THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended
March 31,
1999 1998
Revenue and Income:
Fees and commissions $3,600,000 $2,498,000
Equity in earnings of First Indiana Corporation 1,006,000 950,000
Investment income 62,000 89,000
--------- ---------
Total revenue and income 4,668,000 3,537,000
Operating Expenses:
Salaries, wages, commissions and benefits 1,875,000 1,511,000
General and administrative expenses 441,000 193,000
Occupancy expenses 102,000 79,000
Advertising and marketing 46,000 29,000
Depreciation and amortization 72,000 66,000
Interest expense --- 4,000
Merger expenses --- 163,000
--------- ---------
Total operating expenses 2,536,000 2,045,000
--------- ---------
Income before income taxes and cumulative
effect of changes in accounting principle 2,132,000 1,492,000
Income tax expense 726,000 480,000
--------- ---------
Income before cumulative effect of change in
accounting principle 1,406,000 1,012,000
Cumulative effect of change in accounting
principle, net (115,000) ---
-------- ---------
Net Income $1,291,000 $1,012,000
========= =========
Net income per share:
Basic:
Income before cumulative effect of change
in accounting principle $.49 $.35
Cumulative effect of change in accounting
principle (.04) --
--- ---
$.45 $.35
=== ===
Diluted:
Income before cumulative effect of change
in accounting principle $.48 $.34
Cumulative effect of change in accounting
principle (.04) --
--- ---
$.44 $.34
=== ===
Average Shares Outstanding:
Basic 2,879,917 2,899,097
Diluted 2,920,560 2,973,386
</TABLE>
-2-
See accompanying Notes to Condensed Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 612,000
<SECURITIES> 2,927,000
<RECEIVABLES> 3,527,000
<ALLOWANCES> (138,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,052,000
<PP&E> 1,368,000
<DEPRECIATION> 759,000
<TOTAL-ASSETS> 45,959,000
<CURRENT-LIABILITIES> 1,268,000
<BONDS> 0
0
0
<COMMON> 1,862,000
<OTHER-SE> 33,789,000
<TOTAL-LIABILITY-AND-EQUITY> 45,959,000
<SALES> 3,600,000
<TOTAL-REVENUES> 4,668,000
<CGS> 0
<TOTAL-COSTS> 2,536,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,132,000
<INCOME-TAX> 726,000
<INCOME-CONTINUING> 1,406,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (115,000)
<NET-INCOME> 1,291,000
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
</TABLE>
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 March 31, 1999
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 April 30, 1999 - 2,809,296 SHARES.
Part 1
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 March 31, 1999, were 28% above net earnings
for the first quarter of 1998. Net income amounted to $1,291,000, or $.44 per
diluted share, compared with $1,012,000, or $.34 per diluted share, for the
first quarter of 1998.
The 1999 amount contained a non-recurring charge against net earnings of
$115,000, resulting from the adoption of a new accounting pronouncement on
January 1, 1999. Net income before the one-time charge amounted to $1,406,000,
or $.48 per diluted share, an increase of 39% over the comparable 1998 income.
The one-time charge resulted from the adoption of the American Institute of
Certified Public Accountants' Statement of Position 98-5, which required the
Company to charge to expense previously capitalized costs of start-up
activities.
The improvement in earnings was a result of a 32% increase in revenue and
income during the 1999 quarter when compared with last year. Total revenue and
income amounted to $4,668,000, compared with $3,537,000 for the 1998 quarter,
an increase of $1,131,000.
Fees and commission income from financial and investment services offered by
the Company increased 44% and amounted to $3,600,000, compared with $2,498,000
for the 1998 quarter and accounted for $1,102,000 of the $1,131,000 increase, or
97%. The Company's share of earnings for its 22.7% ownership interest of First
Indiana Corporation increased 6% to $1,006,000, compared with $950,000 for the
same three months of 1998.
Revenue and income from the Company's services are 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.
