THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenue and Income: unaudited unaudited
Fees, commissions, and investment income 2,001,000 1,673,000 7,671,000 5,980,000
Equity in earnings of First Indiana Corp. 1,460,000 1,081,000 3,561,000 3,028,000
--------- --------- --------- ---------
Total revenue and income 3,461,000 2,754,000 11,232,000 9,008,000
Operating Expenses:
Salaries, wages, commissions and benefits 1,890,000 1,430,000 5,586,000 4,358,000
General and administrative expenses 260,000 253,000 983,000 772,000
Occupancy expenses 114,000 91,000 317,000 258,000
Advertising and marketing 69,000 46,000 151,000 121,000
Depreciation and amortization 83,000 68,000 229,000 206,000
Interest expense 0 0 0 4,000
Merger expenses 0 0 0 163,000
--------- --------- --------- ---------
Total operating expenses 2,416,000 1,888,000 7,266,000 5,882,000
Income before income taxes and cumulative effect
of change in accounting principle 1,045,000 866,000 3,966,000 3,126,000
Income tax expense 286,000 238,000 1,207,000 916,000
-------- ------- --------- --------
Income before cumulative effect of change
in accounting principle 759,000 628,000 2,759,000 2,210,000
Cumulative effect of dchange in accounting
principle 0 0 (115,000) 0
-------- ------- --------- --------
Net Income $759,000 $628,000 $2,644,000 $2,210,000
======= ======= ========= =========
Net income per share:
Basic:
Income before cumulative effect of change
in accounting principle $.27 $.22 $.97 $.76
Cumulative effect of change in accounting
principle 0 0 (.04) 0
--- --- --- ---
$.27 $.22 $.93 $.76
=== === === ===
Diluted:
Income before cumulative effect of change
in accounting principle $.27 $.21 $.96 $.74
Cumulative effect of change in accounting
principle 0 0 (.04) 0
--- --- --- ---
$.27 $.21 $.92 $.74
=== === === ===
Average Shares Outstanding:
Basic 2,790,550 2,899,633 2,828,441 2,901,476
Diluted 2,853,503 2,959,547 2,874,351 2,968,918
</TABLE>
-2-
See accompanying Notes to Condensed Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 437,000
<SECURITIES> 1,218,000
<RECEIVABLES> 2,229,000
<ALLOWANCES> 38,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,940,000
<PP&E> 1,627,000
<DEPRECIATION> 968,000
<TOTAL-ASSETS> 46,510,000
<CURRENT-LIABILITIES> 825,000
<BONDS> 0
0
0
<COMMON> 1,862,000
<OTHER-SE> 34,171,000
<TOTAL-LIABILITY-AND-EQUITY> 46,510,000
<SALES> 7,671,000
<TOTAL-REVENUES> 11,232,000
<CGS> 7,266,000
<TOTAL-COSTS> 7,266,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,966,000
<INCOME-TAX> 1,207,000
<INCOME-CONTINUING> 2,759,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 115,000
<NET-INCOME> 2,644,000
<EPS-BASIC> .93
<EPS-DILUTED> .92
</TABLE>
THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<S><C> <C> <C>
September 30, December 31,
ASSETS 1999 1998
Current assets
Cash and cash equivalents $437,000 $526,000
Short term investments 1,218,000 3,713,000
Trade accounts, notes and other
receivables, net 2,191,000 1,888,000
Prepaid expenses 94,000 87,000
--------- ---------
Total current assets 3,940,000 6,214,000
Investments
First Indiana Corporation (Fair values of
$57,928,000 and $55,200,000) 38,169,000 36,104,000
Office furniture and equipment 1,627,000 1,169,000
Less accumulated depreciation 968,000 712,000
-------- --------
659,000 457,000
Other assets
Notes receivable, net 25,000 240,000
Goodwill, net of accumulated amortization 3,192,000 1,074,000
Other 525,000 684,000
--------- ---------
3,742,000 1,998,000
--------- ---------
Total Assets $46,510,000 $44,773,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $186,000 $97,000
Accrued compensation 295,000 194,000
Taxes, other than income taxes 67,000 33,000
Income taxes 59,000 30,000
Other accrued expenses 218,000 65,000
Total current liabilities 825,000 419,000
--------- --------
Deferred income taxes 9,652,000 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 3,542,000 3,599,000
Accumulated other comprehensive income (loss) (18,000) (19,000)
Retained earnings 32,180,000 30,359,000
37,566,000 35,801,000
Less 88,812 and 17,371 treasury shares, at cost (1,533,000) (338,000)
---------- ----------
Total shareholders' equity 36,033,000 35,463,000
---------- ----------
Total Liabilities and Shareholders' Equity $46,510,000 $44,773,000
