THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
(Unaudited) Three Months Ended
March 31,
<S> <C> <C>
2000 1999
Revenue and Income:
Fees and commissions $4,419,000 $3,600,000
Equity in earnings of First Indiana Corp. 1,209,000 1,006,000
Investment income 12,000 62,000
--------- ---------
Total revenue and income 5,640,000 4,668,000
Operating Expenses:
Salaries, wages, commissions and benefits 2,411,000 1,875,000
General and administrative expenses 371,000 441,000
Occupancy expenses 136,000 102,000
Advertising and marketing 42,000 46,000
Depreciation and amortization 133,000 72,000
--------- ---------
Total operating expenses 3,093,000 2,536,000
Income before income taxes and cumulative effect
of change in accounting principle 2,547,000 2,132,000
Income tax expense 874,000 726,000
--------- ---------
Income before cumulative effect of change in
accounting principle 1,673,000 1,406,000
Cumulative effect of change in accounting
principle, net 0 (115,000)
--------- ---------
Net Income $1,673,000 $1,291,000
========= =========
Net income per share:
Basic:
Income before cumulative effect of change in
accounting principle $.60 $.49
Cumulative effect of change in accounting
principle -- (.04)
---- ----
$.60 $.45
==== ====
Diluted:
Income before cumulative effect of change in
accounting principle $.59 $.48
Cumulative effect of change in accounting
principle -- (.04)
---- ----
$.59 $.44
Average Shares Outstanding: ==== ====
Basic 2,804,954 2,879,917
Diluted 2,830,483 2,920,560
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 331,000
<SECURITIES> 0
<RECEIVABLES> 4,431,000
<ALLOWANCES> 30,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,852,000
<PP&E> 2,127,000
<DEPRECIATION> 1,105,000
<TOTAL-ASSETS> 49,034,000
<CURRENT-LIABILITIES> 1,153,000
<BONDS> 0
0
0
<COMMON> 1,862,000
<OTHER-SE> 35,753,000
<TOTAL-LIABILITY-AND-EQUITY> 49,034,000
<SALES> 4,419,000
<TOTAL-REVENUES> 5,640,000
<CGS> 3,093,000
<TOTAL-COSTS> 3,093,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,547,000
<INCOME-TAX> 874,000
<INCOME-CONTINUING> 1,673,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,673,000
<EPS-BASIC> .60
<EPS-DILUTED> .59
</TABLE>
THE SOMERSET GROUP, INC. CONSOLIDATED BALANCE SHEET
<TABLE>
March 31, December 31,
<S> <C> <C>
ASSETS 2000 1999
Current assets (Unaudited)
Cash and cash equivalents $331,000 $1,043,000
Trade accounts, notes and other
receivables less allowance for
doubtful accounts 4,411,000 2,539,000
Prepaid expenses 110,000 93,000
Refundable income taxes 0 14,000
---------- ---------
Total current assets 4,852,000 3,689,000
Investments
First Indiana Corporation (Fair
values of $51,032,000 and
$59,997,000) 39,557,000 39,010,000
Office furniture and equipment 2,127,000 2,000,000
Less accumulated depreciation 1,105,000 1,039,000
--------- ---------
1,022,000 961,000
Other assets
Goodwill, net of amortization 3,103,000 3,152,000
Other 500,000 497,000
--------- ---------
3,603,000 3,649,000
Total Assets $49,034,000 $47,309,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $165,000 $238,000
Accrued compensation 240,000 498,000
Taxes, other than income taxes 145,000 82,000
Income taxes 510,000 0
Other accrued expenses 93,000 67,000
--------- --------
Total current liabilities 1,153,000 885,000
Deferred income taxes 10,266,000 10,053,000
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 3,549,000 3,560,000
Retained earnings 33,989,000 32,792,000
---------- ----------
39,400,000 38,214,000
Less 101,983 and 105,312 shares, at cost (1,785,000) (1,843,000)
---------- ----------
Total shareholders' equity 37,615,000 36,371,000
Total Liabilities and Shareholders' Equity$49,034,000 $47,309,000
========== ==========
</TABLE>
See accompanying Notes to
Consolidated Financial Statements.
