"THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Revenue and Income:
Fees and commissions $1,977,000 $1,636,000 $5,577,000 $4,134,000
Equity in earnings of First Indiana Corp. 1,095,000 997,000 2,101,000 1,947,000
Investment income 31,000 84,000 93,000 173,000
--------- --------- --------- ---------
Total revenue and income 3,103,000 2,717,000 7,771,000 6,254,000
Operating Expenses:
Salaries, wages, commissions and benefits 1,821,000 1,417,000 3,696,000 2,928,000
General and administrative expenses 282,000 326,000 723,000 519,000
Occupancy expenses 101,000 88,000 203,000 167,000
Advertising and marketing 36,000 46,000 82,000 75,000
Depreciation and amortization 74,000 72,000 146,000 138,000
Interest expense 0 0 0 4,000
Merger expenses 0 0 0 163,000
-------- -------- --------- ---------
Total operating expenses 2,314,000 1,949,000 4,850,000 3,994,000
--------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting principle 789,000 768,000 2,921,000 2,260,000
Income tax expense 195,000 198,000 921,000 678,000
------- ------- --------- --------
Income before cumulative effect of change
in accounting principle 594,000 570,000 2,000,000 1,582,000
Cumulative effect of change in
accounting principle, net 0 0 (115,000) 0
------- ------- --------- --------
Net Income $594,000 $570,000 $1,885,000 $1,582,000
======= ======= ========= =========
Net income per share:
Basic:
Income before cumulative effect of change
in accounting principle $.21 $.20 $.70 $.55
Cumulative effect of change in
accounting principle 0 0 (.04) 0
---- --- --- ---
$.21 $.20 $.66 $.55
Diluted:
Income before cumulative effect of change
in accounting principle $.21 $.19 $.69 $.53
Cumulative effect of change in
accounting principle 0 0 (.04) 0
--- --- --- ---
$.21 $.19 $.65 $.53
Average Shares Outstanding:
Basic 2,814,856 2,905,698 2,847,387 2,902,398
Diluted 2,848,990 2,973,821 2,884,775 2,973,604
</TABLE>
-2-
See accompanying Notes to Condensed Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 677,000
<SECURITIES> 2,476,000
<RECEIVABLES> 2,431,000
<ALLOWANCES> 108,000
<INVENTORY> 00
<CURRENT-ASSETS> 5,566,000
<PP&E> 1,454,000
<DEPRECIATION> 809,000
<TOTAL-ASSETS> 44,677,000
<CURRENT-LIABILITIES> 897,000
<BONDS> 00
00
00
<COMMON> 1,862,000
<OTHER-SE> 32,768,000
<TOTAL-LIABILITY-AND-EQUITY> 44,677,000
<SALES> 5,577,000
<TOTAL-REVENUES> 7,771,000
<CGS> 4,850,000
<TOTAL-COSTS> 4,850,000
<OTHER-EXPENSES> 00
<LOSS-PROVISION> 00
<INTEREST-EXPENSE> 00
<INCOME-PRETAX> 2,921,000
<INCOME-TAX> 921,000
<INCOME-CONTINUING> 2,000,000
<DISCONTINUED> 00
<EXTRAORDINARY> 115,000
<CHANGES> 00
<NET-INCOME> 1,885,000
<EPS-BASIC> .66
<EPS-DILUTED> .65
</TABLE>
THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<S> <C> <C> <C>
June 30, December 31,
ASSETS 1999 1998
Current assets
Cash and cash equivalents $677,000 $526,000
Short term investments 2,476,000 3,713,000
Trade accounts, notes and other receivables, net 2,323,000 1,888,000
Prepaid expenses 90,000 87,000
--------- ---------
Total current assets 5,566,000 6,214,000
Investments
First Indiana Corporation (Fair value of
$58,962,000 and $55,200,000) 36,756,000 36,104,000
Office furniture and equipment 1,454,000 1,169,000
Less accumulated depreciation 809,000 712,000
-------- --------
645,000 457,000
Other assets
Notes receivable, net 25,000 240,000
Goodwill, net of accumulated amortization 1,169,000 1,074,000
Other 516,000 684,000
--------- ---------
1,710,000 1,998,000
Total Assets $44,677,000 $44,773,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $169,000 $97,000
Accrued compensation 421,000 194,000
Taxes, other than income taxes 17,000 33,000
Income taxes 171,000 30,000
Other accrued expenses 119,000 65,000
------- -------
Total current liabilities 897,000 419,000
Deferred income taxes 9,150,000 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 3,357,000 3,599,000
Accumulated other comprehensive income (loss) (34,000) (19,000)
Retained earnings 31,510,000 30,359,000
---------- ----------
36,695,000 35,801,000
Less 124,118 and 17,317 treasury shares,at cost (2,065,000) (338,000)
---------- ----------
Total shareholders' equity 34,630,000 35,463,000
Total Liabilities and Shareholders' Equity $44,677,000 $44,773,000
========== ==========
-3-
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SOMERSET GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
