SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by Registrant [ X ]
Filed by Party other than the Registration [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 240.14a-11(c) or
240.14a-12
THE SOMERSET GROUP, INC.
(Name of Registrant as Specified in its Charter)
THE SOMERSET GROUP, INC.
(Name of Person Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-
11.
1) Title of each class of securities to which transaction applies:
..................................................................
2) Aggregate number of securities to which transaction applies:
..................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
..................................................................
4) Proposed maximum aggregate value of transaction:
..................................................................
5) Total fee paid:
..................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
..................................................................
2) Form, Schedule or Registration Statement No.:
..................................................................
3) Filing Party:
..................................................................
4) Date Filed:
..................................................................
12696
March 22, 1999
Dear Shareholder:
The Directors and Officers of The Somerset Group, Inc. join me in extending to
you a cordial invitation to attend the annual meeting of our shareholders. This
meeting will be held on Wednesday, April 21, 1999, at 9:00 a.m., EST, in the
First Indiana Plaza Conference Center, Ohio and Pennsylvania Streets, Seventh
Floor, Indianapolis, Indiana.
We hope you plan to attend the annual meeting where we will review our past
performance and our plans for the future.
The formal notice of the annual meeting and the proxy statement appear on the
following pages. After reading the proxy statement, please mark, sign, and
return the enclosed proxy card to assure that your votes on the business matters
of the meeting will be recorded. Returning the proxy does not affect your right
to vote in person on all matters brought before the meeting.
Sincerely,
Robert H. McKinney
Chairman
FIRST INDIANA PLAZA
135 NORTH PENNSYLVANIA STREET
SUITE 2800
INDIANAPOLIS, IN 46204
(317) 269-1285
THE SOMERSET GROUP, INC.
135 North Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of The Somerset Group, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of the shareholders of The
Somerset Group, Inc. will be held on Wednesday, April 21, 1999, at 9:00 a.m.,
EST, in the First Indiana Plaza Conference Center, Ohio and Pennsylvania Streets
Seventh Floor, Indianapolis, Indiana, to consider and take action on the
following matters:
1. Election of Directors. The election of directors as set forth in the Proxy
Statement.
2. Other Business. The transaction of such other business as properly may come
before the meeting and any adjournments thereof.
Only shareholders of record at the close of business on February 26, 1999 are
entitled to vote at the meeting or any adjournment thereof.
By order of the Board of Directors
Sharon J. Sanford
Secretary
March 22, 1999
IMPORTANT
PLEASE MARK, SIGN AND RETURN THE ENCLOSED PROXY. NO POSTAGE IS NECESSARY IF
MAILED IN THE UNITED STATES.
THE SOMERSET GROUP, INC.
135 North Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
(317) 269-1285
PROXY STATEMENT
The accompanying proxy is solicited by the Board of Directors of The Somerset
Group, Inc. (the "Corporation") for use at the annual meeting of shareholders to
be held on Wednesday, April 21, 1999, at 9:00 a.m., EST, in the First Indiana
Plaza Conference Center, Ohio and Pennsylvania Streets, Seventh Floor,
Indianapolis, Indiana, and any adjournments thereof (the "Annual Meeting"). The
Notice of Annual Meeting of Shareholders, this Proxy Statement and accompanying
form of proxy are first being sent or given to shareholders on or about March
22, 1999.
The election of directors will be determined by a plurality of the shares
present in person or represented by proxy. The holder of each outstanding share
of Common Stock is entitled to vote for as many persons as there are directors
to be elected. Any other matter to come before the Annual Meeting will be
approved if the votes cast at the Annual Meeting (in person or represented by
proxy) in favor of such proposal exceed the votes opposing such proposal. An
abstention, non-vote, or broker non-vote will not change the number of votes
cast for or against the election of any director or for or against any other
matter to come before the Annual Meeting.
A proxy in the enclosed form, if properly executed, duly returned to the
Corporation and not revoked, will be voted in accordance with the instructions
contained therein. The shares represented by executed but unmarked proxies will
be voted FOR the three persons nominated for election as directors referred to
herein. If any other matters are properly brought before the Annual Meeting,
the persons named in the enclosed form of proxy will vote the shares represented
thereby on such matters in accordance with their best judgment. Other than the
election of directors, the Board of Directors has no knowledge of any matters to
be presented for action by the shareholders at the Annual Meeting.
Execution of a proxy given in response to this solicitation will not affect a
shareholder's right to attend and to vote in person at the Annual Meeting.
Presence at the Annual Meeting of a shareholder who has signed a proxy does not
in itself revoke the proxy. Any shareholder giving a proxy may revoke it at any
time before it is voted by giving notice thereof to the Corporation in writing
or at the Annual Meeting or by providing a proxy bearing a later date.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record as of the close of business on February 26, 1999
will be entitled to vote at the Annual Meeting. The Corporation has only one
class of stock, its common stock, of which 2,873,906 shares were outstanding as
of the close of business on February 26, 1999.
The following table shows, as of February 26, 1999, the number and percentage of
shares of common stock owned beneficially by (i) each person who owned
beneficially more than 5% of the issued and outstanding common stock of the
Corporation and (ii) executive officers and directors as a group:
Name and Address Percent
of Beneficial Amount and Nature of of
Owner Beneficial Ownership Class
Robert H. McKinney
135 N. Pennsylvania St., Suite 2800
Indianapolis, Indiana 46204 1,218,424(1) 41.2%
Marni McKinney
135 N. Pennsylvania St., Suite 2800
Indianapolis, Indiana 46204 1,218,424(1) 41.2%
Marvin C. Schwartz
c/o Neuberger & Berman
605 Third Avenue
New York, New York 10158 186,718(2) 6.5%
All executive officers and directors
as a group (11 persons) 1,499,769(3) 49.9%
Unless otherwise noted, the above named persons have sole voting power and sole
investment power.
