THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months E
<TABLE>
<S> <C> <C> <C> <C>
June 30, June 30,
1998 1997 1998 1997
(Restated) (Restated)
Revenue and Income:
Fees and commissions 1,636,000 1,505,000 4,134,000 4,046,000
Equity in earnings of First Indiana 997,000 846,000 1,947,000 1,717,000
Investment income 84,000 106,000 173,000 199,000
--------- -------- --------- ---------
2,717,000 2,457,000 6,254,000 5,962,000
Operating Expenses:
Salaries, wages, commissions 1,417,000 1,753,000 2,928,000 3,584,000
General and administrative expenses 326,000 297,000 519,000 495,000
Occupancy expenses 88,000 83,000 167,000 164,000
Advertising and marketing 46,000 7,000 75,000 48,000
Depreciation and amortization 72,000 60,000 138,000 116,000
Merger expenses --- --- 163,000 ---
--------- --------- --------- ---------
1,949,000 2,200,000 3,990,000 4,407,000
Income from Operations 768,000 257,000 2,264,000 1,555,000
Interest expense --- 3,000 4,000 23,000
------- ------- -------- --------
Income before income taxes 768,000 254,000 2,260,000 1,532,000
Income tax expense 198,000 15,000 678,000 429,000
------- ------- ------- -------
Net Income $570,000 $239,000 $1,582,000 $1,103,000
======= ======= ======== ========
Income Per Share
Basic $.20 $.08 $.55 $.38
Diluted $.19 $.08 $.53 $.37
Average Shares Outstanding:
Basic 2,905,698 2,914,166 2,902,398 2,905,708
Diluted 2,973,821 2,960,509 2,973,604 2,958,600
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 759,000
<SECURITIES> 4,104,000
<RECEIVABLES> 1,601,000
<ALLOWANCES> 153,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,454,000
<PP&E> 1,197,000
<DEPRECIATION> 785,000
<TOTAL-ASSETS> 43,664,000
<CURRENT-LIABILITIES> 631,000
<BONDS> 0
0
0
<COMMON> 1,862,000
<OTHER-SE> 35,568,000
<TOTAL-LIABILITY-AND-EQUITY> 43,664,000
<SALES> 4,134,000
<TOTAL-REVENUES> 6,254,000
<CGS> 3,990,000
<TOTAL-COSTS> 3,994,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,000
<INCOME-PRETAX> 2,260,000
<INCOME-TAX> 678,000
<INCOME-CONTINUING> 1,582,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,582,000
<EPS-PRIMARY> .55
<EPS-DILUTED> .53
</TABLE>
THE SOMERSET GROUP, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <S> <C> <C> <C>
June 30, December 31, June 30,
ASSETS 1998 1997 1997
Current assets (Restated) (Restated)
Cash and cash equivalents $759,000 $600,000 $310,000
Short term investments 4,104,000 5,248,000 5,398,000
Trade accounts, notes and receivables 1,448,000 1,222,000 1,261,000
Prepaid expenses 143,000 80,000 118,000
Refundable income taxes --- 203,000 98,000
--------- --------- ---------
Total current assets 6,454,000 7,353,000 7,185,000
Investments
First Indiana Corporation (market
values of $72,065,000, $68,515,000
and $50,962,000) 34,608,000 32,406,000 30,702,000
Office furniture and equipment 1,197,000 1,143,000 976,000
Less accumulated depreciation 785,000 696,000 615,000
-------- -------- -------
412,000 447,000 361,000
Other assets
Notes receivable, net 567,000 580,000 644,000
Goodwill, net of accumulated amort. 1,117,000 1,133,000 1,175,000
Other 506,000 541,000 522,000
--------- --------- ---------
2,190,000 2,254,000 2,341,000
Total Assets 43,664,000 42,460,000 40,589,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable - bank $459,000 $24,000
Current portion of long-term debt 13,000 13,000
Trade accounts payable 51,000 60,000 52,000
Accrued compensation 289,000 86,000 428,000
Taxes, other than income taxes 64,000 53,000 111,000
Income taxes 182,000 --- ---
Deferred income taxes 327,000 330,000
Other accrued expenses 45,000 104,000 111,000
------- --------- ---------
Total current liabilities 631,000 1,102,000 1,069,000
Deferred income 23,000 ---
Deferred income taxes 8,303,000 7,845,000 7,204,000
Long-term debt, less current portion 30,000 36,000
Shareholders' equity
Common stock without par value, authorized
4,000,000 shares; issued and outstanding
2,909,214, 2,897,724, and 2,905,914 1,862,000 1,855,000 1,860,000
Capital in excess of stated value 3,605,000 3,549,000 3,661,000
Accumulated other comprehensive income 45,000 (22,000) (27,000)
Retained earnings 29,352,000 28,078,000 26,786,000
Less 6,200 treasury shares, at cost (134,000) --- ---
---------- ---------- ----------
Total shareholders' equity 34,730,000 33,460,000 32,280,000
Total Liabilities and Shareholders'Equity43,664,000 42,460,000 40,589,000
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-3-
THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended Year Ended
