THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Revenue and Income: Restated Restated
Fees and commissions $1,581,000 $1,332,000 5,694,000 $5,378,000
Equity in earnings of First Indiana 1,081,000 998,000 3,028,000 2,715,000
Investment income 92,000 100,000 286,000 299,000
--------- --------- --------- ---------
2,754,000 2,430,000 9,008,000 8,392,000
Operating Expenses:
Salaries, wages, commissions,
and benefits 1,430,000 1,126,000 4,358,000 4,710,000
General and administrative expenses 253,000 238,000 772,000 733,000
Occupancy expenses 91,000 81,000 258,000 245,000
Advertising and marketing 46,000 35,000 121,000 83,000
Depreciation and amortization 68,000 63,000 206,000 179,000
Interest expense --- 5,000 4,000 28,000
Merger expenses --- --- 163,000 ---
--------- --------- --------- ---------
1,888,000 1,548,000 5,882,000 5,978,000
Income before income taxes 866,000 882,000 3,126,000 2,414,000
Income tax expense 238,000 262,000 916,000 692,000
------- ------- -------- --------
Net Income $628,000 $620,000 2,210,000 $1,722,000
======== ======= ========= =========
Income Per Share
Basic $.22 $.21 $.76 $.59
Diluted $.21 $.21 $.74 $.58
Average Shares Outstanding:
Basic 2,899,633 2,902,118 2,901,476 2,904,511
Diluted 2,959,547 2,948,191 2,968,918 2,955,130
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 328,000
<SECURITIES> 4,200,000
<RECEIVABLES> 1,687,000
<ALLOWANCES> 153,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,195,000
<PP&E> 1,321,000
<DEPRECIATION> 830,000
<TOTAL-ASSETS> 44,196,000
<CURRENT-LIABILITIES> 551,000
<BONDS> 0
0
0
<COMMON> 1,862,000
<OTHER-SE> 33,163,000
<TOTAL-LIABILITY-AND-EQUITY> 44,196,000
<SALES> 5,694,000
<TOTAL-REVENUES> 9,008,000
<CGS> 5,882,000
<TOTAL-COSTS> 5,882,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,000
<INCOME-PRETAX> 3,126,000
<INCOME-TAX> 2,210,000
<INCOME-CONTINUING> 2,210,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,210,000
<EPS-PRIMARY> .76
<EPS-DILUTED> .74
</TABLE>
THE SOMERSET GROUP, INC. CONSOLIDATED BALANCE SHEE
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited) September 30 December 31 September 30
ASSETS 1998 1997 1997
Current assets Restated Restated
Cash and cash equivalents $328,000 $600,000 $492,000
Short term investments 4,200,000 5,248,000 5,204,000
Trade accounts, notes and other rece 1,534,000 1,222,000 1,081,000
Prepaid expenses 133,000 80,000 151,000
Refundable income taxes --- 203,000 108,000
--------- --------- ---------
Total current assets 6,195,000 7,353,000 7,036,000
Investments
First Indiana Corporation (market values of
$57,928,000, $68,515,000, 53,792,000) 35,384,000 32,406,000 31,500,000
Office furniture and equipment 1,321,000 1,143,000 1,049,000
Less accumulated depreciation 830,000 696,000 655,000
--------- --------- ---------
491,000 447,000 394,000
Other assets
Notes receivable, net 526,000 580,000 606,000
Goodwill, net of accumulated amort. 1,097,000 1,133,000 1,154,000
Other 503,000 541,000 523,000
--------- --------- ---------
2,126,000 2,254,000 2,283,000
Total Assets $44,196,000 42,460,000 $41,213,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable - bank $ $459,000 $353,000
Current portion of long-term debt 13,000 27,000
Trade accounts payable 98,000 $60,000 $58,000
Accrued compensation 167,000 86,000 152,000
Taxes payable, other than income tax 59,000 53,000 54,000
Income taxes payable 151,000
Deferred income taxes 327,000 301,000
Other accrued expenses 76,000 104,000 33,000
------- --------- --------
Total current liabilities 551,000 1,102,000 978,000
Deferred income 23,000
Deferred income taxes 8,620,000 7,845,000 7,532,000
Long-term debt, less current portion 30,000 20,000
Shareholders' equity
Common stock without par value, authorized
4,000,000 shares; issued and outstanding
2,909,214, 2,897,724, and 2,909,199 1,862,000 1,855,000 1,862,000
Capital in excess of stated value 3,504,000 3,549,000 3,568,000
Accum. other comprehensive income 95,000 (22,000) (7,000)
Retained earnings 29,735,000 28,078,000 27,260,000
Less 8,271 treasury shares, at cost (171,000)
---------- ---------- ----------
Total shareholders' equity 35,025,000 33,460,000 32,683,000
Total Liabilities and
Shareholders' Equity $44,196,000 42,460,000 $41,213,000
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-3-
THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C> <C>
Nine Months Ende Year Ended
September 30, December 31,
1998 1997 1997
Cash flows from operating activities: Restated Restated
Net income $2,210,000 $1,722,000 $2,536,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 207,000 179,000 246,000
Deferred income taxes 413,000 840,000 1,199,000
