<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1998
REGISTRATION NO. 333-50421
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
RAGEN MACKENZIE GROUP INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
<TABLE>
<S> <C> <C>
WASHINGTON 6211 91-1898738
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
999 THIRD AVENUE, SUITE 4300
SEATTLE, WASHINGTON 98104
(206) 343-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
V. LAWRENCE BENSUSSEN
SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
RAGEN MACKENZIE GROUP INCORPORATED
999 THIRD AVENUE, SUITE 4300
SEATTLE, WASHINGTON 98104
PHONE: (206) 343-5000
FAX: (206) 464-0901
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
Copies to:
STEWART M. LANDEFELD
DAVID F. MCSHEA
MICHAEL C. PIRAINO
PERKINS COIE LLP
1201 THIRD AVENUE, 40TH FLOOR
SEATTLE, WASHINGTON 98101-3099
PHONE: (206) 583-8888
FAX: (206) 583-8500
--------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND ALL OTHER
CONDITIONS TO THE REORGANIZATION (THE "REORGANIZATION") OF THE REGISTRANT AND
ITS SUBSIDIARIES, INCLUDING RAGEN MACKENZIE INCORPORATED, A WASHINGTON
CORPORATION, PURSUANT TO THE AGREEMENT AND PLAN OF MERGER DESCRIBED IN THE
ENCLOSED PROXY STATEMENT/PROSPECTUS HAVE BEEN SATISFIED OR WAIVED.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B common stock, $.01 par val-
ue................................ 12,034,015(2) $7.40 $89,051,711 $26,270(5)
- ----------------------------------------------------------------------------------------------------------
Class C common stock, $.01 par val-
ue................................ 274,176(3) $7.40 $2,028,902 $598(5)
- ----------------------------------------------------------------------------------------------------------
Class D common stock, $.01 par val-
ue................................ 215,250(4) $7.40 $1,592,850 $470(5)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) of the Securities Act of 1933, as amended,
based on the book value of the shares of common stock of Ragen MacKenzie
Incorporated on March 27, 1998.
(2) Based on the maximum number of shares of Class B common stock of Holding
Company to be issued in connection with the Reorganization described
herein, assuming exercise of all outstanding options, and all options that
may to be granted pursuant to agreements to grant options, to purchase
common stock, $.01 par value per share, of Ragen MacKenzie Incorporated.
Includes also such indeterminate number of shares of common stock, $.01
par value per share, of Holding Company as from time to time may be issued
upon conversion of the Class B common stock registered hereunder.
(3) Includes such indeterminate number of shares of common stock, $.01 par
value per share, of Holding Company as from time to time may be issued
upon conversion of the Class C common stock registered hereunder.
(4) Includes such indeterminate number of shares of common stock, $.01 par
value per share, of Holding Company as from time to time may be issued
upon conversion of the Class D common stock registered hereunder.
(5) Previously paid.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
RAGEN MACKENZIE INCORPORATED
999 THIRD AVENUE, SUITE 4300
SEATTLE, WASHINGTON 98104
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JUNE 21, 1998
----------------
TO OUR SHAREHOLDERS:
A Special Meeting of Shareholders of Ragen MacKenzie Incorporated ("RMI")
will be held at 2:00 p.m. Pacific Daylight Time on Sunday, June 21, 1998, at
the offices of the law firm of Perkins Coie LLP, 1201 Third Avenue, 41st Floor
Large Conference Room, Seattle, Washington, for the following purposes:
1. To consider and act upon a reorganization of RMI and its subsidiaries
as described in the accompanying Proxy Statement/Prospectus (the
"Reorganization"), including an Agreement and Plan of Merger dated as of
May 29, 1998 (the "Merger Agreement"), by and among RMI, Ragen MacKenzie
Group Incorporated, a recently formed Washington corporation and a wholly
owned subsidiary of RMI ("Holding Company"), and RMGI Merger Corp., a
recently formed Washington corporation and a wholly owned subsidiary of
Holding Company ("Merger Sub"), pursuant to which the Reorganization is to
be effected. The Merger Agreement contemplates, among other things, that
Merger Sub will merge with RMI, with RMI as the surviving corporation (the
"Merger"). As a result of the Merger and certain related transactions: (a)
RMI will become a wholly owned subsidiary of Holding Company and (b) each
outstanding share of common stock, par value $.01 per share, of RMI (other
than shares held by holders who have properly exercised dissenters' rights
under Washington law) (i) originally acquired from RMI pursuant to the 1990
Stock Purchase Agreement among RMI and five investors (274,176 shares) will
be converted into one share of Class C common stock, par value $.01 per
share, of Holding Company, (ii) originally acquired from RMI pursuant to
the 1995 Stock Purchase Agreements among RMI and five investors (215,250
shares) will be converted into one share of Class D common stock, par value
$.01 per share, of Holding Company, and (iii) otherwise acquired from RMI
(10,538,383 shares as of May 21, 1998, plus such additional shares as shall
be issued upon exercise of stock options after such date) will be converted
into one share of Class B common stock, par value $.01 per share, of
Holding Company. (Each share of Class B, C and D common stock of Holding
Company, if the public offering of Common Stock currently contemplated by
Holding Company is consummated, will be converted into one share of Common
Stock of Holding Company);
2. To consider and act upon a proposal to direct RMI to elect four
additional directors to the Board of Directors of Holding Company
immediately prior to effectiveness of the Reorganization; and
3. To transact such other business as may properly come before the
Special Meeting.
Further information as to the proposals to be considered and acted upon at
the Special Meeting can be found in the accompanying Proxy
Statement/Prospectus.
Only shareholders of record at the close of business on May 27, 1998 are
entitled to notice of, and to vote at, the Special Meeting.
By Order of the Board of Directors
Michael W. Reinhardt
Assistant Secretary
Seattle, Washington
June 1, 1998
EACH SHAREHOLDER IS URGED TO COMPLETE, SIGN, DATE AND RETURN PROMPTLY THE
ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE, TO WHICH NO POSTAGE NEED BE
AFFIXED IF MAILED IN THE UNITED STATES.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS SHALL NOT CONSTITUTE AN +
+OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR +
+SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROXY STATEMENT/PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION, DATED JUNE 1, 1998
RAGEN MACKENZIE INCORPORATED
999 THIRD AVENUE, SUITE 4300
SEATTLE, WASHINGTON 98104
(206) 343-5000
PROXY STATEMENT
----------
RAGEN MACKENZIE GROUP INCORPORATED
999 THIRD AVENUE, SUITE 4300
SEATTLE, WASHINGTON 98104
(206) 343-5000
PROSPECTUS
----------
This Proxy Statement/Prospectus and the accompanying form of proxy are
furnished in connection with the solicitation of proxies by the Board of
Directors of Ragen MacKenzie Incorporated ("RMI") for use at a Special Meeting
of Shareholders of RMI to be held at 2:00 p.m. Pacific Daylight Time on Sunday,
June 21, 1998 at the offices of the law firm of Perkins Coie LLP, 1201 Third
Avenue, 41st Floor Large Conference Room, Seattle, Washington, and at any
adjournment or postponement thereof (the "Special Meeting"). Only shareholders
of record at the close of business on May 27, 1998 (the "Record Date") are
entitled to notice of, and to vote at, the Special Meeting.
At the Special Meeting, shareholders will be asked to approve a
reorganization of RMI and its subsidiaries, including the Agreement and Plan of
Merger dated as of May 29, 1998 (the "Merger Agreement"), by and among RMI,
Ragen MacKenzie Group Incorporated, a recently formed Washington corporation
and wholly owned subsidiary of RMI ("Holding Company"), and RMGI Merger Corp.,
a recently formed Washington corporation and a wholly owned subsidiary of
Holding Company ("Merger Sub"), pursuant to which the reorganization is to be
effected (such reorganization, including the Merger (as hereinafter defined),
shall be referred to herein as the "Reorganization"). The Merger Agreement
contemplates, among other things, that Merger Sub will merge with RMI, with RMI
as the surviving corporation (the "Merger"). As a result of the Merger and
certain related transactions: (i) RMI will become a wholly owned subsidiary of
Holding Company and (ii) each outstanding share of common stock, par value $.01
per share, of RMI ("RMI Stock") (other than shares held by holders who have
properly exercised dissenters' rights under Washington law), (a) originally
acquired from RMI pursuant to the 1990 Stock Purchase Agreement among RMI and
five investors will be converted into one share of Class C common stock, par
value $.01 per share, of Holding Company (the "Class C common stock"), (b)
originally acquired from RMI pursuant to the 1995 Stock Purchase Agreements
among RMI and five investors will be converted into one share of Class D common
stock, par value $.01 per share, of Holding Company (the "Class D common
stock"), and (c) otherwise acquired from RMI will be converted into one share
of Class B common stock, par value $.01 per share, of Holding Company (the
"Class B common stock" and, together with the Class C common stock and the
Class D common stock, the "Reorganization Common Stock"). See "Proposal I: The
Reorganization."
At the Special Meeting, shareholders will also be asked to approve a proposal
to direct RMI to elect four additional directors to the Board of Directors of
Holding Company immediately prior to effectiveness of the Reorganization. See
"Proposal II: Election of Directors to Holding Company Board."
This Proxy Statement/Prospectus also serves as the Prospectus of Holding
Company under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the issuance of up to 12,523,441 shares of Reorganization
Common Stock in connection with the Reorganization. Further information
concerning the shares offered hereby is contained in "Proposal I: The
Reorganization--Comparison of Shareholder Rights--Certain Substantive
Differences in Articles of Incorporation and Bylaws" and "--Description of
Holding Company Capital Stock."
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
The principal executive offices of RMI are located at 999 Third Avenue, Suite
4300, Seattle, Washington 98104. The principal executive offices of Holding
Company are located at 999 Third Avenue, Suite 4300, Seattle, Washington 98104.
It is anticipated that this Proxy Statement/Prospectus and the accompanying
proxy will first be sent to shareholders on or about June , 1998.
SEE "RISK FACTORS" COMMENCING ON PAGE 13 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED IN CONNECTION WITH THE REORGANIZATION.
----------
The date of this Proxy Statement/Prospectus is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 2
FORWARD-LOOKING STATEMENTS................................................ 2
SUMMARY................................................................... 3
RISK FACTORS.............................................................. 13
THE SPECIAL MEETING....................................................... 24
PROPOSAL I: THE REORGANIZATION............................................ 26
Current Corporate Structure............................................. 26
The Reorganization...................................................... 26
Recommendation of the RMI Board; Reasons for the Reorganization......... 27
Exchange of Certificates in the Merger.................................. 28
Material Federal Income Tax Consequences................................ 28
Accounting.............................................................. 29
Merger Agreement........................................................ 29
Holding Company Articles of Incorporation and Bylaws.................... 30
Description of Holding Company Capital Stock............................ 30
Washington Antitakeover Statute......................................... 35
Certain Provisions in Holding Company Articles.......................... 35
Director and Officer Indemnification and Liability...................... 36
Certain Effects of the Reorganization................................... 36
Comparison of Shareholder Rights--Certain Substantive Differences in
Articles of Incorporation and Bylaws................................... 37
Regulatory Matters...................................................... 40
Interests of Certain Persons in the Reorganization...................... 40
Rights of Dissenting Shareholders....................................... 42
Certain Information Regarding Holding Company........................... 43
PROPOSAL II: ELECTION OF DIRECTORS TO HOLDING COMPANY BOARD............... 44
BUSINESS ................................................................. 45
Company Overview........................................................ 45
Background.............................................................. 46
Business Strategy....................................................... 46
Brokerage Services...................................................... 47
Principal Transactions.................................................. 50
Correspondent Brokerage Services........................................ 51
Investment Banking and Underwriting..................................... 52
Interest Income and Customer Financing.................................. 52
Accounting, Administration and Operations............................... 53
Risk Management......................................................... 54
Competition............................................................. 55
Properties.............................................................. 56
Employees............................................................... 56
Litigation and Potential Securities Law Liability....................... 56
REGULATION................................................................ 57
NET CAPITAL REQUIREMENTS.................................................. 59
SELECTED FINANCIAL DATA................................................... 61
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 63
Overview................................................................ 63
Death Benefits Plan..................................................... 64
Components of Revenues and Expenses..................................... 65
Effects of Inflation.................................................... 65
Earnings Charges if IPO Consummated..................................... 66
Results of Operations................................................... 67
Liquidity and Capital Resources......................................... 71
Year 2000 Compliance.................................................... 71
Statement of Financial Accounting Standards No. 130 and No. 131......... 72
MANAGEMENT OF HOLDING COMPANY............................................. 73
Directors, Director Nominees and Executive Officers..................... 73
Director Committees and Compensation.................................... 74
Compensation Committee Interlocks and Insider Participation............. 75
Executive Compensation.................................................. 75
Compensation Plans...................................................... 76
Employment Contracts.................................................... 80
Change-in-Control Arrangements Under Option Plans....................... 80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 81
HOLDING COMPANY BENEFICIAL OWNERSHIP...................................... 82
RMI BENEFICIAL OWNERSHIP.................................................. 83
INDEPENDENT AUDITORS...................................................... 84
OTHER BUSINESS............................................................ 84
LEGAL OPINION............................................................. 84
TAX OPINION............................................................... 85
EXPERTS................................................................... 85
FINANCIAL STATEMENTS...................................................... F-1
ANNEX A: AGREEMENT AND PLAN OF MERGER..................................... A-1
ANNEX B: ARTICLES OF INCORPORATION AND BYLAWS OF RAGEN MACKENZIE GROUP
INCORPORATED............................................................. B-1
ANNEX C: CHAPTER 23B.13 OF THE WASHINGTON BUSINESS CORPORATION ACT
(DISSENTERS' RIGHTS)..................................................... C-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Under the rules and regulations of the Securities and Exchange Commission
(the "Commission"), the solicitation of RMI's shareholders to approve the
Reorganization constitutes an offering of Reorganization Common Stock to be
issued in connection therewith. Accordingly, Holding Company has filed a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act with respect to such offering, and this Proxy
Statement/Prospectus constitutes a Prospectus of Holding Company filed as part
of the Registration Statement. This Proxy Statement/Prospectus does not
contain all the information set forth in the Registration Statement in
connection with the Reorganization described herein, certain of which
information is omitted as permitted by Commission rules. The Commission
maintains a web site that contains a copy of the Registration Statement and
all exhibits thereto, as well as reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov. The Registration Statement, including
exhibits, may be inspected on the Commission's web site or inspected or copied
at prescribed rates at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact made in this Proxy
Statement/Prospectus or incorporated herein by reference are "forward-looking
statements." In particular, the statements under the headings "Summary," and
those located elsewhere herein regarding industry prospects, Holding Company's
future results of operations or financial position are forward-looking
statements. Forward-looking statements represent management's current
expectations and are inherently uncertain. Investors are warned that Holding
Company's actual results may differ significantly from management's
expectations and, therefore, from the results discussed in such forward-
looking statements. Factors that might cause such differences include, but are
not limited to, those described in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
No person has been authorized to give any information or to make any
representations not contained in this Proxy Statement/Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by RMI or Holding Company. This Proxy Statement/Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
of the securities offered hereby in any jurisdiction to any person to whom it
is unlawful to make such offer or solicitation in such jurisdiction. This
Proxy Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than those to which it
relates. The delivery of this Proxy Statement/Prospectus at any time does not
imply that the information herein is correct as of any time subsequent to its
date.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Proxy Statement/Prospectus and the
Annexes hereto. Shareholders are urged to read this Proxy Statement/Prospectus
and the Annexes in their entirety. Unless otherwise indicated, all references
herein to the "Company" or "Ragen MacKenzie" refer to RMI, prior to the
Reorganization, and to Holding Company and RMI as its consolidated subsidiary,
after the Reorganization.
Background..................
RMI is a broker-dealer registered with the
Commission and is a member of the New York Stock
Exchange (the "NYSE"). RMI's primary business is
retail securities brokerage, which it conducts
through its Seattle, Washington headquarters and
10 additional offices in Washington, Oregon and
Alaska, which include four offices operated by
independent contractors. Other aspects of RMI's
business include proprietary trading of certain
fixed income securities, institutional brokerage
services, correspondent brokerage services and
investment banking services.
The Reorganization..... The Board of Directors of RMI (the "RMI Board")
has approved the Reorganization pursuant to
which, subject to shareholder and NYSE approval,
RMI will become a wholly owned subsidiary of
Holding Company. Shareholders who were previously
shareholders of RMI immediately prior to the
Reorganization (other than those who properly
exercise dissenters' rights under Washington law)
will be shareholders of Holding Company
immediately after the Reorganization, and the
business of Holding Company after the
Reorganization will be conducted primarily
through RMI as an operating subsidiary of Holding
Company. As a result of the Merger and certain
related transactions, each outstanding share of
RMI Stock (other than shares held by holders who
have properly exercised dissenters' rights under
Washington law) (i) originally acquired from RMI
pursuant to the 1990 Stock Purchase Agreement
among RMI and five investors will be converted
into one share of Class C common stock, (ii)
originally acquired from RMI pursuant to the 1995
Stock Purchase Agreements among RMI and five
investors will be converted into one share of
Class D common stock, and (iii) otherwise
acquired from RMI will be converted into one
share of Class B common stock. See "Proposal I:
The Reorganization--The Reorganization." Each
holder of shares of Class B, C or D common stock
immediately after the Reorganization will be
subject to certain restrictions on transfer and,
in the case of holders of Class B and D common
stock, rights of redemption by Holding Company
under the Articles of Incorporation of Holding
Company (the "Holding Company Articles") that are
substantially similar to restrictions and rights
applicable to such holder as an RMI shareholder
immediately prior to the Reorganization pursuant
to certain shareholder agreements. See
"Proposal I: The Reorganization--Description of
Holding Company Capital Stock" and "--Comparison
of Shareholder Rights--Certain Substantive
Differences in Articles of Incorporation and
Bylaws--Shareholder
3
<PAGE>
Agreements Restricting Transfer of Common Stock."
In the event of a "Conversion Event," which
includes a firm commitment underwritten public
offering of common stock, $.01 par value per
share, of Holding Company (the "Common Stock")
that meets certain criteria, the Class B, C and D
common stock will automatically convert into
Common Stock that is not subject to the
restrictions on transfer or rights of redemption
applicable to Class B, C and D common stock under
the Holding Company Articles. Holding Company has
filed a Registration Statement on Form S-1 in
connection with, and expects to shortly commence
its road show with respect to, an initial public
offering of 2,250,000 shares of Common Stock (the
"IPO") which it expects to be consummated shortly
after the Effective Time. If the IPO occurs, it
would constitute a "Conversion Event," pursuant
to which, upon consummation of the IPO, all
shares of Class B, C and D common stock would
automatically convert into shares of Common
Stock. See "Proposal I: The Reorganization--
Description of Holding Company Capital Stock--
Common Stock" and "--Certain Information
Regarding Holding Company" and "Risk Factors--
Restrictions on Transfers of Stock if No Initial
Public Offering."
Recommendation of the RMI
Board; Reasons for the The RMI Board has approved the Reorganization,
Reorganization.............. adopted and approved the Merger Agreement
attached hereto as Annex A and unanimously
recommends the approval of the Reorganization
(which includes approval of the Merger Agreement)
by the shareholders of RMI. In making its
decision to recommend the Reorganization to the
shareholders, the RMI Board considered a number
of factors, including (i) shareholder liquidity
and access to capital markets, (ii) greater
flexibility with respect to future expansion,
(iii) the complexity of Holding Company's capital
structure, and (iv) the establishment of a board
of directors of Holding Company that is smaller
than the current RMI Board. See "Proposal I: The
Reorganization--Recommendation of the RMI Board;
Reasons for the Reorganization." In addition, the
RMI Board believes that the holding company
structure will facilitate an initial public
offering and the creation of a public market for
the Common Stock. There can be no assurance that
an initial public offering will occur at or after
the Reorganization. See "Risk Factors--
Restrictions on Transfers of Stock if No Initial
Public Offering."
Record Date.................
Only holders of record of RMI Stock at the close
of business on May 27, 1998, which has been fixed
as the Record Date, are entitled to notice of,
and to vote at, the Special Meeting.
Quorum; Vote Required....... The presence in person or by proxy of holders
representing a majority of the voting power of
RMI Stock entitled to vote is necessary to
constitute a quorum for the transaction of
business at the Special Meeting. The affirmative
vote of the holders of not less
4
<PAGE>
than two-thirds of the outstanding shares of RMI
Stock, present in person or represented by proxy
and entitled to vote at the Special Meeting, is
required to approve the Reorganization. The
affirmative vote of the holders of not less than
a majority of the outstanding shares of RMI
Stock, present in person or represented by proxy
and entitled to vote at the Special Meeting, is
required to approve the proposal to direct RMI to
elect four additional directors to the Holding
Company's Board of Directors (the "Holding
Company Board") immediately prior to
effectiveness of the Reorganization. Abstentions
will be counted as votes against approval of the
Reorganization and the proposal to direct RMI to
elect three additional directors to the Holding
Company Board. See "The Special Meeting--Quorum;
Vote Required."
Material Federal Income Tax
Consequences................ RMI has received an opinion of Perkins Coie
LLP, counsel to RMI ("Tax Counsel"), to the
effect that it is the opinion of Tax Counsel
that, subject to the assumptions and the
limitations set forth in "Proposal I: The
Reorganization--Material Federal Income Tax
Consequences," the material federal income tax
consequences of the Merger for a holder of RMI
Stock who is a citizen or resident of the United
States are as follows: (i) the Merger will be
treated as a reorganization under Section 368 of
the Internal Revenue Code of 1986, as amended
(the "Code"), or as an exchange pursuant to
Section 351 of the Code , (ii) no gain or loss
will be recognized by the holders of RMI Stock
solely as a result of the conversion of RMI Stock
solely for Reorganization Common Stock pursuant
to the Merger, (iii) the tax basis of the
Reorganization Common Stock received by each such
holder pursuant to the Merger will be the same as
the holder's tax basis in RMI Stock converted in
the Merger, and (iv) the holding period of such
Reorganization Common Stock will include the
period during which such holder held RMI Stock
converted in the Merger.
In rendering such opinion, Tax Counsel has relied
upon certain factual assumptions and upon
representations contained in certificates of RMI.
See "Proposal I: The Reorganization--Material
Federal Income Tax Consequences" for a more
detailed description of the above federal income
tax matters and information with respect to the
applicability of the foregoing to certain
taxpayers subject to special treatment.
Accounting Treatment........ The Merger will be accounted for as if it were a
"pooling of interests" for financial reporting
purposes. As a result, the historical book basis
of RMI's assets and accounting methods will carry
over after consummation of the Merger. See
"Proposal I: The Reorganization--Accounting."
Merger Agreement............
The Merger Agreement has been adopted and
approved by the Board of Directors of each of
RMI, Holding Company and Merger Sub, and by the
sole shareholder of each of Holding Company and
5
<PAGE>
Merger Sub, and each of such companies has
executed the Merger Agreement. The Merger
Agreement provides, among other things, that (i)
Merger Sub will be merged with RMI, with RMI as
the surviving corporation, and (ii) each share of
RMI Stock outstanding immediately before the
Effective Time (as hereinafter defined) (other
than shares held by holders who have properly
exercised dissenters' rights under Washington
law) (a) originally acquired from RMI pursuant to
the 1990 Stock Purchase Agreement among RMI and
five investors will be converted into one share
of Class C common stock, (b) originally acquired
from RMI pursuant to the 1995 Stock Purchase
Agreements among RMI and five investors will be
converted into one share of Class D common stock,
and (c) otherwise acquired from RMI will be
converted into one share of Class B common stock.
It is a condition precedent to the Reorganization
that not more than 2% of RMI Stock is held by RMI
shareholders that perfect dissenters' rights,
which condition is waivable by the unilateral
action of the Holding Company Board or the RMI
Board.
As a result of the Merger and certain related
transactions, RMI will become a wholly owned
subsidiary of Holding Company.
Subject to applicable laws, the Merger Agreement
may be amended by mutual consent of RMI, Holding
Company and Merger Sub at any time before or
after approval of matters presented in connection
with the Merger by the shareholders of RMI, but,
after any such approval, no amendment will be
made which amends, reduces or changes the various
rights and preferences of the capital stock of
Holding Company to be issued to shareholders of
RMI without further approval by such
shareholders. Other amendments would not require
RMI shareholder approval. The Merger Agreement
may also be terminated and abandoned at any time
by unilateral action of the RMI Board or the
Holding Company Board. See "Proposal I: The
Reorganization--Merger Agreement."
Directors and Management....
The current directors of Holding Company, Lesa A.
Sroufe, John L. MacKenzie, Robert J. Mortell, Jr.
and Mark A. McClure, will serve as the directors
of Holding Company immediately after the
Reorganization. In addition, the Holding Board
has nominated Kirby L. Cramer, Arthur W.
Harrigan, Jr., Peter B. Madoff and Gregory B.
Maffei for election to the Holding Company Board
immediately prior to effectiveness of the
Reorganization. See "Proposal II: Election of
Directors to Holding Company Board." The
following current executive officers of Holding
Company will continue to serve as its executive
officers after the Reorganization: Lesa A.
Sroufe, Chief Executive Officer and Chairman of
the Board, Robert J. Mortell, Jr., President,
Chief Operating Officer and Treasurer, Mark A.
McClure, Executive Vice President, and
V. Lawrence Bensussen, Senior Vice President,
Chief Financial Officer and Secretary. See
"Management of Holding Company."
6
<PAGE>
Dividend Policy.............
Holding Company has not previously paid dividends
and has no present intention to pay dividends in
the future. See "Proposal I: The Reorganization--
Certain Information Regarding Holding Company--
Dividend Policy."
Certain Effects of the
Reorganization.............. Upon consummation of the Merger, in accordance
with the terms of the Merger Agreement, Holding
Company will assume certain obligations and
liabilities of RMI, including RMI's obligations
under the RMI 1989 Stock Option Plan (the "1989
Plan"), the RMI 1993 Stock Option Plan (the "1993
Plan") and the RMI 1996 Stock Incentive
Compensation Plan (the "1996 Plan")
(collectively, the "Assumed Plans") and the RMI
1997 Share Repurchase Plan (the "Share Repurchase
Plan"). A vote in favor of the Reorganization,
including the Merger, will constitute approval of
Holding Company's assumption of RMI's obligations
under the Assumed Plans and the Share Repurchase
Plan. As required by certain shareholder
agreements, RMI consents to the transfer of RMI
Stock and its exchange for Reorganization Common
Stock. Upon consummation of the Merger in
accordance with the terms of the Merger
Agreement, these shareholder agreements will
terminate. See "Proposal I: The Reorganization--
Certain Effects of the Reorganization."
Certain Substantive
Differences in Articles of After the Reorganization, the business and
Incorporation and Bylaws.... legal affairs of Holding Company will be governed
by the Holding Company Articles and Holding
Company's Bylaws (the "Holding Company Bylaws")
attached hereto as Annex B. The following tables
set forth certain differences between the Holding
Company Articles and Bylaws and RMI's Restated
Articles of Incorporation, as amended (the "RMI
Articles"), and Bylaws, as amended (the "RMI
Bylaws"), that will result in changes in the
rights of shareholders if the Merger is
consummated. As outlined in the table entitled
"Comparison of Transfer and Redemption Provisions
Applicable to RMI Stock and to Reorganization
Common Stock," in lieu of contractual limitations
and rights that currently apply to the transfer
of RMI Stock, substantially similar restrictions
and rights with respect to transfer will be
included in the Holding Company Articles with
respect to Reorganization Common Stock. Other
differences between the charter documents of RMI
and those of Holding Company are set forth in the
table entitled "Comparison of Certain Provisions
of Articles of Incorporation and Bylaws of RMI
and Holding Company." See "Proposal I: The
Reorganization--Comparison of Shareholder
Rights--Certain Substantive Differences in
Articles of Incorporation and Bylaws."
7
<PAGE>
COMPARISON OF TRANSFER AND REDEMPTION PROVISIONS APPLICABLE TO RMI STOCK
AND TO REORGANIZATION COMMON STOCK
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TRANSFER RESTRICTIONS REDEMPTION
- -----------------------------------------------------------------------------------------------------------------------
REORGANIZATION REORGANIZATION
COMMON STOCK REORGANIZATION COMMON STOCK REORGANIZATION
BEFORE IPO COMMON STOCK BEFORE IPO COMMON STOCK
REORGANIZATION OR OTHER AFTER IPO OR OTHER AFTER IPO
SHAREHOLDER COMMON STOCK "CONVERSION OR OTHER "CONVERSION OR OTHER
AGREEMENT INTO WHICH RMI EVENT" "CONVERSION EVENT" "CONVERSION
PURSUANT TO STOCK IS RMI STOCK (PURSUANT TO EVENT" RMI STOCK (PURSUANT TO EVENT"
WHICH RMI CONVERTED (PURSUANT TO HOLDING (PURSUANT TO (PURSUANT TO HOLDING (PURSUANT TO
STOCK PURSUANT TO SHAREHOLDER COMPANY HOLDING COMPANY SHAREHOLDER COMPANY HOLDING COMPANY
IS HELD REORGANIZATION AGREEMENT) ARTICLES)(1) ARTICLES)(1)(2) AGREEMENT) ARTICLES)(1) ARTICLES)(1)(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1990 Stock Class C RMI and Holding None None None None
Purchase Common other RMI Company and
Agreement Stock shareholders other
have a right Holding
of first Company
refusal shareholders
except for have right
transfers to of first
immediate refusal
family except for
members, transfers to
certain immediate
trusts and family
by members,
inheritance. certain
Offer must trusts and
be made at by
lower of inheritance.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
- -----------------------------------------------------------------------------------------------------------------------
1995 Stock Class D RMI and Holding None RMI may Holding None
Purchase Common other RMI Company and redeem Company
Agreements Stock shareholders other stock at may redeem
have a right Holding book value stock at
of first Company at any book value
refusal shareholders time. at any
except for have right time.
transfers to of first
immediate refusal
family except for
members, transfers to
certain immediate
trusts and family
by members,
inheritance. certain
Offer must trusts and
be made at by
lower of inheritance.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
- -----------------------------------------------------------------------------------------------------------------------
1987 Class B RMI and Holding None RMI may Holding None
Subscription Common other RMI Company and redeem Company
Agreement Stock shareholders other stock at may redeem
have a right Holding book value stock at
of first Company at any book value
refusal. shareholders time. at any
Offer must have right time.
be made at of first
lower of refusal.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
- -----------------------------------------------------------------------------------------------------------------------
1988-1998 Class B RMI and Holding None RMI may Holding None
Shareholder Common other RMI Company and redeem Company
Agreements Stock shareholders other stock at may redeem
have a right Holding book value stock at
of first Company at any book value
refusal. shareholders time. at any
Offer must have right time.
be made at of first
lower of refusal.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
</TABLE>
(1) The Shareholder Agreements which, immediately prior to the
Reorganization, impose certain contractual limitations on the transfer of
RMI Stock and, in certain cases, provided RMI with a right of redemption,
will no longer be in effect immediately after the Reorganization.
Beginning immediately after the Reorganization, and until the IPO or
other "Conversion Event," the Holding Company Articles impose similar
restrictions on the Reorganization Common Stock.
(2) If the IPO or another Conversion Event occurs, the Reorganization Common
Stock will automatically convert into Common Stock that, pursuant to the
Holding Company Articles, is not subject to the restrictions on transfer
or rights of redemption applicable to the Reorganization Common Stock.
8
<PAGE>
COMPARISON OF OTHER PROVISIONS OF ARTICLES OF INCORPORATION
AND BYLAWS OF RMI AND HOLDING COMPANY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RMI ARTICLES AND BYLAWS HOLDING COMPANY ARTICLES AND BYLAWS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCK None Blank Check Preferred Stock
- -------------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS Permit 1 - 20 members, each elected Permit 3 - 15 members; after first
annually; directors may be removed with primary public offering of equity
or without cause by a majority of the securities, members divided into 2
shares entitled classes, each class serving staggered 2-
to vote at an election of directors year term; directors may be removed only
for cause by the holders of no less than
two-thirds of the shares entitled to
elect the director.
- -------------------------------------------------------------------------------------------------------------
ANNUAL MEETINGS OF Held on the third Thursday in November; Held 90 - 180 days after fiscal year-
SHAREHOLDERS any appropriate business may be end; business limited to that brought by
conducted Holding Company Board or by shareholder
who follows certain procedures; Holding
Company Board may postpone the meeting
for up to 120 days
- -------------------------------------------------------------------------------------------------------------
SPECIAL MEETINGS OF May be called by shareholders holding at May be called by written request of
SHAREHOLDERS least 10% of outstanding shares entitled shareholders holding at least 25% of
to vote at the meeting outstanding shares entitled to vote at
the meeting if Holding Company becomes a
"public company"
- -------------------------------------------------------------------------------------------------------------
VOTING RIGHTS Cumulative voting in elections for No cumulative voting in elections for
directors directors
- -------------------------------------------------------------------------------------------------------------
MERGERS, CONSOLIDATIONS, Requires approval by each voting group Requires approval by two-thirds of votes
SALES OF ASSETS entitled to vote by entitled to be cast; but if certain
two-thirds of votes entitled to be cast business combinations are approved by
Continuing Directors, shareholder vote
required is majority of outstanding
shares
- -------------------------------------------------------------------------------------------------------------
AMENDMENT OF GOVERNING Approval by each voting group entitled Approval by a majority of the outstand-
INSTRUMENTS to vote by two-thirds of ing shares required to approve amendment
votes entitled to be cast required to of Holding Company Articles' provisions
amend RMI Articles' provisions that that require shareholder approval to
require shareholder approval for amend, except provisions regarding
amendment amendment of certain provisions of the
Holding Company Bylaws and Articles, the
classified Board of Directors, special
voting provisions for business combina-
tions, and special meetings of share-
holders require approval by two-thirds
of outstanding shares to amend
</TABLE>
Rights of Dissenting A record holder of RMI Stock will have the right to
Shareholders............. dissent with respect to the Merger and, subject to
certain conditions, will be entitled to receive a
cash payment equal to the fair value of his or her
shares under the Washington Business Corporation
Act (the "WBCA"). Any RMI shareholder who intends
to exercise his or her dissenter's rights must not
vote his or her shares in favor of the
Reorganization and must satisfy the procedural
requirements concerning dissenters' rights
specified in the WBCA, which is attached hereto as
Annex C. See "Proposal I: The Reorganization--
Rights of Dissenting Shareholders."
Regulatory Matters....... The business of RMI and Holding Company and the
securities industry in general are subject to
extensive regulation in the United States. As a
consequence, the Reorganization must be approved by
the NYSE. See "Proposal I: The Reorganization--
Regulatory Matters."
Initial Public Offering..
Holding Company has filed a Registration Statement
on Form S-1 in connection with, and expects to
shortly commence its road show with respect to, the
IPO, which it expects to be consummated shortly
after the Effective Time. There can be no assurance
that the IPO will occur. Shareholders of RMI are
cautioned not to rely on the possibility of the IPO
when determining whether to vote in favor of the
Reorganization. If the IPO occurs, it would
constitute a "Conversion Event" pursuant to which,
upon consummation of the IPO, all shares of Class
B, C and D common stock would automatically convert
into shares of Common Stock. See "Proposal I: The
Reorganization--Certain Information Regarding
Holding Company--Initial Public Offering" and "Risk
Factors--Restrictions on Transfers of Stock if No
Initial Public Offering."
9
<PAGE>
Transfer Agent and The transfer agent and registrar for the Common
Registrar................... Stock will be ChaseMellon Shareholder Services
L.L.C. (the "Transfer Agent").
Election of Directors.......
The Holding Company Board has nominated four
additional persons for election as directors of
Holding Company immediately prior to
effectiveness of the Reorganization. The RMI
Board recommends that RMI shareholders approve a
proposal to direct RMI to elect four additional
directors to the Holding Company Board. See
"Proposal II: Election of Directors to Holding
Company Board."
10
<PAGE>
SUMMARY FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX-MONTH
FISCAL YEAR ENDED PERIOD ENDED
--------------------------------------- -------------------
SEPT. SEPT. SEPT. SEPT. SEPT.
24, 30, 29, 27, 26, MARCH 28, MARCH 27,
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DA-
TA:
Principal transactions,
net.................... $18,335 $20,412 $21,683 $23,526 $23,566 $11,240 $12,912
Commissions............. 17,986 18,275 19,553 28,516 30,758 14,588 17,821
Other................... 2,577 3,814 2,524 3,569 4,078 2,219 3,034
------- ------- ------- ------- ------- ------- -------
Total operating
revenues............. 38,898 42,501 43,760 55,611 58,402 28,047 33,767
Interest income......... 7,876 11,316 18,641 24,210 30,179 13,932 18,365
------- ------- ------- ------- ------- ------- -------
Total revenues........ 46,774 53,817 62,401 79,821 88,581 41,979 52,132
Interest expense........ 4,876 6,978 13,052 16,230 19,694 9,138 12,154
------- ------- ------- ------- ------- ------- -------
Net revenues.......... 41,898 46,839 49,349 63,591 68,887 32,841 39,978
------- ------- ------- ------- ------- ------- -------
Non-interest expenses:
Compensation and
benefits(2)(3)......... 23,053 25,419 25,925 33,924 35,176 16,878 20,728
Key person death
benefits plan(4)....... 1,150 800 2,450 -- (5,000) (5,000) --
Occupancy and equipment. 3,725 3,921 3,949 3,938 4,714 2,097 2,641
Communications.......... 2,028 2,620 2,588 2,776 3,276 1,528 1,774
Clearing and exchange
fees................... 1,938 1,963 2,282 2,344 2,338 1,161 1,428
Other................... 2,028 2,359 2,381 3,854 3,534 1,837 1,634
------- ------- ------- ------- ------- ------- -------
Total non-interest
expenses............. 33,922 37,082 39,575 46,836 44,038 18,501 28,205
------- ------- ------- ------- ------- ------- -------
Income before taxes on
income................. 7,976 9,757 9,774 16,755 24,849 14,340 11,773
Taxes on income......... 3,109 3,752 3,672 6,254 9,460 5,348 4,518
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 4,867 $ 6,005 $ 6,102 $10,501 $15,389 $ 8,992 $ 7,255
======= ======= ======= ======= ======= ======= =======
Earning per common
share(5):
Basic.................. $ 0.68 $ 0.79 $ 0.73 $ 1.10 $ 1.54 $ 0.91 $ 0.70
Diluted................ 0.63 0.72 0.68 1.04 1.44 0.85 0.66
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX-MONTH PERIOD
AS OF AND FOR THE FISCAL YEAR ENDED ENDED
------------------------------------------------- -------------------
SEPT. 24, SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, MARCH 28, MARCH 27,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Pretax income as a
percentage of net
revenues............... 19.0% 20.8% 19.8% 26.3% 36.1% 43.7% 29.4%
Annual return on average
equity(6).............. 29.1% 25.0% 18.5% 23.3% 25.1% 31.1% 19.3%
Assets in retail
brokerage accounts (in
millions)(7)........... N/A N/A $4,629 $5,862 $8,806 $6,571 $9,190
Number of employees(7).. 216 221 232 245 271 256 287
Number of retail
brokers(7)............. 56 62 65 65 74 67 78
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 27, 1998
------------------------
ACTUAL AS ADJUSTED(8)
--------- --------------
BALANCE SHEETS DATA:
<S> <C> <C>
Total assets........................................... $ 697,314 $698,001
Long-term borrowings................................... -- --
Stockholders' equity................................... 79,882 97,807
Book value per common share outstanding(9)............. 7.40 7.98
</TABLE>
11
<PAGE>
- --------
(1) RMI utilizes a 52- or 53-week fiscal year ending on the Friday on or
immediately prior to September 30. Fiscal 1994 was a 53-week year and
fiscal 1993 and fiscal 1995 through 1997 were 52-week years. The six-month
periods ended March 28, 1997 and March 27, 1998 each contain 26 weeks.
(2) 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 stock options granted under the Assumed Plans of
$1,213,000, $1,471,000, $955,000, $3,125,000, $2,223,000, $1,323,000 and
$1,150,000 during fiscal 1993 through 1997 and the six-month periods ended
March 28, 1997 and March 27, 1998, respectively. If the IPO is
consummated, the existing option plans will become fixed-award, fair-
value-based plans and the Company will make future stock option grants
pursuant to a newly formed fixed-award stock option plan. Accordingly,
future changes in the market value of the Common Stock will generally not
result in ongoing charges to compensation expense.
(3) 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 RMI's
book-value-based Share Repurchase Plan of $66,000 and $135,000 during
fiscal 1997 and the six-month period ended March 27, 1998, respectively.
No expenses were incurred during any other periods since no Repurchase
SARs under the Share Repurchase Plan were outstanding during such periods.
If the IPO is consummated, the Share Repurchase Plan will be terminated.
(4) 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 RMI
Board approved the termination of the Death Benefits Plan and the Company
recorded a pretax 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Death Benefits
Plan."
(5) 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, the Company utilizes the per-share
book value at the end of each corresponding period as the Share Repurchase
Plan permits 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.
(6) Amounts reflected for the six-month periods represent annualized amounts.
(7) Shown as of the end of period.
(8) Adjusted to give effect to the following nonrecurring items, which,
assuming the IPO is consummated after the Reorganization, will be recorded
in the quarter that the IPO is consummated, assuming an initial public
offering price of $15.00 per share: (i) $3,574,000 in compensation-related
stock option expense arising from recognition of the difference between
the estimated market value of the Common Stock, based on the assumed
initial public offering price and the book value of the Common Stock
immediately preceding the IPO, for all variable-award, book-value-based
stock options estimated to be outstanding on the date of consummation of
the IPO (estimated to be 450,000 stock options), resulting from conversion
of the Assumed Plans from variable-award, book-value-based plans to fixed-
award, fair-value-based plans, (ii) $1,277,000 in compensation expense
(net of tax) related to the Share Repurchase Plan for the difference
between the market value of the Common Stock, based on the assumed 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, and (iii) the sale by the Holding
Company of 1,462,500 shares of Common Stock in the IPO and the application
of the estimated net proceeds therefrom.
(9) Book value per common share outstanding is calculated by dividing total
shareholders' equity by the number of shares of RMI Stock outstanding as
of March 27, 1998, or as described in footnote 8 above.
12
<PAGE>
RISK FACTORS
This Proxy Statement/Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Proxy
Statement/Prospectus. Shareholders of RMI should carefully review the
information contained elsewhere in this Proxy Statement/Prospectus and should
particularly consider the information stated below. See "Forward-Looking
Statements." The following risks apply to RMI currently and will apply to
Holding Company and its consolidated subsidiary following the Reorganization,
except "--No Assurance of Initial Public Offering; Restrictions on Transfers
of Stock," "--Holding Company Structure; Risks of Regulated Subsidiary" and
"--Antitakeover Considerations," which refer to risks relating solely to
ownership of Holding Company stock following the Reorganization. Unless
otherwise indicated, all references herein to the "Company" or "Ragen
MacKenzie" refer to RMI, prior to the Reorganization, and to Holding Company
and RMI as its consolidated subsidiary, after the Reorganization.
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, increased 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 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
13
<PAGE>
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 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.
The Company has historically attempted to attract and retain employees by
offering equity-based incentive compensation arrangements that are tied to the
book value of the Common Stock. If the IPO is consummated, the value of stock
options granted by the Company will be tied to the market value of the 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 after an initial public offering
will be as effective in recruiting and retaining personnel as were the
Company's prior equity-based incentive compensation arrangements, particularly
if the market price of the Common Stock declines or fails to appreciate
sufficiently.
The Company believes that the structure of its equity-based incentive
compensation arrangements has, in the past, provided employees with
disincentives to terminate employment due to the Company's rights to
repurchase, at book value, RMI Stock held by employees, which has accounted in
part for the Company's low historic turnover rate. Although the Holding
Company Articles provide for Holding Company to have the right to repurchase,
at book value, Class B and Class D common stock, as well as a right of first
refusal with respect to Class B, Class C and Class D common stock, these
restrictions on transfer will be eliminated upon the closing of an initial
public offering meeting certain criteria. Termination of the Company's
repurchase rights, and increased liquidity for employees' shares of Common
Stock if an initial public offering is consummated, may substantially reduce
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 have worked together at RMI for
several years, RMI has changed its Chief Executive Officer twice in the past
two 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 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 an initial
public offering, 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
14
<PAGE>
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.
RISKS RELATING TO DEPARTURE OF BROOKS G. RAGEN
Brooks G. Ragen, a founder of RMI's predecessor, RMI's former Chairman and
Chief Executive Officer, RMI's largest shareholder and a senior, highly
productive retail broker with RMI, has entered into a 36-month agreement
commencing upon effectiveness of the proposed 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 of RMI is an independent broker-dealer
which 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.
The Company believes that after Mr. Ragen's departure, Mr. Ragen or his new
company intends to hire, on or before January 1, 1999, up to two professional
and three administrative employees of the Company, who constitute Mr. Ragen's
current client service team. See "Certain Relationships and Related
Transactions." Mr. Ragen and his client service team's production accounted for
approximately $2.8 million (3.2%) and $1.5 million (2.9%) of RMI's total
revenues in the fiscal year ended September 26, 1997 and the six-month period
ended March 27, 1998, respectively, and it is estimated that Mr. Ragen's
activities accounted for a similar percentage of net income during those
periods. The Company expects that many of Mr. Ragen's customers, several of
which are significant customers of RMI, will become customers of Mr. Ragen's
new company, a correspondent of RMI. The departure of Mr. Ragen could result in
the loss of current and 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.
15
<PAGE>
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 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. In addition, disintermediation may occur as issuers attempt to
sell their securities directly to purchasers, including sales using electronic
media such as the Internet. To the extent that issuers and purchasers of
securities transact business without the assistance of financial
intermediaries such as the Company, the Company's operating results could be
adversely affected. There can be no assurance that the rapid development of
discount and/or electronic brokerages, the decrease of commissions at such
brokerages and the potential of disintermediation will not have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows. See "Business--Competition."
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. However,
there can be no assurance that these factors will continue to enable the
Company to remain competitive.
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
16
<PAGE>
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 of its personnel to operate such systems.
In addition, the scope of procedures for ensuring compliance with applicable
regulations and National Association of Securities Dealers, Inc. (the "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 "Business--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 collateralized mortgage obligations ("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 "Business--Principal Transactions--Proprietary
Trading."
RISK RELATING TO CORRESPONDENT BROKERAGE SERVICES
RMI acts as a clearing broker for 18 correspondents with approximately 435
registered representatives. 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
17
<PAGE>
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
Commission, 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 Proxy Statement/Prospectus, 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 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 "Business--
Interest Income and Customer Financing."
REGULATION
RMI'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") such as the NYSE
and the NASD. In addition, the Commission, the NYSE and various other
regulatory agencies have stringent rules
18
<PAGE>
with respect to the protection of customers and maintenance of specified
levels of net capital by broker-dealers. 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. 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
Commission, 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 Commission, other federal and state
governmental authorities and SROs.
RMI is subject to periodic examination by the Commission, 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. Sanctions against RMI may include a censure,
cease and desist order, monetary penalties or an order suspending RMI for a
period of time from conducting certain or all of its securities operations.
Sanctions against individuals may include a censure, cease and desist order,
monetary penalties or an order restricting the individual's activities or
suspending the individual from association with RMI. In egregious cases, RMI
or its personnel could be expelled from an SRO or barred from the securities
industry. RMI has never been the subject of any administrative proceedings by
the Commission, an SRO or any state authority. However, there can be no
assurance that such proceedings will not be initiated against RMI or its
personnel in the future.
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
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 inspected RMI in 1997.
Following that inspection, various issues regarding registration and
bookkeeping requirements, order execution procedures and supervision relating
to such requirements and procedures were referred to the NYSE's Division of
Enforcement (the "Division") for further consideration. In addition, the
Commission and NASD Regulation (the "NASDR") are also aware of the issues
raised by the NYSE inspection. The Division, as well as the Commission and the
NASDR, 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, there can be no assurance that the Division, the NASDR or another
regulator, will not commence an enforcement proceeding. Based on
communications with the NASD, the Company believes that an NASDR enforcement
proceeding may be commenced. If an enforcement proceeding were commenced and
that proceeding 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, cash flows or timing of the proposed IPO. See
"Regulation."
19
<PAGE>
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 broker's former employer. In addition, the
charter documents of Holding Company and of RMI provide for indemnification of
Holding Company'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 "Business--Litigation and Potential Securities Law Liability."
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 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 such 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 systems or systems provided to
the Company by third-party vendors may result from the inability of certain
systems (including those of the Company and, in particular, those
20
<PAGE>
of third-party vendors to the Company) to recognize 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 and intends for such actions to be
substantially implemented by the end of 1998. 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 RMI 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 costs 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.
CONSTRAINTS IMPOSED BY NET CAPITAL REQUIREMENTS
The Commission, 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 rules are designed to
ensure that broker-dealers maintain adequate regulatory capital in relation to
their liabilities and their business activities. These rules (the "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 Commission 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. The Net Capital Requirement Rules could
also restrict the ability of Holding 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 Holding 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
The Company 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 "Business--
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, will beneficially own approximately
17.2% and 78.4%, respectively, of the outstanding shares of Reorganization
Common Stock immediately after the Reorganization, assuming the Reorganization
occurs prior to an initial public offering. As a result, and as is the case in
respect to RMI prior to the Reorganization, the
21
<PAGE>
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. See "Management of Holding Company."
RESTRICTIONS ON TRANSFERS OF STOCK IF NO INITIAL PUBLIC OFFERING
Although Holding Company is actively pursuing an initial public offering,
and has filed a registration statement with the Commission, there can be no
assurance such an initial public offering will occur. Factors that could
postpone or prevent an initial public offering include, by way of example,
conditions of the public equity market, RMI's results of operations, market
perception of Holding Company and RMI, and other factors. If an initial public
offering does not occur, the holders of Reorganization Common Stock will
continue to have illiquid shares and the Class B, Class C and Class D common
stock will continue to be subject to significant restrictions. These
restrictions include Holding Company's right to redeem Class B and Class D
common stock for book value. Restrictions also include a right of first
refusal, at a price equal to the lower of book value or the proposed transfer
price, in respect of Class B, Class C and Class D common stock. See "Proposal
I: The Reorganization--Description of Holding Company Capital Stock."
EARNINGS CHARGES IF IPO CONSUMMATED
In connection with certain events relating to the IPO, if the IPO is
consummated the Company will record nonrecurring charges to earnings,
resulting in an estimated net charge to earnings of $4,851,000 in the quarter
in which the IPO is completed, assuming an initial public offering price of
$15.00 per share. Given the magnitude of the net charge, the Company may
report a loss for the quarter in which such charge is incurred.
If the IPO is consummated, the Company's existing variable-award, book-
value-based stock option plans will become fixed-award, fair-value-based
plans. Accordingly, the Company will be required to record compensation
expense of approximately $3,574,000 based on the difference between the book
value of the Company's stock immediately preceding the IPO and the estimated
fair market value of the stock if the IPO is consummated (assuming an initial
public offering price of $15.00 per share) for all variable-award, book-value-
based stock options estimated to be outstanding on the date of consummation of
the IPO (estimated to be 450,000 stock options). Future stock options will be
granted as fixed-award stock options under the Company's 1998 Stock Incentive
Compensation Plan (the "1998 Plan"). If the IPO is consummated, the Company
will also record compensation expense (net of tax) in the amount of $1,277,000
(assuming an initial public offering price of $15.00 per share), which
reflects the increase in the value of the RMI Stock underlying the Share
Repurchase Plan. The Share Repurchase Plan will terminate if the IPO is
consummated, at which time the Company's liabilities under the Share
Repurchase Plan will be determinable and final. See footnote 8 to the table
set forth in "Summary--Summary Financial Information" and Note 14 of RMI's
Notes to Financial Statements.
RISKS TO HOLDING COMPANY OF REGULATED SUBSIDIARY
Immediately after the Reorganization, substantially all of the Company's
revenues will be generated by RMI. Holding Company, the issuer of the shares
offered hereby, will rely exclusively on distributions from RMI for funds to
pay dividends, implement its strategies and redeem or repurchase shares of
outstanding capital stock. Holding Company'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 through financing
activities. These factors may impose limitations on or prevent Holding Company
from paying dividends, implementing its strategies or repurchasing shares of
its capital stock.
22
<PAGE>
ANTITAKEOVER CONSIDERATIONS
The Holding Company Board 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 Holding Company's shareholders. The rights of the holders of Common Stock
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 the Holding Company 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 Holding Company, 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 the Holding Company. See "Proposal I: The Reorganization--
Description of Holding Company Capital Stock."
23
<PAGE>
THE SPECIAL MEETING
PURPOSE
The Special Meeting will be held at 2:00 p.m. Pacific Daylight Time on
Sunday, June 21, 1998, at the offices of the law firm of Perkins Coie LLP,
1201 Third Avenue, 41st Floor Large Conference Room, Seattle, Washington, or
at any postponement or adjournment thereof, to consider and vote on (i) the
Reorganization, including the Merger Agreement, and (ii) a proposal to direct
RMI to elect four additional directors to the Holding Company Board
immediately prior to effectiveness of the Reorganization.
BOARD RECOMMENDATION
THE RMI BOARD HAS DETERMINED THAT THE REORGANIZATION AND THE MERGER ARE
ADVISABLE AND IN THE BEST INTERESTS OF RMI AND RMI'S SHAREHOLDERS AND HAS
APPROVED THE REORGANIZATION PURSUANT TO THE TERMS OF THE MERGER AGREEMENT. THE
RMI BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
REORGANIZATION (WHICH INCLUDES APPROVAL OF THE MERGER AGREEMENT) AT THE
SPECIAL MEETING AND "FOR" APPROVAL OF THE PROPOSAL TO DIRECT RMI TO ELECT FOUR
ADDITIONAL DIRECTORS TO THE HOLDING COMPANY BOARD IMMEDIATELY PRIOR TO
EFFECTIVENESS OF THE REORGANIZATION.
RECORD DATE; VOTING RIGHTS
Only holders of record of RMI Stock at the close of business on May 27,
1998, which has been fixed as the Record Date, are entitled to notice of and
to vote at the Special Meeting. At the close on business on the Record Date,
11,039,059 shares of RMI Stock were outstanding, each of which entitles the
registered holder thereof to one vote.
QUORUM; VOTE REQUIRED
The presence in person or by proxy of holders representing a majority of the
voting power of RMI Stock entitled to vote is necessary to constitute a quorum
for the transaction of business at the Special Meeting. The affirmative vote
of the holders of not less than two-thirds of the outstanding shares of RMI
Stock, present in person or represented by proxy and entitled to vote at the
Special Meeting, is required to approve the Reorganization. The affirmative
vote of the holders of not less than a majority of the outstanding shares of
RMI Stock, present in person or represented by proxy and entitled to vote at
the Special Meeting, is required to approve the proposal to direct RMI to
elect four additional directors to the Holding Company Board immediately prior
to effectiveness of the Reorganization.
Abstentions with respect to approval of the Reorganization will be counted
for purposes of establishing a quorum, but will have the effect of a vote cast
against approval of the Reorganization and the proposal to direct RMI to elect
four additional directors to the Holding Company Board.
PROXIES
RMI Stock represented by properly executed proxies received at or before the
Special Meeting that have not been revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. RMI Stock
represented by properly executed proxies for which no instruction is given
will be voted "FOR" approval of the Reorganization (which includes approval of
the Merger Agreement) and "FOR" approval of the proposal to direct RMI to
elect four additional directors to the Holding Company Board. RMI's
shareholders are requested to complete, sign, date and return promptly the
enclosed proxy card in the postage-prepaid envelope provided for this purpose
to ensure that their shares are voted. A shareholder may revoke a proxy at any
time before it is voted by signing and returning a later-dated proxy with
respect to the same shares, by filing with the Secretary of RMI a written
revocation bearing a later date or by attending and voting in person at the
Special Meeting. Mere attendance at the Special Meeting will not in and of
itself revoke a proxy.
24
<PAGE>
If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies (except for any
proxies that have theretofore effectively been revoked or withdrawn) will be
voted in the same manner as such proxies would have been voted at the original
convening of the Special Meeting, notwithstanding that such proxies may have
been effectively voted on the same or any other matter at a previous meeting.
The accompanying proxy is solicited by and on behalf of the RMI Board. The
Company has retained ADP Financial Information Services, Inc., 2 Journal
Square Plaza, Jersey City, New Jersey, to aid in the solicitation and
tabulation of proxies. It is estimated that the costs of these services will
be approximately $2,000, plus expenses. RMI will bear the cost of soliciting
proxies from its shareholders. In addition to solicitation by mail, directors,
officers and employees of RMI may solicit proxies by telephone, telegram or
otherwise. Such directors, officers and employees of RMI will not receive
additional compensation for such solicitation, but may be reimbursed for out-
of-pocket expenses incurred in connection therewith.
SHAREHOLDERS AGREEMENTS; RMI GRANTS PRIOR WRITTEN CONSENT
Each holder of RMI Stock has an obligation to make an offer to RMI prior to
transferring RMI Stock without the prior written consent of RMI. As a result
of the Reorganization and Merger, each share of RMI Stock (other than shares
held by holders who have properly exercised dissenters' rights under
Washington law) will be converted into one share of Reorganization Common
Stock, and Holding Company will own 100% of the capital stock of RMI. RMI
hereby consents in writing to each holder of RMI Stock to vote in favor of,
and take such steps as may be necessary to consummate, the Reorganization and
Merger, notwithstanding the fact that the Merger will result in a transfer of
ownership of RMI from current holders of RMI Stock to Holding Company.
