<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14243
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RAGEN MACKENZIE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Washington 91-1898738
(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification Number)
</TABLE>
999 Third Avenue, Suite 4300 Seattle, Washington 98104
(Address of principal executive offices and zip code)
(206) 343-5000
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
As of February 3, 2000 the Company had 13,065,772 shares of common stock
outstanding.
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<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION................. 3
CONSOLIDATED STATEMENTS OF INCOME.............................. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................. 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 15
ITEM 5. OTHER INFORMATION.............................................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 15
SIGNATURES............................................................. 16
EXHIBIT INDEX.......................................................... 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, September 24,
1999 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
------
Cash............................................... $ 2,233 $ 4,972
Cash and market value of securities required to be
segregated under federal or other regulations..... 179,216 191,709
Deposits with clearing organizations............... 1,757 1,757
Receivable from:
Brokers, dealers, and clearing organizations..... 2,046 1,194
Customers........................................ 208,714 184,943
Securities owned, at market value.................. 150,167 125,781
Securities purchased under agreements to resell.... 141,919 123,816
Securities borrowed................................ 2,751 2,026
Furniture, equipment, and leasehold improvements--
net............................................... 3,336 3,093
Other assets....................................... 7,185 9,243
-------- --------
Total........................................ $699,324 $648,534
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Borrowings....................................... $ 63,650 $ --
Payable to:
Brokers, dealers, and clearing organizations... 8,946 10,074
Customers...................................... 347,783 345,804
Securities sold but not yet purchased, at market
value........................................... 136,989 119,255
Securities sold under agreements to repurchase... 38,050
Accrued compensation and related benefits........ 6,387 9,774
Other liabilities and accrued expenses........... 8,916 4,931
-------- --------
Total liabilities............................ 572,671 527,888
Shareholders' Equity:
Preferred stock, $.01 par value--Authorized
10,000,000 shares; no shares issued and
outstanding.....................................
Common stock, $.01 par value--Authorized
50,000,000 shares; issued and outstanding,
13,457,390 shares............................... 135 135
Additional paid-in capital....................... 47,668 47,697
Common shares issuable under deferred
compensation arrangements, less unamortized
purchase discount of $443 and $334,
respectively.................................... 2,438 1,757
Treasury stock--441,884 and 542,197 shares,
respectively, at cost........................... (5,138) (6,328)
Retained earnings................................ 81,550 77,385
-------- --------
Total shareholders' equity................... 126,653 120,646
-------- --------
Total........................................ $699,324 $648,534
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
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RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three-Month Period Ended
-------------------------
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Principal transactions,
net...................... $ 6,460 $ 8,261
Commissions............... 10,765 8,362
Other..................... 1,869 1,490
------- -------
Total operating
revenues............... 19,094 18,113
Interest Income........... 9,606 9,375
------- -------
Total revenues.......... 28,700 27,488
Interest expense.......... 5,028 5,771
------- -------
Net revenues............ 23,672 21,717
------- -------
NONINTEREST EXPENSES:
Compensation and
benefits................. 12,130 10,821
Occupancy and equipment... 1,803 1,239
Communications............ 1,101 947
Clearing and exchange
fees..................... 803 585
Other..................... 1,523 1,189
------- -------
Total noninterest
expenses............... 17,360 14,781
------- -------
INCOME BEFORE TAXES ON
INCOME..................... 6,312 6,936
TAXES ON INCOME............. 2,147 2,365
------- -------
NET INCOME.................. $ 4,165 $ 4,571
======= =======
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic................... 12,971 13,336
Diluted................. 13,540 13,478
EARNINGS PER COMMON SHARE:
Basic................... $ .32 $ .34
Diluted................. .31 .34
</TABLE>
See Notes to Consolidated Financial Statements
4
