FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 - For the fiscal year ended December 31, 1998. or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-14227
THE SOMERSET GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1647888
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
135 N. Pennsylvania Street, #2800, Indianapolis, IN 46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 317/269-1285
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common stock without par value over-the-counter: NASDAQ National Market
System
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $46,341,734 as of February 26, 1999.
As of February 26, 1999, there were 2,873,906 outstanding shares of the Capital
Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the year ended December 31, 1998 are
incorporated by reference into Part III.
Portions of the Form 10-K of First Indiana Corporation for the year ended
December 31, 1998 are incorporated by reference into Part I.
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THE SOMERSET GROUP, INC.
INDEX
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 4
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . .. . . 4
PART II
Item 5. Market for the Registrant's Common Equity
and Related Security Holder Matters . . . . . . . . . . .. . .. 4
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 4
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity. . 4
Item 8. Financial Statements and Supplementary Data . . . . . 4
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . 4
PART III
Item 10. Directors and Executive Officers of the Registrant . 5
Item 11. Executive Compensation . . . . . . . . . . . . . . . 6
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . 6
Item 13. Certain Relationships and Related Transactions . . . 6
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . .. . . . . . . . . . . . . . . . . . 6
Signatures . .. . . . . . . . . . . . . . . . . . . . . . . . 7
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PART I
ITEM 1 - BUSINESS
General Description of Business
The Somerset Group, Inc. (The "Company" or "Registrant"), is a nondiversified,
unitary savings and loan holding company. Its major asset is a 21.7% ownership
interest in First Indiana Corporation ("First Indiana"), which owns 100% of
First Indiana Bank (the "Bank"). The Company operates First Indiana Investor,
which market insurance and investment products primarily to Bank customers.
As a result of a merger on January 20, 1998 with Whipple & Company P.C.
("Whipple"), a division of the Company, Somerset Financial Services provides tax
accounting, health care consulting, investment and wealth management, and
management consulting services.
Financial Information About Business Segments
Described below are the operations of the Company's segments. Financial
information about the segments is incorporated by reference to Note 10 of the
Notes to Consolidated Financial Statements on page 28 of this report.
Narrative Description of Business
I. Insurance and Investment Products Segment
The Company sells insurance and non-insured investment products through two
divisions: First Indiana Insurance Services and First Indiana Investor Services.
First Indiana Insurance Services products consist of tax-deferred fixed-rate
annuities, life insurance, and property and casualty insurance. First Indiana
Investor Services products consist primarily of mutual funds and variable-rate
annuities. These products are marketed to customers of First Indiana Bank and
to the general public in the state of Indiana. Revenue from this segment
consists of commissions from the insurance companies and the broker/dealer
represented.
II. Financial Services Segment
The Company's former Somerset Wealth Management division was merged with Whipple
on January 20, 1998. The merged operations formed a new division, Somerset
Financial Services. This division offers a wide array of financial consulting
services that includes tax planning and preparation, retirement and estate
planning, investment and wealth management, health care consulting, and computer
network design and support. Revenue of this segment is on a fee-only basis,
with no revenue from the sale of products.
III. Information Technology Segment
On January 5, 1999, the Company formed an information technology segment by
merging the computer network design and support department of Somerset Financial
Services with assets and business purchased from two information technology
companies and formed a 100% owned subsidiary, Paradym Technologies, Inc.
("Paradym"). Paradym will provide information technology consulting to the
general public. Services include network design and support, corporate internet
access, design of web based processing systems, and design and installation of
surveillance and security systems.
IV. Banking Segment
Information on the Registrant's bank affiliate, First Indiana Corporation, is
incorporated into this Report by reference to Item 1 of the 1998 Report on Form
10-K for First Indiana Corporation for the year ended December 31, 1998, filed
separately under Commission file number 0-14354.
-3-
ITEM 2 - PROPERTIES
The Registrant's property consists of office equipment and furniture in leased
office space. The leased office space consists of 1,244 square feet located at
Suite 2800, First Indiana Plaza, Indianapolis, Indiana, 1,200 square feet
located at 10044 E. Washington Street, Indianapolis, Indiana, and 16,657 square
feet located at 8425 Woodfield Crossing Blvd., Indianapolis, Indiana.
ITEM 3 - LEGAL PROCEEDINGS
Information relative to this item is incorporated into this Report by reference
to Note 13 of the Notes to Consolidated Financial Statements, on page 33 of this
report.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the final quarter
of the fiscal period covered by this report.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS This information is set forth under the caption "Market for the
Company's Common Stock" on page 9 of this Report.
ITEM 6 - SELECTED FINANCIAL DATA
This information is set forth under the caption "Selected Financial Data" on
page 9 of this Report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND LIQUIDITY
This information is set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition and Liquidity" on
pages 10 through 14 of this Report.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is contained in the Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Independent Auditors' Report on pages 15
through 33 of this Report. Information on the Registrant's bank affiliate,
First Indiana, is incorporated by reference to Item 8 of the 1998 Report on Form
10-K for First Indiana, filed separately under Commission file number 0-14354.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Registrant had no changes in and no disagreements with its accountants
regarding accounting and financial disclosure.
-4-
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Information regarding Directors of the Registrant is incorporated into this
Report by reference to the definitive proxy statement of the Registrant for the
Annual Meeting of Shareholders to be held April 21, 1999, under the caption
"Proposal No. 1: Election of Directors", filed separately under Commission file
number 0-14227.
Executive Officers
Name Office Held Relationship Age
Robert H. McKinney Chairman Father of President 73
and Director and Vice President
Marni McKinney President, CEO Daughter of 42
and Director Chairman
Joseph M. Richter Executive Vice President None 56
Finance and Treasurer
Robert S. Kaspar Executive Vice President None 40
Business Development
Patrick J. Early President of Somerset None 41
Financial Services Division
The term of office for all officers of the Registrant continues until the first
meeting of the Board of Directors following the Annual Meeting of Shareholders
on April 21, 1999.
A brief account of the business experience of each Executive Officer during the
past five years is as follows:
Robert H. McKinney - Chairman of the Registrant; Chairman and Chief Executive
Officer of First Indiana Corporation; Chairman of the Executive Committee of
First Indiana Bank; Chief Executive Officer until May 1992; retired Partner of
Bose McKinney & Evans, attorneys; a Director of First Indiana Corporation;
Chairman, Federal Home Loan Bank Board (1977-1979).
Marni McKinney - President, Chief Executive Officer, and a Director of the
Registrant; Chairman and a Director of First Indiana Corporation and First
Indiana Bank; formerly Vice Chairman (1992 - 1998), Chief Operating Officer of
the Registrant (1992 - 1995); formerly Vice President and Director of Strategic
Planning of First Indiana Bank.
Joseph M. Richter - Executive Vice President, Finance and Treasurer of the
Registrant. Formerly, Executive Vice President, CFO and Treasurer (1990 - 1997)
Robert S. Kaspar - Executive Vice President, Business Development; formerly
President of Somerset Wealth Management, a former division (1997 - 1998);
formerly President and Director of Irwin Union Investor Services, a subsidiary
of Irwin Financial Corporation (1990 - 1996).
Patrick J. Early - President of Somerset Financial Services, a Division of the
Corporation; formerly, President of Whipple & Company, P.C.; Certified Public
Accountant, Certified Financial Planner and Personal Financial Specialist.
-5-
ITEM 11 - EXECUTIVE COMPENSATION
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 21, 1999, under the caption "Compensation of
Directors and Executive Compensation".
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 21, 1999, under the caption "Voting Securities and
Principal Holders Thereof".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 21, 1999, under the caption "Certain
Transactions".
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed in the accompanying Index to Selected
Financial Data, Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity, Financial
Statements and Financial Statement Schedules are filed as part of
this report.
2. The financial statement schedules listed in the accompanying Index
to Selected Financial Data, Management's Discussion and Analysis of
Results of Operations and Financial Condition and Liquidity,
Financial Statements and Financial Statement Schedules are filed as
part of this report.
3. Exhibits - The following exhibits are attached to this Form 10-K.
Exhibit
Number Exhibit
3 Amended Articles of Incorporation and Amended and Restated
By-laws thereto.
22 Subsidiaries of the Registrant.
23 Definitive Proxy Statement for Annual Meeting of
Shareholders to be held April 21, 1999.
24 Consent of Independent Certified Public Accountants, of
report dated February 6, 1998, for incorporation into Form
S-8 registration statement.
99 First Indiana Corporation's Form 10-K for the year ended
December 31, 1997.
All other exhibits are not attached since they are not applicable to the
Registrant:
(b) Reports on Form 8-K.
(c) Financial Statement Schedules.
-6-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE SOMERSET GROUP, INC.
