FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 - For the fiscal year ended December 31, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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 (IRS Employer
incorporation or organization) Identification Number)
135 N. Pennsylvania Street, #2800, Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 317/269-1285
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common stock without par value Over-the-Counter: NASDAQ National Market System
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $71,778,713 as of February 27, 1998.
As of February 27, 1998, there were 2,900,150 outstanding shares of the Capital
Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the year ended December 31, 1997 are
incorporated by reference into Part III.
Portions of the Form 10-K of First Indiana Corporation for the year ended
December 31, 1997 are incorporated by reference into Part I.
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THE SOMERSET GROUP, INC.
INDEX
PART I
Item 1. Business . . . . .. . . . . . . . . . 3
Item 2. Properties . . .. . . . . . . . . . . 4
Item 3. Legal Proceedings . . . . . . . . . . 4
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . 4
PART II
Item 5. Market for the Registrant's Common Equity
and Related Security Holder Matters . .4
Item 6. Selected Financial Data . . . . . . . 4
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition and Liquidity. .4
Item 8. Financial Statements and Supplementary Data 4
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . .5
PART III
Item 10. Directors and Executive Officers of the Registrant . . 5
Item 11. Executive Compensation . . . . . . . . . .. . . . . . 6
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . 6
Item 13. Certain Relationships and Related Transactions . .. . .6
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . 6
Signatures . . . . . . . . . . . . . . . . . . . . . 7
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PART I
ITEM 1 - BUSINESS
General Description of Business
The Somerset Group, Inc. ("the Registrant" or "Company"), is a nondiversified,
unitary savings and loan holding company. Its major asset is a 21.5% ownership
interest in First Indiana Corporation ("First Indiana"), which owns 100% of
First Indiana Bank (the "Bank"). The Company operates One Insurance Agency and
One Investment Corporation, which market insurance and investment products, and
under the name Somerset Wealth Management, provides investment advisory
services, financial counseling, and asset management. As a result of a merger
on January 20, 1998 with Whipple & Company P.C. ("Whipple"), the Company will
also provide tax planning and preparation, retirement and estate planning, and
business consulting.
Financial Information About Business Segments
Described below are the operations of the Company's segments. Financial
information about the segments is incorporated by reference to Note 9 of the
Company's consolidated financial statements on page 28 of this report.
Narrative Description of Business
I. Insurance and Investment Products Segment
The Company sells insurance and non-insured investment products through two
divisions: One Insurance Agency and One Investment Corporation. One Insurance
Agency's products consist of tax-deferred, fixed- rate annuities, life
insurance, and property and casualty insurance. One Investment Corporation's
products consist primarily of mutual funds and variable-rate annuities. These
products are marketed to customers of First Indiana Bank and to the general
public in the state of Indiana.
II. Investment Advisory and Asset Management Services
During 1997, the Company formed Somerset Wealth Management, an activity that
became active on May 1, 1997. The Company offers investment advisory and
financial counseling services to individual clients on a fee only basis. The
investment advisory services include asset allocation advice, investment
management, and portfolio monitoring services. Financial counseling services
include tax, estate, and retirement planning strategies and other counseling
services tailored to meet specific client needs. On March 1, 1998, this
division was merged with Whipple to form a new division of the of the Registrant
; Somerset Financial Services.
III. Whipple & Company P.C. (Merged January 20, 1998)
Whipple was founded in 1960. It provides a wide array of financial services
including tax planning and preparation, retirement planning, estate planning,
investment planning, and business consulting. Whipple also specializes in
health care consulting services to physicians and outpatient surgery centers
nationwide.
IV. Banking Segment
Information on the Registrant's bank affiliate, First Indiana Corporation, is
incorporated into this Report by reference to Item 1 of the 1997 Report on Form
10-K for First Indiana Corporation for the year ended December 31, 1997, filed
separately under Commission file number 0-14354.
-3-
V. Construction Products and Services Segment (Operations Sold During 1995)
The Registrant manufactured precast/prestressed concrete products primarily in
the seven-state area of Illinois, Indiana, Kentucky, Michigan, Ohio,
Pennsylvania, and West Virginia. Products were distributed from the
Indianapolis, Indiana; Westfield, Indiana; and Columbus, Ohio manufacturing
sites via commercial carrier, broker drivers or company-operated trucks to the
job site. The customers for these products were real estate developers, general
contractors and businesses which own and occupy their own structures.
ITEM 2 - PROPERTIES
The Registrant's property consists of office equipment and furniture in leased
office space. The leased office space consists of 1,244 square feet located at
Suite 2800, First Indiana Plaza, Indianapolis, Indiana, and 1,200 square feet
located at 10044 E. Washington Street, Indianapolis, Indiana.
ITEM 3 - LEGAL PROCEEDINGS
Information relative to this item is incorporated into this Report by reference
to Note 14 of the Notes to Consolidated Financial Statements, on page 34 of this
report.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the final quarter
of the fiscal period covered by this report.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
This information is set forth under the caption "Market for the Registrant's
Common Stock" on page 9 of this Report.
ITEM 6 - SELECTED FINANCIAL DATA
This information is set forth under the caption "Selected Financial Data" on
page 9 of this Report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND LIQUIDITY
This information is set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition and Liquidity" on
pages 10 through 15 of this Report.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is contained in the Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Independent Auditors' Report on pages 17
through 34 of this Report. Information on the Registrant's bank affiliate,
First Indiana, is incorporated by reference to Item 8 of the 1997 Report on Form
10-K for First Indiana, filed separately under Commission file number 0-14354.
-4-
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant had no changes in and no disagreements with its accountants
regarding accounting and financial disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Information regarding Directors of the Registrant is incorporated into this
Report by reference to the definitive proxy statement of the Registrant for the
Annual Meeting of Shareholders to be held April 23, 1997, under the caption
"Proposal No. 1: Election of Directors", filed separately under Commission file
number 0-14227.
Executive Officers
Name Office Held Relationship Age
Robert H. McKinney Chairman Father of President 72
and Director and Vice President
Marni McKinney President, CEO Daughter of 41
and Director Chairman
Joseph M. Richter Executive V. P., CFO, None 55
and Treasurer
Robert S. Kaspar President of Somerset None 39
Wealth Management,
a division
The term of office for all officers of the Registrant continues until the first
meeting of the Board of Directors following the Annual Meeting of Shareholders
on April 22, 1998.
A brief account of the business experience of each Executive Officer during the
past five years is as follows:
Robert H. McKinney - Chairman of the Registrant; Chief Executive Officer until
January 1996; Chairman and Chief Executive Officer of First Indiana Corporation;
Chairman of First Indiana Bank; Chief Executive Officer until May 1992; retired
Partner of Bose McKinney & Evans, attorneys; a Director of First Indiana
Corporation; Chairman, Federal Home Loan Bank Board (1977-1979).
Marni McKinney - President, Chief Executive Officer, and a Director of the
Registrant; Vice Chairman and a Director of First Indiana Corporation and First
Indiana Bank; formerly Executive Vice President (1987 - 1992), Chief Operating
Officer of the Registrant (1992-1995); formerly Vice President and Director of
Strategic Planning of First Indiana Bank.
Joseph M. Richter - Executive Vice President, Chief Financial Officer and
Treasurer of the Registrant.
Robert S. Kaspar - President of Somerset Wealth Management, a division; formerly
President and Director of Irwin Union Investor Services, a subsidiary of Irwin
Financial Corporation (1990 - 1996).
-5-
ITEM 11 - EXECUTIVE COMPENSATION
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 22, 1998, under the caption "Compensation of
Directors and Executive Compensation".
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 22, 1998, under the caption "Voting Securities and
Principal Holders Thereof".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 22, 1998, under the caption"Certain Transactions".
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed in the accompanying
Index to Selected Financial Data, Management's
Discussion and Analysis of Results of Operations and
Financial Condition and Liquidity, Financial Statements
and Financial Statement Schedules are filed as part of
this report.
2. The financial statement schedules listed in the
accompanying Index to Selected Financial Data,
Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity,
Financial Statements and Financial Statement Schedules
are filed as part of this report.
3. Exhibits - The following exhibits are attached to this
Form 10-K.
Exhibit
Number Exhibit
3 Amended Articles of Incorporation and Amended and
Restated By-Laws thereto.
22 Subsidiaries of the Registrant.
23 Definitive Proxy Statement for Annual Meeting of
Shareholders to be held April 22, 1998.
24 Consent of Independent Certified Public Accountants, of
report dated February 6, 1998, for incorporation into
Form S-8 registration statement.
99 First Indiana Corporation's Form 10-K for the year ended
December 31, 1997.
All other exhibits are not attached since they are not applicable to
the Registrant:
(b) Reports on Form 8-K.
(c) Financial Statement Schedules.
-6-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
By s/ Robert H. McKinney 3/17/98
Robert H. McKinney, Chairman
By s/ Marni McKinney 3/17/98
Marni McKinney, President and
Principal Executive Officer
By s/ Joseph M. Richter 3/17/98
Joseph M. Richter, Executive Vice
President and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities indicated and on the date indicated.
Signatures Title Date
s/ Robert H. McKinney Director, Chairman 3/17/98
Robert H. McKinney
s/ Marni McKinney Director, President 3/17/98
Marni McKinney and Principal Executive Officer
s/ Kevin K. McKinney Director and Vice President 3/17/98
Kevin K. McKinney
s/ H. J. Baker Director 3/17/98
H. J. Baker
s/ Patrick J. Early Director 3/17/98
Patrick J. Early
s/ William L. Elder Director 3/17/98
William L. Elder
s/ Douglas W. Huemme Director 3/17/98
Douglas W. Huemme
s/Malcolm A. Leslie Director 3/17/98
Malcolm A. Leslie
s/Gary L. Light Director 3/17/98
Gary L. Light
s/ Michael L. Smith Director 3/17/98
Michael L. Smith
-7-
THE SOMERSET GROUP, INC.
Form 10-K for the Year Ended December 31, 1997
Items 5, 6, 7, 8, 14(a) (1) and (2), and 14(c)
Index to Selected Financial Data,
Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity,
Financial Statements and Financial Statement Schedules
Selected Financial Data, Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity, Financial Statements and
Schedules of the Registrant and its subsidiaries, required to be included in
Items 5, 6, 7, 8, 14(a) (1) and (2), and 14(c) are listed below:
Page
MARKET FOR THE REGISTRANT'S COMMON STOCK 9
SELECTED FINANCIAL DATA 9
MANAGEMENT'S DISCUSSION AND ANALYSIS 10
FINANCIAL STATEMENTS:
- - Independent Auditors' Report 17
- - Consolidated Statements of Income for the years ended 18
December 31, 1997, 1996, and 1995
- - Consolidated Balance Sheets as of December 31, 1997 and 1996 19
- - Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996, and 1995 20
- - Consolidated Statements of Cash Flows for the years ended 21
December 31, 1197, 1996, and 1995
- - Notes to Consolidated Financial Statements 22
- - Summarized Consolidated Statements of Subsidiary, Not 35
Consolidated with Registrant
FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted because the required
information is contained in the notes to the financial statements or because
such schedules are not required or are not applicable.
The individual financial statements of the Registrant have been omitted since
the Registrant is primarily an operating company and all subsidiaries included
in the consolidated statements being filed, in the aggregate, do not have
minority equity interest and/or indebtedness to any person other than the
Registrant or its consolidated subsidiaries in amounts which together exceed 25%
of consolidated net assets as shown by the most recent consolidated balance
sheet. All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
-8-
THE SOMERSET GROUP, INC.