25
<PAGE>
PROPOSAL I:
THE REORGANIZATION
CURRENT CORPORATE STRUCTURE
RMI recently organized two direct or indirect wholly owned subsidiaries in
anticipation of the holding company restructure: (i) Holding Company, a wholly
owned subsidiary of RMI, and (ii) Merger Sub, a wholly owned subsidiary of
Holding Company. Each of Holding Company and Merger Sub was created solely for
the purpose of implementing the Reorganization, and neither of such
corporations has conducted any business. See "--Certain Effects of the
Reorganization."
The current corporate structure of RMI and its subsidiaries that were formed
for the purpose of implementing the Reorganization is as follows:
Ragen MacKenzie
Incorporated
("RMI")
-----------------
Ragen MacKenzie
Group
Incorporated
("Holding
Company")
-----------------
RMGI Merger
Corp.
("Merger Sub")
-----------------
THE REORGANIZATION
RMI, Holding Company and Merger Sub have entered into the Merger Agreement
pursuant to which (subject to approval by RMI's shareholders and the NYSE)
Merger Sub will merge with RMI, with RMI as the surviving corporation.
Pursuant to the terms of the Merger, each share of RMI Stock outstanding
immediately prior to the Effective Time (other than shares held by holders who
have properly exercised dissenters' rights under Washington law) (i)
originally acquired from RMI pursuant to the 1990 Stock Purchase Agreement
among RMI and five investors will be converted into one share of Class C
common stock, (ii) originally acquired from RMI pursuant to the 1995 Stock
Purchase Agreements among RMI and five investors will be converted into one
share of Class D common stock, and (iii) otherwise acquired from RMI will be
converted into one share of Class B common stock. A copy of the Merger
Agreement is attached as Annex A to this Proxy Statement/Prospectus.
Immediately following the Merger, RMI will transfer to Holding Company all the
outstanding shares of RMI. As a result of the Reorganization, RMI will become
a wholly owned subsidiary of Holding Company. Following the Reorganization,
Holding Company's operations will be conducted primarily through RMI as the
operating subsidiary of Holding Company.
The Merger Agreement contemplates that the Merger will become effective, and
all other steps in the Reorganization will be completed, after the required
shareholder and regulatory approvals have been received (such effective time
of the Merger, the "Effective Time"), unless the RMI Board or the Holding
Company Board heretofore has elected to abandon such plan.
26
<PAGE>
The corporate structure resulting from the Reorganization will be as
follows:
Ragen MacKenzie
Group
Incorporated
("Holding
Company")
-----------------
Ragen MacKenzie
Incorporated
("RMI")
-----------------
RECOMMENDATION OF THE RMI BOARD; REASONS FOR THE REORGANIZATION
The RMI Board has approved the Reorganization, adopted and approved the
Merger Agreement and unanimously recommends approval of the Reorganization
(which includes approval of the Merger Agreement) by the shareholders of RMI.
The RMI Board and management believe that the Reorganization is in the best
interests of RMI and its shareholders. In making its decision to recommend the
Reorganization to shareholders, the RMI Board considered a number of factors,
including, without limitation, the following:
Flexible Financing Opportunities/Public Market. The RMI Board believes that
the holding company structure will broaden the alternatives for future
financing, allowing for (i) access to capital markets, (ii) the possibility of
separate financings at subsidiary levels, and (iii) the financing of future
acquisitions through Holding Company directly. In addition, the RMI Board
believes that the holding company structure will facilitate an IPO after the
consummation of the Reorganization and the creation of a public market for the
Common Stock. There can be no assurance, however, that an initial public
offering will occur at or after the Effective Time. See "Risk Factors--
Restrictions on Transfer of Stock if No Initial Public Offering."
Flexibility for Business Operations and Management. The RMI Board also
believes that the Reorganization will provide flexibility for both the
business operations and management of RMI and Holding Company within the
resulting corporate structure, which structure the RMI Board believes will
facilitate control of the Company's growth strategy. In particular, a holding
company structure will facilitate the creation of separate subsidiaries and
the allocation of business functions among subsidiaries so that the Company
can maximize economic efficiencies, take advantage of business opportunities
as they develop and structure its lines of business to attain increased
regulatory flexibility and efficiency.
Complexity of Holding Company Capital Structure. The RMI Board considered,
as a negative factor, the complexity of Holding Company's capital structure
that results from seeking to duplicate, in the Holding Company Articles, the
limitations on resale of RMI Stock that have historically been covered in
individual shareholder agreements between RMI and each shareholder. This
effort to replicate the restrictions on RMI Stock resulted in the creation of
Class B, C and D common stock, which convert into Common Stock, as described
in "Description of Holding Company Capital Stock." The RMI Board viewed this
complexity as one that would be more difficult to explain to shareholders than
the current shareholder agreements with which shareholders are familiar. The
RMI Board also considered the addition of preferred stock to be both a
complexity and a change which could be viewed as having an antitakeover
effect. See "Description of Holding Company Capital Stock--Preferred Stock."
Change of Board of Directors. The RMI Board viewed the establishment of a
board of directors of Holding Company that is smaller than the current RMI
Board as a change that employee shareholders could view
27
<PAGE>
as negative, although appropriate for a public company. The RMI Board has 19
directors, each of whom is both a shareholder and an employee of RMI. The
Holding Company Board is proposed to consist of eight directors, of whom only
four are employees.
The Holding Company Board, in deciding to approve the multi-class structure
of Holding Company common stock, determined that the proposed multi-class
changes, although complex, were appropriate because (i) it was likely
(although not certain) that the IPO would be consummated immediately following
the closing of the Merger, (ii) one purpose of the Holding Company multi-class
structure was to facilitate an initial public offering, and (iii) the IPO
would constitute a "Conversion Event" which would result in all Class B, Class
C and Class D common stock being converted into shares of Common Stock,
without further resale restriction (except under applicable laws and lock-up
agreements signed with the Underwriters in connection with the IPO).
EXCHANGE OF CERTIFICATES IN THE MERGER
Promptly after the Effective Time, the Transfer Agent will mail a
transmittal form and instructions to each holder of record of certificates
that immediately prior to the Effective Time represented outstanding shares of
RMI Stock (the "Certificates"), which form and instructions are to be used in
forwarding the Certificates for surrender and exchange for certificates
representing that number of whole shares of Reorganization Common Stock that
such holder has the right to receive pursuant to the Merger. RMI shareholders
are requested not to surrender their Certificates for exchange until such
transmittal form and instructions are received. At and after the Effective
Time and until surrendered as provided above, Certificates will be deemed to
represent the right to receive certificates representing that number of whole
shares of Reorganization Common Stock into which the shares of RMI Stock
formerly represented by such Certificates were converted in the Merger and a
cash payment in lieu of any fractional shares. The holders of Certificates
will not be entitled to receive dividends or other distributions from Holding
Company until such Certificates are so surrendered. Upon surrender of a
Certificate, there shall be paid to the person in whose name such shares of
Reorganization Common Stock are issued any dividends or other distributions
that have a record date after the Effective Time and that became payable prior
to surrender with respect to such shares of Reorganization Common Stock. After
such surrender, there shall be paid to the person in whose name the
Reorganization Common Stock is issued any dividends or other distributions on
such shares that have a record date after the Effective Time and prior to such
surrender and a payment date after such surrender, and such payment will be
made on the payment date. In no event shall the persons entitled to receive
such dividends or other distributions be entitled to receive interest on such
dividends or other distributions.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion sets forth the opinion of Tax Counsel as to the
material U.S. federal income tax consequences of the Reorganization for
holders of RMI Stock. This discussion does not address all aspects of federal
income taxation that may be material to holders of RMI Stock in light of their
particular tax circumstances or who are subject to special treatment under the
Code, including, without limitation, holders who are not citizens or residents
of the United States, dealers in securities, holders in whose hands the RMI
Stock is not a capital asset, banks, insurance companies, tax-exempt entities
and holders of shares subject to restrictions tied to employment. Finally,
this discussion does not address any state, local or foreign tax
considerations.
This discussion is based on the Code, Treasury Regulations thereunder and
the administrative rulings and court decisions as of the date hereof. All the
foregoing are subject to change, and any such change could affect the
continuing validity of this discussion. No ruling has been requested from the
Internal Revenue Service (the "IRS") with respect to the tax consequences of
the Reorganization, and there can be no assurance that the IRS will not
disagree with the conclusion and analysis set forth herein. Holders of RMI
Stock are urged to consult with their own tax advisors regarding the federal
income tax consequences of the Reorganization to them based on their
particular tax circumstances, as well as the effects of state, local and
foreign law.
28
<PAGE>
Tax Counsel's opinion assumes that the Reorganization will take place as
described in the Merger Agreement, that certain factual matters represented by
RMI are true and correct (including the representation that Holding Company
has no plan or intention to reacquire any of the Reorganization Common Stock
issued in the Merger pursuant to the redemption right contained in the Holding
Company Articles), and that RMI will reconfirm such factual matters as of the
Effective Time. Based on these assumptions, and subject to the other
limitations discussed above, it is the opinion of Tax Counsel that the
following are the material federal income tax consequences of the
Reorganization to a holder of RMI Stock:
(i) the Merger will be treated as a reorganization under Section 368 of
the Code or as an exchange under Section 351(a) of the Code,
(ii) no gain or loss will be recognized by the holders of RMI Stock
solely as a result of the conversion of RMI Stock solely into
Reorganization Common Stock pursuant to the Merger,
(iii) the tax basis of the Reorganization Common Stock received by each
holder pursuant to the Merger will be the same as the holder's tax basis in
RMI Stock converted in the Merger, and
(iv) the holding period of such Reorganization Common Stock will include
the period during which such holder held RMI Stock converted in the Merger.
This discussion does not address the compensation-related tax effects of the
Merger, if any, for holders of options or other rights to acquire RMI Stock or
for shareholders who received their RMI Stock as compensation for services
rendered (including pursuant to the exercise of a stock option). Such holders
and shareholders may be subject to certain adverse tax consequences arising
from, among other things, employment-related restrictions applicable to the
shares of RMI Stock or the Reorganization Common Stock or the subsequent
cancellation of such restrictions upon an initial public offering or
otherwise. Employee-shareholders who hold shares of RMI Stock subject to such
restrictions are urged to consult with their tax advisors regarding the
implications of the modification or removal of restrictions in connection with
the Merger or subsequent initial public offering.
A successful IRS challenge to the qualification of the Merger as a
reorganization under Section 368 of the Code and as an exchange under Section
351 of the Code will result in a holder of RMI Stock recognizing gain or loss
with respect to each share of RMI Stock surrendered equal to the difference
between the holder's basis in such share and the fair market value, as of the
Effective Time, of the Reorganization Common Stock received in exchange by
each holder pursuant to the Merger. In such event, a shareholder's aggregate
basis in the Reorganization Common Stock would equal such fair market value
and his or her holding period for such stock would begin the day after the
Effective Time.
ACCOUNTING
The Merger will be accounted for as if it were a "pooling of interests" for
financial reporting purposes. As a result, the historical book basis of RMI's
assets and accounting methods will carry over after consummation of the
Merger.
MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement, a copy of which is attached hereto as Annex A and incorporated
herein by reference. The following summary is qualified in its entirety by
reference to the complete text of the Merger Agreement, which provides, among
other things, that:
(i) Merger Sub will be merged with RMI, with RMI as the surviving
corporation;
(ii) each share of RMI Stock outstanding immediately prior to the
Effective Time (other than shares held by holders who have properly
exercised dissenters' rights under Washington law) (a) if originally
acquired from RMI pursuant to the 1990 Stock Purchase Agreement among RMI
and five investors, will be converted into one share of Class C common
stock, (b) if originally acquired for RMI pursuant to the 1995 Stock
Purchase Agreements among RMI and five investors, will be converted into
one share of Class D
29
<PAGE>
Common Stock, and (c) if otherwise acquired from RMI, will be automatically
converted into one share of Class B common stock; and
(iii) the Common Stock presently held by RMI will be canceled.
As a result of the Merger, RMI will become a wholly owned subsidiary of
Holding Company and all the Reorganization Common Stock outstanding
immediately after the Merger will be owned by the holders of RMI Stock
outstanding immediately prior to the Effective Time (other than holders who
perfect dissenters' rights).
The Merger Agreement provides that RMI, Holding Company and Merger Sub may
by written agreement amend the Merger Agreement at any time prior the
Effective Time, and that the Merger Agreement may be terminated and abandoned
at any time by unilateral action of the RMI Board or the Holding Company
Board. A further condition precedent to the Reorganization that not more than
2% of RMI Stock is held by RMI shareholders that perfect dissenters' right,
which condition is waivable by the unilateral action of the Holding Company
Board or the RMI Board.
HOLDING COMPANY ARTICLES OF INCORPORATION AND BYLAWS
The Holding Company Articles and Bylaws, copies of which are attached as
Annex B hereto, are significantly different from the RMI Articles and Bylaws.
Such changes will impact the rights of holders of Common Stock. See "--
Comparison of Shareholder Rights--Certain Substantive Differences in Articles
of Incorporation and Bylaws."
DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK
The following summary of the capital stock of Holding Company is qualified
in its entirety by reference to the complete text of the Holding Company
Articles, a copy of which is attached as Annex B hereto.
The authorized capital stock of Holding Company consists of 60,000,000
shares, of which 50,000,000 shares are designated as common stock, par value
$.01 per share (the "New Common Stock"), and 10,000,000 shares of Preferred
Stock. The New Common Stock is subject to the rights and preferences of the
Preferred Stock.
NEW COMMON STOCK
As of May 21, 1998, the Common Stock was held of record by RMI and a total
of 100 shares were outstanding or committed for issuance. In addition, no
options to purchase shares of Common Stock were outstanding.
Of the 50,000,000 shares of New Common Stock, 30,000,000 shares have been
designated as "Common Stock," without further designation, 19,000,000 shares
have been designated as "Class B common stock," 500,000 shares have been
designated as "Class C common stock" and 500,000 shares have been designated
as "Class D common stock." The powers, rights and preferences of the Common
Stock, Class B common stock, Class C common stock and Class D common stock are
described below. Each share of Common Stock, Class B common stock, Class C
common stock and Class D common stock entitles the holder to one vote.
Each of the Class B common stock, the Class C common stock and the Class D
common stock converts automatically into Common Stock upon a "Conversion
Event," which is defined as any of the following:
(i) immediately prior to such time as Holding Company shall close a firm
commitment underwritten public offering of shares of Common Stock in which
the aggregate gross proceeds from such offering to Holding Company and any
selling shareholders shall be at least $15,000,000; or
(ii) the determination by the Holding Company Board, which determination
may be made on a class-by-class basis, that the conversion of Class B
common stock, Class C common stock or Class D common stock into shares of
Common Stock is in the best interests of Holding Company. Such
determination, if
30
<PAGE>
made, with respect to one or more, but fewer than all, classes shall apply
only to the designated class and shall not constitute a "Conversion Event"
with respect to other classes; or
(iii) the Holding Company Board and shareholders of Holding Company vote,
as required by law, for the merger or consolidation of Holding Company with
any unaffiliated corporation, or for the sale of all or substantially all
the assets of Holding Company, or for its liquidation; or
(iv) the holders of two-thirds of the then-outstanding shares of New
Common Stock (which includes the Common Stock, Class B common stock, Class
C common stock and Class D common stock) of Holding Company agree in
writing to such conversion.
In the event of conversion, each outstanding share of Class B common stock,
Class C common stock or Class D common stock shall automatically convert into
one share of Common Stock.
The Holding Company Articles provide for restrictions on transfer of the
Class B common stock, the Class C common stock and the Class D common stock.
The Common Stock has no restrictions with respect to its transfer, except as
otherwise required by law, including federal and state securities laws.
31
<PAGE>
The following table compares transfer and redemption provisions applicable
to RMI Stock acquired pursuant to the 1990 Stock Purchase Agreement or the
1995 Stock Purchase Agreements, or otherwise acquired from RMI, with the
transfer and redemption provisions applicable to Class B, C and D common stock
and to Common Stock.
COMPARISON OF TRANSFER AND REDEMPTION PROVISIONS APPLICABLE TO RMI STOCK
AND TO REORGANIZATION COMMON STOCK
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TRANSFER RESTRICTIONS REDEMPTION
- -----------------------------------------------------------------------------------------------------------------------
REORGANIZATION REORGANIZATION
COMMON STOCK REORGANIZATION COMMON STOCK REORGANIZATION
BEFORE IPO COMMON STOCK BEFORE IPO COMMON STOCK
REORGANIZATION OR OTHER AFTER IPO OR OTHER AFTER IPO
SHAREHOLDER COMMON STOCK "CONVERSION OR OTHER "CONVERSION OR OTHER
AGREEMENT INTO WHICH RMI EVENT" "CONVERSION EVENT" "CONVERSION
PURSUANT TO STOCK IS RMI STOCK (PURSUANT TO EVENT" RMI STOCK (PURSUANT TO EVENT"
WHICH RMI CONVERTED (PURSUANT TO HOLDING (PURSUANT TO (PURSUANT TO HOLDING (PURSUANT TO
STOCK PURSUANT TO SHAREHOLDER COMPANY HOLDING COMPANY SHAREHOLDER COMPANY HOLDING COMPANY
IS HELD REORGANIZATION AGREEMENT) ARTICLES)(1) ARTICLES)(1)(2) AGREEMENT) ARTICLES)(1) ARTICLES)(1)(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1990 Stock Class C RMI and Holding None None None None
Purchase Common other RMI Company and
Agreement Stock shareholders other
have a right Holding
of first Company
refusal shareholders
except for have right
transfers to of first
immediate refusal
family except for
members, transfers to
certain immediate
trusts and family
by members,
inheritance. certain
Offer must trusts and
be made at by
lower of inheritance.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
- -----------------------------------------------------------------------------------------------------------------------
1995 Stock Class D RMI and Holding None RMI may Holding None
Purchase Common other RMI Company and redeem Company
Agreements Stock shareholders other stock at may redeem
have a right Holding book value stock at
of first Company at any book value
refusal shareholders time. at any
except for have right time.
transfers to of first
immediate refusal
family except for
members, transfers to
certain immediate
trusts and family
by members,
inheritance. certain
Offer must trusts and
be made at by
lower of inheritance.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
- -----------------------------------------------------------------------------------------------------------------------
1987 Class B RMI and Holding None RMI may Holding None
Subscription Common other RMI Company and redeem Company
Agreement Stock shareholders other stock at may redeem
have a right Holding book value stock at
of first Company at any book value
refusal. shareholders time. at any
Offer must have right time.
be made at of first
lower of refusal.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
- -----------------------------------------------------------------------------------------------------------------------
1988-1998 Class B RMI and Holding None RMI may Holding None
Shareholder Common other RMI Company and redeem Company
Agreements Stock shareholders other stock at may redeem
have a right Holding book value stock at
of first Company at any book value
refusal. shareholders time. at any
Offer must have right time.
be made at of first
lower of refusal.
book value Offer must
or proposed be made at
transfer lower of
price. book value
or proposed
transfer
price.
</TABLE>
(1) The Shareholder Agreements which, immediately prior to the
Reorganization, impose certain contractual limitations on the transfer of
RMI Stock and, in certain cases, provided RMI with a right of redemption,
will no longer be in effect immediately after the Reorganization.
Beginning immediately after the Reorganization, and until the IPO or
other "Conversion Event," the Holding Company Articles impose similar
restrictions on the Reorganization Common Stock.
(2) If the IPO or another Conversion Event occurs, the Reorganization Common
Stock will automatically convert into Common Stock that, pursuant to the
Holding Company Articles, is not subject to the restrictions on transfer
or rights of redemption applicable to the Reorganization Common Stock.
32
<PAGE>
Class B common stock has two significant restrictions. These restrictions
are similar to those set forth in the subscription agreements or shareholder
agreements pursuant to which employees of RMI acquired their shares. See "--
Comparison of Shareholder Rights--Certain Substantive Differences in Articles
of Incorporation and Bylaws." First, the Class B common stock may not be
transferred, encumbered or otherwise disposed of without the prior written
consent of Holding Company, unless the holder thereof has made an offer to
sell those shares (an "Offer") to Holding Company and to all holders of New
Common Stock who are employees, officers or directors of Holding Company, or
its affiliates, and the Offer has not been accepted. The Offer must consist of
a written offer to transfer all such shares, with details of the proposed
transfer terms. If the Offer is not accepted by Holding Company within 30
days, the other holders to whom the Offer was made may, at their election,
choose to acquire the shares within 30 days of their receipt of the Offer. The
purchase price for the offered shares shall be the lower of the proposed
transfer price or the book value of the Class B common stock. If the Offer is
accepted by none of Holding Company or the other recipients of the Offer, the
transfer may be made only in accordance with the terms set forth in the Offer,
and then within 30 days of the expiration of time provided for acceptance of
the Offer. A death, disposition by marital dissolution or divorce, bankruptcy,
termination of employment with Holding Company or an affiliate of Holding
Company, shall each be deemed a proposed transfer, subject to the right of
first offer. The Holding Company Articles, like the relevant shareholder
agreement, provide for specific performance of the transfer restrictions.
The second principal restriction to which the Class B common stock is
subject is a right of redemption at book value at the request of Holding
Company. Holding Company has no obligation to affect the redemption on a pro
rata or other equitable basis among holders of Class B common stock. Notice of
redemption shall be provided by registered or certified mail at least 10 days
prior to the date fixed for redemption.
Similar to Class B common stock, the Class C common stock may not be
transferred, encumbered or otherwise disposed of without the prior written
consent of Holding Company, unless each holder has made an Offer to Holding
Company and to all holders of New Common Stock who are employees, officers or
directors of Holding Company, or its affiliates, and the Offer has not been
accepted. The Offer must consist of a written offer to transfer all such
shares, with details of the proposed transfer terms. If the Offer is not
accepted by Holding Company within 30 days, the other holders to whom the
Offer was made may, at their election, choose to acquire the shares within 30
days of their receipt of the Offer. The purchase price for the offered shares
shall be the lower of the proposed transfer price or the book value of the
Class C common stock. If the Offer is accepted by none of Holding Company or
the other recipients of the Offer, the transfer may be made only in accordance
with the terms set forth in the Offer, and then within 30 days of the
expiration of time provided for acceptance of the Offer. A death, disposition
by marital dissolution or divorce or bankruptcy shall each be deemed a
proposed transfer, subject to the right of first offer.
Holders of Class C common stock may transfer the Class C common stock to
immediate family members or trusts (the beneficiaries of which include only
the holder of the Class C common stock and immediate family members) or by
will or intestate succession. Holders of Class B common stock do not have this
right of intrafamily transfer. Any person to whom the Class C common stock is
transferred in this manner takes the Class C common stock subject to all
restrictions set forth in the Holding Company Articles, and Holding Company is
entitled to require such persons to sign an acknowledgment thereof prior to
effecting the transfer.
The Class C common stock is not subject to a right of redemption at the
request of Holding Company.
Similar to Class B and Class C common stock, the Class D common stock may
not be transferred, encumbered or otherwise disposed of without the prior
written consent of Holding Company, unless each holder has made an Offer to
Holding Company and to all holders of New Common Stock who are employees,
officers or directors of Holding Company, or its affiliates, and the Offer has
not been accepted. The Offer must consist of a written offer to transfer all
such shares, with details of the proposed transfer terms. If the Offer is not
accepted by Holding Company within 30 days, the other holders to whom the
Offer was made may, at their election, choose to acquire the shares within
30 days of their receipt of the Offer. The purchase price for the offered
shares shall be the lower of the proposed transfer price or the book value of
the Class D common stock. If the Offer is
33
<PAGE>
accepted by none of Holding Company or the other recipients of the Offer, the
transfer may be made only in accordance with the terms set forth in the Offer,
and then within 30 days of the expiration of time provided for acceptance of
the Offer. A death, disposition by marital dissolution or divorce or
bankruptcy shall each be deemed a proposed transfer, subject to the right of
first offer. The Holding Company Articles, like the 1995 Stock Purchase
Agreements, provide for specific performance of the transfer restrictions.
Holders of Class D common stock, like holders of Class C common stock, may
transfer the Class D common stock to immediate family members or trusts (the
beneficiaries of which include only the holder of Class D common stock and
immediate family members) or by will or intestate succession. Holders of Class
B common stock do not have this right of intrafamily transfer. Any person to
whom the Class D common stock is transferred in this manner takes the Class D
common stock subject to all the restrictions set forth in the Holding Company
Articles, and the Holding Company is entitled to require such persons to sign
an acknowledgement thereof prior to effecting the transfer.
As for the Class B common stock, the Class D common stock is subject to a
right of redemption at book value at the request of Holding Company. The
Class C common stock is not subject to such right of redemption. Holding
Company has no obligation to effect the redemption on a pro rata or other
equitable basis among holders of Class D common stock. Notice of redemption
shall be provided by registered or certified mail at least 10 days prior to
the date fixed for redemption.
Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, holders of New Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Holding Company Board out of funds legally available therefor. Holding Company
does not intend to pay dividends on the New Common Stock in the foreseeable
future. See "--Certain Information Regarding Holding Company--Dividend
Policy." In the event of a liquidation, dissolution or winding up of Holding
Company, holders of New Common Stock are entitled to share ratably in all
assets remaining after payment of Holding Company's liabilities and the
liquidation preference, if any, of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights. There are no rights to
convert the Common Stock into any other securities, and there are no
redemption provisions with respect to the Common Stock. All the outstanding
shares of Common Stock are, and all outstanding shares of Reorganization
Common Stock upon consummation of the Merger will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of New Common
Stock are subject to, and may be adversely affected by, the rights of holders
of shares of any series of Preferred Stock that Holding Company may designate
and issue in the future.
PREFERRED STOCK
The Holding Company Board has the authority to issue up to 10,000,000 shares
of Preferred Stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting each such
series, without any further vote or action by Holding Company's shareholders.
The Preferred Stock may be issued from time to time in one or more series as
may be determined from time to time by the Holding Company Board and stated in
the resolutions providing for the issuance of those shares. The Holding
Company Board shall have the authority to fix and to determine and amend the
relative rights of the shares of any series that is not yet issued. No shares
of Preferred Stock have been issued. The issuance of Preferred Stock could
have one or more of the following effects: (i) restrict New Common Stock
dividends if Preferred Stock dividends have not been paid, (ii) dilute the
voting power and equity interest of holders of New Common Stock to the extent
that any series of Preferred Stock has voting rights or is convertible into
New Common Stock, or (iii) prevent current holders of New Common Stock from
participating in Holding Company's assets upon liquidation until any
liquidation preferences granted to holders of Preferred Stock are satisfied.
In addition, the issuance of Preferred Stock may, under certain circumstances,
have the effect of discouraging a change in control of Holding Company by, for
example, granting voting rights to holders of Preferred Stock that require
approval by the separate vote of the holders of Preferred Stock for any
amendment to the Holding Company Articles or any reorganization, consolidation
or merger (or other similar transaction
34
<PAGE>
involving Holding Company). As a result, if there is a market for the New
Common Stock by reason of an initial public offering or otherwise, the
issuance of the Preferred Stock may discourage bids for the New Common Stock
at a premium over the market price therefor and could have a material adverse
effect on the market value of the New Common Stock. The Holding Company Board
does not presently intend to issue any shares of Preferred Stock. See "Risk
Factors--Antitakeover Considerations."
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a takeover or change in control of a company
(a "Reporting Company") with a class of securities registered under Section 15
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
effectiveness of the Registration Statement of which this Proxy
Statement/Prospectus is a part, Holding Company will be a Reporting Company.
Chapter 23B.19 of the WBCA prohibits a Reporting Company, with certain
exceptions, from engaging in certain significant business transactions with an
"acquiring person" (defined as a person who acquires 10% or more of such
Reporting Company's voting securities without the prior approval of such
Reporting Company's board of directors) for a period of five years after such
acquisition. The prohibited transactions include, among others, a merger with,
disposition of assets to, or issuance or redemption of stock to or from, the
acquiring person, or otherwise allowing the acquiring person to receive any
disproportionate benefit as a shareholder. After the five-year period, such
Reporting Company may engage in otherwise proscribed transactions, so long as
the transaction complies with certain fair price provisions of the statute or
is approved by a majority of disinterested shareholders within each voting
group entitled to vote separately. A Reporting Company may not exempt itself
from coverage of this statute. These statutory provisions may have the effect
of delaying, deterring or preventing a change in control of a Reporting
Company.
CERTAIN PROVISIONS IN HOLDING COMPANY ARTICLES
The Holding Company Bylaws permit the Holding Company Board to establish by
resolution the authorized number of directors, which shall not be less than
three or more than 15. The Holding Company Articles provide that the Holding
Company Board shall be divided into two classes at the first election of
directors after the first primary public offering of equity securities by
Holding Company pursuant to a registration statement filed under the
Securities Act. At the first election of Holding Company directors to such
classified Board of Directors (i) each Class I director would be elected to a
term expiring at the next ensuing annual meeting of shareholders and (ii) each
Class II director would be elected to a term expiring at the second ensuing
annual meeting of the shareholders. At each annual meeting of shareholders
following the meeting at which the Holding Company Board would be initially
classified, the successors to directors whose terms are expiring will be
elected to serve from the time of election and qualification until the second
annual meeting following election. If necessary to maintain the relative
equality among classes of directors created due to vacancies or removals of
directors, directors may be elected to a class the term of which expires prior
to the second annual meeting of shareholders following such election. This
system of electing directors may tend to discourage a third party from making
a tender offer or otherwise attempting to obtain control of Holding Company
and may maintain the incumbency of the Holding Company Board, as it generally
makes it more difficult for shareholders to replace a majority of directors.
Under Washington law, a merger, share exchange, dissolution or sale of
substantially all the assets of a corporation must be approved by each voting
group entitled to vote separately by two-thirds of all the votes entitled to
be cast, unless otherwise provided in the articles of incorporation. Under
Washington law, a corporation may provide for a greater or lesser vote, so
long as the vote provided for each voting group entitled to vote separately is
not less than a majority of all the votes entitled to be cast by that voting
group. The Holding Company Articles require that certain business combinations
(including a merger, share exchange and the sale, lease, exchange, mortgage,
pledge, transfer or other disposition or encumbrance of a substantial part of
Holding Company's assets other than in the usual and regular course of
business) be approved by the holders of not less than two-thirds of the
outstanding shares, unless such business combination has been approved by a
majority of Continuing Directors (defined as those individuals who were
members of the Holding Company Board on
35
<PAGE>
April 30, 1998 or were elected thereafter on the recommendation of a majority
of Continuing Directors), in which case the affirmative vote required shall be
a majority of the outstanding shares. Under the Holding Company Articles and
Bylaws, the shareholders may call a special meeting only upon the request of
holders of at least 25% of the outstanding shares. The Holding Company
Articles also provide that changes to certain provisions of the Holding
Company Articles, including those regarding amendment of certain provisions of
the Holding Company Bylaws or Articles, the classified Board of Directors,
special voting provisions for business combinations and special meetings of
shareholders, must be approved by the holders of not less than two-thirds of
the outstanding shares.
These provisions may have the effect of delaying, deterring or preventing a
change in control of Holding Company.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Holding Company Articles include a provision that limits the liability
of Holding Company's directors to the fullest extent permitted by the WBCA as
it currently exists or as it may be amended in the future. Consequently,
subject to the WBCA, no person shall be liable to Holding Company or its
shareholders for monetary damages resulting from such person's conduct as a
director of Holding Company. Amendments to the Holding Company Articles may
not adversely affect any right of a director of Holding Company with respect
to acts or omissions occurring prior to such amendment. Section 23B.08.320 of
the WBCA provides that the Holding Company Articles may not limit any
director's liability for acts or omissions involving intentional misconduct or
knowing violations of law, unlawful distributions or transactions from which
the director personally receives benefits in money, property or services to
which the director is not legally entitled. In addition, Washington law
provides for broad indemnification by Holding Company of its officers and
directors. The Holding Company Bylaws implement this indemnification to the
fullest extent permitted by law. Insofar as the indemnity for liabilities
arising under the Securities Act may be permitted to directors or officers of
Holding Company pursuant to the foregoing provisions, Holding Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
CERTAIN EFFECTS OF THE REORGANIZATION
In accordance with the terms of the Merger Agreement, upon consummation of
the Reorganization (i) Holding Company will assume certain obligations and
liabilities of RMI, including RMI's obligations under the Share Repurchase
Plan and the Assumed Plans, including each outstanding option, and each
outstanding agreement to grant an option, to purchase or acquire shares of RMI
Stock under the Assumed Plans, and (ii) each such option, or agreement to
grant an option, will, upon consummation of the Merger, be converted into an
option, or an agreement to grant an option, to purchase or acquire an equal
number of shares of Class B common stock (or Common Stock, if a "Conversion
Event" (as defined in the Holding Company Articles) for Class B common stock
occurs), subject to the terms of the Assumed Plans and such options and
agreements. A vote in favor of the Reorganization, including the Merger, will
constitute approval of Holding Company's assumption of RMI's obligations under
the Assumed Plans and such outstanding options and agreements.
In connection with the Merger, RMI will consent to the transfer of RMI Stock
that is subject to certain shareholder agreements. Upon consummation of the
Merger in accordance with the terms of the Merger Agreement, the shareholder
agreements will terminate.
36
<PAGE>
COMPARISON OF SHAREHOLDER RIGHTS--CERTAIN SUBSTANTIVE DIFFERENCES IN ARTICLES
OF INCORPORATION AND BYLAWS
General. As a result of the Reorganization, holders of RMI Stock will become
shareholders of Holding Company. The following is a table and a narrative
summary of what the Company believes to be the material differences in
shareholder rights arising from distinctions between the RMI Articles and
Bylaws and the Holding Company Articles and Bylaws. The table and the summary
are qualified by and should be read in conjunction with the Holding Company
Article and Bylaws, copies of which are attached as Annex B to this Proxy
Statement/Prospectus.
COMPARISON OF OTHER PROVISIONS OF ARTICLES OF INCORPORATION
AND BYLAWS OF RMI AND HOLDING COMPANY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RMI ARTICLES AND BYLAWS HOLDING COMPANY ARTICLES AND BYLAWS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCK None Blank Check Preferred Stock
- -------------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS Permit 1 - 20 members, each elected Permit 3 - 15 members; after first
annually; directors may be removed with primary public offering of equity
or without cause by a majority of the securities, members divided into 2
shares entitled classes, each class serving staggered 2-
to vote at an election of directors year term; directors may be removed only
for cause by the holders of no less than
two-thirds of the shares entitled to
elect the director.
- -------------------------------------------------------------------------------------------------------------
ANNUAL MEETINGS OF Held on the third Thursday in November; Held 90 - 180 days after fiscal year-
SHAREHOLDERS any appropriate business may be end; business limited to that brought by
conducted Holding Company Board or by shareholder
who follows certain procedures; Holding
Company Board may postpone the meeting
for up to 120 days
- -------------------------------------------------------------------------------------------------------------
SPECIAL MEETINGS OF May be called by shareholders holding at May be called by written request of
SHAREHOLDERS least 10% of outstanding shares entitled shareholders holding at least 25% of
to vote at the meeting outstanding shares entitled to vote at
the meeting if Holding Company becomes a
"public company"
- -------------------------------------------------------------------------------------------------------------
VOTING RIGHTS Cumulative voting in elections for No cumulative voting in elections for
directors directors
- -------------------------------------------------------------------------------------------------------------
MERGERS, CONSOLIDATIONS, Requires approval by each voting group Requires approval by two-thirds of votes
SALES OF ASSETS entitled to vote by entitled to be cast; but if certain
two-thirds of votes entitled to be cast business combinations are approved by
Continuing Directors, shareholder vote
required is majority of outstanding
shares
- -------------------------------------------------------------------------------------------------------------
AMENDMENT OF GOVERNING Approval by each voting group entitled Approval by a majority of the outstand-
INSTRUMENTS to vote by two-thirds of ing shares required to approve amendment
votes entitled to be cast required to of Holding Company Articles' provisions
amend RMI Articles' provisions that that require shareholder approval to
require shareholder approval for amend, except provisions regarding
amendment amendment of certain provisions of the
Holding Company Bylaws and Articles, the
classified Board of Directors, special
voting provisions for business combina-
tions, and special meetings of share-
holders require approval by two-thirds
of outstanding shares to amend
</TABLE>
Authorized Capital Stock. RMI's authorized capital stock consists of
20,000,000 shares of RMI Stock, par value $.01 per share. The Holding Company
Articles provide for an aggregate of 60,000,000 shares of capital stock,
50,000,000 of which will be New Common Stock, par value $.01 per share, and
10,000,000 of which will be Preferred Stock, par value $.01 per share.
Preferred Stock. The Holding Company Board has the authority to issue up to
10,000,000 shares of Preferred Stock in one or more series and to fix the
powers, designations, preferences and relative, participating, optional or
other rights thereof, including dividend rights, conversion rights, voting
rights, redemption terms, liquidation preferences and the number of shares
constituting each such series, without any further vote or action by Holding
Company's shareholders. No shares of Preferred Stock have been issued. The
issuance of Preferred Stock could have one or more of the following effects:
(i) restrict New Common Stock dividends if Preferred Stock dividends have not
been paid, (ii) dilute the voting power and equity interest of holders of New
Common Stock to the extent that any series of Preferred Stock has voting
rights or is convertible into New Common Stock or (iii) prevent current
holders of New Common Stock from participating in Holding Company's assets
upon liquidation until any liquidation preferences granted to holders of
Preferred Stock are satisfied. In addition, the issuance of Preferred Stock
may, under certain circumstances, have the effect of discouraging a change in
control of Holding Company by, for example, granting voting rights to holders
of Preferred Stock that require approval by the separate vote of the holders
of Preferred Stock for any amendment to the Holding Company Articles or any
reorganization, consolidation or merger (or other similar transaction
involving Holding Company). As a result, if there is a market for the New
Common Stock by reason of an initial public offering or otherwise, the
issuance of such Preferred Stock may discourage bids for the New Common Stock
at a premium over the market price therefor and could have a material adverse
effect on the market value of the New Common Stock. The Holding Company Board
does not presently intend to issue any shares of Preferred Stock.
Shareholder Agreements Restricting Transfer of Common Stock. The holders of
RMI Stock are subject to agreements (the "Shareholder Agreements") which
restrict their transfer of RMI Stock. The Shareholder Agreements for all
employees of RMI
37
<PAGE>
and its affiliates provide for two significant restrictions. First, RMI has a
right to redeem the RMI Stock at its request. The purchase price for the
redeemed shares shall be the book value of the RMI Stock, as determined by the
accountants then employed by RMI, at the end of the last fiscal year preceding
the date in which the notice of redemption was made.
Eleven holders of RMI stock were not employees of RMI or its affiliates when
they acquired their RMI Stock. Five of these eleven shareholders acquired
shares in 1995 pursuant to the 1995 Stock Purchase Agreements in a redemption
of certain convertible subordinated debentures; six of these shareholders own
shares that were acquired in 1990 pursuant to the 1990 Stock Purchase
Agreement, in the exchange of certain convertible debentures. These
shareholders are described below as the "Nonemployee Shareholders."
All RMI shareholders, including the Nonemployee Shareholders, are subject to
shareholder agreements that provide for a right of first refusal on behalf of
RMI. Pursuant to that right of first refusal, no holder of RMI Stock may
transfer RMI Stock without the prior written consent of RMI unless the holder
has first made an Offer to sell such holder's shares to RMI and to all holders
of RMI Stock who are employees, officers, or directors of RMI, or affiliates
(the "Employee Shareholders"). If RMI has not accepted the Offer within 30
days, the Offer may be accepted by the Employee Shareholders within 30 days
after their receipt of the Offer. The purchase price for shares acquired
pursuant to this restriction shall be the lower of book value, as established
by RMI's outside accountants, or the proposed transfer price to a third party
as described in the Offer.
The Nonemployee Shareholders have a right, which is not available to the
Employee Shareholders, to transfer their shares to family members. Pursuant to
the 1990 Stock Purchase Agreement and the 1995 Stock Purchase Agreements,
Nonemployee Shareholders may transfer shares to immediate family members,
trusts (the beneficiaries of which include only the Nonemployee Shareholder
and immediate family members), or by will or intestate succession. Any
recipient of RMI Stock pursuant to such an intrafamily transfer takes the RMI
Stock subject to all restrictions on transfer, and RMI may require such
persons to sign an acknowledgment thereof prior to effecting that transfer on
RMI's books and records.
The manner in which the restrictions on transfer under the Shareholder
Agreements may be terminated varies with the terms of the particular
Shareholder Agreement. The 1990 Stock Purchase Agreement, to which five
Nonemployee Shareholders are subject, permits transfer pursuant to any merger
or consolidation of RMI resulting in the change in control of RMI, or pursuant
to any sale of all or substantially all the assets or RMI Stock to a person or
persons not controlling RMI. The 1995 Stock Purchase Agreements, to which five
Nonemployee Shareholders are subject, also permits transfer pursuant to any
merger or consolidation of RMI resulting in the change in control of RMI, or
pursuant to any sale of all or substantially all the assets or RMI Stock, to a
person or persons not then controlling RMI. Moreover, the restrictions on
transfer under the 1995 Stock Purchase Agreements may be terminated upon the
first to occur of (i) a vote of the RMI Board and shareholders as required by
law for the merger or consolidation of RMI with any unaffiliated corporation,
or for the sale of all or substantially all the assets of RMI, or for its
liquidation, or (ii) the agreement in writing by two-thirds of the then-
outstanding shares of RMI Stock to termination of those restrictions or of
similar Shareholder Agreement restrictions entered into between RMI and other
shareholders.
A 1987 Subscription Agreement to which one shareholder, Brooks G. Ragen, is
subject provides for termination of the restrictions upon (a) a vote of the
RMI Board and shareholders as required by law for the merger or consolidation
of RMI with any unaffiliated corporation, or for the sale of all or
substantially all of RMI's assets, or for RMI's liquidation, or (b) an
agreement in writing by the holders of two-thirds of the then-outstanding
shares of RMI Stock to the termination of the restrictions on transfer.
The form of Shareholder Agreement executed between RMI and Employee
Shareholders between 1988 and 1992 provides for termination of restrictions on
transfer upon the first to occur of either (i) the RMI Board and shareholders
voting as required by law for the merger or consolidation or RMI with any
unaffiliated corporation, or for the sale of all or substantially all the
assets of RMI, or for RMI's liquidation, or (ii) an agreement in writing by
the holders of two-thirds of the RMI Stock to a termination of the
restrictions.
38
<PAGE>
The form of Shareholder Agreement entered into between RMI and Employee
Shareholders between 1992 and 1995 provides for termination of the
restrictions in a manner similar to that of the Shareholder Agreement used
between 1988 to 1992. The Shareholder Agreement into which RMI entered into
with Employee Shareholders between 1994 and 1998 provided for termination of
restrictions in a manner similar to that of the Shareholder Agreement used
between 1988 and 1992.
There will be no agreements among shareholders providing for termination of
restrictions of New Common Stock. However, the Reorganization Common Stock
will have limitations on transfer as set forth in the Holding Company
Articles. These restrictions are summarized under "--Description of Holding
Company Capital Stock--New Common Stock."
Board of Directors. The RMI Articles provide that each member of the RMI
Board shall serve until the next annual meeting of shareholders. The Holding
Company Articles and Bylaws, on the other hand, require at the first election
of directors after the first primary, public offering of equity securities by
Holding Company, that the Holding Company Board shall be divided into two
classes as nearly equal in number as possible, and provide that members of
each class will be elected for a term of two years and until their successors
are elected and qualified, with one class being elected annually.
The RMI Articles provide that the number of directors will be determined
pursuant to the RMI Bylaws, which number may be increased or decreased as
provided therein. The RMI Bylaws permit a range in the number of RMI's
directors from one to 20 and allow for a change in the number, either an
increase or decrease, by a vote of a majority of the directors present at a
meeting, as long as a decrease in the number would not shorten the term of any
incumbent director. The Holding Company Bylaws permit a range in the number of
Holding Company's directors from three to 15 and allow for a change in the
number, either an increase or decrease, by amendment to the Holding Company
Bylaws, as long as a decrease in the number would not shorten the term of any
incumbent director.
Vacancies in the Boards of Directors of both RMI and Holding Company may be
filled by a majority vote of the remaining directors, although less than a
quorum. The RMI Bylaws and the Holding Company Bylaws permit a director
elected to fill a vacancy to serve only until the next succeeding annual
election.
The RMI Bylaws provide that a director may be removed with or without cause
by a majority of the shares entitled to vote at an election of directors. By
contrast, the Holding Company Bylaws provide a director may be removed only
for cause by the holders of no less than two-thirds of the shares entitled to
elect the director.
Annual Meeting of Shareholders. The RMI Bylaws provide that the annual
meeting of shareholders shall be held on the third Thursday in November in
each year for the purpose of electing directors and transacting such other
business as may properly come before the meeting. The Holding Company Bylaws
provide that the annual meeting of the shareholders shall be held each year
within 90 to 180 days after the fiscal year-end for the purpose of electing
directors and transacting such other business as may properly come before the
meeting. In addition, the Holding Company Bylaws permit the Holding Company
Board, at any time prior to commencement of the annual meeting, to postpone
the annual meeting for a period of up to 120 days.
Business for Annual Shareholders Meetings. The WBCA does not limit the
business to be conducted at an annual meeting, and all matters appropriate for
shareholder action may be considered at the annual meeting. A corporation's
articles or bylaws, however, may restrict the business permitted at an annual
meeting. The RMI Articles and Bylaws contain no such restrictions. The Holding
Company Bylaws restrict the business to be conducted at an annual meeting to
that (i) brought by or at the direction of the Holding Company Board or
(ii) brought before the meeting by a shareholder entitled to vote at the
meeting, but only if such shareholder proposals are in writing and are
received by the secretary of Holding Company at least 60 and not more than 90
days before the annual meeting.
Special Meetings of Shareholders. The RMI Bylaws provide that the holders of
not less than 10% of all the outstanding shares entitled to vote at the
meeting may call special meetings of the shareholders for any
39
<PAGE>
purpose. By contrast, the Holding Company Articles and Bylaws provide that,
upon qualification of the corporation as a "public company," special meetings
of shareholders may be called at the written request of not less than 25% of
all outstanding shares entitled to vote on any issue proposed to be considered
at such special meeting.
Cumulative Voting; Preemptive Rights. The RMI Articles and Bylaws permit
shareholders to cumulate their votes for election of directors. The Holding
Company Articles prohibit cumulative voting in elections of directors.
Shareholders of both companies have no preemptive rights to subscribe for, or
acquire, additional shares of stock that may be offered by either company.
Mergers, Consolidations and Sales of Assets. Under Washington law, a merger,
share exchange, dissolution or sale of substantially all the assets of a
corporation must be approved by each voting group entitled to vote separately
by two-thirds of all the votes entitled to be cast, unless otherwise provided
in the articles of incorporation. Under Washington law, a corporation may
provide for a greater or lesser vote, so long as the vote provided for each
voting group entitled to vote separately is not less than a majority of all
the votes entitled to be cast by that group. The RMI Articles do not provide
for a greater or lesser vote in such circumstances. The Holding Company
Articles, however, require that certain business combinations (including a
merger, share exchange and the sale, lease, exchange, mortgage, pledge,
transfer or other disposition or encumbrance of a substantial part of Holding
Company's assets other than in the usual and regular course of business) be
approved by the holders of not less than two-thirds of the outstanding shares,
unless such business combination has been approved by a majority of Continuing
Directors, in which case the affirmative vote required shall be a majority of
the outstanding shares.
Amendment of Governing Instruments. Under the WBCA, the RMI Articles can be
amended or repealed by the affirmative vote of the holders of a majority of
the outstanding shares. On the other hand, the Holding Company Articles, by
their terms, adopted in accordance with the WBCA, can be amended or repealed
by the affirmative vote of the holders of a majority of the outstanding
shares. In addition, the Holding Company Articles provide that changes to
certain provisions of the Holding Company Articles, including those regarding
amendment of certain provisions of the Holding Company Bylaws or Articles, the
classified Board of Directors, special voting provisions for business
combinations and special meetings of shareholders, must be approved by the
holders of not less than two-thirds of the outstanding shares.
REGULATORY MATTERS
In connection with the Reorganization, and before it is consummated, Holding
Company will need to be approved by the NYSE as an "approved person" of RMI,
as that term is used in the Constitution of the New York Stock Exchange.
Approval has been requested from the NYSE.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION
Certain directors and officers of Holding Company and RMI have interests,
described below, that may present them with potential conflicts of interest in
connection with the Reorganization.
40
<PAGE>
Certain directors of RMI (one of whom is also an executive officer of RMI
and a director and executive officer of Holding Company) are participants in
the Share Repurchase Plan, under which RMI will redeem RMI Stock owned by an
eligible shareholder for a price equal to (or less than) the book value for
such RMI Stock and, at the end of the eighth fiscal quarter of RMI after the
redemption, will pay an additional compensatory payment per share redeemed
equal to the difference between (i) the book value per share of RMI Stock that
was redeemed and (ii) the book value per share of RMI Stock at the end of such
eighth fiscal quarter (the "Stock Appreciation Amount"). If RMI or a parent of
RMI (such as Holding Company after the Reorganization) makes a public offering
of its shares prior to the end of the applicable eighth fiscal quarter, the
amount received (net of expenses) per share of stock in the public offering
replaces the book value per share as of such eighth fiscal quarter for
purposes of calculating the applicable Stock Appreciation Amount. If the IPO
is consummated prior to the end of the eighth fiscal quarter of RMI after a
director who is listed below has elected to participate in the Share
Repurchase Plan, such director will be entitled to a cash payment calculated
in accordance with the foregoing sentence. The Company expects that the
aggregate amount of any such Stock Appreciation Amount will be paid by the
Company within 30 days after the closing of an initial public offering, if an
initial public offering is consummated. The following table, which includes
each director who has elected to participate in the Share Repurchase Plan,
lists the number of shares of RMI Stock redeemed from such director by RMI
under the Share Repurchase Plan, the book value of such RMI Stock at the time
of the redemption and the value of the Stock Appreciation Amount assuming IPO
proceeds to the Company of $13.95 per share:
<TABLE>
<CAPTION>
AGGREGATE STOCK
NUMBER OF SHARES OF APPRECIATION AMOUNT
RMI STOCK REDEEMED BOOK VALUE OF SUCH TO BE PAID TO INDIVIDUAL
PURSUANT TO THE RMI STOCK AT THE ASSUMING IPO PROCEEDS
SHARE REPURCHASE TIME OF THE TO THE COMPANY OF $13.95
RMI DIRECTOR PLAN REDEMPTION PER SHARE(1)
- ------------ ------------------- ------------------ ------------------------
<S> <C> <C> <C>
Peter C. Hanson......... 23,000 $5.72 $328,416
12,000 $6.00
5,761 $6.36
Robert J. Mortell,
Jr.(2)................. 8,800 $5.72 $ 72,424
Daniel F. Nelson........ 18,400 $5.72 $151,432
Thomas B. Tawresey...... 2,000 $5.14 $111,314
11,000 $5.72
398 $6.00
James E. Webster........ 5,000 $6.00 $ 39,750
</TABLE>
- --------
(1) Assumes an initial public offering price of $15.00 per share of Common
Stock and proceeds to the Company, net of underwriting discounts and
commissions, of $13.95 per share. This information is provided for
illustration purposes only. There can be no assurance that an initial
public offering will occur. See "Risk Factors--Restrictions on Transfers
of Stock if No Initial Public Offering."
(2) Mr. Mortell is also an executive officer of RMI and a director and
executive officer of Holding Company.
The interests of the persons listed above in the Share Repurchase Plan
constitute an interest in the Reorganization to the extent that the
Reorganization may facilitate the IPO and thereby cause the calculation of the
Stock Appreciation Amount to be based in part on the amount received (net of
expenses) per share in the IPO. There can be no assurance that the IPO will
occur at or after the Reorganization, if at all. See "Risk Factors--
Restrictions on Transfers of Stock if No Initial Public Offering."
Each of Lesa A. Sroufe, Robert J. Mortell, Jr., Mark A. McClure, V. Lawrence
Bensussen, John L. MacKenzie and Stanley G. Freimuth has entered into a
noncompetition and nonsolicitation agreement with RMI (the "Noncompetition
Agreements") with a 30-month term commencing on the closing of an
underwritten, initial public offering by Holding Company that results in
aggregate net proceeds to Holding Company and selling shareholders of at least
$15,000,000, provided that such offering occurs on or before December 31, 1998
(a "1998 IPO Closing"). Under the terms of each Noncompetition Agreement, if
any such individual is terminated by RMI without "cause" (as defined in the
Noncompetition Agreement) during the term of such
41
<PAGE>
Noncompetition Agreement, then RMI shall pay such individual a severance
payment equal to the lesser of three months' annual base salary or the annual
base salary that the individual would have received if his or her employment
had continued until the end of such term. In addition, each other director of
RMI has entered into a noncompetition and nonsolicitation agreement with RMI
with a 24-month term commencing on a 1998 IPO Closing, which agreement
provides that if such individual is terminated by RMI without "cause" during
the agreement's term, then RMI shall pay such individual a severance payment
equal to $50,000. The officers and directors that are parties to the
agreements have an interest in the Reorganization to the extent that it may
facilitate an initial public offering, which commences the agreements
providing for severance payments. There can be no assurance that the IPO will
occur after the Reorganization, if it all. See "Risk Factors--Restrictions on
Transfers of Stock if No Initial Public Offering."
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of RMI Stock are entitled to dissenters' rights with respect to the
Merger under Chapter 23B.13 of the WBCA. The following discussion is not a
complete statement of the law pertaining to dissenters' rights under the WBCA
and is qualified in its entirety by the full text of Chapter 23B.13 of the
WBCA, which is reprinted in its entirety as Annex C to this Proxy
Statement/Prospectus.
A record shareholder of RMI Stock will have the right to dissent with
respect to the Merger and, subject to certain conditions, will be entitled to
receive a payment of the fair value of his or her shares under the WBCA. Each
beneficial owner asserting dissenters' rights (each an "RMI Dissenting
Holder") must assert such rights with respect to all shares of which such
shareholder is the beneficial owner or over which such shareholder has power
to direct the vote, and such shareholder must submit to RMI, with or prior to
such beneficial owner's assertion of dissenters' rights, the record
shareholder's written consent to such dissent. A record shareholder may assert
dissenters' rights as to fewer than all the shares registered in such
shareholder's name only if the shareholder dissents with respect to all shares
beneficially owned by any one person and notifies RMI in writing of the name
and address of each person on whose behalf such shareholder asserts
dissenters' rights. An RMI Dissenting Holder (i) must deliver to RMI, before
the vote on the Merger is taken, written notice of such shareholder's intent
to demand payment for such shareholder's shares if the Merger is effectuated
and (ii) must not vote his or her shares in favor of the Merger. Such notice
should be delivered to RMI at its principal executive offices, 999 Third
Avenue, Suite 4300, Seattle, Washington 98104, Attention: Michael W.
Reinhardt. A shareholder who does not satisfy both these requirements will not
be entitled to dissenters' rights.
If the Merger is approved by the shareholders of RMI, RMI shall send a
written dissenters' notice not later than 10 days after the Effective Time to
each RMI Dissenting Holder (i) stating where such shareholder must send his or
her written payment demand, (ii) stating where and when certificates
representing RMI Stock must be deposited, (iii) containing a form for
demanding payment which requires that the dissenter certify whether or not he
or she acquired beneficial ownership before the first public announcement of
the terms of the Merger and (iv) setting a date by which such written payment
demand must be received, which date may not be less than 30 or more than 60
days after the dissenters' notice is delivered. Such notice must be
accompanied by a copy of Chapter 23B.13 of the WBCA. An RMI Dissenting Holder
who does not demand payment in accordance with the terms of such notice will
not be entitled to dissenters' rights.
RMI shall pay to each RMI Dissenting Holder who complies with the procedures
described above, within 30 days after the later of the Effective Time and the
date payment demand is received, the amount that RMI estimates to be the fair
value of such dissenter's shares, plus accrued interest. RMI will provide,
along with such payment, certain financial information, including RMI's
balance sheet, income statement and statement of changes in shareholders'
equity for its last fiscal year and RMI's latest available interim financial
statements, if any, an explanation of how RMI estimated the fair value of the
shares, an explanation of how the accrued interest was calculated and certain
other information. Notwithstanding the foregoing, RMI may elect to withhold
such payment from any dissenter who was not the beneficial owner of the shares
of RMI Stock as to which dissenters' rights are asserted before the date of
the first public announcement of the Merger and, in such event, RMI will
estimate, after the Effective Time, the fair value of such shares of RMI Stock
plus accrued interest, and will
42
<PAGE>
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of the dissenter's demand. Any RMI Dissenting Holder who is
dissatisfied with such payment or such offer may, within 30 days of such
payment or offer for payment, notify RMI in writing of such shareholder's
estimate of the fair value of his or her shares and the amount of interest
due, and demand payment thereof.
If any RMI Dissenting Holder's demand for payment is not settled within 60
days after receipt by RMI of such demand, the WBCA requires that RMI commence
a proceeding in King County Superior Court, and petition the court to
determine the fair value of the shares and accrued interest, naming all RMI
Dissenting Holders whose demands remain unsettled as parties to the
proceeding. The court may appoint one or more persons as appraisers to receive
evidence and recommend the fair value of the shares. The dissenters will be
entitled to the same discovery rights as parties in the other civil actions.