Equity in earnings of First Indiana Corp (3,028,000) (2,715,000) (3,883,000)
Dividends received from First Indiana Co 988,000 814,000 1,087,000
Changes in operating assets and liabilities:
Trade accounts, notes, & other rec. (312,000) 332,000 171,000
Prepaid expenses (53,000) (80,000) (18,000)
Trade payables and accrued expenses 96,000 (9,000) (42,000)
Accrued and refundable income taxes 447,000 (124,000) (173,000)
------- ------- ---------
Net cash provided by operating activities 968,000 959,000 1,123,000
Cash flows from investing activities:
Purchase of shares of First Indiana Corp. (990,000) --- ---
Proceeds from sale of assets --- 8,000 8,000
Purchase of office furniture and equipment (178,000) (134,000) (229,000)
Decrease (increase) in other assets 113,000 (2,000) (3,000)
Decrease (increase) in short-term
investments 1,048,000 (487,000) (524,000)
--------- -------- --------
Net cash used by investing activities (7,000) (615,000) (748,000)
Cash flows from financing activities:
Principal payments on note payable, bank (459,000) (331,000) (225,000)
Principal payments on long-term borrowings (43,000) (9,000) (12,000)
Proceeds from sale of common stock 88,000 330,000 330,000
Purchase of common stock (297,000) (449,000) (475,000)
Cash dividends paid (522,000) (462,000) (462,000)
--------- -------- --------
Net cash used by financing activities (1,233,000) (921,000) (844,000)
--------- -------- -------
Increase (decrease) in cash and equivalents (272,000) (577,000) (469,000)
Cash and cash equivalents at beg of period 600,000 1,069,000 1,069,000
-------- --------- ---------
Cash and cash equivalents at end of period $328,000 $492,000 $600,000
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-4-
THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Accumulated
in Excess Other
Common of Stated Comprehens Retained Treasury
Stock Value Income Earnings Shares Total
Balance January 1, 1997, restated $1,836,000 $3,713,000 $ $26,048,000 $ $31,597,000
Comprehensive Income:
Net income, 9 months ended Sept. 30 --- --- --- 1,722,000 1,722,000
Unrealized losses on short-term
investments, net of deferred
income taxes --- --- (7,000) --- (7,000)
---------
Total comprehensive income 1,715,000
Shares of common stock issued 39,000 291,000 --- --- 330,000
Shares of common stock retired (13,000) (436,000) --- --- (449,000)
Cash dividends paid --- --- --- (462,000) (462,000)
Equity in other capital changes
of First Indiana Corporation,
net of deferred income taxes --- --- --- (48,000) (48,000)
--------- --------- ------ ---------- ----------
Balance September 30, 1997, restated 1,862,000 3,568,000 (7,000) 27,260,000 32,683,000
Comprehensive Income:
Net income October 1 to December 31, --- --- --- 814,000 814,000
Unrealized gains on short-term
investments, net of deferred
income taxes --- --- (15,000) --- (15,000)
--------
Total comprehensive income 799,000
Shares of common stock retired (7,000) (19,000) --- --- (26,000)
Cash dividends paid --- --- --- --- ---
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 4,000 4,000
--------- --------- ------- ---------- ----------
Balance December 31, 1997, restated 1,855,000 3,549,000 (22,000) 28,078,000 33,460,000
Comprehensive Income: ---
Net income, 9 months ended Sept. 30, --- --- --- 2,210,000 2,210,000
Unrealized gain on short-term ---
investments, net of deferred
income taxes --- --- 24,000 --- 24,000
Tax benefit of stock options exercised --- --- 93,000 --- 93,000
---------
Total comprehensive income 2,327,000
Shares of common stock issued 7,000 (45,000) --- --- 126,000 88,000
Purchase of treasury shares --- --- --- --- (297,000) (297,000)
Cash dividends paid --- --- --- (522,000) (522,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (31,000) (31,000)
--------- --------- ------ ---------- ------- ----------
Balance September 30, 1998 $1,862,000 $3,504,000 $95,000 $29,735,000 ($171,000) $35,025,000
========= ========= ====== ========== ======= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-5-
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to __________
Commission File Number: 0-14227
THE SOMERSET GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1647888
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 N. PENNSYLVANIA STREET, SUITE 2800, INDIANAPOLIS, INDIANA 46204
(Address of registrant) (Zip Code)
Registrant's telephone number, including area code: 317/269-1285
___________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filled by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period than 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[ ]
COMMON STOCK OUTSTANDING AT September 30, 1998 - 2,900,943 SHARES.
