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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14243
RAGEN MACKENZIE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
Washington 91-1898738
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation of organization)
999 Third Avenue, Suite 4300
Seattle, Washington 98104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (206) 343-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
As of August 5, 1998 the Company had 13,448,190 shares
of common stock outstanding.
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RAGEN MACKENZIE GROUP INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 26, 1998
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition as of
June 26, 1998 (unaudited) and September 26, 1997 3
Condensed Consolidated Statements of Income (unaudited) for the three
and nine month periods ended June 26, 1998 and June 27, 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the three
and nine month periods ended June 26, 1998 and June 27, 1997 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 11
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
</TABLE>
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
RAGEN MACKENZIE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share amounts)
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JUNE 26, SEPTEMBER 26,
1998 1997
----------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 3,992 $ 4,980
Cash and market value of securities segregated for the
exclusive benefit of customers 251,948 306,704
Deposits with clearing organizations 1,207 1,007
Receivable from:
Brokers, dealers, and clearing organizations 1,640 1,399
Customers 121,167 105,378
Securities owned, at market value 159,083 122,778
Securities purchased under agreements to resell 150,510 111,917
Securities borrowed 2,377 8,097
Furniture, equipment, and leasehold improvements - net 1,300 888
Other assets 4,621 2,729
-------- --------
Total $697,845 $665,877
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings $ 33,350 $ 17,750
Payable to:
Brokers, dealers, and clearing organizations 7,595 10,300
Customers 346,890 406,017
Securities sold but not yet purchased, at market value 144,298 106,629
Securities sold under agreements to repurchase 45,350 41,600
Accrued compensation and related benefits 9,465 8,139
Other liabilities and accrued expenses 5,538 5,194
-------- --------
Total liabilities 592,486 595,629
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, 13,438,590 (unaudited)
and 10,242,889 shares 134 102
Additional paid-in capital 47,801 20,577
Retained earnings 57,424 49,569
-------- --------
Total shareholders' equity 105,359 70,248
-------- --------
Total $697,845 $665,877
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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RAGEN MACKENZIE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
------------------------ -----------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net $ 5,947 $ 5,846 $18,859 $ 17,086
Commissions 7,635 7,239 25,456 21,827
Other 1,262 809 4,296 3,028
------- ------- ------- --------
Total operating revenues 14,844 13,894 48,611 41,941
Interest Income 8,863 7,414 27,228 21,346
------- ------- ------- --------
Total revenue 23,707 21,308 75,839 63,287
------- ------- ------- --------
Interest expense 5,645 4,810 17,799 13,948
------- ------- ------- --------
Net revenue 18,062 16,498 58,040 49,339
------- ------- ------- --------
Non-interest expenses:
Compensation and benefits 8,935 8,296 29,663 25,174
Key person death benefits plan ( 5,000)
Nonrecurring compensation
charges related to IPO 3,480 3,480
Occupancy and equipment 1,142 1,293 3,783 3,390
Communications 894 815 2,668 2,343
Clearing and exchange fees 627 552 2,055 1,713
Other 1,118 996 2,752 2,833
------- ------- ------- --------
Total non-interest expenses 16,196 11,952 44,401 30,453
------- ------- ------- --------
Income before taxes on income 1,866 4,546 13,639 18,886
Taxes on income 1,266 1,745 5,784 7,093
------- ------- ------- --------
Net income $ 600 $ 2,801 $ 7,855 $ 11,793
======= ======= ======= ========
Weighted-average diluted number
of common shares outstanding 11,315 10,637 11,049 10,607
Earnings per Common Share
Basic $.05 $.28 $.74 $1.18
Diluted .05 .26 .71 1.11
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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<TABLE>
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RAGEN MACKENZIE GROUP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine-Month Period Ended
----------------------
June 26, June 27,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,855 $ 11,793
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization 388 311
Noncash key person death benefits plan expense reversal (5,000)