Each dissenter made a party to the proceeding will be entitled to judgment for
the amount, if any, by which the court finds the fair value of his or her
shares, plus accrued interest, exceeds the amount paid by RMI.
Court costs and approval fees will be assessed against RMI, except that the
court may assess such costs against some or all of the dissenters to the
extent that the court finds the dissenters acted arbitrarily, vexatiously or
not in good faith in demanding payment. The court may also assess the fees and
expenses of counsel and experts of the respective parties in amounts that the
court finds equitable (i) against RMI, if the court finds that it did not
substantially comply with certain provisions of the WBCA concerning
dissenters' rights and (ii) against either the dissenter or RMI, if the court
finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously or not in good faith. If the court finds that
services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated, and that the fees should not be assessed
against RMI, the court may award to such counsel reasonable fees to be paid
out of the amounts awarded to all dissenters who benefited from the
proceedings.
CERTAIN INFORMATION REGARDING HOLDING COMPANY
Dividend Policy. Holding Company has not previously paid dividends and has
no present intention to pay dividends in the future. The timing and amount of
future dividends, if any, will be determined by the Holding Company Board and
will depend, among other factors, on Holding Company's earnings, financial
condition and cash requirements at the time such payment is considered.
Initial Public Offering. Holding Company has filed with the Commission a
Registration Statement on Form S-1 in connection with, and expects to shortly
commence its road show with respect to, the public offering of 2,250,000
shares of Common Stock, which it expects to be consummated shortly after the
Effective Time. The IPO will not be consummated unless the Reorganization is
approved and consummated. There can be no assurance that the IPO will occur.
Shareholders of RMI are cautioned not to rely on the possibility of the IPO in
determining whether to vote in favor of the Reorganization. See "Risk
Factors--Restrictions on Transfers of Stock if No Initial Public Offering."
Transfer Agent and Registrar. The Transfer Agent and registrar for the
Common Stock will be ChaseMellon Shareholder Services L.L.C.
THE RMI BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE REORGANIZATION (WHICH INCLUDES APPROVAL OF THE MERGER AGREEMENT).
PROXIES WILL BE VOTED FOR THE REORGANIZATION UNLESS INSTRUCTIONS TO THE
CONTRARY ARE GIVEN.
43
<PAGE>
PROPOSAL II:
ELECTION OF DIRECTORS TO HOLDING COMPANY BOARD
The Holding Company Board currently consists of four directors: Lesa A.
Sroufe, John L. MacKenzie, Mark A. McClure and Robert J. Mortell, Jr. The
number of directors on the Holding Company Board will be, as of immediately
prior to the Effective Time, fixed at eight. The Holding Company Board has
nominated the following four individuals for election as a director of the
Holding Company Board immediately prior to effectiveness of the Reorganization
to serve for a term expiring at the first annual meeting of shareholders of
Holding Company after the Reorganization:
Kirby L. Cramer
Arthur W. Harrigan, Jr.
Peter B. Madoff
Gregory B. Maffei
RMI, as the sole shareholder of Holding Company prior to the Reorganization,
has the power to elect these nominees to the Holding Company Board. The RMI
Board requests that the RMI shareholders vote in favor of this proposal to
direct RMI to elect the four nominees listed above to the Holding Company
Board immediately prior to effectiveness of the Reorganization. Each of the
nominees has indicated that he is able and willing to serve as a director. If
any nominee becomes unable or unwilling to serve, the proxies will be voted to
direct RMI to elect such other person as shall be designated by the Holding
Company Board. Unless instructions to the contrary are specified in a properly
signed and returned proxy, the proxies will be voted in favor of the four
nominees listed above.
THE RMI BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
PROPOSAL TO DIRECT RMI TO ELECT THE FOUR NOMINEES TO THE HOLDING COMPANY BOARD
IMMEDIATELY PRIOR TO EFFECTIVENESS OF THE REORGANIZATION.
44
<PAGE>
BUSINESS
COMPANY OVERVIEW
Ragen MacKenzie is the leading regional brokerage firm headquartered in the
Pacific Northwest. The Company's primary business is retail securities
brokerage, which it conducts through 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 RMI'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 RMI'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, institutional brokerage services, proprietary trading of certain
fixed income securities, correspondent brokerage services and investment
banking services constituted 42.1%, 7.1%, 6.1%, 3.5% and 0.4%, respectively,
of the Company's total revenues in fiscal 1997.
The Company has experienced significant revenue growth over the past five
years while increasing profitability. Total revenues have increased at a
compound annual growth rate of 17.3% from fiscal 1993 through fiscal 1997,
from $46.8 million to $88.6 million. The Company's significant revenue growth
is due in part to growth in customer assets, number of customer accounts,
increases in the number and productivity of retail brokers and substantial
increase in stock values over the past several years. The Company's customer
account balances doubled from $4.6 billion in September 1995 to $9.2 billion
in March 1998 . The Company's net income increased from $4.9 million to $15.4
million from fiscal 1993 through fiscal 1997, and its pretax profit margin
increased from 19.0% in fiscal 1993 to 36.1% in fiscal 1997. Results of
operations during these periods reflected accruals and reversal of amounts
provided under the Death Benefits Plan, which was terminated in 1997. Amounts
provided for benefits accrued under the plan in 1993 resulted in a decrease in
margins from 21.8% to 19.0% for that year. The reversal of the amounts
previously accrued under the plan upon its termination resulted in an increase
in margins in 1997 from 28.8% to 36.1%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Death Benefits
Plan." The following table compares pretax profit margins for the Company
during this period with industry averages for securities firms during the past
five years.
PRETAX PROFIT MARGINS BASED ON NET REVENUES
<TABLE>
<CAPTION>
YEAR
-----------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
RMI(1).................................... 19.0% 20.8% 19.8% 26.3% 36.1%(2)
Industry Average(3)....................... 15.3% 2.4% 12.7% 15.9% 15.0%
Industry Average--Regional Securities
Firms(4)................................. 16.1% 10.0% 13.9% 15.9% 13.5%
</TABLE>
- --------
(1) Data presented for RMI's fiscal year.
(2) Reflects the effect of a $5,000,000 nonrecurring benefit from the
termination of the Death Benefits Plan. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Death Benefits
Plan." If such nonrecurring benefit had not been realized by the Company,
its pretax profit margin would have been 28.8% in 1997.
(3) NYSE member firms doing a public business. Source of data: Securities
Industry Association citing Securities Industry Database.
(4) The largest full-service broker-dealers (non-national full line and non-
New York City based), usually self-clearing with regional branch network
systems (i.e., Midwest, Northeast) providing a wide array of financial
services and products to both retail and institutional clients. This group
does not reflect all firms headquartered outside New York City. Source of
data: Securities Industry Association citing Securities Industry Database.
45
<PAGE>
BACKGROUND
Industry. The size of the capital markets and the volume of trading in the
securities markets have increased substantially in recent years, as has the
demand for securities investments. The Company believes that if these trends
continue in the future, the demand for full-service brokerage services, such
as those offered by the Company, will continue to increase.
The increased demand for securities investments is evident in the shift in
investors' preferences away from bank deposits and into marketable securities.
In 1980, households owned $1.3 trillion of marketable securities, representing
48% of their liquid financial assets compared to $9.9 trillion, or 76% of
household liquid financial assets in 1997, an increase of 660%. Over the same
period, bank deposits decreased from 52% to 24% of household liquid financial
assets. The arrival of a generation of "baby boomers" into what has
historically been considered their prime investing years, ages 50 through 65,
has also fueled the demand for investment products. In 1996, the first 3.4
million baby boomers turned 50; the impact of this generation on the capital
markets is expected to continue to build through the year 2010, when 57
million people will be between the ages of 50 through 65. Additionally, it is
estimated that these individuals will inherit over $10 trillion from the
previous generation between 1990 and 2040.
The volume of equity securities offered to the public illustrates the
response to demand for investment products. Initial public offerings and total
common equity issued in the United States public market grew from $1.4 billion
and $12.8 billion, respectively, in 1980, to $10.2 billion and $19.2 billion,
respectively, in 1990, to $43.9 billion and $118.4 billion, respectively, in
1997. The combination of increasing flows of funds into the equity markets and
new issuance activity has contributed to significantly higher trading volumes.
From 1980 to 1997, average daily trading volume grew at a compound annual rate
of 15.6% on the NYSE and 20.7% on Nasdaq. More recently, the combined NYSE and
Nasdaq average daily trading volumes grew at a compound annual rate of 22.1%
for the five years ended 1997 and increased 22.9% in 1997 over 1996.
Regional. The Pacific Northwest has also experienced dramatic growth in
recent years. The population of the Pacific Northwest increased by 16.1% from
1990 to 1997 as compared to a 7.6% increase nationally. From 1990 to 1994, the
Gross State Product for the states of Idaho, Oregon and Washington increased
at a compound annual rate of 6.5% per year as compared to the United States
Gross State Product, which increased at a compound annual rate of 4.8% per
year for the same period. Venture capital companies invested $2.4 billion in
companies headquartered in Washington during the last three years, and the
state ranked 12th among the 50 states in dollar volume of initial public
offerings for locally headquartered companies in 1997. It is estimated that in
the Seattle area alone there were in excess of 50,000 households with a net
worth of greater than $1,000,000 in 1996.
The Company is the premier regional brokerage firm headquartered in the
Pacific Northwest, based on total revenues and net income in fiscal 1997, and
has demonstrated a history of success and steady growth by capitalizing on
national and regional trends in the securities industry. The Company believes
the Pacific Northwest will continue to experience positive economic
development and that such development will present the Company with further
opportunity for growth within the region.
BUSINESS STRATEGY
The Company believes that the quality and depth of its proprietary research
will continue to help it attract and retain highly productive brokers and
retail, institutional and correspondent customers. The Company intends to use
the quality of its research to grow each aspect of its business and increase
its visibility as the leading regional brokerage firm headquartered in the
Pacific Northwest. The Company's strategy includes the following key elements:
Continued Focus on Proprietary Research Coverage. The Company plans to
continue leveraging the competitive advantages provided by the quality and
depth of its proprietary research coverage. The Company
46
<PAGE>
intends to increase the size of its research staff by recruiting, hiring and
training additional research analysts. The Company also intends to continue
focusing its research efforts on public companies headquartered in the Pacific
Northwest, as well as a selected list of other public companies, in each case
embracing a value-oriented, contrarian philosophy of investment analysis.
Increase Number of Brokers. The Company intends to expand its retail
brokerage services by continuing to recruit experienced, productive retail
brokers. The Company believes that its proprietary research provides it with a
significant competitive advantage in attracting and retaining experienced,
productive retail brokers. From the beginning of fiscal 1993 to March 27,
1998, the Company increased the number of retail brokers from 51 to 78. For
the 12 months ended March 27, 1998, the average production per retail broker
for the Company was over $560,000. Average production per retail broker is
calculated by dividing total retail brokerage revenue for the period
(excluding interest earned on customer balances) by the average of the number
of retail brokers at the beginning and end of the period . The Company intends
to continue focusing its recruiting efforts on experienced, productive retail
brokers and typically does not hire inexperienced or trainee brokers.
Expand Correspondent Brokerage Business. The Company intends to increase
market penetration and expand the geographic coverage of its correspondent
brokerage business by leveraging efficiencies of its clearing operations and
the quality of its proprietary research coverage. The Company believes that
expanding its correspondent business will positively impact margins, because
it believes that such expansion will increase revenues without significant
increase in fixed costs. The Company uses the strength of its "back office"
systems and personnel to market correspondent brokerage services to other
regional brokerage firms which choose not to establish their own back office
operations. The Company plans to capitalize upon (i) the growing need of small
brokerage firms for correspondent services due to a potential increase in net
capital requirements from $50,000 to $500,000 proposed by the National
Securities Clearing Corporation for brokerages providing clearing services;
(ii) the increasing trend among small brokerage firms to reduce fixed costs
associated with clearing activities; and (iii) the increased number of the
Company's correspondent customers outside the Pacific Northwest.
Expand Investment Banking Services. The Company intends to increase its
investment banking business by recruiting experienced investment banking
professionals and leveraging its research coverage of companies headquartered
in the Pacific Northwest. The Company plans to capitalize on increased merger
and acquisition activity in the Pacific Northwest which it believes will
result from significant economic growth in the region. In light of recent
consolidation among investment banking firms, the Company also intends to
capitalize on its regional focus.
Supplement Internal Growth With Strategic Acquisitions. The Company intends
to pursue, on an opportunistic basis, acquisitions of other firms with
complementary businesses that would strengthen or expand the Company's product
or financial service offerings and position within the Pacific Northwest. The
Company plans to focus on smaller regional firms that may realize benefits
from affiliation with a larger firm while retaining their regional focus.
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 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
Nasdaq. In addition to retail
47
<PAGE>
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." From fiscal 1993 through fiscal 1997,
revenues from RMI's retail brokerage activities grew at a compound annual
growth rate of 14.9% from $21,439,000 to $37,326,000, excluding interest
earned on retail brokerage customer balances, while the number of retail
brokers grew at a compound annual growth rate of 7.7%. During fiscal 1996 and
1997 and the six-month period ended March 27, 1998, revenues from RMI's retail
brokerage activities, excluding interest earned in retail brokerage customer
balances, represented approximately 43.8%, 42.1% and 41.2%, respectively, of
RMI'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 productivity of the Company's retail
brokers is evident when compared with that of the industry in general. The
following table compares the average annual commissions per broker for the
Company to industry averages over the past three years.
RAGEN MACKENZIE RETAIL BROKER STATISTICS
<TABLE>
<CAPTION>
AVERAGE ANNUAL COMMISSIONS PER
RETAIL BROKER
-------------------------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Ragen MacKenzie(1)......................... $403,600 $537,900 $548,900
Industry(2)................................ $305,900 $358,800 Not Available
</TABLE>
- --------
(1) Data presented for Ragen MacKenzie's fiscal year.
(2) Source of data: Securities Industry Association.
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. As of March 27, 1998, Ragen MacKenzie employed 78 retail brokers
who had on average more than 17 years of industry experience, and had
independent contractor relationships with 11 additional brokers who had on
average more than 15 years of industry experience. Assets in customer
accounts, including correspondents and independent contractors, totaled
approximately $9.2 billion as of March 27, 1998. 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 March 27, 1998,
the location of the Company's retail offices, the fiscal year each office
opened and the number of retail brokers in each office:
<TABLE>
<CAPTION>
LOCATION OF RETAIL FISCAL YEAR NUMBER OF
OFFICE OFFICE OPENED RETAIL BROKERS
------------------ ------------- --------------
<S> <C> <C>
Seattle, Washington............................ 1982 35
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>
48
<PAGE>
The Company has contractual arrangements with 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 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 seven
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.
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.
Equity Research Focus. One of the most important elements of the Company's
success has been the use of its proprietary equity research products to
support a large portion of the Company's 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 was initially established as of January 2, 1974 by John L.
MacKenzie, while he was employed at another Seattle-based brokerage firm. The
Recommended List has since been maintained continuously under the direction of
Mr. MacKenzie or by Lesa A. Sroufe, the Company's Chief Executive Officer and
former Director of Research. The Recommended List is not distributed publicly
but is made available only to the Company's retail brokers, independent
contractors, retail customers and correspondents.
49
<PAGE>
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.
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, RMI 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.
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 March 31, 1998, the
Company made markets in the common stock or equity securities of approximately
110 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 "Risk Factors--General Risks of the
Securities Industry."
Proprietary Trading. Rather than trading a wide variety of securities in
direct competition with Wall Street firms, the Company has developed a niche
strategy to the 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, 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 counterparts in these transactions are regional broker-dealers. 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.
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, including among others, U.S.
Treasury Separate Trading of Registered Interest and Principal Securities
(STRIPS), Coupons Under Book-Entry System (CUBES), Certificates of Accrual on
Treasury Securities (CATS), Treasury Investment
50
<PAGE>
Growth Receipts (TIGRS) and Financing Corporation (FICO) STRIPS. The Company
also has a CMO trading desk that trades CMOs with other broker-dealers or
banks.
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 daily the profit and loss and
inventory positions of the CMO and zero coupon trading desks. 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 "--Risk
Management" and "Risk Factors--Risks of Proprietary Trading."
CORRESPONDENT BROKERAGE SERVICES
The Company provides clearing services on a fully disclosed basis to 18
correspondents with approximately 435 registered representatives 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. 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.
The execution and clearing process requires the performance of a series of
complex data-processing intensive steps. The execution process begins when the
correspondent accepts its client's order for the purchase or sale of
securities and transmits the order to Ragen MacKenzie's order entry or trading
desks for execution. Ragen MacKenzie, in turn, routes the order to a market to
effect the execution. Ragen MacKenzie receives payment for an order flow in
executing some listed and Nasdaq transactions. A written confirmation
containing the details of each transaction is automatically produced and
delivered to the correspondent's client and posted to the account at the time
of execution.
Ragen MacKenzie typically clears the transaction by taking possession of the
correspondent's client's cash, if securities are being purchased, or
certificate, if any, if securities are being sold, and by delivering cash or
certificates to the broker for the other party to the transaction. Ragen
MacKenzie collects from the correspondent's client the money due on the
transaction, including the commission charged by the correspondent,
51
<PAGE>
deducts from the commission the charge for execution and clearing and any other
amounts due Ragen MacKenzie, and remits the net commission to the correspondent
on a monthly basis. Cash or certificates received by Ragen MacKenzie for the
correspondent's client are either held in the account or delivered to the
client. Ragen MacKenzie sends the correspondent's client a monthly or quarterly
statement of the client's account. The actual clearing functions for multiple
transactions involving many brokerage firms are more complex than as described
above. The securities industry has established a netting process whereby
securities and money are delivered or received between brokerage firms through
central clearing houses instead of matching each buyer and seller in a
transaction and making delivery to and receiving payment from each of them.
INVESTMENT BANKING AND UNDERWRITING
The Company's investment banking strategy is directed at building a balanced
mix of corporate security underwritings, private financings and financial
advisory services with a geographical focus on the Pacific Northwest. In
particular, the Company has targeted co-manager roles on underwritings lead-
managed by national investment banks. Financial advisory services include
advice on mergers, acquisitions, divestitures, fairness opinions, valuations
and financing strategies.
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
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.
The following table presents aggregate customer credit balances, customer
margin balances and customer money market balances for the Company in each of
the past five fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
SEPT. 24, SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26,
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Customer credit balances. $156,613 $175,231 $250,927 $289,224 $ 406,017
Customer margin balances. 47,207 55,228 59,607 86,709 105,378
Customer money market
balances................ 199,231 218,708 301,729 340,645 531,693
-------- -------- -------- -------- ----------
Total.................. $403,051 $449,167 $612,263 $716,578 $1,043,088
======== ======== ======== ======== ==========
</TABLE>
52
<PAGE>
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. Customer margin
balances were $105.8 million as of March 27, 1998.
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 "Risk Factors--
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 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 customers up to specified limits in the event of liquidation.
Additionally, RMI maintains insurance coverage in order to insure customer
accounts up to $14.5 million in excess of SIPC coverage per customer.
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.
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
53
<PAGE>
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 "Risk Factors--Dependence on Systems."
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 Ragen MacKenzie's survival and financial
success. The Company monitors its operating, principal, credit, correspondent
and investment banking risks on a daily basis through a number of control
procedures designed to identify and evaluate the various risks to which it 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 risk as principal 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 mortgage-
backed 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 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 counterparts.
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 which 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 relating to various financing activities is reduced by the
industry practice of obtaining and maintaining collateral. 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 by entering
into master agreements that permit netting, when feasible, monitoring the
creditworthiness of
54
<PAGE>
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.
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 Commission 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.
RMI's Executive Committee has served as RMI's commitment committee. The
committee's objectives are to review potential clients and engagements,
utilize experience with similar clients and situations and analyze RMI's
potential role. The Company seeks to control the risks associated with its
investment banking activities by reviewing the details of potential
transactions prior to accepting an engagement.
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, 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. In
addition, disintermediation may occur as issuers attempt to sell their
securities directly to purchasers, including sales using electronic media such
as the Internet. To the extent that issuers and purchasers of securities
transact business without the assistance of financial intermediaries such as
the Company, the Company's operating results could be adversely affected.
There can be no assurance that the rapid development of discount and/or
electronic brokerages, the decrease of commissions at such brokerages and the
potential of disintermediation 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.
55
<PAGE>
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.
PROPERTIES
The Company occupies an aggregate of approximately 28,191 square feet of
space in Seattle, Washington, under a lease 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.
EMPLOYEES
As of March 31, 1998, the Company had approximately 287 full-time and part-
time employees, of whom 179 are holders of RMI Stock. None of the Company's
employees is covered by a collective bargaining arrangement. The Company
believes that relations with its employees are good.
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. In addition, the charter documents of Holding Company and of
RMI provide for indemnification of Holding Company'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 industry. 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.
56
<PAGE>
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 SROs.
In the United States, the Commission 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 Commission. Certain aspects of broker-dealer regulation has been delegated
to securities-industry SROs, principally the NASD and national securities
exchanges such as the NYSE, which has been designated by the Commission as
RMI's primary regulator. These SROs adopt rules (subject to Commission
approval) that govern the industry, and, along with the Commission, 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. The Company 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.
Much of the Company's market-making business involves securities traded on
Nasdaq. Nasdaq's operations have been the subject of extensive scrutiny,
including allegations of collusion among Nasdaq market-makers by the media and
by governmental regulators, including the Antitrust Division of the Justice
Department. RMI has not been identified as the target of any specific
investigation. The Justice Department recently settled its civil complaint
against 24 other securities firms. The complaint alleged that the defendant
firms violated antitrust laws by maintaining artificially high spreads between
buy and sell prices for Nasdaq stocks and intimidating other market-makers
which offered investors better prices on Nasdaq stocks. The settlement
agreement prohibits such actions and establishes procedures to monitor Nasdaq
traders, including random taping of conversations on Nasdaq desks, spot checks
by regulators, secret taping of traders suspected of violating the rules,
quarterly compliance reports and appointment of an antitrust compliance
officer. The Company is not bound by the terms of the settlement, but if it
were required to establish procedures similar to those outlined in the
settlement, the resulting compliance costs could have a material adverse
effect on its business, financial condition, results of operations or cash
flows. Moreover, the settlement, together with changes to Nasdaq's operations
agreed upon by the NASDR and the Commission in August 1996, which are
applicable to all securities firms, could result in more narrow spreads
between the buy and sell prices of Nasdaq stocks, thereby reducing the
Company's trading profits.
As an investment adviser registered with the Commission, RMI is subject to
the requirements of the Investment Advisers Act of 1940, as amended, and the
Commission'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,
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
57
<PAGE>
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
Commission and are no longer regulated by the states.
RMI also is subject to "Risk Assessment Rules" imposed by the Commission.
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 Commission,
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 Commission, 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 Commission
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.
The Company has never been subject to disciplinary actions by any applicable
regulating authority. RMI is a member of SIPC, which, in the event of the
liquidation of a broker-dealer, provides protection for customer accounts held
by RMI of up to $500,000 for each customer, subject to a limitation of
$100,000 for cash balance claims. RMI pays an annual assessment to SIPC as a
member. RMI also 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. In addition, RMI
has made arrangements for optional custody of customer funds and securities
through The Bank of New York, which certain customers may choose for a fee,
which provide safekeeping and are not subject to the $500,000 SIPC limitation
for securities claims.
As part of its regular examination cycle, the NYSE inspected RMI in 1997.
Following that inspection, various issues regarding registration and
bookkeeping requirements, order execution procedures and supervision relating
to such requirements and procedures were referred to the Division for further
consideration. In addition, the Commission and the NASDR are also aware of the
issues raised by the NYSE inspection. Based on communications with the NASD,
the Company believes that an NASDR enforcement proceeding may be commenced.
The Division, as well as the Commission and the NASDR, 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, there can be no assurance that
the Division, or another regulator, will not commence an enforcement
proceeding. If an enforcement proceeding were commenced and that proceeding
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, cash flows or timing of the proposed IPO.
58
<PAGE>
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 principles ("GAAP")), 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 $250,000 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 Commission 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 Commission'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 Commission 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 Commission 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, repay subordinated debt and
redeem or purchase shares of its outstanding Common Stock.
59
<PAGE>
RMI has been in compliance at all times with all aspects of the Net Capital
Rule. As of March 27, 1998, RMI was required to maintain minimum net capital,
in accordance with Commission rules, of approximately $2.2 million and had
total net capital (as so computed) of approximately $68.5 million, or
approximately $66.3 million in excess of 2% of aggregate debit items and $63.0
million in excess of 5% of aggregate debit items.
60
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are qualified in their entirety by,
and should be read in conjunction with, the Financial Statements of RMI and
the Notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained elsewhere in this Proxy
Statement/Prospectus. The statements of income data for each of the fiscal
years in the three-year period ended September 26, 1997 and the balance sheet
data as of September 27, 1996 and September 26, 1997 have been derived from
the audited financial statements of RMI, which were audited by Deloitte &
Touche LLP, independent auditors, as indicated in their report included
elsewhere in this Proxy Statement/Prospectus. The statements of income data
for fiscal 1993 and 1994 and the balance sheets data as of September 24, 1993,
September 30, 1994 and September 29, 1995 are derived from audited financial
statements that are not included herein. The statements of income data and the
balance sheets data as of and for the six-month periods ended March 28, 1997
and March 27, 1998 are derived from unaudited financial statements included
herein which, in the opinion of management of RMI, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial data for such periods. The results of operations for the six-
month period ended March 27, 1998 are not necessarily indicative of results
that may be expected for any other interim period or for the full year. The
Company utilizes a 52- or 53-week fiscal year ending on the Friday on or
immediately prior to September 30. Fiscal 1994 was a 53-week year and fiscal
1993 and fiscal 1995 through 1997 were 52-week years. The six-month periods
ended March 28, 1997 and March 27, 1998 each contain 26 weeks.
<TABLE>
<CAPTION>
SIX-MONTH
FISCAL YEAR ENDED PERIOD ENDED
------------------------------------------------- -------------------
SEPT. 24, SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, MARCH 28, MARCH 27,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA:
Principal transactions,
net.................... $18,335 $20,412 $21,683 $23,526 $23,566 $11,240 $12,912
Commissions............. 17,986 18,275 19,553 28,516 30,758 14,588 17,821
Other................... 2,577 3,814 2,524 3,569 4,078 2,219 3,034
------- ------- ------- ------- ------- ------- -------
Total operating
revenues.............. 38,898 42,501 43,760 55,611 58,402 28,047 33,767
Interest income......... 7,876 11,316 18,641 24,210 30,179 13,932 18,365
------- ------- ------- ------- ------- ------- -------
Total revenues......... 46,774 53,817 62,401 79,821 88,581 41,979 52,132
Interest expense........ 4,876 6,978 13,052 16,230 19,694 9,138 12,154
------- ------- ------- ------- ------- ------- -------
Net revenues........... 41,898 46,839 49,349 63,591 68,887 32,841 39,978
------- ------- ------- ------- ------- ------- -------
Non-interest expenses:
Compensation and
benefits(1)(2)......... 23,053 25,419 25,925 33,924 35,176 16,878 20,728
Key person death
benefits plan(3)....... 1,150 800 2,450 -- (5,000) (5,000) --
Occupancy and equipment. 3,725 3,921 3,949 3,938 4,714 2,097 2,641
Communications.......... 2,028 2,620 2,588 2,776 3,276 1,528 1,774
Clearing and exchange
fees................... 1,938 1,963 2,282 2,344 2,338 1,161 1,428
Other................... 2,028 2,359 2,381 3,854 3,534 1,837 1,634
------- ------- ------- ------- ------- ------- -------
Total non-interest
expenses.............. 33,922 37,082 39,575 46,836 44,038 18,501 28,205
------- ------- ------- ------- ------- ------- -------
Income before taxes on
income................. 7,976 9,757 9,774 16,755 24,849 14,340 11,773
Taxes on income......... 3,109 3,752 3,672 6,254 9,460 5,348 4,518
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 4,867 $ 6,005 $ 6,102 $10,501 $15,389 $ 8,992 $ 7,255
======= ======= ======= ======= ======= ======= =======
Earnings per common
share(4):
Basic.................. $ 0.68 $ 0.79 $ 0.73 $ 1.10 $ 1.54 $ 0.91 $ 0.70
Diluted................ 0.63 0.72 0.68 1.04 1.44 0.85 0.66
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX-MONTH
AS OF AND FOR THE FISCAL YEAR ENDED PERIOD ENDED
-------------------------------------------- -------------------
SEPT. SEPT. SEPT. SEPT. SEPT. MARCH 28, MARCH 27,
24, 1993 30, 1994 29, 1995 27, 1996 26, 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Pretax income as a
percentage of net
revenues............... 19.0% 20.8% 19.8% 26.3% 36.1% 43.7% 29.4%
Annual return on average
equity(5).............. 29.1% 25.0% 18.5% 23.3% 25.1% 31.1% 19.3%
Assets in retail
brokerage accounts (in
millions)(6)........... N/A N/A $4,629 $5,862 $8,806 $6,571 $9,190
Number of employees(6).. 216 221 232 245 271 256 287
Number of retail
brokers(6)............. 56 62 65 65 74 67 78
BALANCE SHEETS DATA (IN
THOUSANDS):
Total assets............ $310,139 $300,868 $436,068 $483,968 $665,877 $596,936 $697,314
Subordinated debentures. 1,148 815 -- -- -- -- --
Stockholders' equity.... 20,020 28,096 37,776 52,523 70,248 63,008 79,882
</TABLE>
- --------
(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 stock options granted under the Assumed Plans of
$1,213,000, $1,471,000, $955,000, $3,125,000, $2,223,000, $1,323,000 and
$1,150,000 during fiscal 1993 through 1997 and the six-month periods ended
March 28, 1997 and March 27, 1998, respectively. If the IPO is
consummated, the existing option plans will become fixed-award, fair-
value-based plans and Holding Company will make future stock option grants
pursuant to a newly formed fixed-award stock option plan. Accordingly,
future changes in the market value of the Common Stock will generally not
result in ongoing charges to compensation expense.
(2) Compensation and benefits includes an expense recorded for the
appreciation in book value between the grant date and the exercise date
for the Repurchase SARs granted under RMI's book-value-based Share
Repurchase Plan of $66,000 and $135,000 during fiscal 1997 and the six-
month period ended March 27, 1998, respectively. No expenses were incurred
during any other periods since no Repurchase SARs under the Share
Repurchase Plan were outstanding during such periods. If the IPO is
consummated, the Share Repurchase Plan will be terminated.
(3) Reflects amounts recorded for benefits under 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 RMI 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 RMI Board approved the termination of the Death
Benefits Plan and RMI recorded a pretax nonrecurring benefit of
$5,000,000, which reflects the reversal of the amount previously accrued
for plan benefits. RMI had no outstanding obligations or any future
obligations under the Death Benefits Plan at termination date. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Death Benefits Plan."
(4) Basic EPS is calculated by dividing net income by the weighted average
number of shares outstanding. 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, the Company utilizes
the per-share book value at the end of each corresponding period as the
Share Repurchase Plan permits 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) Amounts reflected for the six-month periods represent annualized amounts.
(6) Shown as of end of period.
62
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with "Selected
Financial Data" and RMI's financial statements and the related notes thereto
included elsewhere in this Proxy Statement/Prospectus. In addition to
historical information, the following contains certain forward-looking
statements that involve known and unknown risks and uncertainties. The
Company's actual results could differ significantly from those anticipated in
these forward-looking statements as a result of certain factors, including
those discussed in "Risk Factors," "Business" and elsewhere in this Proxy
Statement/Prospectus.
OVERVIEW
Ragen MacKenzie is the leading regional brokerage firm headquartered in the
Pacific Northwest. The Company's primary business is retail securities
brokerage, which it conducts through 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 the Recommended List, which includes
selected regional and national stocks. 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.
The Company has experienced significant revenue growth over the past five
years while increasing profitability. Total revenues have increased at a
compound annual growth rate of 17.3% from fiscal 1993 through fiscal 1997,
from $46.8 million to $88.6 million. The Company's significant revenue growth
is due in part to growth in customer assets, number of customer accounts,
increases in the number and productivity of retail brokers and the substantial
increase in stock values over the past several years. The Company's customer
account balances doubled from $4.6 billion in September 1995 to $9.2 billion
in March 1998. The Company's net income increased from $4.9 million to $15.4
million from fiscal 1993 through fiscal 1997, and its pretax profit margin
increased from 19.0% to 36.1% from fiscal 1993 to fiscal 1997. Results of
operations during these periods reflected accruals and reversal of amounts
provided under the Death Benefits Plan, which was terminated in 1997. Amounts
provided for benefits accrued under the plan in 1993 resulted in a decrease in
margins from 21.8% to 19.0% for that year. The reversal of the amounts
previously accrued under the plan upon its termination resulted in an increase
in margins in 1997 from 28.8% to 36.1%. See "--Death Benefits Plan."
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 the
Company's compensation expense is variable, many of its activities have fixed
operating costs that do not decrease with reduced levels of activity.
The increase in the Company's profitability over the last five years has
been principally due to the growth in the number of retail brokers from 51 to
78 from the beginning of fiscal 1993 to March 27, 1998, an increase in broker
productivity from $390,000 in fiscal 1993 to $560,000 for the 12-month period
ended March 27, 1998, increases in customer account balances, increases in the
Company's proprietary trading activities and a focus on containing expenses.
The Company's profitability is also affected by changes in the volume of its
correspondent business. As a substantial portion of the expenses associated
with the Company's correspondent brokerage services are fixed, changes in
revenues associated with these services may have a disproportionate impact on
net income.
63
<PAGE>
During the six-month period ended March 27, 1998, RMI experienced increased
levels of revenues compared to the corresponding period in fiscal 1997. In
particular, revenues in RMI's retail brokerage business grew 20.5%, 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 market fluctuations during the quarter ended December 31, 1997, the
addition of new brokers during the second half of fiscal 1997 contributed to
the overall growth in retail revenue during the six-month period ended March
27, 1998. Additionally, the annualized percentage increase in revenues and net
income of RMI's U.S. government and agency zero coupon bond trading operation
in the first six months of fiscal 1998 was higher than in prior periods,
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.
Brooks G. Ragen has entered into an agreement for a term ending three years
after the proposed IPO pursuant to which he intends to establish and be
employed by a newly formed company that will serve as a correspondent of RMI.
See "Risk Factors--Risks Relating to Departure of Brooks G. Ragen" and
"Certain Relationships and Related Transactions." Mr. Ragen and his client
service team's production accounted for approximately $2.8 million (3.2%) and
$1.5 million (2.9%) of RMI's total revenues in the fiscal year ended September
26, 1997 and the six-month period ended March 27, 1998, 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 "Risk
Factors--Recent Changes in Management."
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 latter part of 1995, which continued throughout 1996 and
1997. 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, RMI 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 provisions of the Death
Benefits Plan were determined as a function of the employee-shareholder's
ownership of RMI Stock and were to be provided to the heirs as a supplement to
payments made by RMI in conjunction with the redemption of the book-value-
based RMI Stock. 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, RMI adopted the Share Repurchase Plan pursuant to which
certain employees may elect to receive a right to a Repurchase SAR upon the
redemption of the shareholder's RMI Stock. The amount to be paid to the
Repurchase SAR holder is generally determined as the appreciation in the RMI
Stock over the two-year period subsequent to the Repurchase SAR grant date. As
the Share Repurchase Plan served to provide additional liquidity in RMI Stock,
RMI elected to terminate the Death Benefits Plan. Accordingly, the previously
established accruals under the Death Benefits Plan were reversed, resulting in
a reduction of non-interest expenses of $5,000,000 in the second quarter of
fiscal 1997. The Share Repurchase Plan will terminate if the IPO is
consummated.
As the operation of the Death Benefits Plan has resulted in significant
charges and credits to results of operations that will not continue in the
future, the following information is provided to present information regarding
the financial results of RMI, excluding the effects of the Death Benefits
Plan, to assist in the future analysis of results and trends. Management
believes that this is useful information; however, this presentation is
64
<PAGE>
not in conformity with GAAP and should not be considered as an alternative to
the GAAP presentation. In addition, if the IPO is consummated, certain other
costs of operating as a public company will be incurred in the future that are
not reflected in this presentation.
<TABLE>
<CAPTION>
SIX-MONTH
FISCAL YEAR ENDED PERIOD ENDED
------------------------------------------------- -------------------
SEPT. 24, SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, MARCH 28, MARCH 27,
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical income before
taxes on income........ $7,976 $ 9,757 $ 9,774 $16,755 $24,849 $14,340 $11,773
Adjusted for accrual
(reversal) of Death
Benefits Plan.......... 1,150 800 2,450 -- (5,000) (5,000) --
------ ------- ------- ------- ------- ------- -------
Historical income before
taxes, as revised...... 9,126 10,557 12,224 16,755 19,849 9,340 11,773
Taxes on income,
adjusted to eliminate
effect of Death
Benefits Plan.......... 3,500 4,024 4,529 6,254 7,710 3,598 4,518
------ ------- ------- ------- ------- ------- -------
Adjusted net income..... $5,626 $ 6,533 $ 7,695 $10,501 $12,139 $ 5,742 $ 7,255
====== ======= ======= ======= ======= ======= =======
Historical net income as
reported............... $4,867 $ 6,005 $ 6,102 $10,501 $15,389 $ 8,992 $ 7,255
====== ======= ======= ======= ======= ======= =======
</TABLE>
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 mortgage-backed securities inventory.
Non-Interest 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 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.
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.
65
<PAGE>
EARNINGS CHARGES IF IPO CONSUMMATED
In connection with certain events relating to the IPO, if the IPO is
consummated the Company will record nonrecurring charges to earnings, resulting
in an estimated net charge to earnings of $4,851,000 in the quarter in which
the IPO is completed, assuming an initial public offering price of $15.00 per
share. Given the magnitude of the net charge, the Company may report a loss for
the quarter in which such charge is incurred.
If the IPO is consummated, the Company's existing variable-award, book-value-
based stock option plans will become fixed-award, fair-value-based plans.
Accordingly, the Company will be required to record compensation expense of
approximately $3,574,000 based on the difference between the book value of the
Company's stock immediately preceding the IPO and the estimated fair market
value of the stock if the IPO is consummated (assuming an initial public
offering price of $15.00 per share) for all variable-award, book-value-based
stock options estimated to be outstanding on the date of consummation of the
IPO (estimated to be 450,000 stock options). Future stock options will be
granted as fixed-award stock options under the 1998 Plan. If the IPO is
consummated, the Company will also record compensation expense (net of tax) in
the amount of $1,277,000 (assuming an initial public offering price of $15.00
per share), which reflects the increase in the value of the RMI Stock
underlying the Share Repurchase Plan. The Share Repurchase Plan will terminate
if the IPO is consummated, at which time the Company's liabilities under the
Share Repurchase Plan will be determinable and final. See footnote 8 to the
table set forth in "Summary--Summary Financial Information" and Note 14 of
RMI's Notes to Financial Statements.
66
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data stated as a percentage of net revenues:
<TABLE>
<CAPTION>
SIX-MONTH
FISCAL YEAR ENDED PERIOD ENDED
----------------------------- -------------------
SEPT. 29, SEPT. 27, SEPT. 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Principal transactions, net.. 43.9% 37.0% 34.2% 34.2% 32.3%
Commissions.................. 39.6 44.8 44.7 44.4 44.6
Other........................ 5.1 5.6 5.9 6.8 7.6
----- ----- ----- ----- -----
Total operating revenues... 88.6 87.4 84.8 85.4 84.5
Interest income.............. 37.8 38.1 43.8 42.4 45.9
----- ----- ----- ----- -----
Total revenues............. 126.4 125.5 128.6 127.8 130.4
Interest expense............. 26.4 25.5 28.6 27.8 30.4
----- ----- ----- ----- -----
Net revenues............... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Non-interest expenses:
Compensation and benefits(1). 52.5 53.3 51.1 51.4 51.9
Key person death benefits
plan(2)..................... 5.0 -- (7.3) (15.2) --
Occupancy and equipment...... 8.0 6.2 6.8 6.4 6.6
Communications............... 5.3 4.4 4.8 4.6 4.4
Clearing and exchange fees... 4.6 3.7 3.4 3.5 3.6
Other........................ 4.8 6.1 5.1 5.6 4.1
----- ----- ----- ----- -----
Total non-interest ex-
penses.................... 80.2 73.7 63.9 56.3 70.6
----- ----- ----- ----- -----
Income before taxes on in-
come........................ 19.8 26.3 36.1 43.7 29.4
Taxes on income.............. 7.4 9.8 13.7 16.3 11.3
----- ----- ----- ----- -----
Net income................... 12.4% 16.5% 22.4% 27.4% 18.1%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) See footnotes 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."
COMPARISON OF SIX MONTHS ENDED MARCH 27, 1998 AND MARCH 28, 1997
Net revenues increased by $7,137,000, or 21.7%, to $39,978,000 for the first
six months of fiscal 1998 as compared to the same period in fiscal 1997.
Revenues increased in predominately all of the Company's major areas of
activity during the first six months of fiscal 1998 as compared to the same
period in fiscal 1997.
Revenues from principal transactions increased by $1,672,000, or 14.9%, to
$12,912,000 for the first six months of fiscal 1998 as compared to the same
period in fiscal 1997. Revenues from principal transactions in equity
securities increased by $160,000, or 2.9%, to $5,657,000 for the first six
months of fiscal 1998 as compared to the same period in fiscal 1997. Increased
revenue was due to increased equity trading volumes, which was partially
offset by narrowing margins due to increased competition and greater
regulatory supervision of these markets. Revenues from principal transactions
in debt securities increased by $1,512,000, or 26.3%, to $7,255,000, 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.
67
<PAGE>
Commissions revenues increased by $3,233,000, or 22.2%, to $17,821,000 for
the first six 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. While the increase in trading volume generally resulted from
increased volatility in securities prices during the quarter ended December
31, 1997, successful recruiting efforts during the second half of fiscal 1997
also contributed to the overall growth in revenues during the six-month period
ended March 27, 1998.
Other income increased by $815,000, or 36.7%, to $3,034,000 for the first
six months of fiscal 1998 compared to the same period in fiscal 1997,
primarily due to increases in fees from investment advisory services and
higher revenues relating to underwriting.
Net interest income increased by $1,417,000, or 29.6%, to $6,211,000 for the
first six months of fiscal 1998 as compared to the same period of fiscal 1997.
Interest income increased by $4,433,000, or 31.8%, to $18,365,000 primarily
due to increased customer credit, money-market and margin balances. Interest
expense increased by $3,016,000, or 33.0%, to $12,154,000, primarily due to a
significant increase in customer credit balances.
Non-interest expenses increased by $9,704,000, or 52.5%, to $28,205,000 for
the first six months of fiscal 1998 as compared to the same period of fiscal
1997. This increase consists primarily of a nonrecurring $5,000,000 benefit
related to the reversal of the amounts previously accrued under the Death
Benefits Plan in the six-month period ended March 28, 1997, and increases in
compensation and benefits expenses during the six-month period ended March 27,
1998.
Compensation and benefits expenses increased by $3,850,000, or 22.8%, to
$20,728,000 for the first six months of fiscal 1998 as compared to the same
period in fiscal 1997. Commission and other sales compensation expenses
increased by $1,931,000, or 25.1%, to $9,616,000 for the fiscal 1998 period,
primarily as a result of the increase in principal transactions and commission
revenues 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 profits.
The Death Benefits Plan was terminated during the six-month period ended
March 28, 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 six months of fiscal 1998, as this plan had been terminated.
See footnote 3 to the table set forth in "Selected Financial Data," Note 10 of
RMI's Notes to Financial Statements and "--Death Benefits Plan."
Occupancy and equipment expenses increased $544,000, or 25.9%, to
$2,641,000, due to the Company's investment in technology and expansion of the
retail sales force. Communications expenses increased by $246,000, or 16.1%,
to $1,774,000, 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 $267,000, or 23.0%, to $1,428,000, due to
higher trading volume in retail and correspondent brokerage services. Other
expenses decreased by $203,000, or 11.1%, to $1,634,000 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 38.4% in the first six months of
fiscal 1998 and 37.3% in the first six 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. Assuming the conversion of
the variable-award, book-value-based stock option plans to fixed-award, fair-
value-based stock option plans if the IPO is consummated, the Company's
effective income tax rate is expected to be lower in future periods. See "--
Earnings Charges if IPO Consummated."
68
<PAGE>
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 primarily
due to increased revenues in 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.
Non-interest 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.
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 Death Benefits 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," Note 10 of RMI's Notes to 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.
69
<PAGE>
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. Assuming the conversion of the variable-award, book-value-based stock
option plans to fixed-award, fair-value-based stock option plans if the IPO is
consummated, the Company's effective income tax rate is expected to be lower
in future periods. See "--Earnings Charges if IPO Consummated."
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 27, 1996 AND SEPTEMBER 29, 1995
Net revenues increased by $14,242,000, or 28.9%, to $63,591,000 for fiscal
1996 as compared to fiscal 1995. The increase in net revenues was due
primarily to increases in retail brokerage commissions and principal
transactions and a significant increase in net interest income from retail
customer balances.
Revenues from principal transactions increased by $1,843,000, or 8.5%, to
$23,526,000 for fiscal 1996 as compared to fiscal 1995. Revenues from
principal transactions in equity securities increased by $1,160,000, or 11.1%,
to $11,630,000. The increase was primarily due to higher volumes resulting
from improved retail equity market conditions. Revenues from trading debt
securities increased by $683,000, or 6.1%, to $11,896,000 due to an increase
in revenues from trading in U.S. government and agency zero coupon bonds,
which was offset in large part by a decrease in revenues from trading in
municipal bonds, primarily due to reduced volume in municipal bond trading.
Commissions revenues increased by $8,963,000, or 45.8%, to $28,516,000 for
fiscal 1996 as compared to fiscal 1995. The increase in commissions revenues
was primarily due to increased average retail and institutional production and
higher volumes resulting from strong retail equity market conditions, combined
with an increase in selling concessions on underwriting transactions in fiscal
1996 compared with fiscal 1995.
Other income increased by $1,045,000, or 41.4%, to $3,569,000 for fiscal
1996 as compared to fiscal 1995, primarily due to an increase in investment
banking revenues, including revenues relating to underwriting participations
and fees from investment advisory services.
Net interest income increased by $2,391,000, or 42,8%, to $7,980,000 for
fiscal 1996 as compared to fiscal 1995. Interest income increased by
$5,569,000, or 29.9%, to $24,210,000 primarily due to significant growth in
customer credit and margin balances, which was offset by a decrease in
interest earned from trading mortgage-backed securities due to reduced
inventory levels and lower interest rates earned on customer balances.
Interest expense increased by $3,178,000, or 24.3%, to $16,230,000 for fiscal
1996 as compared to fiscal 1995, due to increased customer credit balances,
which were partially offset by lower interest rates paid on such balances.
Non-interest expenses increased by $7,261,000, or 18.3%, to $46,836,000 for
fiscal 1996 as compared to fiscal 1995, primarily due to increases in
compensation and benefits, which were partially offset by a decrease in Death
Benefits Plan expense.
Compensation and benefits expenses increased by $7,999,000, or 30.9%, to
$33,924,000 for fiscal 1996 as compared to fiscal 1995. Commission and other
sales compensation expenses increased by $3,577,000, or 30.0%, to $15,483,000,
as a result of the increase in commission and principal transaction revenues.
The remaining increase in compensation expense primarily reflects an increase
in stock option expense and higher incentive bonus compensation paid to
trading and non-production-related personnel generally resulting from
increased operating revenue and improved profitability of the Company. See
footnote 1 to the table set forth in "Selected Financial Data" for a
discussion of the stock option expense.
Death Benefits Plan expense decreased to zero in fiscal 1996 as compared
with a $2,450,000 expense recorded in fiscal 1995. No expense accrued 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 RMI's Notes to
Financial Statements.
70
<PAGE>
Occupancy and equipment expenses were generally unchanged, while
communications expense and clearing and exchange fees increased moderately in
fiscal 1996 due to increased trading volume and growth in the number of
customer accounts. Other expenses increased by $1,473,000, or 61.9%, to
$3,854,000, due to higher state and local taxes in 1996 combined with refunds
received in 1995 for overpayments in prior years and increased professional
fees.
The Company's effective income tax rate was 37.3% in fiscal 1996 and 37.6%
in fiscal 1995. The Company's effective income tax rate was higher than the
federal statutory rate primarily due to nondeductible stock option plan
expense. Assuming the conversion of the variable-award, book-value-based stock
option plans to fixed-award, fair-value-based stock option plans if the IPO is
consummated, the Company's effective income tax rate is expected to be lower
in future periods. See "--Earnings Charges if IPO Consummated."
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 98.7%, 99.5% and 99.4% of the Company's
assets as of September 27, 1996, September 26, 1997 and March 27, 1998,
respectively. Substantially all of the Company's receivables are secured by
customer securities or security transactions in the process of settlement.
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 March 27, 1998, the
Company had a secured bank line of credit with a borrowing limit of
$85,000,000 with $56,900,000 outstanding, and a security repurchase
arrangement with $35,125,000 outstanding. The ratio of assets to equity as of
March 27, 1998 was approximately 8.7:1. If the IPO is consummated, at an
assumed offering price of $15.00 per share, this ratio will decline to
approximately 7:1.
Certain minimum amounts of capital must be maintained by the Company to
satisfy the regulatory requirements of the Commission and the NYSE. RMI's
regulatory net capital has historically exceeded these minimum requirements.
See "Net Capital Requirements."
The Company believes that its current level of equity capital, combined with
funds anticipated to be generated from operations and the anticipated net
proceeds from the Common Stock sold by it in the IPO, if it is consummated,
will be adequate to fund its operations for at least 18 to 24 months.
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
necessary action 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
71
<PAGE>
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 costs 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. See "Risk Factors--Year 2000 Compliance."
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 AND NO. 131
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 displaying
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 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 periods beginning after December 15, 1997. SFAS No. 131
requires an enterprise to report certain additional financial and descriptive
information about its reportable operating segments.
The Company will adopt these pronouncements 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
impact the Company's financial position, results of operations or cash flows.
72
<PAGE>
MANAGEMENT OF HOLDING COMPANY
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
The directors, director nominees and executive officers of Holding Company
and their ages and positions as of April 16, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lesa A. Sroufe.......... 40 Chief Executive Officer and Chairman of the Board
Robert J. Mortell, Jr... 52 President, Chief Operating Officer, Treasurer and Director
Mark A. McClure......... 46 Executive Vice President and Director
V. Lawrence Bensussen... 39 Senior Vice President, Chief Financial Officer and Secretary
John L. MacKenzie....... 61 Director
Kirby L. Cramer (1)..... 61 Director Nominee
Arthur W. Harrigan, Jr.
(1).................... 54 Director Nominee
Peter B. Madoff (1)..... 52 Director Nominee
Gregory B. Maffei (1)... 38 Director Nominee
</TABLE>
- --------
(1) Nominees for election as directors of Holding Company will be elected by
RMI immediately prior to the Reorganization.
Lesa A. Sroufe became Chief Executive Officer and Chairman of the Holding
Company Board in April 1998. She has served as a director of RMI since joining
RMI in November 1988, and as a member of the Executive Committee of the RMI
Board since November 1993. 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 a Senior Vice President of RMI from
November 1988 until November 1996 and as Executive Vice President from
November 1996 until February 1998. From 1980 to 1988, she was a research
analyst with the Foster & Marshall division of Shearson Lehman Hutton ("Foster
& Marshall"), a stock brokerage firm, and became Director of Research for
Foster & Marshall in 1986. Ms. Sroufe holds a bachelor's degree in business
from the University of Washington and is a Chartered Financial Analyst.
Robert J. Mortell, Jr. became President, Chief Operating Officer, Treasurer
and a Director of Holding Company in April 1998. He has served as a director
and a member of the Executive Committee of the RMI Board 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 to July 1996. From
1972 to 1982, Mr. Mortell was employed by Foster & Marshall in various
capacities within the operations area and, in 1981, became its Treasurer. Mr.
Mortell holds a bachelor's degree in finance from Seattle University.
Mark A. McClure became Executive Vice President and a director of Holding
Company in April 1998. He has served as Executive Vice President and a
director of RMI, and as a member of the Executive Committee of the RMI Board,
since November 1996. Mr. McClure has been a retail account executive since
joining RMI in June 1994, and has served as the Director of 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 Holding Company in April 1998. He 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.
73
<PAGE>
John L. MacKenzie became a director of Holding Company in April 1998. He has
served as a director of RMI since joining RMI in November 1988, and as
President of RMI from November 1988 until November 1990. He has served as a
member of the Executive Committee of the RMI Board since November 1989. Mr.
MacKenzie began his career as a research analyst in 1960 with Murphy Favre, a
stock brokerage and money management firm. From 1972 to 1986, he was Director
of Research for Foster & Marshall. He holds a bachelor's degree in accounting
from the University of Iowa.
Kirby L. Cramer is a nominee for election by RMI as a director of Holding
Company. Mr. Cramer is Chairman Emeritus of Hazleton Laboratories Corporation
and a Trustee Emeritus and former President of the University of Virginia's
Colgate Darden Graduate School of Business Administration. Mr. Cramer is also
past Chairman of the Advisory Board of the School of Business Administration
of the University of Washington. He also serves on the board of directors of
Immunex Corporation, ATL Ultrasound, Inc., Unilab, Inc., The Commerce Bank of
Washington, Landec Corporation, Northwestern Trust Company, SonoSight, Inc.
and certain privately held companies.
Arthur W. Harrigan, Jr. is a nominee for election by RMI as a director of
Holding Company. Mr. Harrigan was a partner of the law firm Lane Powell Moss &
Miller from 1975 until 1985 and, since January 1986, has been a partner of the
law firm Danielson Harrigan & Tollefson LLP. Mr. Harrigan holds a bachelor's
degree from Harvard College and a law degree from Columbia Law School, and is
a Fellow of the American College of Trial Lawyers.
Peter B. Madoff is a nominee for election by RMI as a director of Holding
Company. Since 1965, Mr. Madoff has served as Senior Managing Director of
Bernard C. Madoff Investment Securities. Mr. Madoff serves on the board of
directors of the Cincinnati Stock Exchange and, from 1993 until 1994, served
as the Vice Chairman of the Board of Directors of the National Association of
Securities Dealers, Inc. He holds a bachelor's degree from Queens College and
a law degree from Fordham Law School.
Gregory B. Maffei is a nominee for election by RMI as a director of Holding
Company. Mr. Maffei has served as Chief Financial Officer of Microsoft
Corporation ("Microsoft") since July 1997. He joined Microsoft in April 1993,
served as Director of Business Development and Investments until April 1994,
Treasurer from April 1994 to June 1996 and Vice President, Corporate
Development from June 1996 to July 1997. Mr. Maffei holds a bachelor's degree
from Dartmouth College and a master's degree in business administration from
Harvard Business School, where he was a Baker Scholar. Mr. Maffei also serves
on the board of directors of Cort Business Services Corporation and Mobile
Telecommunications Technologies Corp.
DIRECTOR COMMITTEES AND COMPENSATION
The Holding Company Board currently has no committees. Prior to or shortly
after consummation of the Reorganization, Holding Company will establish an
audit committee and a compensation committee. The audit committee will review
the functions of the Company's management and independent auditors pertaining
to the Company's consolidated financial statements and will perform such other
related duties and functions as are deemed appropriate by the audit committee
and the Board of Directors. The compensation committee will determine officer
and director compensation and administer the Company's compensation plans.
See""--Compensation Plans."
Directors who are employees of Holding Company or RMI receive no additional
compensation for their service as directors. The Company pays each nonemployee
director $5,000 per year plus reimbursement of expenses incurred in connection
with his or her service as a director. In addition, the Company grants a
nonqualified stock option for 25,000 shares of Common Stock to each
nonemployee director on the date the director is first appointed or elected to
the Holding Company Board, which fully vests on the first anniversary of the
date of grant, and, commencing with the Company's 1999 Annual Meeting of
Shareholders, will grant an additional, fully vested nonqualified stock option
for 5,000 shares of Common Stock to each nonemployee director immediately
following each annual meeting of shareholders.
74
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Holding Company currently has no compensation committee, and its officers
and directors have not deliberated concerning executive compensation. Prior to
or shortly after consummation of the Reorganization, Holding Company will
establish a compensation committee. See "--Director Committees and
Compensation." No executive officer of Holding Company serves as a member of
the compensation committee of any entity that has one or more executive
officers serving as a member of the Holding Company Board.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to
compensation paid by RMI for the fiscal year ended September 26, 1997 to the
Chief Executive Officer and the four other most highly compensated executive
officers of Holding Company during fiscal 1997 (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL UNDERLYING COMPENSATION
POSITION SALARY($) BONUS($) COMMISSIONS($) OPTIONS(#) ($)(1)
------------------ --------- -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Lesa A. Sroufe.......... 263,876 364,000 -- 35,000 882
Chief Executive Officer
Robert J. Mortell, Jr... 397,875 328,000 -- -- 900
President, Chief
Operating
Officer and Treasurer
Mark A. McClure......... 147,875 280,000 214,691 8,750 4,058
Executive Vice
President
V. Lawrence Bensussen... 123,475 120,000 -- -- 499
Senior Vice President,
Chief Financial Officer
and Secretary
Stanley G. Freimuth(2).. 9,000 888,670 979,406 -- 3,579
</TABLE>
- --------
(1) Represents premiums paid by RMI with respect to life insurance for the
benefit of the Named Executive Officers and, for Messrs. McClure and
Freimuth, also includes $3,210 and $2,675, respectively, in cash payments
made upon the exercise of stock options in amounts equal to the difference
between the exercise price of such options and a price contractually
agreed upon by RMI and the Named Executive Officer.