(1) These shares are beneficially owned by a group consisting of Robert H.
McKinney and Marni McKinney. Robert H. McKinney is deemed to be a beneficial
owner as specified in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), of 556,233 shares held by a limited partnership
established by Mr. McKinney for the benefit of his children, including Marni
McKinney and Kevin K. McKinney. The total held by the group also includes
38,063 shares owned directly by Mr. McKinney, 28,362 shares owned of record by
his wife, and 46,189 shares subject to options granted under the Corporation's
Stock Incentive Plans. The total held by the group also includes 477,038 shares
held in two irrevocable trusts of which Marni McKinney is the Trustee and which
were established by Mr. McKinney for the benefit of his children. The above
number also includes 36,507 shares which Ms. McKinney owns individually and
36,032 shares subject to options granted under the Corporation's Stock Incentive
Plans.
(2) This information is taken from the Schedule 13D Report dated February 26,
1992, and filed by the shareholder with the Securities and Exchange Commission
concerning shares held by it. It does not reflect any changes in those
shareholdings which may have occurred since the date of such filing.
(3) Includes 92,283 shares subject to options granted under the Corporation's
Stock Incentive Plans and 34,386 shares subject to options granted under the
1991 Director Stock Option Plan.
PROPOSAL NO. 1: ELECTION OF DIRECTORS
Three directors are to be elected. Patrick J. Early, William L. Elder and Marni
McKinney have been nominated for a term of three years and until their
successors are elected and qualified. Those three persons are members of the
present Board of Directors. The other directors listed in the table below will
continue in office until expiration of their terms. If, at the time of the 1999
Annual Meeting any of such nominees should be unable or decline to serve, the
discretionary authority provided in the proxy may be exercised to vote for a
substitute or substitutes. The Board of Directors has no reason to believe that
any substitute nominee or nominees will be required. Effective upon the date of
the Annual Meeting, H. J. Baker will retire from the Board of Directors. The
Board of Directors does not intend to fill this vacancy, and plans to amend
the By-Laws accordingly. However, in order to maintain an equal number of
directors per class of directors, Mr. Early has agreed to stand for
reelection at the 1999 Annual Meeting rather than waiting until his current term
expires in 2001. The Board of Directors thanks Mr. Baker for his years of
dedicated service to the Corporation.
The Board of Directors unanimously recommends the election of the following
nominees:
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since February 26, 1999 Class
The NOMINEES for election are:
Patrick J. Early, Age 41 1998 53,985 1.9%
President of Somerset Financial
Services, a Division of the Corporation;
formerly, President of Whipple &
Company; Certified Public Accountant,
Certified Financial Planner, and Personal
Financial Specialist.
William L. Elder, Age 76 1986 134,813(1) 4.7%
Formerly Chairman of Southern
Indiana Commerce Corporation;
formerly President of Southern
Indiana Railway, Inc.; formerly
Director of Merchants National
Corporation, a bank holding company,
and Merchants National Bank and
Trust Company.
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since February 26, 1999 Class
Marni McKinney, Age 42 1987 1,218,424(2) 41.2%
President and Chief Executive Officer
of the Corporation; Vice Chairman and
Director of First Indiana Corporation and
Chairman of First Indiana Bank; formerly
President and Chief Operating Officer of
the Corporation (1993-1995) and Executive
Vice President of the Corporation
(1987-1992); formerly Vice President and
Director of Strategic Planning of, First
Indiana Bank; formerly Vice President
of First Indiana Corporation.
Directors whose terms expire
in 2000:
Douglas W. Huemme, Age 57 1990 12,503(3) (4)
Chairman, President and Chief
Executive Officer, Lilly Industries,
Inc., industrial coatings;
formerly Vice President and Group
Executive - Chemicals Group,
Whittaker Corporation.
Malcolm Archibald Leslie, Age 49 1997 3,126(5) (4)
Private investor; formerly General
Partner of CID Equity Partners, private
venture capital firm; formerly Director -
International Treasury, Cummins Engine
Company, Inc., manufacturer of
diesel engines.
Kevin K. McKinney, Age 41 1990 24,314(6) (4)
Vice President of the Corporation;
Publisher of NUVO Newsweekly
and Chairman and President of
NUVO, Inc.; formerly President,
Mid America Media; formerly
Chairman, Indianapolis Extra, Ltd.
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since February 26, 1999 Class
Directors whose terms expire
in 2001:
Gary L. Light, Age 61 1997 4,126(5) (4)
President, E.V.A. Investors, Inc.;
formerly Vice Chairman and Chief
Financial Officer of Sofmor Danck, Inc.
Trustee of PIMCO Mutual Fund Group.
Robert H. McKinney, Age 73 1985 1,218,424(7) 41.2%
Chairman of the Corporation; Chairman
and Chief Executive Officer of First Indiana
Corporation; Chairman of the Executive
Committee, First Indiana Bank; formerly,
Chief Executive Officer of the Corporation
(1984-1995); retired Partner of Bose
McKinney & Evans, attorneys; Director of
First Indiana Corporation; Chairman,
Federal Home Loan Bank Board (1977-1979).
Michael L. Smith, Age 50 1988 12,659(3) (4)
Senior Vice President, Finance,
Anthem, Inc.; formerly
Chief Operating Officer and Chief Financial
Officer of American Health Network;
formerly President of Somerset Financial
Services, a division of the Corporation;
Director, Finishmaster, Inc.
formerly Chairman, Director, President
and Chief Executive Officer, Mayflower
Group, Inc., diversified transportation
services; Director of First Indiana
Corporation and Finish Master, Inc.
