation between the Earnings Indices
provided by the Committee. Allocation elections shall be made in the
Participation Agreement in whole percentage increments and shall be irrevocable
on December 15 and June 15 of the then applicable Deferral Period. The
Participant's Elective Deferred Compensation shall be accumulated without
interest and allocated each July 1 and January 1 to the Earnings Indices elected
by the Participant. Allocations to the Company Stock Index and Treasury Index
shall be credited with a number of units determined by dividing the Elective
Deferred Compensation corresponding to each Earnings Index by the average
closing price of the Common Stock and short-term U.S. Treasury securities during
the five (5) trading days preceding the allocation date less the applicable
discount. The discount shall be based upon the Participant's Compensation
during the prior calendar year and is determined according to the following
schedule:
<TABLE>
<CAPTION>
Prior Calendar Year Compensation Discount Percentage
------------------------------------ -------------------
<S> <C>
greater than, or equal to, $500,000 25.0%
$400,000 - 499,999 22.5%
$300,000 - 399,999 20.0%
$200,000 - 299,999 17.5%
less than, or equal to, 199,999 15.0%
</TABLE>
Deferred Compensation Plan Page 6
<PAGE>
The Committee may change the discount from time to time by giving written notice
to all Participants. No such change may affect a Deferral Commitment entered
into prior to the Committee's action.
The number of units in the portion of the Elective Deferral Account which
is allocated to the Company Stock Index shall be appropriately adjusted to
reflect stock splits, stock dividends, and other like adjustments in the Common
Stock.
4.4 Crediting of Earnings. The Account of each Participant shall be
----------------------
credited with earnings as if such account held actual assets and those assets
were allocated among such Earnings Indices as the Participant elected pursuant
to Section 4.3.
4.5 Determination of Accounts. Each Participant's Elective Deferral
-------------------------
Account as of each Determination Date shall consist of the balance of the
Account as of the immediately preceding Determination Date, plus (i) additional
Elective Deferred Compensation credited during the current Deferral Period, and
(ii) the applicable Account Earnings, minus the amount of any distributions made
since the immediately preceding Determination Date.
4.6 Vesting of Accounts. Each Participant shall be 100% vested in the
-------------------
amounts credited to such Participant's Account and earnings thereon two years
after the last day of the Deferral Period during which the Elective Deferred
Compensation was credited to the Participant's Account. In the event the
Participant (i) is involuntarily terminated during the two-year vesting period
for any reason other than Cause, or (ii) terminates employment during the two-
year vesting period due to retirement at or after age 65, Disability, or death,
then the unvested portion of the Participant's Account shall immediately become
100% vested. In the event the Participant is involuntarily terminated for Cause
or voluntarily terminates employment with the Company prior to the expiration of
the two-year vesting period, the unvested portion of the Participant's Account,
including any Account Earnings thereon, shall be forfeited and no benefit will
be payable to the Participant with respect thereto. Notwithstanding the
foregoing, in the event of any Corporate Transaction during the two-year vesting
period, each Participant's Account shall immediately become 100% vested.
Deferred Compensation Plan Page 7
<PAGE>
4.7 Statement of Accounts. The Committee shall submit to each
---------------------
Participant, within ninety (90) days after the close of each calendar year and
at such other time as determined by the Committee, a statement setting forth
the balance to the credit of the Elective Deferral Account maintained for a
Participant.
ARTICLE V
PLAN BENEFITS
5.1 Distributions Prior to Termination of Employment. A Participant may
------------------------------------------------
elect to receive payment prior to termination of employment of the portion of
the Participant's vested Account attributable to amounts deferred during a
Deferral Period. Such payment will take place at the time specified in the
Participation Agreement filed with respect to the corresponding Deferral Period.
Each Participation Agreement filed with the Company may provide a different date
for pre-termination payments. Any distribution pursuant to this section shall
be payable in a lump sum within thirty (30) days of the date specified in the
Participation Agreement.
5.2 Distributions Following Termination of Employment. Upon a
-------------------------------------------------
Participant's termination of employment with Company for any reason, including
death, Disability, or retirement at or after age 65, the Company shall pay the
Participant or, in the case of death, the Participant's Beneficiary, benefits
equal to the vested balance in the Participant's Elective Deferral Account.
5.3 Form of Benefit Payment. All benefits paid under this plan shall be
-----------------------
paid in the form of Company Stock or cash. That portion of the Elective
Deferral Account which is allocated to the Company Stock Index shall be paid in
Common Stock, which shall be issued under the Company's 1998 Stock Incentive
Compensation Plan. That portion of the Elective Deferral Account which is
allocated to the Treasury Index shall be paid in cash.
5.4 Method of Benefit Payment
--------------------------
(a) Termination. Subject to Section 5.4(b), benefits shall be paid
-----------
according to the method selected by the Participant at the time of the
Deferral
Deferred Compensation Plan Page 8
<PAGE>
Commitment. The method of payment elected in a Participation Agreement
shall control with regard to the portion of the Account attributable to the
corresponding Deferral Period for which the Participation Agreement was
filed. Payment options include:
(i) A lump sum payment, or
(ii) Substantially equal annual installments of the Elective
Deferral Account over a period of five (5), ten (10), or fifteen (15)
years. Account Earnings shall continue to accrue during the payment
period on the unpaid Account balance.
(b) Small Account(s). Notwithstanding Section 5.4(a), if a
----------------
terminated Participant's Elective Deferral Account is under five thousand
dollars ($5,000) on a Determination Date, the Elective Deferral Account
shall be paid in a lump sum.
(c) Termination Due to Death. Upon the death of a Participant, the
------------------------
Company shall pay to the Participant's Beneficiary an amount equal to the
remaining unpaid balance of the Participant's Elective Deferral Account in a
lump sum.
5.5 Commencement of Benefit Payment. Payment of benefits shall commence
-------------------------------
as soon as practical after termination of employment but in no case more than
ninety (90) days after termination.
5.6 Changing Pay-out Election. A Participant may change the method of
-------------------------
benefit payment or the timing of benefit commencement with the consent of the
Committee. In no case may a Participant change such elections in the 12 months
preceding termination of employment. Any change in election filed with the
Committee during the 12 month-period preceding termination shall be ineffective
and reference shall be made to the prior election form.
5.7 Withholding for Taxes. To the extent required by the law in effect at
---------------------
the time payments are made, the Company shall withhold from the benefit payments
made hereunder any taxes required to be withheld by the federal or any state or
local government.
5.8 Valuation and Settlement. The amount of a lump sum payment and the
------------------------
initial amount of installments shall be based on the value of the Participant's
Accounts on the last
Deferred Compensation Plan Page 9
<PAGE>
Determination Date coincident with or preceding the Participant's termination of
employment.
5.9 Payment to Guardian. The Committee may direct payment to the duly
-------------------
appointed guardian, conservator, or other similar legal representative of a
Participant or Beneficiary to whom payment is due. In the absence of such a
legal representative, the Committee may, in its sole and absolute discretion,
make payment to a person having the care and custody of a minor, incompetent or
person incapable of handling the disposition of property upon proof satisfactory
to the Committee of incompetency, minority, or incapacity. Such distribution
shall completely discharge the Committee from all liability with respect to
such benefit.
ARTICLE VI
BENEFICIARY DESIGNATION
6.1 Beneficiary Designation. Subject to Section 6.3, each Participant
-----------------------
shall have the right, at any time, to designate one (1) or more persons or an
entity as Beneficiary (both primary as well as secondary) to whom benefits under
this Plan shall be paid in the event of Participant's death prior to complete
distribution of the Participant's Accounts. Each Beneficiary designation shall
be in a written form prescribed by the Committee and shall be effective only
when filed with the Committee during the Participant's lifetime.
6.2 Changing Beneficiary. Subject to Section 6.3, any Beneficiary
--------------------
designation may be changed by a Participant without the consent of the
previously named Beneficiary by the filing of a new designation with the
Committee. The filing of a new designation shall cancel all designations
previously filed.
6.3 Community Property. If the Participant resides in a community
------------------
property state, the following rules shall apply:
(a) Designation by a married Participant of a Beneficiary other
than the Participant's spouse shall not be effective unless the spouse
executes a written consent that acknowledges the effect of the designation,
or it is established the consent cannot be obtained because the spouse
cannot be located.
Deferred Compensation Plan Page 10
<PAGE>
(b) A married Participant's Beneficiary designation may be
changed by a Participant with the consent of the Participant's spouse as
provided for in Section 6.3(a) by the filing of a new designation with the
Committee.
(c) If the Participant's marital status changes after the Participant
has designated a Beneficiary, the following shall apply:
(i) If the Participant is married at the time of death but was
unmarried when the designation was made, the designation shall be void
unless the spouse has consented to it in the manner prescribed in
Section 6.3(a).
(ii) If the Participant is unmarried at the time of death but
was married when the designation was made:
a) The designation shall be void if the spouse was named
as Beneficiary.
b) The designation shall remain valid if a nonspouse
Beneficiary was named.
(iii) If the Participant was married when the designation was
made and is married to a different spouse at death, the designation
shall be void unless the new spouse has consented to it in the manner
prescribed above.
6.4 No Beneficiary Designation. If any Participant fails to designate a
--------------------------
Beneficiary in the manner provided above, if the designation is void, or if the
Beneficiary designated by a deceased Participant dies before the Participant or
before complete distribution of the Participant's Accounts, the Participant's
Beneficiary shall be the person in the first of the following classes in which
there is a survivor:
(a) The Participant's spouse;
(b) The Participant's children in equal shares, except that if any of
the children predeceases the Participant but leaves issue surviving,
then such issue shall take by right of representation the share the
parent would have taken if living;
(c) The Participant's estate.
Deferred Compensation Plan Page 11
<PAGE>
ARTICLE VII
ADMINISTRATION
7.1 Committee; Duties. This Plan shall be administered by the
------------------
Committee. The Committee shall have the authority to amend or terminate the
Plan, interpret and enforce all appropriate rules and regulations for the
administration of the Plan and decide or resolve any and all questions,
including interpretations of the Plan, as may arise. A majority vote of the
Committee members shall control any decision.
7.2 Agents. The Committee may, from time to time, employ agents and
------
delegate to them such administrative duties as it sees fit, and may from time to
time consult with counsel who may be counsel to the Company.