June 30, December 31
<TABLE>
<S> <C> <C> <C>
(Restated) (Restated)
Cash flows from operating activities: 1998 1997 1997
Net income $1,582,000 $1,103,000 $2,536,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 132,000 116,000 246,000
Deferred income taxes 131,000 443,000 1,199,000
Equity in earnings of First Indiana Corp(1,947,000) (1,717,000) (3,883,000)
Dividends received from First Indiana Corp 657,000 544,000 1,087,000
Changes in operating assets and liabilities:
Accounts, notes, and other receivables (226,000) 143,000 171,000
Prepaid expenses (63,000) (50,000) (18,000)
Accounts payable and accrued expenses 146,000 414,000 (42,000)
Accrued and refundable income taxes 385,000 (117,000) (173,000)
------- ------- --------
Net cash provided by operating activities 797,000 879,000 1,123,000
Cash flows from investing activities:
Purchase of shares of First Indiana Corp. (990,000) --- ---
Proceeds from sale of assets --- 8,000 8,000
Purchase of office furniture and equipment (54,000) (62,000) (229,000)
Decrease (increase) in other assets 96,000 (39,000) (3,000)
Decrease (increase) in short-term invstmnts 1,144,000 (575,000) (524,000)
--------- ------- -------
Net cash provided(used)by investing activities 196,000 (668,000) (748,000)
Cash flows from financing activities:
Principal payments on note payable, bank (459,000) (660,000) (225,000)
Principal payments on long-term borrowings (43,000) (6,000) (12,000)
Proceeds from sale of common stock 63,000 243,000 330,000
Purchase of treasury shares (134,000) (313,000) (475,000)
Cash dividends paid (261,000) (234,000) (462,000)
------- ------- -------
Net cash used by financing activities (834,000) (970,000) (844,000)
Increase(decrease)in cash and cash equivalents 159,000 (759,000) (469,000)
Cash and equivalents at beginning of period 600,000 1,069,000 1,069,000
------- -------- --------
Cash and cash equivalents at end of period $759,000 $310,000 $600,000
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-4-
THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<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, 1997, restated 1,836,000 3,713,000 26,048,000 31,597,000
Comprehensive Income:
Net income, 6 months ended 6/30/97 --- --- --- 1,103,000 1,103,000
Unrealized losses on short-term
investments, net of defered
income taxes --- --- (27,000) ---
---------
Total comprehensive income 1,076,000
Shares of common stock issued 37,000 239,000 --- --- 276,000
Shares of common stock retired (13,000) (291,000) --- --- (304,000)
Cash dividends paid --- --- --- (234,000) (234,000)
Equity in other capital changes of
First Indiana Corporation, net
of deferred income taxes --- --- --- (131,000) (131,000)
-------- -------- ------ --------- ---------
Balance June 30, 1997, restated 1,860,000 3,661,000 (27,000)26,786,000 32,280,000
Comprehensive Income:
Net income July 1 to December 31,1997 --- --- --- 1,347,000 1,347,000
Unrealized gains on short-term invest-
ments,net of deferred income taxes --- --- 5,000 --- 5,000
-------
Total comprehensive income
Shares of common stock issued 2,000 26,000 --- 125,000 153,000
Shares of common stock retired (7,000) (138,000) --- --- (145,000)
Cash dividends paid --- --- --- (228,000) (228,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 48,000 48,000
-------- -------- ------ --------- ---------
Balance December 31, 1997, restated 1,855,000 3,549,000 (22,000)28,078,000 33,460,000
Comprehensive Income:
Net income, 6 months ended 6/30/98 --- --- --- 1,582,000 1,582,000
Unrealized gain on short-term invest-
ments, net of deferred income taxes --- --- 5,000 --- 5,000
Tax benefit of stock options exercise --- --- 62,000 --- 62,000
--------
Total comprehensive income 1,649,000
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 $3,605,000 $45,000 $29,352,000 ($134,000)34,730,000
========= ========= ====== ========== ======= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-5-
THE SOMERSET GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
The Somerset Group, Inc. (The "Company") is a nondiversified, unitary savings
and loan holding company. Its major asset is a 21.6% ownership interest in
First Indiana Corporation ("First Indiana"), which owns 100% of First Indiana
Bank. As Somerset Financial Services, the Company provides investment and
wealth management services, health care consulting, tax planning and
preparation, information technology, business valuation and litigation services.