By s/ Robert H. McKinney 3/17/99
Robert H. McKinney, Chairman
By s/ Marni McKinney 3/17/99
Marni McKinney, President and
Principal Executive Officer
By s/ Joseph M. Richter 3/17/99
Joseph M. Richter, Executive Vice
President and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant in the
capacities indicated and on the date indicated.
Signatures Title Date
s/ Robert H. McKinney Director, Chairman 3/17/99
Robert H. McKinney
s/ Marni McKinney Director, President 3/17/99
Marni McKinney and Principal Executive Officer
s/ Kevin K. McKinney Director and Vice President 3/17/99
Kevin K. McKinney
s/ H. J. Baker Director 3/17/99
H. J. Baker
s/ Patrick J. Early Director 3/17/99
Patrick J. Early
s/ William L. Elder Director 3/17/99
William L. Elder
s/ Douglas W. Huemme Director 3/17/99
Douglas W. Huemme
s/Malcolm A. Leslie Director 3/17/99
Malcolm A. Leslie
s/Gary L. Light Director 3/17/99
Gary L. Light
s/ Michael L. Smith Director 3/17/99
Michael L. Smith
-7-
THE SOMERSET GROUP, INC.
Form 10-K for the Year Ended December 31, 1998
Items 5, 6, 7, 8, 14(a) (1) and (2), and 14(c)
Index to Selected Financial Data,
Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity,
Financial Statements and Financial Statement Schedules
Selected Financial Data, Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity, Financial Statements and
Schedules of the Registrant and its subsidiaries, required to be included in
Items 5, 6, 7, 8, 14(a) (1) and (2), and 14(c) are listed below:
Page
MARKET FOR THE REGISTRANT'S COMMON STOCK 9
SELECTED FINANCIAL DATA 9
MANAGEMENT'S DISCUSSION AND ANALYSIS 10
FINANCIAL STATEMENTS:
- - Independent Auditors' Report 16
- - Consolidated Statements of Income for the years ended
- - December 31, 1998 1997 and 1996 17
- - Consolidated Balance Sheets as of December 31, 1998 and 1997 18
- - Consolidated Statements of Shareholders' Equity for the years
- - ended December 31, 1998, 1997, and 1996 19
- - Consolidated Statements of Cash Flows for the years ended
- - December 31, 1998 1997 and 1996 20
- - Notes to Consolidated Financial Statements 21
- - Summarized Consolidated Statements of Subsidiary, Not
- - Consolidated with Registrant 34
FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted because the required information
is contained in the notes to the financial statements or because such schedules
are not required or are not applicable.
The individual financial statements of the Registrant have been omitted since
the Registrant is primarily an operating company and all subsidiaries included
in the consolidated statements being filed, in the aggregate, do not have
minority equity interest and/or indebtedness to any person other than the
Registrant or its consolidated subsidiaries in amounts which together exceed 25%
of consolidated net assets as shown by the most recent consolidated balance
sheet. All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
-8-
THE SOMERSET GROUP, INC.
SELECTED FINANCIAL DATA (1)
(Dollars in thousands except per share amounts)
Years Ended December 31,
1998 1997 1996 1995 1994
Fees, commissions and
investment income $7,656 $7,242 $6,532 $5,099 $3,937
Equity in earnings of
First Indiana 4,130 3,883 3,003 3,938 2,616
Gross profit of construction
operations (2) --- --- --- 1,649 4,303
Income from operations
before income taxes 4,001 3,567 3,123 5,571 4,159
Net income 2,865 2,536 2,145 3,355 2,624
Net income per share - basic (3) .99 .87 .75 1.16 .92
Net income per share - diluted (3) .97 .86 .73 1.15 .90
as of December 31,
1998 1997 1996 1995 1994
Working capital $5,795 $6,251 $5,998 $9,146 $6,917
Carrying value-investment
in First Indiana 36,104 32,406 29,746 27,549 24,265
Market value-investment
in First Indiana 55,169 68,515 48,470 38,882 23,782
Total assets 44,773 42,460 39,718 40,188 41,075
Long-term debt --- 30 44 2,500 5,500
Total liabilities 9,310 9,000 8,121 10,429 14,392
Shareholders' equity 35,463 33,460 31,597 29,759 26,683
Cash dividends per share (3) .18 .18 .16 .128 .064
Book value per share (3) 12.26 11.55 10.91 0.41 9.26
___________________
(1) All historical amounts have been restated for a merger that occurred
January 20, 1998.
(2) The construction operations were sold in June 1995.
(3) 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. The quarterly range of prices for the Company's common stock for
the years ended December 31, 1998 and 1997 is presented below:
1998 1997
Quarter High Low High Low
First - ended March 31, $25.625 $19.250 $20.75 $14.25(a)
Second - ended June 30, $24.250 $21.000 $15.50 $13.50
Third - ended September 30, $25.000 $17.875 $15.75 $13.50
Fourth - ended December 31, $18.875 $15.750 $22.00 $14.94
As of February 26, 1999, there were 192 shareholders of record and approximately
840 beneficial owners.
__________________
(a) A five-for-four stock split was effective February 26, 1997.
-9-
MANAGEMENT?S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Earnings for the year ended December 31, 1998 of $2,865,000 were 13% above
comparable earnings for 1997 of $2,536,000, and 34% above earnings for 1996 of
$2,145,000. Earnings for 1998 were lowered by non-recurring expenses for the
merger with Whipple and Company, P.C. ("Whipple") that occurred in the first
quarter of 1998. These expenses reduced net earnings approximately $100,000.
If these expenses were excluded from 1998 results, earnings increased to
$2,965,000, an increase of 17% over the 1997 earnings and 38% over the 1996
earnings.
The merger was accounted for as a pooling-of-interests business combination, and
all historical amounts have been restated to include the financial results of
Whipple as if the merger had occurred at the beginning of all time periods
presented in this Annual Report.
Net earnings during each of the three years ended December 31, 1998, by source
of revenue and income, is presented below to provide an overall perspective of
the results of each of the Company's operations.
Amounts are After Income Taxes
1998 1997 1996
Per* Per* Per*
Amount Share Amount Share Amount Share
Fee income $ 198,000 $.07 $ (43,000) $(.01) $ 106,000 $.04
Commissions and investment
income 273,000 .09 411,000 .14 425,000 .14
Equity in earnings of
First Indiana 2,929,000 .99 2,693,000 .91 2,137,000 .73
--------- ---- --------- --- --------- ---
3,400,000 1.15 3,061,000 1.04 2,668,000 .91
General corporate
expenses (435,000) (.15) (525,000) (.18) (523,000) (.18)
Net income before
merger expenses 2,965,000 1.00 2,536,000 .86 2,145,000 .73
Merger expenses (100,000) (.03) --- --- --- ---
--------- --- --------- --- --------- ---
Net income $2,865,000 $.97 $2,536,000 $.86 $2,145,000 $.73
========= === ========= === ========= ===
* Per average diluted share outstanding.
Fee income and commissions and investment income represent the Company's direct
operations in the financial services industry. The operations consist of two
divisions of the Company: Somerset Financial Services division and First Indiana
Investor Services division.
Fee income is generated by Somerset Financial Services that was formed in 1998
as a result of the merger with Whipple. The merger combined the Company's
former financial advisory and asset management operations with the operations of
Whipple. Services provided by this division are paid for on an independent
consulting fee only basis, with no revenue generated from the sale of any
products. Commission income is generated by First Indiana Investor Services.
Operations consist of an insurance agency and an investment-marketing department
that offers non- Federal Deposit Insurance Corporation ("FDIC") insured
insurance and investment products primarily to customers of First Indiana Bank.
Revenue is commission based from the insurance companies and investment product
issuers it represents. Also included in this category is income generated from
the Company's own investment portfolio.
FEES, COMMISSIONS AND INVESTMENT INCOME
Revenue from fees, commissions and investment income for the three years ended
December 31, 1998 were as follows:
1998 1997 1996
Fee revenue $6,386,000 $5,765,000 $5,069,000
Commission revenue 941,000 1,084,000 1,006,000
--------- ---------- ---------
7,327,000 6,849,000 6,075,000
Investment income 329,000 393,000 457,000
--------- --------- --------
$7,656,000 $7,242,000 $6,532,000
========= ========= =========
-10-
Revenue from fees and commissions during 1998 of $7,327,000 represented an
increase of 7% over 1997 revenue of $6,849,000, and a 21% increase over 1996
revenue of $6,075,000. Increased fee income for health care consulting,
investment and wealth management, and tax preparation and consulting services
were the service specialties primarily responsible for the increase. These
increases more than offset the loss of revenue in 1998 from attestation
services. Attestation services included financial statement audits,
compilations and reviews. The business providing these services was sold by
Whipple & Company P.C. prior to the merger of Whipple with Somerset. Revenue for
performance of these attestation services is included in 1997 and 1996 revenue,
with no such revenue in 1998. The Company has recently implemented strategies to
expand the range of consulting services it offers and to increase revenue.