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RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three-Month Period Ended
-------------------------
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 4,165 $ 4,571
Adjustments to reconcile net income to net cash
provided (used) by
operating activities:
Depreciation and amortization.................... 392 165
Deferred tax benefit............................. (70) (196)
Amounts retained under deferred compensation
arrangements.................................... 625 677
Deferred compensation expense.................... 56
Other............................................ 68
Cash provided (used) by changes in operating
assets and liabilities:
Cash and market value of securities required to
be segregated under federal or other
regulations................................... 12,493 (43,446)
Deposits with clearing organizations........... (400)
Receivable from:
Brokers, dealers, and clearing organizations... (852) 500
Customers...................................... (23,771) (17,137)
Securities owned............................... (24,386) 33,941
Securities purchased under agreements to
resell........................................ (18,103) 42,861
Securities borrowed............................ (725) (3,134)
Other assets................................... 2,043 605
Payable to:
Brokers, dealers, and clearing
organizations............................... (1,128) (4,241)
Customers.................................... 1,979 80,385
Securities sold but not yet purchased.......... 17,734 (39,710)
Securities sold under agreements to
repurchase.................................... (38,050) (3,400)
Accrued compensation and related benefits...... (3,387) (384)
Other liabilities and accrued expenses......... 3,985 2,458
------- -------
Net cash provided (used) by operating activities... (66,932) 54,115
INVESTING ACTIVITIES:
Purchases of furniture, equipment, and leasehold
improvements...................................... (618) (138)
FINANCING ACTIVITIES:
Proceeds from (repayment of) borrowings, net....... 63,650 (47,225)
Proceeds from issuance of common stock............. 1,161 55
Repurchases of common stock for treasury........... -- (1,531)
------- -------
Net cash provided (used) by financing activities... 64,811 (48,701)
------- -------
INCREASE (DECREASE) IN CASH.......................... (2,739) 5,276
CASH:
Beginning of period................................ 4,972 2,143
------- -------
End of period...................................... $ 2,233 $ 7,419
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the fiscal period for:
Interest......................................... $ 4,908 $ 6,355
Federal income taxes............................. 0 0
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include Ragen
MacKenzie Group Incorporated and its subsidiaries (collectively, the Company).
Ragen MacKenzie Group Incorporated is a holding company engaged, through its
subsidiaries, in securities brokerage and related investment services that
include retail and institutional brokerage of securities, investment research,
market making, trading, underwriting, distribution of corporate securities and
correspondent clearing. Ragen MacKenzie Group Incorporated's two operating
subsidiaries, Ragen MacKenzie Incorporated (RMI) and Ragen MacKenzie
Investment Services, Inc. (RMIS), are each member firms of the National
Association of Securities Dealers, Inc. and registered with the Securities and
Exchange Commission (the SEC) as broker/dealers, and have retail offices
located in seven western states. RMI is a member firm of the New York Stock
Exchange (the NYSE).
These financial statements have been prepared pursuant to the rules and
regulations of the SEC and, therefore, do not include all information and
notes required by generally accepted accounting principles for complete
financial statements. The interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
presented. The nature of the Company's business is such that the results of
any interim period are not necessarily indicative of results for a full year.
These financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto for the fiscal year ended September
24, 1999 included in the Company's Annual Report on Form 10-K (the 1999 Annual
Report) as filed with the SEC.
NOTE 2. SHAREHOLDERS' EQUITY
During the quarter ended December 31, 1999, 100,313 shares of the Company's
treasury stock were issued upon the exercise of options under the Company's
employee stock option plans.
NOTE 3. NET CAPITAL REQUIREMENTS
The broker/dealer subsidiaries of the Company are subject to the Uniform Net
Capital Rule 15c3-1 (the Rule) under the Securities Exchange Act of 1934,
which requires the maintenance of minimum net capital. RMI has elected to
compute net capital under the alternative provisions of the Rule, which
require RMI to maintain net capital, as defined, equal to the greater of
$1,000,000 or 2% of aggregate debit items arising from customer transactions,
as defined. At December 31, 1999, RMI's net capital was $108,027,000, which
was 55% of aggregate debit items, and which exceeded the minimum net capital
requirement of $3,912,000 by $104,115,000.