MARKET FOR THE REGISTRANT'S COMMON STOCK
The Company's common stock trades on The NASDAQ National Market System under the
symbol SOMR. The quarterly range of prices for the Company's common stock for
the years ended December 31, 1997 and 1996 is presented below:
1997 1996
Quarter High Low High Low
First - ended March 31, $20.75 $14.25 (a) $19.50 $14.88(b)
Second - ended June 30, $15.50 $13.50 $16.50 $14.75
Third - ended September 30, $15.75 $13.50 $16.50 $15.00
Fourth - ended December 31, $22.00 $14.94 $17.50 $16.25
As of February 27, 1998, there were 205 shareholders of record and approximately
812 beneficial owners.
__________________
(a) A five-for-four stock split was effective February 26, 1997.
(b) A five-for-four stock split was effective February 29, 1996.
SELECTED FINANCIAL DATA
(in thousands except per share amounts)
Years Ended December 31,
1997 1996 1995 1994 1993
Equity income of First Indiana $3,883 $3,002 $3,938 $2,616 $3,614
Commissions, fees and
investment income 1,502 1,447 554 70 95
Gross profit of construction
operations (1) --- --- 1,649 4,303 2,544
Income from operations before
income taxes 3,407 2,926 5,548 4,132 3,631
Net income 2,450 2,039 3,358 2,617 2,219
Net income per share - basic (2) .95 .80 1.31 1.03 .89
Net income per share - diluted (2).93 .78 1.29 1.01 .88
As of December 31,
1997 1996 1995 1994 1993
Working capital $5,970 $5,835 $9,104 $6,852 $4,885
Carrying value-investment
in First Indiana 32,406 29,746 27,549 24,265 21,873
Market value-investment in
First Indiana 68,515 48,470 38,882 23,782 24,890
Total assets 40,976 38,212 38,726 39,804 34,995
Long-term debt --- --- 2,500 5,500 5,500
Total liabilities 8,013 6,976 9,228 13,375 11,091
Shareholders' equity 32,963 31,236 29,498 26,429 23,904
Cash dividends per share (2) .18 .16 .128 .064 ---
Book value per share (2) 12.85 12.22 11.56 10.32 9.53
___________________
(1) The construction operations were sold in June 1995.
(2) Per share amounts have been adjusted for five-for-four stock splits that
were effective February 26, 1997, and February 29, 1996.
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THE SOMERSET GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
The Company earned $2,450,000 in 1997, compared to $2,039,000 in 1996, and
$3,358,000 in 1995. Income for 1995 included a gain on the sale of assets of
the construction operations, and operating profit for the period prior to their
sale. There were no such amounts during 1997 or 1996. Net income for 1995,
excluding such non-recurring income amounted to $1,960,000. Net income after
allocation of selling, general and administrative expense, and income taxes for
the three years ended December 31, 1997, was provided from operations as
follows:
Amounts are After Income Taxes
1997 1996 1995
Per* Per* Per*
Amount Share Amount Share Amount share
Equity in earnings of
First Indiana $2,693,000 $1.02 $2,137,000 $.82 $2,382,000 $.91
Fees, commissions and
investment income 282,000 .11 425,000 .16 162,000 .06
---------- --- -------- --- --------- ---
2,975,000 1.13 2,562,000 .98 2,544,000 .97
Gain on sale of assets --- --- 782,000 .30
Operating income
construction operations --- --- 616,000 .24
---------- --- ---------------------------- ---
2,975,000 1.13 2,562,000 .98 3,942,000 1.51
General corporate
expenses (525,000) (.20) (523,000) (.20) (584,000) (.22)
--------- ---- -------- --- -------- ----
Net income $2,450,000 $.93 $2,039,000 $.78 $3,358,000 $1.29
* Per average diluted shares outstanding
Equity in earnings of First Indiana Corporation increased 26% in 1997, compared
to 1996 ($2,693,000 vs. $2,137,000), and was 13% above 1995 ($2,693,000 vs.
$2,382,000). Net income generated from fees, commissions, and investment income
decreased 34% for 1997 compared to 1996 ($282,000 vs. $425,000), and was 74%
above 1995 ($282,000 vs. $162,000). General corporate expenses of $525,000 were
$2,000 higher than 1996 expense of $523,000, and were 10% ($59,000) below the
$584,000 expended in 1995.
Equity in Earnings of First Indiana Corporation
First Indiana Corporation completed another year of solid performance in 1997;
net income set a new record high and asset growth was substantial. The
Company's equity earnings from this significant investment increased 26% after
income taxes, compared to 1996. The year ended December 31, 1996 included an
industry-wide special assessment to recapitalize the Savings Association
Insurance Fund. The negative effect of this assessment on net equity income was
$515,000 ($852,000 before income taxes). Excluding this one time expense,
equity income during 1996 amounted to $2,652,000. Net equity income for 1997 of
$2,693,000 represented a 2% increase over these 1996 pro-forma earnings, and a
13% increase over the 1995 amount of $2,382,000.
Net interest income is the most critical component of First Indiana's earnings.
It is affected by both volume and interest rates of interest-earning assets and
interest-bearing liabilities. Interest income was $62,979,000 in 1997, compared
to $61,683,000 in 1996, and $58,044,000 in 1995. The increase was the result of
growth in home equity, residential construction, and individual loan portfolios.
Net interest margin was 4.36% for the year ended December 31, 1997, compared to
4.37% in 1996, and 4.12% in 1995.
Residential mortgage loan originations amounted to $373 million, compared to
$346 million in 1996. Originations in home equity lending were $276 million,
compared to $231 million in 1996. First Indiana continued to develop banking
relationships in construction lending, with originations of $334 million,
compared to $310 million last year. Business-related originations reached $117
million in 1997, a 23% increase over 1996.
-10-
The net loan loss provision in 1997 was $10,700,000, compared with $10,794,000
in 1996, and $7,900,000 in 1995. By continuing to provide for loan losses in a
manner consistent with the higher risk associated with commercial and
industrial, construction, and home equity lending, First Indiana's loan loss
allowance was $22,414,000 at year-end, or 122% of non-performing loans, compared
with $18,768,000, or 84% of non-performing loans, at December 31, 1996.
Non-interest income increased $157,000 to $18,005,000, from $17,848,000 in 1996,
and $16,251,000 in 1995. The principal increase occurred in the gains realized
by the bank in the sale of residential and home equity loans into the secondary
market. Pre-tax gains during 1997 were $3,069,000 on the sale of $72 million of
fixed-rate home equity loans, while residential gains amounted to $1,863,000
from sales of $144 million of loans.
The 1996 special assessment to recapitalize the Savings Association Insurance
Fund reduced First Indiana's insurance premiums 93% in 1997.
Total assets of First Indiana increased 7.8% to $1,613,405,000 at year-end,
compared to $1,496,421,000 at December 31, 1996. The tangible and core capital
of the bank was 8.37% of assets; well in excess of regulatory minimums.
First Indiana's growth has come from successfully differentiating itself in a
marketplace that is highly competitive. The strategic direction centers around
a desire to understand their customers, so they can provide services and
products that are customer-focused, satisfying customer expectations and
producing solid returns.
For a more detailed discussion of the Results of Operations of First Indiana
Corporation, please refer to the Form 10-K of First Indiana Corporation, filed
with the Securities and Exchange Commission under File Number 0-14354.
Fees, Commissions and Investment Income
This segment of reporting represents the Company's direct operations in the
financial services industry. The construction operations were sold in 1995 in
order to focus human and financial resources on expansion in this industry. The
operations consist of an insurance agency and investment marketing division that
offers non-FDIC insured investment products primarily to customers of First
Indiana Bank. These operations were acquired in 1996. The Company entered the
business of providing financial advisory and asset management services to
individuals and businesses by forming a new division, Somerset Wealth
Management, that commenced operations on May 1, 1997. Also included in the
financial results is income from the Company's own investment portfolio.
Net income from fees, commissions and investment income activities was lower in
1997, compared to 1996, primarily as a result of operating losses incurred
during the initial eight months of operations of Somerset Wealth Management. The
1997 results were above 1995 because the insurance and brokerage services and
the financial advisory and asset management services were not initiated until
1996 and 1997, respectively.
A comparison of net income by component is as follows:
Amounts are After Income Taxes
Year Ended December 31,
1997 1996 1995
Insurance and brokerage $191,000 $235,000 $ ---
Financial advisory and
asset management (129,000) --- ---
Investment income 220,000 190,000 162,000
------- -------- -------
$282,000 $425,000 $162,000
-11-
Insurance and brokerage income was lower in 1997 compared to 1996, as the volume
of sales declined in the second half of 1997. The decline is attributed
partially to an increase in competition for individual investors. Also, the
interest rate environment caused downward pressure on sales of fixed rate
annuities, the division's primary product. During 1997, this division made
significant progress in expanding its sales focus into other investment products
such as variable annuities, mutual funds, stocks and fixed income securities.
Somerset Wealth Management made significant progress toward profitable
operations since its inception on May 1, 1997. This venture has exceeded our
expectations, as assets under management grew from zero at May 1, 1997, to over
$120 million at year end. During 1998, these services will be combined with
similar services acquired in the merger with Whipple & Company Professional
Corporation ("Whipple"). Combined, Somerset will manage more than $250 million
in assets for individuals, families and businesses located throughout the
Midwest.
Investment income, net of interest expense, increased in each of the three years
primarily from an increase in the average amount of net cash available for
investment. It is anticipated that investments will decline in the future as
cash is used to expand operations.
On January 20, 1998, the Company merged with Whipple, a financial services
company that provides financial advisory and asset management services similar
to the Company, and who also offers tax planning and preparation services,
retirement and estate planning, and business consulting for specialized
industries. The financial results of Whipple are not included in consolidated
financial results for 1997 and prior years.
The Company issued 333,339 shares of its common stock for all the outstanding
common stock of Whipple. This business combination will be accounted for as a
pooling-of-interests combination and, accordingly, Somerset's historical
consolidated financial statements presented in future reports will be restated
to include the accounts and results of Whipple. The 333,339 shares issued by
Somerset consisted of 293,833 shares held as treasury shares and 39,605
previously unissued shares.
The following pro forma data summarizes the combined net income of Somerset and
Whipple as if the combination had been consummated on December 31, 1997.
Year Ended December 31,
1997 1996 1995
Combined net income $2,536,000 $2,145,000 $4,355,000
Basic earnings per share $.88 $.75 $1.16
Diluted earnings per share $.86 $.73 $1.15
Under the terms of the merger agreement, compensation following the date of the
combination paid to officers of Whipple who are also shareholders, will be
significantly lower than historical amounts, and make the above combined
historical results of operations unrepresentative of future results. The
following pro forma information reflects the effects of salary changes that are
supported by employment agreements and are necessary to assess the impact of
this business combination.
Year Ended December 31,
1997 1996 1995
Combined net income $2,536,000 $2,145,000 $4,355,000
Contractual reduction
of officers' salaries 519,000 330,000 345,000
Related income taxes (202,000) (129,000) (135,000)
--------- --------- ---------
Pro forma net income $2,853,000 $2,346,000 $3,565,000
Basic earnings per share $.99 $.82 $1.24
Diluted earnings per share $.96 $.80 $1.22
-12-
Historical net income, before the Whipple combination, as reported in the
attached consolidated income statements, is as follows:
Year Ended December 31,
1997 1996 1995
Net income $2,450,000 $2,039,000 $3,358,000
========= ========= =========
Basic earnings per share $.95 $.80 $1.31
Diluted earnings per share $.93 $.78 $1.29
Earnings as shown in the above pro forma, giving effect to the merger
compensation agreements, are accretive on an earnings per share basis for the
years ended December 31, 1997 and 1996. Management expects the combined
operations of Whipple and Somerset to increase earnings and earnings per share
in future years.