-3-
THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
(Unaudited) Three Months Ended
March 31,
2000 1999
Cash flows from operating activities:
<S> <C> <C>
Net income $1,673,000 $1,291,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 133,000 72,000
Deferred income taxes 304,000 237,000
Equity in earnings of First Indiana Corp (1,209,000) (1,006,000)
Dividends received from First Indiana Corp 386,000 359,000
Changes in operating assets and liabilities:
Trade accounts, notes, and receivables (1,872,000) (1,501,000)
Prepaid expenses (17,000) (37,000)
Accounts payable and accrued expenses (242,000) 417,000
Accrued and refundable income taxes 524,000 432,000
--------- --------
Net cash (used) provided by operating activities (320,000) 264,000
Cash flows from investing activities:
Purchase of office furniture and equipment (127,000) (199,000)
(Increase) decrease in other assets (3,000) 175,000
Decrease in short-term investments --- 786,000
-------- --------
Net cash provided (used) by investing activities (130,000) 762,000
Cash flows from financing activities:
Proceeds from sale of common stock 92,000 25,000
Purchase of common stock (49,000) (677,000)
Cash dividends paid (308,000) (288,000)
------- -------
Net cash used by financing activities (265,000) (940,000)
(Decrease) increase in cash and cash equivalents (712,000) 86,000
Cash and cash equivalents at beginning of period 1,043,000 526,000
--------- -------
Cash and cash equivalents at end of period $331,000 $612,000
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-4-
<TABLE>
THE SOMERSET GROUP, INC.
Condensed Consolidated Statements of Shareholders' Equity
January 1, 1999 to March 31, 2000
(Unaudited)
Capital Accumulated
in Excess Other
Common of Stated Comprehensive Retained Treasury
Stock Value Income Earnings Shares Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $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 investments,
net of 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 Corp, 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
Comprehensive Income:
Net income April 1 to December 31, 1999 --- --- --- 2,101,000 - 2,101,000
Unrealized gains on short-term investments
net of deferred income taxes --- --- 29,000 --- - 29,000
---------
Total comprehensive income 2,130,000
Tax benefit of stock options exercised --- 98,000 --- --- --- 98,000
Reissuance of treasury shares --- (101,000) --- --- 1,434,000 1,333,000
Purchase of treasury shares --- --- --- --- (2,323,000) (2,323,000)
Cash dividends paid --- --- --- (278,000) - (278,000)
Equity in other capital changes of First
Indiana Corp, net of deferred income taxes --- --- --- (240,000) - (240,000)
--------- --------- ------- ---------- --------- ----------
Balance December 31, 1999 1,862,000 3,560,000 --- 32,792,000 (1,843,000) 36,371,000
Comprehensive Income:
Net income January 1 to March 31, 2000 --- --- --- 1,673,000 - 1,673,000
---------
Total comprehensive income 1,673,000
Tax benefit of stock options exercised --- 4,000 --- --- - 4,000
Reissuance of treasury shares --- (15,000) --- --- 107,000 92,000
Purchase of treasury shares --- --- --- --- (49,000) (49,000)
Cash dividends paid --- --- --- (308,000) - (308,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (168,000) - (168,000)
--------- --------- ------ ---------- --------- ----------
Balance March 31, 2000 $1,862,000 $3,549,000 $-- $33,989,000 ($1,785,000)$37,615,000
========= ========= ====== ========== ========= ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
-5-
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the period ended March 31, 2000
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 May 4, 2000 - 2,810,537 SHARES.
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, 2000 is
a 21.8% 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 subsidiary of the Company, Somerset Financial Services
L.L.C.,
provides tax, accounting, health care consulting, investment and wealth
management, and management consulting services. Another subsidiary of the
Company, Paradym Technologies, Inc., provides 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) 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.
(e) 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.
(f) 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-
(g) Earnings Per Share: Basic earnings per share for the three months ended
March 31, 2000 and 1999 were computed by dividing net income by the weighted
average shares of common stock outstanding (2,804,954 and 2,879,917
respectively). Diluted earnings per share for the three months ended March
31, 2000 and 1999 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 (2,830,483 and 2,920,560 respectively). Dilution of the per
share calculations relate to outstanding stock options.