Stock option expense 2,932 1,708
Deferred tax expense (benefit) (631) 2,203
Gain on sale of Pacific Stock Exchange membership (290)
Cash provided (used) by changes in operating assets and
liabilities:
Cash and market value of securities segregated for the
exclusive benefit of customers 54,756 (61,900)
Deposits with clearing organizations (200)
Receivable from:
Brokers, dealers, and clearing organizations (241) (6,114)
Customers (15,789) (5,726)
Securities owned (36,305) (34,189)
Securities purchased under agreements to resell (38,593) (16,810)
Securities borrowed 5,720 (1,499)
Other assets (1,288) 183
Payable to:
Brokers, dealers, and clearing organizations (2,705) 8,911
Customers (59,127) 102,368
Securities sold but not yet purchased 37,669 19,667
Securities sold under agreements to repurchase 3,750 4,492
Accrued compensation and related benefits 1,326 3,031
Other liabilities and accrued expenses 344 (115)
------- -------
Net cash provided (used) by operating activities (40,429) 23,314
INVESTING ACTIVITIES:
Purchases of furniture, equipment, and leasehold
improvements (800) (417)
Proceeds from sale of Pacific Stock Exchange membership 317
------- -------
Net cash used by investing activities (483) (417)
FINANCING ACTIVITIES:
Proceeds from (repayment) of borrowings, net 15,600 (20,325)
Proceeds from initial public offering, net of issuance costs 18,609
Proceeds from exercise of stock options 7,296 1,495
Repurchases of common stock (1,581) (1,454)
------- -------
Net cash provided (used) by financing activities 39,924 (20,284)
-------- -------
INCREASE (DECREASE) IN CASH (988) 2,613
CASH:
Beginning of period 4,980 1,770
-------- -------
End of period $ 3,992 $ 4,383
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17,861 $ 14,057
Federal income taxes 7,500 4,500
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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RAGEN MACKENZIE GROUP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
Ragen MacKenzie Group Incorporated and its subsidiary (collectively, the
"Company"). Ragen MacKenzie Group Incorporated is a holding company engaged,
through its subsidiary, in securities brokerage and related investment services.
Ragen MacKenzie Group Incorporated's operating subsidiary, Ragen MacKenzie
Incorporated (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.
These financial statements have been prepared pursuant to the rules and
regulations of the SEC and, therefore, do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. The interim financial statements have been prepared utilizing the
interim basis of reporting and, as such, reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the periods presented. The
nature of the Company's business is such that the results of any interim period
are not necessarily indicative of results for a full year. These financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto for the year ended September 26, 1997 included
in the Company's Registration Statement on Form S-1, (No.333-50735), including
the related Prospectus dated June 22, 1998 as filed with the SEC (the
"Registration Statement on Form S-1").
Note 2: INITIAL PUBLIC OFFERING
On June 26, 1998, the Company completed its 2,350,000 share initial public
offering (the "IPO"), including 1,562,500 shares sold by the Company. The IPO
raised approximately $18.6 million for the Company after deducting underwriting
discounts, commissions and estimated expenses totaling $2,366,250. On July 27,
1998 the underwriters exercised their over-allotment option and purchased
347,100 shares, including 9,600 shares sold by the Company (the "Company Over-
Allotment Option"). The Company used the net proceeds and available cash from
the IPO and the Company Over-Allotment Option to pay down current short-term
borrowings.
The nonrecurring $3,480,000 compensation charges related to the IPO reflect a
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
and are consistent with amounts previously reported in the Company's
Registration Statement on Form S-1.
Note 3: NET CAPITAL REQUIREMENTS
The Company is subject to the Uniform Net Capital Rule 15c3-1 (the Rule) under
the Securities Exchange Act of 1934. The Company has elected to compute net
capital under the alternative provisions of the Rule, which require the Company
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 June
26, 1998, the Company's net capital was $90,880,000 which was 73.2% of aggregate
debit items, and which exceeded the minimum net capital requirements of
$2,483,000 by $88,397,000.
The net capital rules of the NYSE also provide that equity capital may not be
withdrawn or cash dividends paid without notification if resulting net capital
would be less than 5% of aggregate debit items.