7.3 Binding Effect of Decisions. The decision or action of the Committee
---------------------------
with respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the rules and
regulations promulgated hereunder shall be final, conclusive and binding upon
all persons having any interest in the Plan.
7.4 Indemnity of Committee. The Company shall indemnify and hold
-----------------------
harmless the members of the Committee against any and all claims, loss, damage,
expense or liability arising from any action or failure to act with respect to
this Plan on account of such person's service on the Committee, except in the
case of gross negligence or willful misconduct.
ARTICLE VIII
CLAIMS PROCEDURE
8.1 Claim. The Committee shall establish rules and procedures to be
-----
followed by Participants and Beneficiaries in (a) filing claims for benefits,
and (b) for furnishing and verifying proofs necessary to establish the right to
benefits in accordance with the Plan, consistent with the remainder of this
Article. Such rules and procedures shall require that claims and proofs be made
in writing and directed to the Committee.
Deferred Compensation Plan Page 12
<PAGE>
8.2 Review of Claim. The Committee shall review all claims for benefits.
---------------
Upon receipt by the Committee of such a claim, it shall determine all facts
which are necessary to establish the right of the claimant to benefits under the
provisions of the Plan and the amount thereof as herein provided within ninety
(90) days of receipt of such claim. If prior to the expiration of the initial
ninety (90) day period, the Committee determines additional time is needed to
come to a determination on the claim, the Committee shall provide written notice
to the Participant, Beneficiary or other claimant of the need for the extension,
not to exceed a total of one hundred eighty (180) days from the date the
application was received.
8.3 Notice of Denial of Claim. In the event that any Participant,
-------------------------
Beneficiary or other claimant claims to be entitled to a benefit under the Plan,
and the Committee determines that such claim should be denied in whole or in
part, the Committee shall, in writing, notify such claimant that the claim has
been denied, in whole or in part, setting forth the specific reasons for such
denial. Such notification shall be written in a manner reasonably expected to
be understood by such claimant and shall refer to the specific sections of the
Plan relied on, shall describe any additional material or information necessary
for the claimant to perfect the claim and an explanation of why such material or
information is necessary, and where appropriate, shall include an explanation of
how the claimant can obtain reconsideration of such denial.
8.4 Reconsideration of Denied Claim.
-------------------------------
(a) Within sixty (60) days after receipt of the notice of the denial
of a claim, such claimant or duly authorized representative may request, by
mailing or delivery of such written notice to the Committee, a
reconsideration by the Committee of the decision denying the claim. If the
claimant or duly authorized representative fails to request such a
reconsideration within such sixty (60) day period, it shall be conclusively
determined for all purposes of this Plan that the denial of such claim by
the Committee is correct. If such claimant or duly authorized
representative requests a reconsideration within such sixty (60) day
period, the claimant or duly authorized representative shall have thirty
(30) days after filing a
Deferred Compensation Plan Page 13
<PAGE>
request for reconsideration to submit additional written material in
support of the claim, review pertinent documents, and submit issues and
comments in writing.
(b) After such reconsideration request, the Committee shall determine
within sixty (60) days of receipt of the claimant's request for
reconsideration whether such denial of the claim was correct and shall
notify such claimant in writing of its determination. The written notice
of decision shall be in writing and shall include specific reasons for the
decision, written and calculated in a manner reasonably expected to be
understood by the claimant, as well as specific references to the pertinent
Plan provisions on which the decision is based. In the event of special
circumstances determined by the Committee, the time for the Committee to
make a decision may be extended by an additional sixty (60) days upon
written notice to the claimant prior to the commencement of the extension.
8.5 Company to Supply Information. To enable the Committee to perform
-----------------------------
its functions, the Company shall supply full and timely information to the
Committee of all matters relating to the retirement, death or other cause for
termination of employment of all Participants, and such other pertinent facts as
the Committee may require.
ARTICLE IX
AMENDMENT AND TERMINATION OF PLAN
9.1 Amendment. The Board or the Committee may at any time amend the Plan
---------
by written instrument, notice of which is given to all Participants and to any
Beneficiaries to whom a benefit is due. No amendment shall reduce the amount
accrued in any Account to the date such notice of the amendment is given.
9.2 Company's Right to Terminate. Notwithstanding any other provision of
----------------------------
this plan; the Board or the Committee may at any time partially or completely
terminate the Plan if, in its judgment, the tax, accounting or other effects of
the continuance of the Plan, or potential payments thereunder would not be in
the best interests of the Company.
Deferred Compensation Plan Page 14
<PAGE>
(a) Partial Termination. The Board or the Committee may partially
-------------------
terminate the Plan by not accepting any additional Deferral Commitments.
If such a partial termination occurs, the Plan shall continue to operate
and be effective with regard to Deferral Commitments entered into prior to
the effective date of such partial termination.
(b) Complete Termination. The Board or the Committee may completely
--------------------
terminate the Plan by not accepting any additional Deferral Commitments,
and by terminating all ongoing Deferral Commitments. If such a complete
termination occurs, the Plan shall cease to operate and the Company shall
pay out each Account. Payment shall be made in a lump sum within sixty
(60) days after the Board or the Committee terminates the Plan.
ARTICLE X
MISCELLANEOUS
10.1 Unfunded Plan. This plan is an unfunded plan maintained primarily to
-------------
provide deferred compensation for a select group of "management or highly-
compensated employees" within the meaning of Sections 201, 301 and 401 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
therefore is exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA.
10.2 Unsecured General Creditor. Participants and Beneficiaries shall be
--------------------------
unsecured general creditors, with no secured or preferential right to any assets
of Company or any other party for payment of benefits under this Plan. Any
property held by Company in connection with this Plan shall remain its general,
unpledged and unrestricted assets. Company's obligation under the Plan shall be
an unfunded and unsecured promise to pay money in the future.
10.3 Trust Fund.
----------
(a) At its discretion, the Company may establish one or more trusts,
with such trustees as the Committee may approve, for the purpose of
providing for the payment of benefits owed under the Plan. Such trusts
assets shall be held for payment of all the Company's general creditors in
the event of insolvency or
Deferred Compensation Plan Page 15
<PAGE>
bankruptcy. To the extent any benefits provided under the Plan are paid
from any such trust, the Company shall have no further obligation to pay
them. If not paid from the trust, such benefits shall remain the
obligation of Company.
(b) In the event of a Corporate Transaction, the Company shall
establish such trust, if it has not already done so. Immediately after the
Corporate Transaction the Company shall deposit an amount in the trust
which will cause the value of the trust's assets to be no less than the sum
of all Participant Accounts on the date of the Corporate Transaction.
Thereafter, the trust shall be valued no less often than annually and the
Company shall deposit any additional amounts necessary to cause the value
of the trust's assets to equal or exceed the sum of all Participant
Accounts on the date of the valuation.
10.4 Nonassignability. Neither a Participant nor any other person shall
----------------
have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, transfer, hypothecate or convey in advance of actual
receipt the amounts, if any, payable hereunder, or any part thereof, which are,
and all rights to which are, expressly declared to be unassignable and
nontransferable. No part of the amounts payable shall, prior to actual payment,
be subject to seizure or sequestration for the payment of any debts, judgments,
alimony or separate maintenance owed by a Participant or any other person, nor
be transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
10.5 Not a Contract of Employment. This Plan shall not constitute a
----------------------------
contract of employment between Company and the Participant. Nothing in this
Plan shall give a Participant the right to be retained in the service of Company
or to interfere with the right of Company to discipline or discharge a
Participant at any time.
10.6 Protective Provisions. A Participant will cooperate with Company by
---------------------
furnishing any and all information and taking other actions as requested by
Company in order to facilitate the administration of the Plan and the payment of
benefits hereunder.
Deferred Compensation Plan Page 16
<PAGE>
10.7 Governing Law. The provisions of this Plan shall be construed and
-------------
interpreted according to the laws of the state of Washington, except as
preempted by federal law.
10.8 Validity. In case any provision of this Plan shall be held illegal
--------
or invalid for any reason, said illegality or invalidity shall not affect the
remaining parts hereof, but this Plan shall be construed and enforced as if such
illegal and invalid provision had never been inserted herein.
10.9 Notice. Any notice required or permitted under the Plan shall be
------
sufficient if in writing and hand delivered or sent by registered or certified
mail. Such notice shall be deemed as given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the receipt
for registration or certification. Mailed notice to the Committee shall be
directed to the Company's address. Mailed notice to a Participant or Beneficiary
shall be directed to the individual's last known address in the Company's
records.
10.10 Successors. The provisions of this Plan shall bind and inure to the
----------
benefit of Company and its successors and assigns. The term successors as used
herein shall include any corporate or other business entity which shall, whether
by merger, consolidation, purchase or otherwise acquire all or substantially all
of the business and assets of Company, and successors of any such corporation or
other business entity.
Page 17
<PAGE>
EXHIBIT 10.22
FIRST AMENDMENT
TO
SEVERANCE AND CORRESPONDENT CLEARING AGREEMENT
This First Amendment to Severance and Correspondent Clearing Agreement (the
"Amendment") is made by and among Brooks G. Ragen ("Mr. Ragen"), Ragen MacKenzie
Incorporated (the "Company"), Ragen MacKenzie Group Incorporated ("Group") and
Brooks G. Ragen & Associates, Inc. ("NewCo") on and as of June 19, 1998.
RECITAL
The parties hereto are parties to a Severance and Correspondent Clearing
Agreement (the "Agreement") signed April 17, 1998, to which this is the First
Amendment. The execution of that Agreement, as revised herein, is done in
conjunction with the initial public offering of Group.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and mutual
covenants contained herein and in the Agreement, the parties agree that Section
2.4 to the Agreement shall read as follows:
2.4 EMPLOYMENT OF 24-MONTH SENIOR PRODUCERS
Certain senior employees of the Company have executed employment and
noncompetition agreements (the "Producer Agreements"). These individual
signators are set forth at Exhibit A to this Agreement. During the Term,
neither Mr. Ragen nor the Company may solicit, nor, before January 1, 2001,
accept as employees or consultants, any of the Producers as employees or
consultants without the prior written consent of the Company; provided,
however, that on or after January 1, 2001, Mr. Ragen and NewCo may accept
any of the Producers as employees.