(2) Mr. Freimuth served as RMI's Chief Executive Officer from October 1996 to
February 1998. He plans to resign as RMI's Chairman of the Board upon
consummation of the Reorganization. Mr. Freimuth will not be an executive
officer or director of Holding Company following the Reorganization.
75
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended September
26, 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
ANNUAL RATES
INDIVIDUAL GRANTS OF STOCK
--------------------------------------------- PRICE
NUMBER OF PERCENT OF APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE(2) 5%($) 10%($)
---- ---------- ------------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Lesa A. Sroufe.......... 19,425 4.7% 5.14 3/11/99 10,234 20,967
15,575 3.8% 5.14 1/2/00 11,853 24,786
Robert J. Mortell, Jr... -- -- -- -- -- --
Mark A. McClure......... 8,750 2.1% 5.14 11/30/98 4,200 8,570
V. Lawrence Bensussen... -- -- -- -- -- --
Stanley G. Freimuth..... -- -- -- -- -- --
</TABLE>
- --------
(1) All options were granted at book value on the date of grant. Mr. McClure
will be entitled to a cash payment equal to $2.28 per share upon exercise
of such options.
(2) Options for 19,425 shares and 15,575 shares were granted to Ms. Sroufe on
March 11, 1997 and an option for 8,750 shares was granted to Mr. McClure
on February 4, 1997. The options granted were immediately exercisable on
the date of grant except that the option for 15,575 shares granted to Ms.
Sroufe vested on January 2, 1998.
(3) The assumed rates of growth are prescribed by the Commission for
illustrative purposes only and are not intended to forecast or predict
future stock prices.
OPTION EXERCISES IN FISCAL 1997 AND YEAR-END OPTION VALUES
The following table sets forth certain information regarding option
exercises by the Named Executive Officers during the fiscal year ended
September 26, 1997, and unexercised stock options held by the Named Executive
Officers as of September 26, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
VALUE OPTIONS AT FISCAL YEAR-END(#) FISCAL YEAR-END ($)(2)
SHARES ACQUIRED REALIZED --------------------------------- -------------------------
NAME ON EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lesa A. Sroufe.......... -- -- 43,925 15,575 89,149 19,002
Robert J. Mortell, Jr... -- -- -- -- -- --
Mark A. McClure......... 42,000 110,790 36,750 -- 83,635 --
V. Lawrence Bensussen... 7,000 19,170 7,000 -- 18,240 --
Stanley G. Freimuth..... 35,000 92,325 33,425 -- 91,121 --
</TABLE>
- --------
(1) Calculated based on the difference between the exercise price and the book
value per share on the date of exercise.
(2) Calculated based on the difference between the exercise price and the book
value of $6.36 per share at September 26, 1997.
COMPENSATION PLANS
EXECUTIVE COMPENSATION POOL AND PERFORMANCE BONUS PLAN
RMI's Executive Committee, consisting of Stanley G. Freimuth, Lesa A.
Sroufe, Mark A. McClure and Robert J. Mortell, Jr., are compensated for their
management service from a compensation pool (the "Base
76
<PAGE>
Pool") and are further entitled to participate in RMI's executive performance
bonus plan (the "Bonus Plan"). Historically, the Base Pool and the Bonus Plan
have been administered by the Chief Executive Officer. Following the
Reorganization, Holding Company intends for the Base Pool and the Bonus Plan,
if continued, to be administered by a committee (the "Committee") of the
Holding Company Board comprised of nonemployee directors. The Base Pool
provides that the management services component of base salaries for the
eligible group is an aggregate of $800,000, to be divided among the eligible
group. The Bonus Plan provides for an award pool from which awards may be paid
to eligible employees. The amount included in the award pool for any year will
equal a percentage of adjusted pretax net income of RMI for the year, before
providing for incentive compensation and extraordinary items ("Pool Income").
The award pool shall consist of 10% of Pool Income, if any, from $8,000,000 to
$10,000,000; 9% of Pool Income, if any, from $10,000,000 to $20,000,000; 8% of
Pool Income, if any, from $20,000,000 to $30,000,000; and 7% of Pool Income,
if any, in excess of $30,000,000. At the conclusion of each fiscal year, the
award pool is allocated among the eligible employees; in no event will the
percentage portion of the award pool allocated to any participant exceed 50%
of the award pool. The Committee may establish criteria that it deems
appropriate for awards under the Bonus Plan, which may or may not be tied to
pretax operating income of RMI, so long as the amounts of the awards fall
within the maximum amounts described above. The Holding Company Board (or,
prior to the Reorganization, the RMI Board) may at any time terminate, suspend
or modify the Bonus Plan and the terms and conditions of any award thereunder
that has not been paid. No award may be granted under the Bonus Plan during
any period of suspension or after its termination. Awards previously made
under the Bonus Plan for the last fiscal year are reflected in the Summary
Compensation Table.
RESTRICTED STOCK PURCHASE PLAN
In the event of an initial public offering of Holding Company's equity
securities, Holding Company plans to implement a Restricted Stock Purchase
Plan (the "Restricted Stock Purchase Plan"). Certain of RMI's executive
officers and other key employees would be eligible to participate in the
Restricted Stock Purchase Plan. Eligible employees whose compensation in the
prior year equaled or exceeded $100,000 would be permitted to defer a portion
of their base pay (ranging from 15% of base pay for employees whose
compensation is at least $100,000 to 25% of base pay for employees whose
compensation is at least $500,000) to purchase Common Stock at a discount that
similarly would range from 15% to 25% of the trading price of the Common Stock
on the purchase date, which would be January 1 and July 1 of each year. No
later than December 20 and June 20 of each year, eligible employees would have
the choice of electing to use their deferred pay to purchase short-term
Treasury Notes at the same discount that would be available to them for the
purchase of Common Stock. The number of shares of Common Stock available to be
purchased under the Restricted Stock Purchase Plan would be determined
annually by the Holding Company Board. If less shares are available than
requested, a pro rata share of each eligible employee's deferrals would be
used to purchase Treasury Notes. The Common Stock and the Treasury Notes would
vest over three years following the date of purchase unless vesting was
extended by the plan administrator with the consent of the employee. The
Holding Company Board presently intends to allocate approximately 400,000
shares of Common Stock for issuance pursuant to the Restricted Stock Purchase
Plan. These shares would be issued under the 1998 Plan.
EMPLOYEE STOCK PURCHASE PLAN
In the event of an initial public offering of Holding Company's equity
securities, Holding Company plans to implement an Employee Stock Purchase Plan
(the "ESPP"). The ESPP is intended to qualify under Section 423 of the Code,
and permits eligible employees of the Company and its subsidiaries to purchase
Common Stock through payroll deductions of up to 15% of their compensation,
provided that no employee may purchase Common Stock worth more than $15,000 in
any calendar year. Employees who are eligible to participate in the Restricted
Stock Purchase Plan will not be eligible to participate in the ESPP. An
aggregate of 200,000 shares of Common Stock are authorized for issuance under
the ESPP.
The ESPP will be implemented with six-month offering periods, the first such
period to commence on July 1, 1998. Thereafter, offering periods will begin on
each January 1 and July 1. The price of Common Stock
77
<PAGE>
purchased under the ESPP will be the lesser of 85% of the average fair market
value of the Common Stock during the offering period and 85% of the fair
market value of the Common Stock on the last day of the offering period,
except that the price cannot be less than the lesser of 85% of the fair market
value on the first and last day of the offering period. The Holding Company
Board may establish a different purchase price for any future offerings that
is not less than 85% of the lesser of the fair market value of the Common
Stock on the first and last day of the offering period. The ESPP does not have
a fixed expiration date, but may be terminated by the Holding Company Board at
any time. No shares have been issued under the ESPP.
1998 STOCK INCENTIVE COMPENSATION PLAN
The purpose of the 1998 Plan is to enhance the long-term shareholder value
of Holding Company by offering employees, directors, officers, consultants,
agents, advisors and independent contractors of Holding Company and its
subsidiaries an opportunity to participate in Holding Company's growth and
success, and to encourage them to remain in the service of Holding Company and
its subsidiaries and to acquire and maintain stock ownership in Holding
Company. The 1998 Plan includes stock option, stock appreciation right
("SAR"), stock award (including restricted stock), performance award and other
stock-based award features. The 1998 Plan is a long-term incentive
compensation plan that is designed to provide a competitive and balanced
incentive reward program for participants. A maximum of 2,000,000 shares of
Class B common stock (or Common Stock, if a "Conversion Event" (as defined in
the Holding Company Articles) with respect to the Class B common stock occurs)
will be available for issuance under the 1998 Plan. Approximately 285 persons
will be eligible to receive awards under the 1998 Plan. No awards will be made
under the 1998 Plan until after the consummation of the Reorganization.
Stock Option Grants. The Compensation Committee of the Holding Company Board
(the "Plan Administrator") will have the authority to select individuals who
are to receive options under the 1998 Plan and to specify the terms and
conditions of each option so granted (incentive or nonqualified), the exercise
price (which must be at least equal to the fair market value of the New Common
Stock on the date of grant with respect to incentive stock options), the
vesting provisions and the option term. For purposes of the 1998 Plan, fair
market value means, if the New Common Stock is listed on Nasdaq, the closing
price as reported by The Nasdaq Stock Market on the date of grant. Unless
otherwise provided by the Plan Administrator, an option granted under the 1998
Plan expires three years from the date of grant or, if earlier, three months
after termination of the optionee's employment or services, other than
termination for cause, and except that, in the case of disability or death,
the option will be exercisable for a one-year period after such termination.
Stock Appreciation Rights. The Plan Administrator may grant SARs separately
or in tandem with a stock option award. A SAR is an incentive award that
permits the holder to receive, for each share covered by the SAR, an amount
equal to the amount by which the fair market value of a share of New Common
Stock on the date of exercise exceeds the exercise price of such share (the
"base price"). A SAR granted in tandem with a related option will generally
have the same terms and provisions as the related option with respect to
exercisability, and the base price of such SAR will generally be equal to the
exercise price under the related option. A SAR granted separately will have
such terms as the Plan Administrator may determine, except that, unless
otherwise established by the Plan Administrator, a standalone SAR will have a
10-year term, will have a base price at least equal to 85% of the fair market
value of the New Common Stock and will be subject to the same provisions
relating to termination of employment or services as stock options.
Stock Awards. The Plan Administrator is authorized under the 1998 Plan to
issue shares of New Common Stock to eligible participants on such terms and
conditions and subject to such restrictions, if any, as the Plan Administrator
may determine in its sole discretion. Such restrictions may be based on
continuous service with Holding Company or its subsidiaries or the achievement
of such performance goals as the Plan Administrator may determine. Holders of
restricted stock are recorded as shareholders of Holding Company and have,
subject to certain restrictions, all the rights of shareholders with respect
to such shares.
78
<PAGE>
Performance Awards. The Plan Administrator is authorized under the 1998 Plan
to grant performance awards that may be denominated in cash, shares of New
Common Stock, or any combination thereof. The Plan Administrator is authorized
to determine the nature, length and starting date of the performance period
for each performance award and the performance objectives to be used in
valuing the performance award and determining the extent to which the
performance award has been earned.
Other Stock-Based Awards. The Plan Administrator may grant other stock-based
awards under the 1998 Plan pursuant to which shares of New Common Stock are or
may in the future be acquired, or awards denominated in stock units, including
awards valued using measures other than market value. Such other stock-based
awards may be granted alone or in addition to or in tandem with any award of
any type granted under the 1998 Plan and must be consistent with the 1998
Plan's purpose.
Adjustments. Proportional adjustments to the aggregate number of shares
issuable under the 1998 Plan and to outstanding awards will be made for stock
splits and other capital adjustments.
Corporate Transactions. In the event of certain Corporate Transactions (as
defined below), each outstanding option, SAR and restricted stock award under
the 1998 Plan will automatically accelerate so that it will become 100% vested
immediately before the Corporate Transaction, except that acceleration will
not occur if such option, SAR or restricted stock award is, in connection
with the Corporate Transaction, to be assumed by the successor corporation or
parent thereof. Any option, SAR or restricted stock award that is assumed or
replaced in the Corporate Transaction and does not otherwise accelerate at
that time shall be accelerated in the event the holder is an executive officer
and such holder, for Good Reason (as defined in the 1998 Plan), or the
successor corporation, without Cause (as defined in the 1998 Plan), terminates
the holder's employment or services within two years following such Corporate
Transaction. "Corporate Transaction," as defined in the 1998 Plan, includes
(i) the consummation of a merger or consolidation of Holding Company in which
it is not the surviving corporation or pursuant to which shares of Class B
common stock (or Common Stock, if a "Conversion Event" (as defined in the
Holding Company Articles) with respect to Class B common stock has occurred)
are converted into cash, securities or other property (other than a merger or
consolidation in which holders of Holding Company's outstanding securities
immediately before such transaction own at least two-thirds of the outstanding
voting securities of the capital stock of the surviving corporation following
such transaction), (ii) the consummation of a sale, lease, exchange or other
transfer of all or substantially all of Holding Company's assets (other than a
transfer to a majority-owned subsidiary), (iii) the approval by the holders of
Class B common stock (or Common Stock, if a "Conversion Event" (as defined in
the Holding Company Articles) with respect to Class B common stock has
occurred) of any plan or proposal for the Holding Company's liquidation or
dissolution, or (iv) the acquisition by a person, within the meaning of
Section 3(a)(9) or Section 13(d)(3) (as in effect on the date of adoption of
the 1998 Plan) of the Exchange Act of a majority or more of Holding Company's
outstanding voting securities.
ASSUMED PLANS
Upon consummation of the Reorganization, Holding Company will assume
obligations of RMI under the 1996 Plan, the 1993 Plan and the 1989 Plan. See
"Proposal I: The Reorganization--Certain Effects of the Reorganization." The
terms of the 1996 Plan are substantially the same as the terms of the 1998
Plan. The terms of the 1993 Plan and the 1989 Plan are substantially the same
as the terms of the 1998 Plan as it relates to stock options. As of May 21,
1998, there were 1,027,866 shares of RMI Stock issuable upon the exercise of
stock options outstanding and exercisable under the Assumed Plans and 512,655
shares of RMI Stock issuable upon the exercise of stock options that RMI has
agreed to issue upon satisfaction of certain performance goals, or that have
been issued and will vest upon satisfaction of certain performance goals. See
Note 11 of Notes to RMI's Financial Statements. No additional options will be
granted under the Assumed Plans after consummation of the Reorganization.
79
<PAGE>
EMPLOYMENT CONTRACTS
Mark A. McClure, the Company's Executive Vice President, is employed by RMI
pursuant to an employment agreement, dated June 16, 1994, as amended by an
addendum dated June 3, 1997 (the "McClure Agreement"). Under the McClure
Agreement, which is effective until his employment is terminated, Mr. McClure
is compensated on a commission basis for his activities as a broker. In
addition, Mr. McClure is obligated to commit 75% to 80% of his time to
management efforts at RMI, for which he is to be compensated at a base salary
of $100,000 per year. The McClure Agreement provides that RMI may terminate
Mr. McClure's employment for "cause," as defined in the McClure Agreement.
CHANGE-IN-CONTROL ARRANGEMENTS UNDER OPTION PLANS
The vesting of stock options, SARs and restricted stock awards outstanding
under the 1998 Plan and the Assumed Plans may accelerate upon the occurrence
of certain corporate transactions involving Holding Company, as provided in
such plans. See "Management of Holding Company--Compensation Plans."
80
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Brooks G. Ragen, 64, a founder of RMI's predecessor and former RMI Chairman
and Chief Executive Officer, is RMI's largest shareholder and a senior, highly
productive retail broker of RMI. In anticipation of the proposed IPO, Mr.
Ragen and the Company have entered into an agreement 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 of RMI is an independent broker-
dealer which 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. The Company believes that after Mr. Ragen's departure, Mr. Ragen or
his new company intends to hire, on or before January 1, 1999, up to two
professional and three administrative employees of the Company, who constitute
Mr. Ragen's current client service team, and one former employee of RMI. Mr.
Ragen has agreed during the term of the agreement, which expires 36 months
after the closing of the proposed IPO, to conduct all or substantially all of
his Commission- and NASD-regulated business, except for business currently
conducted with one outside investment advisor, and certain corporate finance
activities through RMI. Mr. Ragen has agreed not to compete with RMI otherwise
than through his new company. Mr. Ragen has agreed not to employ current
employees of the Company who are subject to noncompetition agreements until
after January 1, 2001. If he does not form the new company, Mr. Ragen has
agreed to be bound by the terms of a 30-month noncompetition agreement
substantially similar to that entered into by the senior executives of RMI.
See "Employment Contracts, Termination of Employment and Change-in-Control
Arrangements." Although the Company has structured fees charged to Mr. Ragen's
new company in a way that it believes to be fair to both parties, there can be
no assurance that Mr. Ragen's departure will not have a material adverse
effect on the Company's business, financial condition, results of operations,
cash flows or prospects. See "Risk Factors--Risks Relating to Departure of
Brooks G. Ragen." As part of its understanding with Mr. Ragen, the Company has
agreed that Mr. Ragen may sell in the proposed IPO at least 40% of the shares
that he will own in Holding Company as of the Reorganization, and as
reasonably close to 50% of the shares as possible. A portion of such shares
will be sold in the primary offering in the proposed IPO, and the balance will
be included in the underwriters' over-allotment option. Mr. Ragen has agreed
that, except for those shares sold in the proposed IPO, he will be subject to
the same restrictions on transfer that apply to other employees of the
Company. Although Mr. Ragen and the Company have agreed to release claims that
he or it may have against the other, neither the Company nor Mr. Ragen
currently has any pending claims against the other. Mr. Ragen has agreed that,
once it has been formed, Mr. Ragen's new company will become a party to the
agreement between Mr. Ragen and the Company. Mr. Ragen will continue to
receive compensation with respect to corporate finance advisory assignments
originated by him. The portion of fees payable to Mr. Ragen will vary
depending on various factors, including his role in originating the
transaction. With respect to one ongoing assignment, RMI has agreed to pay Mr.
Ragen 17.5% of the fees, if any, earned by RMI, which could result in payments
to Mr. Ragen of fees between $100,000 and $200,000.
Cameron B. Ragen, Brooks Ragen's son, has been employed by RMI since
September 1994. For the fiscal years ended September 29, 1995, September 27,
1996 and September 26, 1997 and the six months ended March 27, 1998, Cameron
B. Ragen received compensation of $59,116, $89,468, $112,965 and $78,458,
respectively. Teresa A. James, John MacKenzie's daughter, has been employed by
RMI since August 1992. For the fiscal years ended September 29, 1995,
September 27, 1996 and September 26, 1997 and the six months ended March 27,
1998, Teresa A. James received compensation of $94,007, $86,070, $98,992 and
$42,284, respectively. William R. Mortell, Robert J. Mortell Jr.'s son, has
been employed by RMI since February 1994. For the fiscal years ended September
29, 1995, September 27, 1996 and September 26, 1997 and the six months ended
March 27, 1998, William R. Mortell received compensation of $28,795, $39,504,
$48,025 and $35,500, respectively. The Company believes that the terms of such
employment were at least as favorable to RMI as would have been obtainable in
arm's-length dealings with unrelated third parties.
Robert J. Mortell, Jr., an executive officer and director of Holding
Company, is a participant in the Share Repurchase Plan, pursuant to which RMI
redeemed from Mr. Mortell 8,800 shares of RMI Stock on April 11, 1997 for
$50,336 (the book value of the shares as of the end of the Company's fiscal
quarter preceding
81
<PAGE>
redemption). Under the Share Repurchase Plan, Mr. Mortell will be entitled to
a cash payment equal to the difference between the book value of the shares at
the time of the redemption and (i) the book value of the shares at the end of
the eighth quarter after the redemption or (ii) if the proposed IPO occurs,
the initial public offering price. This payment by RMI to Mr. Mortell may be
in excess of $60,000.
Peter B. Madoff, a nominee for election by RMI as a director of Holding
Company, is Senior Managing Director of Bernard L. Madoff Investment
Securities ("BMIS"), which executes orders to purchase or sell securities at
the request of RMI, as one of several third-party market firms. Payments by
BMIS to RMI for such services were $142,513, $215,712, $220,308 and $166,776
for the fiscal years ended September 29, 1995, September 27, 1996 and
September 26, 1997 and for the six months ended March 27, 1998, respectively.
Arthur W. Harrigan, Jr., a nominee for election by RMI as a director of
Holding Company, is a partner of the law firm Danielson Harrigan & Tollefson
LLP, which RMI has retained in the current fiscal year in connection with
certain matters relating to the Reorganization and the proposed IPO.
Robert J. Mortell, Jr. and Mark A. McClure have pledged 309,526 and 63,350
shares of RMI Stock, respectively, to commercial banks as security for
individual lines of credit. The Company has in the past delivered letters to
banks indicating its desire to significantly limit the number of shares of RMI
Stock held by nonemployees. In particular, the Company has stated in such
letters that, subject to certain regulations requiring RMI to maintain
specified amounts of capital, it has followed a policy of repurchasing shares
of RMI Stock held by shareholders who default on loans secured by such shares.
The Company intends to deliver like letters to such banks notifying them of
the termination of its repurchase policy as of the consummation of the IPO, if
it occurs.
RMI, in the ordinary course of its business, extends credit to margin
accounts in which certain of its officers and directors and director nominees
may have an interest. These extensions of credit have been made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with nonaffiliated
persons, and do not involve more than a normal risk of collectibility or
present other unfavorable features. From time to time and in the ordinary
course of its business, the Company also enters into transactions involving
the purchase or sale of securities as principal from, or to, directors,
officers and employees and accounts in which they have an interest. Such
purchases and sales are effected on substantially the same terms as similar
transactions with unaffiliated third parties.
During fiscal 1995, 1996 and 1997, John MacKenzie's aggregate compensation
from the Company was $536,885, $461,423 and $812,215, respectively. During
fiscal 1995, 1996 and 1997, Brooks Ragen's aggregate compensation from the
Company was $808,094, $487,909 and $699,807, respectively.
HOLDING COMPANY BENEFICIAL OWNERSHIP
From the formation of Holding Company until the Effective Time, RMI has
owned and will own 100% of the outstanding capital stock of Holding Company.
82
<PAGE>
RMI BENEFICIAL OWNERSHIP
The following table sets forth as of May 21, 1998, certain information with
respect to the beneficial ownership of the RMI Stock by (i) each person known
by RMI to beneficially own more than 5% of the RMI Stock, (ii) each director
of RMI, (iii) each of the four highest paid executive officers and Chief
Executive Officer of RMI, and (iv) all of RMI's directors and executive
officers as a group. Except as otherwise indicated, RMI believes that the
beneficial owners of the RMI Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect
to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
--------------------
NAME AND ADDRESS NUMBER PERCENTAGE
---------------- --------- ----------
<S> <C> <C>
Brooks G. Ragen(1)................................... 1,002,841 9.1%
c/o Ragen MacKenzie Incorporated
999 Third Avenue, Suite 4300
Seattle, WA 98104
John L. MacKenzie(2)................................. 977,625 8.8%
c/o Ragen MacKenzie Incorporated
999 Third Avenue, Suite 4300
Seattle, WA 98104
Stanley G. Freimuth(3)............................... 556,675 5.0%
c/o Ragen MacKenzie Incorporated
999 Third Avenue, Suite 4300
Seattle, WA 98104
Lesa A. Sroufe....................................... 262,500 2.4%
Robert J. Mortell, Jr................................ 441,776 4.0%
Mark A. McClure(4)................................... 121,100 1.1%
V. Lawrence Bensussen................................ 105,000 *
David D. Lewis....................................... 240,600 2.2%
T. Scott Eaton....................................... 237,188 2.2%
Glen W. Hamilton(5).................................. 302,841 2.7%
Jefferson E. Bruner(6)............................... 183,575 1.7%
Gregg M. Ose......................................... 128,240 1.2%
Timothy H. Ganahl.................................... 168,784 1.5%
Peter C. Hanson(7)................................... 199,805 1.8%
Daniel F. Nelson..................................... 137,000 1.2%
Michael McMillen, Jr.(8)............................. 121,265 1.1%
Dale W. Slater(9).................................... 221,284 2.0%
Thomas B. Tawresey(10)............................... 66,489 *
Richard W. Tschetter(11)............................. 176,050 1.6%
Timothy J. Tucker(12)................................ 112,000 1.0%
James E. Webster(13)................................. 147,810 1.3%
All directors and executive officers as a group (21
persons)(14)........................................ 5,910,448 53.1%
</TABLE>
- --------
* Less than 1%.
(1) Does not include 18,550 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
(2) Includes 50,400 shares issuable to Mr. MacKenzie upon exercise of stock
options that are exercisable within 60 days of May 21, 1998.
(3) Does not include 20,475 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
83
<PAGE>
(4) Does not include 10,325 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
(5) Does not include 6,475 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
(6) Does not include 20,065 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
(7) Includes 4,000 shares issuable upon exercise of stock options that are
exercisable within 60 days of May 21, 1998.
(8) Includes 23,965 shares issuable upon exercise of stock options that are
exercisable within 60 days of May 21, 1998. Does not include 13,860 shares
issuable pursuant to agreements to grant options if certain performance
goals are met.
(9) Does not include 5,850 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
(10) Includes 2,500 shares issuable upon exercise of stock options that are
exercisable within 60 days of May 21, 1998. Does not include 2,425 shares
issuable pursuant to agreements to grant options if certain performance
goals are met.
(11) Includes 17,150 shares issuable upon exercise of stock options that are
exercisable within 60 days of May 21, 1998. Does not include 17,065 shares
issuable pursuant to agreements to grant options if certain performance
goals are met.
(12) Does not include 35,000 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
(13) Does not include 5,850 shares issuable pursuant to agreements to grant
options if certain performance goals are met.
(14) See footnotes 1-13 above.
INDEPENDENT AUDITORS
Deloitte & Touche LLP served as Ragen MacKenzie Incorporated's independent
auditors for the fiscal year ended September 26, 1997, and continues to serve
in such capacity, and will serve as auditors for Ragen MacKenzie Group
Incorporated. Representatives of Deloitte & Touche LLP are expected to be
present at the Special Meeting and will have the opportunity to make a
statement if they so desire and to respond to appropriate questions.
OTHER BUSINESS
Management knows of no other business that will be presented for action at
the Special Meeting. If other business requiring a vote of the shareholders
should come before the Special Meeting, the persons designated as proxies will
vote or refrain from voting in accordance with their best judgment.
LEGAL OPINION
The legality of the shares of Reorganization Common Stock to be issued in
connection with the Reorganization is being passed upon for Holding Company by
Perkins Coie LLP, Seattle, Washington.
84
<PAGE>
TAX OPINION
The tax consequences of the Merger to the shareholders of RMI will be passed
upon prior to the effectiveness of the Registration Statement and at the
Effective Time, by Perkins Coie LLP. See "Proposal I: The Reorganization--
Material Federal Income Tax Consequences."
EXPERTS
The financial statements of Ragen MacKenzie Incorporated as of September 26,
1997 and September 27, 1996 and for each of the three years in the period
ended September 26, 1997, and the statement of financial condition of Ragen
MacKenzie Group Incorporated as of April 16, 1998 included in this Proxy
Statement/Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and have been so
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
85
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RAGEN MACKENZIE GROUP INCORPORATED
Independent Auditors' Report............................................. F-2
Statement of Financial Condition as of April 16, 1998.................... F-3
Note to Statement of Financial Condition................................. F-4
RAGEN MACKENZIE INCORPORATED
Independent Auditors' Report............................................. F-5
Statements of Financial Condition as of September 27, 1996, September 26,
1997 and
March 27, 1998 (unaudited).............................................. F-6
Statements of Income for the Fiscal Years Ended September 29, 1995,
September 27, 1996 and September 26, 1997 and the Six-Month Periods
Ended March 28, 1997 (unaudited) and
March 27, 1998 (unaudited).............................................. F-7
Statements of Cash Flows for the Fiscal Years Ended September 29, 1995,
September 27, 1996 and September 26, 1997 and the Six-Month Periods
Ended March 28, 1997 (unaudited) and
March 27, 1998 (unaudited).............................................. F-8
Statements of Changes in Stockholders' Equity for the Fiscal Years Ended
October 1, 1994, September 29, 1995, September 27, 1996 and September
26, 1997 (unaudited) and the Six-Month Period Ended March 27, 1998
(unaudited)............................................................. F-10
Notes to Financial Statements............................................ F-11
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ragen MacKenzie Group Incorporated
Seattle, Washington
We have audited the accompanying statement of financial condition of Ragen
MacKenzie Group Incorporated (the Company) as of April 16, 1998. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit 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 statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such financial statement presents fairly, in all material
respects, the financial position of the Company as of April 16, 1998, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
April 16, 1998
F-2
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED
STATEMENT OF FINANCIAL CONDITION
APRIL 16, 1998
<TABLE>
<CAPTION>
APRIL 16,
1998
---------
<S> <C>
ASSETS
Cash................................................................. $1,000
------
TOTAL ASSETS....................................................... $1,000
======
STOCKHOLDER'S 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; 100
shares issued and outstanding....................................... $1,000
------
TOTAL STOCKHOLDER'S EQUITY......................................... $1,000
======
</TABLE>
See Note to Statement of Financial Condition.
F-3
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED
NOTE TO STATEMENT OF FINANCIAL CONDITION
APRIL 16, 1998
BASIS OF PRESENTATION: Ragen MacKenzie Group Incorporated (the Company), a
Washington Corporation, was formed for the purpose of becoming the sole
shareholder of Ragen MacKenzie Incorporated (RMI) pursuant to an Agreement and
Plan of Merger (the merger agreement). The merger agreement, which is subject
to shareholder approval, provides that all issued and outstanding common
shares of RMI, other than those held by dissenters, will be exchanged for an
equivalent number of common shares of the Company and RMI will become a wholly
owned subsidiary of the Company. In addition, the Company will ensure the
obligations of RMI with respect to RMI's outstanding stock options, stock
appreciation rights and other performance-based arrangements. The Company
intends to serve as the holding company for all operations of RMI upon
completion of the exchange of shares and completion of the merger.
RMI capitalized the Company through the purchase of 100 shares of common
stock.
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ragen MacKenzie Incorporated
Seattle, Washington
We have audited the accompanying statements of financial condition of Ragen
MacKenzie Incorporated (the Company) as of September 27, 1996, and September
26, 1997, and the related statements of income, cash flows, and changes in
stockholders' equity for each of the three years in the period ended September
26, 1997. 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 financial statements present fairly, in all material
respects, the financial position of Ragen MacKenzie Incorporated as of
September 27, 1996, and September 26, 1997, and the results of its operations
and its cash flows for each of the three years in the period ended September
26, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Seattle, Washington
November 6, 1997
(May 29, 1998 as to note 14)
F-5
<PAGE>
RAGEN MACKENZIE INCORPORATED
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26, MARCH 27,
1996 1997 1998
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH................................... $ 1,770 $ 4,980 $ 4,518
CASH AND MARKET VALUE OF SECURITIES
SEGREGATED FOR THE EXCLUSIVE BENEFIT
OF CUSTOMERS.......................... 226,766 306,704 317,555
DEPOSITS WITH CLEARING ORGANIZATIONS... 1,007 1,007 1,207
RECEIVABLE FROM:
Brokers, dealers, and clearing
organizations....................... 1,466 1,399 3,562
Customers............................ 86,709 105,378 105,814
SECURITIES OWNED, at market value...... 78,681 122,778 132,822
SECURITIES PURCHASED UNDER AGREEMENTS
TO RESELL............................. 75,343 111,917 123,097
SECURITIES BORROWED.................... 5,781 8,097 4,606
FURNITURE, EQUIPMENT, AND LEASEHOLD
IMPROVEMENTS, at cost, less
accumulated depreciation and
amortization of $3,205, $3,629, and
$3,867 (unaudited).................... 844 888 989
OTHER ASSETS........................... 5,601 2,729 3,144
-------- -------- --------
TOTAL.................................. $483,968 $665,877 $697,314
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Borrowings........................... $ 20,325 $ 17,750 $ 56,900
Payable to:
Brokers, dealers, and clearing
organizations...................... 4,374 10,300 9,648
Customers, including free credit
balances of $274,939, $391,602, and
$373,537 (unaudited)............... 289,224 406,017 387,595
Securities sold but not yet
purchased, at market value.......... 69,600 106,629 118,148
Securities sold under agreement to
repurchase.......................... 34,688 41,600 35,125
Accrued compensation and related
benefits............................ 9,018 8,139 6,194
Other liabilities and accrued
expenses............................ 4,216 5,194 3,822
-------- -------- --------
Total liabilities.................. 431,445 595,629 617,432
COMMITMENTS AND CONTINGENCIES (Notes 8
and 14)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value--
Authorized, 20,000,000 shares;
issued and outstanding, 9,893,100,
10,242,889, and 10,790,870
(unaudited) shares.................. 99 102 108
Additional paid-in capital........... 18,244 20,577 22,950
Retained earnings.................... 34,180 49,569 56,824
-------- -------- --------
Total stockholders' equity......... 52,523 70,248 79,882
-------- -------- --------
TOTAL.................................. $483,968 $665,877 $697,314
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
RAGEN MACKENZIE INCORPORATED
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX-MONTH PERIOD ENDED
----------------------------------------- -----------------------
SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Principal
transactions, net.... $21,683 $23,526 $23,566 $11,240 $12,912
Commissions........... 19,553 28,516 30,758 14,588 17,821
Other................. 2,524 3,569 4,078 2,219 3,034
------- ------- ------- ------- -------
Total operating
revenues........... 43,760 55,611 58,402 28,047 33,767
Interest Income....... 18,641 24,210 30,179 13,932 18,365
------- ------- ------- ------- -------
Total revenues...... 62,401 79,821 88,581 41,979 52,132
Interest expense...... 13,052 16,230 19,694 9,138 12,154
------- ------- ------- ------- -------
Net revenues........ 49,349 63,591 68,887 32,841 39,978
------- ------- ------- ------- -------
NON-INTEREST EXPENSES:
Compensation and
benefits............. 25,925 33,924 35,176 16,878 20,728
Key person death
benefits plan........ 2,450 (5,000) (5,000)
Occupancy and
equipment............ 3,949 3,938 4,714 2,097 2,641
Communications........ 2,588 2,776 3,276 1,528 1,774
Clearing and exchange
fees................. 2,282 2,344 2,338 1,161 1,428
Other................. 2,381 3,854 3,534 1,837 1,634
------- ------- ------- ------- -------
Total noninterest
expenses........... 39,575 46,836 44,038 18,501 28,205
------- ------- ------- ------- -------
INCOME BEFORE TAXES ON
INCOME................. 9,774 16,755 24,849 14,340 11,773
TAXES ON INCOME......... 3,672 6,254 9,460 5,348 4,518
------- ------- ------- ------- -------
NET INCOME.............. $ 6,102 $10,501 $15,389 $ 8,992 $ 7,255
======= ======= ======= ======= =======
EARNINGS PER COMMON
SHARE:
Basic................. $ 0.73 $ 1.10 $ 1.54 $ 0.91 $ 0.70
Diluted............... 0.68 1.04 1.44 0.85 0.66
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
RAGEN MACKENZIE INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX-MONTH PERIOD ENDED
----------------------------------------- -----------------------
SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............. $ 6,102 $10,501 $15,389 $ 8,992 $ 7,255
Adjustments to
reconcile net income
to net cash provided
(used) by operating
activities:
Depreciation and
amortization......... 424 377 425 195 238
Noncash key person
death benefits plan
expense (reversal)... 2,450 (5,000) (5,000)
Stock option expense.. 955 3,125 2,223 1,323 1,150
Deferred tax expense
(benefit)............ (1,164) (716) 2,476 2,214 (37)
Cash provided (used)
by changes in
operating assets and
liabilities:
Cash and market value
of securities
segregated for the
exclusive benefit of
customers............ (69,866) (25,961) (79,938) (61,586) (10,851)
Deposits with
clearing
organizations........ (240) 10 (200)
Receivable from:
Brokers/dealers and
clearing
organizations....... (513) 1,539 67 (2,084) (2,163)
Customers............ (4,380) (27,101) (18,669) 947 (436)
Securities owned...... (36,268) 2,634 (44,097) (25,393) (10,044)
Securities purchased
under agreements to
resell............... (21,135) 1,996 (36,574) (26,641) (11,180)
Securities borrowed... (1,754) 862 (2,316) 1,122 3,491
Other assets.......... 89 (791) 396 (1,639) (378)
Payable to:
Brokers/dealers and
clearing
organizations....... (420) (887) 5,926 6,526 (652)
Customers............ 75,696 38,297 116,791 52,882 (18,422)
Securities sold but
not yet purchased.... 22,733 (9,930) 37,029 27,663 11,519
Securities sold under
agreement to
repurchase........... (15,698) 31,836 6,912 (719) (6,475)
Accrued compensation
and related
benefits............. (1,439) 988 4,122 1,261 (1,945)
Other liabilities and
accrued expenses..... 2,031 405 979 (604) (1,372)
------- ------- ------- ------- -------
Net cash provided
(used) by operating
activities, carried
forward (42,397) 27,184 6,141 (20,541) (40,502)
------- ------- ------- ------- -------
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
RAGEN MACKENZIE INCORPORATED
STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX-MONTH PERIOD ENDED
----------------------------------------- -----------------------
SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 26, MARCH 28, MARCH 27,
1995 1996 1997 1997 1998
------------- ------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided
(used) by operating
activities,
brought forward....... $(42,397) $27,184 $ 6,141 $(20,541) $(40,502)
-------- ------- ------- -------- --------
INVESTING ACTIVITIES:
Purchases of furniture,
equipment, and
leasehold
improvements.......... (232) (246) (469) (382) (339)
-------- ------- ------- -------- --------
FINANCING ACTIVITIES:
Proceeds from
(repayment) of
borrowings, net....... 40,982 (27,557) (2,575) 20,475 39,150
Proceeds from issuance
of common stock....... 2,211 2,233 1,830 993 2,058
Repurchases of common
stock................. (403) (1,112) (1,717) (823) (829)
-------- ------- ------- -------- --------
Net cash provided
(used) by financing
activities............ 42,790 (26,436) (2,462) 20,645 40,379
-------- ------- ------- -------- --------
INCREASE (DECREASE) IN
CASH................... 161 502 3,210 (278) (462)
CASH:
Beginning of period.... 1,107 1,268 1,770 1,770 4,980
-------- ------- ------- -------- --------
End of period.......... $ 1,268 $ 1,770 $ 4,980 $ 1,492 $ 4,518
======== ======= ======= ======== ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid during the
period for:
Interest............... $ 13,399 $15,959 $19,797 $ 9,165 $ 12,379
Federal income taxes... 4,450 7,700 6,000 4,500 5,600
Conversion of
subordinated loans to
common stock.......... 815
</TABLE>
See Notes to Financial Statements.
F-9
<PAGE>
RAGEN MACKENZIE INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, October 1, 1994....... 8,009,827 $ 80 $10,439 $17,577 $28,096
Stock options exercised....... 1,152,816 12 2,199 2,211
Repurchase and retirement of
common stock................. (141,400) (2) (401) (403)
Conversion of subordinated
loans to common stock........ 285,250 3 812 815
Noncash compensation--Stock
Options...................... 955 955
Net income.................... 6,102 6,102
---------- ---- ------- ------- -------
BALANCE, September 29, 1995.... 9,306,493 93 14,004 23,679 37,776
Stock options exercised....... 879,032 9 2,224 2,233
Repurchase and retirement 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 exercised....... 670,425 7 1,812 1,819
Repurchase and retirement 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 exercised
(unaudited).................. 670,950 7 2,022 2,029
Repurchase and retirement of
common stock (unaudited)..... (127,402) (1) (828) (829)
Issuance of common stock
(unaudited).................. 4,433 29 29
Noncash compensation--Stock
Options (unaudited).......... 1,150 1,150
Net income (unaudited)........ 7,255 7,255
---------- ---- ------- ------- -------
BALANCE, March 27, 1998
(unaudited)................... 10,790,870 $108 $22,950 $56,824 $79,882
========== ==== ======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-10
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: Ragen MacKenzie Incorporated (the Company) is
registered with the Securities and Exchange Commission (the SEC) as a
broker/dealer and is a member firm of the New York Stock Exchange (the NYSE).
The Company 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. The Company has retail offices located
in Washington, Oregon, and Alaska.
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 29, 1995, September 27, 1996, and September 26, 1997 consist of 52-
week periods. Results of operations for the six-month periods ended March 28,
1997 and March 27, 1998 consist of 26-week periods.
Revenue recognition: Principal transactions and commission revenue and
expense are generally recorded 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.
Cash: Cash as reflected in the 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
statement 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 statements
of financial condition. Management considers the receivable 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
F-11
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
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 on a straight-line method basis 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 as 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. Management believes that it is more
likely than not that the Company will generate sufficient taxable income to
provide for the realization of the deferred tax asset.
Recently issued accounting standards: In June 1997, the Financial Accounting
Standards Board (the 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 stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
requires an enterprise to report certain additional financial and descriptive
information about its reportable operating segments.
The Company will adopt SFAS No. 130 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.
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.
F-12
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
Unaudited Interim Information: The financial information as of March 27,
1998 and for the six-month periods ended March 28, 1997 and March 27, 1998 is
unaudited. In the opinion of management, such information contains all
adjustments, consisting only of normal recurring adjustments, necessary for
fair presentation of the results of such periods. The results of operations
for the six-month period ended March 27, 1998 are not necessarily indicative
of the results to be expected for the full year.
Reclassifications: Certain reclassifications of prior years' balances have
been made to conform with the current year's presentation. The
reclassifications include reclassifying interest expense as a reduction of net
revenues, and amounts paid for common shares in excess of par value to
additional paid-in capital.
NOTE 2: 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 $226,160,000, $306,222,000 and $317,074,000 at September
27, 1996, September 26, 1997 and March 27, 1998, 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 26, 1997 and March 27, 1998, these securities, all of which were
U.S. Government and government agency obligations, had a market value of
$309,290,000 and $320,249,000, respectively. The agreements to resell
securities purchased were with two counterparties and have a stated maturity
of one day.
NOTE 3: 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 27, 1996 SEPTEMBER 26, 1997 MARCH 27, 1998
------------------ ------------------- -----------------
(UNAUDITED)
SOLD BUT SOLD BUT SOLD BUT
NOT YET NOT YET NOT YET
OWNED PURCHASED OWNED PURCHASED OWNED PURCHASED
--------- ---------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Corporate bonds, deben-
tures, and notes....... $ 2,524 $ 36 $ 1,710 $ 447 $ 5,279 $ 1,053
U.S. Government and gov-
ernment agency obliga-
tions.................. 56,985 69,065 107,925 105,411 117,468 115,746
Collateralized mortgage
obligations............ 15,188 9,461 86 6,168 308
State and municipal ob-
ligations.............. 2,559 2,311 11 2,142 35
Corporate stocks........ 1,425 499 1,371 674 1,765 1,006
--------- --------- -------- -------- -------- --------
$ 78,681 $ 69,600 $122,778 $106,629 $132,822 $118,148
========= ========= ======== ======== ======== ========
</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 statements of financial condition.
F-13
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
NOTE 4: 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 ($35,521,000, $74,835,000 and $88,439,000 at September 27, 1996,
September 26, 1997, and March 27, 1998, respectively), and bear interest at
the prevailing broker rate (5.8%, 5.9% and 5.9% at September 27, 1996,
September 26, 1997, and March 27, 1998, respectively).
NOTE 5: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At September 27, 1996, September 26, 1997 and March 27, 1998, the market
value of the securities sold subject to repurchase was $38,036,000,
$42,434,000 and $35,831,000, respectively, and the average effective interest
rate at these dates on the transactions was 5.5%, 6.0% and 5.8%, respectively.
NOTE 6: INCOME TAXES
Taxes on income included in the statements of income consist of the
following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX-MONTH PERIOD ENDED
---------------------- -----------------------
1995 1996 1997 1997 1998
------ ------ ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal current tax expense..... $4,836 $6,970 $6,984 $3,134 $4,555
Federal deferred tax expense
(benefit)...................... (1,164) (716) 2,476 2,214 (37)
------ ------ ------ ------ ------
$3,672 $6,254 $9,460 $5,348 $4,518
====== ====== ====== ====== ======
</TABLE>
The components of the provision (benefit) for deferred income taxes consist
of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX-MONTH PERIOD ENDED
---------------------- -----------------------
1995 1996 1997 1997 1998
------- ----- ------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred compensation and bene-
fit plans...................... $ (857) $ -- $1,727 $1,750 $(47)
Other liabilities and accrued
expenses....................... (218) (245) 245 135
Other........................... (89) (471) 504 329 10
------- ----- ------ ------ ----
Total deferred tax expense (ben-
efit).......................... $(1,164) $(716) $2,476 $2,214 $(37)
======= ===== ====== ====== ====
</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 SIX-MONTH PERIOD ENDED
--------------------- -----------------------
1995 1996 1997 1997 1998
----- ----- ----- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory rate................. 35% 35% 35% 35% 35%
Nondeductible stock option plan
expense....................... 3 2 3 3 3
Nontaxable income.............. (1) (1)
Other.......................... 1
----- ----- ----- --- ---
Effective tax rate............. 38% 37% 38% 37% 38%
===== ===== ===== === ===
</TABLE>
F-14
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
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 27, SEPTEMBER 26, MARCH 27,
1996 1997 1998
------------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred compensation and benefit
plans................................. $1,750 $ 23 $ 70
Other liabilities and accrued expenses. 1,135 890 890
Other.................................. 732 228 218
------ ------ ------
Total deferred tax asset............... $3,617 $1,141 $1,178
====== ====== ======
</TABLE>
There were no deferred tax liabilities at September 27, 1996, September 26,
1997 or March 27, 1998. The Company determined that no valuation allowance
against deferred tax assets at September 27, 1996, September 26, 1997, or
March 27, 1998 was necessary.
NOTE 7: LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
In September 1995, the Company called for redemption of its outstanding
debentures totalling $815,000. At the election of the holders, the debentures
were converted into 285,250 shares of common stock of the Company.
The convertible subordinated debentures were subject to subordination
agreements, all of which were authorized by the NYSE for inclusion in the
Company's calculation of net capital at September 30, 1994.
NOTE 8: LEASES, COMMITMENTS, AND CONTINGENT LIABILITIES
The Company leases certain office space under noncancellable operating
leases which expire through 2002. 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:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER (IN THOUSANDS)
--------------------- --------------
<S> <C>
1998..................................................... $1,090
1999..................................................... 977
2000..................................................... 921
2001..................................................... 765
2002..................................................... 303
------
$4,056
======
</TABLE>
Total rental expense under the leases for fiscal 1995, 1996, 1997, and the
six-month periods ended March 28, 1997 and March 27, 1998 was $862,000,
$916,000, $990,000, $471,000 and $608,000, 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.
F-15
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
NOTE 9: 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 September 26, 1997, the Company's net capital was $59,851,000
which was 54% of aggregate debit items, and which exceeded the minimum net
capital requirement of $2,233,000 by $57,618,000.
At March 27, 1998, the Company's net capital was $68,461,000 which was 62%
of aggregate debit items, which exceeded the minimum net capital requirement
of $2,197,000 by $66,264,000 and which was $62,967,000 in excess of 5% of
aggregate debit items.
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.
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 $100,000
in 1995, $115,000 in 1996, $110,000 in 1997 and $75,000 and $70,000 for the
six-month periods ended March 28, 1997 and March 27, 1998, respectively.
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 nonrecurring 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: STOCKHOLDERS' EQUITY
The Company maintains variable award stock option plans under which
incentive stock options and nonqualified stock options are awarded. Options to
purchase shares of common stock are generally 100% vested at date of grant and
typically expire two years from the date of grant. All options are granted at
prices based upon a formula which is consistently applied from period to
period. The Company follows the variable plan accounting provisions of
Accounting Principles Board Opinion (APB) No. 25 in recording the effect of
its stock option plans. As such, changes in the formula-based value between
option grant dates and option exercise dates are recorded as a component of
compensation expense. Such expense totaled $955,000, $3,125,000, $2,223,000,
$1,323,000 and $1,150,000 for the fiscal years ended September 29, 1995,
September 27, 1996 and September 26, 1997 and for the six-month periods ended
March 28, 1997 and March 27, 1998, respectively. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value
F-16
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
at the grant dates for awards under those plans consistent with the provisions
of SFAS No. 123, the Company's net income for fiscal 1996 and 1997 would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net income:
As reported............................................. $10,501 $15,389
Pro forma............................................... 13,365 17,418
</TABLE>
<TABLE>
<CAPTION>
1996 1997
------------- -------------
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
<S> <C> <C> <C> <C>
Earnings per common share:
As reported............................... $1.10 $1.04 $1.54 $1.44
Pro forma ................................ 1.40 1.32 1.74 1.63
</TABLE>
The per share weighted average fair value of stock options granted during
the fiscal years ended September 27, 1996, and September 26, 1997, was $0.31
and $0.51, respectively, on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions: 1996--expected
dividend yield of -0-%, risk-free interest rate of 5.8%, and an expected life
of 1.8 years; 1997--expected dividend yield of -0-%, risk-free interest rate
of 5.9%, and an expected life of 1.8 years. Under the provisions of SFAS No.
123 for nonpublic entities, no assumptions were made for expected volatility.
At March 27, 1998, there were 3,599,834 shares of unissued common stock
reserved for issuance under the plans, of which options for the purchase of
2,368,579 shares were available for future grants. The price ranges of options
exercised were $1.07 to $3.17 in 1995, $1.14 to $3.75 in 1996, $2.45 to $6.00
in 1997 and $2.98 to $6.74 during the six-month period ended March 27, 1998. 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 30, 1994...................... 2,688,161 $2.25
Granted............................................ 1,160,425 3.25
Exercised.......................................... (1,531,761) 1.92
Expired and canceled............................... (131,600) 2.41
---------- -----
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 (unaudited)................................ 344,405 6.63
Exercised (unaudited).............................. (670,950) 3.02
Expired and canceled (unaudited)................... (35,020) 5.18
---------- -----
Outstanding March 27, 1998 (unaudited)............... 1,231,255 $5.21
========== =====
</TABLE>
F-17
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
Additional information regarding options outstanding as of March 27, 1998,
is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
- -------------------------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING WEIGHTED
RANGE OF AND CONTRACTUAL AVERAGE
EXERCISE PRICES EXERCISABLE LIFE (YEARS) EXERCISE PRICE
- --------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$3.75 467,355 0.24 $3.75
5.14-6.0 362,290 1.09 5.57
$6.36-6.74 401,610 1.99 6.60
---------- --------- ---- -----
$3.75-6.74 1,231,255 1.06 $5.21
========== ========= ==== =====
</TABLE>
The Company also enters into arrangements with certain employees, entitling
the employee to receive fully vested options subject to attainment of specific
performance goals, generally related to commission volume. Under the
performance-based arrangements, 523,775, 579,325 and 605,555 options to
receive shares or rights to receive options to purchase shares of common stock
have been committed to employees at September 27, 1996, September 26, 1997 and
March 27, 1998, 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 formula-based option value currently used to exchange shares of
common stock at the date the performance measures are met. Per share exercise
amounts related to the 605,555 outstanding commitments at March 27, 1998,
range from $1.36 to $9.50. Compensation expense for fiscal 1995, 1996, 1997
and the six-month periods ended March 28, 1997 and March 27, 1998 included
$201,000, $171,000, $250,000, $87,000 and $56,000, respectively, under such
arrangements.
Generally, options under the plans, 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.
In January 1997, the Company's shareholders approved an amendment to the
Company's Amended and Restated Articles of Incorporation in connection with a
7-for-1 split of the Company's common stock that increased the authorized
number of shares of common stock from 14,000,000 to 20,000,000 shares. All
common, common equivalent shares, and option awards have been restated to give
effect to the stock split.
In February 1997, the Company's Board of Directors approved the adoption of
the Share Repurchase Plan. Under terms of the plan, an eligible shareholder
may elect to receive a stock appreciation right (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 is 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 is 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
this plan, the Company granted 124,500 and 193,159 Repurchase SARs and accrued
compensation expense of $66,000 and $135,000 related to the outstanding rights
for the year ended September 26, 1997 and the six-month period ended March 27,
1998.
The Share Repurchase Plan provides that eligible holders of common stock, as
defined, may request the Company to redeem their shares upon execution of
certain agreements specified in the Plan. At the sole discretion
F-18
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
of the Company's Board of Directors, including upon consideration of a
redemption request by a shareholder, the Plan may be modified or canceled at
any time without notification of, or approval by, the holders of common stock.
As a result, the Company has determined that the redemption of shares by
eligible shareholders under the Plan is not outside of the control of the
Company. Accordingly, such shares have not been classified as mandatorily
redeemable common stock in the accompanying statement of financial condition.
The Company's Board of Directors suspended the Plan in February 1998 in
connection with the planned share exchange and merger described in note 14 to
the financial statements.
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 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 26, 1997 and March 27, 1998 the contract value of the Company's
financial futures commitments was $6,600,000 and $1,900,0000, respectively.
There were no financial futures commitments at September 27, 1996. 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 26,
1997 and March 27, 1998, was not material. The average fair value of such
financial instruments for the fiscal year ended September 26, 1997 and the
six-month period ended March 27, 1998 and the total net gain or loss arising
from such trading activities during these periods was not material.
F-19
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
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 prescribed by SFAS No.128,
Earning 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 each corresponding period as the Company's Share Repurchase Plan
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. The following table sets forth the computations for basic and diluted
net income per common share (in thousands except per share amounts):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX-MONTH PERIOD ENDED
---------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
-------------- --------------- --------------- -------------- --------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
------ ------- ------- ------- ------- ------- ------ ------- ------ -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NUMERATOR:
Net income............. $6,102 $6,102 $10,501 $10,501 $15,389 $15,389 $8,992 $8,992 $7,255 $7,255
DENOMINATOR:
Weighted average shares
outstanding........... 8,352 8,352 9,546 9,546 10,014 10,014 9,927 9,927 10,426 10,426
Dilutive effect of
stock options......... 563 570 657 627 493
------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Adjusted weighted
average shares
outstanding............ 8,352 8,915 9,546 10,116 10,014 10,671 9,927 10,554 10,426 10,919
------ ------ ------- ------- ------- ------- ------ ------ ------ ------
Earnings per common
share.................. $ 0.73 $ 0.68 $ 1.10 $ 1.04 $ 1.54 $ 1.44 $ 0.91 $ 0.85 $ 0.70 $ 0.66
====== ====== ======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
NOTE 14: SUBSEQUENT EVENTS
During the quarter ended March 27, 1998, the Company's Board of Directors
authorized the formation of a newly formed company, Ragen MacKenzie Group
Incorporated (the Holding Company), for the purpose of becoming the sole
shareholder of the Company pursuant to an Agreement and Plan of Merger (the
merger agreement). The merger agreement, which is subject to shareholder
approval, provides that all issued and outstanding common shares of the
Company, other than those held by dissenters, will be exchanged for an
equivalent number of common shares of the Holding Company. Ragen MacKenzie
Group Incorporated intends to serve as the holding company for all operations
of the Company upon completion of the exchange of shares and completion of the
merger. In addition, the Company authorized the filing of a registration
statement with the SEC relating to an initial public offering of common stock
of the Holding Company (the IPO), and approved the termination of the Share
Repurchase Plan subject to the successful completion of the proposed IPO.
Upon successful completion of the IPO, the Company's variable-award, book-
value-based stock option plans will be converted to fixed-award, fair-value-
based stock option plans, which will be operated and accounted for as fixed-
award plans under the provisions of APB No. 25. This conversion will result in
a new measurement date for all then outstanding options and in a compensation
charge based upon the difference between the estimated initial public offering
price and the book value established at the most recent period immediately
preceding the IPO. The Company will be required to record compensation expense
of approximately $3,574,000 based on the difference between the book value of
the Company's stock immediately preceding the IPO and the estimated fair
market value of the stock if the IPO is consummated (assuming an initial
public offering price of $15.00 per share) for all variable-award, book-value-
based stock options estimated to be outstanding on the date
F-20
<PAGE>
RAGEN MACKENZIE INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE SIX-MONTH PERIODS ENDED MARCH 28, 1997 AND
MARCH 27, 1998 IS UNAUDITED)
of consummation of the IPO (estimated to be 450,000 stock options). The
expense recorded as a result of the new measurement date for the outstanding
options will be a noncash, nonrecurring item. Subsequent to the conversion of
the Company's stock option plans, changes in the market value of the Company's
stock will not result in compensation expense. The Company will also record
compensation expense (net of tax) in the amount of $1,277,000 (assuming an
initial public offering price of $15.00 per share), which reflects the
increase in the value of the Repurchase SARs outstanding under the Share
Repurchase Plan underlying the Share Repurchase Plan. The Share Repurchase
Plan will terminate if the IPO is consummated, at which time the Company's
liabilities under the Share Repurchase Plan will be determinable and final.