6
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Note 4: TAXES ON INCOME
Taxes on income for the three- and nine-month periods ended June 26,1998 and
June 27, 1997 do not bear a normal relationship to income before taxes on income
due to certain permanent differences between tax and financial reporting. A
summary reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
---------------------------------- ---------------------------------
JUNE 26, 1998 JUNE 27, 1997 JUNE 26, 1998 JUNE 27, 1997
---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0% 35.0%
Nondeductible stock option plan expense 33.4 3.0 7.5 3.2
Other (.6) .4 (.1) (.6)
---------------- ---------------- --------------- ----------------
Effective tax rate 67.8% 38.4% 42.4% 37.6%
================ ================ =============== ================
</TABLE>
Note 5: EARNINGS PER COMMON SHARE
The Company computes its earnings per common share (EPS) in accordance with
Statement of Financial Accounting Standards ("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 common shares and dilutive common equivalent shares
outstanding. For the purpose of calculating the dilutive effect of stock options
in Diluted EPS, the Company utilizes the per-share book value at the end of the
corresponding period for periods prior to the IPO as the share repurchase plan
in effect prior to the IPO permits selling shareholders to offer their shares to
the Company for redemption at book value as calculated in accordance with the
terms of the plan. Subsequent to the completion of the IPO, the Company utilizes
the average market price for computation of the dilutive effect of stock options
in Diluted EPS. The following table sets forth the computation for basic and
diluted earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE-MONTH PERIOD ENDED NINE-MONTH PERIOD ENDED
------------------------------------- -------------------------------------
JUNE 26, 1998 JUNE 27, 1997 JUNE 26, 1998 JUNE 27, 1997
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NUMERATOR:
Net income $ 600 $ 600 $ 2,801 $ 2,801 $ 7,855 $ 7,855 $11,793 $11,793
DENOMINATOR:
Weighted average
shares outstanding 11,098 11,098 10,040 10,040 10,650 10,650 9,965 9,965
Dilutive effect of
stock options 217 597 399 642
------- ------- ------- ------- ------- ------- ------- -------
Adjusted weighted
average shares
outstanding 11,098 11,315 10,040 10,637 10,650 11,049 9,965 10,607
------- ------- ------- ------- ------- ------- ------- -------
Earnings per common
share $ .05 $ .05 $ .28 $ .26 $ .74 $ .71 $ 1.18 $ 1.11
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis should be read in conjunction with the Company's
condensed consolidated financial statements and the related notes thereto
appearing in Item 1 of this report. In addition to historical information, this
Form 10-Q contains and may incorporate by reference statements which may
constitute forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from predicted results. 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 staement is not forward-looking. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and assumptions that are difficult to predict. Factors that could affect the
Company's actual results include, among other things, the general risks of the
securities industry, including reduced revenue during periods of lower prices or
reduced trading volume (including relating to under-performance of value-
oriented stocks) and intense competition; dependence on, and ability to recruit
key personnel; recent changes in management and risks relating to the departure
of Brooks G. Ragen; dependence on proprietary research; regional concentration;
management of growth of new and existing business; and the risks relating to
proprietary trading and correspondent brokerage services. More information about
factors that could affect the Company's financial results is included in the
Company's final prospectus dated June 22, 1998, included in the Company's
Registration Statement on Form S-1, (No. 333-50735) as filed with the SEC (the
"Registration Statement on Form S-1").
RESULTS OF OPERATIONS
Comparison of three months ended June 26, 1998 and June 27, 1997
Net revenues increased by $1,564,000, or 9.5%, to $18,062,000 for the third
quarter of fiscal 1998 as compared to the same period in fiscal 1997. Revenues
increased in virtually all of the Company's major areas of activity during the
third quarter of fiscal 1998 as compared to the same period in fiscal 1997.
Revenues from principal transactions increased modestly from the third quarter
of fiscal 1997 to the same period in fiscal 1998. Revenues from principal
transactions in debt securities increased by $532,000, or 16.6%, to $3,722,000,
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 $431,000, or 16.2%, to
$2,225,000 for the third quarter of fiscal 1998 as compared to the same period
in fiscal 1997. Decreased revenue was due to 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 $396,000, or 5.5%, to $7,635,000 for the
third quarter of fiscal 1998 as compared to the same period in fiscal 1997. The
increase was primarily due to significant growth in syndicate commissions over
the comparative period. The Company's normal universe of research focuses on
depressed, value-oriented stocks. The stock market's recent volatility combined
with the under-performance of value-oriented stocks could have a material
adverse affect on our commission business.
Other income increased by $453,000, or 56.0%, to $1,262,000 for the third
quarter of fiscal 1998 compared to the same period in fiscal 1997. The increase
reflects a $290,000 gain recorded for the Company's sale of its Pacific Stock
Exchange membership and increases in fees from investment advisory services.
