THE SOMERSET GROUP, INC.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
Revenue and income: 1996 1995 1996 1995
Commissions and fees $210,000 $210,000 ---
Investment income 103,000 172,000 266,000 227,000
Equity in earnings,First Indiana Corp 930,000 1,083,000 1,942,000 2,047,000
1,243,000 1,255,000 2,418,000 2,274,000
Gross profit from construction product 312,000 1,649,000
Gain on sale of assets 1,293,000 1,293,000
1,243,000 2,860,000 2,418,000 5,216,000
Expenses:
Selling expenses 66,000 84,000 66,000 210,000
General and administrative expenses 126,000 425,000 339,000 907,000
Interest expense 81,000 42,000 199,000
192,000 590,000 447,000 1,316,000
Income before income taxes 1,051,000 2,270,000 1,971,000 3,900,000
Income tax expense 336,000 894,000 618,000 1,539,000
Net Income $715,000 $1,376,000 $1,353,000 $2,361,000
Net income per share $.34 $.66 $.64 $1.13
Average shares outstanding 2,098,904 2,100,767 2,095,437 2,093,800
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 849,000 849,000
<SECURITIES> 4,579,000 4,579,000
<RECEIVABLES> 491,000 491,000
<ALLOWANCES> 105,000 105,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,860,000 5,5860,000
<PP&E> 311,000 311,000
<DEPRECIATION> 203,000 203,000
<TOTAL-ASSETS> 37,432,000 37,432,000
<CURRENT-LIABILITIES> 388,000 388,000
<BONDS> 0 0
0 0
0 0
<COMMON> 1,829,000 1,829,000
<OTHER-SE> 28,811,000 28,811,000
<TOTAL-LIABILITY-AND-EQUITY> 37,432,000 37,432,000
<SALES> 210,000 210,000
<TOTAL-REVENUES> 1,243,000 2,418,000
<CGS> 0 0
<TOTAL-COSTS> 192,000 405,000
<OTHER-EXPENSES> 0 42,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 42,000
<INCOME-PRETAX> 1,051,000 1,971,000
<INCOME-TAX> 336,000 618,000
<INCOME-CONTINUING> 715,000 1,353,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 715,000 1,353,000
<EPS-PRIMARY> .34 .64
<EPS-DILUTED> .34 .64
</TABLE>
THE SOMERSET GROUP, INC.
(Unaudited) CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C> <C> <C>
ASSETS June 30 December 31 June 30
Current assets 1996 1995 1995
Cash and cash equivalents $849,000 $1,699,000 $4,519,000
Short term investments 4,579,000 7,194,000 3,440,000
Trade accounts, notes & receivables
less allowance for doubtful accounts 386,000 1,005,000 3,627,000
Prepaid expenses 46,000 3,000 25,000
Total current assets 5,860,000 9,901,000 11,611,000
Investments
First Indiana Corporation(market values
of $43,487,000, $38,882,000 29,072,000 27,549,000 26,008,000
and $29,822,000)
Office furniture and equipment 311,000 241,000 244,000
Less accumulated depreciation 203,000 196,000 190,000
108,000 45,000 54,000
Other assets
Notes receivable 757,000 771,000 795,000
Goodwill, net of amortization 1,175,000 ---
Other 460,000 460,000 461,000
2,392,000 1,231,000 1,256,000
Total Assets $37,432,000 $38,726,000 $38,929,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $135,000 $221,000 $618,000
Accrued compensation 12,000 36,000 321,000
Taxes, other than income taxes 6,000 15,000 177,000
Income taxes 44,000 191,000 948,000
Other accrued expenses 191,000 334,000 696,000
Total current liabilities 388,000 797,000 2,760,000
Long-term notes payable - banks --- 2,500,000 2,500,000
Deferred income taxes 6,404,000 5,931,000 4,792,000
Shareholders' equity
Common stock w/o par value, authorized
4,000,000 shares,issued 2,286,760 1,829,000 1,829,000 1,829,000
Capital in excess of stated value 5,025,000 4,986,000 4,985,000
Unrealized gains(losses)on short-term
investments,net of deferred tax (34,000) 72,000 31,000
Retained earnings 25,359,000 24,230,000 23,311,000
32,179,000 31,117,000 30,156,000
Less 231,332, 245,414, and 215,788
treasury shares, at cost 1,539,000 1,619,000 1,279,000
Total shareholders' equity 30,640,000 29,498,000 28,877,000
Total Liabilities and Shareholders' Equity $37,432,000 $38,726,000 $38,929,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months Ended Year Ended
<TABLE>
June 30, December 31
<S> <C> <C> <C>
1996 1995 1995
Cash flows from operating activities:
Net income $1,353,000 $2,361,000 $3,358,000
Add (deduct) items not affecting cash:
Depreciation and amortization 13,000 246,000 252,000
Deferred income taxes 473,000 387,000 1,404,000
Gain on sale of assets (1,293,000) (1,293,000)
Equity in earnings First Indiana (1,942,000)(2,047,000) (3,938,000)
Dividends received from First Indiana 508,000 423,000 846,000
Other, net (28,000)
Changes in operating assets and liabilities