The merger with Whipple & Company represents an important step in the strategic
development of The Somerset Group, Inc. The combined expertise in financial
planning, consulting, tax and real estate planning services will be an important
resource for development of future client relationships.
Financial Condition and Liquidity
Management considers the financial condition and liquidity of the Company to be
excellent at December 31, 1997. The Company was also in a very sound position
at the end of 1996. Because of the 1995 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
additional acquisitions and the expansion of existing financial service
operations.
At December 31, 1997, the Company had a very high ratio of current assets to
current liabilities of 42.2 to one, compared to 40.2 to one at December 31,
1996. In addition, 95% of the current assets consisted of cash, cash equiv-
alents and short-term investments. Net working capital was $5,970,000 at
December 31, 1997, compared to $5,835,000 at the end of 1996. The increase is
attributable to an increase in refundable income taxes. The Company had no
long-term debt at December 31, 1997 or 1996. Shareholders' equity increased to
$32,963,000 at December 31, 1997 from $31,236,000 at the end of 1996. The per
share amounts were $12.85 compared to $12.22; an increase of 5.2%.
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
$7.9 million) may not be paid. The market value of our investment in First
Indiana at December 31, 1997 was approximately $69 million, or $36 million
greater than the investment amount reflected in our balance sheet at December
31, 1997.
Operating activities during 1997 provided $780,000 of cash, compared to
$1,401,000 in 1996. The primary cause of this decrease was a 1996 positive cash
flow change in working capital, from the completed conversion to cash of
accounts receivable of the construction operations that were sold in 1995 that
resulted in net positive cash flow after payment of related accounts payable.
During 1997 there was no further activity from these former operations.
The Company invested an additional $524,000 in short-term investments and spent
$133,000 for equipment, which was primarily computers and software for use in
the financial advisory and asset management services.
-13-
The Company paid $462,000 in cash dividends to its shareholders in 1997, at an
annual rate of $.18 per share, which represented a 12.5% increase over the
dividend paid in 1996. On a per share basis, the 1996 dividend represented an
annual rate of $.16 per share. Dividends paid during 1997 represented 59% of
cash flow from operations.
In 1997 the Company repurchased 30,825 shares of its common stock, at a cost of
$449,000, and reissued 40,157 shares of common stock for proceeds of $254,000.
The shares were reissued pursuant to stock option grants that were exercised
during the year.
The Somerset Group, Inc. 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.
The effect of the merger with Whipple on the financial condition and liquidity
of the Company is shown by the following Restated Summarized Consolidated
Balance Sheet at December 31, 1997. The restated numbers present the amounts as
if the merger had occurred at December 31, 1997.
Summarized Consolidated Balance Sheets
December 31, 1997
Assets Actual Restated Change
Cash and cash equivalents $553,000 $600,000 $47,000
Short term investments 5,248,000 5,248,000 ---
Other current assets 314,000 1,505,000 1,191,000
--------- --------- ---------
Total current assets 6,115,000 7,353,000 1,238,000
Investment in First Indiana 32,406,000 32,406,000 ---
All other assets 2,455,000 2,701,000 246,000
---------- --------- ---------
Total assets $40,976,000 $42,460,000 $1,484,000
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities $145,000 $643,000 $498,000
Deferred income 23,000 23,000 ---
Long term debt ---- 489,000 489,000
Deferred income taxes 7,845,000 7,845,000 ---
Shareholders' equity:
Common stock 1,829,000 1,855,000 26,000
Capital in excess
of stated value 5,199,000 3,549,000 (1,650,000)
Unrealized investment loss (22,000) (22,000) ---
Retained earnings 27,908,000 28,078,000 170,000
Treasury shares (1,951,000) --- 1,951,000
--------- --------- --------
32,963,000 33,460,000 497,000
Total liabilities and
shareholders' equity $40,976,000 $42,460,000 $1,484,000
========= ========= ========
Shares outstanding 2,564,385 2,897,724 333,339
-14-
Impact of Accounting Standards Not Yet Adopted
During 1997 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 is effective for fiscal
years beginning after December 15, 1997. The Company adopted this statement
effective January 1, 1998. It is not expected to 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 is effective for
fiscal years beginning after December 15, 1997. It is not expected to have a
material impact on the financial condition or results of operations of the
Company, since the disclosures are similar to those currently presented.
Other pronouncements by the FASB during 1997 have either been adopted by the
Company or are not applicable to the Company's consolidated financial
statements.
Information on Forward-Looking Statements
The statements in the Annual 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.
-15-
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management of The Somerset Group, Inc. has prepared and is responsible for
the financial statements and for the integrity and consistency of other related
information contained in the Annual Report. In the opinion of management, the
financial statements, which necessarily include amounts based on management's
estimates and judgments, have been prepared in conformity with generally
accepted accounting principles appropriate to the circumstances.
The Corporation maintains a system of internal accounting controls designed
to provide reasonable assurance that assets are safeguarded, that transactions
are executed in accordance with the Corporation's authorizations and policies,
and that transactions are properly recorded so as to permit preparation of
financial statements that fairly present the financial position and results of
operations in conformity with generally accepted accounting principles.
Internal accounting controls are augmented by written policies covering
standards of personal and business conduct and an organizational structure
providing for division of responsibility and authority.
Management believes the system of controls has prevented any occurrences
that could be material to the financial statements.
The Corporation engaged the firm of KPMG Peat Marwick LLP, independent
certified public accountants, to render an opinion on the financial statements.
The accountants have advised management that they were provided with access to
all information and records necessary to render their opinion.
The Board of Directors exercises its responsibility for the financial
statements and related information through the Audit Committee, which is
composed entirely of outside directors. The Audit Committee meets regularly
with management and KPMG Peat Marwick LLP to assess the scope of the annual
audit plan, to review the Annual Report and Form 10-K, including major changes
in accounting policies and reporting practices, and to approve non-audit
services rendered by the independent auditors.
KPMG Peat Marwick LLP also meets with the Audit Committee, without
management present, to afford the Committee the opportunity to express its
opinion on the adequacy of compliance with established corporate policies and
procedures and the quality of financial reporting.
February 6, 1998
s/Robert H. McKinney s/Marni McKinney s/Joseph M. Richter
Robert H. McKinney Marni McKinney Joseph M. Richter
Chairman President and Chief Financial
Chief Executive Officer Officer
-16-
The Board of Directors and Shareholders
The Somerset Group, Inc.:
We have audited the accompanying consolidated balance sheets of The Somerset
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of The Somerset Group,
Inc.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Somerset Group,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Indianapolis, Indiana
February 6, 1998
-17-
THE SOMERSET GROUP, INC. CONSOLIDATED STAT
Year Ended December 31,
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Revenue and income:
Equity in earnings of First Indiana Corporation:
Earnings before FDIC special assess 3,883,000 3,854,000 $3,938,000
FDIC special assessment --- (852,000) ---
--------- --------- ---------
3,883,000 3,002,000 3,938,000
Fees and commissions 1,119,000 1,006,000 ---
Investment income 383,000 441,000 554,000
--------- --------- ---------
5,385,000 4,449,000 4,492,000
Gross profit from construction product --- --- 1,649,000
Gain on sale of assets --- --- 1,293,000
--------- --------- ---------
Total revenue and income 5,385,000 4,449,000 7,434,000
Expenses:
Selling expenses 788,000 460,000 210,000
General and administrative expenses 1,190,000 1,021,000 1,390,000
Interest expense --- 42,000 286,000
--------- --------- ---------
Total expenses 1,978,000 1,523,000 1,886,000
Income before income taxes 3,407,000 2,926,000 5,548,000
Income tax expense 957,000 887,000 2,190,000
--------- --------- ---------
Net income 2,450,000 2,039,000 $3,358,000
========= ========= =========
Income per share
Basic $0.95 $0.80 $1.31
Diluted $0.93 $0.78 $1.29
Average shares outstanding
Basic 2,569,461 2,559,947 2,564,453
Diluted 2,634,111 2,618,693 2,605,717
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-18-
THE SOMERSET GROUP, INC. CONSOLIDATED BALANCE
ASSETS 1997 1996
Current assets
Cash and cash equivalents $553,000 $1,060,000
Short term investments 5,248,000 4,724,000
Trade accounts, notes and other receivables 77,000 187,000
Prepaid expenses 31,000 13,000
Refundable income taxes 206,000 ---
--------- ---------
Total current assets 6,115,000 5,984,000
Investments
First Indiana Corporation (market values of
$68,515,000 and $48,470,000) 32,406,000 29,746,000
Office furniture and equipment 359,000 226,000
Less accumulated depreciation 128,000 86,000
--------- ---------
231,000 140,000
Other assets
Notes receivable, net 580,000 740,000
Goodwill, net of accumulated amortization 1,133,000 1,142,000
Other 511,000 460,000
--------- ---------
2,224,000 2,342,000
--------- ---------
Total Assets 40,976,000 38,212,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $19,000 $37,000
Accrued compensation 14,000 64,000
Taxes, other than income taxes 15,000 9,000
Income taxes --- 16,000
Other accrued expenses 97,000 23,000
--------- ---------
Total current liabilities 145,000 149,000
Deferred income 23,000 ---
Deferred income taxes 7,845,000 6,827,000
Shareholders' equity
Common stock without par value, authorized
4,000,000 shares, issued 2,858,218 shares 1,829,000 1,829,000
Capital in excess of stated value 5,199,000 5,181,000
Unrealized losses on short-term
investments, net of deferred income taxes (22,000) ---
Retained earnings 27,908,000 25,962,000
--------- ---------
34,914,000 32,972,000
Less 293,833 and 303,165 treasury shares (1,951,000) (1,736,000)
--------- ---------
Total shareholders' equity 32,963,000 31,236,000
--------- ---------
Total Liabilities and Equity 40,976,000 38,212,000
========== ==========
See accompanying Notes to Consolidated Financial Statements.