<TABLE>
June 30,
<S> <C>
1999 1998
Cash flows from operating activities:
Net income $1,885,000 $1,582,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 146,000 132,000
Deferred income taxes 554,000 131,000
Equity in earnings of First Indiana Corporation (2,101,000) (1,947,000)
Dividends received from First Indiana Corporation 717,000 657,000
Changes in operating assets and liabilities:
Trade accounts, notes and other receivables, net (435,000) (226,000)
Prepaid expenses 3,000 (63,000)
Trade accounts payable and accrued expenses 337,000 146,000
Accrued income taxes 221,000 385,000
Cumulative effect of change in accounting principal (115,000) ---
------- ------
Net cash provided by operating activities 1,212,000 797,000
--------- -------
Cash flows from investing activities:
Purchase of shares of First Indiana Corporation --- (990,000)
Purchase of office furniture and equipment (285,000) (54,000)
Decrease in short-term investments 1,237,000 1,144,000
Decrease in other assets 324,000 96,000
--------- --------
Net cash provided by investing activities 1,276,000 196,000
--------- -------
Cash flows from financing activities:
Principal payments on note payable, bank --- (459,000)
Principal payments on long-term borrowings --- (43,000)
Reisuance of treasury shares 251,000 63,000
Purchase of treasury shares (2,300,000) (134,000)
Cash dividends paid (288,000) (261,000)
--------- --------
Net cash used by financing activities (2,337,000) (834,000)
--------- --------
Increase in cash and cash equivalents 151,000 159,000
Cash and cash equivalents at beginning of period 526,000 600,000
------- -------
Cash and cash equivalents at end of period $677,000 $759,000
======= =======
</TABLE>
-4-
See accompanying Notes to Condensed Consolidated Financial Statements.
THE SOMERSET GROUP, INC.
Consolidated Statements of Shareholders' Equity
January 1, 1998 to June 30, 1999
(unaudited)
<TABLE>
<S> <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 June 30, 1998 --- --- --- 1,582,000 --- 1,582,000
Unrealized gains on short-term investments,
net of deferred income taxes --- --- 5,000 --- --- 5,000
--------
Total comprehensive income 1,587,000
---------
Tax benefit of stock options exercised --- 62,000 --- --- --- 62,000
Shares of common stock issued 7,000 56,000 --- --- --- 63,000
Purchase of treasury shares --- --- --- --- (134,000) (134,000)
Cash dividends paid --- --- --- (261,000) --- (261,000)
Equity in other capital changes of First Indiana
Corporation, net of deferred income taxes --- --- --- (47,000) --- (47,000)
--------- --------- ------ ---------- ------- ----------
Balance June 30, 1998 $1,862,000 $3,667,000 ($17,000) $29,352,000 (134,000) $34,730,000
Comprehensive Income:
Net income July 1 to December 31, 1998 --- --- --- 1,283,000 --- 1,283,000
Unrealized gains on short-term investments
net of deferred income taxes --- --- (2,000) --- --- (2,000)
------
Total comprehensive income 1,281,000
---------
Tax benefit of stock options exercised --- 33,000 --- --- --- 33,000
Shares of common stock issued --- (101,000) --- --- 126,000 25,000
Purchase of treasury shares --- --- --- --- (330,000) (330,000)
Cash dividends paid --- --- --- (261,000) --- (261,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (15,000) --- (15,000)
--------- --------- ------ ---------- ------- ----------
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 June 30, 1999 --- --- --- 1,885,000 --- 1,885,000
Unrealized gains on short-term investments
net of deferred income taxes --- --- (15,000) --- --- (15,000)
---------
Total comprehensive income 1,870,000
---------
Tax benefit of stock options exercised --- 80,000 --- --- --- 80,000
Reissuance of treasury shares --- (322,000) --- --- 573,000 251,000
Purchase of treasury shares --- --- --- --- (2,300,000) (2,300,000)
Cash dividends paid --- --- --- (288,000) --- (288,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (446,000) --- (446,000)
--------- ---------- ------- ---------- --------- ----------
Balance June 30, 1999 $1,862,000 $3,357,000 ($34,000) $31,510,000($2,065,000) $34,630,000
========= ========= ====== ========== ========= ==========
</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 June 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 5, 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.