All operating segments and service specialties in existence last year recorded
increased fee and commission revenue and net income. Paradym Technologies,
Inc., a wholly owned subsidiary formed in January 1999 that offers information
technology services, performed well above expectations and made a positive
contribution to the increases.
The growth in revenue occurred both from the addition of new clients as well as
an increase in services offered to existing clients. Revenue of the Company's
Somerset Financial Services division increased 25% to $2,896,000 compared with
$2,317,000 for the same quarter last year, and revenue from the First Indiana
Investor Services division increased 37% to $248,000, compared with $181,000
during the 1998 quarter. Paradym Technologies, Inc. contributed $455,000 to
consolidated revenue, with no such revenue in the 1998 quarter.
The 6% increase in equity earning from First Indiana primarily resulted from
growth in the Bank's loan portfolios that caused an increase in net interest
income. Non-interest income for the quarter also increased 22%, compared with
the 1998 quarter, and was due largely to gain on the sale of loans and loan
servicing.
Net loan receivables of First Indiana grew 11%, compared with the same period
in 1998, with significant increases in the construction, business, and consumer
loan portfolios.
-2-
Operating expenses increased $654,000, or 35%, during the 1999 quarter,
compared with the 1998 period, excluding $163,000 of non-recurring merger
expenses from the 1998 amount. Total expenses for the 1999 quarter amounted to
$2,536,000, compared with $1,882,000 of the same expenses in the 1998 quarter.
The higher operating expenses were primarily due to the addition of professional
staff in the financial services division and the inclusion for the first time of
all categories of expenses for the new subsidiary Paradym Technologies, Inc.
The addition of talented individuals with specialty experience was in response
to continued growth demands of the Company's financial planning and specialty
consulting services and the addition of new services to better serve clients.
The growth in revenue and income during the quarter is supportive of the
Company's expansion. Management expects continued growth in revenue and income
during the remainder of the year as the new services are further integrated into
our client relationships. Management expects revenue to grow faster than
operating expenses as efficiency of the new staff continues to improve.
Financial Condition and Liquidity
Management considers the financial condition and liquidity of the Company to be
excellent at March 31, 1999. The Company was also in a very sound position at
December 31, 1998 and March 31, 1998. The Company's balance sheet contains a
large percentage of liquid assets. These liquid assets are being invested
temporarily and are intended for use in additional acquisitions, the expansion
of existing financial service operations, and to fund a common stock repurchase
program.
At March 31, 1998, the Company had a high ratio of current assets to current
liabilities of 5.6 to one. In addition, 50% of the current assets consisted of
cash, cash equivalents, and short-term investments. Net working capital
remained stable during the periods and amounted to $5,784,000 at March 31, 1999,
$5,795,000 at December 31, 1998, and $6,534,000 at March 31, 1998.
The Company had no outstanding debt at any of the dates presented in the
Consolidated Balance Sheets.
All short-term and long-term debt was retired during the first quarter of 1998.
Shareholders' equity increased to $35,651,000 at March 31, 1999, from
$35,463,000 at December 31, 1998 and $34,150,000 at March 31, 1998. On a per
share basis, the amounts were $12.49, $12.26, and $11.79 respectively.
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 us to record our investment in First
Indiana at a net carrying value which represents our acquisition cost of First
Indiana shares, plus our equity share of First Indiana's net income, rather than
at market value. Under certain circumstances, the tax liability recorded in
this manner (approximately $9 million) may never be incurred. The market value
of our investment in First Indiana at March 31, 1999 was approximately $52.4
million, or $15.9 million greater than the investment amount reflected in our
balance sheet at March 31, 1999.
Operating activities during the three months ended March 31, 1999 provided cash
of $264,000, slightly above the $254,000 provided during the same period in
1998. As revenue increases, additional working capital is needed to support a
corresponding increase in trade accounts, notes, and other receivables. The
cyclical nature of operations as noted above causes a rapid increase in
receivables during the first four months of the year. Management expects cash
from operations to improve during the remaining three-quarter of the year, as
the balance of trade accounts receivable reduce in the less than peak period of
the year.
