SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by Registrant [ X ]
Filed by Party other than the Registration [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
THE SOMERSET GROUP, INC.
(Name of Registrant as Specified in its Charter)
THE SOMERSET GROUP, INC.
(Name of Person Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
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<PAGE>
March 23, 1998
Dear Shareholder:
The Directors and Officers of The Somerset Group, Inc. (the "Corporation")
join me in extending to you a cordial invitation to attend the annual meeting
of our shareholders. This meeting will be held on Wednesday, April 22, 1998,
at 9:00 a.m., EST, in the First Indiana Plaza Conference Center, Ohio and
Pennsylvania Streets, Seventh Floor, Indianapolis, Indiana.
We hope you plan to attend the annual meeting where we will review our past
performance and our plans for the future.
The formal notice of the annual meeting and the proxy statement appear on the
following pages. After reading the proxy statement, please mark, sign, and
return the enclosed proxy card to assure that your votes on the business
matters of the meeting will be recorded. Returning the proxy does not affect
your right to vote in person on all matters brought before the meeting.
Sincerely,
Robert H. McKinney
Chairman
FIRST INDIANA PLAZA
135 NORTH PENNSYLVANIA STREET
SUITE 2800
INDIANAPOLIS, IN 46204
(317) 269-1285
SOMERSET GROUP, INC.
135 North Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of The Somerset Group, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of the shareholders of
The Somerset Group, Inc. (the "Corporation") will be held on Wednesday, April
22, 1998, at 9:00 a.m., EST, in the First Indiana Plaza Conference Center,
Ohio and Pennsylvania Streets, Seventh Floor, Indianapolis, Indiana, to
consider and take action on the following matters:
1. Election of Directors. The election of directors as set forth in the
Proxy Statement.
2. Amendment of Articles of Incorporation. The amendment of the
Corporation's Articles of Incorporation to increase the amount of
authorized common stock by two million shares, from four million to six
million shares.
3. 1998 Stock Incentive Plan. To approve and ratify the adoption of The
Somerset Group, Inc. 1998 Stock Incentive Plan.
4. Other Business. The transaction of such other business as properly may
come before the meeting and any adjournments thereof.
Only shareholders of record at the close of business on February 27, 1998 are
entitled to vote at the meeting or any adjournment thereof.
By order of the Board of Directors
Sharon J. Sanford
Secretary
March 23, 1998
IMPORTANT
PLEASE MARK, SIGN AND RETURN THE ENCLOSED PROXY. NO POSTAGE IS NECESSARY IF
MAILED IN THE UNITED STATES.
THE SOMERSET GROUP, INC.
135 North Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
(317) 269-1285
PROXY STATEMENT
The accompanying proxy is solicited by the Board of Directors of The
Somerset Group, Inc. (the "Corporation") for use at the annual meeting of
shareholders to be held on Wednesday, April 22, 1998, at 9:00 a.m., EST, in
the First Indiana Plaza Conference Center, Ohio and Pennsylvania Streets,
Seventh Floor, Indianapolis, Indiana, and any adjournments thereof (the
"Annual Meeting"). The Notice of Annual Meeting of Shareholders, this Proxy
Statement and accompanying form of proxy are first being sent or given to
shareholders on or about March 23, 1998.
The election of directors will be determined by a plurality of the
shares present in person or represented by proxy. The holder of each
outstanding share of Common Stock is entitled to vote for as many persons as
there are directors to be elected. The approval and ratification of the
adoption of The Somerset Group, Inc. 1998 Stock Incentive Plan (the "1998
Plan") will be determined by a majority of the shares present in person or
represented by proxy. The proposed amendment of the Corporation's Articles
of Incorporation to increase the amount of authorized common stock to
6,000,000 shares (the "Amendment") and any other matter to come before the
Annual Meeting will be approved if the votes cast at the Annual Meeting (in
person or represented by proxy) in favor of such proposal exceed the votes
opposing such proposal. An abstention, non-vote, or broker non-vote will not
change the number of votes cast for or against the election of any director
or for or against any other matter to come before the Annual Meeting.
A proxy in the enclosed form, if properly executed, duly returned to
the Corporation and not revoked, will be voted in accordance with the
instructions contained therein. The shares represented by executed but
unmarked proxies will be voted FOR the four persons nominated for election
as directors referred to herein and in favor of adopting and ratifying the
adoption of the 1998 Plan and the approval of the Amendment. If any other
matters are properly brought before the Annual Meeting, the persons named in
the enclosed form of proxy will vote the shares represented thereby on such
matters in accordance with their best judgment. Other than the election of
directors, the approval and ratification of the adoption of the 1998 Plan,
and the approval of the Amendment, the Board of Directors has no knowledge
of any matters to be presented for action by the shareholders at the Annual
Meeting.
Execution of a proxy given in response to this solicitation will not
affect a shareholder's right to attend and to vote in person at the Annual
Meeting. Presence at the Annual Meeting of a shareholder who has signed a
proxy does not in itself revoke the proxy. Any shareholder giving a proxy
may revoke it at any time before it is voted by giving notice thereof to the
Corporation in writing or at the Annual Meeting or by providing a proxy
bearing a later date.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record as of the close of business on February 27,
1998 will be entitled to vote at the Annual Meeting. The Corporation has
only one class of stock, its common stock, of which 2,900,150 shares were
outstanding as of the close of business on February 27, 1998.
The following table shows, as of February 27, 1998, the number and
percentage of shares of common stock owned beneficially by (i) each person
who owned beneficially more than 5% of the issued and outstanding common
stock of the Corporation and (ii) executive officers and directors as a
group:
Name and Address Percent
of Beneficial Amount and Nature of of
Owner Beneficial Ownership Class
Robert H. McKinney
135 N. Pennsylvania St., Suite 2800
Indianapolis, Indiana 46204 1,210,294(1) 40.6%
Marni McKinney
135 N. Pennsylvania St., Suite 2800
Indianapolis, Indiana 46204 1,210,294(1) 40.6%
Marvin C. Schwartz
c/o Neuberger & Berman
605 Third Avenue
New York, New York 10158 186,718(2) 6.4%
All executive officers and directors
as a group (12 persons) 1,496,952(3) 49.8%
Unless otherwise noted, the above named persons have sole voting power
and sole investment power.