RMIS follows the primary (aggregate indebtedness) method under the Rule,
which requires the maintenance of minimum net capital and requires that the
ratio of aggregate indebtedness to net capital, both as defined, not exceed 15
to 1. At December 31, 1999, RMIS had net capital of $488,000, which was
$388,000 in excess of its required net capital of $100,000, and had a net
capital ratio of 2.2 to 1.
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 4. EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) and diluted EPS are required to be computed
using the methods specified in Statement of Financial Accounting Standards No.
128, Earnings per Share. Basic EPS is calculated using the weighted average
number of common shares outstanding for the period, and diluted EPS is
computed using the weighted average number of shares and dilutive common
equivalent shares outstanding calculated under the treasury stock method.
6
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
The following table sets forth the computations for basic and diluted
earnings per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three-Month Period Ended
-------------------------
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Net income.......................................... $4,165 $4,571
====== ======
Denominator:
Weighted-average basic shares outstanding........... 12,971 13,336
Dilutive effect of employee stock plans............. 569 142
------ ------
Weighted-average diluted shares outstanding......... 13,540 13,478
====== ======
Earnings per common share:
Basic............................................... $ .32 $ .34
====== ======
Diluted............................................. $ .31 $ .34
====== ======
</TABLE>
Options to purchase 2,450 shares and 177,652 shares for 1999 and 1998,
respectively, were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average
market price of the common shares for the related period.
NOTE 5. SEGMENT REPORTING DATA
In 1999, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company offers a wide variety of
products and services, primarily those of a full service broker-dealer,
through its two operating segments: retail distribution and institutional
distribution. The Company's reportable segments are managed separately based
on the types of products and services offered and their related client bases.
The retail distribution segment includes brokerage services and products
(such as purchase and sale of securities, investment advisory services, and
margin lending) provided to individual investors through retail branches of
the Company's two broker-dealer subsidiaries, net interest income earned on
account balances of individual investors, correspondent brokerage services,
and market making of equity and fixed income securities which is generally
conducted to facilitate transactions by individual investors.
The institutional distribution segment includes securities brokerage
services emphasizing the sale of equities and fixed income products to
institutions, investment banking services (such as mergers and acquisitions
advisory services and management and participation in underwritings, exclusive
of sales credits related to individual investors which are included in the
retail distribution segment), and market making of certain fixed income
securities, including collateralized mortgage obligations and U.S. government
and government agency obligations, where the couterparties are generally other
broker-dealers and banks.
The Company has not disclosed asset information by segment as the
information is not produced internally. However, total assets attributable to
the institutional distribution segment are predominately comprised of fixed
income trading securities, which include U.S. government and government agency
obligations and collateralized mortgage obligations, and certain securities
purchased under agreements to resell. Total assets attributable to the retail
distribution segment generally include all of the assets not included in the
institutional distribution segment.
7
<PAGE>
RAGEN MACKENZIE GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(unaudited)
Financial information by segment for the three-month period ended December
31, 1999 and December 31, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Retail Institutional
Distribution Distribution Total
------------ ------------- -------
<S> <C> <C> <C>
December 31, 1999
Total operating revenues.................... $15,161 $3,933 $19,094
Interest income, net........................ 4,886 (308) 4,578
Net revenues................................ 20,047 3,625 23,672
Income before taxes on income............... 5,485 827 6,312
December 31, 1998
Total operating revenues.................... 12,411 5,702 18,113
Interest income, net........................ 4,208 (604) 3,604
Net revenues................................ 16,619 5,098 21,717
Income before taxes on income............... 5,126 1,810 6,936
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the related Notes thereto
appearing in Item 1 of this report. In addition to historical information,
this Form 10-Q contains and may incorporate by reference statements which may
constitute forward-looking statements that involve risks and uncertainties.