<PAGE>
IN WITNESS WHEREOF, the parties have executed and entered into this
Agreement on the date set forth above, NewCo/Brooks G. Ragen & Associates, Inc.
shall be added as a subsequent signatory in accordance with the terms of this
Agreement.
RAGEN MACKENZIE INCORPORATED
By: /s/ V. Lawrence Bensussen
-----------------------------
Its: Chief Financial Officer
-----------------------
RAGEN MACKENZIE GROUP,
INCORPORATED
By: /s/ V. Lawrence Bensussen
-----------------------------
Its: Chief Financial Officer & Secretary
-----------------------------------
BROOKS G. RAGEN
By: /s/ Brooks G. Ragen
-----------------------------
BROOKS G. RAGEN & ASSOCIATES,
INC.
By:
-----------------------------
Its:
-------------------------
-2-
<PAGE>
EXHIBIT 10.23
SECOND AMENDMENT
SEVERANCE AND CORRESPONDENT CLEARING
AGREEMENT
This Second Amendment to Severance and Correspondent Clearing Agreement
("Second Amendment") is entered into by Brooks G. Ragen ("Mr. Ragen") and Ragen
MacKenzie Incorporated (the "Company").
WHEREAS, Mr. Ragen and the Company entered into that certain Severance and
Correspondent Clearing Agreement (the "Preexisting Agreement") on April 17, 1998
("Preexisting Agreement Date"; and
WHEREAS, the parties wish to clarify certain duties and obligations
thereunder in light of developments occurring subsequent to execution of the
Preexisting Agreement;
NOW THEREFORE, in consideration of the premises, the mutual promises,
covenants and conditions set forth below, and other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the
parties hereby agree as follows:
1. Definitions; References. (a) Unless otherwise specifically defined
-----------------------
herein, each term used herein which is defined in the Preexisting Agreement
shall have the meaning assigned to such term in the Preexisting Agreement.
(b) The Preexisting Agreement as amended by the First Amendment dated
June 19, 1998 and this Second Amendment (the "Amended Agreement") is in full
force and effect and is hereby ratified and confirmed. Reference in the
Preexisting Agreement to "this Agreement" and to words such as "herein",
"hereafter", "hereof", "hereunder" and any other words of similar import shall
refer to the Amended Agreement. References to the Preexisting Agreement
contained in any other document executed and delivered in connection with the
transactions contemplated by the Preexisting Agreement shall refer to the
Amended Agreement.
2. Team. The Preexisting Agreement is hereby amended by deleting
----
reference to Barbara Powell as a member of the "Team", as that term is defined
in Section 2.1.
3. Scott McAdams. Section 2.3 of the Preexisting Agreement and the
-------------
severance agreement with Mr. McAdams are amended to allow Mr. McAdams to act on
behalf of NewCo and or The Trust Company and their affiliates consistent with
the terms of the Amended Agreement: provided however, that if NewCo does not
begin operations or if such are discontinued or Mr. McAdams leaves the
employment of NewCo during the term of his severance agreement with the Company,
the provisions of such severance agreement shall then reapply.
4. Solicitation. The Preexisting Agreement is hereby amended by adding
------------
the following sentences immediately prior to the final sentence of Section 2.5:
The Company hereby acknowledges and agrees that the Team may communicate
directly to Team clients assigned to accounts 510 as they may choose subject
however, in any event to the nondisparagement and
<PAGE>
other provisions of the Amended Agreement. The Company will acquiesce to or
approve of written communications that otherwise conform with this Amended
Agreement. This acquiescence and approval in no way constitutes concurrence and
agreement by the Company with statements made in the communications. The Company
will send the Puget Sound Business Journal article regarding NewCo dated July
28, 1998 to clients assigned to account 510 and clients assigned to account 001
who have not executed a letter designating another account at the time of such
mailing as soon as practical upon execution of this Amendment. Neither the Team,
Mr. Ragen, Barbara Powell nor the Company shall send any written solicitation to
any clients assigned to account 001 (prior to the Preexisting Agreement Date)
who have not properly executed and returned a letter designating a
representative choice as of the date of this Agreement to transfer their account
to another for a period extending from the execution of this Second Amendment
through the earlier of three months or the date on which NewCo has registered
and qualified and begins operations as an independent broker-dealer and/or
investment advisor. Any communication between any of Mr. Ragen, the Team,
Barbara Powell or the Company and clients of the Company (prior to the
Preexisting Agreement Date) assigned to account 001 shall be subject to the
nondisparagement provisions of Section 2.6 of the Preexisting Agreement.
5. Transfer of Assets. The Preexisting Agreement is hereby amended by
------------------
restating Section 3.5 in its entirety as follows:
No transfer of Ragen Client Assets (as defined below) will be made out of
the Company or NewCo to money managers, investment advisers, etc. (other than
with the Knowlton Brothers, the fees for which are addressed in Section 3.2) for
which Mr. Ragen, his Team, or NewCo will be paid, unless compensation
arrangements satisfactory to the Company are established and implemented. By
example but without limitation, any transfer of Ragen Client Assets to The Trust
Company of Washington, Inc., or any or its affiliates other than NewCo (now or
hereafter existing) (together defined as the "Trust Company") shall be deemed to
be a transfer of Ragen Client Assets for which Mr. Ragen, his Team or NewCo are
paid within the meaning of this Section 3.5. NewCo shall compensate the Company
for any SEC-regulated business, performed with respect to such transferred Ragen
Client Assets (so long as they continue to be held by Trust Company) as if Mr.
Ragen, his Team or NewCo still held such assets. However, the Trust Company
alone shall be entitled to any fees as trustee (but not for portfolio
management) or custodian services consistent with the Trust Company practices.
"Ragen Client Assets" means assets of (a) clients in the Team account numbers at
the Company prior to the NewCo Employment Date except for (i) those assets (a)
that such clients have elected to have assigned to account 005, (ii) that such
clients have elected to have remain with the Company but be assigned to an
account other than accounts 005 or 510, (iii) that such clients have failed to
request by reassigned from account 001 prior to the NewCo Employment Date, and
(iv) that are moved to or held by a broker-dealer or investment adviser other
than the Company prior to the NewCo Employment Date, and (b) clients who became
clients of Mr. Ragen, his Team or NewCo between the NewCo Employment Date and
the end of the Term.
<PAGE>
6. Verification. The Preexisting Agreement is hereby amended by restating
------------
the introductory clause of Section 3 as follows: "The following fee and other
arrangements shall apply during the Term, except that where specifically
provided certain obligations shall survive the Term:" and by adding a new
Section 3.7 as follows:
3.7 VERIFICATION
(a) NewCo will cause The Trust Company to adopt policies that:
1. The Trust Company recognizes and confirms its intent to adhere to
and assist compliance with Sections 3.5, 3.7 and 3.8.
2. The Trust Company shall notify the Company in the event that it
agrees to pay or pays a referral fee or other compensation to Mr. Ragen or
the Team for Investment Services (as defined in Section 3.8) and set forth
the terms of such compensation.
3. The Trust Company will not accept during the Term a transfer of
Ragen Client Assets from the Company, NewCo, Mr. Ragen, the Team or any
affiliate of the foregoing (other than the Trust Company of Washington) now
or hereafter existing, unless prior to such transfer there is either (i) a
written agreement that NewCo will continue to manage such account, or (ii)
a written agreement between the Company and NewCo, Mr. Ragen the Team or
any affiliate as applicable concerning compensation arrangements pursuant
to Section 3.2.
(b) NewCo will prepare the following reports on a quarterly basis.
1. If and to the extent that assets are transferred from NewCo to the
Trust Company, all transfers will be reported, with identification of
assets.
2. The quarterly report will include a summary of compensation to be
paid to NewCo, Mr. Ragen or the Team by the Trust Company.
(c) NewCo will cause the Trust Company to prepare the following reports
on a quarterly basis.
1. The aggregate dollar value of assets in the Trust Company that had
been transferred by NewCo, Mr. Ragen, or the Team, together with an
aggregate summary of all fees paid. This report will include data
(including change in asset value as a result of increase or decrease of
funds, or increase or decrease in market value) to permit a reconciliation
of the aggregate amounts on a quarterly basis.
2. The aggregate dollar amount of any compensation paid directly or
indirectly to NewCo, Mr. Ragen or the Team (other than in their capacity as
a shareholder of the Holding Company) as referral fees for new accounts
with The Trust Company or for Investment Services to the Trust Company
accounts.
<PAGE>
3. The Trust Company's third party independent auditors will, on an
annual basis, confirm that the appropriate fees have been paid with respect
to all Trust Company assets as to which NewCo, Mr. Ragen or the Team are
obligated to make payments to the Company pursuant to the Amended Agreement
and that any compensation paid by the Trust Company to NewCo, Mr. Ragen or
the Team for referral fees or for Investment Services has been properly
reported.
(d) The Company will use the information provided pursuant to the
reports in this Section 3.7 ("Confidential Information") only for the
purpose of evaluating the compliance of Mr. Ragen, his Team and NewCo with
this Agreement. The Company may provide the Confidential Information
received to its own employees or professional advisors (including
independent auditors and counsel) only on a "need to know" basis and only
for the purpose of assisting the Company in analyzing such compliance, as
long as such persons agree to operate under the same nondisclosure and use
restrictions as are imposed on the Company. The Company will make only as
many copies of the Confidential Information as are necessary for its own
internal use and purposes, and as necessary to transfer the information to
a third party pursuant to this paragraph. The Company will segregate all
Confidential Information from the Company's confidential materials and the
confidential materials of others in order to prevent commingling. The
Company shall maintain an ethical barrier within the Company such that its
personnel (other than those with a "need to know" for the limited purpose
permitted hereunder) do not have access to the investing strategies and
strategic planning information contained therein. In addition, the Company
may disclose Confidential Information as required by law, rule, regulation
or judicial process, provided that it promptly notifies NewCo of the
pending disclosure so that NewCo may have a reasonable period of time
within which to seek a protective order. The Company agrees to reasonably
cooperate with NewCo to obtain any such protective order that NewCo, in its
sole discretion, may decide to seek.