(1) These shares are beneficially owned by a group consisting of
Robert H. McKinney and Marni McKinney. Robert H. McKinney is
deemed to be a beneficial owner as specified in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), of 556,233 shares held by a limited partnership
established by Mr. McKinney for the benefit of his children,
including Marni McKinney and Kevin K. McKinney. The total held
by the group also includes 27,549 shares owned directly by
Mr. McKinney, 28,362 shares owned of record by his wife, and
52,658 shares subject to options granted under the Corporation's
Stock Incentive Plans. The total held by the group also includes
477,038 shares held in two irrevocable trusts of which Marni
McKinney is the Trustee and which were established by
Mr. McKinney for the benefit of his children. The above number
also includes 36,422 shares which Ms. McKinney owns individually
and 32,032 shares subject to options granted under the
Corporation's Stock Incentive Plans.
(2) This information is taken from the Schedule 13D Report dated
February 26, 1992, and filed by the shareholder with the
Securities and Exchange Commission concerning shares held by it.
It does not reflect any changes in those shareholdings which may
have occurred since the date of such filing.
(3) Includes 104,129 shares subject to options granted under the
Corporation's Stock Incentive Plans and 29,697 shares subject to
options granted under the 1991 Director Stock Option Plan.
PROPOSAL NO. 1: ELECTION OF DIRECTORS
Four directors are to be elected. Patrick J. Early, Gary L. Light, Robert
H. McKinney and Michael L. Smith have been nominated for a term of three
years and until their successors are elected and qualified. All four
gentlemen are members of the present Board of Directors, with Mr. Early
having been elected by the Board of Directors in January, 1998 to serve until
the Annual Meeting and his election by the shareholders. The other directors
listed in the table below will continue in office until expiration of their
terms. If, at the time of the 1998 Annual Meeting any of such nominees
should be unable or decline to serve, the discretionary authority provided
in the proxy may be exercised to vote for a substitute or substitutes. The
Board of Directors has no reason to believe that any substitute nominee or
nominees will be required.
The Board of Directors unanimously recommends the election of the
following nominees:
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since February 27, 1998 Class
The NOMINEES for election are:
Patrick J. Early, Age 40 1998 53,764 1.9%
President of Somerset Financial
Services, a Division of the Corporation;
formerly, President of Whipple &
Company; Certified Public Accountant,
Certified Financial Planner, and Personal
Financial Specialist.
Gary L. Light, Age 60 1997 1,563(1) (2)
President, E.V.A. Investors, Inc.;
formerly Vice Chairman and Chief
Financial Officer of Sofmor Danck, Inc.
Trustee of PIMCO Mutual Fund Group.
Robert H. McKinney, Age 72 1985 1,210,294(3) 40.6%
Chairman of the Corporation; Chairman
and Chief Executive Officer of First
Indiana Corporation, a savings and loan
holding company; Chairman of First
Indiana Bank; formerly, Chief Executive
Officer of the Corporation (1984-1995);
retired Partner of Bose McKinney & Evans,
attorneys; Director of First Indiana
Corporation; Chairman, Federal Home
Loan Bank Board (1977-1979).
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since February 27, 1998 Class
Michael L. Smith, Age 49 1988 11,096(4) (2)
Chief Operating Officer and Chief Financial
Officer of American Health Network;
formerly President of Somerset Financial
Services, a division of the Corporation;
formerly Chairman, Director, President
and Chief Executive Officer, Mayflower
Group, Inc., diversified transportation
services; Director of First Indiana
Corporation and Finish Master, Inc.
Directors whose terms expire
in 1999:
H. J. Baker, Age 70 1986 12,893(4) (2)
Chairman Emeritus, BMW
Constructors, Inc., industrial
mechanical contractors; Director
of First Indiana Corporation.
William L. Elder, Age 75 1986 133,250(5) 4.4%
Formerly Chairman of Southern
Indiana Commerce Corporation;
formerly President of Southern
Indiana Railway, Inc.; formerly
Director of Merchants National
Corporation, a bank holding company,
and Merchants National Bank and
Trust Company.
Marni McKinney, Age 41 1987 1,210,294(6) 40.6%
President and Chief Executive Officer
of the Corporation; Vice Chairman and
Director of First Indiana Corporation and
First Indiana Bank; formerly President and
Chief Operating Officer of the Corporation
(1993-1995) and Executive Vice President
of the Corporation (1987-1992); Vice
Chairman of, and formerly Vice President
and Director of Strategic Planning of, First
Indiana Bank; formerly Vice President of
First Indiana Corporation.<PAGE>
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since February 27, 1998 Class
Directors whose terms expire
in 2000:
Douglas W. Huemme, Age 56 1990 10,940(4) (2)
Chairman, President and Chief
Executive Officer, Lilly Industries,
Inc., industrial coatings; Director
of First Indiana Corporation;
formerly Vice President and Group
Executive - Chemicals Group,
Whittaker Corporation.
Malcolm Archibald Leslie, Age 48 1997 1,563(1) (2)
Private investor; formerly General
Partner of CID Equity Partners, private
venture capital firm; formerly Director -
International Treasury, Cummins Engine
Company, Inc., manufacturer of
diesel engines.
Kevin K. McKinney, Age 40 1990 22,727(7) (2)
Vice President of the Corporation;
Publisher of NUVO Newsweekly
and Chairman and President of
NUVO, Inc.; formerly President,
Mid America Media; formerly
Chairman, Indianapolis Extra, Ltd.
______________
(1) Includes 1,563 shares subject to options granted under the 1991
Director Stock Option Plan.
(2) The number of shares represents less than 1% of the outstanding
shares of the Corporation.
(3) See note (1) to the table under heading "Voting Securities and
Principal Holders Thereof" above.
(4) Includes 7,815 shares subject to options granted under the 1991
Director Stock Option Plan.
(5) Includes 130,124 shares which Mr. Elder owns individually and
3,126 shares subject to options granted under the 1991 Director
Stock Option Plan.
(6) See note (1) to the table under heading "Voting Securities and
Principal Holders Thereof" above. Ms. McKinney is a daughter of
Robert H. McKinney and a sister of Kevin K. McKinney.
(7) Includes 17,038 shares owned directly and 5,689 shares subject
to options granted under the Corporation's Stock Incentive Plans.
Mr. McKinney is a son of Robert H. McKinney and a brother of
Marni McKinney.
The Board of Directors met five times during the Corporation's last
fiscal year. All directors attended in excess of 75% of the aggregate of (1)
the total number of meetings of the Board of Directors and (2) the total
number of meetings held by all committees on which he or she served.
Nominees for election as a director of the Corporation are selected by
the Board of Directors.