(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
June 30, 1999 and 1998 were computed by dividing net income by the weighted
average shares of common stock outstanding (2,814,856 and 2,905,698
respectively). Diluted earnings per share for the three months ended June
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 (2,848,990 and 2,973,821 respectively).
Basic earnings per share for the six months ended June 30, 1999 and 1998
were computed by dividing net income by the weighted average shares of
common stock outstanding (2,847,387 and 2,902, 398 respectively). Diluted
earnings per share for the six months ended June 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 (2,884,775 and
2,973,604 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 six months ended June 30, 1999 were as follows:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
Shares held in treasury, beginning of period 55,308 17,371
Number of shares repurchased 98,500 139,563
Number of shares re-issued for exercise
of stock options (29,690) (32,816)
------- -------
Shares held in Treasury, June 30, 1999 124,118 124,118
======= =======
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 insured. 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.
-7-
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)
<TABLE>
<S> <C> <C> <C> <C> <C>
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
</TABLE>
Note 5. Investment in First Indiana Corporation
The Company's percentage of ownership of First Indiana Corporation was 22.0% at
June 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 34,134 and 68,123
equivalent shares included in the average diluted shares outstanding for the
three months ended June 30, 1999 and June 30, 1998, respectively, and 37,388 and
71,206 equivalent shares included for the six months and June 30, 1999 and June
30, 1998, respectively.
The Company had the following shares of its stock reserved for exercise of stock
options.
Date Shares
June 30, 1999 225,195
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 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.
-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.
Three Months Ended June 30 Six Months Ended June 30
<TABLE>
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Assets:
Somerset Group Management Division $39,814,000 $40,551,000 $39,814,000 $40,551,000
Somerset Financial Services Division 2,903,000 1,811,000 2,903,000 1,811,000
First Indiana Investor Services Division 1,359,000 1,302,000 1,359,000 1,302,000
Paradym Technologies, Inc. 601,000 --- 601,000 ---
---------- ---------- ---------- ----------
$44,677,000 $43,664,000 $44,677,000 $43,664,000
========== ========== ========== ==========
Revenue and Income: (A)
Somerset Group Management Division $1,126,000 $1,081,000 $2,194,000 $2,120,000
Somerset Financial Services Division 1,512,000 1,367,000 4,411,000 3,696,000
First Indiana Investor Services Division 200,000 269,000 447,000 438,000
Paradym Technologies, Inc. 265,000 --- 719,000 ---
--------- --------- -------- --------
$3,103,000 $2,717,000 $7,771,000 $6,254,000
========= ========= ========= =========
Net Income (Loss):
Somerset Group Management Division $665,000 $634,000 $1,309,000 $1,217,000
Somerset Financial Services Division (105,000) (106,000) 568,000 326,000
First Indiana Investor Services Division 9,000 42,000 23,000 39,000
Paradym Technologies, Inc. 25,000 --- 100,000 ---
------- -------- -------- ---------
Income before cumulative effect of change
in accounting principle 594,000 570,000 2,000,000 1,582,000
Cumulative effect of change in accounting
principle (B) --- --- (115,000) ---
------- ------- --------- ---------
$594,000 $570,000 $1,885,000 $1,582,000
======= ======= ========= =========
</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 represents a significant part of The
Somerset Group, Inc.'s revenue and income.