-19-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
January 1, 1995 to December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Capital Unrealized
in Excess Gains
Common of Stated (Losses) Retained Treasury
Stock Value Investme Earnings Shares Total
Balance January 1, 1995 1,829,000 4,979,000 --- 20,999,000 (1,378,000)26,429,000
Net income --- --- --- 3,358,000 --- 3,358,000
Shares of common stock issued in
connection with restricted stock grants,
401(k) plan & exercise of opt --- 7,000 --- 84,000 176,000 267,000
Purchase of treasury shares --- --- --- --- (417,000) (417,000)
Cash dividends paid --- --- --- (327,000) --- (327,000)
Unrealized gains on short-term investments
net of deferred income taxes --- --- 72,000 --- --- 72,000
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 116,000 --- 116,000
------------------------------------------------------------
Balance December 31, 1995 1,829,000 4,986,000 72,000 24,230,000 (1,619,000)29,498,000
Net income --- --- --- 2,039,000 --- 2,039,000
Shares of common stock issued in
connection with restricted grants,
& exercise of options --- 195,000 --- 64,000 120,000 379,000
Purchase of treasury shares --- --- --- --- (237,000) (237,000)
Cash dividends paid --- --- --- (409,000) --- (409,000)
Unrealized gains on short-term
investments, net of deferred
income taxes --- --- (72,000) --- --- (72,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- 38,000 --- 38,000
------------------------------------------------------------
Balance December 31, 1996 1,829,000 5,181,000 --- 25,962,000 (1,736,000)31,236,000
Net income --- --- --- 2,450,000 --- 2,450,000
Shares of common stock issued in
connection with restricted grants,
& exercise of options --- 18,000 --- 41,000 234,000 293,000
Purchase of treasury shares --- --- --- --- (449,000) (449,000)
Cash dividends paid --- --- --- (462,000) --- (462,000)
Unrealized losses on short-term investments
net of deferred income taxes --- --- (22,000) --- --- (22,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (83,000) --- (83,000)
-------------------------------------------------------------
Balance December 31, 1997 1,829,000 5,199,000 (22,000)27,908,000 1,951,00032,963,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-20-
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
Year Ende
Cash flows from operating activities: 1997 1996 1995
Net income 2,450,000 2,039,000 3,358,000
Add (deduct) items not affecting cash
Depreciation and amortization 133,000 67,000 252,000
Deferred income taxes 1,135,000 896,000 1,404,000
Gain on sale of assets --- --- (1,293,000)
Equity in earnings of First Indiana Corp. (3,883,000)
Dividends received from First Indiana Corp. 1,087,000 1,015,000 846,000
Other, net 2,000 15,000 (28,000)
Changes in operating assets and liabilities:
Trade accounts, notes, and other receivables 110,000 1,029,000 5,065,000
Contracts in progress, unbilled and inventor 2,159,000
Prepaid expenses (18,000) (10,000) 106,000
Accounts payable and accrued expenses (58,000) (473,000)(2,427,000)
Accrued and refundable income taxes (178,000) (175,000) (246,000)
-------- -------- --------
Net cash provided by operating activities 780,000 1,401,000 5,258,000
Cash flows from investing activities:
Proceeds from sale of assets 5,222,000
Purchase of property, plant and equipment (133,000) (89,000) (44,000)
Decrease (Increase) in other assets 27,000 (1,384,000) (190,000)
(Increase) Decrease in short-term investments (524,000) 2,470,000 (7,076,000)
-------- -------- --------
Net cash used by investing activities (630,000) 997,000 (2,088,000)
Cash flows from financing activities:
Principal payments on long-term borrowings --- (2,500,000)(3,000,000)
Proceeds from reissue of treasury shares 254,000 109,000 267,000
Purchase of treasury shares (449,000) (237,000) (417,000)
Cash dividends paid (462,000) (409,000) (327,000)
-------- -------- --------
Net cash used by financing activities (657,000)(3,037,000)(3,477,000)
Decrease in cash and cash equivalents (507,000) (639,000) (307,000)
Cash and cash equivalents at beginning of period 1,060,000 1,699,000 2,006,000
-------- -------- --------
Cash and cash equivalents at end of period $553,000 1,060,000 1,699,000
======= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-21
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" or "Somerset") is a nondiversified,
unitary savings and loan holding company. Its major asset is a 21.5% ownership
interest in First Indiana Corporation ("First Indiana"), which owns 100% of
First Indiana Bank (the "Bank"). The Company operates One Insurance Agency and
One Investment Corporation, which market insurance and investment products, and
under the name Somerset Wealth Management, provides investment advisory
services, financial counseling, and asset management. As a result of a merger
on January 20, 1998 with Whipple and Company P.C.("Whipple"), the Company will
also provide tax planning and preparation, retirement and estate planning, and
business consulting.
(a) Basis of Financial Statement Presentation: The consolidated financial
statements include the accounts of the Company and its 100% owned
subsidiaries. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing
the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses
for the period. Actual results could differ significantly from those
estimates.
(b) Fees and Commissions: Fees and commissions represent revenue from its
advisory, financial counseling and asset management services and 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 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
nondiversified 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) Construction Contracts: The Company used the percentage-of-completion
method for reporting profits from construction contracts for financial
statement purposes during 1995. The units-of-production method was
utilized in the computation.
(g) 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.
(h) Employee Benefit Plans: The Company maintained a non-contributory,
trusteed, defined benefit Pension Plan and an Employee Savings and
Investment Plan which was qualified for tax deferred employee
contributions under section 401(k) of the Internal Revenue Code. The
Employee Savings and Investment Plan was terminated on June 30, 1995, and
the Pension Plan was terminated on November 30, 1995.
-22-
The Company adopted a Salary Reduction Simplified Employee Pension Plan (SAR-
SEP) in 1996, with the Company matching a portion of the employee's
contribution.
(i) 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.
(j) Earnings Per Share: In February 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 128
"Earnings Per Share". This statement provides computation, presentation,
and disclosure requirements for earnings per share and supersedes
Accounting Principles Board Opinion 15. Basic earnings per share for
1997, 1996, and 1995 were computed by dividing net income by the weighted
average shares of common stock outstanding. Dilution of the per share
calculation relates to stock options. Diluted earnings per share are the
same amounts as primary earnings per share calculated and reported under
superseded APB 15. All share and per share amounts have been adjusted for
five-for-four stock splits that were effective February 26, 1997 and
February 29, 1996.
(k) Treasury Shares: Treasury shares issued are valued at average cost of all
treasury shares at the date of issuance.
Note 2. Business Combinations
Whipple and Company Professional Corporation
On January 20, 1998, Somerset issued 333,339 shares of its common stock for all
the outstanding common stock of Whipple, a provider of financial and accounting
services that includes tax planning and preparation, retirement planning, estate
planning, investment planning, business consulting and accounting services.
This business combination will be accounted for as a pooling-of-interests
combination and, accordingly, Somerset's historical consolidated financial
statements presented in future reports will be restated to include the accounts
and results of Whipple.
The following pro forma data summarizes the combined results of operations of
Somerset and Whipple as if the combination had been consummated on December 31,
1997, and reflects adjustments to conform the accounting methods of Whipple with
those of Somerset.
Year Ended December 31,
1997 1996 1995
Combined revenue and income $11,125,000 $9,534,000 $11,975,000
Combined net income $2,536,000 $2,145,000 $3,355,000
Basic earnings per share $.88 $.75 $1.16
Diluted earnings per share $.86 $.73 $1.15
The 333,339 shares issued by Somerset in the transaction consisted of 293,833
shares held as treasury shares and 39,506 previously unissued shares.
-23-
Under the terms of the merger agreement, compensation following the date of the
combination paid to officers of Whipple who are also shareholders, will be
significantly lower than historical amounts, and make the above combined
historical results of operations unrepresentative of future results. The
following pro forma information reflects the effects for the year ended December
31, 1997, of salary changes that are supported by employment agreements and is
necessary to assess the impact of the business combination. The duties of these
officers will not be reduced, and additional costs are not expected to be
incurred that would offset the cost savings.
(Unaudited)
Year Ended December 31, 1997
Combined revenue and income $11,125,000
Combined net income $2,536,000
Contractual reduction of officers' salaries 519,000
Related income taxes (202,000)
-------
Pro forma net income $2,853,000
=========
Basic earnings per share $.99
Diluted earnings per share $.96
One Investment Corporation
Effective April 30, 1996, the Company acquired all the outstanding common stock
of One Investment Corporation for $1,415,000 in cash from the Company's
affiliate First Indiana Bank. One Investment Corporation and its wholly-owned
subsidiary, One Insurance Agency, Inc., engage in the sale of insurance and non-
FDIC insured investment products.
The acquisition was accounted for by the purchase method and, accordingly, the
results of operations of One Investment Corporation have been included in the
Company's consolidated financial statements from April 30, 1996. The excess of
the purchase price over the fair value of the net identifiable assets acquired
of $1,188,000 was recorded as goodwill and is being amortized on a straight-line
basis over 15 years.
The purchase agreement also provides for additional payments over a three-year
period contingent on future operating income of One Investment Corporation. The
additional payments, if any, will be accounted for as additional goodwill.
During 1997, the Company paid $74,000 as additional purchase price for the 12
month period ended April 30, 1997, increasing the cost to $1,489,000, and the
excess of purchase price over fair value to $1,262,000.
The following unaudited pro forma financial information presents the combined
results of operations of the Company and One Investment Corporation as if the
acquisition had occurred as of the beginning of 1996 and 1995, after giving
effect to certain adjustments, including amortization of goodwill, additional
depreciation expense, and related income tax effects.
The pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and One Investment
Corporation constituted a single entity during such periods.
(Unaudited)
Year Ended December 31,
1996 1995
Revenue and income $4,977,000 $9,400,000
Net income $2,169,000 $3,789,000
Basic earnings per share $.85 $1.48
Diluted earnings per share $.83 $1.45
-24-
In conjunction with the April 30, 1996 purchase of all of the capital stock of
One Investment Corporation for $1,415,000, liabilities were assumed as follows:
Fair value of asset acquired, including goodwill $1,473,000
Cash paid for the capital stock (1,415,000)
---------
Liabilities assumed $ 58,000
========
Note 3. Sale of Assets
The Company sold all assets of its construction products and services operations
during 1995 and ceased doing business in the construction industry. The results
of these operations are included in the consolidated financial statements for
the year ended December 31, 1995. The total sale price of the assets was
$5,522,000. After consideration of expenses relating to the sales, the Company
recorded gains on sale before income taxes of $1,293,000.
Sales, costs of sales, and gross profit from construction products and services
for the year ended December 31, 1995 were as follows:
Sales $11,178,000
Cost of sales 9,529,000
---------
Gross profit $ 1,649,000
=========
Note 4. 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.
The investments at December 31, 1997 and 1996 consisted of the following:
Unrealized Unrealized Market
December 31, 1997 Cost Gains (Losses) Value
Bond Mutual Funds $2,480,000 $5,000 $(41,000) $2,444,000
Government Agency Securities 200,000 --- --- 200,000
Government Agency 922,000 3,000 --- 925,000
Collateralized Mortgage 1,080,000 4,000 --- 1,084,000
Securities
Money Market Funds, 595,000 --- --- 595,000
Pending Investment --------- ------ ------- --------
$5,277,000 $12,000 $(41,000) $5,248,000
========= ====== ======= =========
December 31, 1996
Bond Mutual Funds $4,724,000 $ --- $ --- $4,724,000
========= ====== ===== =========
Note 5. Allowances for Doubtful Accounts
Trade accounts, notes and other receivables, and notes receivable are net of
allowances for doubtful accounts of $108,000 and $100,000 at December 31, 1997
and 1996. Activity concerning the allowances for doubtful accounts for the
three years ended December 31, 1997 was as follows:
-25-
Year Ended December 31,
1997 1996 1995
Balance at beginning of period $100,000 $105,000 $8,000
Additions charged to cost and expense 20,000 --- 105,000
Uncollectible accounts written off,
Net of recoveries (12,000) (5,000) (8,000)
------- ------- -------
Balance at end of period $108,000 $100,000 $105,000
Amount classified as a reduction of trade
accounts, notes, and other receivables $8,000 $100,000 $105,000
Amount classified as a reduction of other
assets, notes receivable $100,000 --- ---
-------- ------ ------
$108,000 $100,000 $105,000
======= ======= =======
Note 6. Investment in First Indiana Corporation
The Company's percentage ownership in First Indiana was as follows:
(Shares adjusted for First Indiana's stock splits.)
First Indiana
Shares Shares Percentage
As of: Owned Outstanding Ownership
December 31, 1997 2,717,967 12,668,191 21.5%
December 31, 1996 2,717,967 12,455,122 21.8%
December 31, 1995 2,717,967 12,408,483 21.9%
The Company's equity in earnings of First Indiana was as follows:
Year Ended December 31,
1997 1996 1995
Equity in earnings of First Indiana based
on percentage of ownership $3,815,000 $2,886,000 $3,624,000
Equity in First Indiana's gain on sale of
subsidiary sold to the Company,
contained in equity in earnings (15,000) (147,000) ---
Purchase price adjustments:
The Company's equity ownership
of First Indiana's net assets exceeds
the actual cost of its shares. Under
the purchase accounting method,
these purchase price adjustments
are being amortized to income using
both the declining balance and straight
line methods and amortization periods
of 3 to 10 years 83,000 263,000 314,000
-------- ------- --------
Total equity in earnings $3,883,000 $3,002,000 $3,938,000
At December 31, 1997, the unamortized balance of the purchase price adjustments
was $436,000.