The Company expended $677,000 for the purchase of 41,063 shares of its common
stock during the first quarter of 1999, under a continuing program to acquire
its own stock for future use in funding employee benefit plans and for future
acquisitions.
-3-
Semi-annual dividends of $288,000 were paid to shareholders, compared to
$261,000 paid in the first quarter of 1998. The increase was a result of an
increase in the 1999 annual dividend rate to $.20 per share, compared to $.18
per share for 1998, an 11% increase.
The Company completed the purchase of assets and the formation of Paradym
Technologies during the quarter, which required the outlay of $315,000 in cash.
Proceeds from the sale of short-term investments amounted to $786,000. The
investments were sold to provide funding for the uses of cash described above.
Management anticipates that the continuing stock repurchase program and
expansion activities, including future purchase of property and equipment, will
be funded from available cash and short-term investments. A major acquisition
could require the use of bank debt and/or the issuance of additional shares of
common stock.
The Company is a registered savings and loan holding company and is subject to
regulations of permitted activities defined in the National Housing Act and
administered by the Office of Thrift Supervision.
Impact of Accounting Standards Not Yet Adopted
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), Report On The Costs of Start-Up
Activities. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incurred. It further requires that any such
costs capitalized in prior periods be charged to expense. SOP 98-5 was
effective for financial statements for fiscal years beginning after December 15,
1998. The Company adopted SOP 98-5 effective January 1, 1999. Concurrent with
the adoption, the Company charged $189,000 to expense ($115,000 after income
taxes) that is reported as the cumulative effect of a change in accounting
principle in the attached financial statements.
Other pronouncements by the Financial Accounting Standards Board and the
American Institute of Certified Public Accountants during the three months ended
March 31, 1999 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
Company's operations of the First Indiana Investor Services division is subject
to review by the Federal Financial Institutions Examination Council (FFIEC)
and its Somerset Financial Services division, as a Registered Investment
Advisor is subject to review by the Securities and Exchange Commission (SEC).
Both the FFIEC and the SEC require us to assess the Company's and its vendors'
ability to be Year 2000 ready by June 30, 1999 for all mission critical systems.
Because the Company relies 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 contacted. The Company identified potential Year 2000
readiness issues and developed action plans and contingency plans for each
issue. During 1998, the Company tested systems for purposes of validating year
2000 readiness, upgraded and replaced existing hardware, software, and embedded
systems, and implemented 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 will cause
management to doubt the ability of the vendor to be adequately prepared for the
Year 2000 and thus possibly impact the Company's ability to conduct business
beyond the century change.
The Company uses external data service bureaus for processing and reporting of
some customer data. Proxy testing has been conducted on the mission critical
aspects with the service bureaus.
-5-
The Company completed an upgrade of personal computer hardware during 1998, at
a cost of approximately $140,000, and also completed the installation of
replacement vendor supplied software at a cost of approximately $20,000.
At March 31, 1999, all computer hardware is capable of processing data in the
Year 2000, and all mission critical software has been tested and determined to
be Year 2000 compliant, with the exception of one software system that is
scheduled to be replaced by June 30, 1999. The cost of this replacement is
estimated to be $45,000.
Due to uncertainties associated with Year 2000 problems, the Company's
contingency plan in the event that its business or operations are disrupted
January 1, 2000, is to focus the resources and professional staff of Paradym
Technologies, Inc. immediately on the remediation of any system failure that
may have gone undetected. Paradym Technologies, Inc. is a wholly owned
subsidiary of the Company that is in the business of providing information
technology services to clients of the Company.
Management sees no internal impact or risk to the Company's ability to operate
in the twenty-first century, but it is not possible to assess the financial
impact of lost revenue due to Year 2000 issues or future expenditures due to
external factors 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
based 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.
PART II
OTHER INFORMATION
Items 1,2,3 and 5
The information required by these items has been omitted. The registrant had no
activity applicable to these items.
Item 4 - Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders was held April 21, 1999.
The following directors were elected at the meeting.