(e) "Confidential Information" for purposes of this Section 3.7 does
not include information which (i) is or becomes generally available to the
public other than as a result of a disclosure not permitted by this
Agreement, (ii) was available to the Company on a non-confidential basis
prior to its disclosure to the Company or (iii) becomes available to the
Company on a non-confidential basis from a person other than Mr. Ragen, his
Team, McAdams, NewCo or The Trust Company of Washington, Inc., who, to the
knowledge of the Company, is not otherwise bound by a confidentiality
agreement with Mr. Ragen, his Team, McAdams, NewCo or The Trust Company of
Washington, Inc., or is not otherwise prohibited from transmitting the
relevant information to the Company, or (iv) becomes available to the
Company as a result of regular reports or information provided by NewCo as
a clearing client of the Company, which information shall be handled in
accordance with the parties' Clearing Agreement.
(f) Notwithstanding the prior provisions of this Section 3.7, in the
event NewCo or The Trust Company reasonably determines, in good faith, that
disclosure of some or all of the information required by this Section 3.7
to the Company would expose
<PAGE>
NewCo, The Trust Company, Mr. Ragen, the Team, any of their affiliates now
or hereafter existing and/or the Company to liability for such disclosure,
NewCo and/or The Trust Company may withhold such information. In such
event, NewCo and The Trust Company agree to cooperate and use commercially
reasonable efforts to provide for a reasonably acceptable verification
procedure, whether by third party accounting firm or otherwise, which would
not violate any law, rule or regulation.
(g) The provisions of the preceding paragraphs (d) and (e) shall
survive the Term indefinitely.
7. Service of Trust Company Assets. The Preexisting Agreement if hereby
-------------------------------
amended by adding a new Section 3.8 as follows:
3.8 MANAGEMENT BY NEWCO OF TRUST COMPANY ASSETS
Mr. Ragen, his Team or NewCo will not be compensated, directly or
indirectly, by the Trust Company for referring clients or providing asset
management, investor counseling or related advice ("Investment Services"),
before compensation arrangements satisfactory to the Company and NewCo are
established and implemented. "Investment Services" shall not include
administrative, general client development or board services. If the parties
are unable to agree, then the Company will be paid 23% of compensation paid to
Mr. Ragen, his Team or NewCo for Investment Services.
8. Conduct of Business. The Preexisting Agreement is hereby amended by
-------------------
adding a new Section 4.5 as follows:
4.5 CONDUCT OF BUSINESS
Until the NewCo Employment Date, the Company shall promptly provide Mr.
Ragen and his Team with all commercially reasonable administrative and
personnel support generally available to other brokers at the Company in a
substantially similar position or as might otherwise be reasonably
requested by Mr. Ragen and his Team. The Company agrees not to hinder
contact or communication of any kind or nature with Ragen Clients by Mr.
Ragen or his designees, except to the extent that the content or substance
of the contact or communication (a) violates any applicable law or
regulation governing the securities business, or (b) breaches the Amended
Agreement. Without limiting the foregoing, the Company agrees, upon
request by Mr. Ragen or his designees, to promptly approve for release to
Ragen Clients any correspondence, press releases or other items concerning
Mr. Ragen, his Team, NewCo, Scott McAdams and/or The Trust Company of
Washington, Inc., without any editorial intervention, except to the extent
required to prevent the content or substance of the contact or
communication from (x) violating any applicable law or regulation governing
the securities business, or (y) breaching or describing a proposed
structure or action which would breach the Amended Agreement. The Company
shall promptly set forth in writing a detailed explanation of any violation
or breach that the Company believes any such proposed contact or
communication would
<PAGE>
cause, accompanied by the revisions to the contact or communication that
would alleviate the violation or breach.
9. Counterparts. Mr. Ragen and the Company hereby acknowledge the
------------
applicability of Section 22 of the Preexisting Agreement to this Amendment No.
1.
IN WITNESS WHEREOF, Mr. Ragen and the Company have executed this Second
Amendment as of the dates written below.
RAGEN MACKENZIE INCORPORATED BROOKS G. RAGEN
/s/ Lesa A. Sroufe /s/ Brooks G. Ragen
- ------------------------------- -------------------------------
By Brooks G. Ragen
----------------------------
Its CEO
---------------------------
Date: September 18, 1998 Date: 9/21/98
------------------------- ------------------------
JOINDER
The undersigned has executed this Second Amendment to acknowledge her
agreement to the provisions of Section 4 as such relate to the undersigned.
BARBARA POWELL
/s/ Barbara Powell
- ------------------------------
Barbara Powell
- --------------
Date: 9/21/98
------------------------
<PAGE>
EXHIBIT 10.24
SEVENTH AMENDMENT TO LEASE AGREEMENT
BETWEEN
WRIGHT RUNSTAD PROPERTIES L.P. ("LANDLORD")
AND
RAGEN MACKENZIE INCORPORATED ("TENANT")
This Seventh Amendment is to that certain Lease Agreement dated November 8,
1983, as amended by First Amendment to Lease Agreement dated December 19, 1988,
by Second Amendment to Lease Agreement dated August 24, 1992, by Third Amendment
to Lease Agreement dated June 1, 1993, by Fourth Amendment to Lease Agreement
dated July 20, 1995, by Fifth Amendment to Lease Agreement dated April 30, 1997,
and by Sixth Amendment to Lease Agreement dated June 6, 1997, by and between
WRIGHT RUNSTAD PROPERTIES L.P., a Delaware limited partnership, as successor in
the Lease to Wright-Carlyle Seattle Limited Partnership, a Washington limited
partnership, as successor in the Lease to Wright-Carlyle Seattle, a Washington
general partnership, as Landlord, and RAGEN MACKENZIE INCORPORATED, a Washington
corporation, as successor in the Lease to Cable, Howse & Ragen, as Tenant (the
"Lease").
As parties hereto, Landlord and Tenant agree to further amend the Lease as
follows:
1. SECTION 1(c) AGREED AREAS, SHALL BE AMENDED TO READ:
Agreed Areas: As of the Effective Date of this Seventh Amendment, and
as used in this Lease, Landlord and Tenant agree to the following
areas and percentage: area of Building is deemed to be 915,883 net
rentable square feet; area of Tenant's Premises is deemed to be:
21,109 net rentable square feet on Floor 43 and 7,965 net rentable
square feet on Floor 37; Tenant's Percentage of the Building is deemed
to be: approximately 2.30% on Floor 43 and approximately 0.87% on
Floor 37. This reflects the addition of approximately 883 net rentable
square feet on Floor 37, identified as the "10/17/97 Expansion Space"
on the attached Exhibit A.
In the event a portion of the Building is damaged or condemned or any
other event occurs which alters the rentable area of the premises or
the rentable area of the Building, Landlord may adjust Tenant's
Percentage of the Building to properly reflect the proportion of the
rentable area of the Building (as altered by such event) which is
attributable to the rentable area of the Premises (as altered by such
event).
2. SECTION 1(g) RENT, SHALL BE AMENDED TO READ:
RENT. Rent shall be payable monthly on or before the first day of each
month. Rent for each month of the lease term as hereby extended shall
be one-twelfth (1/12) of the annual rent calculated by multiplying the
dollar amounts set forth below times the number of rentable square
feet then included within the Premises. Rent shall be adjusted from
time to time as provided in Section 7-8 of the Lease.
<TABLE>
<CAPTION>
Net Base $ Per Net Rentable
Time Period Floor Rentable Year Square Foot Per
Square Feet Year
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
04/01/97-07/23/97 43 21,109 1994 $24.00
37 (I) 2,130 1996 $18.75
37 (II) 1,372 1996 $24.16
- -----------------------------------------------------------------------------
07/24/97-10/16/97 43 21,109 1994 $24.00
37 (I) 2,130 1996 $18.75
37 (II) 1,372 1996 $24.16
37 (III) 3,580 1997 $25.00
- -----------------------------------------------------------------------------
</TABLE>
(continued)
<PAGE>
Seventh Amendment to Lease Agreement
Ragen MacKenzie Incorporated
Page 2
(continued from previous page)
<TABLE>
<CAPTION>
Net $ Per Net Rentable
Rentable Base Square Foot Per
Time Period Floor Square Feet Year Year
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/17/97-12/31/98 43 21,109 1994 $24.00
37 (I) 2,130 1996 $18.75
37 (II) 1,372 1996 $24.16
37 (III) 3,580 1997 $25.00
37 (IV) 883 1997 $27.50
- ------------------------------------------------------------------------------------------------------------
01/01/99-01/31/99 43 21,109 1994 -0-*
37 (I) 2,130 1996 $18.75
37 (II) 1,372 1996 $24.16
37 (III) 3,580 1997 $25.00
37 (IV) 883 1997 $27.50
- ------------------------------------------------------------------------------------------------------------
02/01/99-02/28/02 43 21,109 1997 $25.00
37 (I) 2,130 1997 $25.00
37 (II) 1,372 1997 $25.00
37 (III) 3,580 1997 $25.00
37 (IV) 883 1997 $27.50
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*Rent Abatement
--------------
(1) No Rent is due on the Floor 43 Premises for the following months
(the "Free Rent Months," collectively): February 1, 1994, through
February 28, 1995, and the month of January 1999.
(2) The entire Rent otherwise due and payable for the Free Rent
Months shall become immediately due and payable upon the occurrence of
an event of monetary or other material default by Tenant under this
Lease which is not cured within applicable notice and cure periods.