The Company's First Indiana Investor Services Division markets insurance and
investment products.
(a) Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its 100%-owned subsidiaries.
(b) Commissions and Fees: Commissions and fees represent revenue from services
provided by Somerset Financial Services and by investment products sold by
First Indiana Investor Services.
(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 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.
(e) Investment in First Indiana Corporation: First Indiana Corporation is a
bank holding company whose primary subsidiary is a thrift institution,
First Indiana Bank. 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 on consolidated retained earnings.
(f) Office Furniture and Equipment: Office furniture and equipment are stated
at historical costs for financial reporting purposes. Depreciation is
determined using the straight-line method based upon the estimated useful
life of 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.
(h) Income Per Share: Basic and diluted earnings per share were computed in
accordance with the Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards No. 128 "Earnings Per Share." Basic
earnings per share were computed by dividing net income by the weighted
average of common stock outstanding. Dilution of the per share calculation
relates to stock options outstanding during the periods.
-6-<PAGE>
Note 2. Business Combination and Restatement of Historical Financial Statements
On January 20, 1998, Somerset issued 333,359 shares of its common stock for all
the outstanding stock of Whipple & Company Professional Corporation
("Whipple"). The business combination was accounted for as a pooling-of-
interests combination and, accordingly, Somerset's 1997 consolidated financial
statements presented are restated to include the accounts and results of
Whipple. Following is a summary of Revenue and Income and Net income for each
of the entities.
Three Months Ended Six Months Ended Years Ended
June 30, June 30, December 31,
1998 1997 1998 1997 1998 1997
Revenue and Income:
Somerse $1,356,000 $1,247,000 $2,576,000 $2,551,000 $5,385,000 $4,449,000
Whipple 1,361,000 1,210,000 3,678,000 3,411,000 5,740,000 5,085,000
--------- --------- --------- --------- --------- ---------
Combined $2,717,000 $2,457,000 $6,254,000 $5,962,000 $11,125,000 $9,534,000
Net Income:
Somerset $676,000 $400,000 $1,256,000 $1,036,000 $2,450,000 $2,039,000
Whipple (106,000 (161,000) 326,000 67,000 86,000 106,000
------- ------- --------- --------- --------- ---------
Combined $570,000 $239,000 $1,582,000 $1,103,000 $2,536,000 $2,145,000
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 will be favorably affected, as
compared to the remaining three quarters of the year.
Revenue, net income and earnings per share, as restated to include Whipple, for
the four quarterly periods ending December 31, 1997 were as follows:
Year Ended December 31, 1997
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Total
March 31 June 30 Sept. 30 Dec. 31 1997
Revenue and income $3,505,000 $2,452,000 $2,433,000 $2,735,000 $11,125,000
Net income $864,000 $239,000 $620,000 $813,000 $2,536,000
Basic earnings per
share $.30 $.08 $.22 $.28 $.88
Diluted earnings per
share $.29 $.08 $.21 $.28 $.86
Note 4. Investment in First Indiana Corporation
The Company's percentage of ownership of First Indiana Corporation was 21.6% at
June 30, 1998, 21.5% at December 31, 1997, and 21.4% at June 30, 1997. 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.