Accounts, notes, other receivables 619,000 2,443,000 5,065,000
Contracts in progress,and inventory 1,708,000 2,159,000
Prepaid expenses (43,000) 84,000 106,000
Accounts payable and accrued expenses (262,000) (770,000) (2,427,000)
Accrued income taxes payable (147,000) 511,000 (246,000)
Cash provided by operating activities 572,000 4,053,000 5,258,000
Cash flows from investing activities:
Proceeds from sale of assets 5,144,000 5,222,000
Purchase of property, plant and equip. (70,000) (44,000) (44,000)
Decrease (increase) in long-term notes
receivable 14,000 (308,000) (260,000)
Decrease (increase) in Goodwill and
other assets (1,182,000) 93,000 70,000
Decrease (increase) in short-term
investments, at cost 2,446,000 (3,409,000) (7,076,000)
Net cash provided (used) by investing
activities 1,208,000 1,476,000 (2,088,000)
Cash flows from financing activities:
Principal payment on long-term borrowing(2,500,000)(3,000,000) (3,000,000)
Proceeds from reissue of treasury shares 96,000 215,000 267,000
Purchase of treasury shares (21,000) (67,000) (417,000)
Cash dividends paid (205,000) (164,000) (327,000)
Net cash provided (used ) by financing
activities (2,630,000)(3,016,000) (3,477,000)
Increase (decrease) in cash and cash
equivalents (850,000) 2,513,000 (307,000)
Cash and cash equivalents at beginning
of the period 1,699,000 2,006,000 2,006,000
Cash and cash equivalents at end of period $849,000 $4,519,000 $1,699,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
January 1, 1995 to June 30, 1996
<TABLE>
<S> <C> <C> <C> <C>
Capital Unrealized
in Excess Gains
Common of Stated (Losses) on Retained Treasury
Stock Value Investments Earnings Shares Total
Balance January 1, 1995 $1,829,000 $4,979,000 $ --- $20,999,000 ($1,378,000)$26,429,000
Net income 6 months ended 6/30/96 --- --- --- 2,361,000 --- 2,361,000
Shares of common stock issued in
connection with restricted stock grants,
& exercise of stock options --- 6,000 --- 43,000 166,000 215,000
Purchase of treasury shares --- --- --- --- (67,000) (67,000)
Cash dividends paid --- --- --- (164,000) --- (164,000)
Unrealized gains, short-term investments
net of deferred income taxes --- --- 31,000 --- --- 31,000
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 72,000 --- 72,000
Balance June 30, 1995 1,829,000 4,985,000 31,000 23,311,000 (1,279,000) 28,877,000
Net income 7/1/95 to 12/31/95 --- --- --- 997,000 --- 997,000
Shares of common stock issued in
connection with restricted stock grants,
& exercise of stock options --- 1,000 --- 41,000 10,000 52,000
Purchase of Treasury shares --- --- --- --- (350,000) (350,000)
Cash dividends paid --- --- --- (163,000) --- (163,000)
Unrealized gains - short-term investments
net of deferred income taxes --- --- 41,000 --- --- 41,000
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 44,000 --- 44,000
Balance December 31, 1995 1,829,000 4,986,000 72,000 24,230,000 (1,619,000) 29,498,000
Net income 6 months ended 6/30/96 --- --- --- 1,353,000 --- 1,353,000
Shares of common stock issued in
connection with restricted grants,
and exercise of stock options --- 39,000 --- 19,000 101,000 159,000
Purchase of Treasury Shares --- --- --- --- (21,000) (21,000)
Cash dividends paid --- --- --- (205,000) --- (205,000)
Unrealized losses - short-term investments
net of deferred income taxes --- --- (106,000) --- --- (106,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (38,000) --- (38,000)
Balance June 30, 1996 $1,829,000 $5,025,000 ($34,000)$25,359,000 ($1,539,000)$30,640,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
THE SOMERSET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
Note 1. Nature of Operations and Summary of Significant
Accounting Policies
The Somerset Group, Inc. (The Company ) is a registered savings
bank holding company. It s major asset is a 21.8% ownership
interest in First Indiana Corporation, which owns 100% of First
Indiana Bank, a federally chartered stock savings bank. Beginning
during the second quarter of 1996, the Company operates an
insurance agency and also sells investment products. The Company
operated in the construction industry prior to June 1995. During
1995 and 1994 the Company sold substantially all assets of its
construction industry operations for a combination of cash and
notes receivable. The Company is seeking acquisitions in select
financial services industries, including fund management, leasing,
and technology based banking services.