THE SOMERSET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
The Somerset Group, Inc. (The "Company") is a nondiversified, unitary savings
and loan holding company. Its major asset is a 21.7% ownership interest in
First Indiana Corporation ("First Indiana"), which owns 100% of First Indiana
Bank. As Somerset Financial Services, the Company provides investment and wealth
management services, health care consulting, tax planning and preparation,
information technology, and business valuation services. The Company's First
Indiana Investor Services Division markets insurance and investment products.
(a) Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its 100%-owned subsidiaries.
(b) Commissions and Fees: Commissions and fees represent revenue from services
provided by Somerset
Financial Services and by investment and insurance products sold by First
Indiana Investor Services.
(c) Cash and Cash Equivalents: For Purposes of reporting cash flows, cash and
cash equivalents include cash on hand, cash in banks, and money market
funds immediately available.
(d) Short-Term Investments: The investments are valued at market price on the
statement date. They are available-for-sale and proceeds are available on
three days notice. Unrealized holding gains and losses are excluded from
earnings and are reported net of deferred income taxes as a separate
component of shareholders' equity until realized.
(e) Investment in First Indiana Corporation: First Indiana Corporation is a
bank holding company whose primary subsidiary is a thrift institution,
First Indiana Bank. The Company's investment in First Indiana Corporation
is stated at cost, adjusted for the Company's share of undistributed
earnings. Capital changes of First Indiana Corporation are reflected as a
separate component on consolidated retained earnings.
(f) Office Furniture and Equipment: Office furniture and equipment are stated
at historical costs for financial reporting purposes. Depreciation is
determined using the straight-line method based upon the estimated useful
life of individual assets. Both straight-line and accelerated methods are
used for income tax purposes.
(g) Income Taxes: The Company uses the asset and liability method to account
for income taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their tax basis. The principal temporary difference between the financial
statement carrying amounts and the tax basis that result in deferred taxes
is the investment in First Indiana, accounted for under the equity method
of accounting. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
effective date.
(h) Income Per Share: Basic and diluted income per share were computed in
accordance with the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards No. 128 "Earnings Per Share." Basic
income per share was computed by dividing net income by the weighted
average of common stock outstanding. Dilution of the per share calculation
relates to stock options outstanding during the periods.
-6-
Note 2. Business Combination and Restatement of Historical Financial Statements
On January 20, 1998, Somerset issued 333,359 shares of its common stock for all
the outstanding stock of Whipple & Company Professional Corporation ("Whipple").
The business combination was accounted for as a pooling-of-interests combination
and, accordingly, Somerset's 1997 consolidated financial statements presented
are restated to include the accounts and results of Whipple. Following is a
summary of Revenue and Income and Net income for each of the entities.
Three Months Ended Nine Months Ended Years Ended
September 30, September 30, December 31,
1998 1997 1998 1997 1997 1996
Revenue and Income:
Somerset $1,420,000 1,381,000 3,996,000 $3,932,000 $5,385,000 $4,449,000
Whipple 1,334,000 1,049,000 5,012,000 4,460,000 5,740,000 5,085,000
--------- --------- --------- --------- --------- ---------
Combined $2,754,000 2,430,000 9,008,000 8,392,000 11,125,000 9,534,000
========= ========= ========= ========= ========== =========
Net Income:
Somerset $743,000 $726,000 $1,999,000 1,761,000 2,450,000 2,039,000
Whipple (115,000) (106,000) 211,000 (39,000) 86,000 106,000
-------- ------- --------- --------- ---------- ---------
Combined $628,000 $620,000 $2,210,000 1,722,000 2,536,000 2,145,000
======= ======= ========= ========= ========= =========
Note 3. Cyclical Business Operations
Revenue and income from financial services is cyclical in nature as a result of
the timing of income tax planning and preparation services performed by the
Company. Because of government imposed filing deadlines, a larger percentage of
these services occur during the first four months of each calendar year.