The words "believe", "expect", "intend", "anticipate", variations of such
words, and similar expressions identify forward-looking statements, but their
absence does not mean that the statement is not forward-looking. These
forward-looking statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Accordingly, actual results may differ materially from those
anticipated or expressed in such statements. Potential risks and uncertainties
include, among other things, the general risks of the securities industry,
risks of reduced revenue during periods of lower stock prices or reduced
trading volume; dependence on, and ability to retain and recruit, key
personnel; failure to complete the merger with Wells Fargo & Company (Wells
Fargo); dependence on proprietary research; significant fluctuations in
quarterly results; regional concentration; competition; management of growth
of new and existing businesses; the risks relating to proprietary trading and
correspondent brokerage services; risks of extension of credit; risks relating
to regulation; risks relating to litigation and potential securities law
liability; risks relating to Year 2000 compliance; and market, credit and
liquidity risks associated with market-making, principal trading and
underwriting activities. Except as required by law, the Company undertakes no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. More information about factors that
could affect the Company's financial results is included in the section of the
Company's 1999 Annual Report entitled "Additional Factors That May Affect
Future Results."
The Company's discussion of the issues surrounding the Year 2000 contain
forward-looking statements. These forward-looking statements include, but are
not limited to, discussions concerning (1) the financial impact of the Year
2000 project; (2) the Company's estimated timetables for completion of each
phase of the project; (3) the readiness of third-party service providers,
including the functioning of the Company's core brokerage software provided by
an outside software provider; and (4) contingency plans. Many factors,
including those outside of the control of the Company and those that are
difficult or impossible to predict at this time, could cause actual results to
be materially different than those anticipated and expressed in these forward-
looking statements.
OVERVIEW
The Company's primary business is retail securities brokerage, which it
conducts in its Seattle headquarters and 33 additional offices in seven
Western states, which include 25 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 90 publicly
traded companies headquartered in the Pacific Northwest and maintains a
recommended list of 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.
Financial information for the three months ended December 31, 1999 and
December 31, 1998 regarding the Company's two industry segments, retail
distribution and institutional distribution, including the amount of total
operating revenues, net interest income, net revenues and income before taxes
on income attributable to each segment, is set forth in Note 5, entitled
"Segment Reporting Data," of the Notes to Consolidated Financial Statements
appearing in this Form 10-Q.
RECENT DEVELOPMENTS
On September 28, 1999, RMGI entered into an Agreement and Plan of Merger
(the Merger Agreement) with Wells Fargo and Romero Acquisition Corp., a wholly
owned subsidiary of Wells Fargo. Under the terms of the Merger Agreement,
Romero Acquisition Corp. will merge with RMGI and RMGI will become a wholly
9
<PAGE>
owned subsidiary of Wells Fargo. In the acquisition, Wells Fargo will issue
$18.75 worth of its common stock in exchange for each outstanding share of the
Company's Common Stock, subject to adjustment if the average price of Wells
Fargo's common stock is below $36 or above $42 per common share over a period
of time as specified in the Merger Agreement.
As a condition to Wells Fargo entering into the Merger Agreement, RMGI and
Wells Fargo entered into a Stock Option Agreement (the Option Agreement),
pursuant to which RMGI granted to Wells Fargo an irrevocable option to
purchase up to 2,570,093 authorized and unissued shares of the Company's
Common Stock at a price of $15.50 per share, exercisable upon the occurrence
of certain events related to the termination of the Merger Agreement. Under
certain circumstances, RMGI may be required to purchase the option or the
shares acquired pursuant to the exercise of the option.
The Merger Agreement has been approved by the boards of directors of both
companies and the business combination is expected to close during the first
calendar quarter of 2000, subject to approval by the Company's shareholders,
required regulatory approvals and other conditions to closing. Additional
information regarding the proposed merger can be found in the Company's
Current Report on Form 8-K filed with the SEC on September 30, 1999.