Votes Votes
Votes For Against Withheld
--------- -------- --------
Patrick J. Early 2,674,962 5,000
William L. Elder 2,674,494 5,468
Marni McKinney 2,673,323 6,639
The following directors' terms of office continued after the meeting.
Douglas W. Huemme
Malcolm A. Leslie
Gary L. Light
Kevin K. McKinney
Robert H. McKinney
Michael L. Smith
Item 6 - Reports Filed on Form 8-K
No reports on Form 8-K were filed during the three months ended March 31, 1999.
-6-
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)
By s/Marni McKinney
Marni McKinney, President and
Chief Executive Officer
By s/Joseph M. Richter
Joseph M. Richter, Executive Vice President,
Finance and Treasurer
Date: May 11, 1999
-14-
THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<S> <C> <C>
March 31, December 31,
ASSETS 1999 1998
Current assets
Cash and cash equivalents $612,000 $526,000
Short-term investments 2,927,000 3,713,000
Trade accounts, notes and other receivables 3,389,000 1,888,000
Prepaid expenses 124,000 87,000
--------- ---------
Total current assets 7,052,000 6,214,000
--------- ---------
Investments
First Indiana Corporation (Fair values of
$52,400,000 and $55,200,000) 36,500,000 36,104,000
---------- ----------
Office furniture and equipment 1,368,000 1,169,000
Less accumulated depreciation 759,000 712,000
------- -------
609,000 457,000
-------- -------
Other assets
Notes receivable, net 25,000 240,000
Goodwill, net of accumulated amortization 1,269,000 1,074,000
Other 504,000 684,000
--------- ---------
1,798,000 1,998,000
--------- ---------
Total Assets $45,959,000 $44,773,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $344,000 $97,000
Accrued compensation 204,000 194,000
Taxes, other than income taxes 46,000 33,000
Income taxes 462,000 30,000
Other accrued expenses 212,000 65,000
-------- -------
Total current liabilities 1,268,000 419,000
--------- -------
Deferred income taxes 9,040,000 8,891,000
--------- ---------
Shareholders' equity
Common stock without par value, stated
value of $.64, authorized 4,000,000 shares;
issued and outstanding 2,909,214 shares 1,862,000 1,862,000
Capital in excess of stated value 3,563,000 3,599,000
Accumulated other comprehensive
income (loss) (29,000) (19,000)
Retained earnings 31,209,000 30,359,000
---------- ----------
36,605,000 35,801,000
Less 55,308 and 17,317 treasury shares,
at cost (954,000) (338,000)
--------- --------
Total shareholders' equity 35,651,000 35,463,000
---------- ----------
Total Liabilities and Shareholders' Equity $45,959,000 $44,773,000
========== ==========
</TABLE>
-3-
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
<TABLE>
<S> <C> <C> <C>
1999 1998
Cash flows from operating activities:
Net income $1,291,000 $1,012,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 72,000 66,000
Deferred income taxes 237,000 180,000
Equity in earnings of First Indiana Corp (1,006,000) (950,000)
Dividends received from First Indiana Corp 359,000 326,000
Changes in operating assets and liabilities:
Trade accounts, notes, and receivables (1,501,000) (816,000)
Prepaid expenses (37,000) (54,000)
Accounts payable and accrued expenses 417,000 53,000
Accrued income taxes 432,000 437,000
------- -------
Net cash provided by operating activities 264,000 254,000
------- -------
Cash flows from investing activities:
Purchase of office furniture and equipment (199,000) (40,000)
Cumulative effect of change in accounting
principal 188,000 ---
Decrease (increase) in other assets (13,000) 62,000
Decrease in short-term investments 786,000 597,000
------- -------
Net cash provided by investing activities 762,000 619,000
------- -------
Cash flows from financing activities:
Principal payments on note payable, bank --- (459,000)
Principal payments on long-term borrowings --- (43,000)
Reissuance of treasury shares 25,000 9,000
Purchase of treasury shares (677,000) ---
Cash dividends paid (288,000) (261,000)
------- -------
Net cash used by financing activities (940,000) (754,000)
------- -------
Increase in cash and cash equivalents 86,000 119,000
Cash and cash equivalents at beginning
of period 526,000 600,000
------- -------
Cash and cash equivalents at end
of period $612,000 $719,000
======= =======
</TABLE>
-4-
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SOMERSET GROUP, INC.