Net interest income increased by $614,000, or 23.6%, to $3,218,000 for the third
quarter of fiscal 1998 as compared to the same period in fiscal 1997. Interest
income increased by $1,449,000, or 19.5%, to $8,863,000 primarily due to
increased average margin, customer credit, and money-market balances. Interest
expense increased by $835,000, or 17.4%, to $5,645,000 primarily due to an
increase in average customer credit balances.
Non-interest expenses increased by $4,244,000, or 35.5%, to $16,196,000 for the
third quarter of fiscal 1998 as compared to the same period of fiscal 1997.
This increase consists primarily of increases in compensation and benefits
expenses and nonrecurring $3,480,000 compensation charges related to the IPO
during the quarter ended June 26, 1998.
Compensation and benefits expenses increased by $639,000, or 7.7%, to $8,935,000
for the third quarter of fiscal 1998 as compared to the same period in fiscal
1997. Commission and other sales compensation expenses increased by $143,000,
or 3.6%, to $4,127,000 for the fiscal 1998 period, as a result of the increase
in commission revenues. The remaining increase in employee compensation was due
primarily 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 profits.
The nonrecurring $3,480,000 compensation charges related to the IPO reflect a
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
8
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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 and are consistent with
amounts previously reported in the Company's Registration Statement on Form S-1.
Occupancy and equipment expenses decreased $151,000, or 11.7%, to $1,142,000,
primarily due to a decline in the Company's equipment costs. Communications
expenses increased by $79,000, or 9.7%, to $894,000, primarily reflecting higher
telecommunications, printing and mailing costs due to higher trading volume and
growth in the number of customer accounts. Clearing and exchange fees increased
by $75,000, or 13.6%, to $627,000, due to higher trading volume in retail and
correspondent brokerage services. Other expenses increased by $122,000, or
12.2%, to $1,118,000, due to higher professional fees.
The Company's effective income tax rate was 67.8% in the third quarter of fiscal
1998 and 38.4% in the third quarter of fiscal 1997. The Company's effective
income tax rate was higher than the federal statutory rate due to nondeductible
stock option plan expenses which had the effect of increasing the effective tax
rate by 33.4% and 3.0% in the third quarter of 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 nine months ended June 26, 1998 and June 27, 1997
Net revenues increased by $8,701,000, or 17.6%, to $58,040,000 for the first
nine months of fiscal 1998 as compared to the same period in fiscal 1997.
Revenues increased in virtually all of the Company's major areas of activity
during the first nine months of fiscal 1998 as compared to the same period in
fiscal 1997.
Revenues from principal transactions increased by $1,773,000, or 10.4%, to
$18,859,000 for the first nine months of fiscal 1998 as compared to the same
period in fiscal 1997. Revenues from trading debt securities increased by
$2,044,000, or 22.9%, to $10,977,000, 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 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
$271,000, or 3.3%, to $7,882,000 for the first nine months of fiscal 1998 as
compared to the same period in 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 $3,629,000, or 16.6%, to $25,456,000 for the
first nine months of fiscal 1998 as compared to the same period in fiscal 1997.
The increase was primarily due to significant growth in trading volume, an
increase in average gross revenues per broker, and growth in the number of
retail brokers over the comparative period. While 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 revenue during the nine months
ended June 26, 1998. The Company's normal universe of research focuses on
depressed, value-oriented stocks. The stock market's recent volatility combined
with the under-performance of value-oriented stocks could have a material
adverse affect on our commission business.
Other income increased by $1,268,000, or 41.9%, to $4,296,000 for the first nine
months of fiscal 1998 compared to the same period in fiscal 1997, primarily due
to an increase in fees from investment advisory services.
Net interest income increased by $2,031,000, or 27.5%, to $9,429,000 for the
first nine months of fiscal 1998 as compared to the same period in fiscal 1997.
Interest income increased by $5,882,000, or 27.6%, to $27,228,000 due primarily
to increased average customer credits, margin, and money-market balances.
