FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 - For the fiscal year ended December 31, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-14227
THE SOMERSET GROUP, INC.
------------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1647888
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
135 N. Pennsylvania Street, #2800, Indianapolis, IN 46204
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 317/269-1285
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common stock without par value
Name of each exchange on which registered
Over-the-counter: NASDAQ National Market System
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $53,628,508 as of March 3, 2000.
As of March 3, 2000, there were 2,804,105 outstanding shares of the Capital
Stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the year ended December 31, 1999 are
incorporated by reference into Part III.
Portions of the Form 10-K of First Indiana Corporation for the year ended
December 31, 1999 are incorporated by reference into Part I.
-1-
THE SOMERSET GROUP, INC.
INDEX
PART I
Item 1.Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 2.Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Item 3.Legal Proceedings .. . . . . . . . . . . . . . . . . . . . . . . .4
Item 4.Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . . . . . . .4
PART II
Item 5.Market for the Registrant's Common Equity
and Related Security Holder Matters . . . . . . . . . . . . . . .4
Item 6.Selected Financial Data . . . . . . . . . . . . . . . . . . . . .4
Item 7.Management's Discussion and Analysis of Results of Operations
and Financial Condition and Liquidity. . . . . . . . . . . . . . .4
Item 8.Financial Statements and Supplementary Data. . . . . . . . . . . .4
Item 9.Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . .4
PART III
Item 10.Directors and Executive Officers of the Registrant. . . . . . . .5
Item 11.Executive Compensation. . . . . . . . . . . . . . . . . . . . . .6
Item 12.Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . .6
Item 13.Certain Relationships and Related Transactions. . . . . . . . . .6
PART IV
Item 14.Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .6
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . .7
-2-
PART I
ITEM 1 - BUSINESS
General Description of Business
- -------------------------------
The Somerset Group, Inc. (The "Company" or "Registrant")is a comprehensive
financial services company offering a number of specialty consulting and
advisory services and investment and insurance products to the general public.
The Company is also a non-diversified, unitary savings and loan holding company
with an ownership interest of 22.0% in First Indiana Corporation ("First
Indiana"), which owns 100% of First Indiana Bank ("the Bank").
Financial Information About Business Segments
- ---------------------------------------------
Described below are the operations of the Company's segments. Financial
information about the segments is incorporated by reference to Note 11 of the
Notes to Consolidated Financial Statements on pages 31 and 32 of this report.
Narrative Description of Business
I. Insurance and Investment Products Segment
- --------------------------------------------
The Company sells insurance and non-insured investment products through two
divisions: First Indiana Insurance Services and First Indiana Investor Services.
First Indiana Insurance Services?products consist of tax-deferred fixed-rate
annuities, life insurance, and property and casualty insurance. First Indiana
Investor Services?products consist primarily of mutual funds and variable-rate
annuities. These products are marketed to customers of First Indiana Bank and
to the general public in the state of Indiana. Revenue from this segment
consists of commissions from the insurance companies and the broker/dealer
represented.
II. Financial Services Segment
- -------------------------------
The Company's Somerset Financial Services division offers a wide array of
financial consulting services that includes tax planning and preparation,
retirement and estate planning, investment and wealth management, health care
consulting, and computer network design and support. Revenue of this segment
is primarily on a fee-only basis.
III. Information Technology Segment
- ------------------------------------
On January 5, 1999, the Company formed an information technology segment by
merging the computer network design and support department of Somerset
Financial Services with assets and business purchased from two information
technology companies and formed a 100% owned subsidiary, Paradym Technologies,
Inc. ("Paradym"). Paradym provides information technology consulting to the
general public. Services include network design and support, corporate
internet access, and design of web-based processing systems.
IV. Banking Segment
- --------------------
Information on the Registrant's bank affiliate, First Indiana Corporation, is
incorporated into this Report by reference to Item 1 of the 1999 Report on Form
10-K for First Indiana Corporation for the year ended December 31, 1999, filed
separately under Commission file number 0-14354.
ITEM 2 - PROPERTIES
- -------------------
The Registrant's property consists of office equipment and furniture in leased
office space. The leased office space consists of 1,244 square feet located at
Suite 2800, First Indiana Plaza, Indianapolis, Indiana, 1,200 square feet
located at 10044 E. Washington Street, Indianapolis, Indiana, 22,616 square
feet located at 8425 Woodfield Crossing Blvd., Indianapolis, Indiana, and 3,645
square feet located at 2511 E. 46th Street, Indianapolis, Indiana.
-3-
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
Information relative to this item is incorporated into this Report by reference
to Note 14 of the Notes to Consolidated Financial Statements, on page 37 of
this report.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the final quarter
of the fiscal period covered by this report.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
- ------------------------------------------------------------------------------
MATTERS
-------
This information is set forth under the caption "Market for the Company's
Common Stock" on page 9 of this Report.