-26-
The $852,000 FDIC special assessment shown in the consolidated income statement
for the year ended December 31, 1996 represents the Company's equity in the net
earnings effect of the total assessment paid by First Indiana. The one-time
charge was the result of a special assessment by the Federal Deposit Insurance
Corporation imposed on all banks, including First Indiana Bank, whose customers'
deposits are insured by its Savings Association Insurance Fund ("SAIF").
The changes to retained earnings for equity in other capital changes of First
Indiana primarily represents dilution of the Company's percentage share of First
Indiana's net worth that resulted from shares of common stock issued, treasury
shares acquired, and unrealized investment gains and losses of First Indiana.
Equity in undistributed earnings and capital changes of First Indiana of
$19,128,000 and $16,537,000 are included in consolidated retained earnings at
December 31, 1997 and 1996.
First Indiana is not subject to any regulatory restrictions on the payment of
dividends to its stockholders. However, the Office of Thrift Supervision has
promulgated regulations governing dividend payments, stock redemptions, and
other capital distributions, including up streaming of dividends by a savings
institution to a holding company. Under these regulations, the Bank may make
distributions to First Indiana of up to 100 percent of the Bank's net earnings
over the most recent four-quarter period, less distributions made during such
four-quarter period. The Bank is required to give the Office of Thrift
Supervision 30 days advance notice before declaring a dividend.
Note 7. Other Assets
Notes receivable consisted of the following: December 31,
1997 1996
Long-term note receivable in connection with the sale
of discontinued radio broadcasting properties $410,000 $440,000
Long-term note receivable in connection
with the sale of construction assets 270,000 300,000
Less, allowance for doubtful accounts (100,000) ---
-------- -------
$580,000 $740,000
Goodwill is stated net of accumulated amortization. The amounts represent cost
of assets purchased, paid to the Bank, in excess of their market value, and
includes consideration paid for an exclusive operating agreement for marketing
and sales of non FDIC insured insurance and investment products to customers of
the Bank. Amounts paid are being amortized to expense over 15 years and
consisted of the following:
1997 1996
Original amount paid $1,188,000 $1,188,000
Additional purchase price paid under an agreement for
payment if profits exceeded pre-determined amounts
74,000 ---
--------- ----------
1,262,000 1,188,000
Less accumulated amortization (129,000) (46,000)
--------- ---------
$1,133,000 $1,142,000
Other assets consists of an investment in split-dollar life insurance contracts
for a key officer of the Company, secured by cash value and a contractual
guarantee of yield of $460,000 at December 31, 1997 and 1996. At December 31,
1997, other assets also includes $51,000 of organizational costs of the Somerset
Wealth Management division that are being amortized to expense over 5 years.
-27-
Note 8. Financial Instruments
The estimated fair value of the Company's financial instruments at December 31,
1997 and 1996 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 of
$68,515,000 and $48,470,000 at December 31, 1997 and 1996.
Note 9. Business Segments
The components of the Company's business during the three years ended December
31, 1997 consisted of the following:
Year Ended December 31,
1997 1996 1995
Revenue:
Commissions-insurance and
investment products $1,084,000 $1,006,000 $ ---
Fees - financial planning
and asset management 35,000 --- ---
Net sales of construction
products and services --- --- 11,178,000
-------- -------- ----------
Total revenue $1,119,000 $1,006,000 $11,178,000
Operating Profit $78,000 $382,000 $1,019,000
Add (deduct):
Equity in earnings of First Indiana 3,883,000 3,002,000 3,938,000
Investment income 383,000 441,000 554,000
Gain on sale of assets --- --- 1,293,000
Interest expense --- (42,000) (286,000)
Corporate administrative expense (937,000) (857,000) (970,000)
------- ------- -------
Income from operations before income tax 3,407,000 2,926,000 5,548,000
Identifiable assets:
Insurance and investment products $1,345,000 $1,467,000 $ ---
Financial planning & asset management 331,000 --- ---
Investment in First Indiana Corp. 32,406,000 29,746,000 27,549,000
Corporate assets 6,894,000 6,999,000 11,177,000
---------- ---------- ----------
Total assets $40,976,000 $38,212,000 $38,726,000
Depreciation and amortization:
Insurance and investment products $100,000 $54,000 $ ---
Financial planning & asset management 14,000 --- ---
Construction products and services --- --- 237,000
Corporate assets 19,000 13,000 15,000
------- ------ -------
Total depreciation and amortization $133,000 $67,000 $252,000
Capital expenditures:
Insurance and investment products $55,000 $63,000 $ ---
Financial planning and asset management 70,000 --- ---
Construction products and services --- --- 44,000
Corporate assets 8,000 53,000 ---
------- ------- ------
Total capital expenditures $133,000 $116,000 $44,000
-28-
Note 10. Income Taxes
Total income tax expense for the three years ended December 31, 1997 was
allocated as follows: Year Ended December 31,
1997 1996 1995
Income from operations $957,000 $887,000 $2,190,000
Retained earnings for:
Unrealized investment gains(losses) (14,000) (46,000) 46,000
Equity in capital chg of First Indiana (54,000) 25,000 76,000
-------- ------ -------
Total income tax expense $889,000 $866,000 $2,312,000
Income tax expense(benefit) attributable to income from operations consisted of:
Year Ended December 31,
Current: 1997 1996 1995
Federal $(155,000) $(26,000) $637,000
State and local (23,000) (4,000) 149,000
------- ------ -------
(178,000) (30,000) 786,000
Deferred:
Federal 986,000 797,000 1,138,000
State and local 149,000 120,000 266,000
------- ------- --------
1,135,000 917,000 1,404,000
Total:
Federal 831,000 771,000 1,775,000
State and local 126,000 116,000 415,000
------- ------- --------
Total income tax expense on income
from operations $957,000 $887,000 $2,190,000
======= ======== =========
Income tax expense attributable to income from operations differed from the
amounts computed by applying the federal income tax rate of 34% to pretax income
from operations as a result of the following:
Year Ended December 31,
1997 1996 1995
Federal income tax at statutory
rate of 34% $1,158,000 $995,000 $1,886,000
Add (deduct) tax effect of:
State and local income taxes,
net of federal income tax benefit 112,000 168,000 304,000
Dividends received deduction (296,000) (276,000) ---
Other (17,000) --- ---
------- ------- --------
$957,000 $887,000 $2,190,000
The Company received income tax refunds of $125,000 during year ended December
31, 1997, and made income tax payments of $235,000 and $1,168,000 during the
years ended December 31, 1996 and 1995.
-29-
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability at December 31, 1997 and 1996 consist of:
December 31,
Deferred tax assets: 1997 1996
Provision for doubtful accounts $42,000 $39,000
Unrealized investment losses 14,000 ---
Accrued liabilities 28,000 4,000
------ ------
Total deferred tax assets $84,000 $43,000
Deferred tax liabilities:
Investment in First Indiana $7,895,000 $6,858,000
Plant and equipment 15,000 12,000
Organization expense 19,000 ---
--------- --------
Total net deferred tax liabilities $7,929,000 $6,870,000
-------- -------
Net deferred tax liability $7,845,000 $6,827,000
========= =========
Note 11. Interim Quarterly Results (Unaudited)
(Dollars in thousands except per share data)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter Annual
Equity in earnings of
First Indiana $871 $846 $998 $1,168 $3,883
Commissions, fees and
investment income 436 408 394 264 1,502
Operating expenses (415) (789) (414) (360) (1,978)
Income before income taxes 892 465 978 1,072 3,407
Net income $635 $372 $679 $764 $2,450
Income per share - basic $ .25 $ .14 $ .25 $ .31 $ .95
Income per share - diluted $ .24 $ .14 $ .25 $ .30 $ .93
1996
Equity in earnings of
First Indiana $1,012 $930 $70 $990 $3,002
Commissions, fees and
investment income 163 313 461 510 1,447
Operating expenses (255) (192) (457) (619) (1,523)
- --- ----- ---- --- -----
Income before income taxes 920 1,051 74 881 2,926
---- ----- ---- ---- -----
Net income $638 $715 $ 51 $635 $2,039
Income per share - basic $ .25 $ .27 $.03 $ .25 $ .80
Income per share - diluted $ .24 $ .27 $.03 $ .24 $ .78
Note 12. Stock-Based Compensation
The Company has two types of stock-based compensation plans: stock options and
stock grants, as described below. The Company has applied APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock options. Accordingly, no compensation cost has been
recognized for such stock options. Compensation cost for stock grants issued
has been charged against income and includes reimbursement to the grantee of
personal income taxes incurred. The amounts charged for the stock grants and
taxes were $395,000, $270,000, and $82,000 in 1997, 1996, and 1995.
-30-
Had compensation cost for the incentive stock options been determined based on
the fair value at the grant date consistent with the methods of FASB Statement
No. 123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced as shown in the pro forma amounts as
follows:
Year Ended December 31,
1997 1996 1995
Net Income:
As reported $2,450,000 $2,039,000 3,358,000
Pro forma $2,306,000 $1,972,000 $3,321,000
Basic earnings per share:
As reported $.95 $.80 $1.31
Pro forma $.90 $.77 $1.30
Diluted earnings per share:
As reported $.93 $.78 $1.29
Pro forma $.88 $.75 $1.27
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with weighted-average assumptions as
follows:
Year grants issued 1997 1996 1995
Dividend yield 1.15% 1.5% 1.5%
Expected volatility 47% 24% 24%
Risk-free interest rate 6.11% 5.55% 7.05%
Expected option life 5 yrs. 7 yrs. 7 yrs.
The effects of applying FASB Statement No. 123 in the above pro forma are not
indicative of future amounts. The Company expects that grants will be made in
the future.
Stock Options
The Company's 1991 Stock Incentive Plan provides for granting of qualified and
non-qualified stock options to officers and other key employees at the quoted
market value of the Company's common stock on the date of the grant. Qualified
options are exercisable during a period of two to five years after the date of
grant, and expire five years from the date of the grant. Non-qualified options
are exercisable during a period of six months to ten years after the date of the
grant and expire ten years from the date of the grant. The 1991 Plan authorized
156,250 shares for granting options, with or without stock appreciation rights.
The Company also maintains a 1991 Director Stock Option Plan, which authorized
78,125 shares. The plan provides for the granting of stock options to non-
employee directors of the Company. Grants issued are non-qualified stock
options, which do not afford favorable tax treatment to recipients and which
normally result in tax deductions to the Company. Options are granted annually
at the time of the annual meeting of the shareholders, at the quoted market
price on that date. The plan allows no more than the grant of 15,625 shares
annually. Director options have a term of five years and are exercisable during
the second through fifth years.
-31-
The following summary reflects changes in the options outstanding during the
three years ended December
31, 1997.