The Company adopted the 1998 Stock Incentive Compensation Plan on May 29,
1998, and intends to adopt a Restricted Stock Repurchase Plan. Both plans will
become effective upon consummation of the IPO.
F-21
<PAGE>
ANNEX A: AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of May 29, 1998,
among Ragen MacKenzie Incorporated, a Washington corporation (the "Company"),
Ragen MacKenzie Group Incorporated, a Washington corporation and a direct
wholly owned subsidiary of the Company ("Holding Company"), and RMGI Merger
Corp., a Washington corporation and a wholly owned subsidiary of Holding
Company ("Merger Sub").
WHEREAS, the Company and Merger Sub desire to merge on the terms and subject
to the conditions set forth in this Agreement;
WHEREAS, the sole shareholder of each of Holding Company and Merger Sub and
the board of directors of each of the Company, Holding Company and Merger Sub
have approved the merger of Merger Sub with and into the Company on the terms
and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER
Upon the terms and subject to the conditions set forth in this Agreement,
and in accordance with the Washington Business Corporation Act (the "WBCA"),
at the Effective Time (as hereinafter defined) Merger Sub shall be merged with
the Company and the separate corporate existence of Merger Sub shall thereupon
cease (the "Merger"). The Company shall be the surviving corporation in the
Merger (hereinafter sometimes referred to as the "Surviving Corporation").
SECTION 1.2 EFFECTIVE TIME
The Merger shall become effective as of the date and at such time (the
"Effective Time") as a copy of this Agreement pursuant to Section 23B.11.050
of the WBCA and any other documents necessary to effect the Merger in
accordance with the WBCA shall be filed with the Secretary of State of the
State of Washington and become effective.
SECTION 1.3 EFFECTS OF THE MERGER
The Merger shall have the effects set forth in Section 23B.11.060 of the
WBCA.
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1 ARTICLES OF INCORPORATION AND BYLAWS
(a) The Restated Articles of Incorporation, as amended, of the Company (the
"Articles of Incorporation") in effect immediately prior to the Effective Time
shall, at the Effective Time, be the Articles of Incorporation of the
Surviving Corporation until the same shall be further altered, amended or
repealed as therein provided.
(b) The Bylaws of the Company in effect immediately prior to the Effective
Time shall, at the Effective Time, be the Bylaws of the Surviving Corporation.
A-1
<PAGE>
SECTION 2.2 DIRECTORS AND OFFICERS
At and after the Effective Time, the board of directors of the Surviving
Corporation shall be comprised of the directors of the Merger Sub immediately
prior to the Effective Time, in each case until their respective successors
have been duly elected or until the next annual meeting of shareholders,
whichever is later, or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Articles of Incorporation and
Bylaws. At and after the Effective Time, the officers of the Surviving
Corporation shall be the officers of the Company immediately prior to the
Effective Time, in each case until their respective successors have been duly
appointed or until their earlier death, resignation or removal in accordance
with the Surviving Corporation's Articles of Incorporation and Bylaws.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1 CONVERSION OF SHARES
At the Effective Time, by virtue of the Merger and without any action on the
part of any holder of any capital stock of the Company or Merger Sub:
(a) each share of common stock, par value $.01 per share, of the Company
("Company Common Stock") (other than Dissenting Shares (as hereinafter
defined)) issued and outstanding immediately prior to the Effective Time
shall, subject to Section 3.3 hereof, be converted as follows:
(i) each share of Company Common Stock owned by each of the
shareholders set forth below, having been originally acquired from the
Company pursuant to the 1990 Stock Purchase Agreement dated December
28, 1990, among the Company and five investors, will be converted into
one share of Class C common stock, par value $.01 per share, of the
Holding Company (the "Class C Common Stock"):
NAME OF 1990 STOCK PURCHASE AGREEMENT HOLDER:
Robert Arnold
Kay Calhoun
Janet Ketchum
Nancy Ketchum
Mary Williams
Bagley Wright; and
(ii) each share of Company Common Stock owned by each of the
shareholders set forth below, having been originally acquired form the
Company pursuant to a 1995 Stock Purchase Agreement dated September 22,
1995, each between the Company and one of the following five
shareholders, will be converted into one share of Class D common stock,
par value $.01 per share, of the Holding Company (the "Class D Common
Stock"):
NAME OF 1995 STOCK PURCHASE AGREEMENT HOLDER:
Charles Anderson
Peter Eising
Frank Kitchell
KSA Company
W. Hunter Simpson; and
(iii) each share of Company Common Stock owned by any other
shareholder of the Company, having been originally acquired form the
Company pursuant to any agreement other than the 1990 Stock Purchase
Agreement or the 1995 Stock Purchase Agreements, will be converted into
one share of Class B common stock, par value $.01 per share, of the
Holding Company (the "Class B Common Stock").
A-2
<PAGE>
The Class B Common Stock, Class C Common Stock and Class D Common
Stock of the Holding Company are together referred to herein as
"Reorganization Common Stock."
(b) each share of common stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and become
one share of common stock, par value $.01 per share, of the Surviving
Corporation; and
(c) each share of Common Stock, par value $.01 per share, of Holding
Company issued and outstanding immediately prior to the Effective Time
shall be canceled and shall cease to exist and no payment or distribution
shall be made with respect thereto.
SECTION 3.2 EXCHANGE OF STOCK CERTIFICATES
At and after the Effective Time, each certificate theretofore representing
shares of Company Common Stock, without any action on the part of the Company,
Holding Company or the holder thereof, shall be deemed to represent a right to
receive certificates representing that number of shares of Reorganization
Common Stock into which the shares of Company Common Stock were converted
pursuant to Section 3.1 hereof (together with any dividends or other
distributions from Holding Company with respect to such shares from the time
of conversion until the exchange of certificates). At and after the Effective
Time, there shall be no further registrations or transfers on the stock
transfer books of the Surviving Corporation of the shares of the Company
Common Stock which were outstanding immediately prior to the Effective Time.
SECTION 3.3 DISSENTING SHARES
(a) Notwithstanding anything to the contrary contained in this Agreement,
holders of Company Common Stock with respect to which dissenters' rights, if
any, are granted by reason of the Merger under the WBCA and who do not vote in
favor of the Merger and otherwise comply with Chapter 23B.13 of the WBCA
("Dissenting Shares"), shall not be entitled to shares of Reorganization
Common Stock pursuant to Section 3.1 hereof, unless and until the holder
thereof shall have failed to perfect or shall have effectively withdrawn or
lost such holder's right to dissent from the Merger under the WBCA, and shall
be entitled to receive only the payment provided for by Chapter 23B.13 of the
WBCA. If any such holder shall have failed to perfect or shall have
effectively withdrawn or lost such holder's dissenters' rights under the WBCA,
such holder's Dissenting Shares shall thereupon be deemed to be outstanding
shares of Reorganization Common Stock.
(b) Any payments relating to Dissenting Shares shall be made solely by the
Surviving Corporation and no funds or other property have been or will be
provided by Holding Company or any of its other direct or indirect
subsidiaries for such payment.
ARTICLE IV
CONDITIONS TO MERGER
SECTION 4.1 CONDITIONS
The obligations of the Company under this Agreement to effect the Merger are
subject to (a) approval of this Agreement by the affirmative vote of holders
of not less than two-thirds of the outstanding shares of Company Common Stock
entitled to vote at the Special Meeting of the Company shareholders at which
the matter will be considered, (b) any third party or regulatory approvals,
and (c) perfection by no more than 2% of the Company's shareholders of their
dissenters' rights.
SECTION 4.2 WAIVER
Notwithstanding anything to the contrary contained in this Agreement, any or
all of the conditions to the obligation of the Company to effect the Merger
set forth in Section 4.1 may be waived by the unilateral action of the Board
of Directors of the Company or the unilateral action of the Board of Directors
of Holding Company.
A-3
<PAGE>
ARTICLE V
MISCELLANEOUS
SECTION 5.1 OPTIONS
At the Effective Time, each option to purchase shares or other right to
acquire shares of Company Common Stock granted under each of the Company's
1989 Stock Option Plan, 1993 Stock Option Plan and 1996 Stock Incentive
Compensation Plan (collectively, the "Assumed Plans") and each arrangement
entitling persons to receive an option (the "Assumed Arrangements") to
purchase shares of Company Common Stock, which is outstanding immediately
prior to the Effective Time, shall be converted into and become an option or
right to purchase or acquire or Assumed Arrangement for an option to acquire
the same number of shares of Class B Common Stock (provided, however, that if
a "Conversion Event" for the Class B Common Stock (as defined in the Company's
Articles of Incorporation) occurs, the conversion shall be into an option or
right to purchase or acquire or Assumed Arrangement for an option to acquire
the same number of shares of common stock, par value $.01 per share, of
Holding Company ("Holding Company Common Stock")) at the same option price per
share, upon the same terms and subject to the same conditions set forth in the
option or right to acquire or purchase shares and in the Assumed Plans (or in
the Assumed Arrangement for an option, in the case of Assumed Arrangements for
options) as in effect at the Effective Time. The same number of shares of
Class B Common Stock (or Holding Company Common Stock, as the case may be)
shall be reserved for purposes of the Assumed Plans and Assumed Arrangements
as is equal to the number of shares of Company Common Stock so reserved as of
the Effective Time. As of the Effective Time, Holding Company will assume the
Assumed Plans and Assumed Arrangements and all obligations of the Company
under the Assumed Plans and Assumed Arrangements, and the outstanding options
and other rights to acquire or purchase shares of Company Common Stock granted
pursuant to the Assumed Plans and Assumed Arrangements.
SECTION 5.2 OTHER EMPLOYEE BENEFIT PLANS [RESERVED]
SECTION 5.3 AMENDMENT
This Agreement may be amended by written agreement of the parties hereto at
any time prior to the Effective Time.
SECTION 5.4 ABANDONMENT
At any time prior to the Effective Time, this Agreement may be terminated
and abandoned by the unilateral action of the Board of Directors of the
Company or the unilateral action of the Board of Directors of Holding Company.
SECTION 5.5 COUNTERPARTS
This Agreement may be executed in two or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
two or more counterparts have been signed by each of the parties and delivered
to the other parties.
A-4
<PAGE>
SECTION 5.6 GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Washington, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
RAGEN MACKENZIE INCORPORATED
/s/ Robert J. Mortell, Jr.
_____________________________________
By: Robert J. Mortell, Jr.
Its: President
RAGEN MACKENZIE GROUP INCORPORATED
/s/ Lesa A. Sroufe
_____________________________________
By: Lesa A. Sroufe
Its: Chief Executive Officer
RMGI MERGER CORP.
/s/ V. Lawrence Bensussen
_____________________________________
By: V. Lawrence Bensussen
Its: President
A-5
<PAGE>
ANNEX B
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
RAGEN MACKENZIE GROUP INCORPORATED
Pursuant to RCW 23B.10.070, the following constitutes Restated Articles of
Incorporation of the undersigned, a Washington corporation.
ARTICLE 1. NAME
The name of this corporation is Ragen MacKenzie Group Incorporated
ARTICLE 2. SHARES
2.1 AUTHORIZED CAPITAL
The total number of shares which this corporation is authorized to issue is
60,000,000 shares, consisting of 50,000,000 shares of common stock par value
$0.01 per share, and 10,000,000 shares of preferred stock par value $0.01 per
share. The common stock is subject to the rights and preferences of the
preferred stock as hereinafter set forth.
2.2 ISSUANCE OF PREFERRED STOCK IN SERIES
The preferred stock may be issued from time to time in one or more series in
any manner permitted by law and the provisions of these Amended and Restated
Articles of Incorporation (the "Articles of Incorporation") of this
corporation, as determined from time to time by the Board of Directors and
stated in the resolution or resolutions providing for the issuance thereof,
prior to the issuance of any shares thereof. The Board of Directors shall have
the authority to fix and determine and to amend, subject to the provisions
hereof, the designation, preferences, limitations and relative rights of the
shares of any series that is wholly unissued or to be established. Unless
otherwise specifically provided in the resolution establishing any series, the
Board of Directors shall further have the authority, after the issuance of
shares of a series whose number it has designated, to amend the resolution
establishing such series to decrease the number of shares of that series, but
not below the number of shares of such series then outstanding.
2.2.1 DIVIDENDS
The holders of shares of the preferred stock shall be entitled to receive
dividends, out of the funds of this corporation legally available therefor, at
the rate and at the time or times, whether cumulative or noncumulative, as may
be provided by the Board of Directors in designating a particular series of
preferred stock. If such dividends on the preferred stock shall be cumulative,
then if dividends shall not have been paid, the deficiency shall be fully paid
or the dividends declared and set apart for payment at such rate, but without
interest on cumulative dividends, before any dividends on the common stock
shall be paid or declared and set apart for payment. The holders of the
preferred stock shall not be entitled to receive any dividends thereon other
than the dividends referred to in this section.
2.2.2 REDEMPTION
The preferred stock may be redeemable at such price, in such amount, and at
such time or times as may be provided by the Board of Directors in designating
a particular series of preferred stock. In any event, such preferred stock may
be repurchased by this corporation to the extent legally permissible.
B-1
<PAGE>
2.2.3 LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the affairs
of this corporation, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the common stock, the holders of
the preferred stock at the time outstanding shall be entitled to be paid the
preferential amount or amounts per share as may be provided by the Board of
Directors in designating a particular series of preferred stock and dividends
accrued thereon to the date of such payment. The holders of the preferred
stock shall not be entitled to receive any distributive amounts upon the
liquidation, dissolution, or winding up of the affairs of this corporation
other than the distributive amounts referred to in this section, unless
otherwise provided by the Board of Directors in designating a particular
series of preferred stock.
2.2.4 CONVERSION
Shares of preferred stock may be convertible into common stock of this
corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of preferred stock.
2.2.5 VOTING RIGHTS
Holders of preferred stock shall have such voting rights as may be provided
by the Board of Directors in designating a particular series of preferred
stock.
2.3 CLASSES OF COMMON STOCK
Of the 50,000,000 shares of common stock, 30,000,000 shares shall be
initially designated, without further designation, as common stock (the
"Common Stock"), 19,000,000 shares shall be initially designated as Class B
common stock (the "Class B common stock"), 500,000 shares shall be initially
designated as Class C common stock (the "Class C common stock") and 500,000
shares shall be initially designated as Class D common stock (the "Class D
common stock").
The powers, preferences and rights of the Common Stock, the Class B common
stock, the Class C common stock and the Class D common stock and the
qualifications, limitations or restrictions thereof are as set forth in this
Section 2.3.
2.3.1 VOTING
Each share of Common Stock, Class B common stock, Class C common stock and
Class D common stock shall entitle the holder thereof to one vote.
2.3.2 CONVERSION OF SHARES
(a) "Conversion Event" shall mean the occurrence of any of the following
events:
(i) immediately prior to such time as this corporation shall close a firm
commitment underwritten public offering of shares of Common Stock in which
the aggregate gross proceeds to this corporation and selling shareholders
from such offering shall be at least $15,000,000; or
(ii) the determination of the Board of Directors of this corporation,
which determination may be made on a class by class basis, that the
conversion of Class B common stock, Class C common stock or Class D common
stock into shares of Common Stock is in the best interest of this
corporation. Such a determination, if made with respect to only one or
more, but fewer than all, classes of convertible common stock, shall apply
to only the designated class or classes, and shall not constitute a
"Conversion Event" with respect to other classes; or
B-2
<PAGE>
(iii) the Board of Directors and this corporation's shareholders vote as
required by law for the merger or consolidation of this corporation with
any unaffiliated corporation, or for the sale of all or substantially all
of the assets of this corporation, or for its liquidation; or
(iv) the holders of two-thirds of the then outstanding shares of common
stock, including the Common Stock, Class B common stock, Class C common
stock and Class D common stock, of this corporation agree in writing to
such conversion.
(b) Conversion of Class B Common Stock. Each outstanding share of Class B
common stock shall automatically, without any further act or deed on the part
of this corporation or any other person, be converted into one share of Common
Stock, on a one share for one share basis, immediately on, and concurrently
with, an applicable Conversion Event.
(c) Conversion of Class C Common Stock. Each outstanding share of Class C
common stock shall automatically, without any further act or deed on the part
of this corporation or any other person, be converted into one share of Common
Stock, on a one share for one share basis, immediately on, and concurrently
with, an applicable Conversion Event.
(d) Conversion of Class D Common Stock. Each outstanding share of Class D
common stock shall automatically, without any further act or deed on the part
of this corporation or any other person, be converted into one share of Common
Stock, on a one share for one share basis, immediately on, and concurrently
with an applicable Conversion Event.
(e) Conversion Procedure; Issuance of Certificates.
(i) Each holder of any shares of Class B, C, or D common stock that are
automatically converted into shares of Common Stock pursuant to this
Article 2 shall tender certificates representing such shares to this
corporation promptly for reissuance with the post-conversion class
designation; provided, that the conversion of Class B, C or D common stock
into Common Stock pursuant to this Article 2 shall occur automatically and
be effective whether or not the certificates representing such shares
indicate the proper class designation.
(ii) This corporation shall reserve and at all times shall have reserved
out of its authorized but unissued shares solely for the purpose of
issuance upon the conversion of any shares of common stock in accordance
with this Article 2, such number of shares of Common Stock as may be
issuable upon such conversion. All shares of Common Stock issuable upon any
conversion pursuant to this Article 2 shall, when issued, constitute duly
and validly issued, fully paid and nonassessable shares of Common Stock.
This corporation shall use its reasonable best efforts to ensure that all
such shares of Common Stock may be so issued without violation of any
applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Common Stock of the
relevant class may be listed (except for official notice of issuance, which
shall be immediately transmitted by this corporation upon issuance).
(f) Extraordinary Common Stock Event.
Upon the happening of an Extraordinary Common Stock Event after the date of
the initial issuance of any shares of Class B common stock, Class C common
stock or Class D common stock, each share of Class B common stock, Class C
common stock or Class D common stock shall be adjusted by multiplying such
share by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such Extraordinary Common Stock
Event and the numerator of which shall be the number of shares of Common Stock
outstanding immediately after such Extraordinary Common Stock Event, and the
product so obtained shall thereafter be the number of outstanding shares of
such class that was formerly represented by one such share. The Class B common
stock, Class C common stock and Class D common stock, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive
Extraordinary Common Stock Event or
B-3
<PAGE>
Events. "Extraordinary Common Stock Event" shall mean (i) the issuance of
additional shares of Common Stock as a dividend or other distribution on
outstanding Common Stock of this corporation, (ii) a subdivision of
outstanding shares of Common Stock into a greater number of shares of Common
Stock, or (iii) a combination of outstanding shares of Common Stock into a
smaller number of shares of Common Stock.
2.3.3 DIVIDENDS
Subject to the rights of the holders of any other class or series of stock
having a preference as to dividends over the common stock then outstanding,
the holders of common stock will be entitled to receive, to the extent
permitted by law, and to share equally and ratably, share for share, such
dividends as may be declared from time to time by the Board of Directors. No
dividends shall be paid on the Common Stock, the Class B common stock, the
Class C common stock or the Class D common stock, whether in cash, property or
shares of stock of this corporation, unless the same dividend shall be payable
on each share of Common Stock, Class B common stock, Class C common stock or
Class D common stock; provided that if dividends so declared are payable in
shares of common stock, dividends will be declared which are payable at the
same rate on all series of common stock, and the dividends on the Common Stock
will be paid in Common Stock, the dividends on the Class B common stock will
be paid in Class B common stock, the dividends on the Class C common stock
will be paid in Class C common stock and the dividends on the Class D common
stock will be paid in Class D common stock.
2.3.4 RESTRICTIONS ON TRANSFER
2.3.4.1 COMMON STOCK
Except as otherwise required by law, including federal and state securities
law, there are no restrictions on the transfer of shares of Common Stock.
2.3.4.2 CLASS B COMMON STOCK (EMPLOYEE SHAREHOLDER AGREEMENTS)
2.3.4.2(A) Restriction on Transfers Derived from Employee Shareholders'
Agreement. No holder 0f Class B common stock shall transfer, encumber or
otherwise dispose, or permit the transfer, encumbrance or other disposition,
of Class B common stock (any such action being referred to in this Section
2.3.4.2 as a "transfer") without the prior written consent of this corporation
unless such shareholder (also referred to in this Section 2.3.4.2 as the
"Offeror") has first made the offer to sell such shares of Class B common
stock (the "Offer") described in subsection 2.3.4.2(B) and the offer has not
been accepted in the manner described in subsection 2.3.4.2(C).
2.3.4.2(B) Offer by Offeror, Etc. The Offer shall be made to this
corporation and to all of the holders of this corporation's common stock of
any class who are employees, officers or directors of this corporation, any
subsidiary of this corporation or any Affiliated Entity (as defined in
subsection 2.3.4.2(J) hereof) (the "Option Holders") and shall consist of a
written offer to sell the offered shares (the "Offered Shares") delivered to
this corporation. Attached to the Offer shall be a statement of the Offeror's
intention to transfer the Offered Shares setting forth the name and address of
the prospective purchaser, the number of shares involved in the proposed
transfer, and the terms of such transfer (including the proposed purchase
price). This corporation shall communicate the existence of the Offer to the
Option Holders.
2.3.4.2(C) Acceptance of Offer
(a) By This Corporation. Within thirty (30) days after its receipt of the
Offer, this corporation may, at its option, accept the Offer as to all or
some portion of the Offered Shares by giving notice to the Offeror or his,
her or its legal representative of the number of shares this corporation is
electing to purchase.
(b) By The Option Holders. If the Offer is not accepted by this
corporation as to all the Offered Shares, the Option Holders may, at their
option, elect within thirty (30) days after their receipt of the Offer
B-4
<PAGE>
to purchase the Offered Shares that this corporation has not elected to
purchase. Each Option Holder shall exercise his, her or its option
hereunder by giving notice, within such thirty (30) day period, to this
corporation of his, her or its election to purchase all or a specified
number of the Offered Shares. If the total number of shares specified in
the elections submitted by all Option Holders exceeds the number of
available Offered Shares, each Option Holder shall have priority, up to the
number of shares specified in his, her or its notice of election to
purchase, in such proportion of the available Offered Shares as the number
of shares of this corporation's common stock that he, she or it holds bears
to the total number of shares of this corporation's common stock held by
all Option Holders electing to purchase.
2.3.4.2(D) Purchase Price InTimease price for the Offered Shares purchased
pursuant to subsection 2.3.4.2(C) hereof shall be determined in accordance
with subsection 2.3.4.2(M) hereof.
2.3.4.2(E) Closing of Purchase InTimeherwise mutually agreed by the involved
parties, the closing of any purchase of the Offered Shares by this corporation
or by the Option Holders shall take place at the registered office of this
corporation, on the first regular business day of the fourth week after the
last notice of election to purchase the Offered Shares has been received by
this corporation.
2.3.4.2(F) Release from Restriction. If the Offer is not accepted as to all
the Offered Shares by this corporation, the Option Holders or both, the
Offeror may transfer any such unsold Offered Shares to the prospective
purchaser named in the statement of intention attached to the Offer, such
transfer to be made only in strict accordance with the terms set forth in such
statement, and must be completed within thirty (30) days following the
expiration of the time provided for the election by the Option Holders to
purchase such shares, after which any such transfer shall again become subject
to all the restrictions of this Section 2.3.4.2.
2.3.4.2(G) Death of Shareholder. The death of a holder of Class B common
stock shall be deemed a proposed transfer with respect to all shares of his or
her Class B common stock and shall be subject to the restrictions of this
Section 2.3.4.2.
2.3.4.2(H) Marriage Dissolution. Any disposition or proposed disposition of
any shares of Class B common stock pursuant to a property settlement
agreement, or by court decree or otherwise, in connection with any marriage
dissolution or divorce proceeding involving a holder of Class B common stock
shall be deemed a proposed transfer with respect to all shares of Class B
common stock and shall be subject to the restrictions of this Section 2.3.4.2.
2.3.4.2(I) Bankruptcy. The filing of a petition for the voluntary or
involuntary bankruptcy of a holder of Class B common stock (unless such
petition is dismissed within ten (10) days after the date of filing) shall be
deemed a proposed transfer with respect to all shares of the Class B common
stock and shall be subject to the restrictions of this Section 2.3.4.2. The
date on which this corporation receives notification of such filing shall, for
purposes of subsection 2.3.4.2(C) hereof, be deemed to be the date on which an
offer to sell is received and from which the time period described in
subsection 2.3.4.2(C) hereof begins to run.
2.3.4.2(J) Termination or Resignation. The termination of the employment or
other position, or the resignation, of a holder of Class B common stock from
his or her employment with or position as an officer or director of this
corporation, or any affiliated entity operated under a correspondent-type or
similar arrangement with this corporation ("Affiliated Entity") shall be
deemed a proposed transfer with respect to all shares of his or her Class B
common stock and shall be subject to the restrictions of this Section 2.3.4.2.
In addition, the termination of the relationship between this corporation and
any Affiliated Entity shall be deemed to be a transfer with respect to all
shares of Class B common stock and shall be subject to the restrictions of
this Section 2.3.4.2 if the holder of Class B common stock is then employed by
or an officer or director of such Affiliated Entity.
2.3.4.2(K) No Other Transfer Effective. No transfer of any right, title or
interest in the Class B common stock shall be effective, and this corporation
shall not record or recognize any such transfer, until there has been
compliance with the provisions of this Section 2.3.4.2.
B-5
<PAGE>
2.3.4.2(L) Effect of Transfer. In the event of any transfer accomplished in
accordance with the provisions of this Section 2.3.4.2, the transferee shall
receive and hold any and all shares of the Class B common stock so transferred
subject to the terms and provisions of this Section 2.3.4.2 and subject to the
obligations of the transferor hereunder, and shall, upon request by this
corporation, forthwith execute an appropriate instrument to that effect.
2.3.4.2(M) Purchase Price. The purchase price for any of the Class B common
stock sold pursuant to this Section 2.3.4.2 shall be as follows:
2.3.4.2(M)(1) Book Value. The purchase price for any shares of the Class B
common stock being purchased by this corporation or any Option Holders
pursuant to Section 2.3.4.2 shall be equal to the lesser of the book value of
such shares or the purchase price set forth in the statement of intention to
transfer described in subsection 2.3.4.2(B). The book value per share shall be
established by the accountant or accountants then regularly employed by this
corporation; such value shall be the net book value of each such share
involved, calculated in accordance with generally accepted accounting
principles as of the end of the last fiscal quarter of this corporation
preceding the date on which the offer is first received (actually or
constructively) by this corporation. All calculations so made in good faith by
such accountant or accountants shall be conclusive and binding on all parties.
This corporation shall pay all costs of calculating such purchase price, shall
fully cooperate to enable such calculation to be made as soon as practicable,
and if requested shall review the computation of the book value with the
shareholder or the shareholder's representative.
2.3.4.2(M)(2) Payments. The purchase price or prices for the Offered Shares
to be acquired by this corporation or any Option Holder pursuant to subsection
2.3.4.2(A) hereof shall be paid in cash or by certified or cashier's check at
the closing described in subsection 2.3.4.2(E) hereof.
2.3.4.2(N) Redemption at Corporation Request. At any time or from time to
time after the date hereof, this corporation, at its option, may redeem all or
any portion of the Class B common stock. This corporation shall have no
obligation to effect such redemption on a pro rata or other equitable basis
among the holders of this corporation's common stock. Notice of such
redemption shall be provided by registered or certified mail to the
shareholder not less than ten (10) days prior to the date fixed for redemption
by this corporation. The closing of the redemption transaction shall occur on
the date fixed for redemption by this corporation and shall occur at this
corporation's principal executive offices or such other location as this
corporation may in its discretion determine. The purchase price for any shares
of this corporation's Class B common stock purchased hereunder shall be equal
to the book value thereof, as determined in accordance with subsection
2.3.4.2(M) hereof.
2.3.4.2(O) Specific Performance. This corporation and the holders of the
Class B common stock have declared that it is impossible to measure in money
the damages that will accrue to this corporation and the holders of the Class
B common stock by reason of a failure to perform any of the obligations set
forth in this Section 2.3.4.2. Therefore, if either this corporation or any
holder of the Class B common stock shall institute any action or proceeding to
specifically enforce the provisions hereof, the party against whom such action
or proceeding is brought hereby waives the claim or defense therein that such
party has an adequate remedy at law or in damages, and such person shall not
assert in any such action or proceeding the claim or defense that such remedy
at law or in damages exists.
2.3.4.2(P) Legend on Stock Certificates. Each certificate representing
shares of the Class B common stock shall bear a legend in substantially the
following form:
"This Certificate and the shares of stock hereby represented are subject to
the terms, provisions, and conditions of the Corporation's Articles of
Incorporation and may not be sold, transferred or encumbered except in
accordance with the terms and provisions of said Articles of Incorporation,
a copy of which are on file at the registered office of the Corporation, as
the Articles may be amended from time to time."
B-6
<PAGE>
2.3.4.3 CLASS C COMMON STOCK (1990 STOCK PURCHASE AGREEMENT)
2.3.4.3(A) Transfers to Family Members. Notwithstanding the provisions of
subsection 2.3.4.3(B) hereof, holders of Class C common stock shall be
entitled to transfer the Class C common stock to immediate family members or
trusts (the beneficiaries of which include only the holders of Class C common
stock and immediate family members), or by will or intestate succession. Any
person receiving the Class C common stock pursuant to this Section 2.3.4.3
takes such Class C common stock subject to all the restrictions contained in
this Section 2.3.4.3, and this corporation shall be entitled to require such
persons or entities receiving such Class C common stock to sign an
acknowledgment thereof prior to this corporation's effecting such transfer on
its records.
2.3.4.3(B) Limitations on Disposition of Class C Common Stock (Derived from
1990 Stock Purchase Agreement)
2.3.4.3(B)(1) Transfers. No holder of Class C common stock shall transfer,
encumber or otherwise dispose of or permit the transfer, encumbrance or other
disposition, of any of the shares of Class C common stock now owned or
hereafter acquired by him, her or it (any such action being called a
"transfer") without the prior written consent of this corporation, unless the
holder of Class C common stock desiring to make the transfer (the "Offeror")
has first made the offer to sell (the "Offer") described in subsection
2.3.4.3(B)(2) hereof and the Offer has not been accepted in the manner
described in subsection 2.3.4.3(B)(3) hereof.
2.3.4.3(B)(2) Offer by Offeror. The Offer shall be made to this corporation
and to all the holders of any class of common stock who are also employees of
this corporation, any subsidiary thereof, or any affiliated entity operated
under a correspondent-type or similar arrangement with this corporation
("Option Holders") and shall consist of a written offer to sell the offered
shares (the "Offered Shares"). Attached to the Offer shall be a statement of
intention to transfer setting forth the name and address of the prospective
purchaser, the number of shares involved in the proposed transfer, and the
terms of such transfer (including the proposed purchase price). This
corporation shall communicate the existence of the Offer to the Option
Holders.
(A) By this Corporation. Within thirty (30) days after its receipt of the
Offer, this corporation may, at its option, accept the Offer as to all or
some portion of the Offered Shares by giving notice to the Offeror or his,
her or its legal representative and to the Option Holders of the number of
shares this corporation is electing to purchase.
(B) By the Option Holders. If the Offer is not accepted by this
corporation as to all the Offered Shares, the Option Holders may, at their
option, elect within thirty (30) days after their receipt of the Offer to
purchase the Offered Shares that this corporation has not elected to
purchase. Each Option Holder shall exercise his, her or its option
hereunder by giving notice, within such thirty (30) day period, to this
corporation of his, her or its election to purchase all or a specified
number of the Offered Shares. If the total number of shares specified in
the elections exceeds the number of available Offered Shares, each Option
Holder shall have priority, up to the number of shares specified in his,
her or its notice of election to purchase, in such proportion of the
available Offered Shares as the number of the shares of this corporation's
common stock that he, she or it holds bears to the total number of shares
of this corporation's common stock held by all Option Holders electing to
purchase.
2.3.4.3(B)(4) Closing of Purchase. Unless otherwise mutually agreed by the
involved parties, the closing of any purchase by this corporation or by the
Option Holders shall take place at the principal executive office of this
corporation, on the first regular business day of the fourth week after the
last notice of election to purchase the Offered Shares has been received by
this corporation.
2.3.4.3(B)(5) Release from Restriction. If the Offer is not accepted as to
all the Offered Shares by this corporation or by the Option Holders (or by
both), the Offeror may transfer such remaining Offered Shares to the
prospective purchaser named in the statement of intention attached to the
Offer, as provided in subsection
B-7
<PAGE>
2.3.4.3(B)(2) hereof, such transfer to be made only in strict accordance with
the terms set forth in such statement, and must be completed within thirty
(30) days following the expiration of the time provided for the election by
the Option Holders to purchase such shares, after which any such transfer
shall again become subject to all the restrictions of this subsection
2.3.4.3(B).
2.3.4.3(B)(6) Death of Holder. The death of a holder of Class C common stock
shall be deemed a proposed transfer of the shares of this corporation owned by
such holder of Class C common stock and shall be subject to the terms of this
subsection 2.3.4.3(B).
2.3.4.3(B)(7) Marriage Dissolution. Any disposition or proposed disposition
of any shares of this corporation pursuant to a property settlement agreement,
or by court decree or otherwise, in connection with any marriage dissolution
or divorce proceeding involving any holder of Class C common stock shall be
deemed a transfer subject to the restrictions of this subsection 2.3.4.3(B).
2.3.4.3(B)(8) Bankruptcy. The filing of a petition for the voluntary or
involuntary bankruptcy of a holder of Class C common stock (unless such
petition is dismissed within ten (10) days after the date of filing) shall be
deemed a proposed transfer subject to the restrictions of this subsection
2.3.4.3(B). The date on which this corporation or the Option Holders, as the
case may be, receive notification of such filing shall, for purposes of
subsection 2.3.4.3(B)(3) hereof, be deemed to be the date on which an offer to
sell is received and from which the time periods described in subsection
2.3.4.3(B)(3) hereof begin to run.
2.3.4.3(B)(9) No Other Transfer Effective. No transfer of any right, title
or interest in common stock shall be effective, and this corporation shall not
record or recognize any such transfer, until there has been compliance with
the provisions of this subsection 2.3.4.3(B).
2.3.4.3(B)(10) Effect of Transfer. In the event of any transfer accomplished
in accordance with the provisions of this subsection 2.3.4.3(B), the
transferee shall receive and hold any and all shares of this corporation so
transferred subject to the terms and provisions of this subsection 2.3.4.3(B)
and subject to the obligations of the transferor hereunder, and shall, upon
request by this corporation, forthwith execute an appropriate instrument to
that effect.
2.3.4.3(B)(11) Purchase Price. The purchase price for any common stock of
this corporation being purchased by this corporation or by any of the Option
Holders pursuant to this subsection 2.3.4.3(B) shall be equal to the lesser of
the purchase price set forth in the statement of intention to transfer
described in subsection 2.3.4.3(B)(2) hereof or the book value of such shares.
The book value per share shall be established by the accountant or accountants
then regularly auditing this corporation's books; such value shall be the net
book value of each such share involved, calculated in accordance with
generally accepted accounting principles, as of the end of the last fiscal
quarter of this corporation preceding the date on which the Offer is first
received (actually or constructively) by this corporation or the other Option
Holders. All calculations so made in good faith by such accountant or
accountants shall be conclusive and binding on all parties. This corporation
shall pay all costs of calculating such purchase price.
2.3.4.3(B)(12) Change of Control of this Corporation. Notwithstanding the
provisions of this subsection 2.3.4.3(B), a holder of Class C common stock
shall be entitled to transfer the Class C common stock pursuant to any merger
or consolidation of this corporation resulting in the change of control of
this corporation, or pursuant to any sale of all or substantially all of the
assets or common stock of this corporation to a person or persons not then
controlling this corporation.
2.3.4.4 CLASS D COMMON STOCK: RESTRICTIONS ON TRANSFER (DERIVED FROM 1995
STOCK PURCHASE AGREEMENT)
2.3.4.4(A) Transfers to Family Members.
Notwithstanding the provisions of subsection 2.3.4.4(B), holders of Class D
common stock shall be entitled to transfer the Class D common stock to
immediate family members, trusts (the beneficiaries of which include
B-8
<PAGE>
only the holders of Class D common stock and immediate family members), or by
will or intestate succession. Any person receiving the Class D common stock
pursuant to this Section, takes such Class D common stock subject to all of
the restrictions contained in this Section 2.3.4.4, and this corporation shall
be entitled to require such persons or entities receiving such Class D common
stock to sign an acknowledgment thereof prior to this corporation's effecting
such transfer on its records.
2.3.4.4(B) Limitations on Disposition of Class D Common Stock.
2.3.4.4(B)(1) Transfers. No holder of Class D common stock shall transfer,
encumber or otherwise dispose of, or permit the transfer, encumbrance or other
disposition of, any of the shares of Class D common stock now owned or
hereafter acquired by him, her or it (any such action being called a
"transfer") without the prior written consent of this corporation, unless the
holder of Class D common stock has first made the offer to sell such shares
(the "Offer") described in subsection 2.3.4.4(B)(2) and the Offer has not been
accepted in the manner described in subsection 2.3.4.4(B)(3).
2.3.4.4(B)(2) Offer by the Investor. The Offer shall be made to this
corporation and to all of the holders of any class of common stock who are
also employees, officers or directors of this corporation, any subsidiary
thereof, or any affiliated entity operated under a correspondent-type or
similar arrangement with this corporation ("Option Holders") and shall consist
of a written offer to sell the offered shares (the "Offered Shares"). Attached
to the Offer shall be a statement of intention to transfer setting forth the
name and address of the prospective purchaser, the number of shares involved
in the proposed transfer, and the terms of such transfer (including the
proposed purchase price). This corporation shall communicate the existence of
the Offer to the Option Holders.
2.3.4.4(B)(3) Acceptance of Offer.
(A) By this Corporation. Within 30 days after its receipt of the Offer,
this corporation may, at its option, accept the Offer as to all or some
portion of the Offered Shares by giving notice to the holder of Class D
common stock or his, her or its legal representative and to the Option
Holders of the number of shares which this corporation is electing to
purchase.
(B) By the Option Holders. If the Offer is not accepted by this
corporation as to all the Offered Shares, the Option Holders may, at their
option, elect within 30 days after their receipt of the Offer to purchase
the Offered Shares that this corporation has not elected to purchase. Each
Option Holder shall exercise his, her or its option hereunder by giving
notice, within such 30-day period, to this corporation of his, her or its
election to purchase all or a specified number of the Offered Shares. If
the total number of shares specified in the elections exceeds the number of
available Offered Shares, each Option Holder shall have priority, up to the
number of shares specified in his, her or its notice of election to
purchase, in such proportion of the available Offered Shares as the number
of the shares of this corporation's common stock that he, she or it holds
bears to the total number of Common Stock held by all Option Holders
electing to purchase.
2.3.4.4(B)(4) Closing of Purchase. Unless otherwise mutually agreed by the
involved parties, the closing of any purchase by this corporation or by the
Option Holders shall take place at the principal executive office of the
Corporation, on the first regular business day of the fourth week after the
last notice of election to purchase the Offered Shares has been received by
this corporation.
2.3.4.4(B)(5) Release from Restriction. If the Offer is not accepted as to
all the Offered Shares by this corporation or by the Option Holders (or by
both), the holder of Class D common stock who made the Offer may transfer such
remaining Offered Shares to the prospective purchaser named in the statement
of intention attached to the Offer, as provided in subsection 2.3.4.4(B)(2),
such transfer to be made only in strict accordance with the terms set forth in
such statement, and must be completed within 30 days following the expiration
of the time provided for the election by the Option Holders to purchase such
shares, after which any such transfer shall again become subject to all the
restrictions of this subsection 2.3.4.4(B)(2).
B-9
<PAGE>
2.3.4.4(B)(6) Death of Investor. The death of a holder of Class D common
stock shall be deemed a proposed transfer of the shares of this corporation
owned by the holder and shall be subject to the terms of this subsection
2.3.4.4(B).
2.3.4.4(B)(7) Marriage Dissolution. Any disposition or proposed disposition
of any shares of this corporation pursuant to a property settlement agreement,
or by court decree or otherwise, in connection with any marriage dissolution
or divorce proceeding involving a holder of Class D common stock shall be
deemed a transfer subject to the restrictions of this subsection 2.3.4.4(B).
2.3.4.4(B)(8) Bankruptcy. The filing of a petition for the voluntary or
involuntary bankruptcy of a holder of Class D common stock (unless such
petition is dismissed within 10 days after the date of filing) shall be deemed
a proposed transfer subject to the restrictions of this subsection 2.3.4.4(B).
The date on which this corporation or the Option Holders, as the case may be,
receive notification of such filing shall, for purposes of subsection
2.3.4.4(B)(3), be deemed to be the date on which an offer to sell is received
and from which the time periods described in subsection 2.3.4.4(B)(3) begin to
run.
2.3.4.4(B)(9) No Other Transfer Effective. No transfer of any right, title
or interest in Class D common stock shall be effective, and this corporation
shall not record or recognize any such transfer, until there has been
compliance with the provisions of this subsection 2.3.4.4(B).
2.3.4.4(B)(10) Effect of Transfer. In the event of any transfer accomplished
in accordance with the provisions of this subsection 2.3.4.4(B), the
transferee shall receive and hold any and all shares of this corporation so
transferred subject to the terms and provisions of this subsection 2.3.4.4(B)
and subject to the obligations of the transferor hereunder, and shall, upon
request by this corporation, forthwith execute an appropriate instrument to
that effect.
2.3.4.4(B)(11) Purchase Price. The purchase price for any common stock being
purchased by this corporation or by any of the Option Holders pursuant to this
subsection 2.3.4.4(B) shall be equal to the lesser of the purchase price set
forth in the statement of intention to transfer described in subsection
2.3.4.4(B)(2) or the book value of such shares. The book value per share shall
be established by this corporation's internal accountant or accountants; such
value shall be the net book value of each such share involved, calculated on
the basis of the financial statements of this corporation, prepared in
accordance with generally accepted accounting principles, as of the end of the
last fiscal quarter of this corporation preceding the date on which the Offer
is first received (actually or constructively) by this corporation or the
other Option Holders. All calculations so made in good faith by such
accountant or accountants shall be conclusive and binding on all parties. This
corporation shall pay all costs of calculating such purchase price, shall
fully cooperate to enable such calculation to be made as soon as practicable,
and if requested shall review the calculation of the book value with the
holder of Class D common stock or the holder of Class D common stock's
representative.
2.3.4.4(B)(12) Change of Control of this Corporation. Notwithstanding the
provisions of this subsection 2.3.4.4(B), the holder of Class D common stock
shall be entitled to transfer the Class D common stock pursuant to any merger
or consolidation of the Corporation resulting in the change of control of this
corporation, or pursuant to any sale of all or substantially all of the assets
or common stock of this corporation to a person or persons not then
controlling the Corporation.
2.3.4.4(C) Redemption at Corporation Request. At any time or from time to
time after the date hereof, this corporation, at its option, may redeem all or
any portion of the Class D common stock. This corporation shall have no
obligation to effect such redemption on a pro rata or other equitable basis
among the holders of Class D common stock. Notice of such redemption shall be
provided by registered or certified mail to the holder of Class D common stock
not less than ten (10) days prior to the date fixed for redemption by this
corporation. The closing of the redemption transaction shall occur on the date
fixed for redemption by this corporation and shall occur at this corporation's
principal executive offices or such other location as this corporation may in
its discretion determine. The purchase price for any shares of Class D common
stock purchased hereunder shall be equal to the book value thereof, as
determined in accordance with subsection 2.3.4.4(B)(11) hereof.
B-10
<PAGE>
2.3.4.4(D) Specific Performance. This corporation and the holders of the
Class D common stock have declared that it is impossible to measure in money
the damages that will accrue to this corporation and the holders of the Class
D common stock by reason of a failure to perform any of the obligations set
forth in this Section 2.3.4.4. Therefore, if either this corporation or any
holder of the Class D common stock shall institute any action or proceeding to
specifically enforce the provisions hereof, the party against whom such action
or proceeding is brought hereby waives the claim or defense therein that such
party has an adequate remedy at law or in damages, and such person shall not
assert in any such action or proceeding the claim or defense that such remedy
at law or in damages exists.
2.3.5 OTHER POWERS, PREFERENCES AND RIGHTS
Except as otherwise required by law or expressly provided for in these
Articles of Incorporation, the powers, preferences and rights of the Common
Stock, the Class B common stock, the Class C common stock and the Class D
common stock, and the qualifications, limitations or restrictions thereof,
shall in all respects be identical.
2.3.6 LIQUIDATION
In the event of any liquidation, dissolution or winding up of the affairs of
this corporation, whether voluntary or otherwise, the holders of Common Stock,
Class B common stock, Class C common stock and Class D common stock shall be
entitled to share ratably according to the number of shares of Common Stock,
Class B common stock, Class C common stock and Class D common stock held by
them in the remaining assets of this corporation available for distribution to
its shareholders.
2.3.7 REACQUISITION OR CONVERSION OF CLASS B COMMON STOCK, CLASS C COMMON
STOCK OR CLASS D COMMON STOCK
Each share of Class B common stock, Class C common stock or Class D common
stock issued by this corporation, if reacquired by this corporation (whether
by repurchase or other means) or if converted into Common Stock, shall, except
to the extent prohibited by the WBCA, upon such reacquisition or conversion
resume the status of authorized and unissued shares of Common Stock,
undesignated as to class and available for designation and issuance by this
corporation.
2.3.8 AMENDMENT AND RESTATEMENT OF ARTICLES OF INCORPORATION ON CONVERSION
OF ALL CLASS B COMMON STOCK, CLASS C COMMON STOCK OR CLASS D COMMON
STOCK
When, as a result of the conversion of shares of Class B common stock, Class
C common stock or Class D common stock into shares of Common Stock, no such
shares of Class B common stock, Class C common stock or Class D common stock
remain outstanding, the Board of Directors may, at its sole discretion and
without a vote of the shareholders of this corporation, delete this Section
2.3 from these Articles of Incorporation by the filing of the necessary
amendment to and restatement of these Articles of Incorporation.
ARTICLE 3. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 4. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist
with respect to shares of stock of this corporation.
B-11
<PAGE>
ARTICLE 5. DIRECTORS
At the first election of Directors following the first primary, public
offering of equity securities by this corporation pursuant to a registration
statement filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, the Board of Directors shall be divided
into two classes, with said classes to be as equal in number as may be
possible. At the first election of Directors to such classified Board of
Directors, each Class 1 Director shall be elected to serve until the next
ensuing annual meeting of shareholders and each Class 2 Director shall be
elected to serve until the second ensuing annual meeting of shareholders. At
each annual meeting of shareholders following the meeting at which the Board
of Directors is initially classified, the number of Directors equal to the
number of Directors in the class whose term expires at the time of such
meeting shall be elected to serve until the second ensuing annual meeting of
shareholders; provided, however, that, if necessary to maintain relative
equality among the classes of Directors created due to vacancies or removals
of Directors, Directors may be elected to a class whose term expires prior to
such second ensuing annual meeting of shareholders. Notwithstanding any of the
foregoing provisions of this Article, Directors shall serve until their
successors are elected and qualified or until their earlier death, resignation
or removal from office, or until there is a decrease in the number of
Directors.
The Directors of this corporation may be removed only for cause by the
holders of not less than two-thirds of the shares entitled to elect the
Director or Directors whose removal is sought in the manner provided by the
Bylaws.
ARTICLE 6. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal the
Bylaws of this corporation, subject to approval by a majority of the
Continuing Directors (as defined in Article 10); provided, however, that the
Board of Directors may not repeal or amend any bylaw that the shareholders
have expressly provided may not be amended or repealed by the Board of
Directors. The shareholders shall also have the power to adopt, amend or
repeal the Bylaws of this corporation by the affirmative vote of the holders
of not less than two-thirds of the outstanding shares and, to the extent, if
any, provided by resolution or resolutions of the Board of Directors providing
for the issuance of a series of common stock or preferred stock, not less than
two-thirds of the outstanding shares entitled to vote thereon, voting as a
class.
ARTICLE 7. AMENDMENTS TO ARTICLES OF INCORPORATION
In addition to the right of this corporation to amend these Articles of
Incorporation as permitted by law by action of the Board of Directors, this
corporation reserves the right to amend or repeal, by the affirmative vote of
the holders of a majority of the outstanding shares and, to the extent, if
any, provided by resolution or resolutions of the Board of Directors providing
for the issuance of a series of common or preferred stock, majority of the
outstanding shares entitled to vote thereon, voting as a class, any of the
provisions contained in these Articles of Incorporation; provided, however,
that amendment or repeal of Article 5, Article 6, Article 7, Article 9, or
Article 10 shall require the affirmative vote of the holders of two-thirds of
the outstanding shares. The rights of the shareholders of this corporation are
granted subject to this reservation.
ARTICLE 8. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation
or elimination of the liability of Directors, a Director of this corporation
shall not be liable to this corporation or its shareholders for monetary
damages for conduct as a Director. Any amendments to or repeal of this Article
8 shall not adversely affect any right or protection of a Director of this
corporation for or with respect to any acts or omissions of such Director
occurring prior to such amendment or repeal.
B-12
<PAGE>
ARTICLE 9. SPECIAL MEETINGS OF SHAREHOLDERS
Special meetings of the shareholders may be called in the manner provided by
the Bylaws of this corporation; provided, however, that upon qualification of
the corporation as a "public company" under Title 23B RCW the percentage of
votes required to call a special meeting shall be twenty-five percent (25%).
ARTICLE 10. SPECIAL VOTING REQUIREMENTS
In addition to any affirmative vote required by law, by these Articles of
Incorporation or otherwise, any "Business Combination" (as hereinafter
defined) involving this corporation shall be subject to approval in the manner
set forth in this Article 10.
10.1 DEFINITIONS
For the purposes of this Article 10:
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of this corporation or any of its Subsidiaries with any other
corporation; (ii) the sale, lease, exchange, mortgage, pledge, transfer or
other disposition or encumbrance, whether in one transaction or a series of
transactions, by this corporation or any of its Subsidiaries of all or a
substantial part of this corporation's assets otherwise than in the usual
and regular course of business; or (iii) any agreement, contract or other
arrangement providing for any of the foregoing transactions.
(b) "Continuing Director" means any member of the Board of Directors who
was a member of the Board of Directors on April 30,1998 or who is elected
to the Board of Directors after April 30, 1998 upon the recommendation of a
majority of the Continuing Directors voting separately and as a subclass of
Directors on such recommendation.
(c) "Subsidiary" means a domestic or foreign corporation, that has a
majority of its outstanding voting shares owned, directly or indirectly, by
this corporation.
10.2 VOTE REQUIRED FOR BUSINESS COMBINATIONS
10.2.1 SUPERMAJORITY VOTE
Except as provided in subsections 10.2.2 and 10.2.3 hereof, the affirmative
vote of the holders of not less than two-thirds of the outstanding shares
entitled to vote thereon and, to the extent, if any, provided by resolution
adopted by the Board of Directors authorizing the issuance of a class or
series of common stock or preferred stock, the affirmative vote of the holders
of not less than two-thirds of the outstanding shares of such class or series,
voting as a separate voting group, shall be required for the adoption or
authorization of a Business Combination.
10.2.2 MAJORITY VOTE
Notwithstanding subsection 10.2.1 hereof, if a Business Combination shall
have been approved by a majority of the Continuing Directors, voting
separately and as a subclass of Directors, and if such Business Combination is
otherwise required to be approved by this corporation's shareholders pursuant
to the provisions of the Washington Business Corporation Act or of these
Articles of Incorporation other than this Article 10, then the affirmative
vote of the holders of not less than a majority of the outstanding shares
entitled to vote thereon and, to the extent, if any, provided by resolution
adopted by the Board of Directors authorizing the issuance of a class or
series of common stock or preferred stock, the affirmative vote of the holders
of not less than a majority of the outstanding shares of such class or series,
voting as a separate voting group, shall be required for the adoption or
authorization of such Business Combination.
B-13
<PAGE>
10.2.3 NO SHAREHOLDER VOTE
Notwithstanding subsection 10.2.1 or 10.2.2 hereof, if a Business
Combination shall have been approved by a majority of the Continuing
Directors, voting separately and as a subclass of Directors, and if such
Business Combination is not otherwise required to be approved by this
corporation's shareholders pursuant to the provisions of the Washington
Business Corporation Act or of these Articles of Incorporation other than this
Article 10, then no vote of the shareholders of this corporation shall be
required for approval of such Business Combination.
These Articles of Incorporation are executed by said corporation by its duly
authorized officer.
DATED: April 22, 1998 Ragen Mackenzie Group Incorporated
/s/ Robert J. Mortell, Jr.
By___________________________________
Name: Robert J. Mortell, Jr.
Title: President
B-14
<PAGE>
BYLAWS
OF
RAGEN MACKENZIE GROUP INCORPORATED
ORIGINALLY ADOPTED ON: APRIL 22, 1998
B-15
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
SECTION 1 OFFICES........................................................ B-19
SECTION 2 SHAREHOLDERS................................................... B-19
2.1 Annual Meeting................................................. B-19
2.2 Special Meetings............................................... B-19
2.3 Meetings by Communications Equipment........................... B-19
2.4 Date, Time and Place of Meeting................................ B-19
2.5 Business for Shareholders' Meetings............................ B-19
2.5.1 Business at Annual Meetings.................................... B-19
2.5.2 Business at Special Meetings................................... B-20
2.5.3 Notice to Corporation.......................................... B-20
2.6 Notice of Meeting.............................................. B-20
2.7 Waiver of Notice............................................... B-21
2.8 Fixing of Record Date for Determining Shareholders............. B-21
2.9 Voting Record.................................................. B-21
2.10 Quorum......................................................... B-21
2.11 Manner of Acting............................................... B-22
2.12 Proxies........................................................ B-22
2.13 Voting of Shares............................................... B-22
2.14 Voting for Directors........................................... B-22
2.15 Action by Shareholders Without a Meeting....................... B-22
SECTION 3 BOARD OF DIRECTORS............................................. B-22
3.1 General Powers................................................. B-22
3.2 Number and Tenure.............................................. B-23
3.3 Nomination and Election........................................ B-23
3.3.1 Nomination..................................................... B-23
3.3.2 Election....................................................... B-24
3.4 Annual and Regular Meetings.................................... B-24
3.5 Special Meetings............................................... B-24
3.6 Meetings by Communications Equipment........................... B-24
3.7 Notice of Special Meetings..................................... B-24
3.7.1 Personal Delivery.............................................. B-24
3.7.2 Delivery by Mail............................................... B-24
3.7.3 Delivery by Private Carrier.................................... B-24
3.7.4 Facsimile Notice............................................... B-25
3.7.5 Delivery by Telegraph.......................................... B-25
3.7.6 Oral Notice.................................................... B-25
3.8 Waiver of Notice............................................... B-25
3.8.1 In Writing..................................................... B-25
3.8.2 By Attendance.................................................. B-25
3.9 Quorum......................................................... B-25
3.10 Manner of Acting............................................... B-25
3.11 Presumption of Assent.......................................... B-26
3.12 Action by Board or Committees Without a Meeting................ B-26
3.13 Resignation.................................................... B-26
3.14 Removal........................................................ B-26
3.15 Vacancies...................................................... B-26
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.16 Executive and Other Committees............................... B-27
3.16.1 Creation of Committees....................................... B-27
3.16.2 Authority of Committees...................................... B-27
3.16.3 Audit Committee.............................................. B-27
3.16.4 Compensation Committee....................................... B-27
3.16.5 Nominating and Organization Committee........................ B-27
3.16.6 Quorum and Manner of Acting.................................. B-28
3.16.7 Minutes of Meetings.......................................... B-28
3.16.8 Resignation.................................................. B-28
3.16.9 Removal...................................................... B-28
3.17 Compensation................................................. B-28
SECTION 4 OFFICERS..................................................... B-28
4.1 Appointment and Term......................................... B-28
4.2 Resignation.................................................. B-29
4.3 Removal...................................................... B-29
4.4 Contract Rights of Officers.................................. B-29
4.5 Chairman of the Board........................................ B-29
4.6 President.................................................... B-29
4.7 Vice President............................................... B-29
4.8 Secretary.................................................... B-30
4.9 Treasurer.................................................... B-30
4.10 Salaries..................................................... B-30
SECTION 5 CONTRACTS, LOANS, CHECKS AND DEPOSITS........................ B-30
5.1 Contracts.................................................... B-30
5.2 Loans to the Corporation..................................... B-30
5.3 Checks, Drafts, Etc. ........................................ B-30
5.4 Deposits..................................................... B-30
SECTION 6 CERTIFICATES FOR SHARES AND THEIR TRANSFER................... B-31
6.1 Issuance of Shares........................................... B-31
6.2 Certificates for Shares...................................... B-31
6.3 Stock Records................................................ B-31
6.4 Restriction on Transfer...................................... B-31
6.5 Transfer of Shares........................................... B-31
6.6 Lost or Destroyed Certificates............................... B-31
SECTION 7 BOOKS AND RECORDS............................................ B-32
SECTION 8 ACCOUNTING YEAR.............................................. B-32
SECTION 9 SEAL......................................................... B-32
SECTION 10 INDEMNIFICATION.............................................. B-32
10.1 Right to Indemnification..................................... B-32
10.2 Restrictions on Indemnification.............................. B-33
10.3 Advancement of Expenses...................................... B-33
10.4 Right of Indemnitee to Bring Suit............................ B-33
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
10.5 Procedures Exclusive.......................................... B-33
10.6 Nonexclusivity of Rights...................................... B-34
10.7 Insurance, Contracts and Funding.............................. B-34
10.8 Indemnification of Employees and Agents of the Corporation.... B-34
10.9 Persons Serving Other Entities................................ B-34
SECTION 11 AMENDMENTS.................................................... B-34
</TABLE>
B-18
<PAGE>
BYLAWS
OF
RAGEN MACKENZIE GROUP INCORPORATED
SECTION 1. OFFICES
The principal office of the corporation shall be located at the principal
place of business or such other place as the Board of Directors (the "Board")
may designate. The corporation may have such other offices, either within or
without the State of Washington, as the Board may designate or as the business
of the corporation may require.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held each year within 90 to
180 days after the fiscal year end of the corporation at a date, time and
location determined by resolution of the Board of Directors, for the purpose
of electing Directors and transacting such other business as may properly come
before the meeting. At any time prior to the commencement of the annual
meeting, the Board may postpone the annual meeting for a period of up to one
hundred twenty (120) days from the date fixed for such meeting in accordance
with this subsection 2.1.