(h) 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 ended March 31, 2000 were as follows:
Three Months Ended
March 31, 2000
Shares held in treasury, beginning of period 105,312
Number of shares repurchased 2,922
Number of shares re-issued for exercise
of stock options (6,251)
-------
Shares held in treasury, March 31, 2000 101,983
=======
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 for the three months ended March
31, 1999.
Note 3. Cyclical Business Operations
Revenue and income from financial services is cyclical in nature as a result of
the timing of income tax planning and preparation services performed by the
Company. Because of government imposed filing deadlines, a larger percentage of
these services occur during the first four months of each calendar year.
Revenue and income during the first quarter of each year 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, 1999 were as follows:
Year Ended December 31, 1999
(In Thousands)
1st Qtr. 2nd Qtr. 3rd Qtr. 4thQtr Annual
Mar. 31 June 30 Sept. 30 Dec. 31 1999
Revenue and income $4,668 $3,103 $3,461 $4,071 $15,303
Net income $1,291 $594 $759 $748 $3,392
Basic earnings per share $.45 $.21 $.27 $.27 $1.20
Diluted earnings per share $.44 $.21 $.27 $.26 $1.18
Note 4. Investment in First Indiana Corporation
The Company's percentage of ownership of First Indiana Corporation was 21.8% at
March 31, 2000 and 22.0% at December 31, 1999. 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 5. 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 25,529 and 40,643
equivalent shares included in the average diluted shares outstanding for the
three months ended March 31, 2000 and March 31, 1999 respectively.
The Company had the following shares of its stock reserved for exercise of stock
options.
Date Shares
March 31, 2000 15,262
December 31, 1999 86,440
Note 6. 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. There
are four operating and reporting units organized on the basis of the type and
source of their revenue and income'
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 L.L.C.
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, and video
surveillance.
There were no inter-segment sales and no foreign operations for the three months
ended March 31, 2000 and 1999.
-8-
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
March 31,
2000 1999
Assets:
Somerset Group Management Division $40,027,000 $40,251,000
Somerset Financial Services L.L.C. 7,170,000 3,728,000
First Indiana Investor Services Div. 1,368,000 1,351,000
Paradym Technologies, Inc. 469,000 629,000
--------- ---------
$49,034,000 $45,959,000
========== ==========
Revenue and Income: (A)
Somerset Group Management Division $1,221,000 $1,069,000
Somerset Financial Services L.L.C. 3,876,000 2,896,000
First Indiana Investor Services Div. 348,000 248,000
Paradym Technologies, Inc. 195,000 455,000
--------- ---------
$5,640,000 $4,668,000
========= =========
Net Income (Loss):
Somerset Group Management Division $701,000 $639,000
Somerset Financial Services L.L.C. 928,000 673,000
First Indiana Investor Services Div. 53,000 16,000
Paradym Technologies, Inc. (9,000) 78,000
-------- -------
Income before cumulative effect of change
in accounting principle 1,673,000 1,406,000
Cumulative effect of change in accounting
principle (B) --- (115,000)
--------- ---------
Net Income $1,673,000 $1,291,000
========= =========
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 7. Significant Non-Consolidated Subsidiary
Summarized income statement information is presented below for First Indiana
Corporation. This 21.8% owned subsidiary represents a significant part of The
Somerset Group, Inc.'s revenue and income.
First Indiana Corporation and Subsidiaries
Summarized Income Statements
Three Months Ended March 31,
(Dollars in Thousands)
2000 1999
Interest income $40,256 $34,287
Interest expense 21,295 17,799
------ ------
Net interest income 18,961 16,488
Provision for loan losses 2,439 2,460
------ ------
Net interest income after provision 16,522 14,028
Non interest income 4,778 6,093
Non interest expense (12,388) (12,502)
------ ------
Income before income taxes 8,912 7,619
Income tax expense 3,395 2,989
------ -----
Net income $5,517 $4,630
===== =====
Summarized Balance Sheet
March 31, December 31,
2000 1999
Assets $2,065,247 $1,979,774
Loans-Net $1,764,268 $1,673,422
Deposits $1,351,794 $1,312,115
Shareholders' Equity $ 180,770 $ 177,103
For additional financial information about First Indiana Corporation, please
refer to its Form 10-Q filed with the Securities and Exchange Commission ("SEC")
File Number 0-14354. Information in the above table was extracted from First
Indiana Corporation's Form 10-Q.