Interest expense increased by $3,851,000, or 27.6%, to $17,799,000 primarily due
to a significant increase in average customer credit balances
Non-interest expenses increased by $13,948,000, or 45.8%, to $44,401,000 for the
first nine months of fiscal 1998 as compared to the same period of 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 key person death benefits plan in the nine-month
period ended June 27, 1997 and a nonrecurring $3,480,000 compensation charge
related to the IPO during the nine-month period ended June 26, 1998.
Compensation and benefits expenses increased by $4,489,000, or 17.8%, to
$29,663,000 for the first nine months of fiscal 1998 as compared to the same
period in fiscal 1997. Commission and other sales compensation expenses
increased by $2,074,000, or 17.8%, to $13,743,000 for the fiscal 1998 period,
primarily as a result of the increase in commission revenues and principal
transactions, and to a
9
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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 key person death benefits plan was terminated during the nine-month period
ended June 27, 1997, which resulted in the Company's recording a benefit of
$5,000,000 during the 1997 fiscal period. No expense or benefit was recorded
during the first nine months of fiscal 1998, as this plan was terminated.
The nonrecurring $3,480,000 compensation charges related to the IPO reflect a
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
and are consistent with amounts previously reported in the Company's
Registration Statement on Form S-1.
Occupancy and equipment expenses increased $393,000, or 11.6%, to $3,783,000,
due to expansion of the Company's retail sales force. Communications expenses
increased by $325,000, or 13.9%, to $2,668,000, 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 $342,000, or
20.0%, to $2,055,000, due to higher trading volume in retail and correspondent
brokerage services. Other expenses decreased by $81,000, or 2.9%, to
$2,752,000, due to refunds obtained from the State of Washington and the City of
Seattle for overpayment of taxes in prior years, which were partially offset by
higher professional fees.
The Company's effective income tax rate was 42.4% in the first nine months of
fiscal 1998 and 37.6% in the first nine months of 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 7.5% and 3.2% in the first nine months of
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.
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 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 26, 1997 and June 26,
1998. 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 its 2,350,000 share initial public
offering (the IPO), including 1,562,500 shares sold 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 shares, including
9,600 shares sold by the Company (the "Company Over-Allotment Option"). The
Company used the net proceeds and available cash from the IPO and the Company
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 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 June 26, 1998, the Company had a
secured bank line of credit with a borrowing limit of $85,000,000 with
$33,350,000 outstanding, and a security repurchase arrangement with $45,350,000
outstanding. The ratio of assets to equity as of June 26, 1998 was approximately
6.6:1.
Certain minimum amounts of capital must be maintained by the Company to satisfy
the regulatory requirements of the SEC and the NYSE. RMI's regulatory net
capital has historically exceeded these minimum 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.
10
<PAGE>
YEAR 2000 COMPLIANCE
The Company has undertaken a project to identify and take appropriate actions
with respect to systems that are non-Year 2000 compliant and intends for such
actions to be substantially implemented by December 1998. This project includes
steps whereby the Company will identify systems provided by third-party vendors
on which the Company relies. Where Year 2000 issues exist relating to these
systems, the Company will require that the vendors take such actions as are
necessary to become Year 2000 compliant. The Company plans to monitor the
actions taken by the vendors and test for compliance where appropriate. The
Company expects that its total costs of Year 2000 compliance for its systems
will not be material. There can be no assurance, however, that any Year 2000
issue relating to the Company's systems or those of third-party vendors to the
Company will be resolved by the upcoming turn of the century or that the costs
incurred by the Company in addressing the issue will not exceed its current
expectation. The failure of the Company to implement its Year 2000 corrections
in a timely fashion or in accordance with its current cost estimates, or the
failure of other companies to correct Year 2000 issues or their non-Year 2000
compliant systems on which the Company's systems rely in a timely fashion, could
have a material adverse effect on the Company's business, financial condition,
results of operations or cash flows. The Company has not sought or obtained
insurance coverage for possible losses or damages as a result of Year 2000
issues or non-Year 2000 compliant systems.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not yet applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Unregistered Securities:
Ragen MacKenzie Group Incorporated issued 100 shares of its common stock in
consideration of a payment of $1,000 to Ragen MacKenzie Incorporated on April
15, 1998. The sale and issuance of these securities were exempt from
registration under the Securities Act pursuant to Section 4(2) thereof on the
basis that the transaction did not involve a public offering.