______________
(1) Includes 130,124 shares which Mr. Elder owns individually and 4,689 shares
subject to options granted under the 1991 Director Stock Option Plan.
(2) See note (1) to the table under heading "Voting Securities and Principal
Holders Thereof" above. Ms. McKinney is a daughter of Robert H. McKinney and a
sister of Kevin K. McKinney.
(3) Includes 7,815 shares subject to options granted under the 1991 Director
Stock Option Plan.
(4) The number of shares represents less than 1% of the outstanding shares of
the Corporation.
(5) Includes 3,126 shares subject to options granted under the 1991 Director
Stock Option Plan.
(6) Includes 18,625 shares owned directly and 5,689 shares subject to options
granted under the Corporation's Stock Incentive Plans. Mr. McKinney is a son of
Robert H. McKinney and a brother of Marni McKinney.
(7) See note (1) to the table under heading "Voting Securities and Principal
Holders Thereof" above.
The Board of Directors met four times during the Corporation's last fiscal year.
All directors attended in excess of 75% of the aggregate of (1) the total number
of meetings of the Board of Directors and (2) the total number of meetings held
by all committees on which he or she served.
Nominees for election as a director of the Corporation are selected by the
Board of Directors.
Certain Committees of the Board of Directors
Among other committees, the Board of Directors has an Audit Committee and a
Compensation and Policy Committee.
The functions of the Audit Committee are: (1) to review audits of the
accounting records of the Corporation and its financial statements performed by
independent auditors, (2) to confer with the independent auditors and officers
of the Corporation regarding accounting and financial statements and internal
controls, (3) to recommend to the Board the engagement or discharge of the
independent auditors and (4) to perform such other functions as the Committee
deems necessary or desirable. The members of the Audit Committee are: H. J.
Baker (Chairman), William L. Elder and Gary L. Light. The Committee met once
during the last fiscal year of the Corporation. (Mr. Light will become Chairman
upon Mr. Baker's retirement from the Board of Directors.)
The functions of the Compensation and Policy Committee are to review and make
recommendations to the Board of Directors with respect to the compensation,
including stock incentives, of the officers and key employees of the Corporation
and its subsidiaries and review other policy matters. The members of the
Compensation and Policy Committee are: William L. Elder (Chairman), Douglas W.
Huemme and Michael L. Smith. The Committee met three times during the last
fiscal year of the Corporation.
Certain Transactions
In 1996, the Corporation purchased from First Indiana Bank (the "Bank") all of
the outstanding capital stock of One Investment Corporation ("One Investment"),
a wholly owned subsidiary of the Bank that owned all of the outstanding capital
stock of One Insurance Agency, Inc. ("One Insurance"). As a result of this
transaction, and through a multi-year operating agreement that the Corporation
entered into with First Indiana Corporation and the Bank, the Corporation is
providing non-FDIC-insured investment and insurance products and services to the
Bank's customers, and the Bank is focusing its efforts on delivering traditional
banking services. During the year ended December 31, 1998, the Corporation paid
to the Bank $81,947 in accordance with the terms of the purchase agreement and
the operating agreement. Robert H. McKinney and Marni McKinney are officers,
directors and shareholders of First Indiana Corporation and/or the Bank, the
Corporation is a substantial shareholder of First Indiana Corporation, and
Michael L. Smith is a director of First Indiana Corporation
and the Bank.
COMPENSATION OF DIRECTORS
AND EXECUTIVE COMPENSATION
(a) Summary Compensation Table.
The following table sets forth the compensation awarded to, earned by, or paid
by the Corporation during the last three fiscal years to Ms. McKinney as
President and Chief Executive Officer of the Corporation during that period, and
to the three executive officers whose cash compensation in 1998 exceeded
$100,000.
Long Term
Compensation
Annual Compensation Awards
Other Securities All
Name and Annual Underlying Other
Principal Salary Bonus Compen- Options Compensation
Position Year ($) ($) sation ($) (#) ($)
Marni McKinney 1998 $100,000 - $31,000 4,000 $7,691(1)
President and 1997 $80,000 $20,000 $158,288 6,250 $4,800
Chief Executive 1996 $80,000 - - 9,375 $2,963
Officer
Patrick J. Early(2) 1998 $227,500 - - 2,500 $10,442(1)
President of Somerset
Financial Services Division
Robert S. Kaspar(3) 1998 $176,166 - - 2,500 $9,420(1)
Executive Vice 1997 $109,560 $10,000 - 3,125 $7,096
President Business
Development
Joseph M. Richter 1998 $100,951 - - 2,500 $7,362(1)
Executive Vice Presidnt1997 $97,846 6,000 - 4,375 $7,512
Finance and Treasurer 1996 $97,000 $5,256 - 6,250 $4,374
___________________
(1) Consists of (i) the Corporation's contributions to the Corporation's
retirement during 1998 for the accounts of Ms. McKinney, Mr. Early, Mr. Kaspar,
and Mr. Richter in the amounts of $7,231, $9,514, $8,571 and $6,417,
respectively, (ii) the Corporation's contributions to the Corporation's Stock
Incentive Plans during 1998 for the accounts of Ms. McKinney, Mr. Early, Mr.
Kaspar, and Mr. Richter in the amounts of $460, $928, $696 and $450,
respectively, and (iii) premiums during 1998 for term life insurance policies
for Mr. Kaspar and Mr. Richter in the amounts of $153 and $495, respectively.
(2) Mr. Early was employed by the Corporation beginning on January 20, 1998.