These include a group purchasing service for medical practices and expansion of
investment and wealth management services.
Commission revenue from the sale of insurance and investment products for 1998
declined $143,000, or 13% compared to 1997, and were 6% below 1996. The decline
is attributed to several factors including an interest rate environment that
caused downward pressure on sales of fixed rate annuities, the division's
primary product. During 1998, the division made significant progress in
expanding its sales focus into other investment products such as variable
annuities, mutual funds, stocks, and fixed income securities. While sales of
these products assisted in maintaining a reasonable level of product sales, the
commissions received for such sales are generally lower than that on fixed
rate annuities. In the latter part of 1998, the division began focusing on
sales to individuals outside of its alliaance with First Indiana Bank
(the "Bank") in order to increase revenue while continuing to service customers
of the Bank.
Investment income decreased in each of the three years primarily from a decrease
in the average amount of net cash available for investments. It is anticipated
that short-term investments will continue to decline in the future as cash is
used to expand operations.
EQUITY IN EARNINGS OF FIRST INDIANA CORPORATION
The Company's equity in earnings of First Indiana Corporation ("First Indiana")
of $4,130,000 was 6.4% above 1997 and 38% above the amount for 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 was $852,000 on income before income taxes. Excluding this one-
time expense, equity income amounted to $3,855,000. The 1998 equity income
represented a 7% increase over this $3,855,000 comparable amount. This one-time
charge resulted in an ongoing reduction in deposit premiums beginning in 1997.
First Indiana posted record earnings in 1998 while sustaining substantial asset
growth. Total assets increased 11.3% and amounted to $1.8 billion compared to
$1.6 billion at December 31, 1997.
Loans outstanding grew 13%, to $1.5 billion at December 31, 1998 from $1.4
billion at year-end 1997. Total loan originations eclipsed all previous
records, amounting to $1.5 billion, a 35% increase over 1997's record levels.
The significant growth in First Indiana's loan portfolios contributed to net
interest income of $62.8 million, a slight decrease from $63.0 million in 1997.
The decrease arises from a compressed net interest margin due to lower loan
yields in the current interest rate environment.
The increase in loans occurred in all of First Indiana's targeted portfolios.
Loans to business increased 44%, construction loans grew 19%, and consumer loans
grew 6% during 1998 compared with 1997.
Through the sale of residential and consumer loans in the secondary market,
First Indiana earned $9.4 million before income taxes in non-interest income, a
92% increase over 1997 income of $4.9 million. Total non-interest income was
$23.8 million, a 32% increase over $18 million in 1997.
First Indiana experienced a favorable trend in loan charge-offs during 1998.
Net loan charge-offs were $6.5 million during 1998, compared with $7.1 million
in 1997. The allowance for losses on loans and real estate owned at December 31
1998 was $26.2 million.
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.
-11-
OPERATING EXPENSES
Operating expenses of $7,785,000 for 1998 represented a 3% increase over the
$7,558,000 expended in 1997, and 21% above the same expenses in 1996. Expenses
for 1998 included direct merger expenses of $163,000 that were one-time and non-
recurring in nature. Excluding these expenses, operating expenses for 1998
amounted to $7,622,000, or 1% above 1997 expenses, and 19% above the 1996
expenses.
As a percentage of revenue and income, the $7,622,000 incurred in 1998 was 65%
(35% margin), an improvement over the 68% ratio (32% margin) of 1997 and the 67%
ratio (33% margin) in 1996. These percentages of revenue and income are
indicative of operating efficiencies achieved by the merger, and we are pleased
that they were achieved during the first year of merged operations.
We expect operating expenses, measured as a percentage of revenue and income, to
continue to decrease in future periods. During 1998, the Company incurred
general and administrative expenses and marketing expenses that were an indirect
result of combining operations and should not be as high in future periods. In
addition, during the fourth quarter of 1998, professional staff was added in the
Somerset Financial Services division. The addition of these talented
individuals with industry experience was in response to continued demands and
anticipated demand dfor our investment and wealth management and specialty
consulting services. However, they represent an investment for future growth and
reduced earnings in the short term. Their full potential is not expected to be
reflected in financial results until 1999 and beyond.
FINANCIAL CONDITION AND LIQUIDITY
The financial condition and liquidity of the Company was excellent at December
31, 1998. The Company was also in a very sound position at the end of 1997.
Because of 1995 sales of all construction industry operating assets, and the
Company's operating activities since 1995 providing additional positive cash
flow, 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, 1998, the Company had a high ratio of current assets to current
liabilities of 14.8 to one, compared to 6.7 to one at December 31, 1997. In
addition, 68% of the current assets consisted of cash, cash equivalents and
short-term investments. Net working capital was $5.8 million at December 31,
1998, compared to $6.3 million at the end of 1997. This decrease is primarily
attributable to the use of cash to purchase additional shares of First Indiana
and to retire all outstanding debt of Whipple that existed at the date of the
merger. The Company had no debt at December 31, 1998. Outstanding debt at
December 31, 1997 of $502,000 was retired in 1998. Shareholders' equity
increased to $35,463,000 at December 31, 1998, from $33,460,000 at the end of
1997. The book value per share was $12.26 at December 31, 1998, compared to
$11.55 at December 31, 1997, an increase of 6.1%.
Generally Accepted Accounting Principles ("GAAP") require the Company 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
$8.9 million) may not be paid. The market value of our investment in First
Indiana at December 31, 1998 was approximately $55 million, or $19 million
greater than the investment carrying amount reflected in our balance sheet at
December 31, 1998.
Operating activities during 1998 provided $734,000 of cash, compared to
$1,123,000 in 1997. The two primary causes of this decrease were an increase in
trade accounts, notes and other receivables and a comparative decrease in non-
cash deferred income tax expense. The increase in receivables was primarily a
result of the timing of the completion of services that occurred late in 1998
and the overall increase in revenue and operating levels. The comparative lower
deferred income tax expense was a result of the change of the method of filing
taxes for Whipple from cash basis accounting to accrual basis accounting, which
caused a reversal of taxes previously deferred at December 31, 1997.
-12-
The Company purchased 40,500 shares of First Indiana common stock at a cost of
$990,000, and spent $207,000 for equipment; primarily computers and software to
bring systems into readiness for the Year 2000.
The Company paid $522,000 in cash dividends to its shareholders in 1998, at an
annual rate of $.18 per share, the same as the rate paid in 1997. The $.18 per
share paid in 1997 represented a 12.5% increase over the dividend paid in 1996.
The increase in the dollar amount of dividends paid during 1998 was caused by an
increase in the number of shares outstanding, primarily as a result of the
shares issued in the Whipple merger. Dividends paid during 1998 represented 71%
of cash flow from operations, compared to 41% in 1997, and 28% in 1996.
In the later part of 1998, the Company repurchased 23,465 shares of its common
stock, at a cost of $464,000, and reissued 6,094 shares of common stock for
proceeds of $88,000. The shares were reissued pursuant to stock option grants
that were exercised during the year.
Proceeds from the sale of short-term investments amounted to $1,533,000. The
investments were sold to provide funding for the uses of cash previously
described.
Management anticipates that expansion activities, including future purchase of
property and equipment, will be funded from available cash and short-term
investments. A major acquisition could require the use of bank debt and/or the
issuance of additional shares of common stock.
The Company is a registered savings and loan holding company and is subject to
regulations of permitted activities defined in the National Housing Act and
administered by the Office of Thrift Supervision.
IMPACT OF ACCOUNTING STANDARDS NOT YET ADOPTED
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incurred. It further requires that any such
costs capitalized in prior periods be charged to expense. SOP 98-5 is effective
for financial statements for fiscal years beginning after December 15, 1998.
The Company will adopt SOP 98-5 effective January 1, 1999. Concurrent with the
adoption, the Company will charge $189,000 to expense that will be reported as
the cumulative effect of a change in accounting principle in the first quarter
of 1999.
Other pronouncements by the Financial Accounting Standards Board and the
American Institute of Certified Public Accountants during 1998 have either been
adopted by the Company or are not applicable to the Company's consolidated
financial statements.
YEAR 2000 READINESS
The Year 2000 issue refers to shortcomings which exist in some current computer
hardware and software that preclude the correct calculation of date-sensitive
information from, into, and between the twentieth and twenty-first centuries,
including leap year calculations. The Company is subject to regulations of two
governmental agencies in connection with review of its state of readiness. The
Company's operations of the First Indiana Investor Services division is subject
to review by the Federal Financial Institutions Examination Council ("FFIEC")
and its Somerset Financial Services division, as a Registered Investment Advisor
is subject to review by the Securities and Exchange Commission ("SEC"). Both
the FFIEC and the SEC require us to assess the Company's and its vendors'
ability to be Year 2000 ready by June 30, 1999 for all mission critical systems.