Weighted
fficers' and Key Average
Employees' Directors' Price Per
Plan Plan Share
Balance at January 1, 1995 148,048 25,000 $5.85
Options granted 17,187 6,250 8.48
Options expired (24,375) --- 6.24
Options exercised (37,266) --- 4.84
Balance at December 31, 1995 103,594 31,250 6.26
Options granted 28,125 7,812 8.92
Options exercised (10,000) (12,500) 4.86
Balance at December 31, 1996 121,719 26,562 7.82
Options granted 23,879 9,387 16.30
Options expired --- (1,563) (12.80)
Options exercised (35,468) (4,689) (6.33)
Balance at December 31, 1997 110,130 29,697 $10.21
Outstanding option shares at December 31, 1997, by exercise price per share,
were as follows:
Officers' and Key
Price Per Employees' Directors'
Share Plans Plan
$4.00 4,687 ---
4.16 11,563 ---
5.84 12,501 ---
5.92 --- 4,689
6.00 4,375 ---
7.60 --- 4,689
8.32 12,501 ---
8.48 12,501 4,689
11.20 *18,752 ---
12.32 9,375 ---
12.80 --- 6.252
15.50 --- *9,378
15.80 *11,375 ---
$17.38 *12,500 ---
------ ------
110,130 29,697
*Options not exercisable at December 31, 1997, all other options were
exercisable.
Stock Grants
The Company's 1991 Stock Incentive Plan also provides for the issuance of stock
grants to key individuals for achievement of specific results over a three-year
period. On April 1, 1994, the Company awarded 15,625 shares of stock to each of
two executive officers. These shares were subject to recall by the Company in
the event that certain specific employment and performance objectives were not
met by March 31, 1997. Such objectives were met and the shares were vested with
the two executive officers. The Company does not have any stock grants
outstanding at December 31, 1997.
- -32-
Reserved for future stock options and stock grants at December 31, 1997, were
44,873 shares under the Officers and Key Employees' Plan and 29,685 shares under
the Directors' Stock Option Plan.
Note 13. Retirement Plans
The Company sponsored an Employee Savings and Investment Plan that was qualified
for tax-deferred employee contributions under Internal Revenue Code Section
401(k). The trusteed plan was terminated on June 30, 1995. The Company also
maintained a non-contributory, trusteed, defined-benefit pension plan covering
non-bargaining unit employees. The defined-benefit pension plan was terminated
on November 30, 1995. Both plan terminations occurred as a result of the sale
of the assets of the construction products and services divisions and the
related termination of employment of the divisions' employees. These employees
constituted the major portion of all participants of the plans.
Benefits of the Pension Plan were based on years of service and the employee's
compensation. The Company had provided for contributions to the plan equal to
the estimated value of all participants' benefits. The Employee Savings and
Investment Plan was a trusteed, defined-contribution plan with the Company
matching a portion of the employee's contribution in the form of shares of the
Company's common stock.
Both plans were fully liquidated during 1996, and all participant obligations
were satisfied. Plan assets in excess of benefit obligations were distributed
to plan participants and to pay expenses of the plan termination and
liquidation. No plan assets were returned to the Company and no gain or loss
was recognized. Net periodic pension expense of the defined-benefit pension
plan for the year ended December 31, 1995 consisted of the following:
1995
Service cost benefits earned during the year $150,000
Interest cost on projected benefit obligation 321,000
Return on plan assets (298,000)
Net amortization and deferral (22,000)
Gain on termination of plan (344,000)
-------
Net pension expense (benefit) $(193,000)
Plan assets consisted primarily of U.S. Government Agency obligations. On the
date of plan termination, the plan assets exceeded the actuarial estimated value
of benefit obligations by $67,000. The plan termination was approved by the
Pension Benefit Guarantee Corporation and the Internal Revenue Service.
During the year ended December 31, 1995, the Company made contributions to
multi-employer pension plans under contracts with various construction trade
unions. Amounts contributed for the year ended December 31, 1995 for operations
to the dates of sale of the construction operations was $136,000. All contracts
with unionized employees were assumed by the purchasers of the construction
assets.
The Company adopted a new retirement plan for all employees during 1996 as a
replacement for the plans terminated. The plan is a Salary Reduction Simplified
Employee Pension Plan (SAR-SEP), and is qualified for income tax deferral under
Internal Revenue Service Code Section 408(k). Under the plan, employee
contributions and employer matching contributions are deferred for income tax
purposes. All amounts are contributed to trusteed Individual Retirement
Accounts established by the participant.
The Company makes matching contributions for participants of 100% of each
employee's contributions, to a maximum of 6% of salary. The cost of such
matching contributions was $34,000 since inception of the plan on June 1, 1996
to December 31, 1996, and was $53,000 during the year ended December 31, 1997.
-33-
Note 14. Commitments and Contingencies
The Company, in the normal course of business, is involved in various claims and
contingencies. After taking into consideration legal counsel's evaluation and
the extent of insurance coverage, management is of the opinion that the outcome
of claims and contingencies will not result in any ultimate liability material
to the consolidated financial statements.
-34-
FIRST INDIANA CORPORATION
SUMMARIZED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<S> <C> <C>
1997 1996
Assets
Cash and cash equivalents $50,231 $73,618
Investments 111,400 106,895
Mortgage-backed securities - net 38,279 36,412
Loans receivable - net 1,348,529 1,215,550
Premises and equipment 13,947 13,705
Accrued interest receivable 11,322 10,696
Real estate owned 3,907 4,285
Prepaid expenses and other assets 35,790 35,260
-------- --------
Total Assets $1,613,405 $1,496,421
======== ========
Liabilities and Shareholders' Equity
Liabilities
Deposits $1,107,555 $1,095,486
Federal Home Loan Bank Advances 257,458 215,466
Short-term borrowings 75,751 30,055
Accrued interest payable 2,715 2,018
Advances by borrowers for taxes and insurance 1,419 1,120
Other liabilities 10,733 7,933
-------- --------
Total Liabilities 1,455,631 1,352,078
Negative Goodwill 4,738 5,685
Shareholders' Equity 153,036 138,658
Total Liabilities and Shareholders' Equity $1,613,405 $1,496,421
========= ========
</TABLE>
Summarized financial information is presented above and on the following two
pages for First Indiana Corporation. This 21.5 percent-owned subsidiary
represents a significant part of The Somerset Group, Inc.'s income and financial
strength. Summary discussions of the operating and financial results for First
Indiana Corporation appear in the Management's Discussion and Analysis section
of the report. A complete 1997 annual report for First Indiana Corporation is
available upon request.
-35-
FIRST INDIANA CORPORATION
SUMMARIZED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<S> <C> <C> <C>
(Dollars in Thousands)
1997 1996 1995
Interest Income $127,330 $125,468 $124,061
Interest Expense
Deposits 49,936 52,077 50,533
Federal Home Loan Bank Advances 12,288 10,706 12,891
Short-term borrowings 2,127 1,002 2,593
------ ------ ------
Total Interest Expense 64,351 63,785 66,017
Net Interest Income 62,979 61,683 58,044
Provision for Loan Losses 10,700 10,794 7,900
------ ------- ------
Net Interest Income After
Provision for Loan Losses 52,279 50,889 50,144
Non-Interest Income
Sale of loans 4,932 3,075 2,749
Loan servicing income 2,767 2,908 2,645
Loan fees 2,358 2,302 2,206
Dividends on FHLB Stock 1,055 1,033 996
Other 6,893 8,530 7,655
------ ------ ------
Total Non-Interest Income 18,005 17,848 16,251
Non-Interest Expense
Salary and benefits 19,916 18,094 20,890
Net occupancy 2,852 3,087 3,069
Deposit insurance 693 9,186 2,298
Real estate owned operations - net 652 598 (3,060)
Other 16,991 16,288 15,450
------ ------ ------
Total Non-Interest Expense 41,104 47,253 38,647
Earnings Before Income Taxes 29,180 21,484 27,748
Income Taxes 11,436 7,780 10,481
------ ------ ------
Net Earnings $17,744 $13,704 $17,267
</TABLE>
-36-
FIRST INDIANA CORPORATION
SUMMARIZED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Cash Flows from Operating Activities
Net Earnings $17,744 $13,704 $17,267
Adjustments to Reconcile Net Earnings to Net
Cash Provided (Used) by Operating Activities
(Gain) Loss on sales
of assets and deposits (5,148) (4,524) (4,307)
Amortization 864 1,325 2,197
Depreciation 2,022 1,958 1,909
Provision for loan losses 10,700 10,794 7,900
Net sale of loans held for resale (28,700) 32,585 (41,116)
Net change in all other
assets and liabilities (6,197) (3,265) (4,742)
------ ------ -------
Net Cash (Used) Provided by
Operating Activities (8,715) 52,577 (20,892)
Cash Flows from Investing Activities
Proceeds - sales of investments
available for sale 14,991 35,703 72,857
Proceeds - sales of
investment securities --- --- 2,993
Proceeds - maturities of
investment securities 20,932 27,611 6,018
Purchase of investment securities (39,912) (68,225) (35,388)
Origination of loans and
mortgage-backed securities - net
of collections (117,069) (27,964) (240,820)
Proceeds - sale of indirect
installment portfolio --- 32,756 ---
Proceeds from sale of loans 5,274 3,501 125,313
Purchase of premises and equipment (2,291) (2,653) (1,750)
Other - net 7,555 150 32
----- ----- ------
Net Cash (Used) Provided by
Investing Activities (110,520) 879 (70,745)
Cash Flows from Financing Activities
Proceeds from sale of deposits --- --- (25,462)
Net change in deposits 12,069 (41,494) 132,028
Net change in short-term borrowings 45,698 (8,587) 2,720
Net change in FHLB Advances 41,992 685 13,626
Purchase of treasury stock (132) --- (6,203)
Dividends paid (5,065) (4,644) (3,877)
Other - net 1,286 (692) 267
------ ------ ------
Net Cash Provided (Used) by
Financing Activities 95,848 (54,732) 113,099
(Decrease) Increase in Cash and
Cash Equivalents $(23,387) $(1,276) $21,462
</TABLE>
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1997
Part IV - Item 14(b) - Reports on Form 8-K
The Registrant filed one Form 8-K during 1997. The report was filed during the
fourth quarter, on December 23, 1997, pursuant to Section 13 or 15(d) of the
Securities Act of 1934, Item 5 - Other Events. The Form 8-K reported the
signing of a letter of intent for Whipple & Company, P.C. to be merged with the
Registrant. On January 26, 1998, an 8-K was filed under Item 2 of the
regulations - Acquisition or Disposition of Assets, reporting the execution of
the final merger agreement and the merger of Whipple & Company, P. C.
The 1997 Form 8-K and the 1998 Form 8-K are incorporated into this Form 10-K by
reference to file number 0-14227 for such Form 8-K filings with the Commission.
-38-
Exhibit 3
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1997
Amended Articles of Incorporation and Amended and Restated Bylaws Thereto
The amended and restated Bylaws are attached as the remainder of this Exhibit 3.
(Pages 40 - 52)
-39-
Exhibit 22
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1997
Subsidiaries of the Registrant
The following corporations are subsidiaries of the Registrant:
Percent
Ownership Name
100% Concrete Carriers, Inc.
135 N. Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
100% Precast Concrete Systems, Inc.
135 N. Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
21.5% First Indiana Corporation
135 N. Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
-53-
Exhibit 23
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended 31, 1997
Definitive Proxy Statement for Annual Meeting of Shareholders - April 22, 1998
The Registrant's Notice of Annual Meeting, Proxy Statement and Form of Proxy ate
incorporated into this Form 10-K by reference to file number 0-14227 for such
information previously filed with the Commission.
-54-
Exhibit 24
The Board of Directors and Shareholders
The Somerset Group, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-8 of The Somerset Group, Inc. of our report dated February 6, 1998, relating
to the consolidated balance sheets of The Somerset Group, Inc. and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1997, which report appears in the December 31,
1997 annual report on Form 10-K of The Somerset Group, Inc.
s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Indianapolis, Indiana
March 19, 1998
-55-
Exhibit 99
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1997
First Indiana Corporation Form 10-K Annual Report - Year Ended December 31,
1997
First Indiana Corporation's Form 10-K annual report for the year ended December
31, 1997 is incorporated herein by reference to the First Indiana Corporation's
Form 10-K annual report filed separately with the Commission under file number
0-14354.