RESULTS OF OPERATIONS
Comparison of three months ended December 31, 1999 and December 31, 1998
Net revenues increased by $1,955,000, or 9.0%, to $23,672,000 for the first
three months of fiscal 2000 as compared to the same period in fiscal 1999. The
increase in net revenues was due primarily to the third quarter 1999
acquisition of RMIS, higher net interest income earned on retail customer
balances, and increased retail brokerage commissions which was partially
offset by decreased revenue from the Company's proprietary trading of U.S.
government and agency zero coupon bonds.
Revenues from principal transactions decreased by $1,801,000, or 21.8%, to
$6,460,000 for the first three months of fiscal 2000 as compared to the same
period in fiscal 1999. Revenues from trading debt securities decreased by
$1,131,000, or 21.9%, to $4,031,000, due primarily to decreased revenue from
trading in U.S. government and agency zero coupon bonds. The decline in these
trading revenues reflects record revenues achieved by the Company in the year-
ago period as a result of unusually high market volatility in that period.
Revenues from principal transactions in equity securities decreased by
$670,000, or 21.6%, to $2,429,000 for the first three months of fiscal 2000 as
compared to the same period in fiscal 1999. The decrease reflects a fall in
sales credits due to lower retail trading activity in these issues.
Commission revenues increased by $2,403,000, or 28.7%, to $10,765,000 for
the first three months of fiscal 2000 as compared to the same period in fiscal
1999. The increase was primarily due to the acquisition of RMIS and growth in
the number of retail brokers during fiscal 1999. The increase in commissions
from retail brokerage was partially offset by the January 1, 1999 change in
status of Brooks G. Ragen and his son from employee brokers to correspondent
brokers. As a result of this change, commission revenue generated by these two
that was previously reported on a gross basis before compensation and other
expenses is now reported on a net basis after payment has been made to their
correspondent brokerage firm.
Other revenue increased by $379,000, or 25.4%, to $1,869,000 for the first
three months of fiscal 2000 compared to the same period in fiscal 1999,
primarily due to an increase in fees from investment advisory services, IRA
account custodian fees, and investment banking activities.
Net interest income increased by $974,000, or 27.0%, to $4,578,000 for the
first three months of fiscal 2000 as compared to the same period in fiscal
1999. Interest income increased modestly to $9,606,000 due to an increase in
average customer margin balances and higher interest rates earned on customer
credit and margin balances, which was partially offset by a decrease in
average customer credit balances. Interest expense decreased by $743,000, or
12.9%, to $5,028,000 primarily due to lower average balances of customer
credits and short-term borrowings.
10
<PAGE>
Noninterest expenses increased by $2,579,000, or 17.4%, to $17,360,000 for
the first three months of fiscal 2000 as compared to the same period of fiscal
1999. This increase primarily reflects increases in compensation and benefits,
occupancy and equipment and other expenses.
Compensation and benefits expenses increased by $1,309,000, or 12.1%, to
$12,130,000 for the first three months of fiscal 2000 as compared to the same
period in fiscal 1999. Commission and other sales compensation expenses
increased by $1,480,000, or 33.7%, to $5,871,000 for the fiscal 2000 period,
as a result of the increase in commission revenues attributable to the third
quarter 1999 acquisition of RMIS and growth in the number of retail brokers
during fiscal 1999. These increases were partially offset by a decrease in
incentive bonus compensation paid to trading-related personnel generally
resulting from decreased trading revenue.
Occupancy and equipment expenses increased $564,000, or 45.5%, to
$1,803,000, due to the Company's investments in technology and expansion of
the retail sales force and supporting functions. Communications expenses
increased by $154,000, or 16.3%, to $1,101,000 due to higher telecommunication
costs and fees for information data services. Clearing and exchange fees
increased by $218,000, or 37.3%, to $803,000, due to higher trade-related
costs. Other expenses increased by $334,000, or 28.1%, to $1,523,000,
primarily due to higher professional fees and a general increase in the level
of business activities.
The Company's effective income tax rate was 34.0% in the first three months
of fiscal 2000 and was consistent with the 34.1% rate during the first three
months of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically satisfied a large portion of its funding needs
with its own capital resources, consisting largely of internally generated
retained earnings and funds received upon exercise of employee stock options.