Because the Company relies on technology for transaction processing, preparing
for the Year 2000 is a critical focus of resources.
-13-
All hardware and software vendors, as well as significant other vendors, have
been identified and contacted. The Company identified potential Year 2000
readiness issues and developed action plans and contingency plans for each
issue. During 1998, the Company tested systems for purposes of validating Year
2000 readiness, upgraded and replaced existing hardware, software, and embedded
systems, and implemented contingency plans in the event a particular vendor will
not assist the company in its Year 2000 efforts. A team is monitoring
significant vendor relationships to ensure that no issues arise which will cause
management to doubt the ability of the vendor to be adequately prepared for the
Year 2000 and thus possibly impact the Comapny's ability to conduct business
beyond the century change.
The Company uses external data service bureaus for processing and reporting of
some customer data. Proxy testing has been conducted on the mission critical
aspects with the service bureaus.
The Company completed an upgrade of personal computer hardware during 1998, at a
cost of approximately $140,000, and also completed the installation of
replacement vendor supplied software at a cost of approximately $20,000.
At December 31, 1998, all computer hardware is capable of processing data in the
Year 2000, and all mission critical software has been tested and determined to
be Year 2000 compliant, with the exception of two software systems that are
scheduled to be replaced by June 30, 1999. The cost of such upgrades is
estimated to be $25,000.
Due to uncertainties associated with Year 2000 problems, the Company's
contingency plan in the event that its business or operations are disrupted
January 1, 2000, is to focus the resources and professional staff of Paradym
Technologies, Inc. immediately on the remediation of any system failure that may
have gone undetected. Paradym Technologies, Inc. is a wholly-owned subsidiary
of the Company that is in the business of providing information technology
services to clients of the Company.
Management sees no internal impact or risk to the Company's ability to operate
in the twenty-first century, but it is not possible to assess the financial
impact of lost revenue due to Year 2000 issues or future expenditures due to
external factors at this time.
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.
-14-
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management of The Somerset Group, Inc. has prepared and is responsible for the
consolidated financial statements and for the integrity and consistency of other
related information contained in the Annual Report. In the opinion of
management, the consolidated 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 Company 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 the
consolidated 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 persnal and business conduct and an organization structure
providing for division of responsibility and authority.
Management believes the system of controls has prevented any occurrences that
could be material to the consolidated financial statements.
The Company engaged the firm of KPMG LLP, independent auditors, to render an
opinion on the consolidated 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 consolidated
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 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 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 5, 1999
s/Robert H. McKinney s/Marni McKinney s/Joseph M. Richter
Robert H. McKinney Marni McKinney Joseph M. Richter
Chairman President and Chief Financial Officer
Chief Executive Officer
-15-
KPMG
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
s/KPMG LLP
KPMG LLP
Indianapolis, Indiana
February 5, 1999
-16-
THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENT
<TABLE>
<S> <C> <C> <C>
Year Ended December 31
1998 1997 1996
Revenue and Income:
Fees and commissions $7,327,000 $6,849,000 $6,075,000
Equity in earnings of First Indiana 4,130,000 3,883,000 3,003,000
Investment income 329,000 393,000 457,000
---------- ---------- ----------
Total revenue and income 11,786,000 11,125,000 9,535,000
Operating Expenses:
Salaries, wages, commissions and 5,849,000 5,990,000 4,861,000
General and administrative expenses 998,000 882,000 952,000
Occupancy expenses 347,000 305,000 295,000
Advertising and marketing 152,000 96,000 22,000
Depreciation and amortization 272,000 246,000 182,000
Interest expense 4,000 39,000 100,000
Merger expenses 163,000 --- ---
--------- --------- ---------
Total operating expenses 7,785,000 7,558,000 6,412,000
--------- -------- --------
Income before income taxes 4,001,000 3,567,000 3,123,000
Income tax expense 1,136,000 1,031,000 978,000
-------- --------- ---------
Net income 2,865,000 2,536,000 2,145,000
========= ========= =========
Income Per Share
Basic $.99 $.87 $.75
Diluted $.97 $.86 $.73
Average Shares Outstanding:
Basic 2,899,933 2,902,800 2,870,743
Diluted 2,961,835 2,957,978 2,929,489
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-17-
THE SOMERSET GROUP, INC. CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
As of December 31,
ASSETS 1998 1997
Cash and cash equivalents 526,000 600,000
Short-term investments 3,713,000 5,248,000
Trade accounts, notes and other
receivables less Allowance
for doubtful accounts 1,888,000 1,222,000
Prepaid expenses 87,000 80,000
Refundable income taxes --- 203,000
-------- ---------
Total current assets 6,214,000 7,353,000
Investments
First Indiana Corporation (market
Value of $5,169,000 and
$68,515,000) 36,104,000 32,406,000
---------- ----------
Office furniture and equipment 1,169,000 1,143,000
Less accumulated depreciation 712,000 696,000
--------- ---------
457,000 447,000
Other assets
Notes receivable, net 240,000 580,000
Goodwill, net of accumulated
amortization 1,074,000 1,133,000
Other 684,000 541,000
--------- ---------
1,998,000 2,254,000
Total assets 44,773,000 42,460,000
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Note payable - bank --- 549,000
Current portion of long-term debt --- 13,000
Trade accounts papyable 97,000 60,000
Accrued compensation 194,000 86,000
Taxes. other than income taxes 33,000 53,000
Income taxes 30,000 ---
Deferred income taxes --- 327,000
Other accrued expenses 65,000 104,000
------- --------
Total current liabilities 419,000 1,102,000
Deferred income --- 23,000
Deferred income taxes 8,891,000 7,845,000
Long-term debt less current portion --- 30,000
Shareholders' equity
Common stock without par value
Authorized 4,000,000 shares,
Issued and outstanding 2,909,214
shares 1,862,000 1,855,000
Capital in excess of stated value 3,599,000 3,549,000
Accumulated other comprehensive
income (loss) (19,000) (22,000)
Retained Earnings 30,359,000 28,078,000
---------- ----------
35,801,000 33,460,000
Less 17,371 Treasury shares at
cost 338,000 ---
--------- ---------
Total shareholders' equity 35,801,000 33,460,000
---------- ----------
Total liabilities and Shareholders'
Equity 44,773,000 42,460,000
========== =========
</TABLE>
-18-
THE SOMERSET GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
January 1, 1996 to December 31, 1998
<TABLE>
<S> <C> <C> <C> <C> <C>
Capital Accumulated
in Excess Other
Common of Stated Comprehensive Retained Treasury
Stock Value Income (Loss) Earnings Shares Total
Balance January 1, 1996 1,829,000 3,648,000 72,000 24,210,000 $ 29,759,000
Comprehensive Income:
Net income year ended December --- --- --- 2,145,000 2,145,000
Unrealized losses on short-term
investments net of deferred --- ---
income taxes --- --- (72,000) (72,000)
-------
Total comprehensive income 2,073,000
Shares of common stock issued 17,000 292,000 --- 64,000 373,000
Shares of common stock retired (10,000) (227,000) --- --- (237,000)
Cash dividends paid --- --- --- (409,000) (409,000)
Equity in other capital changes
of First Indiana Corporation,
net of deferred income taxes --- --- --- 38,000 38,000
--------- --------- ----- ---------- ----- ----------
Balance December 31, 1996 1,836,000 3,713,000 --- 26,048,000 31,597,000
Comprehensive Income:
Net income year ended December --- --- --- 2,536,000 2,536,000
Unlealized losses on short-term
investments, net of deferred
income taxes --- --- (22,000) --- (22,000)
---------
Total comprehensive income 2,514,000
Shares of common stock issued 39,000 265,000 --- 39,000 343,000
Shares of common stock retired (20,000) (429,000) --- --- (145,000)
Cash dividends paid --- --- --- (462,000) (462,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (83,000) (83,000)
-------- --------- ------- ---------- ----------
Balance December 31, 1997 1,855,000 3,549,000 (22,000) 28,078,000 33,460,000
Comprehensive Income: ---
Net income, year ended December --- --- --- 2,865,000 2,865,000
Unrealized gain on short-term ---
investments, net of deferred
income taxes --- --- 3,000 --- 3,000
Total comprehensive income 2,868,000
Tax benefit of stock
options exercised --- 95,000 --- --- 95,000
Shares of common stock issued 7,000 (45,000) --- --- 126,000 88,000
Purchase of treasury shares --- --- --- --- (464,000) (464,000)
Cash dividends paid --- --- --- (522,000) (522,000)
Equity in other capital changes of
First Indiana Corporation, net of
deferred income taxes --- --- --- (62,000) (62,000)
--------- --------- ------- ---------- ------- ----------
Balance December 31, 1998 1,862,000 3,599,000 (19,000) 30,359,000(338,000)35,463,000
========= ========= ====== ========== ====== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-19-
THE SOMERSET GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Cash flows from operating activities:
Net income $2,865,000 $2,536,000 $2,145,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 272,000 246,000 182,000
Deferred income taxes 719,000 1,199,000 985,000
Equity in earnings of First Indiana (4,130,000) (3,883,000) 3,003,000
Dividends received from First Indiana 1,319,000 1,087,000 1,015,000
Other --- --- (11,000)
Changes in operating assets and liabilities:
Accounts, notes, and other receiva (666,000) 171,000 779,000
Prepaid expenses (7,000) (18,000) (13,000)
Accounts payable and accrued expen 86,000 (42,000) (424,000)
Accrued and refundable income taxe 276,000 (173,000) (173,000)
-------- --------- ---------
Net cash provided by operating activitie 734,000 1,123,000 7,488,000
------- -------- --------
Cash flows from investing activities:
Purchase of shares of First Indiana (990,000) --- ---
Proceeds from sale of assets --- 8,000 2,000
Purchase of property and equipment (207,000) (229,000) (272,000)
Decrease (increase) in other assets 256,000 (3,000) (1,097,000)
Decrease (increase) in short-term
investments 1,533,000 (524,000) 2,470,000
--------- ------- --------
Net cash provided (used) by
investing activities 592,000 (748,000) 1,103,000
------- ------- ---------
Cash flows from financing activities:
Principal payments on note payable, (459,000) (225,000) (249,000)
Principal payments on long-term bor (43,000) (12,000) (2,445,000)
Proceeds from sale of common stock 88,000 330,000 164,000
Purchase of common stock (464,000) (475,000) (298,000)
Cash dividends paid (522,000) (462,000) (409,000)
--------- ------- ----------
Net cash used by financing activities (1,400,000) (844,000) (3,237,000)
---------- ------- ---------
Decrease in cash and cash equivalents (74,000) (469,000) (652,000)
Cash and equivalents at
beginning of period 600,000 1,069,000 1,721,000
------- --------- --------
Cash and cash equivalents at end of period $526,000 $600,000 $1,069,000
======= ======= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-20-
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 at December 31, 1998 is a 21.7% ownership interest in First
Indiana Corporation ("First Indiana"), which owns 100% of First Indiana
Bank (the "Bank"). The Company operates First Indiana Investor
Services, which markets insurance and investment products primarily to
Bank customers.