Revenue and income during the first quarter of each year will be favorably
affected, as compared to the remaining three quarters of the year.
Revenue, net income and earnings per share, as restated to include Whipple, for
the four quarterly periods ending December 31, 1997 were as follows:
Year Ended December 31, 1997
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
March 31 June 30 Sept. 30 Dec. 31 1997
Revenue $3,505,000 $2,452,000 $2,430,000 $2,738,000 $11,125,000
========= ========= ========= ========= ==========
Net income $864,000 $239,000 $620,000 $813,000 $2,536,000
========= ========== ========= ========= =========
Basic earnings
per share $.30 $.08 $.22 $.28 $.88
Diluted earnings
per share $.29 $.08 $.21 $.28 $.86
Note 4. Investment in First Indiana Corporation
The Company's percentage of ownership of First Indiana Corporation was 21.7% at
September 30, 1998, and 21.5% at December 31, 1997 and September 30, 1997. The
Company's equity in earnings of First Indiana Corporation shown in the
Consolidated Statements of Income is before income taxes. Federal and state
income taxes applicable to the equity earnings are contained as a component of
total federal and state income tax expense.
-7-
Note 5. Average Shares Outstanding
Average shares outstanding, computed on the diluted basis as required by
Financial Accounting Standards Board Statement Number 128, included common share
equivalents of outstanding stock options. The following equivalent shares have
been included in the average diluted shares outstanding in the Consolidated
Financial Statements.
1998 1997
Three months ended September 30 59,914 46,073
Nine months ended September 30 67,442 50,619
The Company had 122,143, 139,827, and 106,574 shares of its stock reserved for
exercise of stock options at September 30, 1998, December 31, 1997, and
September 30, 1997, respectively.
Note 6. Financial Instruments
The estimated fair value of the Company's financial instruments at September 30,
1998, December 31, 1997, and September 30, 1997 approximate their carrying value
as reflected in the consolidated balance sheets. The Company's financial
instruments include cash and cash equivalents, short-term investments and notes
receivable. Financial instruments also include the investment in First Indiana
that had a fair value as follows.
Fair
Date Value
September 30, 1998 $57,928,000
December 31, 1997 $68,515,000
September 30, 1997 $53,792,000
Note 7. Significant Non-Consolidated Subsidiary
Summarized income statement information is presented below for First Indiana
Corporation. This 21.7% owned subsidiary represents a significant part of The
Somerset Group, Inc.'s income.
First Indiana Corporation and Subsidiaries
Summarized Income Statements
Three Months Ended Nine Months Ended
(Dollars in Thousands) September 30 September 30
1998 1997 1998 1997
Interest income $34,551 $32,518 $101,410 $94,652
Interest expense 18,905 16,240 54,771 47,363
------ ------ ------ ------
Net interest income 15,646 16,278 46,639 47,289
Provision for loan losses 2,320 2,600 7,460 8,100
------ ------ ------ ------
Net interest income after provision 13,326 13,678 39,1793 39,189
Non interest income 6,597 4,719 17,354 12,569
Non interest expense (11,749) (10,646) (33,557) (30,810)
------ ------ ------ ------
Income before income taxes 8,174 7,751 22,976 20,948
Income tax expense 3,171 3,045 8,938 8,190
----- ----- ------ ------
Net income $5,003 $4,706 $14,038 $12,758
===== ===== ====== ======
For additional financial information about First Indiana Corporation, please
refer to its Form 10-Q filed with the Securities and Exchange Commission ("SEC")
File Number 0-14354. Information in the above table was extracted from First
Indiana Corporation's Form 10-Q.
-8-
Note 8. Financial Statement Preparation
The accompanying financial statements have been prepared with generally accepted
account principles for interim financial information and with the instruction to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included.