-7-
Note 5. Average Shares Outstanding
Average shares outstanding, computed on the diluted basis as required by
Financial Accounting Standards Board Statement Number 128, included common share
equivalents of outstanding stock options. The following equivalent shares have
been included in the average diluted shares outstanding in the Consolidated
Financial Statements.
1998 1997
Three months ended June 30 68,123 46,343
Six months ended June 30 71,206 52,892
The Company had 199,078, 139,827, and 141,389 shares of its stock reserved for
exercise of stock options at June 30, 1998, December 31, 1997, and June 30, 1997
respectively.
Note 6. Financial Instruments
The estimated fair value of the Company's financial instruments at June 30,
1998, December 31, 1997, and June 30, 1997 approximate their carrying value as
reflected in the consolidated balance sheets. The Company's financial
instruments include cash and cash equivalents, short-term investments and notes
receivable. Financial instruments also include the investment in First Indiana
that had a fair value as follows.
Fair
Date Value
June 30, 1998 $72,065,000
December 31, 1997 $68,515,000
June 30, 1997 $50,962,000
Note 7. Financial Statement Preparation
The accompanying financial statements have been prepared with generally accepted
account principles for interim financial information and with the instruction to
From 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.
-8-
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, 1998, were 138% above comparable
earnings for the same period of 1997. Net income amounted to $570,000, or $.19
per diluted share, compared with $239,000, or $.08 per diluted share earned
during the three months of 1997.
For the six months ended June 30, 1998, the Company's earnings were $1,582,000,
or $.53 per diluted share, compared with $1,103,000, or $.37 per diluted share,
for the same period in 1997, an increase of 43%.
Net income includes the results of Whipple & Company, P.C. ("Whipple"), which
was merged with The Somerset Group, Inc. in the first quarter of 1998. The
merger was accounted for as a pooling-of-interests business combination, and
historical results for 1997 have been restated to include the financial results
of Whipple as if the merger had occurred January 1, 1997.
Net income reported for the six month period included non-recurring expenses of
the merger that reduced net income approximately $100,000. If these expenses
are excluded from the six month results, net income increased to $1,682,000, or
$.57 per diluted share, an increase of 52% over the $1,103,000 that the two
companies earned during the first half of 1997.
The increase in earnings for the quarter and the first half of the year were
generally a result of an increase in revenue from financial services, combined
with a decrease in operating expenses, and an increase in equity earnings from
First Indiana Corporation.
During the second quarter, revenue and income increased $260,000, or 10.6%, to
$2,717,000 from $2,457,000 earned during the 1997 quarter. Increases in fee and
commission revenue accounted for $131,000 of the increase, and equity earnings
from First Indiana Corporation increased $151,000. These increases were offset
by a decline of $22,000 in earnings from the investment portfolio.
For the first half of 1998, revenue and income increased $292,000, or 4.9%, to
$6,254,000 from $5,962,000 earned during the first six months of 1997.
Increases in fee and commission revenue amounted to $88,000, and equity earnings
from First Indiana Corporation increased $230,000. These increases were offset
by a decline of $26,000 in earnings from the investment portfolio.
The increases in fee and commission revenue for the quarter and first six months
were primarily from growth in tax consulting and preparation services and
related areas. These increases were partially offset by lower commission income
from insurance and brokerage sales and, on a comparative basis, the loss of all
revenue from attest services. Attest services included financial statement
audits, compilations and reviews. These services were sold by Whipple prior to
the merger of Whipple with Somerset. Revenue for performance of these services
is included in 1997 amounts, with no such revenue in 1998.
-9-
Revenue and income from financial 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.
Management expects revenue and earnings during the second half of 1998 to be
lower than those reported for the first half of the year.
The increase in equity earnings from First Indiana Corporation is a direct
result of a strong economy, low interest rates, and expansion of First Indiana's
activities into new geographic areas, in conjunction with strengthening of
alliances in existing markets. Two areas that have seen substantial growth are
construction and land development loans, which increased 6% and 107%,
respectively, compared with June 30, 1997. Residential loans outstanding
increased 27%, compared to June 30, 1997, and home equity loans increased 8%.