As a result of a merger on January 20, 1998 with Whipple & Company P.C.
("Whipple"), a division of the Company, Somerset Financial Services,
provides tax, accounting, health care consulting, investment and wealth
management, and management consulting services. On January 5, 1999, a
subsidiary of the Company, Paradym Technologies, Inc., purchased the
assets and business of two companies and will provide information
technology consulting, including corporate Internet, networking,
surveillance, and wiring services.
(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 GAAP. The merger with Whipple was accounted
for as a pooling-of-interests combination and, accordingly, Somerset's
historical consolidated financial statements have been restated to
include the accounts and results of Whipple. (See Note 2.) 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
financial services provided to clients 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 fair value
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 accumulated other comprehensive income.
(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) 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.
(g) Employee Benefit Plans: Prior to the merger with Whipple, Somerset
maintained a Salary Reduction Simplified Employee Pension Plan (SAR-
SEP), and Whipple maintained a Profit Sharing Retirement Plan. The SAR-
SEP was qualified for income tax deferral under Internal Revenue Service
Code Section 408(k), and the Profit Sharing Retirement Plan was
qualified under Internal Revenue Service Code Section 401(k). The
Somerset SAR-SEP was terminated in 1998, and the Company adopted the
Whipple Profit Sharing Retirement Plan for all employees.
- -21-
(h) 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.
(i) Earnings Per Share: Basic earnings per share for 1998, 1997, and
1996 were computed by dividing net income by the weighted average shares
of common stock outstanding (2,899,933, 2,902,800, and 2,870,743 in
1998, 1997, and 1996 respectively). Diluted earnings per share for
1998, 1997, and 1996 were computed by dividing net earnings by the
weighted average shares of common stock and common stock that would have
been outstanding assuming the issuance of all potential dilutive shares
outstanding (2,961,835, 2,957,978, and 2,929,489 in 1998, 1997, and 1996
respectively). Dilution of the per-share calculation relates to stock
options. 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.
(j) Treasury Shares: Treasury shares issued were valued at average
cost of all treasury shares at the date of issuance.
(k) Comprehensive Income: The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which established
standards for reporting and displaying comprehensive income and its
components in the consolidated financial statements. Comprehensive
income is the total of all net income and all non-owner changes in
equity. The Company adopted FAS 130 as of January 1, 1998, it was
retroactively applied to December 31, 1996, and the statement had no
impact on the financial condition or results of operations.
(l) Segments of an Enterprise: The FASB also issued Statement of
Financial Accounting Standard No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS 131"), which introduced new
guidelines on segment reporting. The Company adopted FAS 131 as of
January 1, 1998 and has presented the applicable disclosures for 1996,
1997, and 1998. (See Note 10.)
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 include tax planning and preparation,
accounting, health care consulting, information technology, investment
management, and management consulting services. Shares of Whipple were
not publicly traded. This business combination has been accounted for
as a pooling-of-interests combination and, accordingly, the consolidated
financial statements for periods prior to the combination have been
restated to include the accounts and results of operations of Whipple.
-22-
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying
consolidated financial statements are summarized below.
Years Ended December 31,
<TABLE>
<S> <C> <C>
1997 1996
Revenue and income:
Somerset $5,385,000 $4,449,000
Whipple 5,740,000 5,086,000
---------- ---------
Combined $11,125,000 $9,535,000
========== =========
Operating expenses:
Somerset $1,978,000 $1,524,000
Whipple 5,580,000 4,888,000
---------- ---------
Combined $7,558,000 $6,412,000
========= =========
Net income:
Somerset $2,450,000 $2,039,000
Whipple 86,000 106,000
--------- ---------
Combined $2,536,000 $2,145,000
========= =========
</TABLE>
The 333,359 shares issued by Somerset in the transaction consisted of
293,833 shares as treasury shares and 39,506 previously unissued shares.
There were no transactions between Somerset and Whipple prior to the
combination.
Paradym Technologies, Inc.
On January 4, 1999, a 100% owned subsidiary of Somerset purchased the
assets of two companies and commenced operations as Paradym
Technologies, Inc. ("Paradym"). Paradym will provide information
technology consulting services, including corporate Internet,
networking, and video surveillance and wiring services. The total cost
of the assets purchased was $315,000.
Note 3. Short Term Investments
Short-term investments are stated at fair value and are available-for-
sale. The Company is actively seeking additional businesses in the
financial services industry and expects to utilize these funds for that
purpose. The investments at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<S> <C> <C> <C> <C>
Unrealized Unrealized Fair
December 31, 1998 Costs Gains Losses Value
Bond Mutual Funds $2,059,000 $1,000 $(43,000) $2,017,000
Government Agency Mortgage
Securities 830,000 4,000 --- 834,000
Collateralized Mortgage
Securities 674,000 3,000 --- 677,000
Money Market Funds, Pending
Investment 185,000 --- --- 185,000
--------- ------ ------- ---------
$3,748,000 $8,000 $(43,000) $3,713,000
========= ===== ======= =========
December 31, 1997
Bond Mutual Funds $2,480,000 $5,000 $(41,000) $2,444,000
Government Agency
Securities 200,000 --- --- 200,000
Government Agency Mortgage
Securities 922,000 3,000 --- 925,000
Collateralized Mortgage
Securities 1,080,000 4,000 --- 1,084,000
Money Market Funds,
Pending Investment 595,000 --- --- 595,000
---------- ------ ------- ---------
$5,277,000 $12,000 $(41,000) $5,248,000
========= ====== ====== =========
</TABLE>
-23-
Note 4. Allowances for Doubtful Accounts
Trade accounts, notes and other receivables are net of allowances for
doubtful accounts of $108,000 and $100,000 at December 31, 1998 and
1997, respectively. Activity concerning the allowances for doubtful
accounts for the three years ended December 31, 1998 was as follows:
Year Ended December 31,
1998 1997 1996
Balance at beginning of period $153,000 $118,000 $123,000
Additions charged to costs and expenses 10,000 149,000 70,000
Uncollectible accounts written off,
net of recoveries (25,000) (114,000) (75,000)
-------- ------- -------
Balance at end of period $138,000 $153,000 $118,000
Amount classified as a reduction of trade
accounts, notes, and other receivables $138,000 $53,000 $118,000
Amount classified as a reduction of other
assets, notes receivable --- 100,000 ---
------- ------- -------
138,000 $153,000 $118,000
======= ======= =======
Note 5. 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, 1998 2,758,467 12,703,294 21.7%
December 31, 1997 2,717,967 12,668,191 21.5%
December 31, 1996 2,717,967 12,455,122 21.8%
The Company's equity in earnings of First Indiana was as follows:
Year Ended December 31,
1998 1997 1996
Equity in earnings of First Indiana based
on percentage of ownership $4,122,000 $3,815,000 2,886,000
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 exceeded
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 25 years 8,000 83,000 264,000
------ -------- ---------
Total equity in earnings 130,000 $3,883,000 $3,003,000
======= ========= =========
-24-
At December 31, 1998, the actual cost of the Company's shares exceeded
its equity ownership of First Indiana's net assets. In future periods
these aggregate purchase price adjustments will be amortized to expense
using the straight-line method over 3 to 25 years. At December 31,
1998, the unamortized balance of the purchase price adjustments to be
charged against equity in earnings was $62,000.