-56-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 553,000
<SECURITIES> 5,248,000
<RECEIVABLES> 84,800
<ALLOWANCES> 7,800
<INVENTORY> 0
<CURRENT-ASSETS> 6,115,000
<PP&E> 359,000
<DEPRECIATION> 128,000
<TOTAL-ASSETS> 40,976,000
<CURRENT-LIABILITIES> 145,000
<BONDS> 0
0
0
<COMMON> 1,829,000
<OTHER-SE> 31,134,000
<TOTAL-LIABILITY-AND-EQUITY> 40,976,000
<SALES> 1,502,000
<TOTAL-REVENUES> 5,385,000
<CGS> 0
<TOTAL-COSTS> 1,978,000
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<INCOME-CONTINUING> 2,450,000
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</TABLE>
AMENDED AND RESTATED
BYLAWS OF THE SOMERSET GROUP, INC.
ARTICLE I
OFFICES
Section 1. Principal Office. The Somerset Group, Inc. (hereinafter
referred to as the "Corporation") shall at all times maintain a principal office
in the State of Indiana, which, except as otherwise determined by the Board of
Directors of the Corporation (hereinafter referred to as the "Board"), shall be
in the city of Indianapolis, County of Marion.
Section 2. Other Offices. The Corporation may also have offices at such
other places within or without the State of Indiana as the Board shall from time
to time designate or the business of the Corporation shall require.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. All annual and special meetings of
stockholders shall be held at such places within or without the State of Indiana
as may from time to time be designated by the Board and specified in the notice
of meeting.
Section 2. Annual Meeting. A meeting of the stockholders of the
corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held for calendar year 1987 at 10:00 a.m.
on April 23, 1987, and such meeting shall be held each year thereafter at 10:00
a.m. on the first Thursday of May, if not a legal holiday, and if a legal
holiday, then on the next day following such day which is not a legal holiday,
or at such other date and time as the Board may determine and specify in the
notice of the meeting. Failure to hold the annual meeting at the designated
time shall not work any forfeiture or dissolution of the Corporation.
Section 3. Special Meetings. A special meeting of the stockholders may
only be called (1) by the Chairman, (2) by the President, (3) by a majority of
the entire Board, or (4) by the stockholders holding not less than twenty-five
percent (25%) of all shares outstanding and entitled by the Articles of
Incorporation of the Corporation to vote on the business proposed to be
transacted thereat, upon delivery to the Corporation's Secretary of one (1) or
more signed and dated written demands for the meeting describing the purpose or
purposes for which it is to be held. Business transacted at any special meeting
of the stockholders shall be confined to the purpose of purposes
stated in the notice of such meeting.
-40-
Section 4. Conduct of Meetings. Annual and special meetings of the
stockholders shall be conducted in accordance with Indiana law unless otherwise
prescribed by these ByLaws. The Chairman, or in the absence of the Chairman,
the highest ranking officer of the Corporation who is present, or such other
person as the Board shall have designated, shall call to order any meeting of
the stockholders and act as chairman of the meeting. The Secretary of the
Corporation, if present at the meeting, shall be the secretary of the meeting.
In the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman of the meeting shall appoint. The chairman
of any meeting of the stockholders, unless otherwise prescribed by law or
regulation or unless the Chairman has otherwise determined, shall determine the
order of business and the procedure at the meeting.
Section 5. Notice of Meetings. Written notice stating the place, day and
hour of the meeting and the purpose or purposes for which the meeting of the
stockholders is called shall be delivered not less than ten (10) or more than
sixty (60) days before the date of the meeting, either personally or by mail, by
or at the direction of the Chairman, the Secretary or the directors requesting
the meeting, to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed given when deposited in the United States
mail, postage prepaid, addressed to the stockholder at his address as it appears
on the stock transfer hooks or records of the Corporation as of the record date
prescribed in Section 6 of this Article II. When any meeting of the
stockholders, either annual or special, is adjourned for more than thirty (30)
days or if, after adjournment, a new record date as fixed for the adjourned
meeting, notice of the adjourned meeting shall be given as in the case of an
original meeting. It shall not be necessary to give any notice of the time and
place of any other adjourned meeting of the stockholders, other than an
announcement at the meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining
stockholders entitled to notice of or to vote at any meeting of the stockholders
or any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose under Indiana law, the Board may fix, in advance, a date as the
record
date for any such determination of stockholders. Such date shall not be less
than ten (10) days and not more than the maximum number of days before the date
of such meeting allowed by law, nor more than the maximum number of days prior
to any other action allowed by law.
-41-
Section 7. Voting Lists. The Secretary of the Corporation, or other
officer or agent of the Corporation having charge of the stock transfer books
for shares of the capital stock of the Corporation, shall prepare and make, at
least five (5) days before each meeting of the stockholders, a complete list of
the stockholders entitled to vote at such meeting, or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by mach stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least five (5) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or at the Corporation's principal
office. Such list shall also be produced and kept open at the time and place of
the meeting during the whole time thereof and shall be subject to the inspection
of any stockholder present at the meeting. The stock transfer books shall not
be the only evidence as to who are the stockholders entitled to examine the
stock transfer books, or to vote in person or by proxy at any meeting of
stockholders.
Section 8. Quorum. A majority of the outstanding shares of the
Corporation entitled to vote at a meeting of the stockholders, represented in
person or by proxy, shall constitute a quorum at a meeting. If less than a
majority of the outstanding shares are represented at a meeting, a majority of
the shares so represented may adjourn the meeting from time to time without
further notice except as otherwise provided in Section 5 of this Article II. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally called. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
Section 9. Proxies. At any meeting of the stockholders, every stockholder
having the right to vote shall be entitled to vote in person, or by proxy
appointed by an instrument in writing and complying with the requirements of
Indiana law.
Section 10. Voting by the Corporation. Neither treasury shares of its own
capital stock held by the Corporation, nor shares of its own capital stock held
by the Corporation, nor shares held by another corporation, a majority of the
shares of which entitled to vote for the election of directors are held by the
Corporation, shall be entitled to vote or be counted for quorum purposes at any
meeting of the stockholders; provided, however, that the Corporation may vote
shares of its capital stock held by it, or by any such other corporation, if
such shares of capital stock are held by the Corporation or such other
corporation in a fiduciary capacity.
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Section 11. Nominating Committee. The Board shall act as a nominating
committee for selecting the management nominees for election as directors. In
accordance with the Articles of Incorporation, no nominations for directors
except those made by the nominating committee shall be voted upon at the annual
meeting unless other nominations by stockholders are made in writing and
delivered to the Secretary of the Corporation at least sixty (60) days prior to
the date of the annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than thirty (30) days from that
of the prior year's annual meeting, such stockholder nominations must be so
delivered no later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed. Such stockholder
nominations shall set forth (a) as to each person whom the stockholder proposes
to nominate or election or re-election as a director, (i) the name, age,
business address and residence address for such person, (ii) the principal
occupation or employment of such person, and (iii) such person's written consent
to serve as a director, if elected; and (h) as to the stockholder giving the
notice (i) the name and address of such stockholder and (ii) the class and
number of shares of the Corporation which are owned of record by such
stockholder. At the request of the Board, any person nominated by the Board for
election as a director shall furnish to the Secretary of the Corporation, that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee together with the required written consent.
Ballots bearing the names of all the persons duly nominated by the nominating
committee and by stockholders shall be provided for use at the annual meeting.
Section 12. New Business. Any new business to be taken up at the annual
meeting of the stockholders shall be stated in writing and filed with the
Secretary of the Corporation at least sixty (60) days before the date of the
annual meeting; provided, however, that in the event that the date of the annual
meeting is advanced more than thirty (30) days from that of the prior year's
annual meeting such stockholder proposals must be so stated and filed not later
than the close of business on the tenth day following the day on which such
notice of the date of the meeting was mailed. All business so stated, proposed
and filed shall be considered at the annual meeting, but no other proposal shall
be considered at the annual meeting. This provision shall not prevent the
consideration and approval or disapproval at the annual meeting of the
stockholders of reports of officers, directors, and committees, but, in
connection with such reports, no new business shall be acted upon at such annual
meeting unless stated and filed as herein provided.
-43- ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Board except as may be otherwise provided by
law or the Articles of Incorporation. The Board shall annually elect from among
its members a Chairman, a President and may elect one (1) or more Vice Chairmen
of the Board. The Chairman shall preside at all meeting of the Board.
Section 2. Number. The Board shall consist of eight (10) members.
(12/30/97)
Section 3. Election of Directors. Directors of the Corporation elected
at the annual meeting of the stockholders of the Corporation shall hold office
until the next annual meeting of the stockholders of the Corporation and until
their successors are duly elected and qualified, except as otherwise provided
below in this Section 3.
Commencing at the annual meeting of the stockholders of the Corporation
held during calendar year 1987, and thereafter, when the Board of Directors
shall consist of nine (9) or more members, there shall be three (3) classes of
directors, each class to be as nearly equal in number as possible. The
directors of the first class shall hold office for a term expiring at the annual
meeting in 1988; directors of the second class shall hold office for a term
expiring at the annual meeting in 1989; and directors of the third class shall
hold office for a term expiring at the annual meeting in 1990.
At each annual election beginning at the annual meeting of stockholders in
1988, the successors to the class of directors whose term then expires shall be
elected to hold office for a term of three (3) years, to succeed those directors
whose term expires, so that the term of one class of directors shall expire each
year, unless, by reason of any intervening changes in the authorized number of
directors, the board shall have designated one (1) or more directorships whose
term then expires as directorships of another class in order more nearly to
achieve equality of number of directors among the classes.
Notwithstanding the requirement that the three (3) classes shall be as
nearly equal in number of directors as possible, in the event of any change in
the authorized number of directors, each director then continuing to serve as
such shall nevertheless continue as a director of the class of which he is a
member until the expiration of his current term, or his prior resignation,
disqualification, disability or removal. There shall be no cumulative voting in
the election of directors.
-44-
Section 4. Regular Meetings. A regular meeting of the Board shall be held
without other notice than this Bylaw immediately after, and at the same place
as, the annual meeting of the stockholders or at such other time and place as
may be designated by the Board or the Chairman. Additional meetings shall be
held at such time as the Board shall fix at such places within or without the
State of Indiana as shall be fixed by the Board. No call shall be required for
regular meetings for which the time and place has been fixed.
Section 5. Special Meetings. Special meetings of the Board may be called
by or at the request of the Chairman, or in his absence or disability, the
President, or in the absence of disability of both of them, a majority of the
remaining directors. The persons authorized to call special meetings of the
Board may fix any place as the place for holding any special meeting of the
Board called by such persons.
Section 6. Participation in Meetings. Members of the Board may
participate in regular or special meetings by means of conference telephone or
similar communications equipment by which all persons participating in the
meeting can communicate with each other.
Section 7. Notice. The persons authorized to call special meetings of
the Board shall cause the Secretary of the Corporation to give written or oral
notice of the meeting, specifying the time and place of the meeting, to each
director, either personally, by mailing, or by telegram, at least twenty-four
(24) hours in advance of the meeting. Any director may waive notice of any
meeting by a writing filed with the Secretary. The attendance of a director at
a meeting shall constitute a waiver of notice of such meeting, except in the
event a director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of the Board need be specified in the notice or waiver of notice of such
meeting.