First Indiana Corporation and Subsidiaries
Summarized Income Statements
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended June 30 Six Months Ended June 30
1999 1998 1999 1998
Interest income $35,907 $34,255 $70,300 $67,385
Interest expense 18,427 18,429 36,226 35,866
------ ------ ------ ------
Net interest income 17,490 15,826 34,074 31,519
Provision for loan losses 2,460 2,320 4,920 5,140
------ ------ ------ ------
Net interest income after provision 15,030 13,506 29,154 26,379
Non interest income 6,312 5,260 12,309 10,231
Non interest expense 13,246 11,242 25,748 21,808
------ ------ ------ ------
Income before income taxes 8,096 7,524 15,715 14,802
Income tax expense 3,075 2,907 6,064 5,767
----- ----- ------ ------
Net income $5,021 $4,617 $9,651 $9,035
===== ===== ===== =====
</TABLE>
Summarized Balance Sheet
June 30 December 31
1999 1998
Assets $1,916,745 $1,795,990
Loans-Net $1,604,192 $1,518,543
Deposits $1,347,515 $1,227,918
Shareholders' Equity $ 166,716 $ 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 June 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 June 30, 1999 - 2,785,096 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 June 30, 1999 amounted to $594,000, compared
to earnings for the same quarter of 1998 of $570,000, and increase of 4.2%. On
a per diluted share basis, the 1999 earnings represented $.21 per share,
compared to $.19 per share for 1998, an increase of 10.5%.
Earnings for the six months ended June 30, 1999 amounted to $1,885,000, compared
to earnings for the same six months of 1998 of $1,582,000, an increase of 19.2%.
On a per diluted share basis, the 1999 earnings represented $.65 per share,
compared to $.53 per share for 1998, an increase of 22.6%.
Earnings for the six months of 1999 contained a one-time charge against net
income of $115,000, or $.04 per share, from the adoption of an accounting
pronouncement on January 1, 1999. Earnings per share before the non-recurring
charge were $.69, an increase of 30% over the comparable 1998 amount of $.53 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 second quarter and the first half of 1999, compared with last year.
Total revenue and income for the second quarter of 1999 amounted to $3,103,000,
compared with $2,717,000 for the 1998 quarter, an increase of 14%, or $386,000.
Total revenue and income for the first half of 1999 amounted to $7,771,000,
compared with $6,254,000 for the six months of 1998, an increase of 24%, or
$1,517,000.
During the quarter, revenue from fees and commissions for financial and
investment services offered by the Company increased 20.8% to $1,977,000,
compared with $1,636,000 last year. For the six-month period, they increased
34.9% and amounted to $5,577,000, compared with $4,134,000 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 Company's service and contracted with Somerset for additional services,
and that our reputation as a quality provider of financial advice and solutions
continues to grow and is attracting new clients.
The Company's new information technology consulting group made a significant
contribution to the revenue increases, and our traditional tax, accounting
services, and consulting areas also posted increases. These increases were
partially offset by lower commission income from the insurance and investment
products division, which continued to experience a shift in customer preference
towards lower-commission equity products from fixed annuities. The actual
changes in revenue from each financial service division was as follows:
(in thousands) Three Months Ended June 30 Six Months Ended June 30
Division 1999 1998 Change 1999 1998 Change
Fees from Financial Services $1,512 $1,367 $145 $4,411 $3,696 $715
Investment & Insurance Commissions 200 269 (69) 447 438 9
Fees from I. T. Consulting 265 --- 265 719 --- 719
----- ----- --- ------ ----- -----
$1,977 $1,636 $341 $5,577 $4,134 $1,443
===== ===== === ===== ===== =====
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The Company's share of earnings for its 22% ownership interest of First Indiana
Corporation increased 9.8% for the quarter and reached $1,095,000, compared with
$997,000 for the 1998 quarter. For the six months, the Company's share of First
Indiana Corporation's earnings was $2,101,000, a 7.9% increase over the 1998
amount.