Certain Committees of the Board of Directors
Among other committees, the Board of Directors has an Audit Committee,
a Compensation and Policy Committee, a Management Advisory Committee and a
Stock Administration Committee.
The functions of the Audit Committee are: (1) to review audits of the
accounting records of the Corporation and its financial statements performed
by independent auditors, (2) to confer with the independent auditors and
officers of the Corporation regarding accounting and financial statements and
internal controls, (3) to recommend to the Board the engagement or discharge
of the independent auditors and (4) to perform such other functions as the
Committee deems necessary or desirable. The members of the Audit Committee
are: H. J. Baker (Chairperson), William L. Elder and Gary L. Light. The
Committee met twice during the last fiscal year of the Corporation.
The functions of the Compensation and Policy Committee are to review
and make recommendations to the Board of Directors with respect to the
compensation of the officers and key employees of the Corporation and its
subsidiaries and review other policy matters. The members of the
Compensation and Policy Committee are: William L. Elder (Chairperson),
Douglas W. Huemme and Michael L. Smith. The Committee met three times during
the last fiscal year of the Corporation.
The functions of the Management Advisory Committee are to review and
develop business strategies, review marketing plans and their effectiveness,
and develop strategic growth plans for the Somerset Wealth Management
Division. The members of the Management Advisory Committee are: Marni
McKinney (Chairperson), Patrick J. Early, Malcolm Archibald Leslie, Gary L.
Light, Kevin K. McKinney, Robert H. McKinney and Michael L. Smith. The
Committee met five times during the last fiscal year of the Corporation.
The functions of the Stock Administration Committee are to administer
and grant stock options, stock appreciation rights and performance shares
under the Corporation's 1986 and 1991 Stock Incentive Plans (and under the
1998 Plan, if approved and ratified by the shareholders). Members of the
Stock Administration Committee are: Michael L. Smith (Chairperson), Douglas
W. Huemme and Malcolm Archibald Leslie. The Committee met once during the
last fiscal year of the Corporation.
Certain Transactions
Until May 22, 1997 a promissory note payable to the Corporation by
NUVO, Inc. was outstanding. The promissory note resulted from the sale of
assets by the Corporation to Nuvo, Inc. in 1990. Robert H. McKinney, Marni
McKinney, and Kevin K. McKinney are shareholders and directors of NUVO, Inc.,
and Kevin K. McKinney is the Chairman and President of NUVO, Inc. The
principal amount of the promissory note was approximately $79,000, and the
promissory note bore interest at the rate of eight and one-quarter percent
(8.25%) per annum. The promissory note was secured by a security interest
in substantially all of the assets of NUVO, Inc., and the note was paid in
full on May 22, 1997.
In 1996, the Corporation purchased from First Indiana Bank (the "Bank")
all of the outstanding capital stock of One Investment Corporation ("One
Investment"), a wholly owned subsidiary of the Bank that owned all of the
outstanding capital stock of One Insurance Agency, Inc. ("One Insurance").
As a result of this transaction, and through a multi-year operating agreement
that the Corporation entered into with First Indiana Corporation and the
Bank, the Corporation is providing non-FDIC-insured investment and insurance
products and services to the Bank's customers, and the Bank is focusing its
efforts on delivering traditional banking services. During the year ended
December 31, 1997, the Bank paid to the Corporation $219,424 in accordance
with the terms of the purchase agreement and the operating agreement. Robert
H. McKinney and Marni McKinney are officers, directors and shareholders of
First Indiana Corporation and/or the Bank, the Corporation is a substantial
shareholder of First Indiana Corporation, and H.J. Baker, Douglas W. Huemme
and Michael L. Smith are directors of First Indiana Corporation and the Bank.
The transaction, including entering into the operating agreement, was
approved by a committee of the Board of Directors of the Corporation that
consisted solely of directors who were not employees, officers, directors,
or significant shareholders of First Indiana Corporation or the Bank. This
independent committee determined that the transaction was in the best
interests of the Corporation, and negotiated the transaction with a joint
committee of the Board of Directors of First Indiana Corporation and the Bank
that consisted of directors of those entities that were not employees,
officers, directors or substantial shareholders of the Corporation. Prior
to the consummation of the transaction, the committee received an opinion
from an independent appraiser that the transaction was fair to the
shareholders of the Corporation.
COMPENSATION OF DIRECTORS
AND EXECUTIVE COMPENSATION
(a) Summary Compensation Table.
The following table sets forth the compensation awarded to, earned by,
or paid by the Corporation during the last three fiscal years to Ms. McKinney
as President and Chief Executive Officer of the Corporation during that
period, and to the two executive officers whose cash compensation in 1997
exceeded $100,000.
Long Term
Compensation
Annual Compensation Awards
Other Securities All
Name and Annual Underlying Other
Principal Salary Bonus Compen- Options Compensation
Position Year ($) ($) sation ($) (#) ($)
Marni McKinney 1997 $80,000 $20,000 $158,288 6,250 4,800(1)
President and Chief 1996 $80,000 -- -- 9,375 2,963
Executive Officer 1995 $50,000 -- -- 5,468 $441
Joseph M. Richter 1997 $97,846 $ 6,000 -- 4,375 7,512(1)
Executive Vice President
1996 $97,000 $ 5,256 -- 6,250 4,374
and Chief Financial Officer
1995 $95,300 $16,256 -- 3,906 810
Robert W. Kaspar(2)1997 $109,560 $10,000 -- 3,125 7,096(1)
President of Somerset Wealth
Management Division
___________________
(1) Consists of premiums during 1997 for term life insurance policies for
Mr.Richter and Mr. Kaspar in the amounts of $979, and $1,225,
respectively,and the Corporation's contributions to the Corporation's
retirement plan during 1997 for the accounts of Ms. McKinney, Mr.
Richter, and Mr. Kasparin the amounts of $4,800, $6,533 and $5,871,
respectively.
(2) Mr. Kaspar was employed by the Corporation beginning on February 1,
1997. Accordingly, no compensation information is given for Mr. Kaspar
as to 1996 and 1995.
(b) Options Tables.
The following table sets forth the grants of stock options made during
fiscal year 1997 to Ms. McKinney, Mr. Richter and Mr. Kaspar.
Number
of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price
Name (#) Year 1997 ($/Share) Expiration
Date
Marni McKinney 6,250 18.8% $17.38 February 18, 2002
Joseph M. Richter 4,375 13.2% $15.80 February 18, 2002
Robert W. Kaspar 3,125 9.4% $15.80 February 18, 2002
The following table sets forth on an aggregate basis each exercise of
stock options during fiscal year 1997 by Ms. McKinney, Mr. Richter, and Mr.