Section 8. Quorum. A majority of the number of directors fixed pursuant
to Section 2 of this Article III shall constitute a quorum for the transaction
of business at any meeting of the Board, but if less than such majority is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time. Notice of any adjourned meeting shall be given in
the same manner as prescribed by Section 7 of this Article III.
Section 9. Manner of Acting. Unless otherwise prescribed in the Articles
of Incorporation or these Bylaws, the act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board.
-45-
Section 10. Action Without a Meeting. Any action required or permitted
to be taken by the Board at a meeting may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
the directors.
Section 11. Resignation. Any director may resign at any time by sending
a written notice of such resignation to the Corporation addressed to the
Chairman or the President. Unless otherwise specified therein, such resignation
shall take effect upon receipt thereof. More than three (3) consecutive
absences from regular meetings of the Board, unless excused by resolution of the
Board, shall automatically constitute a designation, effective when such
resignation is accepted by the Board.
Section 12. Vacancies. Any vacancy occurring in the Board may be filled
in accordance with the Articles of Incorporation.
Section 13. Compensation. By resolution of the Board, a reasonable fixed
sum, and reasonable expenses of attendance, if any, for actual attendance at
each regular or special meeting of the Board may be paid to directors. Members
of either standing or special committees may be allowed such compensation for
actual attendance at committee meetings as the Board may determine.
Section 14. Presumption of Accept. A director of the Corporation who is
present at a meeting of the Board at which action is taken shall be presumed to
have assented to the action taken unless his dissent or absentation shall be
entered in the minutes of the meeting or unless he shall file a written dissent
to such action with the person acting as the Secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
Secretary of the Corporation within five (5) days after the date a copy of the
minutes of the meeting is received. Such right to dissent shall not apply to a
director who voted in favor of such action.
Section 15. Removal. A director may be removed only for cause as
determined by the affirmative vote of the holders of at least a two-thirds (2/3)
majority of the shares then entitled to vote in an election of directors, which
vote may only be taken at a meeting of stockholders called expressly for that
purpose, or by a two-thirds (2/3) majority vote of the entire Board. Cause for
removal of a director shall be deemed to exist only if the director whose
removal is proposed has been convicted of a felony by a court of competent
jurisdiction to be liable for gross negligence or misconduct in the performance
of such director's duly to the Corporation and such conviction or adjudication
is no longer subject to direct appeal.
-46-
Section 16. Retirement. The normal age of retirement for a director shall
be the last regular meeting of the Board prior to attainment of age seventy
(70); however, such retirement may be waived and an alternative date established
upon recommendation of the Chairman and approval of the Board; (11/9/88)
provided further, however, that this provision shall not apply to those persons
who were members of the Board of Directors on November 9, 1988. (2/17/93)
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
Section 1. Appointment. The Board, by resolution adopted by a majority
of the Board, may designate the Chairman, the President and one (1) or more of
the other directors to constitute an Executive Committee. The designation of
any committee pursuant to this Article IV and the delegation of authority
thereto shall not operate to relieve the Board, or any director, of any
responsibility imposed by Law or regulation.
Section 2. Authority. The Executive Committee, when the Board is not in
session, shall have and may exercise all of the authority of the Board except to
the extent, if any, that such authority shall be limited by the resolution
appointing the Executive Committee, or as otherwise expressly provided by law,
the Articles of Incorporation or these Bylaws.
Section 3. Tenure. Subject to the provisions of Section 8 of this Article
IV, each member of the Executive Committee shall hold office until the next
regular annual meeting of the Board following his designation and until a
successor is designated as a member of the Executive Committee.
Section 4. Meetings. Regular meetings of the Executive Committee may be
held without notice at such times and places as the Executive Committee may fix
from time to time. Special meetings of the Executive Committee may be called by
the Chairman, or in his absence or disability, by the President, or in the
absence or disability of both of them, by a majority of the remaining members of
the Executive Committee upon not less than one (1) day's notice stating the
place, date and hour of the meeting, which notice may be written or oral. Any
member of the Executive Committee may waive notice of any meeting and no notice
of any meeting need be given to any member thereof who attends in person. The
notice of a meeting of the Executive Committee need not state the business
proposed to be transacted at the meeting.
-47-
Regular or special meetings may be held by means of conference telephone
or similar communications equipment by which all persons participating in the
meeting can communicate with each other.
Section 5. Quorum. A majority of the members of the Executive Committee
shall constitute a quorum for the transaction of business at any meeting
thereof, and motion of the Executive Committee must be authorized by the
affirmative vote of a majority of the members present at a meeting at which a
quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to
be taken by the Executive Committee at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the members of the Executive Committee.
Section 7. Vacancies. Any vacancy in the Executive Committee may be
filled by a resolution adopted by a majority of the Board.
Section 8. Resignations and Removal. Any member of the Executive
Committee may be removed at any time with or without cause by resolution adopted
by a majority of the Board. Any member of the Executive Committee may resign
from the Executive Committee at any time by giving written notice to the
Chairman or the President. Unless otherwise specified thereon, such resignation
shall take effect upon receipt. The acceptance of such resignation shall not be
necessary to make it effective.
Section 9. Procedure. The Chairman shall be presiding officer of the
executive Committee, or, in his absence or disability, the President, or in the
absence or disability of both of them, such other person as may be elected by a
majority of the members present. The executive Committee may fix its own rules
of procedure which shall not be inconsistent with these Bylaws. It shall keep
regular minutes of its proceedings and report the same to the Board for its
information at the meeting thereof held next after the proceedings shall have
been taken.
Section 10. Other Committees. The Board may by resolution establish an
audit committee or other committees composed of directors as they may determine
to be necessary or appropriate for the conduct of the business of the
Corporation and may prescribe the duties, constitution and procedures thereof.
-48-<PAGE>
ARTICLE V
OFFICERS
Section 1. Positions. The officers of the Corporation shall be a
Chairman, a President, one (1) or more Vice Presidents, a Secretary and a
Treasurer, each of whom shall be elected by the Board. The Board shall
designate the Chief Executive Officer of the Corporation. (11/16/90 - 12/13/95)
The offices of the Secretary and Treasurer may be held by the same person and a
Vice President may also be either the Secretary or the Treasurer. The Board may
designate one or more Vice Presidents as Executive Vice President or Senior Vice
President. The Board may also elect or authorize the appointment of such other
officers as the business of the Corporation may require. The officers shall
have such authority and perform such duties as the Board may from time to time
authorize or determine. In the absence of action by the Board, the officers
shall have such powers and duties as generally pertain to their respective
offices.
Section 2. Election and Term of Office. The officers of the Corporation
shall be elected annually at the first meeting of the Board held after each
annual meeting of the stockholders, or at such other meeting of the Board as the
Chairman shall determine. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death, resignation, or
removal in the manner hereinafter provided. Election or appointment of an
officer, employee, or agent shall not by itself create any contractual rights.
The Board may authorize the Corporation to enter into an employment contract
with any officer, but no contract shall impair the right of the Board to remove
any officer at any time in accordance with Section 3 of this Article V.
Section 3. Removal. Any officer may be removed by the Board whenever in
its judgment the best interest of the Corporation will be served thereby.
Section 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by a majority
vote of the Board for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed
from time to time by Board.
-49-
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. To the extend permitted by applicable law, the
Articles of Incorporation or these Bylaws, the Board may authorize any officer,
employee or agent of the Corporation to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation. Such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board. Such authority may be general or confined to specific
instances.
Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one (1) or more officers, employees
or agents of the Corporation in such manner as shall from time to time be
determined by the Board.
Section 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in any
duly authorized depositories as the Board may select.
ARTICLE VII
INDEMNIFICATION
Each person now or in the future a director, officer, agent or employee of
the Corporation ( and such person's heirs, executors and administrators) shall
be indemnified by the Corporation against expenses (including, but not limited
to, attorneys' fees and related disbursements), judgments, fines, and amounts
paid in settlement, actually and reasonably incurred by such person in
connection with any action, suit or proceeding to which such person may be made
a party by reason of being, or having been, a director, officer, agent or
employee of the Corporation (whether or not continuing to be much at the time of
incurring such expense) if such person acted in good faith and in a manner
reasonably delivered to be in and not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe this conduct was unlawful. This provision is
intended to provide for directors, officers, agents and employees of the
Corporation such indemnification as is permitted under the Indiana General
Corporation Act; it shall not operate to indemnify any director, officer, agent
or employee in any case in which such indemnification is for any reason contrary
to law.
-50-<PAGE>
ARTICLE VIII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates representing shares of
capital stock of the corporation shall be in such form as shall be determined by
the Board. Such certificates shall be signed by the Chairman or any other
officer of the Corporation authorized by the Board, attested by the Secretary or
an Assistant Secretary, and sealed with the corporate seal or a facsimile
thereof. The signatures of such officers upon a certificate may be facsimiles
if the certificate is manually signed on behalf of a transfer agent or a
registrar other than the Corporation itself or one of its employees. Each
certificate for shares of capital stock shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the share are
issued, with the number of shares issued and date of issue, shall be entered on
the stock transfer books of the Corporation. All certificates surrendered to
the Corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and cancelled, except that in the case of a lost, stolen or
destroyed certificate, a new certificate may be issued therefore upon such terms
and indemnity to the Corporation as the Board may prescribe as sufficient to
indemnify the Corporation against any claim that may be made against it on
account of such loss, theft or destruction.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the
Corporation shall be made only on its stock transfer books. Authority for such
transfer shall be given only by the holder of record thereof or by his legal
representative, who shall furnish proper evidence of such authority, or by his
attorney thereunto dully authorized by power of attorney duly executed and filed
with the Corporation. Such transfer shall be made only on surrender to
cancellation of the certification for such shares. The person in whose name
shares of capital stock stand on the books of the Corporation shall be deemed by
the Corporation to be the owned thereof for all purposes.
Section 3. Control Share Acquisitions. Chapter 42 of the Indiana
Business Corporation Law shall not apply to "control share acquisitions" (as
that term is defined in IC 23-1-42-2) of shares of capital stock of the
Corporation. (7/23/90)
-51-
ARTICLE IX
DIVIDENDS
Subject to applicable law, the Articles of Incorporation of these Bylaws,
the Board may, from time to time, declare, and the Corporation may pay,
dividends on the outstanding shares of capital stock of the Corporation.
ARTICLE X
SECURITIES OF OTHER CORPORATIONS
Unless otherwise ordered by the Board, the Chairman shall have full power
and authority on behalf of the Corporation to purchase, sell, transfer, encumber
or vote any and all securities of any other corporation owned by the
Corporation, and may execute and deliver such documents as may be necessary to
effectuate such purchase, sale, transfer, encumbrance or vote. The Board may,
from time to time, confer like powers upon any other person or person.s
ARTICLE XI
FISCAL YEAR, ANNUAL AUDIT
This fiscal year of the Corporation shall be April 1 through March 31 of
each year; provided, however, that the fiscal year of the Corporation commencing
April 1, 1986, shall continue to and including December 31, 1986. The fiscal
year of the Corporation shall thereafter be January 1 through December 31 of
each year, commencing January 1, 1987, until such time as changed by resolution
of the Board of Directors of the Corporation. The Corporation shall be subject
to an annual audit as of the end of its fiscal year by independent public
accountants appointed by and responsible to the Board.
ARTICLE XII
CORPORATE SEAL
The corporate seal of the Corporation, if any, shall be in such form as the
Board shall prescribe.
ARTICLE XIII
AMENDMENTS
These Bylaws may be adopted, amended or repealed by a resolution adopted
by a two-thirds (2/3) majority of the directors then in office.
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