Condensed Consolidated Statements of Shareholders' Equity
January 1, 1998 to March 31, 1999
(unaudited)
<TABLE>
<C> <C> <C> <C> <C> <C> <C>
Capital Accumulated
in Excess Other
Common of Stated Comprehensive Retained Treasury
Stock Value Income Earnings Shares Total
Balance January 1, 1998 $1,855,000 $3,549,000 ($22,000) $28,078,000 $ --- $33,460,000
Comprehensive Income:
Net income January 1
to March 31, 1998 --- --- --- 1,012,000 --- 1,012,000
Unrealized losses on
short-term investments
net of deferred
income taxes --- --- (3,000) --- --- (3,000)
------
Total comprehensive income 1,009,000
Shares of common
stock issued 1,000 8,000 --- --- --- 9,000
Cash dividends paid --- --- --- (261,000) --- (261,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (67,000) --- (67,000)
------- -------- ------- ---------- ----- ----------
Balance March 31, 1998 $1,856,000 $3,557,000 ($25,000) $28,762,000 --- $34,150,000
Comprehensive Income:
Net income Appril 1
to December 31, 1998 --- --- --- 1,853,000 --- 1,853,000
Unree-alized gains on short-
term investments, net of
deferred income taxes --- --- 6,000 --- --- 6,000
Total comprehensive income 1,859,000
Tax benefit of stock
options exercised --- 95,000 --- --- --- 95,000
Shares of common
stock issued 6,000 (53,000) --- --- 126,000 79,000
Purchase of
treasury shares --- --- --- --- (464,000) (464,000)
Cash dividends paid --- --- --- (261,000) --- (261,000)
Equity in other capital
changes of First Indiana
Corporation, net of
deferred income taxes --- --- --- 5,000 --- 5,000
------- -------- ------ --------- -------- ----------
Balance December 31,1998 1,862,000 3,599,000 (19,000) 30,359,000 (338,000) 35,463,000
Comprehensive Income:
Net income January 1
to March 31, 1999 --- --- --- 1,291,000 --- 1,291,000
Unrealized losses on
short-term investment net
deferred income taxes --- --- (10,000) --- --- (10,000)
------
Total comprehensive income 1,281,000
Reissuance of
treasury shares --- (36,000) --- --- 61,000 25,000
Purchase of treasury shares --- --- --- --- (677,000) (677,000)
Cash dividends paid --- --- --- (288,000) --- (288,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (153,000) --- (153,000)
--------- --------- ------- ---------- -------- ----------
Balance
March 31, 1999 $1,862,000 $3,563,000 ($29,000) $31,209,000 ($954,000) $35,651,000
========= ========= ====== ========== ======= ==========
</TABLE>
-5-
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SOMERSET GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
The Somerset Group, Inc. (The Company or Somerset) is a nondiversified,
unitary savings and loan holding company. Its major asset at March 31, 1999 is
a 21.7% ownership interest in First Indiana Corporation (First Indiana),
which owns 100% of First Indiana Bank (the Bank). The Company operates First
Indiana Investor Services, which markets insurance and investment products
primarily to Bank customers.
A division of the Company, Somerset Financial Services, provides tax,
accounting health care consulting, investment and wealth management, and
management consulting services. On January 5, 1999, a subsidiary of the
Company, Paradym Technologies, Inc., purchased the assets and business of two
companies and commenced providing information technology consulting, including
corporate Internet, networking, surveillance, and wiring services.
(a) Basis of Financial Statement Presentation: The accompanying financial
statements have been prepared with generally accepted accounting 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.