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
This information is set forth under the caption "Selected Financial Data" on
page 9 of this Report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- --------------------------------------------------------------------------
FINANCIAL CONDITION AND LIQUIDITY
---------------------------------
This information is set forth under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition and Liquidity" on
pages 10 through 16 of this Report.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
This information is contained in the Consolidated Financial Statements, Notes
to Consolidated Financial Statements and Independent Auditors' Report on pages
18 through 21 of this Report. Information on the Registrant's bank affiliate,
First Indiana, is incorporated by reference to Item 8 of the 1999 Report on
Form 10-K for First Indiana, filed separately under Commission file number
0-14354.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The Registrant had no changes in and no disagreements with its accountants
regarding accounting and financial disclosure.
-4-
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Directors
- ---------
Information regarding Directors of the Registrant is incorporated into this
Report by reference to the definitive proxy statement of the Registrant for the
Annual Meeting of Shareholders to be held April 26, 2000, under the caption
"Proposal No. 1: Election of Directors", filed separately under Commission file
number 0-14227.
Executive Officers
- ------------------
Name Office Held Relationship Age
- ----- ----------- ------------ ---
Robert H. McKinney Chairman Father of President 74
and Director and Vice President
Marni McKinney (1) President, CEO Daughter of 43
and Director Chairman
Joseph M. Richter Executive Vice President None 57
Finance and Treasurer
Robert S. Kaspar (2) Executive Vice President None 41
Business Development
Patrick J. Early (1) President of Somerset None 42
Financial Services Division
(1) Effective January 16, 2000, Ms. McKinney became Vice Chairman and Chief
Executive Officer of the Company, and Mr. Early became President and
Chief Operating Officer. These two officers held the offices shown in the
table during 1999.
(2) Mr. Kaspar resigned to pursue other opportunities effective January 16,
2000.
The term of office for all officers of the Registrant continues until the first
meeting of the Board of Directors following the Annual Meeting of Shareholders
on April 26, 2000.
A brief account of the business experience of each Executive Officer during the
past five years is as follows:
Robert H. McKinney - Chairman of the Registrant; Chairman and Chief Executive
Officer of First Indiana Corporation; Chairman of the Executive Committee of
First Indiana Bank; Chief Executive Officer until May 1992; retired Partner of
Bose McKinney & Evans, attorneys; a Director of First Indiana Corporation;
Chairman, Federal Home Loan Bank Board (1977-1979).
Marni McKinney - President, Chief Executive Officer, and a Director of the
Registrant; Chairman and a Director of First Indiana Corporation and First
Indiana Bank; formerly Vice Chairman (1992 - 1998), Chief Operating Officer of
the Registrant (1992 - 1995); formerly Vice President and Director of Strategic
Planning of First Indiana Bank.
Joseph M. Richter - Executive Vice President, Finance and Treasurer of the
Registrant. Formerly, Executive Vice President, CFO and Treasurer (1990 - 1997).
-5-
Robert S. Kaspar - Executive Vice President, Business Development; formerly
President of Somerset Wealth Management, a former division (1997 - 1998);
formerly President and Director of Irwin Union Investor Services, a subsidiary
of Irwin Financial Corporation (1990 - 1996).
Patrick J. Early - President of Somerset Financial Services, a Division of the
Corporation; formerly, President of Whipple & Company, P.C.; Certified Public
Accountant, Certified Financial Planner and Personal Financial Specialist.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 26, 2000, under the caption "Compensation of
Directors and Executive Compensation".
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 26, 2000, under the caption "Voting Securities
and Principal Holders Thereof".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
Information relative to this item is incorporated into this Report by reference
to the definitive proxy statement of the Registrant for the Annual Meeting of
Shareholders to be held April 26, 2000, under the caption "Certain
Transactions".
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) 1. The financial statements listed in the accompanying Index to
Selected Financial Data, Management's Discussion and Analysis of
Results of Operations and Financial Condition and Liquidity,
Financial Statements and Financial Statement Schedules are filed
as part of this report.
2. The financial statement schedules listed in the accompanying Index
to Selected Financial Data, Management's Discussion and Analysis of
Results of Operations and Financial Condition and Liquidity,
Financial Statements and Financial Statement Schedules are filed as
part of this report.
3. Exhibits - The following exhibits are attached to this Form 10-K.
Exhibit
Number Exhibit
3 Amended Articles of Incorporation and Amended and Restated
By-laws thereto.
21 Subsidiaries of the Registrant.
22 Definitive Proxy Statement for Annual Meeting of Shareholders
to be held April 26, 2000.
23 Consent of Independent Certified Public Accountants, of report
dated March 20, 2000, for incorporation into Form S-8
registration statement.
99 First Indiana Corporation's Form 10-K for the year ended
December 31, 1999.
All other exhibits are not attached since they are not applicable to the
Registrant:
(b) Reports on Form 8-K.
(c) Financial Statement Schedules.
-6-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE SOMERSET GROUP, INC.
By s/ Robert H. McKinney 3/15/00
Robert H. McKinney, Chairman
By s/ Marni McKinney 3/15/00
Marni McKinney, President and
Principal Executive Officer
By s/ Joseph M. Richter 3/15/00
Joseph M. Richter, Executive Vice
President and Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities indicated and on the date indicated.