Note 8 - Subsequent Event
On April 19, 2000, Somerset and First Indiana jointly announced the signing of
a definitive agreement pursuant to which Somerset will be merged with and into
a wholly-owned subsidiary of First Indiana. The merger agreement provides that
each shareholder of Somerset will have the option of receiving 1.21 shares of
First Indiana common stock (valued at $21.48, based on First Indiana's April 18,
2000 closing price of $17.75 per share) or $24.70 in cash, or a combination of
each (with cash limited to 35% of Somerset's shares outstanding at closing), for
each share of Somerset stock owned as of the effective date of the merger.
Based on First Indiana's April 18, 2000 closing price, and assuming that 80% of
Somerset's shares are exchanged for stock and 20% are exchanged for cash, the
transaction has an aggregate value of approximately $63 million. This
transaction, which is expected to close in August 2000, will be accounted for
using purchase accounting. The transaction is also subject to approval by
Somerset and First Indiana shareholders and the Office of Thrift Supervision.
-10-
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, 2000, were 30% above earnings for
the first quarter of 1999, and amounted to $1,673,000, compared with $1,291,000
for the first quarter of 1999.
First quarter 1999 earnings included a non-recurring charge against net earnings
of $115,000, resulting from the adoption of a new accounting pronouncement at
the
beginning of 1999. Excluding this one-time expense from last year's results,
earnings in the first quarter of 2000 represented a 19% increase over those of
the first quarter of 1999.
Earnings per diluted share for the three months of 2000 of $.59 represented an
increase of 34% over the $.44 reported last year. The higher percentage
increase
on a per share basis compared with the actual earnings increase was a result of
fewer average shares outstanding in 2000 than in 1999.
The improvement in earnings was a result of a 21% increase in revenue and income
during the 2000 quarter when compared with last year. Total revenue and income
amounted to $5,640,000, compared with $4,668,000 for the 1999 quarter, an
increase of $972,000.
Fees and commission income from financial and information technology services
offered by the Company increased 23% to $4,419,000, compared with $3,600,000 for
the 1999 quarter and accounted for $819,000 of the $972,000 increase, or 84%.
The Company's share of earnings for its 21.8% ownership interest of First
Indiana Corporation increased 20% to $1,209,000, compared with $1,006,000 for
the same three months of 1999.
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.
Growth in fees from tax consulting and return preparation was primarily
responsible for the increase in revenue for services during the quarter. New
individual and small business clients continued to be added to the client base.
In addition, first quarter 2000 earnings included the results of McGee, Rice
and Wheat, Inc., a CPA firm that merged with Somerset on September 1, 1999, and
aided in the overall increase in revenues from these service specialties.
Another major contributor to the overall increase in service revenue was a 40%
increase in revenue from our investment and insurance products division. As
expected, revenues were lower from information technology consulting services.
We experienced an unusually high demand from clients for services in 1999 for
testing and upgrading systems for the Year 2000 changes to their computer
systems.
According to First Indiana's March 31, 2000 Form 10-Q filed with the SEC, the
20% increase in equity in earnings of First Indiana primarily resulted from
First Indiana's sales strategy as a locally based, community bank with an
emphasis on building customer relationships that has led to significant
expansion of the Bank's loan portfolios resulting in increased earnings.
-11-
During 1999, First Indiana became more focused and redirected its investment
into lines of business that offer the best long-term return. Net loans
outstanding increased 14% to $1.76 billion, compared with $1.54 billion one
year earlier, and its net interest margin was 3.93%, compared with 3.82% for
the first quarter of 1999. The yield on earning assets was 8.34% for the first
quarter of 2000, compared with 7.94% one year ago.