3. Section 1(k) Exhibits, shall be amended to read:
Exhibit A - Floor Plan of Premises, dated 10/17/97 (Seventh
Amendment)
Exhibit B - Tenant Improvements (original Lease)
Exhibit B.1 - Tenant Improvement Plans (original Lease)
Exhibit B.2 - Tenant Improvements Paid by Tenant (original Lease)
Exhibit B.3 - Tenant Improvements in Conjunction with Fifth
Amendment (Fifth Amendment)
Exhibit B.4 - Tenant Improvements in Conjunction with Sixth
Amendment (Sixth Amendment)
EXHIBIT B.5 - Tenant Improvements in Conjunction with Seventh
Amendment (Seventh Amendment)
Exhibit C - Addendum to Lease (revised by Seventh Amendment)
Exhibit D - Tenant Improvements to be Done in 1992 in Conjunction
with the Second Amendment (Second Amendment)
Exhibit E - Tenant Improvement Budget, dated 07/09/92 (Second
Amendment)
Exhibit F - Tenant Improvements to be Done in 1993 in Conjunction
with the Third Amendment (Third Amendment)
Exhibit G - Tenant Improvements in Conjunction with Fourth
Amendment (Fourth Amendment)
Exhibit H - 05/31/97 Expansion Space (Fifth Amendment; subsequent
to the Sixth Amendment this is referred to as the
07/24/97 Expansion Space)
Exhibit I - Subordination Agreement (Fifth Amendment)
<PAGE>
Seventh Amendment to Lease Agreement
Ragen MacKenzie Incorporated
Page 3
4. EXHIBIT C, ADDENDUM TO LEASE, IS AMENDED BY THE ADDITION OF ITEM 17, TO
READ:
17. Real Estate Commission in Conjunction with Seventh Amendment. [NEW]
------------------------------------------------------------
Landlord shall pay a brokerage fee of $3,090.50 (based on the
addition of 883 net rentable square feet by means of the Seventh
Amendment) upon Tenant's occupancy of the 10/17/97 Expansion Space,
payable 80% to Behar Company and 20% to Tenant.
5. EFFECTIVE DATE. This Seventh Amendment shall be effective October 17, 1997.
6. RATIFICATION. Except as herein specifically provided, the Lease, this
Seventh Amendment to the Lease Agreement, and all previous Amendments to
Lease Agreement, are hereby ratified and approved.
DATED AT SEATTLE, WASHINGTON THIS 26 DAY OF SEPTEMBER, 1997.
-- ---------
TENANT: RAGEN MACKENZIE INCORPORATED
By: /s/ Robert J. Mortell, Jr.
------------------------------------
Its President
--------------------------------
TENANT CORPORATE ACKNOWLEDGMENT
STATE OF WASHINGTON )
----------
) ss.
COUNTY OF KING )
----------
THIS IS TO CERTIFY that on this 26 day of September, 1997, before me, the
--- --------- --
undersigned, a notary public in and for the state of Washington, duly
----------
commissioned and sworn, personally appeared Robert Mortell, Jr. to me know to be
--------------------
the President of Ragen MacKenzie the corporation that executed the within and
--------- ---------------
foregoing instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that they were authorized to execute said
instrument, and that the seal affixed, if any, is the corporate seal of said
corporation.
WITNESS my hand and official seal the day and year in this certificate first
above written.
Signature /s/ NICOLE J. RESSER
----------------------------------------------
[SEAL Printed Name Nicole J. Resser
APPEARS -------------------------------------------
HERE] Notary public in and for the state of Washington,
residing at 999 Third Ave., Suite 4300/Seattle WA 98104
-------------------------------------------
My appointment expires: 3/29/2001
--------------------------------
<PAGE>
Seventh Amendment to Lease Agreement
Ragen MacKenzie Incorporated
Page 4
LANDLORD: WRIGHT RUNSTAD PROPERTIES L.P.
a Delaware limited partnership
By: WRIGHT RUNSTAD ASSET MANAGEMENT L.P.
a Washington limited partnership
Its general partner
By: WRAM, Inc.
a Washington corporation
Its general partner
By: /s/ H. JON RUNSTAD
---------------------------------
Its Chairman and
Chief Executive Officer
----------------------------
LANDLORD ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that I know or have satisfactory evidence that [Name
---------
illegible] is the person who appeared before me, and said person acknowledged
- -----------
that he signed this instrument, on oath stated that he was authorized to execute
the instrument and acknowledged it as the Chairman and CEO of WRAM, Inc., a
corporation, to me known to be the general partner of WRIGHT RUNSTAD ASSET
MANAGEMENT L.P., a limited partnership, to me known to be the general partner of
WRIGHT RUNSTAD PROPERTIES L.P., the limited partnership that executed the within
and foregoing instrument, and acknowledged the said instrument to be the free
and voluntary act and deed of said corporation and partnerships for the uses and
purposes therein mentioned, and on oath stated that said individual was
authorized to execute said instrument. WITNESS my hand and official seal
this [Date illegible] day of [date illegible], 19[date illegible].
---------------- ---------------- ----------------
Signature [Signature illegible]
-------------------------------------------
Printed Name [Signature illegible]
-----------------------------------------
Notary public in and for the state of Washington,
residing at [Address illegible]
------------------------------------------
My appointment expires 3/29/ [Date illegible]
-------------------------------
[SEAL APPEARS
HERE]
<PAGE>
EIGHTH AMENDMENT
This Eighth Amendment (the "Amendment") is made and entered into as of the 21st
day of September, 1998, by and between EOP Northwest Properties, L.L.C., a
Delaware limited liability company ("Landlord"), and Ragen MacKenzie
Incorporated, a Washington corporation ("Tenant").
WITNESSETH
A. WHEREAS, Landlord (as Successor in interest to Wright-Carlyle Seattle, a
Washington general partnership) and Tenant (as successor in interest to
Cable, Howse & Ragen) are parties to that certain lease dated the 8th day
of November, 1983, for space currently containing approximately 29,074
rentable square feet (the "Original Premises") described as Suite No(s).
4300 and 3710 on the full forty-third (43rd) floor and partial thirty-
seventh(37th) floor of the building commonly known as First Interstate
Center and the address of which is 999 Third Avenue, Seattle, WA 98104 (the
"Building"), which lease has been previously assigned and/or amended by
instruments dated December 19, 1988, August 24, 1992, June 1, 1993, July
20, 1995, April 30, 1997, June 6, 1997, and September 26, 1997
(collectively, the "Lease"); and
B. WHEREAS, Tenant has requested that additional space known as Suite No. 4150
containing approximately 2,240 rentable square feet on the forty-first
(41st) floor of the Building shown on Exhibit A hereto (the "Temporary
Expansion Space") be added to the Original Premises on a temporary basis
and that the Lease be appropriately amended and Landlord is willing to do
the same on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree as
follows:
I. EXPANSION AND EFFECTIVE DATE.
----------------------------
A. For the period commencing on the Expansion Effective Date and
ending on the Expansion Termination Date (as such terms are
hereinafter defined), the Premises is temporarily increased from
29,074 rentable square feet on the forty-third and thirty-seventh
floors to 31,314 rentable square feet on the forty-third, thirty-
seventh and forty-first floors by the addition of the Temporary
Expansion Space, and during the Expansion Space Term (as defined
below), the Original Premises and the Temporary Expansion Space,
collectively, shall be deemed the Premises, as defined in the
Lease. The Lease term for the Temporary Expansion Space (the
"Expansion Space Term") shall commence on the Expansion Effective
Date and end on February 28, 2002, unless sooner terminated
pursuant to the terms of the Lease (the "Expansion Termination
Date"). The Temporary Expansion Space is subject to all the terms
and conditions of the Lease except as expressly modified herein
and except that Tenant shall not be entitled to receive any
allowances, abatement or other financial concession granted with
respect to the Original Premises unless such concessions are
expressly provided for herein with respect to the Temporary
Expansion Space.
B. The Expansion Effective Date shall be March 16, 1998.
II. MONTHLY RENT.
------------
In addition to Tenant's obligation to pay Rent for the Original
Premises, during the Expansion Space Term, Tenant shall pay
Landlord the sum of FIVE THOUSAND FOUR HUNDRED THIRTEEN AND
33/100 DOLLARS ($5,413.33) per month as Rent for the Temporary
Expansion Space with each such installment payable on or before
the first day of each month during the period beginning on the
Expansion Effective Date and ending on the Expansion Termination
Date, prorated for any partial month within the Expansion Space
Term.
All such Rent shall be payable by Tenant in accordance with the
terms of Article 4 of the Lease.
III. ADDITIONAL SECURITY DEPOSIT.
---------------------------
(i) INTENTIONALLY OMITTED.
<PAGE>
IV. TENANT'S PRO RATA SHARE.
-----------------------
(i) Until January 1, 1999, Tenant shall not be obligated to pay its
Percentage of the Building of increases in Real Property Taxes
and Operating Costs in excess of Real Property Taxes and
Operating Costs in the Base Year with respect to the Temporary
Expansion Space, it being understood that such sum is included in
the Rent payable with respect to the Temporary Expansion Space
for the initial portion of the Expansion Space Term ending
December 31, 1998; provided, however, the foregoing shall not
affect Tenant's obligation to pay its Percentage of the Building
of Real Property Taxes and Operating Costs with respect to the
Original Premises as provided in the Lease. For the period
commencing January 1, 1999, and ending on the Expansion
Termination Date, Tenant shall pay its Percentage of the Building
applicable to the Temporary Expansion Space of increases in
Operating Costs and Real Property Taxes in excess of Operating
Costs and Real Property Taxes in the Base Year for the Temporary
Expansion Space in the same manner that Tenant pays Tenant's pro
rata share of increases in Operating Costs and Taxes in excess of
Operating Costs and Taxes in the Base Year for the Original
Premises as provided in Section 8 of the Lease. During such
period, Tenant's Percentage of the Building applicable to the
Temporary Expansion Space is 0.2446%. During such period, the
Base Year applicable only to the Temporary Expansion Space (and
not the Original Premises) shall be calendar year 1998.
V. IMPROVEMENTS TO TEMPORARY EXPANSION SPACE.
-----------------------------------------
A. CONDITION OF TEMPORARY EXPANSION SPACE. Tenant has inspected the
Temporary Expansion Space and agrees to accept the same "as is"
without any agreements, representations, understandings or
obligations on the part of Landlord to perform any alterations,
repairs or improvements. Tenant shall vacate the Temporary
Expansion Space on or prior to the Expansion Termination Date and
deliver up the Temporary Expansion Space to Landlord in as good
condition as the Temporary Expansion Space was delivered to
Tenant, ordinary wear and tear excepted.
B. COST OF IMPROVEMENTS TO TEMPORARY EXPANSION SPACE. Any
construction, alterations or improvements made to the Temporary
Expansion Space shall be made at Tenant's sole cost and expense.