========== ==========
</TABLE>
-3-
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
(unaudited) Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net income $2,644,000 $2,210,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 229,000 206,000
Deferred income taxes 1,047,000 413,000
Equity in earnings of First Indiana Corporation (3,561,000) (3,028,000)
Dividends received from First Indiana Corporation 1,076,000 988,000
Changes in operating assets and liabilities:
Trade accounts, notes, and other receivables (303,000) (312,000)
Prepaid expenses (7,000) (53,000)
Accounts payable and accrued expenses 377,000 96,000
Accrued income taxes 109,000 447,000
--------- --------
Net cash provided by operating activities 1,611,000 967,000
Cash flows from investing activities:
Purchase of shares of First Indiana Corporation --- (990,000)
Payment for purchase of McGee, Rice & Wheat, Inc. (1,036,000) ---
Purchase of office furniture and equipment (358,000) (178,000)
Decrease in other assets 117,000 113,000
Decrease in short-term investments 2,495,000 1,048,000
--------- --------
Net cash provided by investing activities 1,218,000 (7,000)
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 338,000 89,000
Purchase of treasury shares (2,690,000) (297,000)
Cash dividends paid (566,000) (522,000)
--------- ---------
Net cash used by financing activities (2,918,000) (1,232,000)
Decrease in cash and cash equivalents (89,000) (272,000)
Cash and cash equivalents at beginning of period 526,000 600,000
------- -------
Cash and cash equivalents at end of period $437,000 $328,000
======= =======
</TABLE>
The Company made income tax payments of $134,000 and $280,000 during the nine
months ended September 30, 1999 and 1998, respectively.
-4-
See accompanying Notes to Condensed Consolidated Financial Statements
THE SOMERSET GROUP, INC.
Consolidated Statements of Shareholders' Equity
January 1, 1998 to September 30, 1999
(unaudited) Capital Accumulated
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
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 September
30, 1998 --- --- --- 2,210,000 --- 2,210,000
Unrealized gains on short-term invest
ments,net of deferred income taxes --- --- 24,000 --- --- 24,000
---------
Total comprehensive income 2,234,000
Tax benefit of stock options exercised --- 93,000 --- --- --- 93,000
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 3,597,000 2,000 29,735,000 (171,000) 35,025,000
Comprehensive Income:
Net income October 1 to December
31, 1998 --- --- --- 655,000 --- 655,000
Unrealized loss on short-term invest-
ments net of deferred income taxes --- --- (21,000) --- --- (21,000)
-------
Total comprehensive income 634,000
Tax benefit of stock options exercised --- 2,000 --- --- --- 2,000
Purchase of treasury shares --- --- --- --- (167,000) (167,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (31,000) --- (31,000)
--------- --------- ------ ---------- ------- ----------
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 September
30, 1999 --- --- --- 2,644,000 --- 2,644,000
Unrealized gains on short-term invest-
ments net of deferred income taxes --- --- 1,000 --- --- 1,000
---------
Total Comprehensive Income 2,645,000
Tax benefit of stock options exercised --- 80,000 --- --- --- 80,000
Reissuance of treasury shares --- (137,000) --- --- 1,495,000 1,358,000
Purchase of treasury shares --- --- --- --- (2,690,000) (2,690,000)
Cash dividends paid --- --- --- (566,000) --- (566,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (257,000) --- (257,000)
--------- --------- ------- ---------- --------- ----------
Balance September 30, 1999 $1,862,000 $3,542,000 ($18,000) $32,180,000 ($1,533,000) $36,033,000
</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 September 30, 1999
is a 22.0% 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 4, 1999, a subsidiary of the Company
Paradym Technologies, Inc., 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 are generated from financial services and
information technology consulting provided to clients, and commissions are
generated 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, a component of shareholders equity.
(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.