Somerset's operating expenses increased $557,000, or 22%, during the 2000
quarter compared with the 1999 quarter. Total expenses for the 2000 quarter
amounted to $3,093,000, compared with $2,536,000 in the 1999 quarter. The
higher operating expenses were primarily due to the inclusion of the operating
expenses of McGee, Rice and Wheat, Inc. in the 2000 amounts that were not
included in the 1999 results. The largest expense of the Company is personnel
and personnel related costs. The September 1, 1999 merger with McGee, Rice and
Wheat added sixteen individuals to our professional and support staff and
accounted for the major portion of the 28% increase in salaries, wages,
commissions, and benefit expenses.
Financial Conditions and Liquidity
At March 31, 2000, the Company had a ratio of current assets to current
liabilities of 4.2 to 1; the same ratio that existed at December 31, 1999. Net
working capital of $3.7 million, at March 31, 2000, represented an increase of
32% over the $2.8 million at December 31, 1999. The increase in working capital
occurred as a result of the cyclical increase in revenue, discussed above, that
occurs during the first four months of a calendar year. Management considers
the financial condition and liquidity of the Company very good at March 31,
2000. The Company was also in a very sound position at the end of 1999.
Management considers a current ratio of three-to-one adequate to support the
working capital needs of operations.
The Company had no debt at March 31, 2000 or December 31, 1999. Shareholders'
equity represented 77% of assets at March 31, 2000 and December 31, 1999.
Shareholders' equity of $37.6 million represented an increase of 3% over the
$36.4 million at December 31, 1999. The book value per share was $13.40,
compared to $12.97 at the end of 1999.
Generally Accepted Accounting Principles ("GAAP") requires the Company to record
income tax expense as full corporate rates on a portion of its equity income
from First Indiana. GAAP also requires Somerset to record its investment in
First Indiana at a net carrying value, which represents its acquisition cost of
First Indiana shares plus its equity share of First Indiana's net income. Under
certain circumstances, the deferred tax liability recorded in this manner
(approximately $10.2 million) may not be paid. The market value of Somerset's
investment in First Indiana at March 31, 2000 was approximately $51 million, or
$11.5 million greater than the investment-carrying amount reflected in its
balance sheet.
Operating activities during the three months ended March 31, 200 used cash of
$320,000, compared with cash provided of $264,000 during the first quarter of
1999. As revenue increased, additional working capital was 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-quarters of the year, as
the balance of trade accounts receivable reduce in the less than peak period of
the year. Cash for these working capital changes increased $1.6 million during
the first quarter of 2000, compared with $689,000 during the first quarter of
1999.
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The Company used cash of $127,000 for the purchase of computer hardware as part
of a continuing plan to increase efficiency in its accounting and tax service
specialties. Cash dividends of $308,000 were paid to its shareholders for the
first half of 2000, representing an annual rate of $22 per share; a 10% increase
over the $20 per share paid in 1999.
Management anticipates that future purchases of property and equipment will be
funded by available cash and cash provided by operations. An acquisition of
another entity would require the use of 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 March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." This pronouncement will
become effective July 1, 2000 on a prospective (future) basis. The Company has
stock option grants outstanding for 49,313 options shares that will be affected
by this pronouncement. The impact on the Company's financial statements cannot
be determined until after July 1, 2000; however, the amount involved is not
expected to be material to the Company's financial statements.
Information on Forward-Looking Statements
The statements in the 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 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.
Items 4 - Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders was held April 26, 2000.
The following directors were elected at the meeting.
Votes Votes Votes
For Against Withheld
Douglas W. Huemme 2,514,389 4,028 5,000
Malcolm A. Leslie 2,515,951 2,466 5,000
Kevin K. McKinney 2,508,084 10,333 5,000
The following directors' terms of office continued after the meeting.
Patrick J. Early Marni McKinney
William L. Elder Robert H. McKinney
Gary L. Light Michael L. Smith
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Item 6 - Reports Filed on Form 8-K
No reports were filed on Form 8-K during the three months ended March 31, 2000.
However, subsequently, on April 19, 2000, the Company filed a Form 8-K. (See
Note 8 of Notes to Condensed Consolidated Financial Statements - "Subsequent
Event.")
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has 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 - Vice Chairman &
Chief Executive Officer
By s/Joseph M. Richter
Joseph M. Richter - Executive Vice President
Finance and Treasurer
Date: May 5, 2000
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