Accordingly, no compensation information is given for Mr. Early as to 1997 or
1996.
(3) Mr. Kaspar was employed by the Corporation beginning on February 1, 1997.
Accordingly, no compensation information is given for Mr. Kaspar as to 1996.
(b) Options Tables.
Grants. The following table sets forth the grants of stock options made during
fiscal year 1998 to Ms. McKinney, Mr. Early, Mr. Richter and Mr. Kaspar.
Number
of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Fiscal Price
Name (#) Year 1998 ($/Share) Expiration Date
Marni McKinney 4,000 6.4% $25.99 February 17, 2003
Patrick J. Early 2,500 4.0% $16.38 February 17, 2004
Robert S. Kaspar 2,500 4.0% $16.38 February 17, 2004
Joseph M. Richter 2,500 4.0% $16.38 February 17, 2004
Options Repricing. On February 17, 1999, the Compensation and Policy
Committee approved a repricing of certain options granted in February 1998 to
employees pursuant to the Corporation's Stock Incentive Plans. Because of a
decline in market value of the Corporation's Common Stock, certain outstanding
options were exercisable at prices that exceeded the market value of the Common
Stock. In view of this decline and in keeping with the Corporation's philosophy
of using equity incentives to motivate and retain qualified employees, the
Compensation and Policy Committee believed it important to regain the incentive
intended to be provided by options to purchase shares of the Corporation's
Common Stock. The Compensation and Policy Committee believed the repricing was
necessary as a result of the competition in the Corporation's industry for
accounting professionals, managers, and other employees. Furthermore, the
failure of the Corporation to provide competitive equity-based compensation
could require the Corporation to pay significantly higher salaries and bonuses
in order to attract and retain the best personnel. In light of the fact that
increased cash compensation would reduce earnings and would likely result in an
immediate drop in the value of the Common Stock, the Compensation and Policy
Committee believed that repricing outstanding options and regaining incentives
intended to be provided by such options would be in the best interest of the
Corporation and its shareholders.
The exercise price of the repriced options was the then-current fair market
value of the Common Stock, thus requiring the stock price to increase in order
for the optionees to realize any value. In addition, in exchange for the
repricing, the vesting periods under the options were restarted. Also, the
expiration date of the options was extended one year. Twenty five employees had
options repriced, involving an aggregate 53,063 shares of Common Stock. The
options of Robert H. McKinney and Marni McKinney were not repriced, but Messrs.
Early, Kaspar, and Richter had options repriced. (The above-table reflects the
adjusted exercise price.)
Other Option Information. The following table sets forth that none of
Ms. McKinney, Mr. Early, Mr. Kaspar, and Mr. Richter exercised any options
during fiscal year 1998, and also sets forth the December 31, 1998 value of the
unexercised options of each such executive officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES*
<TABLE>
<C> <S> <C> <C> <C> <S><C>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired On Value at December 31, 1998 December 31, 1998
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Marni McKinney - - 25,782 10,250 $213,363 -
Patrick J. Early - - - 2,500 - -
Robert S. Kaspar - - - 5,625 - $1,797
Joseph M. Richter - - 6,250 6,875 $32,344 $2,516
</TABLE>
___________________
*The repricing of options described above did not affect any of the amounts
set forth in this table.
(c) Compensation of Directors.
During the Corporation's last fiscal year, directors who are not salaried
officers received a quarterly fee of $1,500 per quarter, a fee of $600 for each
Board meeting attended, and a fee of $400 for each Board committee meeting
attended.
The Corporation's 1991 Director Stock Option Plan provides for the issuance of
non-qualified options to purchase 1,563 shares to each outside director of the
Corporation on August 14, 1991 and thereafter on the date of each annual meeting
of shareholders. No option is exercisable during the period of one year
following the date of grant of such option, and options granted under the plan
must specify an exercise price of not less than 100% of the market price of the
shares at the date of grant.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the next annual meeting
must be received by the Corporation for inclusion in the proxy statement and
form of proxy relating to that meeting no later than November 23, 1999. Any
such proposals should be sent to the attention of the Secretary of the
Corporation. Shareholder proposals not included in the Corporation's 2000 proxy
solicitation materials must, in order to be considered at the 2000 Annual
Meeting, be submitted in writing to the Secretary of the Corporation at least
sixty days before the date of the 2000 Annual Meeting, or, if the 2000 Annual
Meeting is held prior to March 21, 2000, within ten days after notice of the
Annual Meeting is mailed to shareholders. The Board of Directors of the
Corporation will review any shareholder proposals that are filed as required,
and will determine whether such proposals meet applicable criteria for inclusion
in its 2000 proxy solicitation materials or consideration at the 2000 Annual
Meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
certain of the Corporation's officers, and its directors and persons who own
more than 10% of the Corporation's Common Stock, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Such
officers, directors and greater than 10% shareholders are required by Securities
and Exchange Commission regulations to furnish the Corporation with copies of
all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished to the Corporation,
the Corporation believes that during 1998, all Section 16(a) filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were met.
FINANCIAL STATEMENTS AND OTHER INFORMATION
The Corporation's financial statements for the fiscal year ended December 31,
1998, were audited by KPMG LLP ("KPMG"). Representatives of KPMG are expected
to attend the Annual Meeting, with the opportunity to make a statement if they
desire to do so, and will be available to respond to appropriate questions.
The Annual Report of the Corporation for the year ended December 31, 1998,
including audited financial statements, has been mailed to the shareholders.
The Annual Report is not to be considered as proxy solicitation material.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before this
Annual Meeting. However, if other matters should come before the meeting, it is
the intention of each person named in the proxy to vote such proxy in accordance
with his or her judgment on such matters.