2.2 SPECIAL MEETINGS
The Chairman of the Board, the President or the Board may call special
meetings of the shareholders for any purpose. Further, a special meeting of
the shareholders shall be held if the holders of not less than 25% of all the
votes entitled to be cast on any issue proposed to be considered at such
special meeting have dated, signed and delivered to the Secretary one or more
written demands for such meeting, describing the purpose or purposes for which
it is to be held.
2.3 MEETINGS BY COMMUNICATIONS EQUIPMENT
Shareholders may participate in any meeting of the shareholders by any means
of communication by which all persons participating in the meeting can hear
each other during the meeting. Participation by such means shall constitute
presence in person at a meeting.
2.4 DATE, TIME AND PLACE OF MEETING
Except as otherwise provided in these Bylaws, all meetings of shareholders,
including those held pursuant to demand by shareholders as provided herein,
shall be held on such date and at such time and place, within or without the
State of Washington, designated by or at the direction of the Board.
2.5 BUSINESS FOR SHAREHOLDERS' MEETINGS
2.5.1 BUSINESS AT ANNUAL MEETINGS
In addition to the election of directors, other proper business may be
transacted at an annual meeting of shareholders, provided that such business
is properly brought before such meeting. To be properly brought before an
annual meeting, business must be (a) brought by or at the direction of the
Board or (b) brought before the meeting by a shareholder pursuant to written
notice thereof, in accordance with subsection 2.5.3 hereof, and
B-19
<PAGE>
received by the Secretary not fewer than 60 nor more than 90 days prior to the
anniversary of the previous year's annual meeting; provided, however, that in
the event that the date of the annual meeting is more than 30 days earlier or
more than 60 days later than such anniversary date, notice by the stockholder
to be timely must be so given not earlier than the 90th day prior to such
annual meeting and not later than the close of business on the later of the
60th day prior to such annual meeting or the 10th day following the day on
which public announcement of the date of such meeting is first made. Any such
shareholder notice shall set forth (i) the name and address of the shareholder
proposing such business; (ii) a representation that the shareholder is
entitled to vote at such meeting and a statement of the number of shares of
the corporation which are beneficially owned by the shareholder; (iii) a
representation that the shareholder intends to appear in person or by proxy at
the meeting to propose such business; and (iv) as to each matter the
shareholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting, the language of the proposal (if appropriate),
and any material interest of the shareholder in such business. No business
shall be conducted at any annual meeting of shareholders except in accordance
with this subsection 2.5.1. If the facts warrant, the Board, or the chairman
of an annual meeting of shareholders, may determine and declare (a) that a
proposal does not constitute proper business to be transacted at the meeting
or (b) that business was not properly brought before the meeting in accordance
with the provisions of this subsection 2.5.1 and, if, in either case, it is so
determined, any such business shall not be transacted. The procedures set
forth in this subsection 2.5.1 for business to be properly brought before an
annual meeting by a shareholder are in addition to, and not in lieu of, the
requirements set forth in Rule 14a-8 under Section 14 of the Securities
Exchange Act of 1934, as amended, or any successor provision.
2.5.2 BUSINESS AT SPECIAL MEETINGS
At any special meeting of the shareholders, only such business as is
specified in the notice of such special meeting given by or at the direction
of the person or persons calling such meeting, in accordance with subsection
2.4 hereof, shall come before such meeting.
2.5.3 NOTICE TO CORPORATION
Any written notice required to be delivered by a shareholder to the
corporation pursuant to subsection 2.5.1 or subsection 3.3.1 hereof must be
given, either by personal delivery or by registered or certified mail, postage
prepaid, to the Secretary at the corporation's executive offices.
2.6 NOTICE OF MEETING
Written notice stating the place, day and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called shall be given by or at the direction of the Board, the Chairman of the
Board, the President or the Secretary to each shareholder entitled to notice
of or to vote at the meeting not less than 10 nor more than 60 days before the
meeting, except that notice of a meeting to act on an amendment to the
Articles of Incorporation, a plan of merger or share exchange, the sale,
lease, exchange or other disposition of all or substantially all of the
corporation's assets other than in the regular course of business or the
dissolution of the corporation shall be given not less than 20 nor more than
60 days before such meeting. If an annual or special shareholders' meeting is
adjourned to a different date, time or place, no notice of the new date, time
or place is required if they are announced at the meeting before adjournment.
If a new record date for the adjourned meeting is or must be fixed, notice of
the adjourned meeting must be given to shareholders entitled to notice of or
to vote as of the new record date. Such notice may be transmitted by mail,
private carrier, personal delivery, telegraph, teletype or communications
equipment which transmits a facsimile of the notice to like equipment which
receives and reproduces such notice. If these forms of written notice are
impractical in the view of the Board, the Chairman of the Board, the President
or the Secretary, written notice may be transmitted by an advertisement in a
newspaper of general circulation in the area of the corporation's principal
office. If such notice is mailed, it shall be deemed effective when deposited
in the official government mail, first-class postage prepaid, properly
addressed to the shareholder at such shareholder's address as it appears in
the corporation's current
B-20
<PAGE>
record of shareholders. Notice given in any other manner shall be deemed
effective when dispatched to the shareholder's address, telephone number or
other number appearing on the records of the corporation. Any notice given by
publication as herein provided shall be deemed effective five days after first
publication.
2.7 WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder under the
provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver in writing, signed by the person or persons
entitled to such notice and delivered to the corporation, whether before or
after the date and time of the meeting or before or after the action to be
taken by consent is effective, shall be deemed equivalent to the giving of
such notice. Further, notice of the time, place and purpose of any meeting
will be deemed to be waived by any shareholder by attendance thereat in person
or by proxy, unless such shareholder at the beginning of the meeting objects
to holding the meeting or transacting business at the meeting.
2.8 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
For the purpose of determining shareholders entitled (a) to notice of or to
vote at any meeting of shareholders or any adjournment thereof, (b) to demand
a special meeting, or (c) to receive payment of any dividend, or in order to
make a determination of shareholders for any other purpose, the Board may fix
a future date as the record date for any such determination. Such record date
shall be not more than 70 days, and in case of a meeting of shareholders not
less than 10 days prior to the date on which the particular action requiring
such determination is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting,
the record date shall be the day immediately preceding the date on which
notice of the meeting is first given to shareholders. Such a determination
shall apply to any adjournment of the meeting unless the Board fixes a new
record date, which it shall do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting. If no record date is
set for the determination of shareholders entitled to receive payment of any
stock dividend or distribution (other than one involving a purchase,
redemption, or other acquisition of the corporation's shares) the record date
shall be the date the Board authorizes the stock dividend or distribution.
2.9 VOTING RECORD
At least 10 days before each meeting of shareholders, an alphabetical list
of the shareholders entitled to notice of such meeting shall be made, arranged
by voting group and by each class or series of shares therein, with the
address of and number of shares held by each shareholder. This record shall be
kept at the principal office of the corporation for 10 days prior to such
meeting, and shall be kept open at such meeting, for the inspection of any
shareholder or any shareholder's agent.
2.10 QUORUM
A majority of the votes entitled to be cast on a matter by the holders of
shares that, pursuant to the Articles of Incorporation or the Washington
Business Corporation Act, are entitled to vote and be counted collectively
upon such matter, represented in person or by proxy, shall constitute a quorum
of such shares at a meeting of shareholders. If less than a majority of such
votes are represented at a meeting, a majority of the votes so represented may
adjourn the meeting from time to time. Any business may be transacted at a
reconvened meeting that might have been transacted at the meeting as
originally called, provided a quorum is present or represented at such
meeting. Once a share is represented for any purpose at a meeting other than
solely to object to holding the meeting or transacting business thereat, it is
deemed present for quorum purposes for the remainder of the meeting and any
adjournment thereof (unless a new record date is or must be set for the
adjourned meeting) notwithstanding the withdrawal of enough shareholders to
leave less than a quorum.
B-21
<PAGE>
2.11 MANNER OF ACTING
If a quorum is present, action on a matter other than the election of
Directors shall be approved if the votes cast in favor of the action by the
shares entitled to vote and be counted collectively upon such matter exceed
the votes cast against such action by the shares entitled to vote and be
counted collectively thereon, unless the Articles of Incorporation or the
Washington Business Corporation Act requires a greater number of affirmative
votes.
2.12 PROXIES
A shareholder may vote by proxy executed in writing by the shareholder or by
his or her attorney-in-fact or agent. Such proxy shall be effective when
received by the Secretary or other officer or agent authorized to tabulate
votes. A proxy shall become invalid 11 months after the date of its execution,
unless otherwise provided in the proxy. A proxy with respect to a specified
meeting shall entitle its holder to vote at any reconvened meeting following
adjournment of such meeting but shall not be valid after the final
adjournment.
2.13 VOTING OF SHARES
Except as provided in the Articles of Incorporation or in Section 2.14
hereof, each outstanding share entitled to vote with respect to a matter
submitted to a meeting of shareholders shall be entitled to one vote upon such
matter.
2.14 VOTING FOR DIRECTORS
Each shareholder entitled to vote at an election of Directors may vote, in
person or by proxy, the number of shares owned by such shareholder for as many
persons as there are Directors to be elected and for whose election such
shareholder has a right to vote, or (unless otherwise provided in the Articles
of Incorporation) each such shareholder may cumulate such shareholder's votes
by distributing among one or more candidates as many votes as are equal to the
number of such Directors multiplied by the number of such shareholder's
shares. Unless otherwise provided in the Articles of Incorporation, the
candidates elected shall be those receiving the largest number of votes cast,
up to the number of Directors to be elected.
2.15 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action which could be taken at a meeting of the shareholders may be
taken without a meeting if one or more written consents setting forth the
action so taken are signed by all shareholders entitled to vote on the action
and are delivered to the corporation. If not otherwise fixed by the Board, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent. A shareholder may
withdraw a consent only by delivering a written notice of withdrawal to the
corporation prior to the time that all consents are in the possession of the
corporation. Action taken by written consent of shareholders without a meeting
is effective when all consents are in the possession of the corporation,
unless the consent specifies a later effective date. Any such consent shall be
inserted in the minute book as if it were the minutes of a meeting of the
shareholders.
SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS
All corporate powers shall be exercised by or under the authority of, and
the business and affairs of the corporation shall be managed under the
direction of, the Board, except as may be otherwise provided in these Bylaws,
the Articles of Incorporation, as at any time amended, or the Washington
Business Corporation Act.
B-22
<PAGE>
3.2 NUMBER AND TENURE
The Board shall be composed of not less than three (3) nor more than fifteen
(15) Directors, the specific number to be set by resolution of the Board. The
number of Directors may be changed from time to time by amendment to these
Bylaws, but no decrease in the number of Directors shall have the effect of
shortening the term of any incumbent Director.
Prior to the first election of Directors following the first primary, public
offering of equity securities by this corporation pursuant to a registration
statement filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "First Public Company Election"),
unless a Director earlier dies, resigns or is removed, his or her term of
office shall expire at the next annual meeting of shareholders. At the First
Public Company Election, , the Board of Directors shall be divided into two
classes, with said classes to be as equal in number as may be possible. At the
first election of Directors to such classified Board of Directors, each Class
1 Director shall be elected to serve until the next ensuing annual meeting of
shareholders and each Class 2 Director shall be elected to serve until the
second ensuing annual meeting of shareholders. At each annual meeting of
shareholders following the meeting at which the Board of Directors is
initially classified, the number of Directors equal to the number of Directors
in the class whose term expires at the time of such meeting shall be elected
to serve until the second ensuing annual meeting of shareholders.
Notwithstanding any of the foregoing provisions of this Section 3.2, Directors
shall serve until their successors are elected and qualified or until their
earlier death, resignation or removal from office or until there is a decrease
in the number of Directors. Directors need not be shareholders of the
corporation or residents of the State of Washington and need not meet any
other qualifications.
3.3 NOMINATION AND ELECTION
3.3.1 NOMINATION
Only persons who are nominated in accordance with the following procedures
shall be eligible for election as Directors. Nominations for the election of
Directors may be made (a) by or at the direction of the Board or (b) by any
shareholder of record entitled to vote for the election of Directors at such
meeting; provided, however, that a shareholder may nominate persons for
election as Directors only if written notice (in accordance with subsection
2.5.3 hereof) of such shareholder's intention to make such nominations is
received by the Secretary not later than (i) with respect to an election to be
held at an annual meeting of the shareholders, not fewer than 60 nor more than
90 days prior to the anniversary of the previous year's annual meeting
(provided, however, that in the event that the date of the annual meeting is
more than 30 days earlier or more than 60 days later than such anniversary
date, notice by the shareholder to be timely must be so given not earlier than
the 90th day prior to such annual meeting and not later than the close of
business on the later of the 60th day prior to such annual meeting or the 10th
day following the day on which public announcement of the date of such meeting
is first made) and (ii) with respect to an election to be held at a special
meeting of the shareholders for the election of Directors, the close of
business on the seventh business day following the date on which notice of
such meeting is first given to shareholders. Any such shareholder's notice
shall set forth (a) the name and address of the shareholder who intends to
make a nomination; (b) a representation that the shareholder is entitled to
vote at such meeting and a statement of the number of shares of the
corporation which are beneficially owned by the shareholder; (c) a
representation that the shareholder intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (d) as
to each person the shareholder proposes to nominate for election or re-
election as a Director, the name and address of such person and such other
information regarding such nominee as would be required in a proxy statement
filed pursuant to the proxy rules of the Securities and Exchange Commission
had such nominee been nominated by the Board, and a description of any
arrangements or understandings, between the shareholder and such nominee and
any other persons (including their names), pursuant to which the nomination is
to be made; and (e) the consent of each such nominee to serve as a Director if
elected. If the facts warrant, the Board, or the chair of a shareholders'
meeting at which Directors are to be elected, shall determine and declare that
a nomination was not made in accordance with the foregoing
B-23
<PAGE>
procedure and, if it is so determined, the defective nomination shall be
disregarded. The right of shareholders to make nominations pursuant to the
foregoing procedure is subject to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation. The procedures set forth in this subsection 3.3 for
nomination for the election of Directors by shareholders are in addition to,
and not in limitation of, any procedures now in effect or hereafter adopted by
or at the direction of the Board or any committee thereof.
3.3.2 ELECTION
At each election of Directors, the persons receiving the greatest number of
votes shall be the Directors.
3.4 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after and
at the same place as the annual meeting of shareholders. By resolution the
Board, or any committee designated by the Board, may specify the time and
place either within or without the State of Washington for holding regular
meetings without notice other than such resolution.
3.5 SPECIAL MEETINGS
Special meetings of the Board or any committee designated by the Board may
be called by or at the request of the Chairman of the Board or the President
or, in the case of special Board meetings, any two (2) Directors and, in the
case of any special meeting of any committee designated by the Board, by its
Chairman. The person or persons authorized to call special meetings may fix
any place either within or without the State of Washington as the place for
holding any special Board or committee meeting called by them.
3.6 MEETINGS BY COMMUNICATIONS EQUIPMENT
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by, or conduct the meeting
through the use of, any means of communication by which all Directors
participating in the meeting can hear each other during the meeting.
Participation by such means shall constitute presence in person at a meeting.
3.7 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day and
hour of the meeting shall be given to a Director in writing or orally. Neither
the business to be transacted at, nor the purpose of, any special meeting need
be specified in the notice of such meeting.
3.7.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be effective if
delivered to a Director at least two days before the meeting.
3.7.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail at least five days before the
meeting, properly addressed to a Director at his or her address shown on the
records of the corporation, with postage thereon prepaid.
3.7.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed effective
when dispatched to a Director at his or her address shown on the records of
the corporation at least three days before the meeting.
B-24
<PAGE>
3.7.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment which transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched
at least two days before the meeting to a Director at his or her telephone
number or other number appearing on the records of the corporation.
3.7.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed effective if
the content thereof is delivered to the telegraph company for delivery to a
Director at his or her address shown on the records of the corporation at
least three days before the meeting.
3.7.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice shall
be deemed effective if personally given to the Director at least two days
before the meeting.
3.8 WAIVER OF NOTICE
3.8.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Articles of Incorporation or the Washington
Business Corporation Act, a waiver thereof in writing, signed by the person or
persons entitled to such notice and delivered to the corporation, whether
before or after the date and time of the meeting, shall be deemed equivalent
to the giving of such notice. Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the Board or any committee
designated by the Board need be specified in the waiver of notice of such
meeting.
3.8.2 BY ATTENDANCE
A Director's attendance at or participation in a Board or committee meeting
shall constitute a waiver of notice of such meeting, unless the Director at
the beginning of the meeting, or promptly upon his or her arrival, objects to
holding the meeting or transacting business at such meeting and does not
thereafter vote for or assent to action taken at the meeting.
3.9 QUORUM
Subject to the provisions of any agreement concerning special Board approval
or manner of action provisions which may be entered into by the shareholders
of the corporation, a majority of the number of Directors fixed by or in the
manner provided in these Bylaws shall constitute a quorum for the transaction
of business at any Board meeting but, if less than a majority are present at a
meeting, a majority of the Directors present may adjourn the meeting from time
to time without further notice.
3.10 MANNER OF ACTING
If a quorum is present when the vote is taken, subject to the provisions of
any arrangement concerning special Board approval or manner of action
provisions which may be entered into by the shareholders of the corporation,
the act of the majority of the Directors present at a Board meeting shall be
the act of the Board, unless the vote of a greater number is required by these
Bylaws, the Articles of Incorporation, as at any time amended, or the
Washington Business Corporation Act.
B-25
<PAGE>
3.11 PRESUMPTION OF ASSENT
A Director of the corporation who is present at a Board or committee meeting
at which any action is taken shall be deemed to have assented to the action
taken unless (a) the Director objects at the beginning of the meeting, or
promptly upon the Director's arrival, to holding the meeting or transacting
any business at such meeting, (b) the Director's dissent or abstention from
the action taken is entered in the minutes of the meeting, or (c) the Director
delivers written notice of the Director's dissent or abstention to the
presiding officer of the meeting before its adjournment or to the corporation
within a reasonable time after adjournment of the meeting. The right of
dissent or abstention is not available to a Director who votes in favor of the
action taken.
3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee created by the Board may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee member either before or after the action is
taken and delivered to the corporation. Action taken by written consent of
Directors without a meeting is effective when the last Director signs the
consent, unless the consent specifies a later effective date. Any such written
consent shall be inserted in the minute book as if it were the minutes of a
Board or a committee meeting.
3.13 RESIGNATION
Any Director may resign from the Board or any committee of the Board at any
time by delivering either oral tender of resignation at any meeting of the
Board or any committee or written notice to the Chairman of the Board, the
President, the Secretary or the Board. Any such resignation is effective upon
delivery thereof unless the notice of resignation specifies a later effective
date and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
3.14 REMOVAL
Subject to the provisions of any agreement concerning special Board approval
or manner of action provisions which may be entered into by the shareholders
of the corporation, one or more members of the Board, including the entire
Board, may be removed with or without cause (unless the Articles of
Incorporation permit removal for cause only), at a meeting of shareholders
called expressly for that purpose, by the holders of the shares entitled to
elect the Director or Directors whose removal is sought if the number of votes
cast to remove the Director exceeds the number of votes cast not to remove the
Director (unless a greater vote is required by the Articles of Incorporation).
If the Articles of Incorporation permit cumulative voting in the election of
Directors, then a Director may not be removed if the number of votes
sufficient to elect such Director if then cumulatively voted at an election of
the entire Board or, if there are classes of Directors, at an election of the
class of Directors of which such Director is a part, is voted against the
Director's removal.
3.15 VACANCIES
Unless the Articles of Incorporation, as at any time amended, provide
otherwise, any vacancy occurring on the Board may be filled by the
shareholders, the Board or, if the Directors in office constitute fewer than a
quorum, by the affirmative vote of a majority of the remaining Directors. Any
vacant office to be held by a Director elected by the holders of one or more
classes or series of shares entitled to vote and be counted collectively
thereon shall be filled only by the vote of the holders of such class or
series of shares. A Director elected to fill a vacancy shall serve only until
the next election of Directors by the shareholders.
B-26
<PAGE>
3.16 EXECUTIVE AND OTHER COMMITTEES
3.16.1 CREATION OF COMMITTEES
The Board, by resolution adopted by the greater of a majority of the
Directors then in office and the number of Directors required to take action
in accordance with these Bylaws, may create standing or temporary committees,
including an Executive Committee, and appoint members thereto from its own
number and invest such committees with such powers as it may see fit, subject
to such conditions as may be prescribed by the Board, the Articles of
Incorporation, these Bylaws and applicable law. Each committee must have two
or more members, who shall serve at the pleasure of the Board.
3.16.2 AUTHORITY OF COMMITTEES
Each committee shall have and may exercise all of the authority of the Board
to the extent provided in the resolution of the Board creating the committee
and any subsequent resolutions and adopted in like manner, except that no such
committee shall have the authority to: (1) authorize or approve a distribution
except according to a general formula or method prescribed by the Board, (2)
approve or propose to shareholders actions or proposals required by the
Washington Business Corporation Act to be approved by shareholders, (3) fill
vacancies on the Board or any committee thereof, (4) adopt, amend or repeal
Bylaws, (5) amend the Articles of Incorporation, pursuant to RCW 23B.10.020,
(6) approve a plan of merger not requiring shareholder approval, or (7)
authorize or approve the issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences and limitations of
a class or series of shares except that the Board may authorize a committee or
a senior executive officer of the corporation to do so within limits
specifically prescribed by the Board.
3.16.3 AUDIT COMMITTEE
In addition to any committees appointed pursuant to this Section 3.16.2,
there shall be an Audit Committee, appointed annually by the Board, consisting
of at least two Directors who are not members of management. It shall be the
responsibility of the Audit Committee to review the scope and results of the
annual independent audit of books and records of the corporation, to review
compliance with all corporate policies which have been approved by the Board
and to discharge such other responsibilities as may from time to time be
assigned to it by the Board. The Audit Committee shall meet at such times and
places as the members deem advisable, and shall make such recommendations to
the Board as they consider appropriate.
3.16.4 COMPENSATION COMMITTEE
The Board may, in its discretion, designate a Compensation Committee
consisting of not less than two Directors as it may from time to time
determine. The duties of the Compensation Committee shall consist of the
following: (a) to establish and review periodically, but not less than
annually, the compensation of the officers of the corporation and to make
recommendations concerning such compensation to the Board; (b) to consider
incentive compensation plans for the employees of the corporation; (c) to
carry out the duties assigned to the Compensation Committee under any stock
option plan or other plan approved by the corporation; (d) to consult with the
President concerning any compensation matters deemed appropriate by the
President or the Compensation Committee; and (e) to perform such other duties
as shall be assigned to the Compensation Committee by the Board.
3.16.5 NOMINATING AND ORGANIZATION COMMITTEE
The Board may, in its discretion, designate a Nominating and Organization
Committee consisting of not less than two Directors as it may from time to
time determine. The duties of the Nominating and Organization Committee shall
consist of the following: (a) to report and make recommendations to the Board
on the size and composition of the Board and nominees for Directors; (b) to
evaluate the performance of the officers of the
B-27
<PAGE>
corporation and together with management, select and recommend to the Board
appropriate individuals for election, appointment and promotion as officers of
the corporation and ensure the continuity of capable management; (c) to report
and make recommendations to the Board on the organization of the corporation;
and (d) to perform such other duties as shall be assigned to the Nominating
and Organization Committee by the Board.
3.16.6 QUORUM AND MANNER OF ACTING
Subject to the provisions of any agreement concerning special Board approval
or manner of action provisions which may be entered into by the shareholders
of the corporation, a majority of the number of Directors composing any
committee of the Board, as established and fixed by resolution of the Board,
shall constitute a quorum for the transaction of business at any meeting of
such committee but, if less than a majority are present at a meeting, a
majority of such Directors present may adjourn the meeting from time to time
without further notice. Except as may be otherwise provided in the Washington
Business Corporation Act, if a quorum is present when the vote is taken the
act of a majority of the members present shall be the act of the committee.
3.16.7 MINUTES OF MEETINGS
All committees shall keep regular minutes of their meetings and shall cause
them to be recorded in books kept for that purpose.
3.16.8 RESIGNATION
Any member of any committee may resign at any time by delivering written
notice thereof to the Chairman of the Board, the President, the Secretary or
the Board. Any such resignation is effective upon delivery thereof, unless the
notice of resignation specifies a later effective date, and the acceptance of
such resignation shall not be necessary to make it effective.
3.16.9 REMOVAL
Subject to the provisions of any agreement concerning special Board approval
or manner of action provisions which may be entered into by the shareholders
of the corporation, the Board may remove any member of any committee elected
or appointed by it but only by the affirmative vote of the greater of a
majority of the Directors then in office and the number of Directors required
to take action in accordance with these Bylaws.
3.17 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 4. OFFICERS
4.1 APPOINTMENT AND TERM
The officers of the corporation shall be those officers appointed from time
to time by the Board or by any other officer empowered to do so. The Board
shall have sole power and authority to appoint executive officers. As used
herein, the term "executive officer" shall mean the President, any Vice
President in charge of a principal business unit, division or function or any
other officer who performs a policy-making function. The Board or the
President may appoint such other officers and assistant officers to hold
office for such period, have such authority
B-28
<PAGE>
and perform such duties as may be prescribed. The Board may delegate to any
other officer the power to appoint any subordinate officers and to prescribe
their respective terms of office, authority and duties. Any two or more
offices may be held by the same person. Unless an officer dies, resigns or is
removed from office, he or she shall hold office until his or her successor is
appointed.
4.2 RESIGNATION
Any officer may resign at any time by delivering written notice thereof to
the corporation. Any such resignation is effective upon delivery thereof,
unless the notice of resignation specifies a later effective date, and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
4.3 REMOVAL
Any officer may be removed by the Board at any time, with or without cause.
An officer or assistant officer, if appointed by another officer, may be
removed by any officer authorized to appoint officers or assistant officers.
4.4 CONTRACT RIGHTS OF OFFICERS
The appointment of an officer does not itself create contract rights.
4.5 CHAIRMAN OF THE BOARD
The Chairman of the Board shall be the chief executive officer of the
corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders and, subject to the
Board's control, shall supervise and control all of the assets, business and
affairs of the corporation. The Chairman of the Board may sign, with the
Secretary or an Assistant Secretary or with the Treasurer or an Assistant
Treasurer, certificates for shares of the corporation, deeds, mortgages,
bonds, contracts or other instruments, except when the signing and execution
thereof have been expressly delegated by the Board or by these Bylaws to some
other officer or agent of the corporation or are required by law to be
otherwise signed or executed by some other officer or in some other manner. In
general, the Chairman of the Board shall perform all duties incident to the
office of the chief executive officer of a corporation and such other duties
as are prescribed by the Board from time to time.
4.6 PRESIDENT
The President shall be the chief operating officer of the corporation unless
some other officer is so designated by the Board and in the event of the death
of the Chairman of the Board or his or her inability to act, the President
shall perform the duties of the Chairman of the Board, except as may be
limited by resolution of the Board, with all the powers of and subject to all
the restrictions upon the Chairman of the Board. The President may sign, with
the Secretary or any Assistant Secretary or with the Treasurer or an Assistant
Treasurer, certificates for shares of the corporation. The President shall
have, to the extent authorized by the Chairman of the Board or the Board, the
same powers as the Chairman of the Board to sign deeds, mortgages, bonds,
contracts or other instruments. The President shall perform such other duties
as from time to time may be assigned to him or her by the Chairman of the
Board or by the Board.
4.7 VICE PRESIDENT
In the event of the death of the President or his or her inability to act,
the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President,
or if no Vice President is so designated, the Vice President first elected to
such office) shall perform the duties of the President, except as may be
limited by resolution of the Board, with all the powers of and subject to all
the restrictions upon the President. Any Vice President may sign, with the
Secretary or any Assistant Secretary or with the Treasurer or any Assistant
Treasurer, certificates for shares of the corporation. Vice Presidents shall
B-29
<PAGE>
perform such other duties as from time to time may be assigned to them by the
Chairman of the Board, the President or the Board.
4.8 SECRETARY
If appointed, the Secretary shall be responsible for preparation of minutes
of the meetings of the Board and shareholders, maintenance of the corporation
records and stock registers, and authentication of the corporation's records
and shall in general perform all duties incident to the office of Secretary
and such other duties as from time to time may be assigned to him or her by
the President or by or at the direction of the Board. In the absence of the
Secretary, an Assistant Secretary may perform the duties of the Secretary.
4.9 TREASURER
If appointed, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in
banks, trust companies or other depositories selected in accordance with the
provisions of these Bylaws, and in general perform all of the duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned to him or her by the President or by or at the direction of the
Board. In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer.
4.10 SALARIES
The salaries of the officers shall be fixed from time to time by the Board
or by any person or persons to whom the Board has delegated such authority. No
officer shall be prevented from receiving such salary by reason of the fact
that he or she is also a Director of the corporation.
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of
and on behalf of the corporation. Such authority may be general or confined to
specific instances.
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the corporation and no evidences
of indebtedness shall be issued in its name unless authorized by a resolution
of the Board. Such authority may be general or confined to specific instances.
5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, or agent or agents, of the corporation and
in such manner as is from time to time determined by resolution of the Board.
5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be deposited from
time to time to the credit of the corporation in such banks, trust companies
or other depositories as the Board may select.
B-30
<PAGE>
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE O SHARES
No shares of the corporation shall be issued unless authorized by the Board,
or by a committee designated by the Board to the extent such committee is
empowered to do so.
6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed, either
manually or in facsimile, by the President or any Vice President and by the
Treasurer or any Assistant Treasurer or the Secretary or any Assistant
Secretary and shall include on their face written notice of any restrictions
which may be imposed on the transferability of such shares. All certificates
shall be consecutively numbered or otherwise identified.
6.3 STOCK RECORDS
The stock transfer books shall be kept at the principal office of the
corporation or at the office of the corporation's transfer agent or registrar.
The name and address of each person to whom certificates for shares are
issued, together with the class and number of shares represented by each such
certificate and the date of issue thereof, shall be entered on the stock
transfer books of the corporation. The person in whose name shares stand on
the books of the corporation shall be deemed by the corporation to be the
owner thereof for all purposes.
6.4 RESTRICTION ON TRANSFER
Except to the extent that the corporation has obtained an opinion of counsel
acceptable to the corporation that transfer restrictions are not required
under applicable securities laws, or has otherwise satisfied itself that such
transfer restrictions are not required, all certificates representing shares
of the corporation shall, in addition to any legends required by any agreement
concerning special Board approval or manner of action provisions which may be
entered into by the shareholders of the corporation, bear a legend on the face
of the certificate, or on the reverse of the certificate if a reference to the
legend is contained on the face, which reads substantially as follows in
addition to any legends required by any shareholder agreement:
"The securities evidenced by this certificate have not been registered
under the Securities Act of l933, as amended, or any applicable state law,
and no interest therein may be sold, distributed, assigned, offered,
pledged or otherwise transferred unless (a) there is an effective
registration statement under such Act and applicable state securities laws
covering any such transaction involving said securities or (b) this
corporation receives an opinion of legal counsel for the holder of these
securities (satisfactory to this corporation) stating that such transaction
is exempt from registration or this corporation otherwise satisfies itself
that such transaction is exempt from registration."
6.5 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed
and filed with the Secretary of the corporation. All certificates surrendered
to the corporation for transfer shall be canceled and no new certificate shall
be issued until the former certificates for a like number of shares shall have
been surrendered and canceled.
6.6 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new certificate
may be issued therefor upon such terms and indemnity to the corporation as the
Board may prescribe.
B-31
<PAGE>
SECTION 7. BOOKS AND RECORDS
The corporation shall:
(a) Keep as permanent records minutes of all meetings of its shareholders
and the Board, a record of all actions taken by the shareholders or the
Board without a meeting, and a record of all actions taken by a committee
of the Board exercising the authority of the Board on behalf of the
corporation.
(b) Maintain appropriate accounting records.
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of
shares held by each; provided, however, such record may be maintained by an
agent of the corporation.
(d) Maintain its records in written form or in another form capable of
conversion into written form within a reasonable time.
(e) Keep a copy of the following records at its principal office:
1. the Articles of Incorporation and all amendments thereto as
currently in effect;
2.the Bylaws and all amendments thereto as currently in effect;
3. the minutes of all meetings of shareholders and records of all
action taken by shareholders without a meeting, for the past
three years;
4. the financial statements described in Section 23B.16.200(1) of
the Washington Business Corporation Act, for the past three
years;
5. all written communications to shareholders generally within the
past three years;
6. a list of the names and business addresses of the current
Directors and officers; and
7. the most recent annual report delivered to the Washington
Secretary of State.
SECTION 8. ACCOUNTING YEAR
The accounting year of the corporation shall be the fiscal year ending on
the last Friday in September, provided that if a different accounting year is
at any time selected by the Board for purposes of federal income taxes, or any
other purpose, the accounting year shall be the year so selected.
SECTION 9. SEAL
The Board may provide for a corporate seal which shall consist of the name
of the corporation, the state of its incorporation and the year of its
incorporation.
SECTION 10. INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was, is or is threatened to be made a party to or is
otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit, claim or proceeding, whether
civil, criminal, administrative or investigative and whether formal or
informal (hereafter a "proceeding"), by reason of the fact that he or she is
or was a Director or officer of the corporation or, that being or having been
such a Director or officer or an employee of the corporation, he or she is or
was serving at the request of the corporation as a Director, officer, partner,
trustee, employee or agent of another corporation or of a partnership, joint
venture, trust, employee benefit plan or other enterprise (hereinafter an
"indemnitee"), whether the basis of a proceeding is alleged action in an
official capacity or in any other capacity while serving as such a Director,
officer, partner,
B-32
<PAGE>
trustee, employee or agent, shall be indemnified and held harmless by the
corporation against all losses, claims, damages (compensatory, exemplary,
punitive or otherwise), liabilities and expenses (including attorneys' fees,
costs, judgments, fines, ERISA excise taxes or penalties and amounts to be
paid in settlement and any other expenses) actually and reasonably incurred or
suffered by such indemnitee in connection therewith, and such indemnification
shall continue as to an indemnitee who has ceased to be a Director, officer or
employee of the Company or a Director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and shall inure to the benefit of the
indemnitee's heirs, executors and administrators. Except as provided in
subsection 10.4 of this Section with respect to proceedings seeking to enforce
rights to indemnification, the corporation shall indemnify any such indemnitee
in connection with a proceeding (or part thereof) initiated by such indemnitee
only if a proceeding (or part thereof) was authorized or ratified by the
Board. The right to indemnification conferred in this Section shall be a
contract right.
10.2 RESTRICTIONS ON INDEMNIFICATION
No indemnification shall be provided to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to
which the indemnitee was not legally entitled or if the corporation is
otherwise prohibited by applicable law from paying such indemnification.
Notwithstanding the foregoing, if Section 23B.08.560 or any successor
provision of the Washington Business Corporation Act is hereafter amended, the
restrictions on indemnification set forth in this subsection 10.2 shall be as
set forth in such amended statutory provision.
10.3 ADVANCEMENT OF EXPENSES
The right to indemnification conferred in this Section shall include the
right to be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). An advancement of expenses shall be made upon delivery to the
corporation of an undertaking (hereinafter an "undertaking"), by or on behalf
of such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified.
10.4 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 10.1 or 10.3 of this Section is not paid in full
by the corporation within 60 days after a written claim has been received by
the corporation, except in the case of a claim for an advancement of expenses,
in which case the applicable period shall be 20 days, the indemnitee may at
any time thereafter bring suit against the corporation to recover the unpaid
amount of the claim. If successful in whole or in part, in any such suit or in
a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to
be paid also the expense of litigating such suit. The indemnitee shall be
presumed to be entitled to indemnification under this Section upon submission
of a written claim (and, in an action brought to enforce a claim for an
advancement of expenses, when the required undertaking has been tendered to
the corporation) and thereafter the corporation shall have the burden of proof
to overcome the presumption that the indemnitee is so entitled.
10.5 PROCEDURES EXCLUSIVE
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and
the advancement of expenses set forth in this Section are in lieu of the
procedures required by Section 23B.08.550 or any successor provision of the
Washington Business Corporation Act.
B-33
<PAGE>
10.6 NONEXCLUSIVITY OF RIGHTS
Except as set forth in subsection 10.5, the right to indemnification and the
advancement of expenses conferred in this Section shall not be exclusive of
any other right that any person may have or hereafter acquire under any
statute, provision of the Articles of Incorporation or the Bylaws of the
corporation, general or specific action of the Board or shareholders, contract
or otherwise.
10.7 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect itself
and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise against any expense, liability or
loss, whether or not the corporation would have the authority or right to
indemnify such person against such expense, liability or loss under the
Washington Business Corporation Act or other law. The corporation may enter
into contracts with any Director, officer, partner, trustee, employee or agent
of the corporation in furtherance of the provisions of this Section and may
create a trust fund, grant a security interest or use other means (including,
without limitation, a letter of credit) to ensure the payment of such amounts
as may be necessary to effect indemnification as provided in this Section.
10.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
In addition to the rights of indemnification set forth in subsection 10.1,
the corporation may, by action of the Board, grant rights to indemnification
and advancement of expenses to employees and agents or any class or group of
employees and agents of the corporation (a) with the same scope and effect as
the provisions of this Section with respect to indemnification and the
advancement of expenses of Directors and officers of the corporation; (b)
pursuant to rights granted pursuant to, or provided by, the Washington
Business Corporation Act; or (c) as are otherwise consistent with law.
10.9 PERSONS SERVING OTHER ENTITIES
Any person who, while a Director, officer or employee of the corporation, is
or was serving (a) as a Director, officer, employee or agent of another
corporation of which a majority of the shares entitled to vote in the election
of its directors is held by the corporation or (b) as a partner, trustee or
otherwise in an executive or management capacity in a partnership, joint
venture, trust, employee benefit plan or other enterprise of which the
corporation or a wholly owned subsidiary of the corporation is a general
partner or has a majority ownership shall conclusively be deemed to be so
serving at the request of the corporation and entitled to indemnification and
the advancement of expenses under subsections 10.1 and 10.3 of this Section.
SECTION 11. AMENDMENTS
Subject to the provisions of any agreement concerning special Board approval
or manner of action provisions which may be entered into by the shareholders
of the corporation, these Bylaws may be altered, amended or repealed and new
Bylaws may be adopted by the Board, except that the Board may not repeal or
amend any Bylaw that the shareholders have expressly provided, in amending or
repealing such Bylaw, may not be amended or repealed by the Board. The
shareholders may also alter, amend and repeal these Bylaws or adopt new
Bylaws. All Bylaws made by the Board may be amended, repealed, altered or
modified by the shareholders.
The foregoing Bylaws were adopted by the Board of Directors on April 22,
1998.
/s/ Robert J. Mortell, Jr.
By___________________________________
Title: President
B-34
<PAGE>
ANNEX C: CHAPTER 23B.13 OF THE
WASHINGTON BUSINESS CORPORATION ACT
(DISSENTERS' RIGHTS)
23B.13.010 DEFINITIONS
As used in this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger
or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under RCW 23B.13.020 and who exercises that right when and in the
manner required by RCW 23B.13.200 through 23B.13.280.
(3) "Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be
inequitable.
(4) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is
fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
23B.13.020 RIGHT TO DISSENT
(1) A shareholder is entitled to dissent from, and obtain payment of the fair
value of the shareholder's shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
(i) if shareholder approval is required for the merger by RCW
23B.11.030, 23B.11.080, or the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the
corporation is a subsidiary that is merged with its parent under RCW
23B.11.040;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within one year after the date of sale;
(d) An amendment of the articles of incorporation that materially reduces
the number of shares owned by the shareholder to a fraction of a share
if the fractional share so created is to be acquired for cash under RCW
23B.06.040; or
(e) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled
to dissent and obtain payment for their shares.
C-1
<PAGE>
(2) A shareholder entitled to dissent and obtain payment for the shareholder's
shares under this chapter may not challenge the corporate action creating
the shareholder's entitlement unless the action fails to comply with the
procedural requirements imposed by this title, RCW 25.10.900 through
25.10.955, the articles of incorporation, or the bylaws, or is fraudulent
with respect to the shareholder or the corporation.
(3) The right of a dissenting shareholder to obtain payment of the fair value
of the shareholder's shares shall terminate upon the occurrence of any one
of the following events:
(a) The proposed corporate action is abandoned or rescinded;
(b) A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
(c) The shareholder's demand for payment is withdrawn with the written
consent of the corporation.
23B.13.030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer than all
shares registered in the shareholder's name only if the shareholder
dissents with respect to all shares beneficially owned by any one person
and notifies the corporation in writing of the name and address of each
person on whose behalf the shareholder asserts dissenters' rights. The
rights of a partial dissenter under this subsection are determined as if
the shares as to which the dissenter dissents and the dissenter's other
shares were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of which
such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
23B.13.200 NOTICE OF DISSENTERS' RIGHTS
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this chapter and be accompanied by a copy of this
chapter.
(2) If corporate action creating dissenters' rights under RCW 23B.13.020 is
taken without a vote of shareholders, the corporation, within ten days
after effective date of such corporate action, shall notify in writing all
shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in RCW 23B.13.220.
23B.13.210 NOTICE OF INTENT TO DEMAND PAYMENT
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights must (a) deliver to
the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
proposed action is effected, and (b) not vote such shares in favor of the
proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section is not entitled to payment for the shareholder's shares under
this chapter.
23B.13.220 DISSENTERS' NOTICE
(1) If proposed corporate action creating dissenters' rights under RCW
23B.13.020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of RCW 23B.13.210.
C-2
<PAGE>
(2) The dissenters' notice must be sent within ten days after the effective
date of the corporate action, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired
beneficial ownership of the shares before that date;
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after
the date the notice in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this chapter.
23B.13.230 DUTY TO DEMAND PAYMENT
(1) A shareholder sent a dissenters' notice described in RCW 23B.13.220 must
demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to RCW 23B.13.220(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's share
certificates under subsection (1) of this section retains all other rights
of a shareholder until the proposed corporate action is effected.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
23B.13.240 SHARE RESTRICTIONS
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed
corporate action is effected or the restriction is released under RCW
23B.13.260.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until the effective date
of the proposed corporate action.
23B.13.250 PAYMENT
(1) Except as provided in RCW 23B.13.270, within thirty days of the later of
the effective date of the proposed corporate action, or the date the
payment demand is received, the corporation shall pay each dissenter who
complied with RCW 23B.13.230 the amount the corporation estimates to be
the fair value of the shareholder's shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity
for that year, and the latest available interim financial statements,
if any;
(b) An explanation of how the corporation estimated the fair value of the
shares;
(c) An explanation of how the interest was calculated;
C-3
<PAGE>
(d) A statement of the dissenter's right to demand payment under RCW
23B.13.280; and
(e) A copy of this chapter.
23B.13.260 FAILURE TO TAKE ACTION
(1) If the corporation does not effect the proposed action within sixty days
after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release any transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation wishes to undertake the proposed action, it
must send a new dissenters' notice under RCW 23B.13.220 and repeat the
payment demand procedure.
23B.13.270 AFTER-ACQUIRED SHARES
(1) A corporation may elect to withhold payment required by RCW 23B.13.250
from a dissenter unless the dissenter was the beneficial owner of the
shares before the date set forth in the dissenters' notice as the date of
the first announcement to news media or to shareholders of the terms of
the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under subsection
(1) of this section, after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall
pay this amount to each dissenter who agrees to accept it in full
satisfaction of the dissenter's demand. The corporation shall send with
its offer an explanation of how it estimated the fair value of the shares,
an explanation of how the interest was calculated, and a statement of the
dissenter's right to demand payment under RCW 23B.13.280.
23B.13.280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
(1) A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of
interest due, and demand payment of the dissenter's estimate, less any
payment under RCW 23B.13.250, or reject the corporation's offer under RCW
23B.13.270 and demand payment of the dissenter's estimate of the fair
value of the dissenter's shares and interest due, if:
(a) The dissenter believes that the amount paid under RCW 23B.13.250 or
offered under RCW 23B.13.270 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under RCW 23B.13.250 within sixty
days after the date set for demanding payment; or
(c) The corporation does not effect the proposed action and does not return
the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in
writing under subsection (1) of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.
23B.13.300 COURT ACTION
(1) If a demand for payment under RCW 23B.13.280 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the court to determine the fair value of
the shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
C-4
<PAGE>
(2) The corporation shall commence the proceeding in the superior court of the
county where a corporation's principal office, or, if none in this state,
its registered office, is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of
the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled, parties to the proceeding as
in an action against their shares and all parties must be served with a
copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(4) The corporation may join as a party to the proceeding any shareholder who
claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this chapter. If the court
determines that such shareholder has not complied with the provisions of
this chapter, the shareholder shall be dismissed as a party.
(5) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to it.
The dissenters are entitled to the same discovery rights as parties in
other civil proceedings.
(6) Each dissenter made a party to the proceeding is entitled to judgment (a)
for the amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
corporation, or (b) for the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which the corporation elected to
withhold payment under RCW 23B.13.270.
23B.13.310 COURT COSTS AND COUNSEL FEES
(1) The court in a proceeding commenced under RCW 23B.13.300 shall determine
all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the
costs against the corporation, except that the court may assess the costs
against all or some of the dissenters, in amounts the court finds
equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under RCW
23B.13.280.
(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of RCW 23B.13.200 through 23B.13.280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by chapter 23B.13 RCW.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation,
the court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
C-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on
terms sufficiently broad to permit indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Bylaws (the "Bylaws")
provides for indemnification of the registrant's directors, officers,
employees and agents to the maximum extent permitted by Washington law.
Section 23B.08.320 of the WBCA authorizes a corporation to eliminate or
limit a director's personal liability to the corporation or its shareholders
for monetary damages for conduct as a director, except in certain
circumstances involving acts or omissions, intentional misconduct by a
director or knowing violations of law by a director or distributions illegal
under Washington law, or any transaction from which the director will
personally receive a benefit in money, property or services to which the
director is no legally entitled. Article 8 of the registrant's Articles of
Incorporation (the "Articles of Incorporation") contains provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
The above discussion of the WBCA and the registrant's Bylaws and Articles of
Incorporation is not intended to be exhaustive and is qualified in its
entirety by reference to such statute, the Bylaws and the Articles of
Incorporation.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of May 29, 1998 (attached to
Proxy Statement/Prospectus as Annex A).
3.1 Articles of Incorporation of Ragen MacKenzie Group Incorporated
(attached to Proxy Statement/Prospectus as Annex B).
3.2 Bylaws of Ragen MacKenzie Group Incorporated (attached to Proxy
Statement/Prospectus as Annex B).
5.1 Opinion of Perkins Coie LLP as to the legality of the securities
being registered.
8.1 Opinion of Perkins Coie LLP regarding tax matters.
10.1+ Master Note of Ragen MacKenzie Incorporated in favor of Bank America
National Trust and Savings Association, dated July 9, 1997.
10.2+ Security Agreement between Ragen MacKenzie Incorportated and Bank
America National Trust and Savings Association, dated October 14,
1995.
10.3+ Lease Agreement between Wright-Carlyle Seattle and Ragen MacKenzie
Incorporated, 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 the registrant 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 Ragen
MacKenzie Incorporated and Brooks G. Ragen, executed April 17, 1998.
10.6+ Agreement and Release between Ragen MacKenzie Incorporated and Scott
McAdams, dated March 22, 1998.
10.7+ Ragen MacKenzie Incorporated 1989 Stock Option Plan.
10.8+ Ragen MacKenzie Incorporated 1993 Stock Option Plan.
10.9+ Ragen MacKenzie Incorporated 1996 Stock Incentive Compensation Plan.
10.10+ Ragen MacKenzie Incorporated 1997 Share Repurchase Plan.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.11 Ragen MacKenzie Group Incorporated 1998 Stock Incentive Compensation
Plan.
10.12+ ABC Brokerage Accounting System Agreement between Pershing Division
of Donaldson, Lufkin & Jenrette Securities Corporation and Ragen
MacKenzie Incorporated, dated April 1, 1997.
10.13 Employment Agreement between Ragen MacKenzie Incorporated and Mark
A. McClure, dated June 16, 1994, as amended by an addendum dated
June 3, 1997.
10.14 Ragen MacKenzie Group Incorporated Employee Stock Purchase Plan
10.15 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Mark
McClure dated June 16, 1994.
10.16 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Mark
McClure dated February 25, 1997.
10.17 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Stan
Freimuth dated April 29, 1996.
10.18 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Stan
Freimuth dated June 11, 1996.
21.1+ Subsidiaries of the registrant
23.1 Consent of Perkins Coie LLP (contained in opinion filed as Exhibit
5.1 hereto)
23.2 Consent of Deloitte & Touche LLP
23.3+ Consent of Arthur W. Harrigan, Jr.
23.4+ Consent of Kirby L. Cramer
23.5+ Consent of Peter B. Madoff
23.6 Consent of Gregory B. Maffei
24.1+ Power of Attorney
27.1+ Financial Data Schedule
99.1 Form of Proxy
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(b) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being
II-2
<PAGE>
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form S-4, within one business day of receipt
of such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Seattle, State of Washington, on the 29th day of May, 1998.
RAGEN MACKENZIE GROUP INCORPORATED
/s/ Robert J. Mortell, Jr.
By: _________________________________
Robert J. Mortell, Jr.
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to this Registration Statement has been signed by the
following persons in the capacities indicated below on the 29th day of May,
1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
Lesa A. Sroufe * Chairman of the Board and Chief
______________________________________ Executive Officer (Principal
Lesa A. Sroufe Executive Officer)
/s/ Robert J. Mortell, Jr. President, Chief Operating Officer,
______________________________________ Treasurer and Director
Robert J. Mortell, Jr.
V. Lawerance Bensussen * Senior Vice President, Chief Financial
______________________________________ Officer and Secretary (Principal
V. Lawrence Bensussen Financial and Accounting Officer)
Mark A. McClure* Executive Vice President and Director
______________________________________
Mark A. McClure
John L. MacKenzie* Director
______________________________________
John L. MacKenzie
</TABLE>
/s/ Robert J. Mortell, Jr.
*By: _______________________
Robert J. Mortell, Jr.
Attorney-in-Fact
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger dated as of May 29, 1998 (attached to
Proxy Statement/Prospectus as Annex A).
3.1 Articles of Incorporation of Ragen MacKenzie Group Incorporated
(attached to Proxy Statement/Prospectus as Annex B).
3.2 Bylaws of Ragen MacKenzie Group Incorporated (attached to Proxy
Statement/Prospectus as Annex B).
5.1 Opinion of Perkins Coie LLP as to the legality of the securities
being registered.
8.1 Opinion of Perkins Coie LLP regarding tax matters.
10.1+ Master Note of Ragen MacKenzie Incorporated in favor of Bank America
National Trust and Savings Association, dated July 9, 1997.
10.2+ Security Agreement between Ragen MacKenzie Incorporated and Bank
America National Trust and Savings Association, dated October 14,
1995.
10.3+ Lease Agreement between Wright-Carlyle Seattle and Ragen MacKenzie
Incorporated, 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 the registrant 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 Ragen
MacKenzie Incorporated and Brooks G. Ragen, executed April 17, 1998.
10.6+ Agreement and Release between Ragen MacKenzie Incorporated and Scott
McAdams, dated March 22, 1998.
10.7+ Ragen MacKenzie Incorporated 1989 Stock Option Plan.
10.8+ Ragen MacKenzie Incorporated 1993 Stock Option Plan.
10.9+ Ragen MacKenzie Incorporated 1996 Stock Incentive Compensation Plan.
10.10+ Ragen MacKenzie Incorporated 1997 Share Repurchase Plan.
10.11 Ragen MacKenzie Group Incorporated 1998 Stock Incentive Compensation
Plan.
10.12+ ABC Brokerage Accounting System Agreement between Pershing Division
of Donaldson, Lufkin & Jenrette Securities Corporation and Ragen
MacKenzie Incorporated, dated April 1, 1997.
10.13 Employment Agreement between Ragen MacKenzie Incorporated and Mark
A. McClure, dated June 16, 1994, as amended by an addendum dated
June 3, 1997.
10.14 Ragen MacKenzie Group Incorporated Employee Stock Purchase Plan
10.15 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Mark
McClure dated June 16, 1994.
10.16 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Mark
McClure dated February 25, 1997.
10.17 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Stan
Freimuth dated April 29, 1996.
10.18 Ragen MacKenzie Incorporated Agreement to Grant Stock Option to Stan
Freimuth dated June 11, 1996.
21.1+ Subsidiaries of the registrant
23.1 Consent of Perkins Coie LLP (contained in opinion filed as Exhibit
5.1 hereto)
23.2 Consent of Deloitte & Touche LLP
23.3+ Consent of Arthur W. Harrigan, Jr.
23.4+ Consent of Kirby L. Cramer
23.5+ Consent of Peter B. Madoff
23.6 Consent of Gregory B. Maffei
24.1+ Power of Attorney
27.1+ Financial Data Schedule
99.1 Form of Proxy
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 5.1
June 1, 1998
Ragen MacKenzie Group Incorporated
999 Third Avenue, Suite 4300
Seattle, WA 98104
Gentlemen and Ladies:
We have acted as counsel to you in connection with the proceedings for the
authorization and issuance by Ragen MacKenzie Group Incorporated (the "Company")
of (i) up to 12,034,015 shares (the "Class B Shares") of the Company's Class B
common stock, par value $.01 per share, (ii) up to 274,176 shares (the "Class C
Shares") of the Company's Class C common stock, par value $.01 per share, and
(iii) up to 215,250 shares (the "Class D Shares") of the Company's Class D
common stock (the Class D Shares, the Class C Shares and Class B Shares are
hereinafter collectively referred to as the "Common Shares"), pursuant to the
terms of the Agreement and Plan of Merger dated as of May 29, 1998 (the "Merger
Agreement") by and among the Company, Ragen MacKenzie Incorporated ("RMI") and
RMGI Merger Corp. ("Merger Sub"), and the preparation and filing of a
registration statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, which you are filing with the Securities and Exchange
Commission with respect to the Common Shares.
We have examined the Registration Statement and such documents and records
of the Company and other documents as we have deemed necessary for the purpose
of this opinion.
Based upon the foregoing, we are of the opinion that upon the happening of
the following events:
(a) due action by the holders of common stock of each of RMI and Merger
Sub, approving the Merger Agreement;
(b) the filing of the Registration Statement and any amendments thereto
and the effectiveness of the Registration Statement:
<PAGE>
June 1, 1998
Page 2
(c) the filing by RMI and/or Merger Sub of all documents required to be
filed with the appropriate governmental entities of the State of
Washington;
(d) satisfaction or waiver of all conditions precedent set forth in the
Merger Agreement; and
(e) due execution by the Company and registration by its registrar of the
Common Shares, and the issuance and sale of the Common Shares as
contemplated by the Registration Statement and in accordance with the
aforesaid shareholder and governmental authorization,
the Common Shares will be duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm in the Proxy
Statement/Prospectus of the Registration Statement under the headings "Legal
Opinion" and "Tax Opinion."
Very truly yours,
/s/ PERKINS COIE LLP
Perkins Coie LLP
<PAGE>
EXHIBIT 8.1
June 1, 1998
Ragen MacKenzie Incorporated
999 Third Avenue, Suite 4300
Seattle, Washington 98104
ATTN: V. Lawrence Bensussen
Senior Vice President and Chief Financial
Officer
RE: AGREEMENT AND PLAN OF MERGER BETWEEN RMI AND HOLDING COMPANY
Ladies and Gentlemen:
We have been asked, as counsel to Ragen MacKenzie Incorporated, a
Washington corporation ("RMI"), to render this opinion regarding the material
U.S. federal income tax consequences to RMI shareholders of the merger (the
"Merger") of RMGI Merger Corp. (the "Subsidiary"), a Washington corporation and
100% subsidiary of Ragen MacKenzie Group Incorporated (the "Holding Company"),
with and into RMI pursuant to that certain Agreement and Plan of Merger, dated
as of May 29, 1998 by and between RMI, the Subsidiary and the Holding Company
(the "Agreement"). Capitalized terms not otherwise defined herein shall have
the same meanings given to them in the Agreement or, if not defined therein, as
described in the Registration Statement on Form S-4 initially filed with the
Securities and Exchange Commission on April 17, 1998 relating to the Merger, as
amended from time to time (the "S-4").