Kaspar, and the December 31, 1997 value of the unexercised options of each
such executive officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired On Value December 31, 1997 December 31, 1997
Name Exercise Realized Exercisable UnexercisableExercisable Unexercise
Marni McKinney 4,687 $54,076 25,782 6,250 $296,490 $18,719
Joseph M. Richter15,625 $135,296 -- 10,625 -- $77,359
Robert W. Kaspar -- -- -- 3,125 -- $14,358
(c) Compensation of Directors.
During the Corporation's last fiscal year, directors who are not
salaried officers received a quarterly fee of $1,250 per quarter, a fee of
$600 for each Board meeting attended, and a fee of $300 for each Board
committee meeting attended.
The Corporation's 1991 Director Stock Option Plan provides for the
issuance of non-qualified options to purchase 1,563 shares to each outside
director of the Corporation on August 14, 1991 and thereafter on the date of
each annual meeting of shareholders. No option is exercisable during the
period of one year following the date of grant of such option, and options
granted under the plan must specify an exercise price of not less than 100%
of the market price of the shares at the date of grant.
PROPOSAL NO. 2: AMENDMENT OF THE CORPORATION'S ARTICLES OF INCORPORATION
TO INCREASE THE AMOUNT OF AUTHORIZED COMMON STOCK TO 6,000,000
The Board of Directors of the Corporation has proposed an increase in
the number of authorized shares of the Corporation's common stock to
6,000,000 shares from 4,000,000 shares. The proposed increase would result
in 6,000,000 total authorized shares of Corporation stock, consisting solely
of 6,000,000 shares of common stock, without par value.
The terms of the additional authorized shares will be the same as those
that apply to the Corporation's currently authorized common stock. There are
2,900,150 shares of common stock outstanding as of the date of this Proxy
Statement. The increase in the authorized number of shares of common stock
will provide flexibility for corporate planning and result in shares being
available for future equity financing through issuances to the general
public, future acquisitions (such as mergers), stock option grants, stock
dividends or splits, and for other corporate purposes for which the issuance
of common stock may be advisable. The Corporation has no current plans to
undertake any of these issuances, but the Board of Directors believes it is
appropriate to provide the Corporation with this flexibility at this time.
Shareholders have no preemptive rights with respect to the issuance of
additional shares of common stock. Accordingly, any issuance of authorized
but unissued shares of common stock (which will not require shareholder
approval) could have the effect of diluting the earnings per share and book
value per share of currently outstanding shares of common stock. However,
the Corporation has no current plans to issue any shares of its common stock
in a transaction which is expected to have such a dilutive effect.
As stated above, the Corporation has no immediate plans, arrangements,
commitments, or understandings with respect to the issuance of any additional
shares of common stock which would be authorized by the proposed amendment.
However, increased authorized shares could be used to make a takeover attempt
more difficult such as by using the shares to make a counter-offer for the
shares of the bidder or by selling shares to dilute the voting power of the
bidder. As of this date, the Board of Directors in unaware of any efforts
to accumulate the Corporation's shares or to obtain control of the
Corporation by means of a merger, tender offer, solicitation in opposition
of management or otherwise.
The current Articles of Incorporation contain other provisions that may
be viewed as having possible anti-takeover effects. For instance, the
Corporation's Board of Directors is divided into three classes, with
approximately one-third of the members of the Board nominated each year.
Thus, two annual meetings are necessary for a majority shareholder to replace
a majority of incumbent directors. In addition, directors may be removed
only for cause and only upon the affirmative vote of the holders of
two-thirds of the outstanding voting power of the Corporation. The current
Articles of Incorporation further provide that, in certain circumstances, the
affirmative vote of the holders of two-thirds of the Corporation's
outstanding voting power is required to approve certain business transactions
(such as mergers or sales of assets involving another entity that
beneficially owns ten percent or more of the voting power of the
Corporation). The current Articles of Incorporation also provide that the
Board of Directors, when evaluating such transactions shall, in connection
with the exercise of its judgment in determining what is in the best
interests of the Corporation and its shareholders, give due consideration to
all relative factors including its social and economic effects on employees,
customers, and other constituents of the Corporation and on the communities
in which the Corporation conducts business.
The Board of Directors unanimously recommends that shareholders vote in
favor of this Proposal.
PROPOSAL NO. 3: APPROVAL OF THE 1998 STOCK INCENTIVE PLAN
There will be presented to the 1998 Annual Meeting a proposal to approve
the 1998 Plan. The 1998 Plan was adopted by the Board of Directors on
February 18, 1998, subject to shareholder approval. The purpose of the 1998
Plan is to attract and retain qualified persons as directors, employees and
members of management to the Corporation so as to maintain and enhance the
Corporation's long-term performance.
The Corporation currently maintains two stock option plans: the 1991
Stock Incentive Plan (the "1991 Plan") and the 1991 Directors Stock Option
Plan (the "Directors' Plan"). In addition, options are outstanding under a
third plan, the 1986 Stock Incentive Plan, which terminated in 1996. As of
February 27, 1998, grants for 179,264 options were outstanding under these
three plans. This includes grants for 63,063 options that were made on
February 18, 1998. Grants will continue to be made under the Directors' Plan
and the 1991 Plan until their expiration in 2001. As of February 27, 1998,
2,310 options remained available for grants under the 1991 Plan, and a
maximum of 15,625 options per year may be granted under the Directors' Plan.
General
The 1998 Plan provides for the issuance of a total of up to 145,000
shares of Common Stock, which may be authorized and unissued shares, treasury
shares or reacquired shares. This is equivalent to slightly less than five
percent (5%) of the shares of Common Stock outstanding as of February 27,
1998.
Awards under the 1998 Plan may be made in the form of (i) incentive
stock options, (ii) non-qualified stock options, (iii) stock appreciation
rights, (iv) dividend equivalent rights, (v) restricted stock, and (vi) other
stock-based awards. Awards may be made to any director, officer or employee
of the Corporation and its subsidiaries, and to such consultants to the
Corporation as the Stock Administration Committee may select.
Awards with respect to no more than 25,000 shares of common stock may
be granted to any one eligible person during any one-year period. In the
event of a stock dividend, stock split, recapitalization or similar event,
the Stock Administration Committee will equitably adjust the aggregate number
of shares subject to the 1998 Plan, the number of shares subject to each
outstanding award, the exercise price of each outstanding option and any
other per share limits under the 1998 Plan.