(b) Fees and Commissions: Fees and commissions represent revenue from financial
services provided to clients and from the sale of insurance and investment
products.
(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 fair value 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 accumulated other
comprehensive income.
(e) Investment in First Indiana Corporation: First Indiana Corporation is a non-
diversified unitary savings and loan holding company whose primary
subsidiary is a federally chartered stock savings bank. It operates retail
banking and mortgage and consumer loan offices throughout Indiana and
mortgage and consumer loan offices in seven other states. Somerset's
investment in First Indiana Corporation is stated at cost, adjusted for its
share of undistributed earnings, and includes adjustments under the purchase
method of accounting. Capital changes of First Indiana Corporation are
reflected as a separate component of consolidated retained earnings.
(f) Office Furniture and Equipment: Office furniture and equipment are stated
at historical cost for financial reporting purposes. Depreciation is
determined using the straight-line method based upon the estimated useful
lives of the 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.
-6-
(h) Earnings Per Share: Basic earnings per share for the three months ended
March 31, 1999 and 1998 were computed by dividing net income by the weighted
average shares of common stock outstanding (2,879,917 and 2,899,097
respectively). Diluted earnings per share for the three months ended March
31, 1999 and 1998 were computed by dividing net earnings by the weighted
average shares of common stock and common stock that would have been
outstanding assuming the issuance of all potential dilutive shares
outstanding (2,920,560 and 2,973,386 respectively). Dilution of the per-
share calculation relates to stock options.
(i) Treasury Shares: Treasury shares issued are valued at average cost of all
treasury shares at the date of issuance.
Note 2. Change in Accounting Principle
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), Report On The Costs of Start-Up
Activities. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incured. It further requires that any such
costs capitalized in prior periods be charged to expense. SOP 98-5 was
effective for financial statements for fiscal years beginning after December 15,
1998. The Company adopted SOP 98-5 effective January 1, 1999. Concurrent with
the adoption, the Company charged $188,000 to expense ($115,000 after income
taxes) that is reported as the cumulative effect of a change in accounting
principle in the Condensed Consolidated Financial Statements.
Note 3. Business Combinations
On January 4, 1999, a 100% owned subsidiary of Somerset purchased the assets of
two companies and commenced operations as Paradym Technologies, Inc.
(Paradym). Paradym provides information technology consulting services,
including corporate Internet, network design, installation and support, and
video surveillance, and wiring services. The total cost of the assets purchased
was $315,000, of which $95,000 was office furniture and equipment and $220,000
was recorded as Goodwill.
Note 4. 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 is favorably affected,
as compared to the remaining three-quarters of the year.
Revenue, net income and earnings per share for the four quarterly periods ending
December 31, 1998 were as follows:
Year Ended December 31, 1998
(In Thousands)
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Annual
Mar. 31 June 30 Sept. 30 Dec. 31 1998
Revenue and income $3,537 $2,717 $2,754 $2,778 $11,786
Net income $1,012 $570 $628 $655 $2,865
Basic earnings per share $.35 $.20 $.22 $.23 $.99
Diluted earnings per share $.34 $.19 $.21 $.22 $.97
Note 5. Investment in First Indiana Corporation
The Company's percentage of ownership of First Indiana Corporation was 21.7% at
March 31, 1999, and December 31, 1998. The Company's equity in earnings of
First Indiana Corporation shown in the Condensed 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 6. Average Shares Outstanding
Average shares outstanding, computed on the diluted basis as required by
Financial Accounting Standards Board Statement 128, included the common share
equivalents of outstanding stock options. There were 40,643 and 74,289
equivalent shares included in the average diluted shares outstanding for the
three months ended March 31, 1999 and March 31, 1998, respectively.
The Company had the following shares of its stock reserved for exercise of stock
options.
Date Shares
March 31, 1999 203,342
December 31, 1998 109,043
Note 7. Segment Reporting
Somerset's business units are organized to operate in the financial services
industry and as a holding company for its investment in First Indiana. During
the first quarter of 1999, there were four operating and reporting units
organized on the basis of the type and source of their revenue and income.