In connection with our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the relevant documents related to the Merger, including the Agreement and the S-
4. Furthermore, we have examined that certain RMI Tax Matters Certificate,
dated as of the date hereof, the form of which is attached hereto as Exhibit A
(the "RMI Tax Certificate").
Our opinion is conditioned on, among other things, the initial and
continuing accuracy of the facts, information, covenants and representations set
forth in the documents referred to above and the representations given by RMI in
the RMI Tax Certificate. In rendering our opinion we have assumed and relied
upon the accuracy of all information and representations and the performance of
all undertakings contained in the reviewed documents as set forth above, the
conformity of all copies to the original documents, and the genuineness of all
signatures. We have not attempted to verify independently the accuracy of any
information in any such document, and we have assumed that such documents
accurately and completely set forth all material facts
<PAGE>
relevant to this opinion. If any of these facts or assumptions are not correct,
please advise us at once as our advice may be affected by a change in such facts
or assumptions.
Opinion. It is our opinion that, subject to the foregoing and the
limitations set forth in the S-4 or discussed below, the material federal income
tax consequences of the Merger for a holder of RMI Stock who is a citizen or
resident of the United States are as follows:
(i) The Merger will be treated as a reorganization under Section 368
of the Code or as an exchange under Section 351(a) of the Code,
(ii) No gain or loss will be recognized by a shareholder of RMI solely
as a result of the conversion of RMI Stock solely into Reorganization Common
Stock pursuant to the Merger,
(iii) The tax basis of the Reorganization Common Stock received by
each shareholder pursuant to the Merger will be same as such shareholder's tax
basis in RMI Stock converted in the Merger, and
(iv) The holding period of such Reorganization Common Stock will
include the period during which such shareholder held RMI Stock converted in the
Merger.
However, as discussed above and as indicated in the S-4, if any of the
assumptions or representations set forth above prove incorrect, then the
conclusions set forth above may not be accurate, with the consequences discussed
in the S-4 under the heading "PROPOSAL 1: THE REORGANIZATION - Material Federal
Income Tax Consequences."
Limitations. Our opinion is limited to the specific matters and subject to
the qualifications described in the S-4 under the caption "PROPOSAL 1: THE
REORGANIZATION - Material Federal Income Tax Consequences." We give no opinion
with respect to other tax matters, whether federal, state or local, that may
relate to the Merger. Our opinion may not address issues that are material to
an individual shareholder based on his or her particular tax situation. No
ruling will be requested from the Internal Revenue Service ("IRS") regarding the
Merger. Our opinion is not binding on the IRS and does not constitute a
guarantee that the IRS will not challenge the tax treatment of the Merger.
In rendering our opinion, we have considered the applicable provisions of
the Code, Treasury Regulations promulgated thereunder and the pertinent judicial
and administrative authorities. We caution that our opinion is based on the
federal income tax laws as they exist on the date hereof. It is possible that
subsequent changes in the tax law could be enacted and applied retroactively to
the Merger and that such changes could result in a materially different result
than the result described in the opinions above. We do not assume the
obligation to tell the Company of any such changes.
2
<PAGE>
This opinion is furnished in connection with the Merger. We consent to the
reference to our firm under the caption "SUMMARY--Material Federal Income Tax
Consequences" and "PROPOSAL 1: THE REORGANIZATION--Material Federal Income Tax
Consequences" and to the filing of this opinion as an exhibit to the S-4.
Very truly yours,
PERKINS COIE LLP
3
<PAGE>
EXHIBIT 10.5
RAGEN MACKENZIE INCORPORATED
BROOKS G. RAGEN
SEVERANCE AND CORRESPONDENT CLEARING
AGREEMENT
This Agreement is entered into by and between Brooks G. Ragen ("Mr. Ragen")
and Ragen MacKenzie Incorporated (the "Company").
RECITALS
A. Mr. Ragen was a founder, chairman and chief executive officer of the
Company and its predecessor entity, is the Company's largest shareholder, and is
the senior employee of the Company.
B. Both Mr. Ragen and the Company desire to establish a new relationship
between them in the anticipation of an initial public offering of equity
securities of the Company's parent corporation, Ragen MacKenzie Group
Incorporated (the "Holding Company").
AGREEMENT
Now, therefore, in consideration of the foregoing recitals and mutual
covenants contained below, the parties agree as follows:
1. ESTABLISHMENT OF INDEPENDENT CORPORATION
1.1 CREATION OF NEWCO
Mr. Ragen intends to and, subject to the May 15 election set forth below,
will promptly take all commercially reasonable steps to form a new corporation
or other entity ("NewCo") which will, beginning on a date (the "NewCo Employment
Date") no earlier than immediately following the IPO Closing Date (as defined
below) and no later than January 1, 1999, employ Mr. Ragen and certain members
of Mr. Ragen's working team at Ragen MacKenzie, as more precisely described
below.
1.2 EMPLOYEE DURING INTERIM
Through December 31, 1998, or such earlier date as permitted by Section 1.2
below, Mr. Ragen will continue to be an employee of the Company; provided,
however, that although Mr. Ragen intends to form NewCo as provided in this
<PAGE>
Section 1.2, nothing herein either requires him to terminate his employment with
the Company should he choose to stay (although Mr. Ragen acknowledges that he,
like other employees, is employed at will by the Company and subject to
termination as an "at will employee") or prevent him from retiring (subject to
the provisions of Section 10). Mr. Ragen will continue to be a positive and
constructive employee of the Company until the NewCo Employment Date. On or
before May 15, 1998, Mr. Ragen will give to the Company a binding, written
election, subject to regulatory and third party approval, as to which Mr.
Ragen's obligations shall be best efforts only, to form NewCo (and, subject to
regulatory approval, whether as a clearing customer or an independent
contractor) or to remain as an employee. Mr. Ragen and the Company will
amicably cooperate to find appropriate (high, west-side view) office space for
NewCo. Unless the parties agree otherwise, this space shall be located closely
to, but not, unless the parties agree, within, the 999 Third Avenue Building.
The parties shall work professionally and amicably toward a budget for the
build-out of this new space, which shall include a contribution toward a tenant
improvement budget by the Company of $40,000. Mr. Ragen currently intends, and
the parties shall work amicably to seek a NewCo opening in its new space on
October 1, 1998, which shall in no event open later than January 1, 1999. The
Company will make available to Mr. Ragen its resources for the formation of a
new branch, clearing customer or independent contractor, including personnel, in
order to facilitate Mr. Ragen's efforts to make his election with respect to
NewCo.
1.3 STATUS OF NEWCO
It is Mr. Ragen's intent that NewCo will register as an independent broker-
dealer and/or investment advisor with the appropriate state, federal and self-
regulatory entities, including the Securities and Exchange Commission (the
"SEC"), the National Association of Securities Dealers (the "NASD"), and related
entities. NewCo will file Focus reports, have its own operations staff, conduct
annual audits, and comply with other applicable regulatory requirements.
However, at Mr. Ragen's option, NewCo may be structured as an independent
contractor relationship with the Company which would not involve such
requirements.
1.4 NEWCO BUSINESS DURING TERM
For a 36 month period (the "Term") which beings on the date of the closing
(the "IPO Closing Date") of the Holding Company IPO (as defined below), and
except as set forth at Section 1.5 below, all categories of NewCo's and Mr.
Ragen's SEC and NASD regulated business will be conducted by means of a
clearing agreement (or, as specifically set forth herein, an independent
contractor agreement) with the Company, except as set forth in the following
sentence. As an exception to the foregoing sentence, NewCo may:
-2-
<PAGE>
(a) conduct business with Knowlton Brothers (subject to payment of
investment advisory fees as described below);
(b) engage in merger and acquisition advisory and private placement
services ("Corporate Finance"), beginning at the Commencement Date (as defined
below); and
(c) effect trades of municipal bonds solely as permitted at Section
1.5 below.
From the IPO Closing Date through the NewCo Employment Date, all activities
described in this Section 1.4 will be conducted by Mr. Ragen as an employee of
the Company. Beginning on the NewCo Employment Date through the balance of the
Term, these activities will be conducted with Mr. Ragen as an employee of NewCo.
1.5. MUNICIPAL BOND TRADING
Mr. Ragen and NewCo shall have and shall follow a policy that during the
Term all trades of municipal bonds will be conducted through the Company's
municipal bond trading desk so long as the Company provides reasonably
competitive market prices, and fulfills all applicable regulatory obligations.
1.6 NO COMPETITION EXCEPT WITHIN NEWCO
Mr. Ragen agrees that except as permitted in his employment by NewCo or as
permitted under this Agreement, he will not, directly or indirectly, during
the Term, be employed by, consult with or otherwise perform services for, own,
manage, operate, join, control or participate in the ownership, management,
operation or control of or be connected with, in any manner, any organization
which, by reason of its activities as a broker, dealer, investment advisor,
investment company or related business (other than with the Knowlton Brothers as
provided herein), is subject to regulation by the SEC and which conducts
business in any state or province in which the Company conducts business (a
"Competitor"). Mr. Ragen shall be deemed to be related to or connected with a
competitor if such Competitor is (a) a partnership in which Mr. Ragen is a
general or limited partner or employee, (b) a corporation or association of
which Mr. Ragen is a shareholder, officer, employee or director, or (c) a
partnership, corporation or association of which Mr. Ragen is a member,
consultant or agent; provided, however, that nothing herein shall prevent the
-------- -------
purchase or ownership by Mr. Ragen of shares which constitute less than ten
percent of the outstanding equity securities of a publicly or privately held
corporation, if Mr. Ragen has no other relationship with such corporation;
provided, further, that serving as an independent outside director of an entity
that is or owns a Competitor, shall be permitted and not in violation of this
Agreement.
-3-
<PAGE>
2. RECRUITMENT OF TEAM; NONSOLICITATION, NONDISPARAGEMENT AND NONDISCLOSURE
2.1 TEAM
The Company and Mr. Ragen will jointly notify Company employees Cameron
Ragen, Barbara Powell, Lauri Taft, Kelly Bitner and Nancy Davidson (together the
"Team") that each of them is free to either remain as an employee of the
Company, or to join NewCo as an employee commencing January 1, 1999 (or any
earlier NewCo Employment Date). Neither the Company nor Mr. Ragen will exert
pressure on these individuals to make a choice, but shall permit each to freely
make a decision with respect to his or her employment relationship.
2.2 TEAM NONCOMPETITION OBLIGATIONS
The Company will amend any employment or noncompetition agreement entered
into by any of the Team to provide for that individual's ability to compete with
the Company solely as an employee of NewCo and subject to limitation, and
benefits substantially equivalent to those of Mr. Ragen under this Agreement.
2.3 SCOTT MCADAMS
The Company agrees that Scott McAdams may work in the following manner as
an employee of NewCo. First, he may act strictly in an administrative capacity
to oversee the formation, regulatory compliance, capitalization and otherwise
administratively assist in the creation and establishment of NewCo until the
NewCo Employment Date. Second, beginning October 1, 1998, (or the NewCo
Employment Date, if earlier) Mr. McAdams may begin to prepare for the
commencement of his research operations at NewCo, including preparing research
reports to be issued following the NewCo Employment Date; in no event, however,
shall NewCo, through Mr. McAdams, or otherwise, publish research reports, or
otherwise engage in acts of trade or business until the NewCo Employment Date.
Except as otherwise provided pursuant to Sections 4.1, 4.2 or 4.4 hereof, Mr.
McAdams will refrain from contacting the Company's customers, from making public
announcements, being publicly interviewed, or otherwise publicly associated with
NewCo prior to the NewCo Employment Date.
The Company will amend its severance agreement with Mr. McAdams to provide
an amendment to and waiver of Mr. McAdams' obligations so as to provide for Mr.
McAdams' ability to compete with the Company to the extent that he does so
consistent with this Section 2.3.
-4-
<PAGE>
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, 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.
2.5 NONSOLICITATION
During the Term, except as set forth in Sections 2.1 through 2.4 or
Sections 4.1 or 4.2, hereof, neither Mr. Ragen nor NewCo shall directly or
indirectly hire, retain, engage, accept as employees or consultants, solicit,
influence or entice, or attempt to hire, retain, engage, solicit, influence or
entice, any employee or consultant of the Company to cease his or her
relationship with the Company or solicit, influence, entice or in any way divert
any customer, distributor, partner, joint venturer or supplier of the Company to
do business or in any way become associated with any Competitor except (with
respect to distributors or suppliers) NewCo which may do business with such
distributor or supplier on a nonexclusive basis. Both NewCo and the Company may
accept and service (without solicitation) customers who are also customers of
the other. This subsection 2.5 shall apply during the Term and with respect to
any state or province in which the Company current conducts business.
2.6 NONDISPARAGEMENT
Neither Mr. Ragen (on his own behalf and on behalf of NewCo) nor the
Company (on its behalf and on behalf of its officers and directors and the
Holding Company and its officers and directors), will, during the Term, make any
statements that disparage or damage the reputation of the other, the other's
directors, officers, employees and representatives. For purposes of Section
2.4 and Section 2.5 hereof, "the Company" shall include any subsidiaries of the
Company (whether existing currently or in the future), any parent corporation of
the Company and any business ventures in which the Company, its subsidiaries or
its parent corporation may participate.
2.7 NONDISCLOSURE; RETURN OF MATERIALS
During the term of Mr. Ragen's employment by the Company and following
termination of such employment, Mr. Ragen will not disclose (except as required
by Mr. Ragen's duties to the Company), any confidential or proprietary concept,
design, process, technology, trade secret, customer list, plan, embodiment, or
invention, any other confidential or proprietary intellectual property or any
other confidential information, whether patentable or not, of the Company or its
affiliates of which
-5-
<PAGE>
Mr. Ragen becomes informed or aware during Mr. Ragen's employment, whether or
not developed by Mr. Ragen; provided, however, that Mr. Ragen and NewCo shall
have access to and, as appropriate, copies or originals of Mr. Ragen's and the
Team's present accounts and information as the parties shall amicably and
equitably agree to be reasonable and appropriate to permit the full servicing of
the Team's accounts, by NewCo. Except as otherwise provided herein, or with the
prior written consent of the Company, Mr. Ragen will return all documents, data
and other materials of whatever nature, including, without limitation research,
reports, embodiments, software and manuals to the Company provided by or
appurtenant to Mr. Ragen's position with the Company or to any intellectual
property and shall not retain or cause or allow any third party to retain
photocopies or other reproductions of the foregoing.
2.8 EQUITABLE RELIEF
Each of Mr. Ragen, NewCo, the Company and the Holding Company acknowledge
that their material covenants are essential to the other and to the other's
willingness to enter into this Agreement, that no party would enter into this
Agreement if it did not include Sections 1.2, 1.5, 1.6, 2, 3, 4, 5, 6, 7, 8, 9,
10 and 11 and that damages sustained by the Company or Mr. Ragen as a result of
a breach of this Agreement cannot be adequately remedied by monetary damages,
and each agrees that the others, notwithstanding any other provision of this
Agreement, including, without limitation, Section 17 (Arbitration) hereof, and
in addition to any other remedy it may have under this Agreement or at law,
shall be entitled to injunctive and other equitable relief to prevent or curtail
any breach of any provision of this Agreement, including, without limitation,
Sections 1.2, 1.5, 1.6, 2, 3, 4, 5, 6, 7, 8, 9, 10 and 11. Each party agrees
that it will not claim or argue that monetary damages are an adequate substitute
for actual performance.
2.9 CONSIDERATION
Mr. Ragen and the Company acknowledge and agree that additional
consideration has been given to the Company and Mr. Ragen entering into this
Section 2, as well as other provisions of this Agreement, such additional
consideration including, without limitation, (a) Mr. Ragen's foregoing of that
redemption of his shares of common stock at book value which would have been
coupled with his ability to start NewCo without the restrictions as set forth
herein; (b) the Company receives the agreement of Mr. Ragen to do business as
set forth herein; and (c) the Company's proceeding with an initial public
offering..
-6-
<PAGE>
2.10 PERFORMANCE BY THE COMPANY
In consideration of the fees to be received by the Company from NewCo as
provided in Section 3, the Company shall provide services to NewCo consistent in
quality and timing as provided by the Company to its correspondents and
franchisees.
3. FEES
The following fee arrangements apply during the Term:
3.1 SEC-REGULATED BUSINESS GENERALLY
In regard to general SEC-regulated business, the Company will retain 25% of
revenue from all SEC-regulated business conducted by NewCo (subject to a $25.00
per ticket minimum). In the event that NewCo is restructured to serve as an
independent contractor-like relationship to the Company, the "25%" retainage
shall instead be "28%."
3.2 INVESTMENT ADVISORY RELATED BUSINESS
For investment advisory related business, the Company will (a) retain 23%
of all revenue derived from investment advisory fees; and (b) charge $.04 per
share on transactions, subject to a $25.00 per ticket minimum. This will apply
(by way of example, and not as a limitation) to management, profit-sharing and
other fees received from Knowlton Brothers. In the event that NewCo is
restructured to serve in an independent contractor-like relationship to the
Company, "23%" retainage shall instead be "26%."
3.3 FREE CREDIT BALANCES; MARGIN LOANS
The Company will pay 25 basis points as a rebate on free credit balance and
money market balance of NewCo. The Company will continue to provide favorable
lending rates on Mr. Ragen's clients' margin loans, in accordance with past
practice. In the event that NewCo is restructured to serve in an independent
contractor-like relationship to the Company, the Company will not provide any
rebate on free credit balances and money market balances of NewCo.
3.4 CORPORATE FINANCE
Through March 31, 1999, fees for Corporate Finance activities shall be
negotiated between the Company and Mr. Ragen in a manner consistent with their
recent past practices. After March 31, 1999, there shall be no retainage or fee
sharing with regard to Corporate Finance activities except as the parties may
otherwise agree.
-7-
<PAGE>
3.5 TRANSFER OF ASSETS
No transfer of assets will be made out of NewCo to money managers,
investment advisors, 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.
3.6 MATERIAL CHANGE IN PAYOUT TO PRODUCERS
If, during the last 24 months of the 36-month Term, there is a material
change to the payout arrangements by the Company's largest retail brokers, then
the Company, Mr. Ragen and NewCo shall agree on an equitable adjustment of the
25% retainage for general SEC-regulated business. For example, if payout
arrangements to the Company's largest retail brokers were to be increased from
40% to 44% (a 10% increase) then the retainage for general SEC-regulated
business would be decreased from 25% to 22.5% (a 10% decrease) and the retainage
for revenue derived from investment advisory fees would be reduced from 23% to
20.7% (a 10% decrease).
4. COMMUNICATIONS
4.1 APRIL 1998 PRELIMINARY COMMUNICATIONS
The Company and Mr. Ragen shall, immediately following the filing by the
Holding Company of a registration statement for an initial public offering on
Form S-1, jointly communicate to Mr. Ragen's customers with respect to Mr.
Ragen's proposed new status with the Company, as described in this Agreement.
The parties shall jointly and amicably characterize this as arising from Mr.
Ragen's desire to return to his long-time role as a chief executive officer of a
securities business, without the administrative and logistical demands of a
publicly-held entity.
4.2 FORMAL CLIENT COMMUNICATIONS
Since NewCo will continue to clear with the Company, the initial written
client communications notifying clients of the NewCo arrangements shall be made
cooperatively and, if possibly, jointly. The initial communications by both
parties shall clearly state that although clients are free to keep their
accounts at the Company or to move their accounts to NewCo, all transfers to
NewCo would be made expeditiously and amicably, but accounts would also be
serviced by the Company if they remained. Such communications shall name the
Team members joining NewCo; shall indicate what personnel will be available at
the Company to service accounts that remain at the Company; and shall be
businesslike, courteous and otherwise in compliance with this Agreement.
-8-
<PAGE>
4.3 NAME OF NEWCO
The parties agree that, during the Term, the NewCo name may include Mr.
Ragen's name and shall be one of: "Brooks G. Ragen and Associates,
Incorporated" or a name consisting of three or more surnames that begin with
"McAdams," is followed by one or more surnames other than McAdams or Ragen,
which is or are then followed by "Ragen." In the use of the "Brooks G. Ragen
and Associates" name, the names "Brooks" shall be given equal prominence in all
commercial uses whether verbally (e.g., in advertising or by telephone), in
writing (e.g., letterhead or announcements) or electronically (e.g., web site),
with no shortening or over-emphasis of "Ragen." The parties recognize the
present value in the marketplace of the "Ragen MacKenzie" name, and acknowledge
a continuing need, including after the Term, to avoid confusion in the
marketplace between NewCo's name and the "Ragen MacKenzie" name. In no event
shall any name of NewCo be confusingly similar to "Ragen MacKenzie." NewCo may,
without the Company's consent, change its name to a name not containing "Ragen;"
otherwise, any changes to this name must be approved by a majority vote of the
independent outside directors of Holding Company.
4.4 REGISTRATION STATEMENT; ROAD SHOW
Mr. Ragen and the Company shall amicably agree upon language that carries
through the spirit of the April 1998 preliminary communication (described above)
in the Holding Company's registration statements, as well as in public
presentations based upon those statements pursuant to the marketing of the
Holding Company's initial public offering.
5. RESEARCH
During the Term, each of the Company and NewCo shall provide to the other
copies of its research, on a timely basis, without additional charge. In
consideration for the fees in Section 3, NewCo may distribute the Company's
research to NewCo customers. In the event that the Company elects to distribute
NewCo's research to the Company's customers, the Company and NewCo will
establish a reasonable pricing and payment policy.
6. PUBLIC OFFERING AND HOLDING COMPANY REORGANIZATION
6.1 SELLING SHAREHOLDER
The Company will permit Mr. Ragen, shall he so select, to sell at least 40%
and as reasonably close to 50% as possible, of his shares of Holding Company in
its initial public offering. The parties acknowledge that a portion of those
shares may be sold in the primary offering, and a portion pursuant to the
underwriters' overallotment
-9-
<PAGE>
option, generally ratably allocated. Mr. Ragen's rights in this Section 6.1 are
subject to his execution of selling shareholder documents in form to be
negotiated by and accepted to counsel to Mr. Ragen and Raymond James &
Associates, Inc.
6.2 PRICING COMMITTEE
The Holding Company will name a four-person pricing committee, of which Mr.
Ragen shall be one member.
6.3 LOCK-UP
Mr. Ragen will be unable to sell any shares not sold in the initial public
offering for a period of 6 months. In the period beginning 6 months and ending
12 months after the initial public offering, he will be able to sell only 25% of
his remaining shares. After 12 months, there shall be no further restrictions.
Mr. Ragen acknowledges that he will be required, and agrees, to sign a lockup
agreement together with selling stockholder and other ancillary agreements
reasonably requested by, and with, Raymond James & Associates, Inc. to this
effect.
6.4 Voting in Support of Holding Company Merger
Mr. Ragen shall vote his shares of the Company (or grant and not withdraw a
proxy) in favor of the Merger Agreement among the Company and two affiliated
corporations, the Holding Company and a transitory acquisition subsidiary of the
Holding Company, pursuant to which the Holding Company will become the sole
shareholder of the Company (as summarized herein and as described in the
Registration Statement on Form S-4, the "Holding Company Reorganization"). The
Holding Company Reorganization provides for, as described in the Registration
Statement on Form S-4, a merger pursuant to which the Company will merge with a
subsidiary of the Holding Company. Mr. Ragen and other shareholders of the
Company who are currently employees of the Company will receive "Class B common
stock", which is subject to restrictions intended to be substantively identical
to those to which they are currently bound. Non-employee shareholders will be
recipients of either "Class C common stock" (for owners of shares acquired
pursuant to the 1990 Stock Purchase Agreement) or "Class D common stock" (for
owners of shares acquired pursuant to 1995 Stock Purchase Agreements) pursuant
to which each holder will be subject to restrictions substantively identical to
the shareholder agreements to which they are currently bound. Mr. Ragen shall
support the Holding Company Reorganization and will not vote his Company shares
in favor of any action which would prevent the Holding Company Reorganization to
be realized, or otherwise impede, interfere with or attempt to discourage the
Holding Company Reorganization.
-10-
<PAGE>
7. MUTUAL RELEASE OF CLAIMS
Each of Mr. Ragen and the Company represents that he or it has not filed,
and agrees and warrants he or it will not file, any complaints, charges or
lawsuits against the other with any governmental agency or any court. Each of
Mr. Ragen and the Company expressly waives any claims against the other and each
releases the other (including its officers, directors, owners, control persons,
managers, agents and representatives) from any claims that he or it may have in
any way connected with Mr. Ragen's employment and the termination thereof. It
is understood that Mr. Ragen's release includes, but is not limited to, any
claims for wages, bonuses, employment benefits, or damages of any kind
whatsoever, arising out of any contracts, express or implied, any theory of
wrongful discharge or other legal restriction on the Company's right to
terminate employment, or any federal, state or other governmental statute or
ordinance, including, without limitation, Title VII of the Civil Rights Act of
1964, the federal Age Discrimination in Employment Act, the Americans with
Disabilities Act, the Family Medical Leave Act, the Washington Law Against
Discrimination, or any other legal limitation on the employment relationship.
For purposes of this Section 18, the term the "Company" shall include all
of the officers, directors, owners, managers, agents, and representatives of the
Company.
This waiver and release shall not apply to claims that may arise from
actions or in actions that occur after the date hereof, nor preclude Mr. Ragen,
NewCo or the Company from filing a lawsuit for the exclusive purpose of
enforcing his or its rights under this Agreement.
8. CONDITIONS PRECEDENT
The obligations of Mr. Ragen (including Section 10) and the Company to
consummate the transactions contemplated by this Agreement shall be subject to
the closing of a firm commitment underwritten public offering of shares of
common stock of the Holding Company (the "Holding Company IPO") in which the
aggregate gross proceeds to the Holding Company and selling shareholders from
such offering shall be at least $15,000,000, and which shall have occurred on or
before December 31, 1998. In the event such a closing does not occur on or
before December 31, 1998, this Agreement shall be null and void, and shall have
no further force or effect; provided, however, that the failure of such a
closing to occur shall in no way invalidate any earlier closing of the Holding
Company Reorganization, rescind votes cast in favor of or actions taken in
furtherance of that Holding Company Reorganization, or negate Mr. Ragen's
continuing obligations under the last sentence of Section 6.4.
-11-
<PAGE>
9. EXECUTION OF AGREEMENT BY NEWCO; COOPERATION
As soon as NewCo is formed, Mr. Ragen will cause NewCo to execute this
agreement as a co-obligor with Mr. Ragen. NewCo and Mr. Ragen will be jointly
responsible for the covenants of Mr. Ragen and NewCo set forth in this
agreement. The Holding Company and the Company shall be jointly responsible for
the covenants of the Company and the Holding Company set forth in this
Agreement. Each party (including NewCo and the Holding Company) will use
commercially reasonable efforts to cooperate with each other party in connection
with any steps required to be taken as part of its obligations under this
agreement. Each party will use all reasonable efforts to take promptly, or
cause to be taken promptly, all things necessary, proper or appropriate to
satisfy their respective obligations in this agreement. NewCo will enter into
the Company's customary form of clearing agreement and margin agreement,
modified, as necessary, to provide for the terms set forth herein.
10. 30-MONTH NONCOMPETITION/NONSOLICITATION COVENANTS
Mr. Ragen agrees that, in the event that he elects not to proceed with the
establishment of NewCo pursuant to the terms of this agreement, he shall be
bound by the Executive Employment Agreement between Ragen MacKenzie Incorporated
and Brooks G. Ragen set forth as Exhibit B (Section 10) hereto, as if it were
dated the date of this agreement, and as if it were fully executed by Mr. Ragen
as "Employee" and the Company and "Ragen MacKenzie Incorporated". The terms of
that Executive Employment Agreement are expressly incorporated herein by this
reference, and become binding upon Mr. Ragen and the Company, in the event that
Mr. Ragen elects not to proceed with formation and consummation of the expected
commencement of business within NewCo on the Commencement Date. All provisions
of this Agreement shall remain in full force and effect except for those that
depend upon the existence of NewCo.
11. EARLY TERMINATION; RECIPROCAL CHANGE OF CONTROL EVENTS
If and to the extent that, after the IPO Closing Date and during the Term,
the Company and/or the Holding Company provides change of control agreements to
its key executives or senior producers (whether pursuant to the Producer
Agreements, comparable agreement for senior management or otherwise), it and Mr.
Ragen will amend this Agreement to provide for early termination of the Term
upon such a change of control, which change of control will be defined in a
manner substantively identical to the way in which it is defined in such change
of control agreement.
-12-
<PAGE>
12. REPRESENTATIONS AND WARRANTIES
In order to induce the other to enter into this Agreement, each of Mr.
Ragen and the Company represents and warrants to the other that neither the
execution nor the performance of this Agreement by the representing party will
violate or conflict in any way with any other agreement by which the
representing party may be bound, or with any other duties imposed upon the
representing party by corporate or other statutory or common law. Each of the
parties shall have the Agreement approved by its Board of Directors prior to the
IPO Closing Date.
13. NOTICE AND CURE OF BREACH
Whenever a breach of this Agreement by either party is relied upon as
justification for any action taken by the other party pursuant to any provision
of this Agreement, before such action is taken, the party asserting the breach
of this Agreement shall give the other party at least 10 business days' prior
written notice of the existence and the nature of such breach before taking
further action hereunder and shall give the party purportedly in breach of this
Agreement the opportunity to correct such breach during the 10 business-day
period.
14. FORM OF NOTICE
All notices given hereunder shall be given in writing, shall specifically
refer to this Agreement and shall be personally delivered or sent by telecopy or
other electronic facsimile transmission or by registered or certified mail,
return receipt requested, at the address set forth below or at such other
address as may hereafter be designated by notice given in compliance with the
terms hereof:
If to Mr. Ragen: Brooks G. Ragen
999 Third Avenue, Suite 4300
Seattle, WA 98104
[This shall automatically become the
------------------------------------
NewCo address, without further action or notice]
------------------------------------------------
Copy to: C. Kent Carlson
Preston Gates & Ellis
701 Fifth Ave., Suite 5000
Seattle, WA 98104
If to the Company: Chief Executive Officer
Ragen MacKenzie Incorporated
999 Third Avenue, Suite 4300
Seattle, WA 98104
-13-
<PAGE>
Copy to: Stewart M. Landefeld
Perkins Coie LLP
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
If notice is mailed, such notice shall be effective upon mailing, or if notice
is personally delivered or sent by telecopy or other electronic facsimile
transmission, it shall be effective upon receipt.
15. ASSIGNMENT
This Agreement is personal to Mr. Ragen and shall not be assignable by Mr.
Ragen. The Company may, subject to Section 11, assign its rights hereunder to
(a) any corporation resulting from any merger, consolidation or other
reorganization to which the Company is a party, (b) any parent corporation of
the Company whether existing currently or in the future, or (c) any corporation,
partnership, association or other person to which the Company may transfer all
or substantially all of the assets and business of the Company existing at such
time. All of the terms and provisions of this Agreement shall be binding on and
shall inure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns.
16. WAIVERS
No delay or failure by any party hereto in exercising, protecting or
enforcing any of its rights, titles, interests or remedies hereunder, and no
course of dealing or performance with respect thereto, shall constitute a waiver
thereof. The express waiver by a party hereto of any right, title, interest or
remedy in a particular instance or circumstance shall not constitute a waiver
thereof in any other instance or circumstance. All rights and remedies shall be
cumulative and not exclusive of any other rights or remedies.
17. ARBITRATION FOR MONETARY DAMAGES
Except as provided in Section 2.7 hereof, any controversies or claims for
monetary damages arising out of or relating to this Agreement (but not for
matters appropriate for equitable relief) shall be fully and finally settled by
arbitration in accordance with the rules, constitutions, or by-laws of the
National Association of Securities Dealers, Inc., as may be amended from time to
time. The prevailing party shall be entitled to costs, expenses and reasonable
attorneys' fees. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
-14-
<PAGE>
18. AMENDMENTS IN WRITING
No amendment, modification, waiver, termination or discharge of any
provision of this Agreement, nor consent to any departure therefrom by either
party hereto, shall in any event be effective unless the same shall be in
writing, specifically identifying this Agreement and the provision intended to
be amended, modified, waived, termination or discharged and signed by the
Company and Mr. Ragen, and each such amendment, modification, waiver,
termination or discharge shall be effective only in the specific instance and
for the specific purpose for which given. No provision of this Agreement shall
be varied, contradicted or explained by any oral agreement, course of dealing or
performance or any other matter not set forth in an agreement in writing and
signed by the Company and Mr. Ragen.
19. APPLICABLE LAW
This Agreement shall in all respects, including all matters of
construction, validity and performance, be governed by, and construed and
enforced in accordance with, the laws of the state of Washington, without regard
to any rules governing conflicts of laws.
20. SEVERABILITY
If any provision of this Agreement shall be held invalid, illegal or
unenforceable in any jurisdiction, for any reason, including, without
limitation, the duration of such provision, its geographical scope or the extent
of the activities prohibited or required by it, then, to the full extent
permitted by law (a) all other provisions hereof shall remain in full force and
effect in such jurisdiction and shall be liberally construed in order to carry
out the intent of the parties hereto as nearly as may be possible, (b) such
invalidity, illegality or unenforceability shall not affect the validity,
legality or enforceability of any other provision hereof, and (c) any court or
arbitrator having jurisdiction thereover shall have the power to reform such
provision to the extent necessary for such provision to be enforceable under
applicable law.
21. HEADINGS
All headings used herein are for convenience only and shall not in any way
affect the construction of, or be taken into consideration in interpreting, this
Agreement.
22. COUNTERPARTS
This Agreement, and any amendment or modification entered into pursuant to
this Agreement, may be executed in any number of counterparts, each of which
-15-
<PAGE>
counterparts, when so executed and delivered, shall be deemed to be an original
and all of which counterparts, taken together, shall constitute one and the same
instrument.
23. ENTIRE AGREEMENT
This Agreement on and as of the date hereof constitutes the entire
agreement between the Company and Mr. Ragen with respect to the subject matter
hereof and all prior or contemporaneous oral or written communications,
understandings or agreements between the Company and Mr. Ragen with respect to
such subject matter are hereby superseded and nullified in their entireties.
-16-
<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/ Lesa A. Sroufe
---------------------------------------
Its CEO
-----------------------------------
RAGEN MACKENZIE GROUP, INCORPORATED
By /s/ Robert J. Mortell, Jr
---------------------------------------
Its President
-----------------------------------
BROOKS G. RAGEN
By /s/ Brooks G. Ragen
---------------------------------------
BROOKS G. RAGEN & ASSOCIATES, INC.
By /s/ V. Lawrence Bensussen
---------------------------------------
Its Chief Financial Officer
-----------------------------------
-17-
<PAGE>
EXHIBIT 10.11
RMI GROUP INCORPORATED
1998 STOCK INCENTIVE COMPENSATION PLAN
SECTION 1. PURPOSE
The purpose of the RMI Group Incorporated 1998 Stock Incentive Compensation
Plan (the "Plan") is to enhance the long-term shareholder value of RMI Group
Incorporated, a Washington corporation (the "Company"), by offering
opportunities to employees, directors, officers, consultants, agents, advisors
and independent contractors of the Company and its Subsidiaries (as defined in
Section 2) to participate in the Company's growth and success, and to encourage
them to remain in the service of the Company and its Subsidiaries and to acquire
and maintain stock ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 AWARD
"Award" means an award or grant made to a Participant pursuant to the Plan,
including, without limitation, awards or grants of Options, Stock Appreciation
Rights, Stock Awards, Performance Awards, Other Stock-Based Awards or any
combination of the foregoing (including any Dividend Equivalent Rights granted
in connection with such Awards).
2.2 BOARD
"Board" means the Board of Directors of the Company.
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 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the Class B common stock, par value $.01 per share, of
the Company; provided, however, that if a "Conversion Event" for the Class B
common stock (as
<PAGE>
defined in the Company's Articles of Incorporation) has occurred, the "Common
Stock" means the Common Stock, par value $.01 per share, of the Company.
2.6 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 8.3) 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
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.
2.7 DISABILITY
"Disability" has the meaning set forth in Section 7.6.
2.8 DIVIDEND EQUIVALENT RIGHT
"Dividend Equivalent Right" means an Award granted under Section 13.
2.9 EARLY RETIREMENT
"Early Retirement" means early retirement as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
-2-
<PAGE>
2.10 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.11 FAIR MARKET VALUE
The "Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing selling price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing selling
price for the Common Stock as such price is officially quoted in the composite
tape of transactions on such exchange for a single trading day. If there is no
such reported price for the Common Stock for the date in question, then such
price on the last preceding date for which such price exists shall be
determinative of the Fair Market Value.
2.12 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the Holder's
reasonable judgment, represents a substantial reduction in the status, title,
position or responsibilities as in effect immediately prior thereto; the
assignment to the Holder of any duties or responsibilities that, in the Holder's
reasonable judgment, are materially inconsistent with such status, title,
position or responsibilities; or any removal of the Holder from or failure to
reappoint or reelect the Holder to any of such positions, except in connection
with the termination of the Holder's employment for Cause, for Disability or as
a result of his or her death, or by the Holder other than for Good Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Successor Corporation's requiring the Holder (without the
Holder's consent) to be based at any place outside a 35-mile radius of his or
her place of employment prior to a Corporate Transaction, except for reasonably
required travel on the Successor Corporation's business that is not materially
greater than such travel requirements prior to the Corporate Transaction;
(d) the Successor Corporation's failure to (i) continue in effect any
material compensation or benefit plan (or the substantial equivalent thereof) in
which the Holder was participating at the time of a Corporate Transaction,
including, but not limited to, the Plan, or (ii) provide the Holder with
compensation and benefits substantially equivalent (in terms of benefit levels
and/or reward opportunities) to those provided for under each material employee
benefit plan, program and practice as in effect immediately prior to the
Corporate Transaction;
-3-
<PAGE>
(e) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent plan of
the Successor Corporation; or
(f) any purported termination of the Holder's employment or services
for Cause by the Successor Corporation that does not comply with the terms of
the Plan or any substantially equivalent plan of the Successor Corporation.
2.13 GRANT DATE
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
2.14 HOLDER
"Holder" means (i) the Participant to whom an Award is granted; (ii) for a
Holder who has died, the personal representative of the Holder's estate, the
person(s) to whom the Holder's rights under the Award have passed by will or by
the applicable laws of descent and distribution, or the beneficiary designated
in accordance with Section 14; or (iii) the person(s) to whom an Award has been
transferred in accordance with Section 14.
2.15 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
2.16 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.17 OPTION
"Option" means the right to purchase Common Stock granted under Section 7.
2.18 OTHER STOCK-BASED AWARD
"Other Stock-Based Award" means an Award granted under Section 12.
2.19 PARTICIPANT
"Participant" means an individual who is a Holder of an Award or, as the
context may require, any employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary who has been designated
by the Plan Administrator as eligible to participate in the Plan.
-4-
<PAGE>
2.20 PERFORMANCE AWARD
"Performance Award" means an Award granted under Section 11, the payout of
which is subject to achievement through a performance period of performance
goals prescribed by the Plan Administrator.
2.21 PLAN ADMINISTRATOR
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.22 RESTRICTED STOCK
"Restricted Stock" means shares of Common Stock granted under Section 10,
the rights of ownership of which are subject to restrictions prescribed by the
Plan Administrator.
2.23 RETIREMENT
"Retirement" means retirement as of the individual's normal retirement date
under the Company's 401(k) Plan or other similar successor plan applicable to
salaried employees or, if no such plan exists, as that term is defined by the
Plan Administrator from time to time for purposes of the Plan.
2.24 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.25 STOCK APPRECIATION RIGHT
"Stock Appreciation Right" means an Award granted under Section 9.
2.26 STOCK AWARD
"Stock Award" means an Award granted under Section 10.
2.27 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
2.28 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth in Section 16.2.
-5-
<PAGE>
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board (the "Plan Administrator"). If and so long as the Common
Stock is registered under Section 12(b) or 12(g) of the Exchange Act, the Plan
shall be administered by the Compensation Committee of the Board, except to the
extent the Board appoints another committee (which term includes a subcommittee)
to administer the Plan, and the Board shall consider in selecting the Plan
Administrator, with respect to any persons likely to become subject to Section
16 of the Exchange Act, the provisions regarding (a) "outside directors" as
contemplated by Section 162(m) of the Code and (b) "nonemployee directors" as
contemplated by Rule 16b-3 under the Exchange Act. The Board may delegate the
responsibility for administering the Plan with respect to designated classes of
eligible Participants to different committees consisting of two or more members
of the Board, subject to such limitations as the Board deems appropriate.
Committee members shall serve for such term as the Board may determine, subject
to removal by the Board at any time. To the extent consistent with applicable
law, the Board may authorize the Chief Executive Officer or President of the
Company to grant Awards to eligible Participants, within the limits specifically
prescribed by the Board.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 16.1, a
maximum of 2,000,000 shares of Common Stock shall be available for issuance
under the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
-6-
<PAGE>
4.2 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection with future grants of Awards under the
Plan. Shares that are subject to tandem Awards shall be counted only once.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards
may include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options, Stock Appreciation Rights, Stock Awards, Performance Awards, Other
Stock-Based Awards and Dividend Equivalent Rights. Awards may be granted
singly, in combination or in tandem so that the settlement or payment of one
automatically reduces or cancels the other. Awards may also be made in
combination or in tandem with, in replacement of, as alternatives to, or as the
payment form for, grants or rights under any other employee or compensation plan
of the Company.
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, except as may be required for
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such
Awards shall be deemed to be Participants and Holders.
-7-
<PAGE>
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be ten years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall vest and become exercisable, which provisions may be waived or
modified by the Plan Administrator at any time.
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5; provided, however,
that no fewer than 100 shares (or the remaining shares then purchasable under
the Option, if less than 100 shares) may be purchased upon any exercise of
options hereunder and that only whole shares will be issued pursuant to the
exercise of any Option.
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or check, or, unless the Plan Administrator in its sole
discretion determines otherwise, either at the time the Option is granted or at
any time before it is exercised, and subject to such limitations as the Plan
Administrator may determine, a combination of cash and/or check (if any) and
one or more of the following alternative forms: (a) the tendering (either
actually or, if and so long as the Common Stock is registered under Section
12(b) or 12(g) of the Exchange Act, by attestation) of Common Stock already
owned by the Holder for at least six months (or any shorter period necessary to
avoid a charge to the Company's earnings for financial reporting purposes)
having a Fair Market Value on the day prior to the exercise date equal to the
aggregate Option exercise price or (b) if
-8-
<PAGE>
and so long as the Common Stock is registered under Section 12(b) or 12(g) of
the Exchange Act, delivery of a properly executed exercise notice, together with
irrevocable instructions, to (i) a brokerage firm designated by the Company to
deliver promptly to the Company the aggregate amount of sale or loan proceeds to
pay the Option exercise price and any withholding tax obligations that may arise
in connection with the exercise and (ii) the Company to deliver the certificates
for such purchased shares directly to such brokerage firm, all in accordance
with the regulations of the Federal Reserve Board. In addition, to the extent
permitted by the Plan Administrator in its sole discretion, the exercise price
for shares purchased under an Option may be paid, either singly or in
combination with one or more of the alternative forms of payment authorized by
this Section 7.5, by (y) a full-recourse note delivered pursuant to Section 14
or (z) such other consideration as the Plan Administrator may permit.
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time.
In the case of termination of the Holder's employment or services other
than by reason of Disability, death, or Cause, the Option shall be exercisable,
to the extent of the number of shares purchasable by the Holder at the date of
such termination, only within three months after the date of such termination,
but in no event later than the remaining term of the Option. Any portion of an
Option that is not exercisable on the date of termination of the Holder's
employment or services shall terminate on such date, unless the Plan
Administrator determines otherwise.
In the case of termination of the Holder's employment or services by reason
of Disability, the Option shall be exercisable, to the extent of the number of
shares purchasable by the Holder at the date of such termination, only within
one year after the date of such termination, but in no event later than the
remaining term of the Option. As used in the Plan, the term "Disability" refers
to a mental or physical impairment of the Holder 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 Holder 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 Plan
Administrator.
Any Option exercisable at the time of the Holder's death may be exercised,
to the extent of the number of shares purchasable by the Holder at the date of
the Holder's death, by the personal representative of the Holder's estate, the
person(s) to whom the Holder's rights under the Award have passed by will or the
applicable laws of descent and distribution or the beneficiary designated
-9-
<PAGE>
pursuant to Section 15 at any time or from time to time within one year after
the date of death, but in no event later than the remaining term of the Option.
In the case of termination of the Holder's employment or services for
Cause, the Option shall automatically terminate upon first notification to the
Holder of such termination, unless the Plan Administrator determines otherwise.
If a Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation.
A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
Unless the Plan Administrator determines otherwise, a leave of absence approved
in accordance with Company procedures shall not be considered a termination of
employment or services, except that with respect to Incentive Stock Options such
leave of absence shall be subject to any requirements of Section 422 of the
Code.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the
event the Participant holds two or more such Options that become exercisable for
the first time in the same calendar year, such limitation shall be applied on
the basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If a Participant owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this
-10-
<PAGE>
Section 8.3, "parent corporation" and "subsidiary corporation" shall have the
meanings attributed to those terms for purposes of Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed ten years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option designated
as an Incentive Stock Option must be exercised within three months after
termination of employment for reasons other than death, except that, in the case
of termination of employment due to total disability, such Option must be
exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Participant's reemployment rights are guaranteed by statute or contract. For
purposes of this Section 8.5, "total disability" shall mean Disability or, if it
differs, "disability" as that term is defined for purposes of Section 22(e)(3)
of the Code.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Participant must hold the shares issued upon
the exercise of an Incentive Stock Option for two years after the Grant Date of
the Incentive Stock Option and one year from the date of exercise. A
Participant may be subject to the alternative minimum tax at the time of
exercise of an Incentive Stock Option. The Participant shall give the Company
prompt notice of any disposition of shares acquired by the exercise of an
Incentive Stock Option prior to the expiration of such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 14 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. STOCK APPRECIATION RIGHTS
9.1 GRANT OF STOCK APPRECIATION RIGHTS
The Plan Administrator may grant a Stock Appreciation Right separately or
in tandem with a related Option.
9.2 TANDEM STOCK APPRECIATION RIGHTS
A Stock Appreciation Right granted in tandem with a related Option will
give the Holder the right to surrender to the Company all or a portion of the
related Option and to receive an
-11-
<PAGE>
appreciation distribution (in shares of Common Stock or cash or any combination
of shares and cash, as the Plan Administrator, in its sole discretion, shall
determine at any time) in an amount equal to the excess of the Fair Market Value
for the date the Stock Appreciation Right is exercised over the exercise price
per share of the right, which shall be the same as the exercise price of the
related Option. A tandem Stock Appreciation Right will have the same other terms
and provisions as the related Option. Upon and to the extent a tandem Stock
Appreciation Right is exercised, the related Option will terminate.
9.3 STAND-ALONE STOCK APPRECIATION RIGHTS
A Stock Appreciation Right granted separately and not in tandem with an
Option will give the Holder the right to receive an appreciation distribution in
an amount equal to the excess of the Fair Market Value for the date the Stock
Appreciation Right is exercised over the exercise price per share of the right.
A stand-alone Stock Appreciation Right will have such terms as the Plan
Administrator may determine, except that the term of the right, if not otherwise
established by the Plan Administrator, shall be ten years from the Grant Date.
9.4 EXERCISE OF STOCK APPRECIATION RIGHTS
Unless otherwise provided by the Plan Administrator in the instrument that
evidences the Stock Appreciation Right, the provisions of Section 7.6 relating
to the termination of a Holder's employment or services shall apply equally, to
the extent applicable, to the Holder of a Stock Appreciation Right.
SECTION 10. STOCK AWARDS
10.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock to
Participants on such terms and conditions and subject to such restrictions, if
any (which may be based on continuous service with the Company or the
achievement of performance goals, where such goals may be stated in absolute
terms or relative to comparison companies), as the Plan Administrator shall
determine, in its sole discretion, which terms, conditions and restrictions
shall be set forth in the instrument evidencing the Award. The terms, conditions
and restrictions that the Plan Administrator shall have the power to determine
shall include, without limitation, the manner in which shares subject to Stock
Awards are held during the periods they are subject to restrictions and the
circumstances under which forfeiture of Restricted Stock shall occur by reason
of termination of the Holder's services.
10.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall release, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of
-12-
<PAGE>
the Holder's estate or as the appropriate court directs, the appropriate number
of shares of Common Stock.
10.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
SECTION 11. PERFORMANCE AWARDS
11.1 PLAN ADMINISTRATOR AUTHORITY
Performance Awards may be denominated in cash, shares of Common Stock or
any combination thereof. The Plan Administrator is authorized to grant
Performance Awards and shall determine the nature, length and starting date of
the performance period for each Performance Award and the performance objectives
to be used in valuing Performance Awards and determining the extent to which
such Performance Awards have been earned. Performance objectives and other
terms may vary from Participant to Participant and between groups of
Participants. Performance objectives may be stated in absolute terms or
relative to comparison companies, as the Plan Administrator shall determine, in
its sole discretion. Performance periods may overlap and Participants may
participate simultaneously with respect to Performance Awards that are subject
to different performance periods and different performance factors and criteria.
The Plan Administrator shall determine for each Performance Award the range
of dollar values or number of shares of Common Stock (which may, but need not,
be shares of Restricted Stock pursuant to Section 10), or a combination thereof,
to be received by the Participant at the end of the performance period if and to
the extent that the relevant measures of performance for such Performance Awards
are met. The earned portion of a Performance Award may be paid currently or on
a deferred basis with such interest or earnings equivalent as may be determined
by the Plan Administrator. Payment shall be made in the form of cash, whole
shares of Common Stock (which may, but need not, be shares of Restricted Stock
pursuant to Section 10), Options or any combination thereof, either in a single
payment or in annual installments, all as the Plan Administrator shall
determine.
11.2 ADJUSTMENT OF AWARDS
The Plan Administrator may adjust the performance goals and measurements
applicable to Performance Awards to take into account changes in law and
accounting and tax rules and to make such adjustments as the Plan Administrator
deems necessary or appropriate to reflect the inclusion or exclusion of the
impact of extraordinary or unusual items, events or circumstances. The Plan
Administrator also may adjust the performance goals and measurements applicable
to Performance Awards and thereby reduce the amount to be received by any
Participant pursuant to such Awards if and to the extent that the Plan
Administrator deems it appropriate.
-13-
<PAGE>
11.3 PAYOUT UPON TERMINATION
The Plan Administrator shall establish and set forth in each instrument
that evidences a Performance Award whether the Award will be payable, and the
terms and conditions of such payment, if a Holder ceases to be employed by, or
to provide services to, the Company or its Subsidiaries, which provisions may be
waived or modified by the Plan Administrator at any time. If not so established
in the instrument evidencing the Performance Award, the Award will be payable
according to the following terms and conditions, which may be waived or modified
by the Plan Administrator at any time. If during a performance period a
Participant's employment or services with the Company terminate by reason of the
Participant's Retirement, Early Retirement at the Company's request, Disability
or death, such Participant shall be entitled to a payment with respect to each
outstanding Performance Award at the end of the applicable performance period
(a) based, to the extent relevant under the terms of the Award, on the
Participant's performance for the portion of such performance period ending on
the date of termination and (b) prorated for the portion of the performance
period during which the Participant was employed by the Company, all as
determined by the Plan Administrator. The Plan Administrator may provide for an
earlier payment in settlement of such Performance Award discounted at a
reasonable interest rate and otherwise in such amount and under such terms and
conditions as the Plan Administrator deems appropriate.
Except as otherwise provided in Section 16 or in the instrument evidencing
the Performance Award, if during a performance period a Participant's employment
or services with the Company terminate other than by reason of the Participant's
Retirement, Early Retirement at the Company's request, Disability or death, then
such Participant shall not be entitled to any payment with respect to the
Performance Awards relating to such performance period, unless the Plan
Administrator shall otherwise determine. The provisions of Section 7.6
regarding leaves of absence and termination for Cause shall apply to Performance
Awards.
SECTION 12. OTHER STOCK-BASED AWARDS
The Plan Administrator may grant other Awards under the Plan pursuant to
which shares of Common Stock (which may, but need not, be shares of Restricted
Stock pursuant to Section 10) are or may in the future be acquired, or Awards
denominated in stock units, including ones valued using measures other than
market value. Such Other Stock-Based Awards may be granted alone or in addition
to or in tandem with any Award of any type granted under the Plan and must be
consistent with the Plan's purpose.
SECTION 13. DIVIDEND EQUIVALENT RIGHTS
Any Awards under the Plan may, in the Plan Administrator's discretion, earn
Dividend Equivalent Rights. In respect of any Award that is outstanding on the
dividend record date for Common Stock, the Participant may be credited with an
amount equal to the cash or stock dividends or other distributions that would
have been paid on the shares of Common Stock covered by such Award had such
covered shares been issued and outstanding on such dividend record date. The
Plan Administrator shall establish such rules and procedures governing the
-14-
<PAGE>
crediting of Dividend Equivalent Rights, including the timing, form of payment
and payment contingencies of such Dividend Equivalent Rights, as it deems are
appropriate or necessary.
SECTION 14. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or director of the
Company) in acquiring shares of Common Stock pursuant to an Award granted under
the Plan, the Plan Administrator, in its sole discretion, may authorize, either
at the Grant Date or at any time before the acquisition of Common Stock pursuant
to the Award, (a) the extension of a loan to the Holder by the Company, (b) the
payment by the Holder of the purchase price, if any, of the Common Stock in
installments, or (c) the guarantee by the Company of a loan obtained by the
grantee from a third party. The terms of any loans, installment payments or
loan guarantees, including the interest rate and terms of and security for
repayment, will be subject to the Plan Administrator's discretion; provided,
however, that repayment of any Company loan to the Holder shall be secured by
delivery of a full-recourse promissory note for the loan amount executed by the
Holder, together with any other form of security determined by the Plan
Administrator. The maximum credit available is the purchase price, if any, of
the Common Stock acquired, plus the maximum federal and state income and
employment tax liability that may be incurred in connection with the
acquisition.
SECTION 15. ASSIGNABILITY
No Option, Stock Appreciation Right, Performance Award, Other Stock-Based
Award or Dividend Equivalent Right granted under the Plan may be assigned,
pledged or transferred by the Holder other than by will or by the laws of
descent and distribution, and during the Holder's lifetime, such Awards may be
exercised only by the Holder; provided, however, that any shares issuable upon
the exercise of an Option may be issued in the name of an individual retirement
account, as defined in the Code, for the benefit of the Participant.
Notwithstanding the foregoing, and to the extent permitted by Section 422 of the
Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit a Holder of such Awards
to designate a beneficiary who may exercise the Award or receive compensation
under the Award after the Holder's death; provided, however, that any Award so
assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award.
SECTION 16. ADJUSTMENTS
16.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to
shareholders other than a normal cash dividend, or other change in the Company's
corporate or capital structure results in (a) the outstanding shares, or any
securities exchanged therefor or received in their place, being exchanged for a
different number or class of securities of the
-15-
<PAGE>
Company or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Plan Administrator
shall make proportional adjustments in (i) the maximum number and kind of
securities subject to the Plan as set forth in Section 4.1 and (ii) the number
and kind of securities that are subject to any outstanding Award and the per
share price of such securities, without any change in the aggregate price to be
paid therefor. The determination by the Plan Administrator as to the terms of
any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, a Corporate Transaction shall not be governed by
this Section 16.1 but shall be governed by Section 16.2.
16.2 CORPORATE TRANSACTION
(a) Except as otherwise provided in the instrument that evidences the
Award, in the event of any Corporate Transaction, each Option, Stock
Appreciation Right or Restricted Stock Award that is at the time outstanding
shall automatically accelerate so that each such Award shall, immediately prior
to the specified effective date for the Corporate Transaction, become 100%
vested.
(b) Such Award shall not so accelerate, however, if and to the extent that
such Award is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation or parent thereof (the "Successor
Corporation") or to be replaced with a comparable award for the purchase of
shares of the capital stock of the Successor Corporation. The determination of
Award comparability shall be made by the Plan Administrator, and its
determination shall be conclusive and binding. Any such Award granted to an
"executive officer" (as that term is defined for purposes of Section 16 of the
Exchange Act) of the Company that is assumed or replaced in the Corporate
Transaction and does not otherwise accelerate at that time shall be accelerated
in the event the Holder's employment or services should subsequently terminate
within two years following such Corporate Transaction, unless such employment or
services are terminated by the Successor Corporation for Cause or by the Holder
voluntarily without Good Reason.
(c) All such Awards shall terminate and cease to remain outstanding
immediately following the consummation of the Corporate Transaction, except to
the extent assumed by the Successor Corporation.
(d) The acceleration will not occur if, in the opinion of the Company's
accountants, it would render unavailable "pooling of interest" accounting for a
Corporate Transaction that would otherwise qualify for such accounting
treatment.