The 1998 Plan will be administered by the Stock Administration
Committee, composed of not less than two directors. To the extent required
for compliance with Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), all actions relating to awards to
persons subject to Section 16 of the Exchange Act will be taken by the Board
of Directors unless each person who serves on the Stock Administration
Committee is a "non-employee director" within the meaning of Rule 16b-3
promulgated under the Exchange Act. To the extent required for compensation
realized from awards under the 1998 Plan to be deductible by the Corporation
pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), the members of the Stock Administration Committee will be
"outside directors" within the meaning of Section 162(m) of the Code. The
Stock Administration Committee is authorized to construe, interpret and
implement the 1998 Plan, to select the eligible persons to whom awards will
be granted, to determine the terms and provisions of such awards, and to
amend outstanding awards. The determinations of the Stock Administration
Committee are made in its sole discretion and are conclusive. The Stock
Administration Committee presently consists of Douglas W. Huemme, Malcolm
Archibald Leslie and Michael L. Smith, all of whom are "non-employee" and
"outside" directors.
Grants under the 1998 Plan
Stock Options. Each stock option granted under the 1998 Plan will be
exercisable during the period fixed by the Stock Administration Committee;
however, no incentive stock option will be exercisable more than ten years
after the date of grant. The purchase price per share payable upon the
exercise of an option (the "option purchase price") will be established by
the Stock Administration Committee, provided that the option exercise price
of an incentive stock option will not be less than 100% of the fair market
value of a share of the common stock on the date of grant (110% in the case
of an individual who owns more than 10% of the voting power of the
Corporation's outstanding capital stock). The option exercise price is
payable in cash, or by surrender of shares of common stock acquired at least
one year prior to the option exercise date and having a fair market value on
the date of the exercise equal to part or all of the option exercise price,
or by such other payment method as the Stock Administration Committee may
prescribe.
Stock Appreciation Rights. Stock appreciation rights may be granted in
connection with all or any part of, or independently of, any option granted
under the 1998 Plan. Generally, no stock appreciation right will be
exercisable at a time when any option to which it relates is not exercisable.
The grantee of a stock appreciation right has the right to surrender the
stock appreciation right and to receive from the Corporation an amount equal
to the aggregate appreciation (over the exercise price of such right, or over
the option exercise price if the stock appreciation right is granted in
connection with an option) in such stock appreciation right. Payment due
upon exercise of a stock appreciation right may be in cash, in common stock,
or partly in each, as determined by the Stock Administration Committee in its
discretion.
Dividend Equivalent Rights. The Stock Administration Committee may
include in any award a dividend equivalent right entitling the grantee to
receive amounts equal to the ordinary dividends that would be paid, during
the time such award is outstanding and unexercised, on the shares of common
stock covered by such award if the such shares were then outstanding. The
Stock Administration Committee will determine whether such payments may be
made in cash, in shares of common stock or in another form, whether they will
be conditioned upon the exercise of the award to which they relate, and such
other terms and conditions as the Stock Administration Committee deems
appropriate.
Restricted Stock. The Stock Administration Committee may grant
restricted shares of common stock to such eligible persons, in such amounts,
and subject to such terms and conditions (which may depend upon or be related
to performance goals and other conditions) as the Stock Administration
Committee determines in its discretion. Certificates for the shares of
common stock covered by a restricted stock award will remain in the
possession of the Corporation until such shares are free of restrictions.
Subject to the applicable restrictions, the grantee has the rights of a
shareholder with respect to the restricted stock.
Other Stock-Based Awards. The Board may authorize other types of
stock-based awards, which the Stock Administration Committee may grant to
such eligible persons, in such amounts and subject to such terms and
conditions as the Stock Administration Committee determines in its sole
discretion.
Except as otherwise specified in the applicable grant agreement, no
award or right granted to any person under the 1998 Plan will be assignable
or transferable other than by will or by laws of descent and distribution.
Other Features of the 1998 Plan
Unless sooner terminated by the Board of Directors, the provisions of
the 1998 Plan with respect to the grant of incentive stock options will
terminate on February 18, 2008. All awards made under the 1998 Plan prior
to its termination will remain in effect until they are satisfied or
terminated. The Board of Directors may, without shareholder approval,
suspend, discontinue, revise or amend the 1998 Plan at any time or from time
to time; provided, however, that shareholder approval will be obtained for
any amendment for which such approval is required by Section 422 of the Code
or under other applicable law.
In the event of a merger or consolidation of the Corporation with or
into any other corporation or entity, any previously granted option or stock
appreciation right will continue in effect or be replaced by an equivalent
substituted option or right relating to the stock of the successor entity or
its parent. Similarly, any previously granted award of restricted stock will
continue in effect or, if there is a successor employer, be replaced with an
equivalent award of restricted stock of such successor or its parent.
Federal Income Tax Consequences of the 1998 Plan
The description of Federal tax consequences set forth below is
necessarily general in nature and does not purport to be complete.
There are generally no Federal tax consequences either to the optionee
or the Corporation upon the grant of a stock option. On exercise of an
incentive stock option, the optionee will not recognize any income, and the
Corporation will not be entitled to a deduction for tax purposes, although
such exercise may give rise to liability for the optionee under the
alternative minimum tax provisions of the Code. However, if the optionee
disposes of shares acquired upon exercise of an incentive stock option within
two years of the date of grant or one year of the date of exercise, the
optionee will recognize compensation income, and the Corporation will be
entitled to a deduction for tax purposes in the same amount, equal to the
excess of the fair market value of the shares of common stock on the date of
exercise over the option exercise price (or the gain on sale, if less); the
remainder of the gain to the optionee will be treated as capital gain.
Otherwise, the Corporation will not be entitled to any deduction for tax
purposes upon disposition of such shares, and the entire gain for the
optionee will be treated as a capital gain. On the exercise of a
non-qualified stock option, the amount by which the fair market value of the
common stock on the date of exercise exceeds the option exercise price will
generally be taxable to the optionee as compensation income, and will
generally be deductible for tax purposes by the Corporation. The disposition
of shares of common stock acquired upon exercise of a non-qualified stock
option will generally result in a capital gain or loss for the optionee, but
will have no tax consequences for the Corporation.
The grant of a stock appreciation right, a dividend equivalent right or
restricted stock generally will not result in income for the grantee or in
a tax deduction for the Corporation. Upon the settlement of such a right and
upon the vesting of restricted stock, the grantee will recognize ordinary
income equal to the fair market value of any shares of common stock and/or
any cash received, and the Corporation will be entitled to a tax deduction
in the same amount. With respect to an award of restricted stock the grantee
may elect to recognize ordinary income equal to the fair market value of the
shares less any amount paid for them at the time of grant, and the
Corporation will be entitled to a tax deduction in the same amount.