Signatures Title Date
s/ Robert H. McKinney Director, Chairman 3/15/00
Robert H. McKinney
s/ Marni McKinney Director, President 3/15/00
Marni McKinney and Principal Executive Officer
s/ Kevin K. McKinney Director and Vice President 3/15/00
Kevin K. McKinney
s/ Patrick J. Early Director 3/15/00
Patrick J. Early
s/ William L. Elder Director 3/15/00
William L. Elder
s/ Douglas W. Huemme Director 3/15/00
Douglas W. Huemme
s/Malcolm A. Leslie Director 3/15/00
Malcolm A. Leslie
s/Gary L. Light Director 3/15/00
Gary L. Light
s/ Michael L. Smith Director 3/15/00
Michael L. Smith
-7-
THE SOMERSET GROUP, INC.
Form 10-K for the Year Ended December 31, 1998
Items 5, 6, 7, 8, 14(a) (1) and (2), and 14(c)
Index to Selected Financial Data,
Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity,
Financial Statements and Financial Statement Schedules
Selected Financial Data, Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity, Financial Statements and
Schedules of the Registrant and its subsidiaries, required to be included in
Items 5, 6, 7, 8, 14(a) (1) and (2), and 14(c) are listed below:
Page
MARKET FOR THE REGISTRANT'S COMMON STOCK 9
SELECTED FINANCIAL DATA 9
MANAGEMENT'S DISCUSSION AND ANALYSIS 10
FINANCIAL STATEMENTS:
- - Independent Auditors' Report 18
- - Consolidated Statements of Income for the years ended December 31,
1999, 1998, and 1997 19
- - Consolidated Balance Sheets as of December 31, 1999 and 1998 20
- - Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997 21
- - Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998, and 1997 22
- - Notes to Consolidated Financial Statements 23
- - Summarized Consolidated Statements of Subsidiary, Not Consolidated
with Registrant 38
FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules have been omitted because the required
information is contained in the notes to the financial statements or because
such schedules are not required or are not applicable.
The individual financial statements of the Registrant have been omitted since
the Registrant is primarily an operating company and all subsidiaries included
in the consolidated statements being filed, in the aggregate, do not have
minority equity interest and/or indebtedness to any person other than the
Registrant or its consolidated subsidiaries in amounts which together exceed
25% of consolidated net assets as shown by the most recent consolidated balance
sheet. All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.
-8-
THE SOMERSET GROUP, INC. -- FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA (1)
(Dollars in thousands except per share amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31,
1999 1998 1997 1996 1995
----------------------------------
Fees, commissions and investment income $10,317 $7,656 $7,242 $6,532 $5,099
Equity in earnings First Indiana 4,986 4,130 3,883 3,003 3,938
Gross profit construction operations (2) -- -- -- -- 1,649
Income from operations before income taxes 5,141 4,001 3,567 3,123 5,571
Net income (3) 3,392 2,865 2,536 2,145 3,355
Net income per share - basic (4) 1.20 .99 .87 .75 1.16
Net income per share - diluted (4) 1.18 .97 .86 .73 1.15
December 31,
1999 1998 1997 1996 1995
Working capital $2,804 $5,795 $6,251 $5,998 $9,146
Carrying value investment First Indiana 39,010 36,104 32,406 29,746 27,549
Market value investment First Indiana 59,997 55,169 68,515 48,470 38,882
Total assets 47,309 44,773 42,460 39,718 40,188
Long-term debt -- -- 30 44 2,500
Total liabilities 10,938 9,310 9,000 8,121 10,429
Shareholders' equity 36,371 35,463 33,460 31,597 29,759
Cash dividends per share (4) .20 .18 .18 .16 .128
Book value per share (4) 12.97 12.26 11.55 10.91 10.41
</TABLE>
(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) 1999 net income was reduced $115 for the cumulative effect of a change in
accounting principle.
(4) 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, 1999 and 1998 is presented below:
1999 1998
--------------- -----------------
Quarter High Low High Low
-----------------------------------------------------------------
First - ended March 31, $17.125 $15.75 $25.625 $19.250
Second - ended June 30, $20.125 $14.625 $24.250 $21.000
Third - ended September 30, $22.50 $19.188 $25.000 $17.875
Fourth - ended December 31, $19.75 $17.75 $18.875 $15.750
As of March 3, 2000, there were 196 shareholders of record and approximately 850
beneficial owners.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The Company earned $3,392,000 in 1999, compared with $2,865,000 in 1998 and
$2,536,000 in 1997. Net income for 1999 included a non-recurring charge
against net income of $115,000, representing the cumulative effect of a change
in accounting principle. Excluding this non-recurring charge, 1999 earnings
were $3,507,000. Earnings for 1999 of $3,392,000 represented an 18.4% increase
over 1998 earnings and a 33.8% increase over 1997 earnings. Earnings, excluding
the non-recurring charge of $3,507,000, represented a 22.4% increase over 1998
earnings and a 38.3% increase over 1997 earnings.
Net income per diluted share for 1999 of $1.18 represented a 22% increase over
the $.97 earned in 1998 and a 37% increase over the $.86 earned in 1997.