Use of Proceeds:
The effective date of the Registration Statement on Form S-1, registering
2,350,000 shares (1,562,500 primary shares) of Common Stock of the Company, was
June 22, 1998. The date of commencement of the offering of such registered
shares was June 23, 1998. The Company received the proceeds from the sale of
primary shares. The managing underwriters in the offering were Raymond James &
Associates, Inc. and Ragen MacKenzie Incorporated.
Information concerning the registered shares as of the date of this report is
set forth below:
<TABLE>
<CAPTION>
Title of Security: Common Stock
<S> <C>
Amount Registered: 2,350,000
Aggregate Price of the Offering Amount Registered: $32,900,000
Amount Sold by the Company: 1,562,500
Aggregate Offering Price of Amount Sold by the Company: $21,875,000
Amount Sold by Selling Shareholders: 787,500
Aggregate Offering Price of Amount Sold by Selling Shareholders: $11,025,000
</TABLE>
11
<PAGE>
A reasonable estimate of the amount of the expenses incurred by the Company in
connection with the issuance and distribution of the registered shares is as
follows:
Underwriting Discounts and Commissions: $ 1,531,250
Expenses Paid to or for Underwriters: 100,000
Other Expenses: 1,635,000
-----------
Total $ 3,266,250
===========
All of the expenses listed above were direct or indirect payments to others and
not payments to directors, officers, affiliates (except in the case of Ragen
MacKenzie Incorporated which received underwriting discounts and commissions) or
10% stockholders (or their associates) of the Company. The amount of net
offering proceeds to the Company after the total expenses listed above was
approximately $18,608,750. The Company used the net proceeds and available cash
to pay down a portion of current short-term borrowings existing on June 26, 1998
and none of such payments were made to directors, officers, affiliates or 10%
stockholders (or their associates) of the Company.
On July 27, 1998 the underwriters exercised their over-allotment option and
purchased 347,100 shares, including 9,600 shares sold by the Company. The
Company used the net proceeds and available cash from the Company Over-Allotment
Option to pay down a portion of current short-term borrowings existing on July
27, 1998 and none of such payments were made to directors, officers, affiliates
or 10% stockholders (or their associates) of the Company.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings Per Share*
27 Financial Data Schedule
* See Note 5 to the Notes to Condensed Consolidated Financial Statements.
(b) Reports on Form 8-K
The company filed no reports on Form 8-K during the quarter ended June 26,
1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAGEN MACKENZIE GROUP INCORPORATED
(REGISTRANT)
DATE: AUGUST 10, 1998 BY: /s/ Lesa A. Sroufe
---------------------------------------
Lesa A. Sroufe
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
DATE: AUGUST 10, 1998 BY: /s/ V. Lawrence Bensussen
---------------------------------------
V. Lawrence Bensussen
Senior Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -----------------------------------------------------
11 Computation of Earnings per Share.*
27 Financial Data Schedule.
* See Note 5 of the Company's Notes to Condensed Consolidated Financial
Statements
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> SEP-25-1998 SEP-25-1998
<PERIOD-START> SEP-27-1997 MAR-28-1998
<PERIOD-END> JUN-26-1998 JUN-26-1998
<CASH> 3,992 3,992
<RECEIVABLES> 122,807 122,807
<SECURITIES-RESALE> 402,458 402,458
<SECURITIES-BORROWED> 2,377 2,377
<INSTRUMENTS-OWNED> 159,083 159,083
<PP&E> 1,300 1,300
<TOTAL-ASSETS> 697,845 697,845
<SHORT-TERM> 33,350 33,350
<PAYABLES> 354,485 354,485
<REPOS-SOLD> 45,350 45,350
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 144,298 144,298
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 134 134
<OTHER-SE> 105,225 105,225
<TOTAL-LIABILITY-AND-EQUITY> 697,845 697,845
<TRADING-REVENUE> 18,859 5,947
<INTEREST-DIVIDENDS> 27,228 8,863
<COMMISSIONS> 25,456 7,635
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 4,296 1,262
<INTEREST-EXPENSE> 17,799 5,645
<COMPENSATION> 29,663 8,935
<INCOME-PRETAX> 13,639 1,866
<INCOME-PRE-EXTRAORDINARY> 7,855 600
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,855 600
<EPS-PRIMARY> .74 .05
<EPS-DILUTED> .71 .05
</TABLE>