EXPENSES OF SOLICITATION
The entire expense of preparing, assembling, printing and mailing the proxy form
and material used in the solicitation of proxies will be paid by the
Corporation. The solicitation will not be made by specially engaged employees
or paid solicitors. In addition to the use of the mails, solicitation may be
made by employees of the Corporation by telephone, telegraph, cable or personal
interview.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. Therefore, shareholders who
do not expect to attend in person are urged to execute and return the proxy.
For the Board of Directors
Sharon J. Sanford
Secretary
March 22, 1999
215970
-10-
[FRONT]
THE SOMERSET GROUP, INC. This proxy is solicited on behalf of the Board
2800 First Indiana Plaza of Directors of the Corporation
135 North Pennsylvania Street
Indianapolis, Indiana 46204 The undersigned hereby appoints Joseph M. Richter
and Sharon J. Sanford, and each of them,
attorneys-in-fact and proxies, with full power of
substitution, to vote as designated below all
shares of The Somerset Group, Inc. The
"Corporation") which the undersigned would be
entitled to vote if personally present at the
Annual Meeting of Shareholders to be held on
April 21, 1999, at 9:00 a.m., EST, and at any
adjournment thereof.
1. ELECTION OF DIRECTORS:
o FOR all nominees listed below
(except as marked to the contrary
below)
o WITHHOLD AUTHORITY
to vote for all nominees
Nominees for a term of three years:
Patrick J. Early, William L. Elder and Marni McKinney
(Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.)
_______________________________________________________________________________
2. In their discretion, the Proxies are authorized to vote such other business
as may properly come before the meeting.
(Continued and to be signed on other side.)
[BACK]
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made, this proxy will be voted
FOR Proposal 1.
The undersigned acknowledges receipt from The Somerset Group, Inc., prior to the
execution of this proxy, of notice of the meeting, a proxy statement, and an
Annual Report to Shareholders.
Please sign exactly as name appears below. When shares are held as joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by the president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Signature _________________________________(Signature if held jointly)__________
Dated: , 1999
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
REVOCABLE PROXY
STAYING
==THE==
COURSE
THE SOMERSET GROUP
Nineteen Ninety-Eight
Annual Repor
table of contents
brief history 3
a letter to the shareholders 4
our mission 6
financial highlights 10
selected financial data 11
management's discussion and analysis 12
independent auditors' report 17
consolidated statements of income 18
consolidated balance sheets 19
consolidated statements of cash flows 20
consolidated statements of shareholders' equity 21
statement of management responsibility 22
notes to consolidated financial statements 23
summarized consolidated financial statements
of first indiana corporation 35
board of directors 38
operating companies and management 39
Somerset
a safe harbor in
uncertain, changing times
The Somerset Group is named for a county in Western England that served
as a safe harbor for ships seeking refuge from the hazards of navigating the
dangerous, lonely waters of the Atlantic Ocean.
Like its namesake, The Somerset Group provides a safe harbor of its own.
We offer our clients the tools they need to chart their financial future. We
help businesses plan the right strategies for financial success. We help
individuals navigate the uncertain waters of taxes, estate planning, and
wealth management.
This report describes Somerset's successes in achieving its financial
targets for 1998. It also shares our vision for the future as we continue
building on our commitment to provide a holistic, integrated set of financial
solutions for our clients while adding value for our shareholders.
a letter to the
shareholders
March 1999
dear shareholders:
We are pleased to report that The Somerset Group, Inc. achieved net income of
$2,865,000, or $.97 per diluted share, for the year ended December 31, 1998,
compared with $2,536,000, or $.86 per diluted share, for the year ended
December 31, 1997, an increase of 13 percent. Our income includes the results
of Whipple & Company P.C., which merged with Somerset in 1998, and also
includes expenses in connection with the merger that reduced net income by
approximately $100,000.
As an expression of confidence in Somerset's future, the Board of Directors
has declared an increase in the semi-annual cash dividend to $.10 per share
from $.09 per share, an 11 percent annual increase, for shareholders of record
as of March 12, 1999.
Throughout 1998, Somerset continued positioning itself as a holistic provider
of financial services that helps its clients capture opportunities in today's
technology-oriented environment. We realized as we were charting Somerset's
future that today's financial services marketplace was in need of a firm that
offered a broad range of expertise that provided forward-looking solutions
with an emphasis on objectivity, responsiveness, and reliability.
In response to this market need, in January 1998 we merged with Whipple &
Company, a full-service certified public accounting and consulting firm with
over 2,000 clients. The merger brought together the talent and expertise of
almost 100 individuals, many of whom are CPAs, CFPs, and other financial
professionals.
In addition to investment and wealth management services, we now offer
management advisory and accounting services, tax planning and preparation,
retirement and estate planning, health care consulting, computer network
design and support, and Internet services. These businesses complement the
core strengths of our affiliate, First Indiana Corporation, which offers a
broad range of banking services through its First Indiana Bank division.
To further expand the range of services that Somerset can offer in today's
technology-based environment, we recently invested in two new ventures:
Somerset Purchasing Services and Paradym Technologies, Inc. Somerset
Purchasing Services is an Internet-based purchasing system with the collective
purchasing power of over $12 billion. The formation of Somerset Purchasing
Services was a natural adjunct to Somerset Financial Services' growing health
care consulting practice and will initially be targeted toward helping
physicians reduce their costs of medical and office supplies.