Prior to the formation of Paradym Technologies, Inc., which commended operations
in the first quarter of 1999, Somerset had three operating and reporting
segments.
The Somerset Group Management Division.
This division manages all investment and treasury functions of the Company,
including overseeing its investment in First Indiana. It also sets policy
guidelines for the other operating divisions. Revenue and income is derived
from the Company's investment in First Indiana and from investment and loan
portfolios.
Somerset Financial Services Division
Services provided to the general public by Somerset Financial Services include
tax planning and preparation, health care consulting, information technology,
investment and wealth management, and management consulting services for
entrepreneurs, their businesses, families, and individuals. Revenue and income
for services is on a fee basis only; as an hourly fee or a quoted flat fee. No
products are sold and no remuneration is received as an agent for any other
business or organization.
First Indiana Investor Services Division
This division markets investment and insurance products primarily within the
branch bank system of First Indiana and to a lesser degree to the general
public. The primary investment products include variable annuities, mutual
funds, and stocks and bonds. The primary insurance products include fixed
annuities, life insurance, and property and casualty insurance. Revenue and
income received is generated solely from commissions received on products sold,
as an agent for insurance companies or through a contractual arrangement with a
registered investment broker/dealer.
Paradym Technologies, Inc.
This subsidiary provides information technology consulting services, including
corporate Internet, network design, installation and support, video surveil-
lance, and wiring services.
There were no inter-segment sales and no foreign operations.
The segment financial information provided below is based on the internal
management reporting system used by the Company's management to monitor and
manage the financial performance of the Company. The Company evaluates segment
performance based on the return on assets and the return on revenue.
-8-
Three Months Ended March 31,
1999 1998
Assets:
Somerset Group Management Division $40,562,000 $38,878,000
Somerset Financial Services Division 3,417,000 2,960,000
First Indiana Investor Services Division 1,351,000 1,265,000
Paradym Technologies, Inc. 629,000 ---
--------- ---------
$45,959,000 $43,103,000
========== ==========
Revenue and Income: (A)
Somerset Group Management Division $1,069,000 $1,039,000
Somerset Financial Services Division 2,896,000 2,317,000
First Indiana Investor Services Division 248,000 181,000
Paradym Technologies, Inc. 455,000 ---
--------- ---------
$4,668,000 $3,537,000
========= =========
Net Income (Loss):
Somerset Group Management Division $639,000 $582,000
Somerset Financial Services Division 673,000 433,000
First Indiana Investor Services Division 16,000 (3,000)
Paradym Technologies, Inc. 78,000 ---
-------- -------
Income before cumulative effect of change
in accounting principle 1,406,000 1,012,000
Cumulative effect of change in
accounting principle (B) (115,000) ---
-------- --------
$1,291,000 $1,012,000
========= =========
Notes:
(A) All revenue and income is from external sources, except for $1,006,000 and
$950,000, respectively, of equity in earnings of First Indiana Corporation,
included in Somerset Group Management Division.
(B) A significant non-recurring, non-cash expense.
Note 8. 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 revenue and income.
First Indiana Corporation and Subsidiaries
Summarized Income Statements
(Dollars in Thousands) Three Months Ended March 31,
1999 1998
Interest income $34,287 $33,130
Interest expense 17,799 17,437
------ ------
Net interest income 16,488 15,693
Provision for loan losses 2,460 2,820
------ ------
Net interest income after provision 14,028 12,873
Non interest income 6,093 4,971
Non interest expense (12,502) (10,566)
------ ------
Income before income taxes 7,619 7,278
Income tax expense 2,989 2,860
----- -----
Net income $4,630 $4,418
===== =====
-9-
Summarized Balance Sheet
March 31 December 31
1999 1998
Assets $1,826,565 $1,687,938
Loans-Net $1,547,263 $1,394,604
Deposits $1,305,728 $1,192,424
Shareholders' Equity $ 167,301 $ 156,317
For addition 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.
-10-