C. RESPONSIBILITY FOR IMPROVEMENTS TO TEMPORARY EXPANSION SPACE. Any
construction, alterations or improvements to the Temporary
Expansion Space shall be performed by Tenant using contractors
selected by Tenant and approved by Landlord and shall be governed
in all respects by the provisions of paragraphs 3, 4, 5 and 6 of
Exhibit B.5 of the Seventh Amendment dated September 26, 1997 to
the Lease. In any and all events, the Expansion Effective Date
shall not be postponed or delayed if the initial improvements to
the Temporary Expansion Space are incomplete on the Expansion
Effective Date for any reason whatsoever. Any delay in the
completion of initial improvements to the Temporary Expansion
Space shall not subject Landlord to any liability for any loss or
damage resulting therefrom.
VI. EARLY ACCESS TO TEMPORARY EXPANSION SPACE. During any period that
-----------------------------------------
Tenant shall be permitted to enter the Temporary Expansion Space prior
to the Expansion Effective Date (e.g., to perform alterations or
improvements, if any), Tenant shall comply with all terms and
provisions of the Lease, except those provisions requiring payment of
Rent or additional Rent as to the Temporary Expansion Space. If Tenant
takes possession of the Temporary Expansion Space prior to the
Expansion Effective Date for any reason whatsoever (other than the
performance of work in the Temporary Expansion Space with Landlord's
prior approval), such possession shall be subject to all the terms and
conditions of the Lease and this Amendment, and Tenant shall pay Rent
and Additional Rent as applicable to the Temporary Expansion Space to
Landlord on a per diem basis for each day of occupancy prior to the
Expansion Effective Date.
VII. MUTUAL TERMINATION OPTION. At any time during the Expansion Space
-------------------------
Term, as same may be extended by written agreement between the
parties, Landlord and Tenant each shall have the right to terminate
this Lease, with respect to the Temporary Expansion Space only
("Termination Option"), for
<PAGE>
any reason by providing at least thirty (30) days prior written notice
to the other party, in which event, this Lease shall be deemed
terminated with respect to the Temporary Expansion Space as of the
date of termination ("Accelerated Expansion Termination Date")
specified in such notice and Tenant shall vacate the Temporary
Expansion Space on or prior to the Accelerated Expansion Termination
Date and deliver up the Temporary Expansion Space to Landlord in as
good condition as the Temporary Expansion Space was delivered to
Tenant, ordinary wear and tear excepted. If either party exercises the
Termination Option as provided for herein, Tenant shall remain liable
for all obligations relating to the Temporary Expansion Space up to
and including the Accelerated Expansion Termination Date, including,
without limitation, the payment of all Rent and other sums due under
the Lease with respect to the Temporary Expansion Space up to and
including the Accelerated Expansion Termination Date even though
billings for such may occur subsequent to the Accelerated Expansion
Termination Date. In no event shall the termination of the Lease with
respect to the Temporary Expansion Space as provided herein affect any
of the rights or obligations of the parties under the Lease with
respect to the Original Premises or be deemed a termination of the
Lease with respect to any portion of the Original Premises.
Notwithstanding anything in this Paragraph VII to the contrary,
Landlord shall not have the right to exercise its Termination Option
as above described with respect only to the Temporary Expansion Space,
unless and until sixty (60) days following Tenant's expansion into
permanent expansion space in the Building.
VIII. NO EXTENSION OR EXPANSION OPTIONS. The parties hereto acknowledge and
---------------------------------
agree that any option or other rights contained in the Lease which
entitle Tenant to extend the term of the Lease or expand the Premises
shall apply only to the Original Premises and shall not be applicable
to the Temporary Expansion Space in any manner.
IX. HOLDOVER. If Tenant should holdover in the Temporary Expansion Space
--------
after expiration or earlier termination of the Temporary Expansion
Space Term, any remedies available to Landlord as a consequence of
such holdover contained in Article 27 of the Lease or otherwise shall
be applicable, but only with respect to the Temporary Expansion Space
and shall not be deemed applicable to the Original Premises unless and
until Tenant holds over in the Original Premises after expiration or
earlier termination of the Lease Term.
X. OTHER PERTINENT PROVISIONS. Landlord and Tenant agree that, effective
--------------------------
as of the date hereof (unless different effective date(s) is/are
specifically referenced in this Section), the Lease shall be amended
in the following additional respects:
A. Paragraph 1(j) of the Lease shall be deleted and the following
substituted therefor:
"Notice Address" shall mean the following addresses for Landlord:
Landlord:
EOP Northwest Properties, L.L.C.
c/o Wright Runstad & Company
First Interstate Center
999 Third Avenue, Suite 1010
Seattle, WA 98104
Attention: Building Manager
With a copy to:
EOP Northwest Properties, L.L.C.
c/o Equity Office Properties Trust
Two North Riverside Plaza
Suite 2200
Chicago, IL 60606
Attention: General Counsel of Property Operations
Payments of Rent only shall be made payable to the order of:
Equity Office Properties
<PAGE>
At the following address:
EOP Northwest Properties, L.L.C.
d/b/a First Interstate Center
P.O. Box 3834
Seattle, WA 98124-3834
B. Paragraph 31 of the Lease, Landlord's Liability, shall be deleted
and the following substituted therefor:
LIMITATION OF LIABILITY. Notwithstanding anything to the contrary
-----------------------
contained in this lease, the liability of landlord (and of any
successor landlord hereunder) to tenant shall be limited to the
interest of landlord in the building, and tenant agrees to look
solely to landlord's interest in the building for the recovery of
any judgment or award against the landlord, it being intended
that neither landlord nor any member, principal, partner,
shareholder, officer, director or beneficiary of landlord shall
be personally liable for any judgment or deficiency. Tenant
hereby covenants that, prior to the filing of any suite for an
alleged default by landlord hereunder, it shall give landlord and
all mortgagees whom tenant has been notified hold mortgages or
deed of trust liens on the property, building or premises notice
and reasonable time to cure such alleged default by landlord. In
addition, tenant acknowledges that any entity managing the
building on behalf of landlord, or which executes this lease as
agent for landlord, is acting solely in its capacity as agent for
landlord and shall not be liable for any obligations,
liabilities, losses or damages arising out of or in connection
with this lease, all of which are expressly waived by tenant.
XI. MISCELLANEOUS.
-------------
A. This Amendment sets forth the entire agreement between the
parties with respect to the matters set forth herein. There have
been no additional oral or written representations or agreements.
Under no circumstances shall Tenant be entitled to any Rent
abatement, improvement allowance, leasehold improvements, or
other work to the Premises, or any similar economic incentives
that may have been provided Tenant in connection with entering
into the Lease, unless specifically set forth in this Amendment.
B. Except as herein modified or amended, the provisions, conditions
and terms of the Lease shall remain unchanged and in full force
and effect.
C. In the case of any inconsistency between the provisions of the
Lease and this Amendment, the provisions of this Amendment shall
govern and control.
D. Submission of this Amendment by Landlord is not an offer to enter
into this Amendment but rather is a solicitation for such an
offer by Tenant. Landlord shall not be bound by this Amendment
until Landlord has executed and delivered the same to Tenant.
E. The capitalized terms used in this Amendment shall have the same
definitions as set forth in the Lease to the extent that such
capitalized terms are defined therein and not redefined in this
Amendment.
F. Tenant hereby represents to Landlord that Tenant has dealt with
no broker, other than Wright Runstad & Company, in connection
with this Amendment. Tenant agrees to indemnify and hold
Landlord, its members, principals, beneficiaries, partners,
officers, directors, employees, mortgagee(s) and agents, and the
respective principals and members of any such agents
(collectively, the "Landlord Related Parties") harmless from all
claims of any other brokers claiming to have represented Tenant
in connection with this Amendment. Landlord hereby represents to
Tenant that Landlord has dealt with no broker other than Wright
Runstad & Company, in connection with this Amendment. Landlord
agrees to indemnify and hold Tenant, its members, principals,
beneficiaries, partners, officers, directors, employees, and
agents, and the respective principals and members of any such
agents (collectively, the "Tenant Related Parties") harmless from
all claims of any other brokers claiming to have represented
Landlord in connection with this Amendment.
<PAGE>
G. This Amendment shall be of no force and effect unless and until
accepted by any guarantors of the Lease, who by signing below
shall agree that their guarantee shall apply to the Lease as
amended herein, unless such requirement is waived by Landlord in
writing.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment
as of the day and year first above written.
WITNESSES; ATTESTATION LANDLORD: EOP Northwest Properties, L.L.C.
a Delaware limited liability company
BY: EOP Northwest Properties, Inc.
a Delaware corporation,
its manager
/s/ [Signature illegible]
- --------------------------- By: /s/ JOHN GALLANDER
----------------------------
/s/ [Signature illegible] Name: John Gallander
- --------------------------- --------------------------
Title: Vice President
-------------------------
TENANT: Ragen MacKenzie, Inc.,
a Washington corporation
- ------------------------- By: /s/ ROBERT J. MORTELL, JR.
----------------------------
Name: Robert J. Mortell, Jr.
- ------------------------- --------------------------
Title: President and CEO
-------------------------
<PAGE>
LANDLORD ACKNOWLEDGMENTS
STATE OF (COLORADO)
COUNTY OF (ARAPAHOE) ss:
I, the undersigned, a Notary Public, in and for the County and State aforesaid,
do hereby certify that John Gallander, personally known to me to be the Vice
President of EOP Northwest Properties, Inc., a Delaware corporation, manager of
EOP Northwest Properties, L.L.C., a Delaware limited liability company, and
personally known to me to be the same person whose name is subscribed to the
foregoing instrument, appeared before me this day in person and acknowledged
that as such officer of said entity being authorized so to do, (s)he executed
the foregoing instrument on behalf of said entity, by subscribing the name of
such entity by himself/herself as such officer, as a free and voluntary act, and
as the free and voluntary act and deed of said entity, for the uses and purposes
therein set forth.
GIVEN under my hand and official seal this 22 day of September, 1998.