-9-
PART I
Item 1 - Financial Statements
The information required by Rule 10.01 of Regulation S-X is presented on the
previous pages.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Earnings for the three months ended September 30, 1998 were slightly above
comparable earnings for the same period of 1997. Net income amounted to
$628,000, or $.21 per diluted share, compared with $620,000, or $.21 per diluted
share earned during the same quarter in 1997.
For the nine months ended September 30, 1998, the Company's earnings were
$2,210,000, or $.74 per diluted share, representing a 28% increase over the
$1,722,000, or $.58 per diluted share earned during the nine months of 1997.
Net income includes the results of Whipple & Company, P.C. ("Whipple"), which
was merged with The Somerset Group, Inc. in the first quarter of 1998. The
merger was accounted for as a pooling-of-interests business combination, and
historical results for 1997 have been restated to include the financial results
of Whipple as if the merger had occurred January 1, 1997.
Net income reported for the nine month period included non-recurring expenses of
the merger that reduced net income approximately $100,000. If these expenses
are excluded from the nine month results, net income increased to $2,310,000, or
$.79 per diluted share, an increase of 34% over the $1,722,000 that the two
companies earned during the first nine months of 1997.
Consolidated revenue and income for the third quarter of $2,754,000 increased
13% when compared with the $2,430,000 for the same quarter of 1997. Higher fees
and commission revenue for financial services accounted for 10% of the increase,
and higher equity income from First Indiana Corporation amounted to 3%.
For nine months ended September 30, 1998, consolidated revenue and income of
$9,008,000 increased 7% over the 1997 amount of $8,392,000. Higher fees and
commission revenue accounted for 3% of the increase, and higher equity income
from First Indiana Corporation amounted to 4%.
Increased fee income for wealth management services and health care consulting
were the service specialties primarily responsible for the increase in fee and
commission revenue. These increases more than offset a decrease in commissions
from the sale of investment and insurance products and, on a comparative basis,
the loss of all revenue from attest services. Attest services included
financial statement audits, compilations and reviews. These services were sold
by Whipple prior to the merger of Whipple with Somerset. Revenue for perfor-
mance of these services is included in 1997 amounts, with no such revenue in
1998.
Revenue and income from financial services historically have been cyclical as a
result of timing of income tax planning and preparation services performed by
the Company. Because of government imposed filing deadlines, a larger
percentage of these services occur during the first four months of each calendar
year. Management is pleased with the growth in revenue and income during the
third quarter of the year and expect continued growth in revenue and income
during the other months of the year, as additional revenue sources are
implemented that will help reduce the cyclical nature of operations.
-10-
The increase in the Company's equity in earnings of First Indiana Corporation
reflects the fact that First Indiana reports that all of its loan areas
experienced growth. According to First Indiana's report to the SEC, its growth
in loans was primarily a result of successful marketing and a strong economy in
the areas in which First Indiana has operations. Two areas that sustained
substantial growth during the first nine months were construction and land
development lending. Construction loans outstanding increased 25% at September
30, 1998, compared with September 30, 1997, and land development loans
outstanding as of September 30, 1998, were double the amount for the same period
last year.
According to First Indiana reports filed with the SEC, First Indiana's net
interest margin decreased in the third quarter to 3.77% compared with 4.49% one
year ago. The margin fell for two primarily reasons: a change in the compo-
sition of the Bank's assets to include more residential and lower loan-to-value
home equity loans, which are less risky, and an unfavorable flat interest rate
environment that placed competitive pressure on lending rates. Non-interest
income for the quarter increased 40%, and 30% for the nine months. The increase
is a result of originating and selling residential and consumer loans to the
secondary market.
Management of First Indiana reportedly has chosen to continue expansion in the
residential market with the realization that the net interest rate margin would
decrease in the near term. However, First Indiana reports that is management
believes that First Indiana improves its position for long-term growth by
expanding a customer base that has the potential of utilizing other First
Indiana products and services.
First Indiana also reported that its non-performing assets were 1.11% of assets
at September 30, 1998, compared with 1.41% of assets at December 31, 1997 and
1.42% of assets at September 30, 1997.
Investment income from Somerset's temporary investments declined modestly during
the third quarter and for the nine month period as a result of the use of
investable cash for other purposes. Short-term investments at September 30,
1998, declined $1,004,000, compared to September 30, 1997.