The changes in retained earnings for equity in other capital changes of
First Indiana primarily represents changes in the Company's percentage
share of First Indiana's net worth resulting from changes in the number
of First Indiana shares outstanding or the number of shares owned by the
Company. Such capital changes also represent changes in First Indiana's
unrealized gain or loss on investments and other changes reflected in
First Indiana's retained earnings.
The Company's equity in undistributed earnings (equity earnings not
received as dividends) and capital changes of First Indiana, included in
consolidated retained earnings at December 31, 1998 and 1997 were
$21,829,000 and $19,128,000, respectively.
Equity in earnings of First Indiana for the year ended December 31, 1996
were reduced by an FDIC special assessment. The $852,000 assessment
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 FDIC imposed on all banks, including First
Indiana Bank, whose customers' deposits are insured by its Savings
Association Insurance Fund.
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 6. Other Assets
Notes receivable consisted of the following: December 31,
1998 1997
Long-term note receivable in connection
with the sale of construction assets $240,000 $270,000
Long-term note receivable in connection with the sale
of discontinued radio broadcasting properties --- 410,000
Less allowance for doubtful accounts --- (100,000)
-------- --------
$240,000 $580,000
======= =======
Goodwill is stated net of accumulated amortization. The amounts
represents 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.
-25-
Amounts paid are being amortized to expense over 15 years and consisted
of the following:
December 31,
1998 1997
Original amount paid $1,188,000 $1,188,000
Additional purchase price paid under an agreement for
payment if profits exceeded
pre-determined amounts 101,000 74,000
-------- --------
1,289,000 1,262,000
Less accumulated amortization (215,000) (129,000)
--------- ---------
$1,074,000 $1,133,000
========= =========
Other assets consisted of the following:
December 31,
1998 1997
Investment in split-dollar life insurance $495,000 $460,000
Organizational costs 189,000 81,000
------- --------
$684,000 $541,000
======= =======
The investment in split-dollar life insurance consists of contracts for
a key officer of the Company and is secured by cash value of the
contracts and a contractual guarantee of yield.
Organizational costs were incurred in connection with the start-up of
specialty consulting services offered by the Company and Whipple. The
Company adopted the American Institute of Certified Public Accountants
("AICPA") Statement of Position No. 98-5, Reporting on the Costs of
Start-Up Activities, effective January 1, 1999. Concurrent with this
adoption, the $189,000 will be charged to expense as a change in
accounting method and will be reported in the 1999 first quarter
results.
Note 7. Financial Instruments
The estimated fair value of the Company?s financial instruments at
December 31, 1998 and 1997 approximate their carrying value as reflected
in the consolidated balance sheets. The Company?s financial instruments
include cash and cash equivalents, short-term investments, and notes
receivable. Financial instruments also include the investment in First
Indiana that had a fair value of $55,169,000 and $68,515,000 at December
31, 1998 and 1997.
Note 8. Income Taxes
Income tax expense (benefit) attributable to income from operations
consisted of:
Year Ended December 31,
Current: 1998 1997 1996
Federal $321,000 $(147,000) $(24,000)
State and local 58,000 (20,000) (4,000)
------- ------- ------
379,000 (167,000) (28,000)
------- ------- ------
Deferred:
Federal 659,000 1,033,000 863,000
State and local 98,000 165,000 143,000
------- -------- --------
757,000 1,198,000 1,006,000
------- -------- --------
Total:
Federa 980,000 886,000 838,000
State and local 156,000 145,000 140,000
-------- ------- -------
Total income tax expense on
income from operations $1,136,000 1,031,000 978,000
========= ======== =======
-26-
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,
1998 1997 1996
Federal income tax at
statutory rate of 34% 1,360,000 1,213,000 $1,062,000
Add tax effect of:
State and local income taxes,
net of federal income tax benefit 106,000 132,000 192,000
Dividends received deduction
(First Indiana) (259,000) (296,000) (276,000)
Other 29,000 (18,000) ---
--------- -------- --------
$1,136,000 1,031,000 $978,000
========= ========= =======
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability at December 31, 1998 and 1997
consist of:
December 31,
Deferred tax assets: 1998 1997
Allowance for doubtful accounts $53,000 $42,000
Unrealized investment losses 12,000 14,000
Accrued liabilities 7,000 28,000
------ ------
Total deferred tax assets $ 72,000 $84,000
======= ======
Deferred tax liabilities:
Investment in First Indiana $8,951,000 $7,895,000
Office furniture and equipment 12,000 15,000
Cash basis tax accounting versus accrual basis --- 327,000
--------- ---------
Total net deferred tax liabilities $8,963,000 $8,256,000
========= =========
Net deferred tax liability $8,891,000 $8,172,000
========= =========
Amount classified as current $ --- $327,000
Amount classified as long-term 8,891,000 7,845,000
--------- ---------
$8,891,000 $8,172,000
========= =========
The Company made income tax payments of $61,000 during the year ended
December 31, 1998, received income tax refunds of $125,000 during the
year ended December 31, 1997, and made income tax payments of $235,000
during the year ended December 31, 1996.
-27-
Note 9. Interim Quarterly Results (Unaudited)
(Dollars in thousands except per share data)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter Annual
Commissions, fees and
investment income $2,587 $1,720 $1,673 $1,676 $7,656
Equity in earnings of First
Indiana 950 997 1,081 1,102 4,130
Operating expenses (2,045) (1,949) (1,888) (1,903) (7,785)
----- ----- ----- ----- -----
Income before taxes 1,492 768 866 875 4,001
----- ---- ---- ---- -----
Net income $1,012 $570 $628 $655 $2,865
===== === === === =====
Income per share - basic $.35 $.20 $.22 $.23 $ .99
=== === === === ===
Income per share -diluted $.34 $.19 $.21 $.22 $.97
=== === === === ===
1997
Commissions, fees and
investment income $2,634 $1,611 $1,432 $1,565 $7,242
Equity in earnings of
First Indiana 871 846 998 1,168 3,883
Operating expenses (2,227) (2,203) (1,548) (1,580) (7,558)
----- ----- ----- ----- -----
Income before taxes 1,278 254 882 1,153 3,567
----- --- ---- ----- -----
Net income $ 863 $ 239 $ 620 $ 814 $2,536
==== ==== ==== ==== =====
Income per share - basic $ .30 $ .08 $ .21 $ .28 $ .87
==== ==== ==== ===== ====
Income per share -diluted $ .29 $ .08 $ .21 $ .28 $ .86
==== ==== ==== ==== ====
Revenue and income from financial services is cyclical in nature as a
result of the timing of income tax planning and preparation services
performed by the Company. Because of government imposed filing
deadlines, a larger percentage of these services occur during the first
four months of each calendar year. Revenue and income during the first
quarter of each year will be favorably affected, as compared to the
remaining three-quarters of the year.
Note 10. Segment Reporting
Somerset's business units are organized to operate in the financial
services industry and as a holding company for its investment in First
Indiana. There are three operating and reporting units organized on the
basis of the type and source of their revenue and income.
The Somerset Group Management Division.
This division manages all investment and treasury functions of the
Company, including overseeing its investment in First Indiana. It also
sets policy guidelines for the other operating divisions. Revenue and
income is derived from the Company's investment in First Indiana and
from investment and loan portfolios.
Somerset Financial Services Division
Services provided to the general public by Somerset Financial Services
include tax planning and preparation, health care consulting,
information technology, investment and wealth management, and management
consulting services for entrepreneurs, their businesses, families, and
individuals.. Revenue and income for services is on a fee basis only;
as an hourly fee or a quoted flat fee. No products are sold and no
remuneration is received as an agent for any other business or
organization.
First Indiana Investor Services Division
This division markets investment and insurance products primarily within
the branch bank system of First Indiana and to a lesser degree to the
general public. The primary investment products include variable
annuities, mutual funds, and stocks and bonds. The primary insurance
products include fixed annuities, life insurance, and property and
casualty insurance. Revenue and income received is generated solely
from commissions received on products sold, as an agent for insurance
companies or through a contractual arrangement with a registered
investment broker/dealer.