(a) Principles of Consolidation: The consolidated financial
statements include the accounts of The Somerset Group, Inc.
( the Company ) and its 100% owned subsidiaries for all
periods.
(b) 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.
(c) Short-Term Investments: The investments are valued at market
price on the statement date. They are available-for-sale and
proceeds are available on three days notice. Unrealized
holding gains and losses are excluded from earnings and are
reported net of deferred income taxes as a separate component
of shareholders equity until realized.
(d) Investment in First Indiana Corporation: First Indiana
Corporation is a bank holding company whose primary subsidiary
is a savings bank which operates in Indiana, North Carolina,
and Florida through its mortgage banking division. The
Company s investment in First Indiana Corporation is stated at
cost, adjusted for the Company s 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) Income Taxes: The Company uses the asset and liability method
to account for income taxes. The principal temporary
difference between the financial statement carrying amounts
and the tax bases of existing assets and liabilities that
results in deferred taxes is the investment in First Indiana
Corporation, which is accounted for under the equity method of
accounting.
(f) Income Per Share: Income per share is based on the average
number of common shares and common share equivalents (stock
options) outstanding during the year. The effect of
outstanding stock options on income per share on a fully
diluted basis is not material. All share and per share
amounts have been adjusted for a five-for-four stock split
that was effective February 29, 1996.
(g) Treasury Shares: Treasury shares issued to fund employee
benefit plans are valued at average cost of all treasury
shares at the date of issuance.
6
Note 2. Sale of Assets
The Company sold all assets of its construction products and
services operations during 1995 and 1994, and ceased doing business
in the construction industry. The results of these operations are
included in the consolidated financial statements through the dates
of sale. The total sale price of the assets was $5,522,000 and
$1,437,000 for 1995 and 1994, respectively. After consideration of
expenses relating to the sales, the Company recorded gains on sale
before income taxes for 1995 and 1994 of $1,293,000 and $76,000,
respectively. At the time of the sales, these assets represented
all of the Company s operating activities. Sales, cost of sales,
and gross profit of the construction operations contained in the
Consolidated Statements of Income were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Sales $ --- $4,819,000 $ --- $11,178,000
Cost of Sales --- 4,507,000 --- 9,529,000
------ --------- ------ ----------
Gross Profit $ --- $ 312,000 $ --- $ 1,649,000
Note 3. Short-Term Investments
Short-term investments are valued at market price and are
available-for-sale. The Company is actively seeking new businesses
in the financial services industry and expects to utilize these
funds for that purpose.
Note 4. Investment in First Indiana Corporation
The Company s percentage of ownership of First Indiana Corporation
was 21.8% at June 30, 1996, 21.9% at December 31, 1995, and 22.1%
at June 30, 1995. The Company s equity in earnings of First
Indiana Corporation shown in the Consolidated Statements of Income
is before income taxes. Federal and state income taxes applicable
to the equity earnings are contained as a component of total
federal and state income tax expense.
Note 5. Average Shares Outstanding
Average shares outstanding included the common share equivalents of
outstanding stock options. There were 46,232, 47,623, and 34,956
equivalent shares included in the average shares outstanding for
the periods ended June 30, 1996, December 31, 1995, and June 30,
1995. The Company had 84,250 shares, 113,375 shares, and 121,730
shares of its stock reserved for future stock grants as of June 30,
1996, December 31, 1995, and June 30, 1995.
Note 6. Financial Statement Preparation
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions 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.
7
PART I
Item 1 - Financial Statements
The information required by Rule 10.01 of Regulation S-X is
presented on the previous pages.
Item 2 - Management's Discussion and Analysis of Financial
Condition and
Results of Operations
Results of Operations.
During the second quarter of 1996, the Company completed a major
step in its expansion into the financial services industry. It
acquired One Insurance Agency, Inc. and One Investment Corporation
from its affiliated company First Indiana Bank. The acquisition
included the licensed agents and brokers of the companies and the
existing portfolios of insurance and investment products offered
for sale. These two companies formed the nucleus of Somerset s
Financial Services Division.
Somerset also entered into an agreement with First Indiana Bank for
Somerset to provide non-FDIC-insured investment and insurance
products and investment counseling services for customers of the
Bank. Under the terms of the agreement, the Bank agreed to
exclusively refer customers for these products to Somerset.
Net income for the quarter amounted to $715,000, or $.34 per share,
compared to $1,376,000, or $.66 per share, including a non-
recurring gain from the sale of assets in the same quarter of last
year. The gain resulted from the sale of the Company s
construction operations and amounted to $1,293,000 before income
taxes, and $782,000, or $.37 per share, after income taxes.