Income before cumulative effect of change in accounting principle per diluted
share for 1999 of $1.22 represented a 26% increase over the $.97 earned in 1998
and a 42% increase over the $.86 earned in 1997.
The change in accounting principle was the adoption on January 1, 1999 of the
American Institute of Certified Public Accountants Statement of Position 98-5
("SOP 98-5"), Reporting on the Costs of Start-up Activities. SOP 98-5 required
the Company to charge to expense costs of start-up activities, including
organization costs, which had been capitalized in prior periods.
REVENUE AND INCOME
The increases in earnings were a result of a 30% increase in revenue and equity
income during 1999 that reached $15,303,000, compared with $11,786,000 in 1998.
The $15,303,000 represented a 38% increase over the $11,125,000 recorded in
1997.
The three components of revenue and income consist of fees and commissions,
investment income, and equity in earnings of First Indiana Corporation.
Fees and commissions and investment income represent the Company's direct
operations in the financial services industry. During 1999 operations
consisted of three entities: Somerset Financial Services, Paradym Technologies,
Inc., and First Indiana Investor Services. The other component of revenue and
income, equity in earnings of First Indiana Corporation, represents the
Company's ownership percentage (22% at December 31, 1999) of the net income
of First Indiana Corporation.
Fee income is generated by Somerset Financial Services and Paradym
Technologies, Inc. ("Paradym"). Somerset Financial Services was formed in 1998
as a result of a merger with Whipple & Company P.C. ("Whipple"), a certified
public accounting firm. Paradym, an information technology company, was formed
in 1999 by combining the Company's existing information technology resources
with resources acquired from two other companies. Services provided by these
two entities are paid for primarily on an independent consulting fee basis,
either as a flat fee or on an hourly basis. Commission income is primarily
generated by First Indiana Investor Services, which is an independent insurance
agency and a representative for an investment broker/dealer, and it receives its
compensation as a percentage of the insurance or investment products sold.
Investment income is income generated from the Company's own investment
portfolio.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company completed a merger with McGee, Rice & Wheat, Inc. ("MRW"), a
certified public accounting firm on September 1, 1999. The merger was
accounted for as a purchase, and the operations of MRW were combined with
Somerset Financial Services.
The results of MRW are included in consolidated financial results commencing
on the date of the merger.
FEES, COMMISSIONS, AND INVESTMENT INCOME
Revenue from fees, commissions, and investment income for the three years ended
December 31, 1999 were as follows:
1999 1998 1997
-------------------------------------
Fee revenue $ 9,115,000 $6,386,000 $5,765,000
Commission revenue 1,113,000 941,000 1,084,000
---------- --------- ---------
10,228,000 7,327,000 6,848,000
Investment income 89,000 329,000 393,000
---------- --------- ---------
$10,317,000 $7,656,000 $7,242,000
========== ========= =========
Revenue from fees and commissions during 1999 of $10,228,000 represented an
increase of 40% over 1998 revenue of $7,327,000, and a 49% increase over 1997
revenue of $6,848,000. Paradym Technologies, Inc., the Company's information
technology company formed early in 1999, contributed $1,398,000 of the increase,
or 19% of the total increase. Paradym achieved positive financial results
during its initial year of operation. The level of client services provided
was above expectations partially due to clients' computer preparations for the
Year 2000 (referred to as Y2K). Increased fee income for tax consulting and
preparation, health care consulting, and investment and wealth management
were the service specialties primarily responsible for the remainder of the
increase in fee revenue. The increase came as a result of adding new clients
throughout the year and also from an increase in the number of services
provided to existing clients.
Commission revenue from the sale of insurance and investment products for 1999
increased $172,000, or 18% compared to 1998, and 3% compared to 1997. The
turnaround in revenue occurred primarily from increased sales of mutual funds
and fixed annuity insurance contracts. Increased sales resulted from the
introduction of new products into our portfolio offerings, concentrated
marketing efforts within the branch banking system of First Indiana Bank, and
an expansion of marketing efforts to existing clients and non-bank related
clients.
Investment income decreased in each of the three years primarily from a
decrease in the average amount of net cash available for investments.
During 1999 the investment portfolio was liquidated at a loss of $124,000,
which further reduced investment income for the year. The investment portfolio
consisted primarily of fixed rate bonds, which would have continued to decline
in value as interest rates continued to increase. The funds generated from the
liquidation were primarily used to fund the merger with McGee, Rice & Wheat,
Inc., and for a stock repurchase program.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
EQUITY IN EARNINGS OF FIRST INDIANA CORPORATION
The Company's equity in earnings of First Indiana Corporation ("First Indiana")
of $4,986,000 was 20.7% above 1998 and 28.4% above the amount for 1997. First
Indiana posted record earnings in 1999 while sustaining asset growth. Total
assets increased 10.2% and amounted to $2.0 billion compared to $1.8 billion
at December 31, 1998. This growth in assets followed an 11.3% increase in 1998
over year-end 1997 of $1.8 billion, compared to $1.6 billion at December 31,
1997.