Paradym Technologies, Inc. specializes in Internet services, web page design,
network design and installation, telecommunications systems, and video
security and surveillance systems. Paradym merged with our Information
Technology Group, and together they offer a wide range of information
technology services. In 1999, Paradym's management team will concentrate on
further growth into related electronic commerce ventures focusing on the needs
of our diverse client base.
The combination of a financial services firm and an Internet services provider
makes good business sense. We have found that many of our clients are looking
for advice and resources to help them operate their businesses in the new
millennium with the increased emphasis on technology that their customers
require.
As the year progresses, we will continue to look for other alliances that will
enhance our ability to provide our clients with a holistic approach to
financial services.
Net income for 1998 was driven primarily by fees and commissions generated by
Somerset Financial Services and Somerset's First Indiana Investor Services
division, which sells annuities, mutual funds, and other investments to First
Indiana Bank's customers. Revenue from fees and commissions grew 7 percent
in 1998 to $7,327,000 from $6,849,000 in 1997.
Our earnings were also aided by record earnings of First Indiana Corporation,
in which Somerset holds a 22 percent equity investment. Growth in assets,
interest income, and secondary marketing activities all contributed to First
Indiana's improved performance.
In November 1998, nine of the leading professionals from the Indianapolis
division of a major superregional bank joined First Indiana to form FirstTrust
Indiana. FirstTrust provides a full range of trust and investment services to
businesses, individuals, and not-for-profit organizations. Of course,
FirstTrust is a natural complement to Somerset's investment and wealth
management services, and we look forward to offering FirstTrust's expertise to
our clients.
Like many of our customers, Somerset and First Indiana are locally based,
family-operated, and entrepreneurial. We believe that the shared philosophy
of our companies and our clients brings something different to the marketplace
in an age where the emphasis is on mass production, standardization, and
business decisions made at corporate headquarters in distant cities.
Our associates at Somerset share in our corporate philosophy. In 1998, we
introduced an employees' stock purchase plan and achieved a participation rate
of over 95 percent. Our associates' commitment to ownership demonstrates our
collective enthusiasm for team-based growth.
We believe that future earnings will reflect the market's acceptance of our
companies' strategies. We look forward to further growth as we continue
executing our plan as a comprehensive financial services provider.
Robert H. McKinney Marni McKinney
CHAIRMAN PRESIDENT AND CHIEF
EXECUTIVE OFFICER
ADVISORS ARE EASY TO FIND
THE HARD PART
IS GETTING THEM TO TALK TO
EACH OTHER.
Accountants. Bankers. Financial planners. Investment advisors. Management
consultants. People with these skills are abundant in today's marketplace.
But few firms tie them all together the way The Somerset Group does.
Instead of focusing on discrete products and services, we take a holistic
approach. We find out our clients' needs, from personal tax planning to
business investments. We learn about their long-term desires. Then we draw
from the collective expertise of our professionals to develop the best
solutions.
Somerset Financial Services brings together the talent of some 100
professionals, including CPAs and CFPs. We can help you craft the right
solutions to meet your business and personal goals, using our resources in
management advisory and accounting services, tax planning and preparation,
health care consulting, information technology consulting, investment and
wealth management, and retirement and estate planning.
Through our affiliate, First Indiana Bank, we offer a full range of banking
services, from checking accounts to business loans. Through FirstTrust
Indiana, we provide trust and investment services, offered by an experienced
team of longtime Indiana banking professionals.
Our team of experts is large enough to be well-versed in a variety of
professions, but small enough to work as one team in behalf of you, your
business, and your family. Most important, our experts work together toward
one common goal: your long-term business and personal success. Let us help
you chart the course that guides you in the right direction.
SOMERSET PRESENTS
GOOD NEWS FOR
THOSE WHO LIVE
IN FEAR
OF THE WORDS "DOT COM."
In today's environment, technology is no longer a luxury. It's absolutely
essential for corporate survival. Customers are requesting - even demanding -
Internet access to your products and services. Businesses who aren't prepared
for electronic commerce risk the fate that befell the buggy whip.
The ability to transact business on the Internet will soon be integral to the
success of every company. Through Paradym Technologies, Somerset's team of
professionals can be your partner as you navigate the uncharted waters of
electronic commerce.
But Paradym can do much more than just design and activate your web site. We
can wire and install networked systems for your electronic business and even
design the right security system for protecting your home or business. Thus,
we have all the tools you need to make e-commerce a crucial component of your
business strategies.
OUR NEW PURCHASING SERVICES DIVISION
REDEFINES
THE ACCOUNTANT'S APPROACH TO
COST CONTROL.
Somerset's needs-based, holistic philosophy has taken us in unexpected
directions. For instance, we've learned from our health care clients that
their operating costs are going nowhere but up.
A traditional accounting firm might suggest ways to reduce overhead and then
move on to the next assignment. But Somerset goes beyond the traditional,
hands-off approach. To help our clients compete more effectively, we have
launched Somerset Purchasing Services (SPS).
SPS leverages $12 billion in purchasing power toward helping physicians lower
the costs of medical and office supplies. Our initial efforts in this new
venture have proven successful, and we expect to extend SPS to other market
segments in the near future.
Somerset's ventures into e-commerce and group purchasing systems symbolize our
emphasis on listening to our clients' needs and responding accordingly. We
see ourselves as being in the client services business, not just the financial
services businesses. This distinction keeps us abreast of our clients'
changing expectations as they chart their personal and business goals.
A NEW DAY IS
ALREADY HERE.
WE CAN HELP YOU
SEIZE IT.
The world is changing even as these words are being written. Ideas are born.
Families are started. Companies are launched. Futures are planned. Moving
through a world that changes as fast as this one requires courage, stamina,
and vision.