Notary Public /s/ [Signature illegible]
---------------------------------------
Printed Name /s/ [Name illegible]
---------------------------------------
[SEAL
My Commission Expires: 2/18/02 APPEARS
-------------- HERE]
TENANT ACKNOWLEDGMENTS
CORPORATION
STATE OF WASHINGTON )
COUNTY OF KING ) ss: MY COMMISSION EXPIRES 02/18/02
On this the 16th day of July 1998 before me a Notary Public duly authorized
in and for the said County in the State aforesaid to take acknowledgments
personally appeared Robert J. Mortell known to me to be the President of Ragen
MacKenzie, one of the parties described in the foregoing instrument, and
acknowledged that as such officer, being authorized so to do, (s)he executed the
foregoing instrument on behalf of said corporation by subscribing the name of
such corporation by himself/herself as such officer and caused the corporate
seal of said corporation to be affixed thereto, as a free and voluntary act, and
as the free and voluntary act of said corporation, for the uses and purposes
therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
[SEAL
APPEARS Notary Public YVONNE CARLSON
HERE] --------------------------
Printed Name YVONNE CARLSON
--------------------------
My Commission Expires: 4-01-2000
------------
<PAGE>
NINTH AMENDMENT
This Ninth Amendment (the "Amendment") is made and entered into
as of the 6th day of November, 1998, by and between EOP Northwest
Properties, L.L.C., a Delaware limited liability company ("Landlord"),
and Ragen MacKenzie Incorporated, a Washington corporation ("Tenant").
WITNESSETH
A. WHEREAS, Landlord (as successor in interest to Wright-Carlyle
Seattle, a Washington general partnership) and Tenant (as
successor in interest to Cable, Howse & Ragen) are parties to
that certain lease dated the 8th day of November, 1983, for space
currently containing approximately 31,314 rentable square feet
(the "Original Premises") described as Suite Nos. 3710,
4150 and 4300 on the thirty-seventh (37th), forty-first (41st)
and forty-third (43rd) floors of the building commonly known as
First Interstate Center and the address of which is 999 Third
Avenue, Seattle, WA 98104 (the "Building"), which lease has been
previously amended by instruments dated December 19, 1988, August
24, 1992, June 1, 1993, July 20, 1995, April 30, 1997, June 6,
1997, September 26, 1997, and September 21, 1998 (collectively,
the "Lease"); and
B. WHEREAS, Tenant has requested that additional space known as
Suite Nos. 3760 and 3780 containing approximately 3,971 rentable
square feet on the thirty-seventh (37th) floor of the Building
shown on Exhibit A hereto (the "Expansion Space") be added to the
Original Premises and that the Lease be appropriately amended and
Landlord is willing to do the same on the terms and conditions
hereinafter set forth;
C. WHEREAS, the Lease by its terms shall expire on February 28, 2002
("Prior Expiration Date"), and the parties desire to extend the
Term of the Lease for only the Expansion Space, all on the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:
I. EXPANSION AND EFFECTIVE DATE.
----------------------------
A. For the period commencing on the Expansion Effective
Date and ending on the Expiration Date (as such terms
are hereinafter defined), the Premises is increased
from 31,314 rentable square feet on the forty-first
(41st), forty-third (43rd) and thirty-seventh (37th)
floors to 35,285 rentable square feet on the forty-
first (41st), forty-third (43rd) and thirty-seventh
(37th) floors by the addition of the Expansion Space,
and during this period, the Original Premises and the
Expansion Space, collectively, shall be deemed the
Premises, as defined in the Lease. For the period
commencing on the day after the Expiration Date and
ending on the Expansion Expiration Date, the Lease with
respect to the Original Premises shall be terminated
and the Premises shall be the Expansion Space only,
unless Tenant has exercised its option to extend the
Lease term pursuant to Item 15 of Exhibit C to the
Lease. The Lease term for the Expansion Space (the
"Expansion Space Term") shall commence on the Expansion
Effective Date and end on the Expansion Expiration Date
(as hereinafter defined), unless sooner terminated
pursuant to the terms of the Lease. The Expansion Space
is subject to all the terms and conditions of the Lease
except as expressly modified herein and except that
Tenant shall not be entitled to receive any allowances,
abatement or other financial concession granted with
respect to the Original Premises unless such
concessions are expressly provided for herein with
respect to the Expansion Space.
B. The Expansion Effective Date shall be December 1, 1998.
II. EXTENSION. The Term with respect to the Expansion Space only
---------
is hereby extended for a period of twenty-one (21) months
and shall expire on November 30, 2003 ("Expansion Expiration
Date"), unless sooner terminated in accordance with the
terms of the Lease.
<PAGE>
III. MONTHLY RENT.
------------
In addition to Tenant's obligation to pay Rent for the Original
Premises, Tenant shall pay Landlord the sum of Seven Hundred Thirty
Four Thousand Six Hundred Thirty Five and 20/100 Dollars ($734,635.20)
as Rent for the Expansion Space in sixty (60) monthly installments as
follows:
A. Sixty (60) equal installments of Twelve Thousand Two Hundred
Forty Three and 92/100 Dollars ($12,243.92) each payable on or
before the first day of each month during the period beginning
December 1, 1998 and ending November 30, 2003.
All such Rent shall be payable by Tenant in accordance with the terms
of Section 4 of the Lease.
IV. ADDITIONAL SECURITY DEPOSIT. Intentionally omitted.
---------------------------
V. TENANT'S PERCENTAGE OF THE BUILDING. For the period commencing with
-----------------------------------
the Expansion Effective Date and ending on the Expansion Expiration
Date, Tenant's Percentage of the Building for the Expansion Space is
four thousand one hundred eighty-one ten-thousandths percent
(0.4181%).
VI. OPERATING COSTS AND TAXES. For the period commencing on January 1,
-------------------------
1999 and ending on the Expansion Expiration Date, Tenant shall pay for
its pro rata share of Operating Costs and Taxes applicable to the
Expansion Space in accordance with the terms of Sections 8 and 9 of
the Lease, as amended; provided, however, during such period, the Base
Year for the computation of Tenant's pro rata share of Operating Costs
and Taxes applicable to the Expansion Space is 1998.
VII. IMPROVEMENTS TO EXPANSION SPACE.
-------------------------------
A. CONDITION OF EXPANSION SPACE. Tenant has inspected the Expansion
Space and agrees to accept the same "as is" without any
agreements, representations, understandings or obligations on the
part of Landlord to perform any alterations, repairs or
improvements, except as may be expressly provided otherwise in
this Amendment.
B. COST OF IMPROVEMENTS TO EXPANSION SPACE. Provided Tenant is not
in default, Tenant shall be entitled to receive an improvement
allowance (the "Expansion Improvement Allowance") in an amount
not to exceed Thirty Nine Thousand Seven Hundred Ten and No/100
Dollars ($39,710.00) (i.e.,$10.00 per rentable square foot of the
Expansion Space) to be applied toward the cost of performing
initial construction, alteration or improvement of the Expansion
Space, including but not limited to the cost of space planning,
design and related architectural and engineering services. In the
event the total cost of the initial improvements to the Expansion
Space exceeds the Expansion Improvement Allowance, Tenant shall
pay for such excess upon demand. The entire unused balance of the
Expansion Improvement Allowance, if any, shall accrue to the sole
benefit of Landlord. Landlord shall pay such Expansion
Improvement Allowance directly to the contractors retained to
perform the construction, design or related improvement work to
the Expansion Space.
C. RESPONSIBILITY FOR IMPROVEMENTS TO EXPANSION SPACE. Landlord
shall enter into a direct contract for the initial improvements
to the Expansion Space with a general contractor selected by
Landlord. Tenant shall devote such time in consultation with
Landlord or Landlord's architect as may be required to provide
all information Landlord deems necessary in order to enable
Landlord to complete, and obtain Tenant's written approval of,
the plans for the initial improvements to the Expansion Space in
a timely manner. All plans for the initial improvements to the
Expansion Space shall be subject to Landlord's consent, which
consent shall not be unreasonably withheld. If the cost of such
improvements exceeds the Expansion Improvement Allowance, then
prior to commencing any construction of improvements to the
Expansion Space, Landlord shall submit to Tenant and written
estimate setting forth the anticipated cost, including but not
limited
<PAGE>
to the cost of space planning, design and related architectural
and engineering services, labor and materials, contractor's fees,
and permit fees. Within a reasonable time thereafter, Tenant
shall either notify Landlord in writing of its approval of the
cost estimate or specify its objections thereto and any desired
changes to the proposed improvements. In the event Tenant
notifies Landlord of such objections and desired changes, Tenant
shall work with Landlord to reach a mutually acceptable
alternative cost estimate.
D. Tenant acknowledges that the improvement work to the Expansion
Space may be performed by Landlord in the Expansion Space during
Normal Business Hours subsequent to the Expansion Effective Date.
Landlord and Tenant agree to cooperate with each other in order
to enable the improvement work to the Expansion Space to be
performed in a timely manner and with as little inconvenience to
the operation of Tenant's business as is reasonably possible.
Notwithstanding anything herein to the contrary, any delay in the
completion of the improvement work to the Expansion Space or
inconvenience suffered by Tenant during the performance of the
improvement work to the Expansion Space shall not subject
Landlord to any liability for any loss or damage resulting
therefrom or entitle Tenant to any credit, abatement or
adjustment of Rent or other sums payable under the Lease.
VIII. EARLY ACCESS TO EXPANSION SPACE. During any period that Tenant shall
-------------------------------
be permitted to enter the Expansion Space prior to the Expansion
Effective Date (e.g., to perform alterations or improvements, if any),
Tenant shall comply with all terms and provisions of the Lease, except
those provisions requiring payment of Rent of Additional Rent as to
the Expansion Space. If Tenant takes possession of the Expansion Space
prior to the Expansion Effective Date for any reason whatsoever (other
than the performance of work in the Expansion Space with Landlord's
prior approval), such possession shall be subject to all the terms and
conditions of the Lease and this Amendment, and Tenant shall pay Rent
and Additional Rent as applicable to the Expansion Space to Landlord
on a per diem basis for each day of occupancy prior to the Expansion
Effective Date.