First Indiana's return on average equity for 1999 was 13.4%, compared with
12.0% in 1998, and 12.2% in 1997.
Growth in loans and lower-cost deposits contributed to First Indiana's net
interest margin. The margin was 3.92% for the year ended December 31, 1999,
compared with 3.88% in 1998, and 4.39% in 1997. The average interest rate
spread, the primary factor in computing net interest margin, was 3.28% for 1999,
compared with 3.16% in 1998, and 3.70% in 1997.
During the third quarter of 1999, First Indiana completed two significant
events that affected earnings. The first was the sale of its Evansville
division, which allowed the Bank to focus resources in Central Indiana, the
fastest-growing region of the state. The second was that the Bank exited the
traditional mortgage banking business in favor of originating mortgages for
relationship customers.
Loans outstanding grew $155 million, or 10% when compared to the end of 1998,
bringing total loans outstanding to $1.7 billion, compared with $1.5 billion
at the end of 1998, and $1.4 billion at year-end 1997. Business loans grew
32%, consumer loans increased 16%, and residential construction loans grew 27%.
Excluding Evansville and jumbo deposits, total deposits grew 12% during 1999 to
$1.0 billion, from $904 million at the end of 1998. The growth primarily
occurred in checking accounts and passbook savings accounts.
Total non-interest income increased 19% in 1999 to $27.0 million, from $22.7
million in 1998, and $17.0 million in 1997. The sale of deposits of the
Evansville division contributed $7.6 million to non-interest income.
First Indiana's loan losses as a percentage of outstanding loans decreased
primarily due to reduced consumer and construction loan charge-offs. Net
charge-offs amounted to $6.4 million, $6.5 million, and $7.1 million in 1999,
1998, and 1997, respectively. The allowance for loan losses increased to
$28.8 million at December 31, 1999, or 163% of non- performing loans at
year-end.
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.
OPERATING EXPENSES
Operating expenses of $10,162,000 for 1999 represented a 31% increase over the
$7,785,000 expended in 1998, and were 35% above such operating expenses of 1997.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS
As a percentage of revenue and income, the $10,162,000 incurred in 1999 was 66%
(a 34% margin), one percentage point higher than in 1998, excluding one-time
merger costs incurred in 1998 (a 35% margin), and two percentage points lower
than the 68% ratio (a 32% margin) of 1997.
Generally, the major reason for the increase in operating expenses was the
continued growth of the Company as evidenced by the 30% increase in revenue and
income. The 1999 amount included expenses for the first time of the newly
formed information technology subsidiary, Paradym Technologies, Inc., the
merged operations of McGee, Rice & Wheat, Inc., and added staff and other costs
to support the increase in fees and commissions from operations contained in all
three years. The percentage improvements of 1999 and 1998, compared with 1997,
are indicative of operating efficiencies achieved by the 1998 merger with
Whipple & Company, P.C.
We expect operating expenses, measured as a percentage of revenue and income,
to decrease in future years. The merger with McGee, Rice & Wheat, Inc.,
occurred on September 1, 1999. The four months included in 1999 consolidated
results are historically the lowest four months of revenue generation for a
certified public accounting firm. Therefore, operating expenses include four
months of expenses approximating all other months, without any benefit of the
peak revenue cycle of January through April. In addition, the Company incurred
higher than normal general and administrative expenses from outside sources in
connection with the investigation and review of possible acquisition candidates,
which is expected to be lower in 2000. Also, additional professional staff was
hired during the fourth quarter to support anticipated demand for our services.
The full revenue potential of these talented individuals is not expected to be
realized in financial results until 2000 and beyond.
The Company is also making significant changes in technology to improve
efficiency in operations and for better and faster delivery of information to
our clients. The major work and output functions of each entity and service
specialty have been reviewed and plans adopted for each area. The many
improvements include better client Internet access to their investment accounts
and greater use of technology for accumulation, review, analysis, and storage
of data for tax, accounting and consulting services.
FINANCIAL CONDITION AND LIQUIDITY
The financial condition and liquidity of the Company remained very good at
December 31, 1999. The Company was also in a very sound position at the end of
1998.
The Company's balance sheet at December 31, 1998 contained a large percentage
of liquid assets that at that time were considered by management in excess of
the working capital needs of the Company and were intended for future use in
expansion of operations and other uses to increase shareholder value. These
liquid assets were primarily represented by short-term investments of $3,713,000
shown in the current asset section of the 1998 Consolidated Balance Sheet.
During 1999 the Company utilized a major portion of these excess liquid assets
for acquisitions and other long-term transactions as discussed below.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS
At December 31, 1999, the Company had a ratio of current assets to current
liabilities of 4.2 to one, compared to 14.8 to one at December 31, 1998. On a
pro forma basis, had the short-term investments at December 31, 1998 been used
for non-current purposes, the 1998 pro forma current ratio would have been 6.0
to one.
Net working capital at December 31, 1999 was $2.8 million, compared to 1998
working capital of $5.8 million. On a pro forma basis (excluding the short-
term investments) the 1998 working capital was $2.1 million, $700,000 less than
the 1999 amount.