Dividends paid on forfeitable restricted shares are treated as compensation
for Federal tax purposes. A grant of unrestricted shares of common stock
will result in income for the grantee, and a tax deduction for the
Corporation, generally equal to the fair market value of such shares less any
amount paid for them.
The benefits and amounts that may be received or allocated in the future
under the 1998 Plan are not generally determinable because they are within
the discretion of the Stock Administration Committee. To date, no grants
have been made under the 1998 Plan other than stock options representing, in
the aggregate, the right to obtain 20,500 shares of the Corporation's Common
Stock, subject to shareholder approval of the 1998 Plan, granted to the
following persons and groups of persons:
Number of
Shares
Underlying Exercise
Options or Base
Granted Price
Name (#) ($/Share) Expiration Date
Marni McKinney 4,000 $23.625 February 18, 2008
Robert W. Kaspar 2,500 $23.625 February 18, 2008
All executive officers as a group
13,000 $23.625 February 18, 2008
Non-executive director group(1) -- --
Non-executive officer employee group(2)
7,500 $23.625 February 18, 2008
______________
(1) All current directors who are not executive officers.
(2) All employees, including all current officers who are not
executive officers, as a group.
Any shareholder may request and receive a copy of the 1998 Plan from
the Corporation's Secretary, 2800 First Indiana Plaza, 135 North Pennsylvania
Street, Indianapolis, Indiana 46204.
The Board of Directors unanimously recommends that shareholders vote in
favor of this Proposal.
SHAREHOLDER PROPOSALS
Proposals of Shareholders intended to be presented at the next annual
meeting must be received by the Corporation for inclusion in the proxy
statement and form of proxy relating to that meeting no later than
November 23, 1998. Any such proposals should be sent to the attention of the
Secretary of the Corporation. Shareholder proposals not included in the
Corporation's 1999 proxy solicitation materials must, in order to be
considered at the 1999 Annual Meeting, be submitted in writing to the
Secretary of the Corporation at least sixty days before the date of the 1999
Annual Meeting, or, if the 1999 Annual Meeting is held prior to March 22,
1999, within ten days after notice of the Annual Meeting is mailed to
shareholders. The Board of Directors of the Corporation will review any
shareholder proposals that are filed as required, and will determine whether
such proposals meet applicable criteria for inclusion in its 1999 proxy
solicitation materials or consideration at the 1999 Annual Meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires certain of the Corporation's officers, and its directors and persons
who own more than 10% of the Corporation's Common Stock, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Such officers, directors and greater than 10% shareholders are
required by Securities and Exchange Commission regulations to furnish the
Corporation with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the
Corporation, the Corporation believes that during 1997, all Section 16(a)
filing requirements applicable to its officers, directors and greater than
10% beneficial owners were met.
FINANCIAL STATEMENTS AND OTHER INFORMATION
The Corporation's financial statements for the fiscal year ended
December 31, 1997, were audited by KPMG Peat Marwick LLP ("Peat Marwick").
Representatives of Peat Marwick are expected to attend the Annual Meeting,
with the opportunity to make a statement if they desire to do so, and will
be available to respond to appropriate questions.
The Annual Report of the Corporation for the year ended December 31,
1997, including audited financial statements, has been mailed to the
shareholders. The Annual Report is not to be considered as proxy
solicitation material.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
this Annual Meeting. However, if other matters should come before the
meeting, it is the intention of each person named in the proxy to vote such
proxy in accordance with his or her judgment on such matters.
EXPENSES OF SOLICITATION
The entire expense of preparing, assembling, printing and mailing the
proxy form and material used in the solicitation of proxies will be paid by
the Corporation. The solicitation will not be made by specially engaged
employees or paid solicitors. In addition to the use of the mails,
solicitation may be made by employees of the Corporation by telephone,
telegraph, cable or personal interview.
<PAGE>
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. Therefore,
shareholders who do not expect to attend in person are urged to execute and
return the proxy.
For the Board of Directors
Sharon J. Sanford
Secretary
March 23, 1998
[FRONT]
THE SOMERSET GROUP, INC. This proxy is solicited on behalf of the Board of
Directors of the Corporation
2800 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204 The undersigned hereby appoints Marni
McKinney and Sharon J. Sanford, and each
of them, attorneys-in-fact and proxies,
with full power of substitution, to vote
as designated below all shares of The
Somerset Group, Inc. (the "Corporation")
which the undersigned would be entitled
to vote if personally present at the
Annual Meeting of Shareholders to be
held on April 22, 1998, at 9:00 a.m.,
EST, and at any adjournment thereof.
1. ELECTION OF DIRECTORS:
FOR all nominees listed below
(except as marked to the contrary below)
<PAGE>
WITHHOLD AUTHORITY
to vote for all nominees<PAGE>
Nominees for a term of three years:
Patrick J. Early, Gary L. Light, Robert H. McKinney and Michael L. Smith
(Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.)
_____________________________________________________________________________
2. APPROVAL OF AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK:
FOR AGAINST ABSTAIN
3. APPROVAL OF THE CORPORATION'S 1998 STOCK INCENTIVE PLAN:
FOR AGAINST ABSTAIN
4. In their discretion, the Proxies are authorized to vote such other business
as may properly come before the meeting.
(Continued and to be signed on other side.)
<PAGE>
[BACK]
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made, this proxy will be voted
FOR Proposals 1, 2 and 3.
The undersigned acknowledges receipt from The Somerset Group, Inc., prior to the
execution of this proxy, of notice of the meeting, a proxy statement, and an
Annual Report to Shareholders.
Please sign exactly as name appears below. When shares are held as joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Signature
(Signature if held jointly)
Dated: , 1998
REVOCABLE PROXY
168779
CHARTING A COURSE
THE SOMERSET GROUP, INC.