Caapital chnges 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
September 30, 1999 and 1998 were computed by dividing net income by the
weighted average shares of common stock outstanding (2,790,550 and
2,899,633 respectively). Diluted earnings per share for the three months
ended September 30, 1999 and 1998 were computed by dividing net income 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 (2,853,503 and 2,959,547 respectively).
Basic earnings per share for the nine months ended September 30, 1999 and
1998 were computed by dividing net income by the weighted average shares of
common stock outstanding (2,828,441 and 2,901,476 respectively). Diluted
earnings per share for the nine months ended September 30, 1999 and 1998
were computed by dividing net income 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 (2,874,351 and
2,968,918 respectively). Dilution of the per share calculations relate to
outstanding stock options.
(i) Treasury Shares: Treasury shares issued are valued at average cost of all
treasury shares at the date of issuance. Treasury share transactions for
the three months and nine months ended September 30, 1999 were as follows:
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
Shares held in treasury, beginning of period 124,118 17,371
Number of shares repurchased 18,700 158,263
Number of shares re-issued:
For exercise of stock options (6,564) (39,380)
For merger with McGee, Rice & Wheat, Inc. (47,442) (47,442)
------ ------
Shares held in treasury, September 30, 1999 88,812 88,812
====== ======
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 September 1, 1999, Somerset completed a merger with McGee, Rice & Wheat, Inc.
a certified public accounting firm located in Indianapolis, Indiana. The
accounting, tax, and other services offered by McGee, Rice & Wheat, Inc. were
combined with the Company's financial services division. This business
combination was accounted for as a purchase. Accordingly, the results of
McGee, Rice & Wheat, Inc. have been included in the condensed consolidated
financial statements since the date of the merger. Somerset issued 47,442
shares of its common stock, valued at $1,020,000, and paid $1,036,000 cash in
exchange for all the outstanding shares of McGee, Rice & Wheat, Inc. The
transaction was valued at $2,056,000, of which $2,035,000 was considered
Goodwill, and is being amortized over 20 years. There were no liabilities
assumed, and no cash was acquired in the transaction.
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 $220,000 was considered Goodwill, which is being amortized
over 15 years. Amortization of Goodwill related to the business combinations
for the nine months ended September 30, 1999 was $16,000.
-7-
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 ended
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 22.0% at
September 30, 1999 and 21.7% at 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.
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 62,953 and 59,914
equivalent shares included in the average diluted shares outstanding for the
three months ended September 30, 1999 and September 30, 1998, respectively, and
45,910 and 67,442 equivalent shares included for the nine months ended September
30, 1999 and September 30, 1998, respectively.
The Company had the following shares of its stock reserved for exercise of stock
options.
Date Shares
September 30, 1999 218,531
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 half 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 commenced 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.
-8-
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 surveillance
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.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended September, 30 Ended September, 30
1999 1998 1999 1998
Assets:
Somerset Group Management Division $39,929,000 $42,060,000 $39,929,000 $42,060,000
Somerset Financial Services Division 4,480,000 880,000 4,480,000 880,000
First Indiana Investor Services Division 1,494,000 1,256,000 1,494,000 1,256,000
Paradym Technologies, Inc. 607,000 --- 607,000 ---
---------- ---------- ---------- ----------
$46,510,000 $44,196,000 $46,510,000 $44,196,000
========== ========== ========== ==========
Revenue and Income: (A)
Somerset Group Management Division $1,462,000 $1,171,000 $3,667,000 $3,309,000
Somerset Financial Services Division 1,437,000 1,334,000 5,836,000 5,012,000
First Indiana Investor Services Division 356,000 249,000 803,000 687,000
Paradym Technologies, Inc. 206,000 --- 926,000 ---
--------- --------- ---------- ---------
$3,461,000 $2,754,000 $11,232,000 $9,008,000
========= ========= ========== =========
Net Income (Loss):
Somerset Group Management Division $834,000 $742,000 $2,142,000 $1,958,000
Somerset Financial Services Division (163,000) (115,000) 406,000 211,000
First Indiana Investor Services Division 55,000 1,000 79,000 41,000
Paradym Technologies, Inc. 33,000 --- 132,000 ---
Income before cumulative effect of change
in accounting principle 759,000 628,000 2,759,000 2,210,000
Cumulative effect of change in accounting
principle (B) --- --- (115,000) ---
------- ------- --------- ---------
$759,000 $628,000 $2,644,000 $2,210,000
======= ======= ========= =========
</TABLE>
Notes:
(A) All revenue and income is from external sources, except for equity in
earnings of First Indiana Corporation, included in Somerset Group Management
Division.