The decrease in the current ratio and the amount of net working capital resulted
from the sale of all short-term investments and the use of the cash primarily
for the cash portion of the merger with McGee, Rice & Wheat, Inc., of
$1,046,000; purchase of assets for the formation of Paradym Technologies, Inc.,
of $315,000; and the net repurchase of 87,941 treasury shares of Somerset
common stock (at an average price of $17.50) of $1,539,000. The remainder was
used to purchase hardware and software for technology improvements.
Management considers a current ratio of three to one adequate to support the
working capital needs of operations.
The Company had no debt at December 31, 1999 or December 31, 1998.
Shareholders' equity increased to $36,371,000 at December 31, 1999, from
$35,463,000 at the end of 1998. The book value per share was $12.97, compared
to $12.26 at the end of 1998, an increase of 5.8%.
Generally Accepted Accounting Principles ("GAAP") requires the Company to
record income tax expense at full corporate rates on a portion of its equity
income from First Indiana. GAAP also requires Somerset to record its investment
in First Indiana at a net carrying value, which represents its acquisition cost
of First Indiana shares plus its equity share of First Indiana's net income.
Under certain circumstances, the tax liability recorded in this manner
(approximately $10 million) may not be paid. The market value of Somerset's
investment in First Indiana at December 31, 1999 was approximately $60 million,
or $21 million greater than the investment-carrying amount reflected in its
balance sheet at December 31, 1999.
Operating activities during 1999 provided $1,547,000 of cash, compared to
$734,000 in 1998. The primary causes of the increase were an increase in net
income, deferred income tax expense, accounts payable and accrued expenses,
which were offset by an increase in trade accounts, notes, and other
receivables. Deferred income tax expense increased when compared to 1998,
because 1998 included a change of method of reporting taxable income for
Whipple from cash basis accounting to accrual basis accounting, causing a
reversal of taxes previously deferred at December 31, 1997. The increase
in accounts payable, accrued expenses, trade accounts, notes, and other
receivables resulted from the overall increase in revenue and operating levels.
In addition to the uses of cash discussed above, the Company paid cash
dividends of $566,000 to its shareholders, at an annual rate of $.20 per share,
which was $.02 per share higher than 1998 and 1997. Dividends paid during 1999
represented 37% of cash flow from operations, compared to 71% in 1998, and
41% in 1997.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management anticipates that future purchases of property and equipment will be
funded by available cash and cash provided by operations. An acquisition of
another entity would require the use of 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
Pronouncements by the Financial Accounting Standards Board and the American
Institute of Certified Public Accountants during 1999 are not applicable to the
Company's consolidated financial statements.
YEAR 2000 READINESS
The Company was subject to regulations of two governmental agencies in
connection with review of its state of readiness for the Year 2000. The
Company's operations of the First Indiana Investor Services division was
subject to review by the Federal Financial Institutions Examination Council
("FFIEC"), and its Somerset Financial Services division, as a Registered
Investment Advisor, was subject to review by the Securities and Exchange
Commission ("SEC"). Both the FFIEC and the SEC required Somerset 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 was a critical focus of
resources.
All hardware and software vendors, as well as significant other vendors, were
identified and contacted. The Company identified potential Year 2000 readiness
issues and developed action plans and contingency plans for each issue. During
1998 and 1999, 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
would not assist the Company in its Year 2000 efforts. A team monitored
significant vendor relationships to ensure that no issues would 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 was conducted on the mission critical
aspects with the service bureaus.
The Company completed an upgrade of personal computer hardware during 1998 at a
cost of approximately $140,000 and also completed the installation of
replacement vendor-supplied software at a cost of approximately $20,000.
During 1999 the Company completed the upgrade of two additional software
systems at a cost of $25,000.
Throughout the rollover period into Year 2000 and the first two months of the
new year, there were no significant Year 2000 related systems issues; however,
the Company will continue to monitor these systems.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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.
-16-
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 11, 2000
s/Marni McKinney s/Patrick J. Early s/Joseph M. Richter
Marni McKinney Patrick J. Early Joseph M. Richter
Vice Chairman and President and Chief Financial
Chief Executive Officer Chief Operating Officer Officer
-17-
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
s/KPMG LLP
KPMG LLP
Indianapolis, Indiana
February 11, 2000
-18-
CONSOLIDATED STATEMENTS OF INCOME
THE SOMERSET GROUP, INC.