On a comparative basis, operating expenses for the third quarter of 1998 of
$1,888,000 were 22% above the $1,543,000 incurred in the 1997 quarter. For the
first nine months of 1998, operating expenses of $5,878,000 were 1% below last
year. Excluding $163,000 of non-recurring merger expenses from the 1998
expenses brings the total nine month comparative expense reduction to $235,000,
or 4%.
The higher operating expenses for the third quarter were primarily due to the
addition of professional staff in the financial services division. These
additions were in response to increased demand for tax, financial planning, and
health care consulting services during the quarter. In addition, management
anticipates further increases in demand for current consulting specialties and
has plans for expansion into additional consulting specialties that will fully
utilize the talents of these professionals.
Financial Condition and Liquidity
Management considers the financial condition and liquidity of the Company to be
excellent at September 30, 1998. The Company was also in a very sound position,
on a restated basis, at December 31, 1997 and September 30, 1997. The Company's
balance sheet contains a large percentage of liquid assets. These liquid assets
have been invested temporarily and are intended for use in additional
acquisitions and the expansion of existing financial service operations.
At September 30, 1998, the Company had a high ratio of current assets to current
liabilities of 11.2 to one, compared to 6.7 to one at December 31, 1997, and 7.2
to one at September 30, 1997. In addition, 73% of the current assets consisted
of cash, cash equivalents, and short-term investments. Net working capital
declined slightly during the period and amounted to $5,644,000 at September 30,
1998, $6,251,000 at December 31, 1997, and $6,058,000 at September 30, 1997.
-11-
All short-term and long-term debt was retired during the first quarter of 1998.
The debt was that of Whipple at the time of the merger and amounted to a
combined total of $502,000 at December 31, 1997 and $400,000 at September 30,
1997. Short-term investments were sold to provide the cash for the debt
retirement.
Shareholders' equity increased to $35,025,000 at September 30, 1998, from the
restated $33,460,000 at December 31, 1997 and $32,683,000 at September 30,
1997. On a per outstanding share basis, the amounts were $12.07, $11.55, and
$11.28 as restated for the Whipple merger.
Generally Accepted Accounting Principles ("GAAP") require Somerset to record
income tax expense at full corporate rates on a portion of its equity income
from First Indiana. GAAP also requires Somerset to record its investment in
First Indiana at net carrying value, which represents the acquisition cost of
First Indiana shares plus Somerset's equity share of First Indiana's net income,
rather than at market value. Under certain circumstances, the deferred tax
liability recorded in this manner (approximately $8.6 million) may never be
incurred. The market value of our investment in First Indiana at September 30,
1998 was approximately $57.9 million, or $22.5 million greater than the
investment amount reflected in our balance sheet at September 30, 1998.
Operating activities for the nine months ended September 30, 1998 provided cash
of $968,000, compared with $959,000 during the same period in 1997. The modest
increase was the net result of several changes in operating assets and
liabilities. Compared to the nine months of 1997, operations for 1998 provided
more cash principally from higher net income, larger cash dividends from First
Indiana and an increase in current and deferred income taxes payable; however,
additional cash was needed to support working capital requirements that
materially offset the cash provided. The additional working capital needs were
a result of revenue increases that also increased trade accounts receivable.
Management considers all of the changes noted in cash flow as positive
indications of growth and expects similar changes to occur in the future as the
long-term strategic plan for growth continues to be implemented.
The Company purchased an additional 40,500 shares of First Indiana Corporation
common stock in the open market at a cost of $990,000 during the second
quarter. The purchase increased our holdings to 2,758,467 shares of First
Indiana, or 21.7% of First Indiana's shares outstanding.
During the first nine months of 1998, the Company sold short-term investments of
$1,048,000. Proceeds from these sales were primarily used to fund the purchase
of the First Indiana shares and retire all outstanding debt.
Cash dividends of $522,000 were paid to Somerset's shareholders, an increase of
13% over the cash dividends paid during the same period in 1997. The semi-
annual dividend rate remained constant at $.09 per share in both years, or $.18
per share annually. The increase in the amount paid resulted from additional
shares outstanding from the issuance of shares for the Whipple merger
transaction.
The Company continues to periodically purchase treasury shares in the open
market for use in funding employee benefit plans and for possible use in
acquisitions. The Company is seeking additional acquisitions in selected
financial service industries. These acquisitions could necessitate the use of
cash on hand, unissued shares of common stock, and could include cash from debt
placement.