First Indiana continues to expand the range of markets in which it offers home
equity loans through a network of local agents. This network now encompasses 17
states. As a result of growth in some lower risk areas and a favorable trend in
delinquencies and loss experience, First Indiana lowered its second quarter
provision for loan losses $400,000, from $2.7 million in 1997 to $2.3 million in
1998.
The comparative decline in investment income was caused by the use of investable
cash for other purposes. Short-term investments at June 30, 1998, declined
$1,294,000, compared to June 30, 1997.
On a comparative basis, operating expenses for the second quarter of 1998 of
$1,949,000 were 11% below the $2,200,000 incurred in the 1997 quarter. For the
first six months of 1998, operating expenses of $3,990,000 were 9% below last
year. Excluding the non-recurring merger expenses from the 1998 actual expenses
brings the total six month comparative expense reduction to $580,000, or 13%.
The lower operating expenses were primarily in personnel costs of salaries,
wages, commissions, and benefits. Several factors caused reductions in these
expenses as follows:
a) During the first half of 1997, the Company formed a new division; Somerset
Wealth Management. One-time expenses for commencement of operations of
this division, and other non-recurring compensation expenses, caused
personnel expenses to be much higher than normal operating amounts.
Therefore, the 1998 amounts are being compared to unusually higher amounts
in 1997.
b) Personnel costs related to the performance of financial statement audits,
compilations, and reviews were included in the 1997 restated income, since
they were historical operations of Whipple. There were no such expenses
in the 1998 amounts since these operations were sold in January 1998.
c) The increase in revenue and the consolidation of operations as part of the
merger allowed the merged company to operate more efficiently. The
consolidation did not cause a reduction of personnel; rather, it allowed
existing professional staff to service more clients. Certain cash
incentive compensation plans were also revised that aligned compensation
on a performance basis rather than a return on owner's invested capital.
-10-
Financial Condition and Liquidity
Management considers the financial condition and liquidity of the Company to be
excellent at June 30, 1998. The Company was also in a very sound position, on
a restated basis, at December 31, 1997 and June 30, 1997. The Company's
balance sheet contains a large percentage of liquid assets. These liquid assets
have been invested temporarily and are intended for use in additional acqui-
sitions and the expansion of existing financial service operations.
At June 30, 1998, the Company had a high ratio of current assets to current
liabilities of 10.2 to one, compared to 6.7 to one at December 31, 1997, and 6.7
to one at June 30, 1997. In addition, 75% of the current assets consisted of
cash, cash equivalents, and short-term investments. Net working capital
remained stable during the periods and amounted to $5,823,000 at June 30, 1998,
$6,251,000 at December 31, 1997, and $6,116,000 at June 30, 1997.
All short-term and long-term debt was retired during the first half of 1998.
The debt was that of Whipple at the time of the merger and amounted to a
combined total of $502,000 at December 31, 1997 and $60,000 at June 30, 1997.
Short-term investments were sold to provide the cash for the debt retirement.
Shareholders' equity increased to $34,730,000 at June 30, 1998, from the
restated $33,460,000 at December 31, 1997 and $32,280,000 at June 30, 1997. On
a per outstanding share basis, the amounts were $11.94, $11.55 and $11.10 as
restated for the Whipple merger.
Generally Accepted Accounting Principles (GAAP) require Somerset to record
income tax expense at full corporate rates on a portion of its equity income
from First Indiana. GAAP also requires us to record our investment in First
Indiana at a net carrying value which represents our acquisition cost of First
Indiana shares, plus our equity share of First Indiana's net income, rather than
at market value. Under certain circumstances, the tax liability recorded in this
manner (approximately $8.3 million) may never be incurred. The market value of
our investment in First Indiana at June 30, 1998 was approximately $72.1 million
or $37.5 million greater than the investment amount reflected in our balance
sheet at June 30, 1998.