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1999 1998 1997
Revenue and income:
Fees and commissions $10,228,000 $7,327,000 $6,849,000
Equity in earnings of FIC 4,986,000 4,130,000 3,883,000
Investment income 89,000 329,000 393,000
---------- ---------- ----------
Total revenue and income 15,303,000 11,786,000 11,125,000
Operating expenses:
Salaries, wages, commissions,
& benefits 7,689,000 5,849,000 5,990,000
General & administrative expenses 1,474,000 998,000 882,000
Occupancy expenses 449,000 347,000 305,000
Advertising and marketing 201,000 152,000 96,000
Depreciation and amortization 349,000 272,000 246,000
Interest expense -- 4,000 39,000
Merger expenses -- 163,000 --
---------- --------- ---------
Total operating expenses 10,162,000 7,785,000 7,558,000
---------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle 5,141,000 4,001,000 3,567,000
Income tax expense 1,634,000 1,136,000 1,031,000
--------- --------- ---------
Income before cumulative effect of
change in accounting principle 3,507,000 2,865,000 2,536,000
Cumulative effect of change in
accounting principle, net (115,000) -- --
---------- --------- ---------
Net income $3,392,000 $2,865,000 $2,536,000
========= ========= =========
Income per share:
Basic:
Income before cumulative effect of
change in accounting principle $1.24 $.99 $.87
Cumulative effect of change in
accounting principle (.04) -- --
----- ----- ----
$1.20 $.99 $.87
====== ===== ====
Diluted:
Income before cumulative effect of
change in accounting principle $1.22 $.97 $.86
Cumulative effect of change in
accounting principle (.04) -- --
------ ------ -----
$1.18 $.97 $.86
====== ====== ======
Average shares outstanding
Basic 2,822,583 2,899,933 2,902,800
Diluted 2,868,229 2,961,835 2,957,978
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-19-
CONSOLIDATED BALANCE SHEET
THE SOMERSET GROUP, INC.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
As of December 31,
1999 1998
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,043,000 $ 526,000
Short-term investments -- 3,713,000
Trade accounts, notes and other receivables
less allowance for doubtful accounts 2,539,000 1,888,000
Prepaid expenses 93,000 87,000
Refundable income taxes 14,000 --
-------- --------
Total current assets 3,689,000 6,214,000
Investments:
First Indiana Corporation (market values of
$59,997,000 and $55,169,000) 39,010,000 36,104,000
---------- ---------
Office furniture and fixtures 2,000,000 1.169,000
Less accumulated depreciation 1,039,000 712,000
--------- --------
961,000 457,000
--------- --------
Other assets:
Note receivable, net -- 240,000
Goodwill, net of accumulated amortization 3,152,000 1,074,000
Other 497,000 684,000
-------- --------
3,649,000 1,998,000
-------- --------
Total assets $47,309,000 $44,773,000
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable 238,000 97,000
Accrued compensation 498,000 194,000
Taxes, other rhan income taxes 82,000 33,000
Income taxes -- 30,000
Other accrued expenses 67,000 65,000
------- -------
Total current liabilities 885,000 419,000
------- -------
Deferred income taxes 10,053,000 8,891,000
---------- ---------
Sharedholders' equity:
Common stock without par value, authorized
4,000,000 shares, issued and outstanding
2,909,214 shares 1,862,000 1,862,000
Capital in excess of stated value 3,560,000 3,599,000
Accumulated other comprehensive income(loss)
net of deferred income taxes -- (19,000)
Retained earnings 32,792,000 30,359,000
---------- ----------
38,214,000 35,801,000
Less 105,312 and 17,371 shares, at cost (1,843,000) (338,000)
---------- ----------
Total shareholders' equity 36,371,000 35,463,000
---------- ----------
Total liabilities and Shareholders' equity $47,309,000 $44,773,000
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
-20-
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Somerset Group, Inc.
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1999 1998 1997
Cash flows from operating activities:
Net Income 3,392,000 2,865,000 2,536,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
principles, net 115,000 -- --
Depreciation and amortization 349,000 272,000 246,000
Deferred income taxes 1,448,000 719,000 1,199,000
Equity in earnings of First Indiana Corp (4,986.000)(4,130,000)(3,883,000)
Dividends received from First Indiana Corp 1,434,000 1,319,000 1,087,000
Changes in operating assets and liabilities:
Trade accounts, notes and other receivables (651,000) (666,000) 171,000
Prepaid expenses (6,000) (7,000) (18,000)
Accounts payable and accrued expenses 496,000 86,000 (42,000)
Accrued and refundable income taxes (44,000) 276,000 (173,000)
------- ------- -------
Net cash provided by operating activities 1,517,000 734,000 1,123,000
Cash flows from investing activities:
Decrease(increase) in short-term investments 3,713,000 1,533,000 (524,000)
Payment for purchase of McGee, Rice & Wheat Inc. (1,046,000) -- --
Purchase of shares of First Indiana Corporation -- (990,000) --
Proceeds from sale of assets -- -- 8,000
Purchase of property and equipment (755,000) (207,000) (229,000)
Decrease(increase) in other assets 286,000 256,000 (3,000)
-------- -------- ------
Net cash provided(used) by investing activities 2,198,000 592,000 (748,000)
Cash flows from financing activities:
Principal payments on note payable, bank -- (459,000) (225,000)
Princapal payments on long-term borrowings -- (43,000) (12,000)
Proceeds form sale of common stock 338,000 88,000 330,000
Purchase of common stock (3,000,000) (464,000) (475,000)
Cash dividend paid (566,000) (522,000) (462,000)
--------- ------- -------
Net cash used by financing activities (3,228,000)(1,400,000) (844,000)
Increase (decrease) in cash and cash equivalents 517,000 (74,000) (469,000)
Cash and cash equivalents at beginning of period 526,000 600,000 1,069,000
------- ------- --------
Cash and cash equivalents at end of period 1,043,000 526,000 600,000
======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-21-
Consolidated Statements of Shareholders' Equity
The Somerset Group, Inc.