1997 ANNUAL REPORT
Table of Contents
Brief History 3
Letter to the Shareholders 4
Our Mission 6
Financial Highlights 10
Selected Financial Data 11
Management's Discussion and Analysis 12
Independent Auditors' report 17
Consolidated Statements of Income 18
Consolidated Balance Sheets 19
Consolidated Statements of Cash Flows 20
Consolidated Statements of Shareholders' Equity 21
Statement of Management Responsibility 22
Notes to Consolidated Financial Statements 23
Summarized Consolidated Financial Statements
of First Indiana Corporation 35
Board of Directors 38
Operating Companies and Management 39
SOMERSET
A POINT OF NAVIGATION
The waters off the coast of western England were dreaded by sailors for
hundreds of years. Dense fogs, icy storms and swirling tides tested one's
seamanship, and even the most experienced crew with the best-laid course could
never be assured where they would end up. Or if they would end up anywhere at
all. Loose timbers from sunken ships littered the coastline, testament to the
luck required to make a life from the sea.
But on that rocky coast was a seemingly charmed spot. The coastal county of
Somerset, where the only safe harbors for hundreds of miles could be found.
Battered ships limped into small fishing villages where they could make repairs
and adjust their headings.
Somerset had no vanities to make it attractive, it was simply a place to find
one's bearings and take on provisions. And as such, it was given more prominent
notation on ship's charts than its size would suggest. It was rarely a
destination. More often, it was a vital point on a longer journey.
THE SOMERSET GROUP, INC.
1997 Message to Shareholders
Dear Shareholders:
It is a pleasure to report that The Somerset Group had net income for 1997
of $2.5 million, or $.93 per share, compared with $2.0 million, or $.78 per
share, in 1996. Earnings in 1996 included a one-time charge against Somerset's
equity income in First Indiana Corporation of $515,000, or $.20 per share, for
an industry-wide assessment to recapitalize the Savings Association Insurance
Fund, which insures First Indiana's customers' deposits. Somerset's 1997 income
was decreased as a result of the start up cost of Somerset Wealth Management,
which made significant progress during the year, but was still not at profitable
levels at year end. Our success in annuity and other investment sales were
somewhat below that of the previous year, and steps have been taken to improve
these sales results.
Following a critical year of change and growth, we are pleased to report
that The Somerset Group is strategically positioned for the years ahead. In
1997, we completed two crucial steps in our transformation of Somerset from a
diversified banking and construction services company into a comprehensive
financial services provider offering value-added solutions to targeted market
segments.
As we began to chart Somerset's future, we realized that despite literally
thousands of alternatives, today's financial services marketplace does not offer
a global, forward-looking solution, with an emphasis on objective advice and
responsive service. To begin to address this unmet need, we formed Somerset
Wealth Management in January 1997. Somerset Wealth Management offers investment
advisory services, financial counseling, and wealth management, with an emphasis
on objectiveness, responsibility, and reliability.
In December 1997, we announced our intention to merge with Whipple &
Company, a privately held certified public accounting and consulting firm in
Indianapolis. Upon completion of the merger in January 1998, Whipple brought
more than 2,000 clients to Somerset and increased our total assets under
management to more than $250 million. Somerset Wealth Management and Whipple &
Company now operate under a new name that reflects our integrated approach:
Somerset Financial Services.
The merger with Whipple was a logical step in Somerset's transformation
into a comprehensive financial services firm. Established in 1960, Whipple has
operated under second generation ownership since 1985. Over the past decade,
the firm has expanded from traditional audit and accounting services into a
diverse consulting practice. Whipple brings together the talent and expertise
of seventy individuals, many of whom are CPAs, CFPs, and other financial
professionals.
The addition of Whipple & Company places Somerset in an enviable position
in the Indiana marketplace. We can now offer a full array of financial products
and services, including tax planning and preparation, health care consulting,
information technology services, management consulting, estate planning,
retirement planning, and accounting services. First Indiana Bank, with its
traditional banking products, and our One Investment Division, which offers tax-
deferred annuities, mutual funds, and securities, round out the array of
financial services available to our clients.
Like many of our clients, Somerset Financial Services is locally based,
family-operated, and entrepreneurial in philosophy. Our needs-based, problem-
solving approach is striking a responsive chord with the family-owned businesses
and high-net-worth individuals we have targeted. Many of our clients have not
felt adequately served by traditional financial planners, and others have been
put off by the hidden fees and soft-dollar compensation of investment advisers.
This alignment of heritage and philosophies between Somerset and our clients
creates exciting possibilities. Somerset Financial Services brings enormous
potential for growth in our client base and earnings.
Somerset's transition to a comprehensive financial services provider has
been challenging. Now that the transition is nearing completion, we believe
that we are well-positioned to meet the unique needs of an under-served segment
of the marketplace and move forward with confidence in higher earnings and
greater long-term potential.
We look forward to reporting to you on our progress throughout 1998, and
we appreciate your loyalty and confidence.
Sincerely,
Robert H. McKinney Marni McKinney
Chairman President and Chief Executive Officer
As you boldly move toward the horizon, how can you be sure it is the right
one?
Today's business owner has many ways to plan for the future. Now there
is a partner that offers an integrated solution. Somerset Financial Services
occupies a unique position in the Indiana marketplace. Few, if any, companies
can match the range of financial services and expertise we offer.
With the collective talent of over 70 financial professionals, many of
whom are CPAs and CFPs, Somerset Financial Services addresses the entire
spectrum of our clients' financial needs. We offer a variety of consulting
services, including tax planning and preparation, health care consulting,
information technology consulting, investment and wealth management,
management consulting, estate planning retirement planning, and accounting.
Working as one team, our professionals deliver service within a client-
driven culture based on four guiding principles: objectivity, responsiveness,
reliability, and independence. Our clients' interests come first in
everything we do, and we work hard to earn and maintain their trust and
confidence.
There are several horizons to choose from in today's complex world.
Through our integrated approach and breadth of expertise, we can help you find
the right one.
They say navigation is a mixture of calculation, experience, and luck. We say
luck has nothing to do with it.
Sound long-term strategies don't have much to do with luck. Success in
today's competitive world calls for an astute financial partner to help
navigate uncharted waters.
Somerset's business strategy is based on giving our clients the best
advice at the right time. To accomplish this, we continually support and
build our professional staff so they stay abreast of trends and ideas.
Our client base consists mainly of individuals, families, and owner-
operated businesses in the construction, distribution, health care,
manufacturing, real estate, and service industries. Like many of our clients,
Somerset is a family-operated, entrepreneurial company that has faced similar
challenges on its own path toward growth. Because of our shared experiences,
we are well-positioned to understand our clients' needs and create innovative
solutions.
With the experience and skill of our team of professionals, Somerset's
clients don't have to rely on luck in order to succeed.
While changing course is never simple, our clients seem to prefer it to the
alternative.