16.3 FURTHER ADJUSTMENT OF AWARDS
Subject to Section 16.2, the Plan Administrator shall have the discretion,
exercisable at any time before a sale, merger, consolidation, reorganization,
liquidation or change in control of the Company, as defined by the Plan
Administrator, to take such further action as it determines to be necessary or
advisable, and fair and equitable to Participants, with respect to Awards. Such
-16-
<PAGE>
authorized action may include (but shall not be limited to) establishing,
amending or waiving the type, terms, conditions or duration of, or restrictions
on, Awards so as to provide for earlier, later, extended or additional time for
exercise, payment or settlement or lifting restrictions, differing methods for
calculating payments or settlements, alternate forms and amounts of payments and
settlements and other modifications, and the Plan Administrator may take such
action with respect to all Participants, to certain categories of Participants
or only to individual Participants. The Plan Administrator may take such action
before or after granting Awards to which the action relates and before or after
any public announcement with respect to such sale, merger, consolidation,
reorganization, liquidation or change in control that is the reason for such
action.
16.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 17. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, exercise, payment or settlement of any Award. Subject to the Plan and
applicable law, the Plan Administrator may, in its discretion, permit the Holder
to satisfy withholding obligations, in whole or in part, by paying cash, by
electing to have the Company withhold shares of Common Stock or by transferring
shares of Common Stock to the Company, in such amounts as are equivalent to the
Fair Market Value of the withholding obligation. The Company shall have the
right to withhold from any Award or any shares of Common Stock issuable pursuant
to an Award or from any cash amounts otherwise due or to become due from the
Company to the Participant an amount equal to such taxes. The Company may also
deduct from any Award any other amounts due from the Participant to the Company
or a Subsidiary.
SECTION 18. AMENDMENT AND TERMINATION OF PLAN
18.1 AMENDMENT OF PLAN
The Plan may be amended only by the Board in such respects as it shall deem
advisable; however, to the extent required for compliance with Section 422 of
the Code or any applicable law or regulation, shareholder approval will be
required for any amendment that will (a) increase the total number of shares as
to which Options may be granted or that may be used in payment of Stock
Appreciation Rights, Performance Awards, Other Stock-Based Awards or Dividend
Equivalent Rights under the Plan or that may be issued as Stock Awards, (b)
modify the class of persons eligible to receive Options, or (c) otherwise
require shareholder approval under any applicable law or regulation.
-17-
<PAGE>
18.2 TERMINATION OF PLAN
The Board may suspend or terminate the Plan at any time. The Plan will
have no fixed expiration date; provided, however, that no Incentive Stock
Options may be granted more than ten years after the earlier of the Plan's
adoption by the Board and approval by the shareholders.
18.3 MODIFICATION AND AMENDMENT OF AWARD
Subject to the requirements of Section 422 of the Code with respect to
Incentive Stock Options and to the terms and conditions and within the
limitations of the Plan, the Plan Administrator may modify or amend outstanding
Awards granted under the Plan. The modification or amendment of an outstanding
Award, or the amendment or termination of the Plan, shall not, without the
consent of the Holder, impair or diminish any of the Holder's rights or any of
the obligations of the Company under such Award. Except as otherwise provided
in the Plan, no outstanding Award shall be terminated without the consent of the
Holder. Unless the Holder agrees otherwise, any changes or adjustments made to
outstanding Incentive Stock Options granted under the Plan shall be made in such
a manner so as not to constitute a "modification" as defined in Section 425(h)
of the Code and so as not to cause any Incentive Stock Option issued hereunder
to fail to continue to qualify as an "incentive stock option" as defined in
Section 422(b) of the Code.
SECTION 19. GENERAL
19.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
that shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and that are not inconsistent with the
Plan.
19.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan as a Participant or any action
of the Plan Administrator taken under the Plan shall be construed as giving any
person any right to be retained in the employ of the Company or limit the
Company's right to terminate the employment or services of any person.
19.3 REGISTRATION
The Company shall be under no obligation to any Participant to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if
made. The Company may restrict the exercise of any Option and may adopt
exercise control restrictions in order to maintain any exemption requirements of
federal or state securities laws. The Company may refuse the exercise of any
Option for which an exemption from registration
-18-
<PAGE>
under federal and state securities laws is unavailable. The Company may issue
certificates for shares with such legends and subject to such restrictions on
transfer and stop-transfer instructions as counsel for the Company deems
necessary or desirable for compliance by the Company with federal and state
securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
19.4 NO RIGHTS AS A SHAREHOLDER
No Option, Stock Appreciation Right, Performance Award or Other Stock-Based
Award shall entitle the Holder to any cash dividend (except to the extent
provided in an Award of Dividend Equivalent Rights), voting or other right of a
shareholder unless and until the date of issuance under the Plan of the shares
that are the subject of such Award, free of all applicable restrictions.
19.5 COMPLIANCE WITH LAWS AND REGULATIONS
Notwithstanding anything in the Plan to the contrary, the Board, in its
sole discretion, may bifurcate the Plan so as to restrict, limit or condition
the use of any provision of the Plan to Participants who are officers or
directors subject to Section 16 of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other Participants.
Additionally, in interpreting and applying the provisions of the Plan, any
Option granted as an Incentive Stock Option pursuant to the Plan shall, to the
extent permitted by law, be construed as an "incentive stock option" within the
meaning of Section 422 of the Code.
19.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
19.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
-19-
<PAGE>
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 20. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption.
Adopted by the Board on ____________________, 1998 and approved by the
Company's sole shareholder on ________________, 1998.
-20-
<PAGE>
PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
<TABLE>
<CAPTION>
Date of
Adoption/
Amendment/ Date of Shareholder
Adjustment Section Effect of Amendment Approval
---------- ------- ------------------- ---------
<S> <C> <C> <C>
</TABLE>
-1-
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
--------------------
RAGEN MACKENZIE INCORPORATED
MARK MCCLURE
This Agreement dated as of the effective date indicated on the signature
page hereto, is between Ragen MacKenzie Incorporated, a corporation organized
under the laws of the state of Washington ("RMI") and Mark McClure ("Broker").
1. Employment. Broker will join RMI on June 16, 1994, and will be
----------
employed as a registered representative of RMI in accordance with the rules and
regulations of the New York Stock Exchange, Inc. During Broker's employment,
Broker shall serve RMI faithfully and to the best of his ability under the
direction of the Executive Committee of RMI, devoting substantially all of his
working time, attention, and energies to the business of RMI. Broker shall not
engage in any other business activity (except the management of personal
investments which in the aggregate do not interfere with the performance of
Broker's duties hereunder), without first obtaining the written consent of RMI.
2. Registration. Upon employment, Broker will promptly complete all
------------
application papers necessary in order to be admitted as a registered
representative of RMI in accordance with the rules and regulations of the New
York Stock Exchange, Inc., any other self-regulatory organization, or any state
having jurisdiction over the business activities of Broker or RMI. Broker shall
become a registered representative of RMI upon completion of all required
filings and upon receipt of all required approvals and licenses.
3. Term. Commencing on the effective date indicated on the signature page
----
hereto, this Agreement shall continue for so long as Broker is employed by RMI,
except those sections which specifically state that they shall be effective
following Broker's termination of employment.
4. Vested Stock Options. Broker shall be granted the options to purchase
--------------------
authorized but unissued common stock of RMI, par value $0.01 (the "Stock"),
subject to the terms and conditions of the attached Incentive Stock Option
Letter Agreement and the Ragen MacKenzie Incorporated 1993 Stock Option Plan.
Purchase of the Stock upon exercise of the options shall be contingent upon
Broker's execution of the Subscription Agreement and Shareholders Agreement
attached hereto as Attachments A and B respectively. In connection with the
purchase of the Stock, Broker knows that the Stock has not been registered under
either federal or state securities laws, and
<PAGE>
Broker represents and warrants that Broker is purchasing such Stock for
investment for Broker's own account and not on behalf of any other person, nor
with a view to, or for resale or other distribution of the Stock. Broker also
understands that RMI is under no obligation and has no intention to register the
Stock or take any actions as to make available exemptions from the registration
requirements of the state and federal securities laws and that the Stock cannot
be sold or otherwise distributed in the absence of an exemption from such
registration requirements. Broker also acknowledges that Attachments A and B
hereto contain rights of first refusal with respect to sales of such Stock and
other transfer restrictions, and Broker agrees to abide by such restrictions.
Broker agrees to cooperate fully with RMI and to provide any information which
may be necessary to enable RMI to qualify for applicable exemptions from
registration requirements with respect to the sale of the Stock to Broker
hereunder.
5. Contingent Options. Broker shall also be granted further options to
------------------
purchase authorized but unissued common stock of RMI, par value $0.01, subject
to the terms and conditions of the attached Agreement to Grant Stock Option.
6. Disclosure of Information and Retention of Records. Broker agrees that
--------------------------------------------------
he shall not at any time, either during his tenure as a registered
representative or employee or after such tenure, divulge to any person, firm or
corporation, any nonpublic information received by him concerning RMI's
customers, clients, and accounts (other than accounts directly serviced by
Broker), or the business or financial aspects of RMI or its business. The
parties agree that monetary damages are not adequate to compensate RMI for a
breach of this section and that injunctive relief shall be available to RMI.
7. Compensation. As compensation for Broker's services hereunder, and,
------------
contingent upon Broker's continued employment hereunder, Broker shall be paid
the following amounts:
a) During the first six months of Broker's employment (ending as of
the end of December 16, 1994), Broker shall be paid $17,333 per month. At
RMI's option, such amount may be paid as of the end of each month, or
prepaid in one or more lump sum payments. During the first six months of
Broker's employment (ending as of the end of the December, 1994 commission
month), Broker shall be paid 40% of Broker's aggregate gross commissions in
excess of $130,000 generated during such six month period. Such payment
shall be made as of the end of each month after such level of aggregate
gross commissions has been exceeded until the end of the sixth month of
Broker's employment.
-2-
<PAGE>
b) Thereafter, during each fiscal year of RMI (ending September 30),
Broker shall be paid monthly the percentages ("Pay-Out Rate") of gross
commissions generated during such month in accordance with the then current
RMI commission schedule. The commission schedule set forth below is current
as of the effective date of this agreement but may be altered from time to
time by RMI in accordance with changes generally made applicable to retail
representatives. For fiscal years 1994 and 1995, Broker's initial Pay-Out
Rate shall be 40%. The initial Pay-Out Rate during any subsequent fiscal
year shall be based on the level of Broker's gross commissions for the
immediately prior full fiscal year.
<TABLE>
<CAPTION>
Gross Commissions
Year to Date or
Prior Fiscal Year
Whichever is Greater Pay-Out Rate
- -------------------- ------------
<S> <C>
Less than $125,000 25%
$125,000 - $150,000 30% retroactive to
beginning of fiscal year
$150,000 - $175,000 35% retroactive to
beginning of fiscal year
Greater than $175,000 40% retroactive to
beginning of fiscal year
</TABLE>
c) Broker shall be involved in management efforts at the Corporation,
and shall be directed in those efforts by John MacKenzie. Broker shall
also be additionally compensated so long as he is actively involved in
management efforts at the Corporation, as follows:
1) For the first twelve months, ending June 16, 1995, Broker
will commit 20%-25% of his time to management efforts, and shall be
compensated at a rate of $50,000 per year.
2) For the second twelve months, ending June 16, 1996, Broker
will commit 40%-50% of his time to management efforts, and shall be
compensated at a rate of $100,000 per year.
3) For the third twelve months, ending June 16, 1997, Broker
will commit 60%-75 % of his time to management efforts, and shall be
compensated at a rate of $150,000 per year.
-3-
<PAGE>
4) After June 16, 1997, Broker will commit 75%-80% of his time
to management efforts, and shall be compensated at a rate of $200,000
per year.
The above payments do not preclude the possibility of a bonus for
management services.
8. Indemnification. RMI shall indemnify Broker and hold him harmless from
---------------
any claim, judgment, order, award, or other damages, including reasonable
attorneys' fees incurred by Broker as the result of any suit or arbitration
proceeding initiated by Kidder Peabody ("Former Employer") or any affiliate
thereof in connection with Broker's termination of employment with Former
Employer and assuming duties with RMI, provided however, that RMI shall not be
liable for payment of any outstanding indebtedness or other obligation owing to
Former Employer by Broker which does not arise as a result of Broker's
termination of employment with Former Employer. Therefore RMI will not be
liable for the repayment to Former Employer of advances, bonuses, "up front"
money or incentives of any kind paid to Broker by Former Employer, or for sums
arising out of claims by customers of the Former Employer for the period their
account was with the Former Employer. Broker's damages, in the event of any
injunctive decree against Broker, shall be limited to the payment monthly, for a
period not to exceed six (6) months, of the compensation described in Section 7
hereof. In the event such a proceeding is initiated against Broker, RMI shall
assume, through its counsel, the defense of such action and shall be liable for
all fees, costs, and awards incurred in connection with said proceedings.
Broker may, at his own expense, also engage counsel of his own choosing to
work with RMI's counsel in furthering Broker's defense, provided, that Broker's
counsel shall not control Broker's defense without the written approval of RMI,
which approval may provide, among other things, that RMI's obligation to
indemnify and hold Broker harmless under this paragraph shall terminate.
9. Termination. RMI may terminate Broker's employment at any time without
-----------
notice upon the good faith determination by the Executive Committee of RMI that
Broker should be terminated for "cause". Cause shall include a material breach
of any obligation created by this Agreement; failure to become approved or
termination of any such approval by the New York Stock Exchange or any other
exchange or securities association of which RMI is a member, if such approval is
required; or gross misconduct, theft, fraud, criminal conduct, any conduct that
is actually or potentially harmful to RMI or its reputation, or failure by
Broker to meet reasonable performance standards as may be set by the Executive
Committee from time to time. If Broker's employment is terminated under this
Section, RMI's compensation
-4-
<PAGE>
obligation to Broker and all other obligations of either party to the other
under this Agreement (except those as set forth herein which state they shall
survive the termination of this Agreement) shall terminate as of the last day of
the month in which termination occurs.
10. Miscellaneous.
-------------
a. This Agreement and all documents executed and delivered hereunder
shall be deemed to be contracts under the laws of the state of Washington
and for all purposes shall be construed in accordance with such laws.
b. Except as otherwise expressly provided in this Agreement, all
communications, requests, consents, and other notices provided for in this
Agreement shall be in writing and shall be deemed given if mailed by
certified or registered mail, postage prepaid, addressed as follows:
(i) If to RMI, to Ragen MacKenzie Incorporated, 999 Third Avenue,
Suite 4300, Seattle, Washington 98104, Attention: Robert J.
Mortell, Jr.
(ii) If to Broker, to the business address of Broker as shown on the
records of RMI.
Notwithstanding the foregoing provisions of this Section, so long as
Broker is employed by RMI, any such communication, request, consent, or
other notice shall be deemed given if delivered as follows: If to RMI, by
hand delivery to any member of the Executive Committee; if to Broker, by
hand delivery to him.
c. This Agreement describes the entire compensation promised the
Broker and supersedes any prior oral or written agreement.
d. This Agreement encompasses the entire contract between Broker and
RMI and supersedes any prior oral or written agreement. No provision of
this Agreement shall be altered, amended, revoked, or waived except by an
instrument in writing signed by the party sought to be charged with such
amendment, revocation, or waiver. Except as herein provided to the
contrary, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective legal representatives,
heirs, successors, and assigns.
-5-
<PAGE>
DATED AND EFFECTIVE as of the 16th day of June, 1994.
RAGEN MACKENZIE INCORPORATED, BROKER:
A Washington Corporation:
__________________________ _________________________
Robert J. Mortell, Jr. Mark McClure
Secretary and Chief Financial Officer
-6-
<PAGE>
ADDENDUM TO THE EMPLOYMENT AGREEMENT OF
MARK MCCLURE
This addendum dated as of the effective date indicated below, is between
Ragen MacKenzie Incorporated, a corporation organized under the laws of the
state of Washington ("RMI") and Mark McClure ("Broker"). Subsection (c) of the
section entitled "Compensation" in the Employment agreement between RMI and
------------
Broker dated June 16, 1994 is hereby entirely revoked and nullified. In
substitution for that subsection, the following is hereby agreed between RMI and
Broker.
c) Broker shall be involved in management efforts at the
Corporation, and shall be directed in those efforts by Stan Freimuth.
Broker shall also be additionally compensated so long as he is
actively involved in management efforts at the Corporation, as
follows:
1) For the first twelve months, ending June 16, 1995,
Broker will commit 20% -25 % of his time to management
efforts, and shall be compensated at a rate of $50,000 per
year.
2) For the second twelve months, ending June 16, 1996,
Broker will commit 40%-50% of his time to management
efforts, and shall be compensated at a rate of $100,000 per
year.
3) For the period from June 17, 1996 to September 30, 1996,
Broker will commit 60% -75% of his time to management
efforts, and shall be compensated at a rate of $150,000 per
year.
4) For the period from October 1, 1996 to September 30,
1997, Broker will commit 60 -75% of his time to management
efforts and shall be compensated at the rate of $100,000 per
year and be entitled to a $50,000 draw versus the Executive
Committee management bonus he may receive on September 30,
1997.
5) After October 1, 1997, Broker will commit 75%-80% of his
time to management efforts, and shall be compensated at a
rate of $100,000 per year, without any draw versus a
possible future Executive Committee management bonus.
-7-
<PAGE>
The above payments neither preclude nor guarantee the
possibility of a bonus for management services.
DATED AND EFFECTIVE as of the 3rd day of June, 1997.
RAGEN MACKENZIE INCORPORATED
A Washington Corporation BROKER:
______________________________ ___________________________
Robert J. Mortell, Jr. Mark McClure (Broker)
President
-8-
<PAGE>
EXHIBIT 10.14
RAGEN MACKENZIE, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I-PURPOSE
1.01. PURPOSE.
The Ragen MacKenzie, Inc. Employee Stock Purchase Plan is intended to provide a
method whereby employees of Ragen MacKenzie, Inc. and its subsidiary
corporations (hereinafter referred to as the "Company") will have an opportunity
to acquire a proprietary interest in the Company through the purchase of shares
of the Common Stock of the Company. It is the intention of the Company to have
the Plan qualify as an "employee stock purchase plan" under (S)423 of the
Internal Revenue Code of 1986 as amended (the "Code"). The provisions of the
Plan shall be construed so as to extend and limit the operation of the Plan in a
manner consistent with the requirements of that section of the Code.
ARTICLE II-DEFINITIONS
2.01. COMPENSATION
"Compensation" shall mean 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.
2.02. COMMITTEE
"Committee" shall mean the individuals appointed by the Company's Board of
Directors, as described in Article XI.
2.03. ELIGIBLE EMPLOYEE
"Eligible Employee" means any employee:
(a) whose customary employment is for more than twenty (20) hours per week
and more than five (5) months per year,and
(b) who is not a highly compensated employee (as defined in section 414(q)
of the Code) with Compensation in excess of $100,000 per year.
Provided, however, that the Committee may decrease the eligibility requirements
under paragraph (a) for any future Offering.
2.04. SUBSIDIARY CORPORATION
"Subsidiary Corporation" shall mean any present or future corporation which:
1
<PAGE>
(a) would be a "subsidiary corporation" of Ragen MacKenzie, Inc., as that
term is defined in (S)424(f) of the Code, and
(b) is a domestic "subsidiary corporation" incorporated under the laws of
any state, or
(c) if not a domestic corporation, is designated as a Subsidiary
Corporation by the Committee.
ARTICLE III-ELIGIBILITY AND PARTICIPATION
3.01. INITIAL ELIGIBILITY.
Any Eligible Employee who has completed ninety (90) days' employment and is
employed by the Company on the date his participation in the Plan is to become
effective may participate in Offerings under the Plan which commence on or after
such ninety (90) day period; provided, however, that the Committee may decrease
or increase (up to two years) this minimum requirement for any future Offering.
3.02. LEAVE OF ABSENCE.
For purposes of participation in the Plan, a person on leave of absence shall be
deemed to be an Eligible Employee for the first 90 days of such leave of
absence, and such employee's employment shall be deemed to have terminated at
the close of business on the 90th day of such leave of absence, unless such
employee returns to regular full-time or part-time employment (as the case may
be) prior to the close of business on such 90th day. Termination by the Company
of any employee's leave of absence, other than termination of such leave of
absence on return to full time or part time employment, shall terminate such
employee's participation in the Plan and right to exercise any option.
3.03. RESTRICTIONS ON PARTICIPATION.
Notwithstanding any provisions of the Plan to the contrary, no employee shall be
granted an option to participate in the Plan:
(a) if, immediately after the grant, such employee would own stock, and/or
hold outstanding options to purchase stock, possessing 5% or more of the total
combined voting power or value of all classes of stock of the Company (for
purposes of this paragraph, the rules of (S)424(d) of the Code shall apply in
determining stock ownership of any employee); or
(b) which permits his rights to purchase stock under all employee stock
purchase plans of the Company to accrue at a rate which exceeds $15,000 in
fair market value of the stock (determined at the time such option is granted)
for each calendar year in which such option is outstanding.
3.04. COMMENCEMENT OF PARTICIPATION.
An Eligible Employee may become a participant by completing an authorization for
a payroll deduction on the form provided by the Company and filing it with the
office of the Treasurer of the Company on or before the date set by the
Committee, which date shall be prior to the Offering Commencement Date for the
Offering (as such terms are defined in (S)4.01 below). Payroll deductions for a
participant shall commence on the applicable Offering Commencement Date when his
authorization for a payroll
2
<PAGE>
deduction becomes effective and shall end on the Offering Termination Date of
the Offering to which such authorization is applicable, unless sooner terminated
by the participant as provided in Article VIII.
ARTICLE IV-OFFERINGS
4.01. SEMI-ANNUAL OFFERINGS.
The Plan will be implemented and operated through semi-annual offerings of the
Company's Common Stock (the "Offerings") beginning on the 1st day of January and
the 1st day of July each year and terminating on June 30th or December 31,
respectively. As used in the Plan, "Offering Commencement Date" means the
January 1 or July 1, as the case may be, on which the particular Offering begins
and "Offering Termination Date" means the June 30 or December 31 as the case may
be, on which the particular Offering terminates.
ARTICLE V-PAYROLL DEDUCTIONS
5.01. AMOUNT OF DEDUCTION.
At the time a participant files his authorization for payroll deduction, he
shall elect to have deductions made from his pay on each payday during the time
he is a participant in an Offering at the rate of any whole percentage, from 1%
to 15% of his Compensation in effect at the Offering Commencement Date of such
Offering. In the case of a part-time hourly employee, such employee's
Compensation during an Offering shall he determined by multiplying such
employee's hourly rate of pay in effect on the Offering Commencement Date by the
number of regularly scheduled hours of work for such employee during such
Offering.
5.02. PARTICIPANT'S ACCOUNT.
All payroll deductions made for a participant shall be credited to his account
under the Plan. A participant may not make any separate cash payment into such
account except when on leave of absence, and then only as provided in
(S)5.04(c).
5.03. CHANGES IN PAYROLL DEDUCTIONS.
A participant may discontinue his participation in the Plan as provided in
Article VIII, but no other change can be made during an Offering and,
specifically, a participant may not alter the amount of his payroll deductions
for that Offering.
5.04. LEAVE OF ABSENCE.
If a participant goes on a leave of absence, such participant shall have the
right to elect:
(a) to withdraw the balance in his or her account pursuant to (S)7.02,
(b) to discontinue contributions to the Plan but remain a participant in the
Plan, or
3
<PAGE>
(c) remain a participant in the Plan during such leave of absence, authorizing
deductions to be made from payments by the Company to the participant during
such leave of absence and undertaking to make cash payments to the Plan at the
end of each payroll period to the extent that amounts payable by the Company
to such participant are insufficient to meet such participant's authorized
Plan deductions.
ARTICLE VI-GRANTING OF OPTIONS
6.01. NUMBER OF OPTION SHARES.
On the Offering Commencement Date of each Offering, a participating employee
shall be deemed to have been granted an option to purchase a maximum number of
shares of the stock of the Company equal to an amount determined as follows: an
amount equal to (i) that percentage of the employee's Compensation which he has
elected to have withheld (but not in any case in excess of 15%) multiplied by
(ii) the employee's Compensation during the period of the Offering (iii) divided
by the purchase price of the option shares determined as provided in (S)6.02
below.
6.02. PURCHASE PRICE.
The purchase price of the option shares shall be the lesser of 85% of the
average daily fair market value of the stock during the Offering period or 85%
of the fair market value of the shares at the date of Exercise; provided,
however, that the Committee may establish a different purchase price for any
Offering based upon a different formula or fixed amount; and provided further,
that in no event may the purchase price be less than the lesser of 85% of the
fair market value of the shares at the date of Grant or 85% of the fair market
value of the shares at the date of Exercise. Fair market value as of any day
shall mean the closing bid price as reported on the National Association of
Securities Dealers Automated Quotation System or, if the stock is traded on a
stock exchange, the closing price for the stock on the principal such exchange.
If Common Stock of the Company is not admitted to trading on any date for which
closing prices of the stock are to be determined, then the fair market value of
the stock on that date shall be established by the Committee.
ARTICLE VII-EXERCISE OF OPTIONS
7.01. AUTOMATIC EXERCISE.
Unless a participant gives written notice to the Company as hereinafter
provided, his option for the purchase of stock with payroll deductions made
during any Offering will be deemed to have been exercised automatically on the
Offering Termination Date applicable to such Offering, for the purchase of the
number of full or fractional shares of stock which the accumulated payroll
deductions in his account at that time will purchase at the applicable option
price (but not in excess of the number of shares for which options have been
granted to the employee pursuant to (S)6.01), and any excess in his account at
that time will be returned to him.
4
<PAGE>
7.02. WITHDRAWAL OF ACCOUNT.
By written notice to the Treasurer of the Company, at any time prior to the
Offering Termination Date applicable to any Offering, a participant may elect to
withdraw all the accumulated payroll deductions in his account at such time.
7.03. FRACTIONAL SHARES.
Offerings may be made and exercised in full and fractional shares of stock,
unless the Committee determines that fractional shares will not be issued. If
the Committee makes such a determination that fractional shares will not be
issued under the Plan, any accumulated payroll deductions which would have been
used to purchase fractional shares will be returned to any employee promptly
following the termination of an Offering, without interest.
7.04. TRANSFERABILITY OF OPTION.
During a participant's lifetime, options held by such participant shall not be
transferable and shall be exercisable only by that participant.
7.05 DELIVERY OF STOCK.
As promptly as practicable after the Offering Termination Date of each Offering,
the Company will deliver to each participant, as appropriate, the stock
purchased upon exercise of his option.
ARTICLE VIII-WITHDRAWAL
8.01. IN GENERAL.
As indicated in (S)7.02, a participant may withdraw payroll deductions credited
to his account under the Plan at any time by giving written notice to the
Treasurer of the Company. All of the participant's payroll deductions credited
to his account will be paid to him promptly after receipt of his notice of
withdrawal, and no further payroll deductions will be made from his pay during
such Offering.
8.02. EFFECT ON SUBSEQUENT PARTICIPATION.
A participant's withdrawal from any Offering will not have any effect upon his
eligibility to participate in any succeeding Offering or in any similar plan
which may hereafter be adopted by the Company.
8.03. TERMINATION OF EMPLOYMENT.
Upon termination of the participant's employment for any reason (including
retirement but excluding death while in the employ of the Company or during the
continuation of a leave of absence for a period beyond 90 days), the payroll
deductions credited to his account will be returned to him, or, in the case of
his death subsequent to the termination of his employment, to the person or
persons entitled thereto under (S)12.01.
5
<PAGE>
8.04. TERMINATION OF EMPLOYMENT DUE TO DEATH.
Upon termination of the participant's employment because of his death, his
beneficiary (as defined in (S)12.01) shall have the right to elect, by written
notice given to the Treasurer of the Company prior to the earlier of the
Offering Termination Date or the expiration of a period of sixty (60) days
commencing with the date of the death of the participant, either:
(a) to withdraw all of the payroll deductions credited to the participant's
account under the Plan, or
(b) to exercise the participant's option for the purchase of stock on the
Offering Termination Date next following the date of the participant's death
for the purchase of the number of full and fractional shares of stock which
the accumulated payroll deductions in the participant's account at the date of
the participant's death will purchase at the applicable option price, and any
excess in such account will be returned to said beneficiary, without interest.
In the event that no such written notice of election shall be duly received by
the office of the Treasurer of the Company, the beneficiary shall automatically
be deemed to have elected, pursuant to paragraph (b), to exercise the
participant's option.
8.05. LEAVE OF ABSENCE.
A participant on leave of absence shall, subject to the election made by such
participant pursuant to (S)5.04, continue to be a participant in the Plan so
long as such participant is on continuous leave of absence. A participant who
has been on leave of absence for more than 90 days and who therefore is not an
Eligible Employee for the purpose of the Plan shall not be entitled to
participate in any Offering commencing after the 90th day of such leave of
absence. Notwithstanding any other provisions of the Plan, unless a participant
on leave of absence returns to regular full-time or part-time employment with
the Company at the earlier of the termination of such leave of absence or three
months from the 90th day of such leave of absence, such participant's
participation in the Plan shall terminate on whichever of such dates first
occurs.
ARTICLE IX-INTEREST
9.01. PAYMENT OF INTEREST
No interest will be paid or allowed on any money paid into the Plan or credited
to the account of any participant employee; except, however, that interest shall
be paid on any and all money which is distributed to an employee or his
beneficiary pursuant to the provisions of (S)(S)7.02, 8.01, 8.03, 8.04 and
10.01. Such distributions shall bear simple interest during the period from the
date of withholding to the date of return at the regular passbook savings
account rates per annum in effect at Seafirst Bank, Seattle, Washington during
the applicable Offering period, or if such rates are not published or otherwise
available for such purpose, at the regular passbook savings account rates per
annum in effect during such period at another major commercial bank in Seattle,
Washington selected by the Committee. Where the amount returned represents an
excess amount in an employee's account after such account has been applied to
the purchase of stock (except amounts attributable to fractional shares under
(S)7.03), the employee's account shall be deemed to have been applied first
toward purchase of stock under the Plan, so that interest shall be paid on the
last deposits to the account during the period which results in the excess
amount.
6
<PAGE>
ARTICLE X-STOCK
10.01. MAXIMUM SHARES.
The maximum number of shares which shall be issued under the Plan (subject to
adjustment upon changes in capitalization of the Company as provided in
(S)12.04) shall be 200,000 shares for all Offerings. If the total number of
shares for which options are exercised on any Offering Termination Date in
accordance with Article VI exceeds the maximum number of shares allowable under
the preceding sentence, the Company shall make a pro rata allocation of the
shares available for delivery and distribution in as nearly a uniform manner as
shall be practicable and as it shall determine to be equitable, and the balance
of payroll deductions credited to the account of each participant under the Plan
shall be returned to him as promptly as possible.
10.02. PARTICIPANT'S INTEREST IN OPTION STOCK.
The participant will have no interest in stock covered by his option until such
option has been exercised.
10.03. REGISTRATION OF STOCK.
Stock to be delivered to a participant under the Plan will be registered in the
name of the participant, or if the participant so directs by written notice to
the Treasurer of the Company prior to the Offering Termination Date applicable
thereto, in the names of the participant and one such other person as may be
designated by the participant, as joint tenants with rights of survivorship or
as tenants by their entireties, to the extent permitted by applicable law.
10.04. RESTRICTIONS ON EXERCISE.
The Board of Directors may, in its discretion, require as conditions to the
exercise of any option that the shares of Common Stock reserved for issuance
upon the exercise of the option shall have been duly listed, upon official
notice of issuance, upon a stock exchange, and that either:
(a) a Registration Statement under the Securities Act of 1933, as amended,
with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of purchase, in form
and substance satisfactory to the Company, that it is his intention to
purchase the shares for investment and not for resale or distribution.
ARTICLE XI-ADMINISTRATION
11.01. APPOINTMENT OF COMMITTEE
The Board of Directors shall appoint a committee (the "Committee") to administer
the Plan, which shall consist of no fewer than two members of the Board of
Directors. Members of the Committee may purchase stock under the Plan, if
otherwise eligible; however, no Committee member who participates in the Plan
may vote on any Board action with respect to the Plan.
7
<PAGE>
11.02. AUTHORITY OF COMMITTEE
Subject to the express provisions of the Plan, the Committee shall have plenary
authority in its discretion to interpret and construe any and all provisions of
the Plan, to adopt rules and regulations for administering the Plan, and to make
all other determinations deemed necessary or advisable for administering the
Plan. The Committee's determination on the foregoing matters shall be
conclusive.
11.03. RULES GOVERNING THE ADMINISTRATION OF THE COMMITTEE
The Board of Directors may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee may select one of its
members as its Chairman and shall hold its meetings at such times and places as
it shall deem advisable and may hold telephonic meetings. A majority of its
members shall constitute a quorum. All determinations of the Committee shall be
made by a majority of its members. The Committee may correct any defect or
omission or reconcile any inconsistency in the Plan, in the manner and to the
extent it shall deem desirable. Any decision or determination reduced to writing
and signed by a majority of the members of the Committee shall be as fully
effective as if it had been made by a majority vote at a meeting duly called and
held. The Committee may appoint a secretary and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
ARTICLE XII-MISCELLANEOUS
12.01. DESIGNATION OF BENEFICIARY.
A participant may file a written designation of a beneficiary who is to receive
any stock and/or cash under the terms of the Plan. Such designation of
beneficiary may be changed by the participant at any time by written notice to
the Treasurer of the Company. Upon the death of a participant, and upon receipt
by the Company of proof of identity and existence at the participant's death of
a beneficiary validly designated by him under the Plan, the Company shall
deliver such stock and/or cash to such beneficiary. In the event of the death
of a participant, and in the absence of a beneficiary validly designated under
the Plan who is living at the time of such participant's death, the Company
shall deliver such stock and/or cash to the executor or administrator of the
estate of the participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its discretion, may
deliver such stock and/or cash to the spouse or to any one or more dependents of
the participant as the Company may designate. No beneficiary shall, prior to
the death of the participant by whom he has been designated, acquire any
interest in the stock or cash credited to the participant under the Plan.
12.02. TRANSFERABILITY.
Neither payroll deductions credited to a participant's account nor any rights
with regard to the exercise of an option or to receive stock under the Plan may
be assigned, transferred, pledged, or otherwise disposed of in any way by the
participant other than by will or the laws of descent and distribution, and any
such attempted assignment, transfer, pledge or other disposition shall be
without effect.
8
<PAGE>
12.03. USE OF FUNDS.
No payroll deductions received or held by the Company under this Plan may be
used by the Company for any corporate purpose, and the Company shall not be
obligated to segregate such payroll deductions from other general assets.
12.04. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
If, while any options are outstanding, the outstanding shares of Common Stock of
the Company have increased, decreased, changed into, or been exchanged for a
different number or kind of shares or securities of the Company through
reorganization, merger, recapitalization, reclassification, stock split, reverse
stock split or similar transaction, appropriate and proportionate adjustments
may be made by the Committee in the number and/or kind of shares which are
subject to purchase under outstanding options and on the option exercise price
or prices applicable to such outstanding options. In addition, in any such
event, the number and/or kind of shares which may be offered in the Offerings
described in Article IV hereof shall also be proportionately adjusted. No
adjustments shall be made for stock dividends. For the purposes of this
paragraph, any distribution of shares to shareholders in an amount aggregating
20% or more of the outstanding shares shall be deemed a stock split, and any
distributions of shares aggregating less than 20% of the outstanding shares
shall be deemed a stock dividend.
Upon the dissolution or liquidation of the Company, or upon a reorganization,
merger or consolidation of the Company with one or more corporations as a result
of which the Company is not the surviving corporation, or upon a sale of
substantially all of the property or stock of the Company to another
corporation, the holder of each option then outstanding under the Plan, upon the
exercise of such option at the next Offering Termination Date, will be entitled
to receive the cash, securities and/or property under the same terms which other
shareholders of the Common stock were entitled to receive upon and at the time
of such transaction. The Board of Directors shall take such steps in connection
with such transactions as the Board shall deem necessary to assure that the
provisions of this (S)12.04 shall thereafter be applicable, as nearly as
reasonably may be determined, in relation to the cash, securities and/or
property to which the holder of such option might thereafter be entitled.
12.05. AMENDMENT AND TERMINATION.
The Plan shall not have a fixed termination date. The Board of Directors shall
have complete power and authority to terminate or amend the Plan; provided,
however, that the Board of Directors shall not, without the approval of the
stockholders of the Corporation (i) increase the maximum number of shares which
may be issued under the Plan (except pursuant to (S) 12.04), or (ii) amend the
requirements as to the class of employees eligible to purchase stock under the
Plan. No termination, modification, or amendment of the Plan may, without the
consent of an employee then having an option to purchase stock under the Plan,
adversely affect the rights of such employee under such option.
12.06. EFFECTIVE DATE.
The Plan shall become effective as of the date of the initial public offering of
the Company, subject to approval by the holders of the majority of the Common
Stock present and represented at a special or annual meeting of the shareholders
held on or before the date that is one year after the effective date of the
Plan. If the Plan is not so approved, the Plan shall not become effective.
9
<PAGE>
12.07. NO EMPLOYMENT RIGHTS.
The Plan does not, directly or indirectly, create any right for the benefit of
any employee or class of employees to purchase any shares under the Plan, or
create in any employee or class of employees any right with respect to
continuation of employment by the Company, and it shall not be deemed to
interfere in any way with the Company's right to terminate, or otherwise modify,
an employee's employment at any time.
12.08. EFFECT OF PLAN.
The provisions of the Plan shall, in accordance with its terms, be binding upon,
and inure to the benefit of, all successors of each employee participating in
the Plan, including, without limitation, such employee's estate and the
executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such employee.
12.09. GOVERNING LAW.
The laws of the State of Washington will govern all matters relating to this
Plan, except to the extent it is superseded by the laws of the United States.
Executed this ______ day of ______________, 1998.
RAGEN MACKENZIE, INC.
By:
---------------------------------------------
Title:
------------------------------------------
10
<PAGE>
EXHIBIT 10.15
RAGEN MacKENZIE INCORPORATED
AGREEMENT TO GRANT STOCK OPTION
TO: Mark McClure
We are please to inform you that Ragen MacKenzie Incorporated (the
"Corporation") hereby agrees to grant to you a stock option (the "Option") under
the Stock Option Plan of the Corporation in effect on the date of such grant
(the "Plan"). The grant of the Option will be conditioned upon your first
achieving gross production of at least $750,000 during any twelve consecutive
months (the "Current Production Goal") prior to June 16, 1999 (the "Goal
Deadline"). The option will entitle you to purchase a number of shares of the
Common Stock of the Corporation, equal to $25,000 divided by the Denominator
[the lower of $24.00, as proportionately adjusted to reflect any subdivision,
combination, reclassification or other recapitalization of the Company's common
stock into a greater or lesser number of shares (the "Ceiling Price"), or the
fully diluted net book value per share as of the date the Current Production
Goal is reached]. No fractional options shall be granted; round the result to
the nearest whole number divisible by 25. The minimum number of options which
can be earned under this agreement is 1,050. The maximum number of options
which can be earned under this agreement is 1,450.
For example, if the fully diluted net book value per share is $17.18 as of the
date the Current Production Goal is reached, then would earn options on 1,450
shares. ($25,000/$17.18 = 1,455, rounded down to 1,450). If the fully diluted
net book value per share is $24.00 as of the date the Current Production Goal is
reached, then you would earn options on 1,050 shares. ($25,000/$24.00 = 1,042,
rounded up to 1050.)
The per share exercise price of the Option will be the book value per share of
the Corporation's Common Stock on the rate of grant of the Option (which is
expected to be on or near the date you achieve the Current Production Goal). In
the event that book value per share on the date of grant is higher then the
Denominator, at such time as you exercise all or any portion of the Option, the
Corporation will make a cash payment to you (the "Equalization Payment") in an
amount equal to the difference between the Denominator and book value per share
on the date grant for each share purchased. The Equalization Payment will be
treated as ordinary income to you. (In the event that, prior to the Goal
deadline, the Option has not yet been granted, and a change of control of the
Corporation occurs that would result, under the Stock Option Plan of the
Corporation then available for option grants, in acceleration of vesting of
outstanding options, then, prior to such change of control, the Corporation
shall grant the Option, and the Option shall be vested and exercisable, whether
or not the Current Production Goal has been achieved, all subject to the terms
of such Stock Option Plan.)
The other terms of the Option will be as set forth in the Plan and in the
Option Letter Agreement evidencing the Option. It is anticipated that certain
of the terms to which the Option will be subject will be as follows:
Exercise: During your lifetime only you will be able to exercise the
--------
Option. The Option may also be exercised in the event of your death by the
personal representative of your estate or the beneficiary thereto. The
Administrator of the Plan may, in its sole discretion at the time of exercise,
determine that the exercise of the Option is subject to your prior execution of
a Shareholders Agreement, in the form in use at the time of the exercise,
whereby under certain circumstances you grant to the Corporation a right of
first offer to purchase the shares acquired by you upon exercise of the Option.
Payment for Shares: The Option may be exercised by the delivery of cash, a
------------------
personal check (unless at the time of exercise, the Administrator of the Plan
determines otherwise), or a bank certified or cashier's check.
Nature of the Option: The Company will use its best efforts to provide that
--------------------
the Option is treated as an incentive stock option or its equivalent.
Termination: The Option will terminate two (2) years from the date of
-----------
grant thereof or upon the earlier cessation of your relationship with the
Corporation or a related corporation, unless cessation is due to death or total
disability, in which case the Option shall terminate three (3) months after
cessation of such relationship.
<PAGE>
Transfer of Option: The Option will not be transferable except by will
-------------------
or by applicable laws of descent and distribution.
The effective date of this Agreement is the 16th day of June, 1994.
Very truly yours,
RAGEN MacKENZIE INCORPORATED
By
--------------------------
Robert J. Mortell, Jr.
Secretary
<PAGE>
EXHIBIT 10.16
CO #222
RAGEN MACKENZIE INCORPORATED
AGREEMENT TO GRANT STOCK OPTION
TO: Mark McClure
We are pleased to inform you that Ragen MacKenzie Incorporated (the
"Corporation") hereby agrees to grant to you a stock option (the "Option") under
the Stock Option Plan of the Corporation in effect on the date of such grant
(the "Plan"). The grant of the Option will be conditioned upon your first
achieving gross production of at least $850,000 during any twelve consecutive
months (the "Current Production Goal") prior to November 30, 1999 (the "Goal
-----------------
Deadline"). The Option will entitle you to purchase a number of shares of the
Common Stock of the Corporation, equal to $20,000 divided by the Denominator [
the lower of $46.00, as proportionately adjusted to reflect any subdivision,
combination, reclassification or other recapitalization of the Company's common
stock into a greater or lesser number of shares (the "Ceiling Price"), or the
fully diluted net book value per share as of the date the Current Production
Goal is reached]. No fractional options shall be granted; round the result to
the nearest whole number divisible by 25. The minimum number of options which
can be earned under this agreement is 425. The maximum number of options which
can be earned under this agreement is 550.
For example, if the fully diluted net book value per share is $35.98 as of the
date the Current Production Goal is reached, then you would earn options on 550
shares. ($20,000/$35.98 = 556 rounded to 550.) If the fully diluted net book
value per share is $46.00 as of the date the Current Production Goal is reached,
then you would earn options on 425 shares. ($20,000/$46.00 = 435, rounded to
425).
The per share exercise price of the Option will be the book value per share of
the Corporation's Common Stock on the date of grant of the Option (which is
expected to be on or near the date you achieve the Current Production Goal). In
the event that book value per share on the date of grant is higher than the
Denominator, at such time as you exercise all or any portion of the Option, the
Corporation will make a cash payment to you (the "Equalization Payment") in an
amount equal to the difference between the Denominator and book value per share
on the date of grant for each share purchased. The Equalization Payment will
be treated as ordinary income to you. (In the event that, prior to the Goal
Deadline, the Option has not yet been granted, and a change of control of the
Corporation occurs that would result, under the Stock Option Plan of the
Corporation then available for option grants, in acceleration of vesting of
outstanding options, then, prior to such change of control, the Corporation
shall grant the Option, and the Option shall be vested and exercisable, whether
or not the Current Production Goal has been achieved, all subject to the terms
of such Stock Option Plan.)
The other terms of the Option will be as set forth in the Plan and in the
Option Letter Agreement evidencing the Option. It is anticipated that certain
of the terms to which the Option will be subject will be as follows:
<PAGE>
Exercise: During your lifetime only you will be able to exercise the
--------
Option. The Option may also be exercised in the event of your death by the
personal representative of your estate or the beneficiary thereto. The
Administrator of the Plan may, in its sole discretion at the time of exercise,
determine that the exercise of the Option is subject to your prior execution of
a Shareholders Agreement, in the form in use at the time of the exercise,
whereby under certain circumstances you grant to the Corporation a right of
first offer to purchase the shares acquired by you upon exercise of the Option.
Payment for Shares: The Option may be exercised by the delivery of cash,
------------------
a personal check (unless at the time of exercise, the Administrator of the Plan
determines otherwise), or a bank certified or cashier's check.
Nature of the Option: The Company will use its best efforts to provide
--------------------
that the Option is treated as an incentive stock option or its equivalent.
Termination: The Option will terminate two (2) years form the date of
-----------
grant thereof or upon the earlier cessation of your relationship with the
Corporation or a related corporation, unless cessation is due to death or total
disability, in which case the Option shall terminate three (3) months after
cessation of such relationship.
Transfer of Option: The Option will not be transferable except by will or
------------------
by applicable laws of descent and distribution.
The effective date of this Agreement is February 25, 1997.
Very truly yours,
RAGEN MacKENZIE INCORPORATED
By /s/ Stanley G. Freimuth
-----------------------------
Stanley G. Freimuth
Chairman of the Board
<PAGE>
EXHIBIT 10.17
CO #178
RAGEN MacKENZIE INCORPORATED
AGREEMENT TO GRANT STOCK OPTION
TO: Stan Freimuth
We are pleased to inform you that Ragen MacKenzie Incorporated (the
"Corporation") hereby agrees to grant to you a stock option (the "Option") under
the Stock Option Plan of the Corporation in effect on the date of such grant
(the "Plan"). The grant of the Option will be conditioned upon your first
achieving gross production of at least $2,750,000 during any twelve consecutive
months (the "Current Production Goal") prior to April 29, 1999 (the "Goal
--------------
Deadline"). The Option will entitle you to purchase a number of shares of the
Common Stock of the Corporation, equal to $55,125 divided by the Denominator
[the lower of $35.00, as proportionately adjusted to reflect any subdivision,
combination, reclassification or other recapitalization of the Company's common
stock into a greater or lesser number of shares (the "Ceiling Price") or the
fully diluted net book value per share as of the date the Current Production
Goal is reached]. No fractional options shall be granted; round the result to
the nearest whole number divisible by 25. The minimum number of options which
can be earned under this agreement is 1,575. The maximum number of options
which can be earned under this agreement is 2,100.
For example, if the fully diluted net book value per share is $26.28 as of the
date the Current Production Goal is reached, then you would earn options on
2,100 shares. ($55,125/$26.28 = 2,098, rounded to 2,100.) If the fully
diluted net book value per share is $35.00 as of the date the Current Production
Goal is reached, then you would earn options on 1,575 shares. ($55,125/$35.00 =
1.575.)
The per share exercise price of the Option will be the book value per share of
the Corporation's Common Stock on the date of grant of the Option (which is
expected to be on or near the date you achieve the Current Production Goal). In
the event that book value per share on the date of grant is higher than the
Denominator, at such time as you exercise all or any portion of the Option, the
Corporation will make a cash payment to you (the "Equalization Payment") in an
amount equal to the difference between the Denominator and book value per share
on the date of grant for each share purchased. The Equalization Payment will be
treated as ordinary income to you. (In the event that, prior to the Goal
Deadline, the Option has not yet been granted, and a change of control of the
Corporation occurs that would result, under the Stock Option Plan of the
Corporation then available for option grants, in acceleration of vesting of
outstanding options, then, prior to such change of control, the Corporation
shall grant the Option, and the Option shall be vested and exercisable, whether
or not the Current Production Goal has been achieved, all subject to the terms
of such Stock Option Plan.)
The other terms of the Option will be as set forth in the Plan and in the
Option Letter Agreement evidencing the Option. It is anticipated that certain
of the terms to which the Option will be subject will be as follows:
Exercise: During your lifetime only you will be able to exercise the
--------
Option. The Option may also be exercised in the event of your death by the
personal representative of your estate or the beneficiary thereto. The
Administrator of the Plan may, in its sole discretion at the time of exercise,
determine that the exercise of the Option is subject to your prior execution of
a Shareholders Agreement, in the form in use at the time of the exercise,
whereby under certain circumstances you grant to the Corporation a right of
first offer to purchase the shares acquired by you upon exercise of the Option.
Payment for Shares: The Option may be exercised by the delivery of cash,
------------------
a personal check (unless at the time of exercise, the Administrator of the Plan
determines otherwise), or a bank certified or cashier's check.
Nature of the Option: The Company will use its best efforts to provide
--------------------
that the Option is treated as an incentive stock option or its equivalent.
Termination: The Option will terminate two (2) years from the date of
-----------
grant thereof or upon the earlier cessation of your relationship with the
Corporation or a related corporation, unless cessation is due to death or total
disability, in which case the Option shall terminate three (3) months after
cessation of such relationship.
<PAGE>
Transfer of Option: The Option will not be transferable except by will
------------------
or by applicable laws of descent and distribution.
The effective date of this Agreement is the 29th day of April, 1996.
Very truly yours,
RAGEN MacKENZIE INCORPORATED
By /s/ Robert J. Mortell, Jr.
--------------------------
Robert J. Mortell, Jr.
Secretary
<PAGE>
EXHIBIT 10.18
RAGEN MacKENZIE INCORPORATED
AGREEMENT TO GRANT STOCK OPTION
TO: Stan Freimuth
We are pleased to inform you that Ragen MacKenzie Incorporated (the
"Corporation") hereby agrees to grant to you a stock option (the "Option") under
the Stock Option Plan of the Corporation in effect on the date of such grant
(The "Plan"). The grant of the Option will be conditioned upon your first
achieving gross production of at least 53,000,000 during any twelve consecutive
months (the "Current Production Goal") prior to June 11, 1999 (the "Goal
-------------
Deadline"). The Option will entitle you to purchase a number of shares of the
Common Stock of the Corporation, equal to $50,000 divided by the Denominator
[the lower or $37.00, as proportionately adjusted to reflect any subdivision,
combination, reclassification or other recapitalization of the Company's common
stock into greater or lesser number of shares (the "Ceiling Price") or the fully
diluted net book value per share as of the date the Current Production Goal is
reached]. No fractional options shall be granted; round the result to the
nearest whole number divisible by 25. The minimum number of options which can be
earned under this agreement is 1,350. The maximum number of options which can be
earned under this agreement is 1,900.
For example, if the fully diluted net book value per share is $26.28 as of the
date the Current Production Goal is reached, then you would earn options on
1,900 shares. ($50,000/$26.28 = 1,903 rounded to 1,900). If the fully diluted
net book value per share is $37.00 as of the date the Current Production Goal is
reached, then you would earn options on 1,350 shares. ($50,000/$37.00 = 1351,
rounded to 1350).
The per share exercise price of the Option will be the book value per share of
the Corporation's Common Stock on the date of grant of the Option (which is
expected to be on or near the date you achieve the Current Production Goal). In
the event that book value per share on the date of grant is higher than the
Denominator, at such time as you exercise all or any portion of the Option, the
Corporation will make a cash payment to you (the "Equalization Payment") in an
amount equal to the difference between the Denominator and book value per share
on the date of grant for each share purchased. The Equalization Payment will be
treated as ordinary income to you. (In the event that, prior to the Goal
Deadline, the Option has not yet been granted, and a change of control of the
Corporation occurs that would result, under the Stock Option Plan of the
Corporation then available for option grants, in acceleration of vesting of
outstanding options, then, prior to such change of control, the Corporation
shall grant the Option, and the Option shall be vested and exercisable, whether
or not the Current Production Goal has been achieved, all subject to the terms
of such Stock Option Plan.)
The other terms of the Option will be as set forth in the Plan and in
the Option Letter Agreement evidencing the Option. It is anticipated that
certain of the terms to which the Option will be subject will be as follows:
Exercise: During your lifetime only you will be able to exercise the
---------
Option. The Option may also be exercised in the event of your death by the
personal representative of your estate or the beneficiary thereto. The
Administrator of the Plan may, in its sole discretion at the time of exercise,
determine that the exercise of the Option is subject to your prior execution of
a Shareholders Agreement, in the form in use at the time of the exercise,
whereby under certain circumstances you grant to the Corporation a right of
first offer to purchase the shares acquired by you upon exercise of the Option.
Payment for Shares: The Option may be exercised by the delivery of cash,
-------------------
a personal check (unless at the time of exercise, the Administrator of the Plan
determines otherwise), or a bank certified or cashier's check.
Nature of the Option: The Company will use its best efforts to provide
---------------------
that the Option is treated as an incentive stock option or its equivalent.
Termination: The Option will terminate two (2) years from the date of
-----------
grant thereof or upon the earlier cessation of your relationship with the
Corporation or a related corporation, unless cessation is due to death or total
disability, in which case the Option shall terminate three (3) months after
cessation of such relationship.
<PAGE>
Transfer of Option: The Option will not be transferable except by will
------------------
or by applicable laws of descent and distribution.
The effective date of this Agreement is the 11th day of June, 1996.
Very truly yours,
RAGEN MacKENZIE INCORPORATED
By /s/ Robert J. Mortell, Jr.
---------------------------
Robert J. Mortell, Jr.
President
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-50421 of Ragen MacKenzie Group Incorporated on Form S-4 of our report
dated November 6, 1997 (May 29, 1998 as to note 14) on the financial
statements of Ragen MacKenzie Incorporated as of September 26, 1997 and
September 27, 1996, and for each of the three years in the period ended
September 26, 1997, and our report dated April 16, 1998 on the statement of
financial condition of Ragen MacKenzie Group Incorporated as of April 16,
1998, appearing in the Proxy Statement/Prospectus, which is a part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Proxy Statement/Prospectus.
Deloitte & Touche LLP
Seattle, Washington
May 29, 1998
<PAGE>
EXHIBIT 23.6
CONSENT TO BE NAMED IN REGISTRATION STATEMENT
I, the undersigned, hereby consent to be named as a nominee for election as
a director of Ragen MacKenzie Group Incorporated ("RMGI") in the Form S-4 and
the Form S-1 Registration Statements that were initially filed by RMGI with the
Securities and Exchange Commission on April 17, 1998 and April 22, 1998,
respectively.
DATED: 4/28/98 Signature: /s/ Gregory B. Maffei
-----------------------------
Print name: Gregory B. Maffei
----------------------------
<PAGE>
Exhibit 99.1
RAGEN MACKENZIE INCORPORATED
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS ON JUNE 21, 1998
The undersigned hereby appoint(s) Stanley G. Freimuth and V. Lawrence
Bensussen and each of them as proxies, with full power of substitution, to
represent and vote as designated all shares of Common Stock of Ragen MacKenzie
Incorporated (the "Company") held of record by the undersigned on May 27, 1998
at the Special Meeting of Shareholders of the Company to be held at the offices
of the law firm of Perkins Core LLP, 1201 Third Avenue, 41st Floor Large
Conference Room, Seattle, Washington, at 2:00 p.m. Pacific Daylight Time on
Sunday, June 21, 1998, or any adjournment or postponement thereof, with
authority to vote upon the matters listed on the other side of this proxy card
and with discretionary authority as to any other matters that may properly come
before the meeting.
IMPORTANT--PLEASE DATE AND SIGN ON THE OTHER SIDE.
<PAGE>
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE SHAREHOLDER IN
THE SPACE PROVIDED. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED "FOR" THE
PROPOSALS.
- --------------------------------------------------------------------------------
The Board of Directors recommends a vote "FOR" the Proposals.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FOR AGAINST ABSTAIN
(1) PROPOSAL TO APPROVE THE REORGANIZATION OF RAGEN [_] [_] [_]
MACKENZIE INCORPORATED (THE "COMPANY") AND ITS
SUBSIDIARIES, INCLUDING APPROVAL OF THE
AGREEMENT AND PLAN OF MERGER DATED AS OF MAY 29,
1998 BY AND AMONG THE COMPANY, RAGEN MACKENZIE
GROUP INCORPORATED, A WHOLLY OWNED SUBSIDIARY OF
THE COMPANY ("HOLDING COMPANY") AND RMGI MERGER
CORP., A WHOLLY OWNED SUBSIDIARY OF THE HOLDING
COMPANY.
FOR AGAINST ABSTAIN
(2) PROPOSAL TO DIRECT RAGEN MACKENZIE INCORPORATED [_] [_] [_]
TO ELECT KIRBY L. CRAMER, ARTHUR W. HARRIGAN,
JR., PETER MADOFF AND GREGORY B. MAFFEI TO THE
BOARD OF DIRECTORS OF HOLDING COMPANY
IMMEDIATELY PRIOR TO THE REORGANIZATION.
</TABLE>
_________________________________________________
Signature(s)_________________________________________ Date ______________
Please sign exactly as your name appears hereon. Attorneys, trustees, executors
and other fiduciaries acting in a representative capacity should sign their
names and give their titles. An authorized person should sign on behalf of
corporations, partnerships, associations, etc., and give his or her title. If
your shares are held by two or more persons, each person must sign. Receipt of
the notice of meeting and proxy statement is hereby acknowledged.