A majority of the Company's assets are highly liquid and short term in nature.
The Company's cash, cash equivalents and liquid assets, consisting of
receivables from customers, brokers and dealers, securities purchased under
agreements to resell, securities owned, securities borrowed and deposits with
clearing organizations, represented in excess of 98% of the Company's assets
as of September 24, 1999 and December 31, 1999. 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 December 31, 1999,
the Company had a secured bank line of credit with $63,650,000 outstanding, a
security repurchase arrangement with no outstanding balance and available
borrowing capacity of approximately $60,000,000. The ratio of assets to equity
as of December 31, 1999 was approximately 5.5:1.
Certain minimum amounts of capital must be maintained by RMI and RMIS, the
Company's broker-dealer subsidiaries, to satisfy the regulatory requirements
of the SEC and the NYSE. RMI and RMIS's regulatory net capital have
historically exceeded these minimum requirements. See Note 3 to the Company's
Notes to Consolidated Financial Statements.
The Company believes that its current level of liquid assets, combined with
funds anticipated to be generated from operations, will be adequate to fund
its operations for at least 18 to 24 months.
YEAR 2000 COMPLIANCE
The Company believes that it has successfully implemented its plan to
achieve year 2000 compliance. To date, the Company has not experienced any
material problems in this area. The Company's experience is
11
<PAGE>
consistent with the general experience of the securities industry. The total
cost of addressing year 2000 compliance has not been material.
Nonetheless, some year 2000 problems may not appear until several months
after January 1, 2000. These problems could arise in the Company's systems or
the systems of third parties on which the Company's operations are dependent.
Any problems that are not successfully solved could adversely affect the
Company's business. The Company does not expect, however, that the cost to fix
any year 2000 problems that may arise in the future will be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument represents a contractual agreement between
counterparties and has value that is derived from changes in the value of some
other underlying asset such as the price of another security, interest rates,
currency exchange rates, specified rates (e.g. LIBOR) or indices (e.g. S&P
500), or the value referenced in the contract.
The Company does not act as dealer, trader or end-user of complex
derivatives such as swaps, collars and caps. From time to time, the Company
enters into exchange-listed financial futures contracts for the purpose of
hedging certain dealing activities. Any futures contract commitments are
considered held for trading purposes and are carried at market value.
Financial futures contracts are transactions in which one party agrees to
deliver a financial instrument to a counterparty at a specified price on a
specified date. The Company's exposure to market risk arises from the
possibility of unfavorable changes in the market price of the underlying
financial instrument. The Company's exposure to credit risk at any point is
represented by the fair value or replacement cost on contracts in which the
Company has recorded an unrealized gain. The risks inherent in derivative
financial instruments are managed consistent with the Company's overall risk
management policies. See "--Risk Management".
At December 31, 1999, the Company had no outstanding financial futures
commitments.
RISK MANAGEMENT
Exposure to risk and the management of risks on a day-to-day basis are
critical to the Company's survival and financial success. The Company monitors
its market, credit and correspondent risks on a daily basis through a number
of control procedures designed to identify and evaluate the various risks to
which the Company is exposed. There can be no assurance, however, that the
Company's risk management procedures and internal controls will prevent losses
from occurring as a result of such risks.
The Company's primary market risk arises from 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,
municipal obligations, investment-grade corporate debt, U.S. government and
agency securities and CMO securities. In doing this, the Company may be
required to maintain certain amounts of inventories in order to facilitate
customer order flow. The Company seeks to cover its exposure to market risk by
limiting its net long or short positions, by selling or buying similar
instruments and by utilizing various financial instruments such as financial
futures.
Trading activities generally result in the creation of inventory positions.
Trading and inventory accounts are monitored on an ongoing basis, and the
Company 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 and are reviewed by traders,
trading managers, department managers and management personnel. These reports
are reviewed independently by the Company's corporate accounting group on a
daily basis. 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
12
<PAGE>
RMI and enables senior management to review inventory levels and monitor
results of the trading groups. The Company also reviews and monitors, at
various levels of management, inventory pricing, concentration and securities
ratings.