The chances of success are enhanced through a close association with an
advisor who understands the challenges facing today's businesses and the
individuals who own and operate them. Because The Somerset Group shares the
entrepreneurial history and vision that our clients demonstrate, we are well-
positioned to take the long view right along with you. We aspire to
understand your dreams, desires, and goals. We pledge to develop and deepen
our knowledge of your business so we can bring our skills to bear on its long-
term success. And we look out for your personal goals, helping you plan for
the needs of your family as they face the future.
The Somerset Group has grown by anticipating, listening, and responding. We
are ready to help you chart your own course.
FINANCIAL HIGHLIGHTS
At and for the Years Ended December 31,
1998 1997 1996
Revenue and income $11,786,000 $11,125,000 $9,535,000
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 taxes 1,136,000 1,031,000 978,000
--------- --------- ---------
Net income $ 2,865,000 $ 2,536,000 $ 2,145,000
========= ========= =========
Earnings per share - basic $.99 $.87 $.75
Earnings per share - diluted $.97 $.86 $.73
Assets:
Current assets $ 6,214,000 $ 7,353,000 $ 7,248,000
Investment in First Indiana
Corporation 36,104,000 32,406,000 29,746,000
All other 2,455,000 2,701,000 2,724,000
---------- ---------- ----------
Total assets $44,773,000 $42,460,000 $39,718,000
========== ========== ==========
Shareholders' equity $33,463,000 $33,460,000 $31,597,000
========== ========== ==========
Return on revenue and income 24.3% 22.8% 22.5%
Return on average assets 6.6% 6.2% 5.4%
Return on average shareholders' equity 8.3% 7.8% 7.0%
Book value per share $12.26 $11.55 $10.91
Historical amounts have been restated for a merger on January 20, 1998.
All per share amounts have been adjusted for five-for-four stock splits that
were effective February 26, 1997 and February 29, 1996.
SHAREHOLDER INFORMATION
Annual Meeting Registrar and Transfer Agent
The Annual Meeting of Shareholders will be Harris Trust and Savings Bank
held Wednesday, April 21, 1999 at 9:00 a.m. 311 W.Monroe Street,11th Flr
EST at First Indiana Plaza,7th Floor Chicago, Illinois 60606
Conference Center,135 N. Pennsylvania St., 800/573-4048
Indianapolis, Indiana
Capital Stock Independent Auditors
The Somerset Group, Inc. stock is traded KPMG LLP
on the NASDAQ National Market System Indianapolis, Indiana
under the symbol "SOMR"
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 invest. 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 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
December 31,
1998 1997 1996 1995 1994
Working capital $5,795 $6,251 $5,998 $9,146 $6,917
Carrying value-invest.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 10.41 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.
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 & 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 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 corp.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 shares 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 and First
Indiana Investor Services.
Fee income is generated by Somerset Financial Services, which 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
========= ========= =========
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 6% compared to 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 those
for fixed rate annuities. In the latter part of 1998, the division began
focusing on sales to individuals outside of its alliance 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 current and
anticipated demand for 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.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 latter 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.
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 Company'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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
INDEPENDENT AUDITORS' REPORT
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.
KPMG LLP
Indianapolis, Indiana
February 5, 1999
CONSOLIDATED STATEMENTS OF INCOME
The Somerset Group, Inc.
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 Corporation 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 benefits 5,849,000 5,990,000 4,861,000
General & 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
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
The Somerset Group, Inc.
As of December 31,
ASSETS 1998 1997
Current assets
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 values
Of $55,169,000 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 $ - $459,000
Current portion of long-term debt - 13,000
Trade accounts payable 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 and 2,897,724 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 35,463,000 33,460,000
---------- ----------
Total Liabilities and Shareholders' Equity $44,773,000 $42,460,000
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Somerset Group, Inc.
Year Ended December 31,
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
Corporation (4,130,000) (3,883,000) (3,003,000)
Dividends received from First Indiana
Corporation 1,319,000 1,087,000 1,015,000
Other - - (11,000)
Changes in operating assets and liabilities:
Trade accounts, notes, and
other receivables (666,000) 171,000 779,000
Prepaid expenses (7,000) (18,000) (13,000)
Accounts payable and accrued
expenses 86,000 (42,000) (424,000)
Accrued and refundable income
taxes 276,000 (173,000) (173,000)
------- --------- --------
Net cash provided by operating activities 734,000 1,123,000 1,482,000
------- -------- --------
Cash flows from investing activities:
Purchase of shares of First
Indiana Corporation (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, bank (459,000) (225,000) (249,000)
Principal payments on long-term
borrowings (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 cash 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
======== ======= =========
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The Somerset Group, Inc.
January 1, 1996 to December 31, 1998
<TABLE>
<C> <C> <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 31,
1996 - - - 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 31, 1997 - - - 2,536,000 - 2,536,000
Unrealized 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 31, 1998 - - - 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.
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 Company'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 personal and business conduct and an organizational
structure providing for division of responsibility and authority.
Management believes the system of controls has prevented any occurrences that
could be material to the 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
Robert H. McKinney Marni McKinney Joseph M. Richter
Chairman President and Chief Financial Officer
Chief Executive Officer
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, video 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.
(h) Income Taxes: The Company uses the asset and liability method to
accountfor 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 espectively). 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 nonowner 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 & COMPANY P.C.
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.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below.
Year Ended December 31,
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 Expense
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 $2,309,000
Whipple 86,000 106,000
--------- ---------
Combined $ 2,536,000 $2,145,000
========= =========
The 333,339 shares issued by Somerset in the transaction consisted of 293,833
shares held as treasury shares and 39,506 previously unissued shares. 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, 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 new 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 Cost 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>
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 $4,130,000 $3,883,000 $3,003,000
========= ========= =========
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 in 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 upstreaming 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 represent
cost of assets purchased, paid to the Bank, in excess of their market value,
and include consideration paid for an exclusive operating agreement for
marketing and sales of non-FDIC insured insurance and investment products to
customers of the Bank.