(B) A significant non-recurring, non-cash expense.
-9-
Note 8. Significant Non-Consolidated Subsidiary
Summarized income statement information is presented below for First Indiana
Corporation. This 22.0% owned subsidiary represent
First Indiana Corporation and Subsidiaries
Summarized Income Statements
Three Months Nine Months
(Dollars in Thousands) Ended September, 30 Ended September 30
1999 1998 1999 1998
Interest income $37,545 $34,857 $107,845 $102,242
Interest expense 19,301 18,905 55,527 54,771
------ ------ ------ ------
Net interest income 18,244 15,952 52,318 47,471
Provision for loan losses 1,950 2,320 6,870 7,460
------ ------ ------ ------
Net interest income after provision 16,294 13,632 45,448 40,011
Non interest income 8,043 6,291 20,352 16,522
Non interest expense 13,806 11,749 39,554 33,557
------ ------ ------ ------
Income before income taxes 10,531 8,174 26,246 22,976
Income tax expense 3,909 3,171 9,973 8,938
----- ----- ------ ------
Net income $6,622 $5,003 $16,273 $14,038
====== ===== ====== ======
Summarized Balance Sheet
September 30 December 31
1999 1998
Assets $1,878,586 $1,795,990
Loans-Net $1,614,055 $1,518,543
Deposits $1,272,985 $1,227,918
Shareholders' Equity $ 172,898 $ 165,970
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-
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, 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 September 30, 1999 - 2,820,402 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 September 30, 1999 amounted to $759,000,
compared to earnings for the same quarter of 1998 of $628,000, an increase of
20.9%. On a per diluted share basis, the 1999 earnings represented $.27 per
share, compared to $.21 per share for 1998, an increase of 28.6%.
Earnings for the nine months ended September 30, 1999 amounted to $2,644,000,
compared to earnings for the same nine months of 1998 of $2,210,000, an increase
of 19.6%. On a per diluted share basis, the 1999 earnings represented $.92 per
share, compared to $.74 per share for 1998, an increase of 24.3%.
Earnings for the nine months of 1999 contained a one-time charge against net
income of $115,000, or $.04 per share, for the adoption of an accounting
pronouncement on January 1, 1999. Earnings per share before the cumulative
effect of the accounting change were $.96, an increase of 29.7% over the
comparable 1998 amount of $.74 per share. The one-time charge resulted from the
adoption of an American Institute of Certified Public Accountants' Statement of
Position that required the Company to charge to expense previously capitalized
costs for start-up activities.
There were fewer average shares outstanding during the first half of 1999 than
there were in 1998, which caused the percentage increases for the per share
calculations to be higher than the comparisons of actual earnings. The lower
number of average shares outstanding primarily resulted from the Company's stock
repurchase program announced in April 1999.
The improvement in earnings was a result of increases in revenue and income
during the third quarter and the nine months of 1999, compared with last year.
Total revenue and income for the third quarter of 1999 amounted to $3,461,000,
compared with $2,754,000 for the 1998 quarter, an increase of 26%, or $707,000.
Total revenue and income for the nine months of 1999 amounted to $11,232,000,
compared with $9,008,000 for the nine months of 1998, an increase of 25%, or
$2,224,000.
1999 revenue and financial results include the operations of McGee, Rice & Wheat
Inc., a CPA firm, since its acquisition by Somerset on September 1, 1999, and
the results of the information technology consulting group formed in January
1999. Neither of these operations was included in 1998 results.
During the quarter, revenue from fees, commissions, and investment income for
financial and investment services offered by the Company increased 19.6% to
$2,001,000, compared with $1,673,000 last year. In addition, the Company's
equity income from First Indiana Corporation increased 35%, compared to the 1998
quarter and reached $1,460,000.
For the nine-month period, fees, commissions, and investment income increased
28% to almost $7.7 million, compared with $6.0 million for 1998, and equity
income from First Indiana Corporation was up 18% to $3.6 million, compared with
$3.0 million last year.