IX. OTHER PERTINENT PROVISIONS. Landlord and Tenant agree that, effective
--------------------------
as of the date hereof (unless different effective dates are
specifically referenced in this Section), the Lease shall be amended
in the following additional respects:
A. PARKING. Effective as of the Expansion Effective Date, Section
-------
1(i), "Parking", of the Lease is deleted in its entirety and the
following shall be substituted in lieu thereof as Item 18 to
Exhibit C, Addendum to Lease:
18. PARKING.
A. During the period commencing on the Expansion Effective
Date and ending on the Expiration Date, Tenant agrees
to lease from Landlord and Landlord agrees to lease to
Tenant up to a total of twenty three (23) unreserved,
self-park parking spaces (collectively, the "Spaces")
plus two (2) unreserved valet-park parking spaces on a
monthly as available basis, as determined by Landlord,
in the Building garage ("Garage") for the use of Tenant
and its employees. During the period commencing March
1, 2002 and ending on the Expansion Expiration Date,
Tenant shall have the right to lease from Landlord and
Landlord agrees to lease to Tenant up to a total of two
(2) unreserved, self-park parking spaces (collectively,
the "Spaces") in the Building garage ("Garage") for the
use of Tenant and its employees. No deductions or
allowances shall be made for days when Tenant or any of
its employees does not utilize the parking facilities
or for Tenant utilizing less than all of the Spaces.
Tenant shall not have the right to lease or otherwise
use more than the number of reserved and unreserved
Spaces set forth above.
<PAGE>
B. In addition Landlord will work with Tenant to satisfy
its parking needs to the extent possible given the
terms or conditions of other leases in the Building. So
long as there is a surplus of parking spaces in the
Garage due to Wells Fargo Bank (or its successor in the
lease) not using all of the parking called for in its
lease, Tenant may lease up to forty nine (49) parking
spaces in the Garage.
C. During the period commencing on the Expansion Effective
Date and ending on the Expansion Expiration Date,
Tenant shall pay Landlord the sum of $200.00 per month,
plus applicable tax thereon, if any, for each
unreserved Space leased by Tenant hereunder, as such
rates may be adjusted from time-to-time to reflect the
then current rate for parking in the Garage.
D. Except for particular spaces and areas designated by
Landlord for reserved parking, all parking in the
Garage and surface parking areas serving the Building
shall be on an unreserved, first-come, first-served
basis.
E. Landlord shall not be responsible for money, jewelry,
automobiles or other personal property lost in or
stolen from the Garage or the surface parking areas
regardless of whether such loss or theft occurs when
the Garage or other areas therein are locked or
otherwise secured. Except as caused by the negligence
or willful misconduct of Landlord and without limiting
the terms of the preceding sentence, Landlord shall not
be liable for any loss, injury or damage to persons
using the Garage or the surface parking areas or
automobiles or other property therein, it being agreed
that, to the fullest extent permitted by law, the use
of the Spaces shall be at the sole risk of Tenant and
its employees.
F. Landlord shall have the right from time to time to
designate the location of the Spaces and to promulgate
reasonable rules and regulations regarding the Garage,
the surface parking areas, if any, the Spaces and the
use thereof, including, but not limited to, rules and
regulations controlling the flow of traffic to and from
various parking areas, the angle and direction of
parking and the like. Tenant shall comply with and
cause its employees to comply with all such rules and
regulations as well as all reasonable additions and
amendments thereto.
G. Tenant shall not store or permit its employees to store
any automobiles in the Garage or on the surface parking
areas without the prior written consent of Landlord.
Except for emergency repairs, Tenant and its employees
shall not perform any work on any automobiles while
located in the Garage or on the Property. If it is
necessary for Tenant or its employees to leave an
automobile in the Garage or on the surface parking
areas overnight, Tenant shall provide Landlord with
prior notice thereof designating the license plate
number and model of such automobile.
H. Landlord shall have the right to temporarily close the
Garage or certain areas therein in order to perform
necessary repairs, maintenance and improvements to the
Garage or the surface parking areas, if any.
I. Tenant shall not assign or sublease any of the Spaces
without the consent of Landlord. Landlord shall have
the right to terminate this Parking Agreement with
respect to any Spaces that Tenant desires to sublet or
assign.
<PAGE>
J. Landlord may elect to provide parking cards or keys to
control access to the Garage or surface parking areas,
if any. In such event, Landlord shall provide Tenant
with one card or key for each Space that Tenant is
leasing hereunder, provided that Landlord shall have
the right to require Tenant or its employees to place a
deposit on such access cards or keys and to pay a fee
for any lost or damaged cards or keys.
K. Landlord hereby reserves the right to enter into a
management agreement or lease with an entity for the
Garage ("Garage Operator"). In such event, Tenant, upon
request of Landlord, shall enter into a parking
agreement with the Garage Operator and pay the Garage
Operator the monthly charge established hereunder, and
Landlord shall have no liability for claims arising
through acts or omissions of the Garage Operator unless
caused by Landlord's negligence or willful misconduct.
It is understood and agreed that the identity of the
Garage Operator may change from time to time during the
Lease Term. In connection therewith, any parking lease
or agreement entered into between Tenant and a Garage
Operator shall be freely assignable by such Garage
Operator or any successors thereto.
B. Exhibit B, Building Rules and Regulations, attached hereto shall
be added to the Lease and made a part thereof.
C. Landlord and Tenant specifically agree that should Tenant
effectively exercise either or both of its options to extend the
Lease term pursuant to Item 15 of Exhibit C to the Lease, such
extensions shall automatically apply to the Original Premises as
well as the Expansion Space, and the Original Premises and the
Expansion Space thereupon shall be subject to the terms of Item
15 of Exhibit C to the Lease. The Lease term then as to said
Original Premises and the Expansion Space shall expire
coterminously at the conclusion of the 2002 Extended Term or the
2007 Extended Term, as the case may be.
X. Miscellaneous.
-------------
A. This Amendment sets forth the entire agreement between the
parties with respect to the matters set forth herein. There have
been no additional oral or written representations or agreements.
Under no circumstances shall Tenant be entitled to any Rent
abatement, improvement allowance, leasehold improvements, or
other work to the Premises, or any similar economic incentives
that may have been provided Tenant in connection with entering
into the Lease, unless specifically set forth in this Amendment.
B. Except as herein modified or amended, the provisions, conditions
and terms of the Lease shall remain unchanged and in full force
and effect.
C. In the case of any inconsistency between the provisions of the
Lease and this Amendment, the provisions of this Amendment shall
govern and control.
D. Submission of this Amendment by Landlord is not an offer to enter
into this Amendment but rather is a solicitation for such an
offer by Tenant. Landlord shall not be bound by this Amendment
until Landlord has executed and delivered the same to Tenant.
E. The capitalized terms used in this Amendment shall have the same
definitions as set forth in the Lease to the extent that such
capitalized terms are defined therein and not redefined in this
Amendment.
F. Tenant hereby represents to Landlord that Tenant has dealt with
no broker, other than Wright Runstad & Company, in connection
with this
<PAGE>
Amendment. Tenant agrees to indemnify and hold Landlord, its
members, principals, beneficiaries, partners, officers,
directors, employees, mortgagee(s) and agents, and the respective
principals and members of any such agents (collectively, the
"Landlord Related Parties") harmless from all claims of any other
brokers claiming to have represented Tenant in connection with
this Amendment. Landlord hereby represents to Tenant that
Landlord has dealt with no broker other than Wright Runstad &
Company, in connection with this Amendment. Landlord agrees to
indemnify and hold Tenant, its members, principals,
beneficiaries, partners, officers, directors, employees, and
agents, and the respective principals and members of any such
agents (collectively, the "Tenant Related Parties"), harmless
from all claims of any other brokers claiming to have represented
Landlord in connection with this Amendment.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment
as of the day and year first above written.
LANDLORD: EOP NORTHWEST PROPERTIES, L.L.C.,
A DELAWARE LIMITED LIABILITY
COMPANY
BY: EOP Northwest Properties, Inc.
a Delaware corporation, its manager
By: /s/ KIM KOEHN
-------------------------------
NAME: KIM KOEHN
-----------------------------
Title: Senior Vice President
----------------------------
TENANT: RAGEN MACKENZIE, INCORPORATED,
A WASHINGTON CORPORATION
By: /s/ ROBERT MORTELL, JR.
----------------------------------
Name: Robert Mortell, Jr.
--------------------------------
Title: President
--------------------------------
<PAGE>
LANDLORD ACKNOWLEDGMENTS
STATE OF (COLORADO)
--------
COUNTY OF (ARAPOHOE) ss:
--------
I, the undersigned, a Notary Public, in and for the County and State
aforesaid, do hereby certify that Kim J. Koehn, personally known to me to be
------------
the Vice President of EOP Northwest Properties, Inc., a Delaware corporation,
----
manager of EOP Northwest Properties, L.L.C., a Delaware limited liability
company, and personally known to me to be the same person whose name is
subscribed to the foregoing instrument, appeared before me this day in person
and acknowledged that as such officer of said entity being authorized so to do,
(s)he executed the foregoing instrument on behalf of said entity, by subscribing
the name of such entity by himself/herself as such officer, as a free and
voluntary act, and as the free and voluntary act and deed of said entity, for
the uses and purposes therein set forth.
GIVEN under my hand and official seal this 16 day of November 1998
--- --------- --
Notary Public /s/ [Signature illegible]
--------------------------
Printed Name /s/ [Name illegible]
-----------------------
[SEAL APPEARS HERE]
My Commission Expires: 2/18/02
--------
TENANT ACKNOWLEDGMENTS
Corporation
STATE OF (WASHINGTON)
----------
COUNTY OF (KING ) ss:
---------
On this the 30th day of October, 1998, before me a Notary Public duly
---- ------- --
authorized in and for the said County in the State aforesaid to take
acknowledgments personally appeared Robert J. Mortell, Jr. known to me to be the
---------------------- ---
President of Ragen MacKenzie one of the parties described in the foregoing
---------------
instrument, and acknowledged that as such officer, being authorized so to do,
(s)he executed the foregoing instrument on behalf of said corporation by
subscribing the name of such corporation by himself/herself as such officer
and caused the corporate seal of said corporation to be affixed thereto, as a
free and voluntary act, and as the free and voluntary act of said corporation,
for the uses and purposes therein set forth .
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public /s/ YVONNE CARLSON
--------------------
[SEAL
APPEARS
Printed Name YVONNE CARLSON HERE]
----------------------
My Commission Expires: 4.1.2000
----------
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-57571 of Ragen MacKenzie Group Incorporated on Form S-8 of our reports
dated November 20, 1998 appearing in this Annual Report on Form 10-K of Ragen
MacKenzie Group Incorporated for the year ended September 25, 1998.
Deloitte & Touche LLP
Seattle, Washington
December 18, 1998
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