In addition to position and exposure reports, the Company produces a daily
revenue report that summarizes the trading, interest, commissions, fees,
underwriting and other revenue items for each of its business groups. The
daily revenue report is distributed to various levels of senior management
and, together with the position and exposure report, assists senior management
in monitoring and reviewing overall activity of the trading groups.
Credit risk represents the amount of accounting loss the Company would incur
should counterparties to its proprietary transactions fail to perform and the
value of any collateral proves inadequate. Credit risk relating to various
financing activities is reduced by the industry practice of obtaining and
maintaining collateral until commitments are settled. The Company monitors its
exposure to counterparty risk on a daily basis by using credit exposure
information and monitoring collateral values. Senior management approves
various actions, including setting higher margin requirements for large or
concentrated accounts, requiring a reduction of either the level of margin
debt or investment in high-risk securities or, in some cases, requiring the
transfer of the account to another broker-dealer. The Company actively manages
the credit exposure relating to its trading activities by entering into master
agreements that permit netting, when feasible, monitoring the creditworthiness
of counterparties and their related trading limits on an ongoing basis,
requesting additional collateral when deemed necessary and limiting the amount
and duration of exposure to individual counterparties. The Company also often
acts as a principal in customer-related transactions in financial instruments,
which exposes it to risks of default by customers and counterparties.
Management of risk relating to clearing activities for RMI's correspondent
firms begins with a review by certain members of senior management of each
prospective correspondent firm prior to commencing the relationship. This
review includes an examination of the firm's employees, trading history and
finances. Each new correspondent is required to maintain a security deposit.
The amount required is based upon the volume and type of business to be done.
The correspondent agreement requires each correspondent to submit to RMI
copies of all financial information they are required to file with the SEC and
the NASD Regulation monthly or quarterly, including Financial and Operational
Combined Uniform Single Reports ("FOCUS Reports"). Correspondent FOCUS Reports
and other financial statements are reviewed by management. Additionally, each
correspondent's settlements are reviewed daily.
MARKET RISK
Market risk represents the potential loss the Company may incur as a result
of absolute and relative price movements in financial instruments due to
changes in interest rates, foreign exchange rates, equity prices, and other
political factors. The Company is not subject to direct market risk due to
changes in foreign exchange rates. However, the Company is subject to market
risk as a result of changes in interest rates and equity prices, which are
affected by global economic conditions. The principal source of this risk
arises from maintaining securities inventory positions and trading and market-
making in these securities. The Company carries inventories of marketable
securities including equities and municipal, U.S. government and agency zero
coupon, corporate, and CMO fixed income securities for resale to its retail
and institutional brokerage customers and other broker-dealers. All of the
Company's securities inventories are held for trading purposes.
In connection with the Company's dealing activities, the Company is exposed
to interest rate risk due to changes in the level or volatility of interest
rates, changes in the yield curve, mortgage prepayments and credit spreads.
The Company is exposed to equity price risk due to changes in the level and
volatility of equity prices primarily in the Nasdaq and over-the-counter
markets. The Company controls its market risk primarily through notional
limits on trading inventories. In addition, the Company attempts to mitigate
its exposure to interest rate risk on its long CMO and U.S. government and
agency inventories by entering into hedging transactions through the use of
short cash positions in U.S. government obligations and, to a lesser extent,
financial futures contracts.