During the quarter, the Company's fees for specialty consulting services
continued to increase substantially over last year. The revenue growth came
mainly from fee income from both new and existing clients, which is an
indication that the Company's existing clients are pleased with the service and
contracted with Somerset for additional services. Our reputation as a quality
provider of financial advice and solutions continues to grow and is attracting
new clients.
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The Company's new information technology consulting group made a significant
contribution to the revenue increases. The traditional tax, accounting services
and consulting areas posted increases, and commission income from the insurance
and investment products division increased during the quarter, compared to a
flat performance during the first two quarters of the year. These increases
were partially offset by lower investment earnings.
The actual change in revenue for the sources of revenue activities were as
follows:
Three Months Nine Months
(In thousands) Ended September 30 Ended September 30
Division 1999 1998 Change 1999 1998 Change
Fee income from financial services $1,437 $1,334 $103 $5,836 $5,012 $824
Fee income from IT consulting 206 --- 206 925 --- 925
Commission income from investment
and insurance products 356 249 107 803 687 116
Investment income 2 90 (88) 107 281 (174)
----- ----- --- ----- ----- -----
Total $2,001 $1,673 $328 $7,671 $5,980 1,691
The Company's share of pre-tax earnings for its 22% ownership interest of First
Indiana Corporation increased 35% for the quarter and reached $1,460,000,
compared with $1,081,000 for the 1998 quarter. For the nine months, the
Company's share of First Indiana Corporation's earnings was $3,561,000, a 17.6%
increase over the 1998 amount.
According to First Indiana's September 30, 1999 Form 10-Q filed with the
Securities and Exchange Commission, the increase in earnings occurred partially
as a result of actions to implement First Indiana's strategy of concentrating
banking activities in Central Indiana. The actions included the sale of
deposits of its Evansville, Indiana branches, in the southern region of Indiana,
and the out-of-state mortgage banking operations. The sales resulted in record
earnings for the quarter ended September 30, 1999. After giving effect to these
two events and related transactions, third quarter operating earnings were also
a record amount, and were 12% above 1998 quarterly earnings.
As shown in their 10-Q report, during the third quarter of 1999, First Indiana's
cost of funds was 4.83%, compared with 5.24% one year ago. For the nine months
ended September 30, 1999, the cost of funds was 4.77%, compared with 5.20% for
the same period in 1998. As a result of the lower cost of funds combined with
growth in their loan portfolios, net interest income increased 13% over the
third quarter of 1999 compared to 1998, and increased 11% for the comparable
nine-month amounts. First Indiana's net interest margin rose in the third
quarter to 3.99%, compared with 3.77% in the third quarter of 1998.
Somerset's operating expenses increased $528,000, or 28.0% during the 1999 third
quarter, compared with the 1998 quarter, and increased $1,547,000 during the
nine months ended September 30, 1999, compared with 1998, excluding $163,000 of
non-recurring merger expenses from the 1998 amount. The higher operating
expenses were primarily due to the addition of professional and administrative
staff in the financial services divisions, including the staff of McGee, Rice &
Wheat on September 1, 1999, and the inclusion of expenses for the information
technology group for the first time in 1999.
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 the revenue to grow faster than
operating expenses as efficiency of new staff continues to improve, and as the
client base obtained in the acquisition of McGee, Rice & Wheat are introduced to
the specialty consulting services offered by Somerset.
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Financial Condition and Liquidity
Management considers the financial condition and liquidity of the Company to be
excellent at September 30, 1999 and December 31, 1998. Liquidity at September
30, 1999 was substantially lower than the position at December 31, 1998.
However, the Company's liquidity at December 31, 1998 was unusually high for
comparable companies in the financial services industry. At December 31, 1998,
March 31, 1999, and June 30, 1999, management reported that the balance sheet
contained an unusually large percentage of liquid assets. These liquid assets
were being invested temporarily and were intended for use in additional
acquisitions, further expansion of the financial services operation, and
continued funding of a common stock repurchase program. During the nine months
ended September 30, 1999, most of the investments held for resale have been
employed for these purposes. Cash of $2,495,000 was provided from the sale of
investments, during the nine months ended September 30, 1999.