There were no inter-segment sales and no foreign operations.
-28-
Note 10 Segment Reporting (Continued)
The segment financial information provided below is based on the
internal management reporting system used by the Company's management to
monitor and manage the financial performance of the Company. The
Company evaluates segement performance based on the return on beginning equity
employed, and the return on revenue.
Somerset Somerset First Indiana
Group Financial Investor
Management Services Services
Year Ended December 31,1998 Division Division Division Consolidated
Beginning equity employed $31,421,000 $824,000 $1,215,000 $33,460,000
Assets $41,208,000 $2,217,000 $1,348,000 $44,773,000
Revenue and income:
Fee based revenue -
(external customers) $0 $6,386,000 $0 $6,386,000
Commission revenue -
(external customers) 0 0 941,000 941,000
---------- --------- ------- ----------
Total fees and commissions 7,327,000
Equity earnings from
First Indiana Corporation 4,130,000 0 0 4,130,000
Investment income -
(external sources) 329,000 0 0 329,000
--------- -------- ------- ----------
Total revenue and income 4,459,000 6,386,000 941,000 11,786,000
--------- -------- ------- ---------
Expenses:
Salaries, wages, commissions
and benefits 503,000 4,802,000 544,000 5,849,000
General and administrative
expenses 172,000 684,000 142,000 998,000
Occupancy expenses 25,000 303,000 19,000 347,000
Advertising and marketing 12,000 130,000 10,000 152,000
Depreciation and amortization 19,000 143,000 110,000 272,000
Interest expense 0 4,000 0 4,000
Merger expenses (1) 95,000 68,000 0 163,000
----- ------ ------ -------
Total expenses 826,000 6,134,000 825,000 7,785,000
-------- -------- ------- --------
Income before income taxes 3,633,000 252,000 116,000 4,001,000
Income tax expense:
Current provision (benefit) (87,000) 423,000 43,000 379,000
Deferred provision (2) 1,083,000 (327,000) 1,000 757,000
--------- ------- ------ ---------
996,000 96,000 44,000 1,136,000
------- ------ ------ ---------
Net income $2,637,000 $156,000 $72,000 $2,865,000
========= ======= ====== =========
(1) Unusual non-recurring expenses
(2) A significant non-cash expense
-29-
Somerset Somerset First Indiana
Group Financial Investor
Management Services Services
Year Ended December 31, 1997 Division Division Division Consolidated
Beginning equity employed $29,592,000 $761,000 $1,244,000 31,597,000
Assets 39,628,000 1,487,000 1,345,000 42,460,000
Revenue and income:
Fee based revenue -
(external customers) 0 5,765,000 0 5,765,000
Commission revenue -
(external customers) 0 0 1,084,000 1,084,000
--------- --------- --------- ---------
Total fees and commissions 6,849,000
Equity earnings from
First Indiana Corporation 3,883,000 0 0 3,883,000
Investment income -
(external sources) 369,000 24,000 0 393,000
--------- --------- ------- --------
Total revenue and income 4,252,000 5,789,000 1,084,000 11,125,000
--------- --------- -------- ---------
Expenses:
Salaries, wages, commissions
and benefits 756,000 4,788,000 446,000 5,990,000
General and
administrative expenses 133,000 541,000 208,000 882,000
Occupancy expenses 23,000 264,000 18,000 305,000
Advertising and marketing 6,000 78,000 12,000 96,000
Depreciation and amortization 19,000 127,000 100,000 246,000
Interest expense 0 39,000 0 39,000
-------- --------- ------- --------
Total expenses 937,000 5,837,000 784,000 7,558,000
------- --------- ------- --------
Income before income taxes 3,315,000 (48,000) 300,000 3,567,000
--------- ------- ------- ---------
Income tax expense:
Current provision (benefit) (142,000) (131,000) 106,000 (167,000)
Deferred provision (2) 1,069,000 126,000 3,000 1,198,000
927,000 (5,000) 109,000 1,031,000
--------- ------- ------- ---------
Net income $2,388,000 ($43,000) 191,000 $2,536,000
========== ======= ======= ========
Year Ending December 31, 1996
Beginning equity employed $28,132,000 $261,000 1,105,000 29,498,000
Assets $36,742,000 1,509,000 1,467,000 39,718,000
Revenue and income:
Fee based revenue -
(external customers) 0 5,069,000 0 5,069,000
Commission revenue
(external customers) 0 0 1,006,000 1,006,000
---------- --------- --------- ---------
Total fees and commissions 6,075,000
Equity earnings from
First Indiana Corporation 3,003,000 0 0 3,003,000
Investment income -
(external sources) 441,000 16,000 0 457,000
--------- ------ ----- ---------
Total revenue and income 3,444,000 5,085,000 1,006,000 9,535,000
--------- --------- -------- ---------
Expenses:
Salaries, wages
commissions and benefits 593,000 3,908,000 360,000 4,861,000
General and
administrative expenses 217,000 548,000 187,000 952,000
Occupancy expenses 28,000 259,000 8,000 295,000
Advertising and marketing 7,000 0 15,000 22,000
Depreciation and amortization 13,000 115,000 54,000 182,000
Interest expense 42,000 58,000 0 100,000
------- ------- ------ -------
Total expenses 900,000 4,888,000 624,000 6,412,000
------- --------- ------- ---------
Income before income taxes 2,544,000 197,000 382,000 3,123,000
--------- ------- ------- ---------
Income tax expense:
Current provision (benefit) (175,000) 2,000 145,000 28,000)
Deferred provision (2) 915,000 89,000 2,000 1,006,000
------- ------ ------- ---------
740,000 91,000 147,000 978,000
------- ------ ------- -------
Net income $1,804,000 $106,000 $235,000 $2,145,000
========= ======= ======= =========
(2) A significant non-cash expense -30-
Note 11. 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 $31,000, $395,000, and $270,000 in 1998, 1997, and 1996.
Had compensation cost for the stock options granted in 1998, 1997, and
1996 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,
1998 1997 1996
Net Income:
As reported $2,865,000 $2,536,000 $2,145,000
Pro forma $2,336,000 $2,451,000 $2,078,000
Basic earnings per share:
As reported $.99 $.87 $.75
Pro forma $.81 $.84 $.72
Diluted earnings per shares:
As reported $.97 $.86 $.73
Pro forma $.79 $.83 $.71
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 1998 1997 1996
Dividend yield 1.20% 1.15% 1.5%
Expected volatility 59% 47% 24%
Risk-free interest rate 5.43% 6.11% 5.55%
Expected option life 5 yrs. 5 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 and 1998 Stock Incentive Plans provide 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. The two plans are essentially identical.
Qualified options are exercisable during either a period of two to five
years or a period of three 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, and the 1998 Plan
authorized 145,000 shares, with or without stock appreciation rights.
-31-
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.
The following summary reflects changes in the options outstanding during
the three years ended December
31, 1998.
Weighted
Officers' and Key Average
Employees' Directors' Price Per
Plan Plan Share
Balance at January 1, 1996 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
Options granted 62,063 9,378 23.98
Options exercised (13,595) (4,689) 4.81
------- ------
Balance at December 31, 1998 158,598 34,386 15.33
======= ======
Outstanding option shares at December 31, 1998, by exercise price per
share, were as follows:
Officers' and Key
Price Per Employees' Directors'
Share Plans Plan
$4.00 4,688 ---
4.16 5,469 ---
5.84 10,938 ---
7.60 --- 4,689
8.32 12,501 ---
8.48 12,501 4,689
11.20 17,188 ---
12.32 9,375 ---
12.80 --- 6,252
15.50 --- 9,378
15.80 *11,375 ---
17.38 *12,500 ---
23.625 *54,063 ---
24.25 --- *9,378
25.99 *8,000 ---
-------- ------
158,598 34,386
======== ======
*Options not exercisable at December 31, 1998; 85,938 option shares
issued to Officers and Key Employees, and 9,378 option shares issued to
Directors. All other options were exercisable.
-32-
Stock Grants
The Company's 1991 and 1998 Stock Incentive Plans also provide 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, 1998.
Reserved for future stock options and stock grants at December 31, 1998
were 127,000 shares under the Officers and Key Employees' Plans and
20,307 shares under the Directors' Stock Option Plan.
Note 12. Retirement Plans
The Company adopted a new retirement plan for all employees during 1996.
The plan is a 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 participants.
The Company made matching SAR-SEP contributions for participants of 100%
of each employee's contributions, to a maximum of 6% of salary. The
costs of such matching contributions were $52,000, $53,000, and $34,000
during the years ended December 31, 1998, 1997, and 1996, respectively.