Change can be difficult. But businesses, like any living thing, put
themselves at risk if they don't change. Somerset Financial Services offers a
way to change course safely and successfully. We understand the risks
involved with change. We listen to our clients' concerns about the future.
We examine all the courses of action available given our clients' needs and
concerns. Then we recommend an integrated approach that combines past
successes with forward-looking strategies.
By providing comprehensive solutions to our clients' financial needs,
Somerset makes changing a little simpler.
Even the best laid course is useless without the strength to drive it forward.
There are plenty of good ideas. The ones that come to fruition are
backed by courage, vision, and careful tactics. With the breadth of our
services and the expertise of our people, we help our clients capitalize on
their own strengths as they move ahead.
Because Somerset Financial Services consists of entrepreneurs, we
understand the direction our clients want to take. By being objective,
responsive, reliable, and independent, we put our clients first. Then we
develop and maintain long-term relationships by providing the right advice at
the right time.
Somerset Financial Services is well-equipped to help our clients grow.
We look forward to guiding our clients as they lay out the surest path to
long-term success.
FINANCIAL HIGHLIGHTS
At and for the Years Ended December 31,
1997 1996 1995
Revenue and income $5,385,000 $4,449,000 $7,434,000
Operating expenses 1,978,000 1,523,000 1,886,000
Income before income taxes 3,407,000 2,926,000 5,548,000
Income taxes 957,000 887,000 2,190,000
Net income $2,450,000 $2,039,000 $3,358,000
Earnings per share - basic $.95 $.80 $1.31
Earnings per share - diluted $.93 $.78 $1.29
Assets:
Current assets $6,115,000 $5,984,000 $9,901,000
Investment in First Ind.Corp 32,406,000 29,746,000 27,549,000
All other 2,455,000 2,482,000 1,276,000
--------- --------- ---------
Total assets $40,976,000 $38,212,000 $38,726,000
Shareholders' equity $32,963,000 $31,236,000 $29,498,000
Return on revenue and income 45.5% 45.8% 45.2%
Return on average assets 6.2% 5.3% 8.6%
Return on average shareholders' equity 7.6% 6.7% 12.0%
Book value per share $12.85 $12.22 $11.56
All per share amounts have been adjusted for five-for-four stock splits that
were effective February 26, 1997 and February 29, 1996.
SHAREHOLDER INFORMATION
<PAGE>
Annual Meeting
The Annual Meeting of Shareholders
will be held Wednesday, April 22,
1998 at 9:00 a.m. EST at
First Indiana Plaza, 7th Floor
Conference Center,
135 N. Pennsylvania St.,
Indianapolis, Indiana
Capital Stock
The Somerset Group, Inc. stock is
traded on the NASDAQNational
Market System under the symbol
"SOMR"<PAGE>
Registrar and Transfer Agent
Harris Trust and Savings Bank
311 West Monroe Street, 11th Floor
Chicago, Illinois 60606
800/573-4048
Independent Auditors
KPMG Peat Marwick LLP
Indianapolis, Indiana
-10-
THE SOMERSET GROUP, INC.
Selected Financial Data
(Dollars 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 & investment inc. 1,502 1,447 554 70 95
Gross profit of construction opera --- --- 1,649 4,303 2,544
Income from operations before 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) 0.95 0.8 1.31 1.03 0.89
Net income per share--diluted (2) 0.93 0.78 1.29 1.01 0.88
As of December 31,
1997 1996 1995 1994 1993
Working capital 5,970 5,835 9,104 6,852 4,885
Carrying value of investment in FIB 32,406 29,746 27,549 24,265 21,873
Market value of investment in FIB 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) 0.18 0.16 0.128 0.064 ---
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.
Market for the Company's Common Stock
The Company's common stock trades on the NASDAQ National Market System under the
symbol SOMR. 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(a)14.25 19.50(b)14.88
Second -- ended June 30, 15.50 13.50 16.50 15.00
Third -- ended September 30, 15.75 13.50 16.50 15.00
Fourth -- ended December 31, 22.00 14.94 17.5 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
-11-
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-
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
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 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>
CORPORATE OFFICE
135 N. Pennsylvania Street
Suite 2800
Indianapolis, IN 46204
Telephone 317/269-1285
CORPORATE OFFICERS
Robert H. McKinney
Chairman
Marni McKinney
President and
Chief Executive Officer
Joseph M. Richter
Executive Vice President, Finance
and Treasurer
Robert S. Kaspar
Executive Vice President, Business Development
Kevin K. McKinney
Vice President
Sharon J. Sanford
Secretary
Somerset FINANCIAL SERVICES
Patrick J. Early
President
Robert S. Kaspar
Managing Director
Michael J. McCaslin
Managing Director
Robert C. Phillips
Managing Director
Steven J. Riddle
Managing Director
First Indiana Investor SERVICES
Donald P. Feldhaus
Vice President
First Indiana Bank
Robert H. McKinney
Chairman and Chief Executive Officer
of First Indiana Corporation and Chairman of the Bank
Marni McKinney
Vice Chairman of First Indiana Corporation and
Vice Chairman of the Bank
Owen B. Melton, Jr.
President and Chief Operating Officer
of the Corporation and President and
Chief Executive Officer of the Bank
David L. Gray
Internal Support Services Group
Senior Vice President and Treasurer
David A. Lindsey
Consumer Finance Group
Senior Vice President
Merrill E. Matlock
Commercial & Mortgage Banking Group
Senior Vice President
Timothy J. O'Neill
Correspondent Banking Services Group
Senior Vice President
Kenneth L. Turchi
Retail Banking, Marketing, & Strategic Planning Group
Senior Vice President
DIRECTORS
Robert H. McKinney
Chairman, The Somerset Group, Inc.;
Chairman & Chief Executive Officer,
First Indiana Corporation
Marni McKinney
President and Chief Executive Officer,
The Somerset Group, Inc.; Vice Chairman,
First Indiana Corporation
H. J. Baker
Chairman (emeritus)
BMW Constructors, Inc.
Patrick J. Early
President
Somerset Financial Services
William L. Elder
Chairman (emeritus)
Southern Indiana Commerce
Corporation
Douglas W. Huemme
Chairman, President and
Chief Executive Officer,
Lilly Industries, Inc.
Malcolm Archibald Leslie
Private Investor
Gary L. Light
President
E.V.A. Investors, Inc.
Kevin K. McKinney
Vice President, The Somerset Group, Inc.;
Publisher, NUVO Newsweekly
Michael L. Smith
Chief Operating Officer and
Chief Financial Officer
American Health Network, Inc.