The Company had no outstanding debt at September 30, 1999 nor December 31, 1998,
as presented in the Condensed Consolidated Balance Sheets. All short-term and
long-term debt was retired during the first quarter of 1998.
At September 30, 1999, the Company had a ratio of current assets to current
liabilities of 4.8 to one, compared with a very high ratio of 14.8 to one at
December 31, 1998. Net working capital amounted to $3.1 million at September
30, 1999, compared with $5.8 million at December 31, 1999. The decline in these
ratios was caused by the use of cash for non-working capital purposes during the
nine months.
During the first nine months of 1999, the Company systematically repurchased
shares of its common stock under programs approved by the Board of Directors and
announced publicly. For the nine months ended September 30, 1999, 158,263
shares had been repurchased at a cost of $2.69 million (average per share cost
of $17.00).
The Company reissued 47,442 shares in connection with a merger transaction,
and 39,380 shares were reissued for cash via employee exercise of stock options.
Net treasury stock transactions amounted to purchases of $1.33 million for the
nine months ended September 30, 1999. The Company intends to use the remaining
repurchased shares in funding employee benefit programs, including stock options
programs, and for future acquisitions not yet identified.
Cash expenditures for the acquisition and formation of new operations amounted
to $1.4 million during the nine months ended September 30, 1999.
Operating activities during the nine months ended September 30, 1999 provided
cash of $1,611,000, which is $644,000, or 67%, above the $967,000 provided in
the same period in 1998. The cyclical nature of operations includes a rapid
increase in trade accounts receivable during the first four months of the year,
followed by a decrease in accounts receivable during the remainder of the year.
The increase in net income combined with an increase of deferred income taxes
were the principal causes of the increase in cash flow from operations.
The Company expended $358,000 for the purchase of office equipment and furniture
primarily for the information technology subsidiary, and for completion of Y2K
readiness programs.
Cash dividends of $566,000 were paid to shareholders, compared to $522,000 paid
during the nine months 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.
Management anticipates that 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.
-13-
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. Under
certain circumstances, the tax liability recorded in this manner (approximately
$9.7 million) may never be incurred. The fair value of our investment in First
Indiana at September 30, 1999 was approximately $58 million, or $19 million
greater than the investment amount reflected in our balance sheet at September
30, 1999.
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 Supervisions ("OTS").
Impact of Accounting Standards Not Yet Adopted
Recent pronouncements by the Financial Accounting Standards Board ("FASB") and
the American Institute of Certified Public Accountants are not applicable to the
Company's consolidated financial statements. However, First Indiana is
currently assessing the impact of FASB No. 133, "Accounting for Derivative
Instruments and Hedging Activities" on its financial condition and results of
operations upon adoption, for fiscal years beginning after June 15, 2000.
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 the Federal Financial Institutions Examination Council ("FFIEC") guidelines
and review by the OTS. The Somerset Financial Services division, as a
Registered Investment Advisor, is subject to review by the Securities and
Exchange Commission ("SEC"). 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, were
identified and contacted. The Company identified potential Year 2000 readiness
issues and developed action plans and contingency plans for each issue. 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. All vendors have provided the Company written
assurance that they will be Year 2000 compliant on January 1, 2000. 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, and they have been determined to be Year 2000
compliant.
During 1998, the Company completed replacement of computer hardware and software
and installed software upgrades at a cost of $160,000. During the first nine
months of 1999, an additional $116,000 has been expended for these items,
bringing the total cost to $276,000. Future expenditures are not expected to be
material.
At September 30, 1999, all computer hardware is capable of processing data in
the Year 2000, and all computer software systems have been tested and determined
to be Year 2000 compliant.
While the Company has made significant effort to assess, remediate, and test its
computerized systems, it is also developing contingency plans. These
contingency plans are intended to provide alternate processes and actions in the
event of system malfunction at the beginning of Year 2000.
-14-
The first priority is the mission critical systems, which are being addressed in
detail as to the steps to be taken by each individual involved in the process or
system that has failed. In addition, the plan includes focusing the resources
and professional staff of its subsidiary, Paradym Technologies, Inc.,
immediately on the remediation of any system failure that may have gone
undetected. Paradym Technologies, Inc. is in the business of providing
information technology consulting 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, 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
No reports on Form 8-K were filed during the three months ended September 30,
1999.
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: November 9, 1999
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