According to First Indiana's June 30, 1999 Form 10-Q filed with the Securities
& Exchange Commission, earnings for the second quarter were a record for that
period, and resulted primarily from growth in loans and deposits. Net interest
income was $17.5 million for the three months ended June 30, 1999, compared with
$15.8 million last year, and climbed to $34.1 million during the first six
months of 1999, compared with $31.5 million during the same period of 1998.
As shown in their 10-K report, during the second quarter of 1999, First
Indiana's cost of funds was 4.72%, compared with 5.21% one year ago. For the
six months ended June 30, 1999, the cost of funds was 4.74%, compared with 5.18%
for the same period in 1998. Total non-interest income was $6.3 million for the
three months ended June 30, 1999, compared with $5.3 million for the 1998
period. For the six months ended June 30, 1999 and 1998, total non-interest
income was $12.3 million and $10.2 million respectively.
Somerset's operating expense increased $365,000, or 18.7%, during the 1999
second quarter, compared with the 1998 quarter, and increased $1,019,000 during
the six months ended June 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 staff in the
financial services division and the inclusion of expenses for the new
information technology consulting 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 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 June 30, 1999, and December 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,
further expansion of the financial service operations, and continued funding of
a common stock repurchase program.
At June 30, 1999, the Company had a high ratio of current assets to current
liabilities of 6.2 to one. In addition, 57% of the current assets consisted of
cash, cash equivalents, and short-term investments. Net working capital
declined during the six-month period and amounted to $4.7 million at June 30,
1999, compared with $5.8 million at December 31, 1998. The decline was caused
by the use of cash for non-working capital purposes during the period (primarily
the repurchase of treasury shares).
The Company had no outstanding debt at any of the dates presented in the
Condensed Consolidated Balance Sheets. All short-term and long-term debt was
retired during the first quarter of 1998.
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 million) may never be incurred. The fair value of our investment in First
Indiana at June 30, 1999 was approximately $59 million, or $22.2 million greater
than the investment amount reflected in our balance sheet at June 30, 1999.
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During the first six 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 six months June 30, 1999, 139,563 shares had been
repurchased at a cost of $2.3 million (average per share cost of $16.48). The
Company intends to use the repurchased shares in funding employee benefit
programs, including stock options programs, and for future acquisitions not yet
identified.
The treasury share repurchases had the effect of reducing the amount of
shareholder equity during the six-month period. When combined with net income
and other equity transactions, shareholder equity declined $933,000 to
$34,630,000, compared with $35,463,000 at December 31, 1998. On a per share
basis, shareholder equity remained strong and increased to $12.43, compared to
$12.26 at December 31, 1998.
Operating activities during the six months ended June 30, 1999 provided cash of
$1,327,000 which is $530,000, or 66%, above the $797,000 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 the collection of peak period accounts
receivable were the principal causes of the increase in cash flow from
operations.
Additional cash of $324,000 was provided from the collection of long-term notes
receivable, $1,237,000 from the sale of short-term investments, and $251,000
from the reissue of treasury shares under stock option exercises.
The Company expended $285,000 for the purchase of office equipment and
furniture, primarily for the information technology subsidiary, and for
completion of Y2K readiness programs.
Semi-annual dividends of $288,000 were paid to shareholders, compared to
$261,000 paid in the first half 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 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 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.
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.
-13-
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. 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.
During 1998, the Company completed replacement of computer hardware and software
and installed software upgrades at a cost of $160,000. During the first six
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 June 30, 1999, all computer hardware is capable of processing data in the
Year 2000. All computer software systems have been tested and determined to be
Year 2000 compliant, with the exception of one vendor supplied software system
that has been upgraded but not fully tested. The testing process will be
completed by August 16, 1999.
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. 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 June 30, 1999.
-14-
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 McKiney
Marni McKinney, President and
Chief Executive Officer
By s/ Joseph M. Richter
Joseph M. Richter, Executive Vice President,
Finance and Treasurer
Date: August 6, 1999
-15-