The SAR-SEP was terminated in 1998, following the merger with Whipple,
and all employees became participants in a plan maintained by Whipple
for the benefit of its employees.
The Whipple Plan adopted by the Company is a Profit Sharing Plan
qualified for tax-deferred employee and employer contributions under
Internal Revenue Code Section 401(k). Profit sharing contributions made
to the plan for all plan participants were $126,000, $129,000, and
$85,000 during the years ended December 31, 1998, 1997, and 1996,
respectively.
Note 13. 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.
-33-
Note 14. Summarized Financial Statements for First Indiana Corporation
Summarized consolidated financial information is presented below and on the
following two pages for First Indiana. This 21.7 percent-owned subsidiary
represents a significant part of the Company'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 1998 annual report for First Indiana is available upon
request.
(Dollars in Thousands)
1998 1997
Assets
Cash and cash equivalents $57,653 $50,231
Investments 113,291 111,400
Mortgage-backed securities - net 29,680 38,279
Loans receivable - net 1,518,543 1,348,529
Premises and equipment 18,546 13,947
Accrued interest receivable 11,680 11,322
Real estate owned 2,204 3,907
Prepaid expenses and other assets 44,393 35,790
--------- --------
Total Assets $1,795,990 $1,613,405
========= =========
Liabilities and Shareholders's Equity Liabilities
Deposits $1,227,918 $1,107,555
Federal Home Loan Bank Advances 327,247 257,458
Short-term borrowings 54,219 75,751
Accrued interest payable 2,646 2,715
Advances by borrowers for taxes
and insurance 1,958 1,419
Other liabilities 12,242 10,733
-------- --------
Total Liabilities 1,626,230 1,455,631
Negative Goodwill 3,790 4,738
Shareholders' Equity 165,970 153,036
------- -------
Total Liabilities and
Shareholders' Equity $1,795,990 $1,613,405
========= =========
-34-
FIRST INDIANA CORPORATION
(Dollars in thousands)
1998 1997 1996
Interest Income $135,834 $127,330 $125,468
------- ------- -------
Interest Expense
Deposits 54,935 49,936 52,077
FHLB Advances 15,348 12,288 10,706
Short-term borrowings 2,797 2,127 1,002
------ ------ ------
Total Interest Expense 73,080 64,351 63,785
------ ------ ------
Net Interest Income 62,754 62,979 61,683
Provision for Loan Losses 9,780 10,700 10,794
Net Interest Income After
Provision for Loan Losses 52,974 52,279 50,889
------- ------ ------
Non-Interest Income
Sale of loans 9,418 4,932 3,075
Loan servicing income 1,635 2,767 2,908
Loan fees 3,092 2,358 2,302
Dividends on FHLB Stock 1,097 1,055 1,033
Other 8,531 6,893 8,530
----- ----- ------
Total Non-Interest Income 23,773 18,005 17,848
------ ------ ------
Non-Interest Expense
Salary and benefits 22,701 19,916 18,094
Net occupancy 2,893 2,852 3,087
Deposit insurance 691 693 9,186
Real estate owned operations - net 858 652 598
Other 18,613 16,991 16,288
------ ------ ------
Total Non-Interest Expense 45,756 41,104 47,253
------ ------ ------
Earnings Before Income Taxes 30,991 29,180 21,484
Income Taxes 11,844 11,436 7,780
------ ------ -----
Net Earnings $19,147 $17,744 $13,704
====== ====== ======
-35-
FIRST INDIANA CORPORATION
(Dollars in Thousands)
1998 1997 1996
Cash Flows from Operating Activities
Net Earnings $19,147 17,744 $13,704
Adjustments to Reconcile Net Earnings to Net
Cash Provided (Used) by Operating Activities
(Gain) Loss on sales of assets and deposits (10,181) (5,148) (4,524)
Amortization 2,368 864 1,325
Depreciation 2,211 2,022 1,958
Provision for loan losses 9,780 10,700 10,794
Net sale of loans held for resale (31,944) (28,700) 32,585
Net change in other assets and liabilities (17,765) (6,197) (3,265)
------ ------ ------
Net Cash Provided(Used)by Operating Activity (26,384) (8,715) 52,577
------ ----- ------
Cash Flows from Investing Activities
Proceeds - sales of investments
available for sale 20,399 14,991 35,703
Proceeds-sales of investment securities 23,483 --- ---
Proceeds-maturities of investment securities 25,855 20,932 27,611
Purchase of investment securities (47,375) (39,912) (68,225)
Origination of loans and mortgage-backed
securities - net of collections (125,399) (117,069) (27,964)
Proceeds - sale of indirect
installment portfolio --- --- 32,756
Proceeds from sale of loans 9,567 5,274 3,501
Purchase of premises and equipment (6,810) (2,291) (2,653)
Other - net (28,333) 7,555 150
------- ----- -----
Net Cash Provided (Used) by
Investing Activities (128,613) (110,520) 879
------- ------- -----
Cash Flows from Financing Activities
Net change in deposits 120,363 12,069 (41,494)
Net change in short-term borrowings (21,532) 45,698 (8,587)
Net change in FHLB Advances 69,789 41,992 685
Purchase of treasury stock (2,242) (132) ---
Dividends paid (6,125) (5,065) (4,644)
Other - net 2,166 1,286 (692)
------- ------ -------
Net Cash Provided (Used) by
Financing Activities 162,419 95,848 (54,732)
-------- ------ ------
Increase(Decrease)in Cash and Cash Equivalent $7,422 $(23,387) $(1,276)
====== ====== ======
-36-
_ THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1998
Part IV - Item 14(b) - Reports on Form 8-K
The Registrant filed one form 8-K during 1998. The report was filed on January
26, 1998, pursuant to Section 13 or 15 (d) of the Securities Act of 1939, Item 2
of the regulations - Acquisition or Disposition of Assets, reporting the
execution of the final merger agreement and the merger with Whipple & Company,
P.C.
This Form 8-K is incorporated into this Form 10-K by reference to file number
0-14227 for such Form 8-K filings with the Commission.
-37-
EXHIBIT 3
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1998
Amended Articles of Incorporation and Amended and Restated Bylaws Thereto
Amended Articles of Incorporation
One amendment to the Articles of Incorporation was made on April 23, 1998. The
exact text of Article III, Section 3.01 of the Articles of Incorporation is now
as follows:
Section 3.01. Amount. The total number of shares of all classes of stock which
this corporation shall have authority to issue is six million (6,000,000), all
of which shall be common stock, without par value.
The Articles of Incorporation before the above amendment are incorporated by
referenced to Exhibit 3 of Form 10K annual report of the Registrant filed for
year ended December 31, 1993, under commission file number 0-14227. No changes
occurred in subsequent years, other than the above amendment.
Amended and Restated Bylaws
The amended and restated bylaws are incorporated by reference to Exhibit 3 of
Form 10K annual report of the Registrant for the year ended December 31, 1997,
under commission file number 0-14227. No changes occurred in the year ended
December 31, 1998.
-38-
Exhibit 22
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1998
Subsidiaries of the Registrant
The following corporations are subsidiaries of the Registrant:
Percent
Ownership Name
100% Paradym Technologies, Inc.
135 N. Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
21.7% First Indiana Corporation
135 N. Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
-39-
Exhibit 23
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended 31, 1998
Definitive Proxy Statement for Annual Meeting of Shareholders - April 21, 1999
The Registrant's Notice of Annual Meeting, Proxy Statement and Form of Proxy are
incorporated into this Form 10-K by reference to file number 0-14227 for such
information previously filed with the Commission.
-40-
EXHIBIT 24
KPMG
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors and Shareholders
The Somerset Group, Inc.:
We consent to incorporation by reference in the registration statement
(No. 33-44548) on Form S-8 of The Somerset Group, Inc. of our report dated
February 5, 1999, relating to the consolidated balance sheets of The Somerset
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of The Somerset
Group Inc.
s/KPMG LLP
KPMG LLP
Indianapolis, Indiana
March 22, 1999
-41-
KPMG
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
The Board of Directors and Shareholders
The Somerset Group, Inc.:
We consent to incorporation by reference in the registration statement
(No. 333-68391) on Form S-8 of The Somerset Group, Inc. of our report dated
February 5, 1999, relating to the consolidated balance sheets of The Somerset
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of The Somerset
Group Inc.
s/KPMG LLP
KPMG LLP
Indianapolis, Indiana
March 22, 1999
-42-
Exhibit 99
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1998
First Indiana Corporation Form 10-K Annual Report -
Year Ended December 31, 1998
First Indiana Corporation's Form 10-K annual report for the year ended December
31, 1998 is incorporated herein by reference to the First Indiana Corporations's
Form 10-K annual report filed separately with the Commission under file number
0-14354.
-43-
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<FISCAL-YEAR-END> DEC-31-1998
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