Operating activities during the six months ended June 30, 1998, provided cash of
$797,000, compared to $879,000 during the same period in 1997. The slight
decline in cash provided by operations was the net result of several changes in
operating assets and liabilities. Compared to the six months of 1997,
operations for 1998 provided more cash principally from higher net income and
cash dividends from First Indiana; however, additional cash was needed to
support the working capital requirements of the increase in revenue that
resulted in a net decline.
The Company purchased an additional 40,500 shares of First Indiana Corporation
common stock in the open market, at a cost of $990,000, during the second
quarter. The purchase increased our holdings to 2,758,467 shares of First
Indiana, or 21.59% of First Indiana's shares outstanding.
During the first six months of 1998, the Company sold short-term investments of
$1,144,000. Proceeds from these sales were primarily used to fund the purchase
of the First Indiana shares and retire all outstanding debt.
Cash dividends of $261,000 were paid to our shareholders, an increase of 11.5%
over the cash dividends paid during the 1997 first half. The semi-annual
dividend rate remained constant at $.09 per share in both years, or $.18 per
share annually. The increase in the amount paid resulted from additional shares
outstanding that primarily resulted from the issuance of shares for the Whipple
merger transaction.
The Company is seeking additional acquisitions in selected financial service
industries. These acquisitions could necessitate the use of cash on hand, cash
from debt placement, and unissued shares of common stock.
-11-
Impact of Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income," that establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. The statement was effective for fiscal years
beginning after December 15, 1997. The Company adopted this statement effective
January 1, 1998. It did not have a material impact on the financial condition
or results of operations of the Company.
The FASB also issued Statement of Financial Accounting Standard No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
introduces new guidance on segment reporting. The statement was effective for
fiscal years beginning after December 15, 1997. The Company adopted this
statement effective January 1, 1998. It did not have a material impact on the
financial condition or results of operations of the Company, since the
disclosures are similar to those previously presented.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
standard establishes comprehensive accounting and reporting standards for
derivative instruments and hedging activities. The standard will be effective
for the Company on January 1, 2000. As of the date of this report, the standard
is not directly applicable to the Company's consolidated financial statements.
However, the standard would be applicable to First Indiana, the Company's
largest asset and major source of income. First Indiana is reviewing the
standard, but it is not possible at this time to assess the impact on financial
reporting of First Indiana.
Other recent pronouncements by the FASB are not applicable to the Company's
consolidated financial statements.
Year 2000 Readiness
The Company commenced review of all computer hardware and software used in its
operations for shortcomings that would preclude correct calculations of date-
sensitive information as it relates to the twentieth and twenty-first centuries.
The review to date has not identified any major systems requiring extensive
updates or replacement. Management is confident of the Company's ability to
operate in the 21st Century, but it is not possible at this time to assess the
financial impact of non-compliance or of future expenditures.
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.
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PART II
OTHER INFORMATION
Items 1, 2, 3, and 5
The information required by these items has been omitted. The Registrant had no
activity applicable to these items.
Item 4 - Submission of Matters to a Vote of Security Holders.
An annual meeting of shareholders was held April 22, 1998.
The following directors were elected at the meeting.
Votes Votes
Votes For Against Withheld
Patrick J. Early 2,559,522 233 100
Gary L. Light 2,559,522 233 100
Robert H. McKinney 2,559,210 545 100
Michael L. Smith 2,559,522 233 100
The following directors' terms of office continued after the meeting.
H. J. Baker
William L. Elder
Marni McKinney
Douglas W. Huemme
Malcolm Archibald Leslie
Kevin K. McKinney
The following other matters were voted on at the meeting.
Votes Votes
Votes For Against Withheld
Amendment of the Corporation's 2,547,657 7,315 4,883
Articles of Incorporation to increase
the amount of authorized common
stock from four million shares to
six million shares
Approval and ratification of the 2,524,344 22,260 13,251
1998 Stock Incentive Plan
Item 6 - Reports Filed on Form 8-K
No reports on From 8-K were filed during the three months ended June 30, 1998.
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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: Marni McKinney
Marni McKinney
President &
Chief Executive Officer
By: Joseph M. Richter
Joseph M. Richter
Executive Vice President &
Chief Financial Officer
Date: August 4, 1998
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