13
<PAGE>
The following table shows the quoted market values of the Company's
securities owned ("long"), securities sold but not yet purchased ("short"),
net positions and overall position limits as of December 31, 1999 and
September 24, 1999:
<TABLE>
<CAPTION>
December 31, 1999 Long Short Net Limit
----------------- ---- ----- --- -----
<S> <C> <C> <C> <C> <C>
Fixed income securities:
Corporate bonds,
debentures, and
notes................ $ 1,648,000 $ (22,000) $ 1,626,000 Long $ 7,000,000
U.S. Government and
government Agency
obligations.......... 138,268,000 (136,824,000) 1,444,000 Long 180,000,000(1)
Collateralized
mortgage
obligations.......... 4,209,000 (43,000) 4,166,000 Long 30,000,000(2)
State and municipal
obligations.......... 4,932,000 4,932,000 Long 5,000,000
Equity securities:
Corporate stocks...... 1,110,000 (100,000) 1,010,000 Long 2,500,000
Short 2,500,000
<CAPTION>
September 24, 1999 Long Short Net Limit
------------------ ---- ----- --- -----
<S> <C> <C> <C> <C> <C>
Fixed income securities:
Corporate bonds,
debentures, and
notes................ $ 3,825,000 $ (10,000) $ 3,815,000 Long $ 7,000,000
U.S. Government and
government Agency
obligations.......... 116,262,000 (118,998,000) (2,736,000) Long 180,000,000(1)
Collateralized
mortgage
obligations.......... 2,923,000 (114,000) 2,809,000 Long 30,000,000(2)
State and municipal
obligations.......... 2,461,000 2,461,000 Long 5,000,000
Equity securities:
Corporate stocks...... 310,000 (133,000) 177,000 Long 2,500,000
Short 2,500,000
</TABLE>
- --------
(1) $175,000,000 of total long position limit must be adequately hedged.
(2) Unless approval is given, long inventory must be adequately hedged.
The information regarding the Company's market risk included above does not
consider other factors that may influence the Company's market risk, such as
credit spread risk, prepayment risk on CMOs, or changes in the shape of the
yield curve. Information with regard to the Company's securities borrowed,
securities loaned, borrowings, and securities sold under agreements to
repurchase is not included, as the interest rates for such instruments are
generally reset on a daily basis.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Earnings Per Share*
27 Financial Data Schedule (This financial data schedule is only
required to be submitted with the registrant's Quarterly Report on
Form 10-Q as filed electronically to the SEC's EDGAR database.)
- --------
* See Note 4 to the Company's Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
On September 30, 1999, the Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission, reporting the Agreement and Plan of
Merger, dated as of September 28, 1999, that it entered into with Wells Fargo
& Company.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<C> <S>
RAGEN MACKENZIE GROUP INCORPORATED
(REGISTRANT)
/s/ Lesa A. Sroufe
By: ______________________________________
February 14, 2000 Lesa A. Sroufe
Chairman of the Board and Chief Executive
Officer
(Principal Executive Officer)
/s/ V. Lawrence Bensussen
By: ______________________________________
February 14, 2000 V. Lawrence Bensussen
Senior Vice President, Chief Financial
Officer and Secretary (Principal Financial
and Accounting Officer)
</TABLE>
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
11 Computation of Earnings per Share.*
27 Financial Data Schedule.
</TABLE>
- --------
* See Note 4 to the Company's Notes to Consolidated Financial Statements
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RAGEN
MACKENZIE'S DEC. 31, 1999 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-29-2000
<PERIOD-START> SEP-25-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,233
<RECEIVABLES> 210,760
<SECURITIES-RESALE> 321,135
<SECURITIES-BORROWED> 2,751
<INSTRUMENTS-OWNED> 150,167
<PP&E> 3,336
<TOTAL-ASSETS> 699,324
<SHORT-TERM> 63,650
<PAYABLES> 356,729
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 136,989
<LONG-TERM> 0
0
0
<COMMON> 135
<OTHER-SE> 126,518
<TOTAL-LIABILITY-AND-EQUITY> 699,324
<TRADING-REVENUE> 6,460
<INTEREST-DIVIDENDS> 9,606
<COMMISSIONS> 10,765
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 1,869
<INTEREST-EXPENSE> 5,028
<COMPENSATION> 12,130
<INCOME-PRETAX> 6,312
<INCOME-PRE-EXTRAORDINARY> 4,165
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,165
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.31
</TABLE>