Amounts paid are being amortized to expense over 15 years and consisted of the
following:
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 $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, respectively.
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:
Federal 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
========= ======== =======
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 liabilities $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.
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 income 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 income 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.
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
segment performance based on the return on beginning equity employed and the
return on revenue.
First
Somerset Somerset Indiana
Group Financial Investor
Management Services Services
Year Ended December 31, 1998 Division Division Div. 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) $6,386,000 $ 6,386,000
Commission revenue
(external customers) 941,000 941,000
---------- --------- -------- ---------
Total fees and commissions 7,327,000
Equity earnings from First Indiana
Corporation 4,130,000 4,130,000
Investment income -
(external sources) 329,000 329,000
-------- --------- -------- ----------
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 4,000 4,000
Merger expenses (1) 95,000 68,000 163,000
------ -------- ------- ---------
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
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) $5,765,000 $ 5,765,000
Commission revenue
(external customers) 1,084,000 1,084,000
---------- --------- --------- ---------
Total fees and commissions 6,849,000
Equity earnings from First Indiana
Corporation 3,883,000 3,883,000
Investment income
(external sources) 369,000 24,000 393,000
-------- --------- --------- ----------
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 39,000 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 Ended 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) $5,069,000 $ 5,069,000
Commission revenue
(external customers) 1,006,000 1,006,000
---------- --------- --------- ---------
Total fees and commissions 6,075,000
Equity earnings from
First Indiana Corporation 3,003,000 3,003,000
Investment income
(external sources) 441,000 16,000 457,000
--------- -------- ---------- ---------
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 15,000 22,000
Depreciation and amortization 13,000 115,000 54,000 182,000
Interest expense 42,000 58,000 100,000
------ -------- ------- ---------
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
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,
respectively.
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 share:
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.
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.
Officers' Weighted
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.
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.
NOTE 14. SUMMARIZED FINANCIAL STATEMENTS OF 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.
First Indiana Corporation
(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' Equity
Liabilities
Deposits $1,227,918 $1,107,555
Federal Home Loan Bank
(FHLB) 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
========= =========
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 18,055 17,848
Non-Interest Expense
Salary and benefits 22,701 19,916 18,094
Net occupancy 2,983 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
====== ====== ======
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 & 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 all other
assets and liabilities (17,765) (6,197) (3,265)
------- ------ -----
Net Cash (Used) Provided by
Operating Activities (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 (Used) Provided 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 Equivalents $7,422 $ (23,387)$(1,276)
===== ====== =====
BOARD of DIRECTORS
DIRECTORS
Robert H. McKinney
Chairman, The Somerset Group, Inc.;
Chairman & Chief Executive Officer,
First Indiana Corporation
Marni McKinney
President and Chief Executive Officer,
The Somerset Group, Inc.; Vice Chairman,
First Indiana Corporation; Chairman,
First Indiana Bank
H. J. Baker
Chairman (emeritus)
BMW Constructors, Inc.
Patrick J. Early
President
Somerset Financial Services
William L. Elder
Chairman (emeritus)
Southern Indiana Commerce
Corporation
Douglas W. Huemme
Chairman, President and
Chief Executive Officer,
Lilly Industries, Inc.
Malcolm Archibald Leslie
Private Investor
Gary L. Light
President
E.V.A. Investors, Inc.
Kevin K. McKinney
Vice President, The Somerset Group, Inc.;
Publisher, NUVO Newsweekly
Michael L. Smith
Senior Vice President, Finance
Anthem, Inc.
OPERATING COMPANIES and MANAGEMENT
CORPORATE OFFICE
135 N. Pennsylvania Street
Suite 2800
Indianapolis, IN 46204
Telephone 317/269-1285
CORPORATE OFFICERS
Robert H. McKinney
Chairman
Marni McKinney
President and
Chief Executive Officer
Joseph M. Richter
Executive Vice President, Finance
and Treasurer
Robert S. Kaspar
Executive Vice President, Business
Development
Kevin K. McKinney
Vice President
Sharon J. Sanford
Secretary
SOMERSET FINANCIAL SERVICES
Patrick J. Early
President
Robert S. Kaspar
Managing Director
Michael J. McCaslin
Managing Director
Robert C. Phillips
Managing Director
Steven J. Riddle
Managing Director
PARADYM TECHNOLOGIES, INC.
John R. Curtis
President
FIRST INDIANA INVESTOR SERVICES
Donald P. Feldhaus
Vice President
FIRST INDIANA BANK
Robert H. McKinney
Chairman and Chief Executive Officer
of First Indiana Corporation and
Chairman of the
Executive Committee of the Bank
Marni McKinney
Vice Chairman of First Indiana
Corporation and
Chairman of the Bank
Owen B. Melton, Jr.
President and Chief Operating
Officer
of the Corporation and President and
Chief Executive Officer of the Bank
David L. Gray
Financial Management Group
Senior Vice President
David A. Lindsey
Consumer Finance Group
Senior Vice President
Merrill E. Matlock
Commercial & Mortgage Banking Group
Senior Vice President
Timothy J. O'Neill
Correspondent Banking Services Group
Senior Vice President
Edward E. Pollack
Technology and Operations Group
Senior Vice President
Kenneth L. Turchi
Retail Banking, Marketing, &
Strategic Planning Group
Senior Vice President
45