Impact of Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income," that establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. The statement was effective for fiscal years
beginning after December 15, 1997. The Company adopted this statement effective
January 1, 1998. It did not have a material impact on the financial condition
or results of operations of the Company.
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The FASB also issued Statement of Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
introduces new guidance on segment reporting. The statement was effective for
fiscal years beginning after December 15, 1997. The Company adopted this
statement effective January 1, 1998. It did not have a material impact on the
financial condition or results of operations of the Company, since the
disclosures and initial presentation in the Company's annual Form 10K filing are
similar to those previously presented.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
standard establishes comprehensive accounting and reporting standards for
derivative instruments and hedging activities. The standard will be effective
for the Company on January 1, 2000. Management is currently assessing the
impact of the statement on the financial condition and results of operations of
the Corporation upon adoption.
Other recent pronouncements by the FASB are not applicable to the Company's
consolidated financial statements.
Year 2000 Readiness
The Year 2000 issue refers to shortcomings which exist in some current computer
hardware and software that preclude the correct calculation of date-sensitive
information from, into, and between the twentieth and twenty-first centuries,
including leap year calculations. The Company is subject to regulations of two
governmental agencies in connection with review of its state of readiness. The
operations of the First Indiana Investor Services division is subject to review
by the Federal Financial Institutions Council ("FFIEC") and its Somerset
Financial Services Division, as a Registered Investment Advisor, is subject to
review by the SEC. The FFIEC requires that First Indiana Investor Services
Division complete the assessment for the Division and its vendors by December 31
1998. Because the Company relies heavily on technology for transaction
processing, preparing for the Year 2000 is a critical focus of resources.
All hardware and software vendors, as well as significant other vendors, have
been identified and contact has been initiated with these individuals or
companies. The Company has an inventory of known potential year 2000 readiness
issues and has developed action plans and contingency plans for each issue.
During 1998, the Company is testing systems for the purpose of validating year
2000 readiness, upgrading or replacing existing hardware, software, or embedded
systems, and implementing contingency plans in the event a particular vendor
will not assist the Company in its Year 2000 efforts. A team is monitoring
significant vendor relationships to ensure that no issues arise which cause
management to question the ability of the vendor to adequately prepare for the
Year 2000 and thus possibly impact the Company's own ability to conduct business
beyond the century change.
The Company is scheduled to complete an upgrade of personal computer hardware
during the fourth quarter, at a cost of approximately $140,000, and has
completed the installation of replacement vendor supplied software at a cost of
approximately $20,000. Upon completion of the computer hardware installation,
all hardware will be Year 2000 ready. Management is confident of the Company's
ability to operate in the 21st century, but it is not possible to assess the
financial impact of non-compliance, lost revenue, or future expenditures for
computer software at this time.
Information on Forward-Looking Statements
The statements in this Quarterly Report that are not historical are forward-
looking statements. Although the Company believes that its expectations are
upon reasonable assumptions within the bounds of its knowledge of its
business, there can be no assurance that the Company's financial goals will be
realized. Numerous factors may affect the Company's actual results and may
cause results to differ materially from those expressed in forward-looking
statements made by or on behalf of the Company.
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Market Risk
The success of First Indiana is largely dependent upon its management of
interest-rate risk. Interest-rate risk is defined as the exposure of First
Indiana's net interest income and net income to changes in interest rates.
First Indiana has established an Asset/Liability Committee responsible for
managing interest-rate risk and has established acceptable limits for interest-
rate exposure, which are reviewed on a monthly basis. First Indiana uses a
model program to measure interest-rate sensitivity to determine the impact on
net income of immediate and sustained upward and downward movements in interest
rates. First Indiana enters into forward sales contracts for future delivery of
residential fixed-rate mortgage loans at a specific yield in order to limit
market risk associated with its pipeline of residential mortgage loans. Market
risk arises from the possible inability of either party to comply with the
contract terms. These forward sales contracts are designated as hedges.
PART II
OTHER INFORMATION
Items 1,2, 3, 4 and 5
The information required by these items has been omitted. The Registrant had no
activity applicable to these items.
Item 6 - Reports Filed on Form 8-K
There were no reports on Form 8-K filed during the three months ended September
30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SOMERSET GROUP, INC.
(Registrant)
S/ Marni McKinney
Marni McKinney, President
and Chief Executive Officer
S/ Jospeh M. Richter
Joseph M. Richter, Executive Vice President
and Chief Financial Officer
Date: November 4, 1998
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