Excluding this non-recurring gain, the 1996 second quarter earnings
represented a 20% increase over the 1995 adjusted earnings of
$594,000, or $.28 per share. For the six months ended June 30,
1996, net income was $1,353,000, or $.64 per share, compared to
$2,361,000, or $1.13 per share, during the first half of 1995. The
1995 earnings include the operating result of the construction
operations from January 1, 1995 to their sales in the second
quarter, as well as the after tax gain on the sale of assets of
$782,000. During most of the first half of 1996, the Company did
not have any operations to replace the sales and income generated
by these operations in prior years.
Equity income from First Indiana Corporation for the quarter was
lower than last year primarily as a result of First Indiana s
increase in the loan loss provision for the 1996 quarter compared
to 1995. For a discussion of the Results of Operations of First
Indiana Corporation please refer to their Form 10-Q filed with the
Securities and Exchange Commission under File Number 0-14354.
Operating expenses during the quarter and for the six months were
significantly lower than last year as the Company downsized all
operations following the sale of the construction divisions late in
the second quarter of 1995. Cash provided by the sales of the
construction assets was used in early 1996 to retire all
outstanding debt, and therefore the Company did not have any
interest expense during the second quarter of 1996.
The insurance and brokerage operations recently acquired did not
produce material sales and income for the Company during the
quarter. Commissions and fees income amounted to $210,000 for the
quarter. Management does expect future results of these
acquisitions to grow, as operations will be expanded by additions
to the products and services portfolios and entry into non-
traditional bank markets.
8
Capital Resources and Liquidity
Management considers the capital resources and liquidity of the
Company to have been very good at both June 30, 1996 and December
31, 1995. While improved from June 30, 1995, the Company was also
in a relatively sound position at June 30, 1995.
Because of the sale of all construction industry operating assets
and the conversion of the related net current assets to cash, 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 acquisitions of businesses in the financial
services industry.
The acquisition of One Insurance Agency, Inc. and One Investment
Corporation was completed using cash held by the Company. The
purchase price and costs of the acquisition amounted to $1,470,000,
which represented 3.8% of the Registrant s assets. Consolidated
net income of the acquired corporations during 1995, had they been
owned by Somerset, would have amounted to 8.2% of consolidated
income of the Company. The transaction included intangible assets
of $1,181,000.
At June 30, 1996, the Company had a very high ratio of current
assets to current liabilities that stood at 15.1 to one, compared
to 4.2 to one at June 30, 1995. In addition, 93% of current assets
and 15% of total assets consisted of cash, cash equivalents and
short-term investments.
The Company had no long-term debt at June 30, 1996, compared to
$2.5 million at June 30, 1995. Three million of long-term debt was
retired prior to June 30, 1995, and the remaining long-term debt of
$2.5 million was retired early in March 1996.
Shareholders equity increased to $30.6 million at June 30, 1996
from $28.9 million at June 30, 1995. Adjusted for the February 29,
1996 5-for-4 stock split, shareholders equity amounted to $14.91
per share compared to $13.94 per share at June 30, 1995.
The Company s investment in First Indiana Corporation is stated at
cost, plus the Company s share of undistributed earnings, as
required by the FASB s accounting standard for equity accounting.
This treatment does not give effect to the market value of this
investment within the consolidated financial statements. At June
30, 1996, the market value of the Company s investment in First
Indiana Corporation, as determined from the closing price on the
NASDAQ National Market System was $14 million greater than the
carrying value in the consolidated financial statements. At June
30, 1995, such market value was $4 million greater than the
carrying value.
Operating activities during the first half of 1996 provided
$572,000 of cash, compared to $4.1 million provided in the first
half of 1995. The major reason for the change is that the Company
had very little activity from operations during 1996 and used cash
to reduce accounts payable, accrued expenses, and income taxes
payable.
Cash dividends paid increased to $205,000 in the first half of
1996, compared to $164,000 last year, or 25%. This increase
resulted from the 5-for-4 stock split of February 19, 1996, and the
payment of the regular semi-annual dividend of $.10 per share was
paid on the post stock split shares.
9
The Company is seeking additional acquisitions in select financial
services industries including fund management, leasing, annuity
brokerage, and technology-based banking services. The Somerset
Group, Inc. is a registered savings bank holding company and
subject to regulations of permitted activities defined in the
National Housing Act and administered by the Office of Thrift
Supervision.
PART II
OTHER INFORMATION
Items 1 through 6
The information required by these items has been omitted as it is
not applicable.
Reports Filed on Form 8-K
A Form 8-K was filed on June 27, 1996 reporting the event of the
purchase of 100% of the outstanding stock of One Investment
Corporation and its wholly owned subsidiary One Insurance Agency,
Inc.
SIGNATURES
(Registrant)
By s/Marni McKinney
Marni McKinney, President &
Chief Executive Officer
s/Joseph M. Richter
Joseph M. Richter
Executive Vice President &
Chief Financial Officer
Date: August 1, 1996
10