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<S> <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, 1997 $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
Common stock issued (40,157 shs.) 39,000 265,000 39,000 343,000
Common stock retired (30,825 shs.) (20,000) (429,000) (449,000)
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 losses 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
Reissuance of
treasury shares (6,094 shs.) 7,000 (45,000) 126,000 88,000
Purchase of treasury shares (23,465 shs.) (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
Comprehensive income:
Net income year ended
December 31, 1999 3,392,000 3,392,000
Unrealized gain on short-term
investments, net of deferred
income taxes 19,000 19,000
---------
Total comprehensive income 3,411,000
Tax benefit of stock options exercised 98,000 98,000
Reissuance of treasury shares:
Stock plans (39,380 shs.) (347,000) 685,000 338,000
Merger transaction (47,442 shs.) 210,000 810,000 1,020,000
Purchase of treasury shares (174,763 shs.) (3,000,000) (3,000,000)
Cash dividends paid (566,000) (566,000)
Equity in other changes of First
Indiana Corporation, net of
deferred income taxes (393,000) (393,000)
--------- --------- --------- ---------- --------- ----------
Balance December 31, 1999 $1,862,000 $3,560,000$ -- $32,792,000 (1,843,000)$36,371,000
========= ========= ======== ========== ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
-22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Somerset Group, Inc. (The "Company" or "Somerset") is a non-diversified,
unitary savings and loan holding company. Its major asset at December 31, 1999
is a 22.0% 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. A division of the Company, Somerset Financial
Services, provides tax, accounting, health care consulting, investment and
wealth management, and management consulting services. A subsidiary of the
Company, Paradym Technologies, Inc., provides information technology consulting,
including corporate Internet and networking services.
(a) Basis of Financial Statement Presentation: The consolidated financial
statements include the accounts of the Company and its 100% owned subsidiary.
The consolidated financial statements have been prepared in conformity with
Generally Accepted Accounting Principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
(b) Fees and Commissions: Fees and commissions represent revenue from 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: 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 non-
diversified 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.
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(g) Employee Benefit Plans: Somerset maintains a profit-sharing retirement and
savings plan that is qualified under Internal Revenue Service Code Section
401(k). The Company makes direct contributions to the plan for all eligible
employees annually and also matches employee contributions to the plan.
(h) Income Taxes: The Company uses the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax basis. The
principal temporary difference between the financial statement carrying amounts
and the tax basis that result in deferred taxes is the investment in First
Indiana, accounted for under the equity method of accounting. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period in which the change became effective.
(i) Earnings Per Share: Basic earnings per share for 1999, 1998, and 1997, were
computed by dividing net income by the weighted average shares of common stock
outstanding (2,822,583, 2,899,933, and 2,902,800 in 1999, 1998, and 1997,
respectively). Diluted earnings per share for 1999, 1998, and 1997, 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 (2,868,229, 2,961,835, and 2,957,978 in
1999, 1998, and 1997, 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: Comprehensive income is the total of net income and
all non-owner changes in shareholders' equity.
NOTE 2. CHANGE IN ACCOUNTING PRINCIPLE
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 was
effective for financial statements for fiscal years beginning after December
15, 1998. The Company adopted SOP 98-5 effective January 1, 1999. Concurrent
with the adoption, the Company charged $189,000 to expense ($115,000 after
income taxes) that is reported as the cumulative effect of a change in
accounting principle in the Consolidated Statements of Income.
-24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. 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 & Company P.C. ("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 was 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.
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 provides information technology consulting services,
including corporate Internet and networking services. The total cost of the
assets purchased was $315,000.
MCGEE, RICE & WHEAT, INC.
On September 1, 1999, Somerset completed a merger with McGee, Rice & Wheat, Inc.
("MRW"), a certified public accounting firm located in Indianapolis, Indiana.
The accounting, tax, and other services offered by MRW were combined with the
Company's financial services division. This business combination was accounted
for as a purchase. Accordingly, the results of MRW have been included in the
Consolidated Financial Statements since the date of the merger. Somerset issued
47,442 shares of its common stock, valued at $1,020,000, and paid $1,046,000
cash in exchange for all outstanding shares of MRW. The transaction was valued
at $2,066,000, all of which was considered goodwill, and is being amortized
over 20 years. There were no liabilities assumed, and no cash was acquired in
the transaction.
The following unaudited pro forma financial information presents the combined
results of operations of Somerset and MRW as if the merger had occurred as of
the beginning of 1997, after giving effect to certain adjustments, including
amortization of goodwill and related income tax effects. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had Somerset and MRW constituted a single entity
during the periods shown.
<TABLE>
Year Ended December 31,
(unaudited) 1999 1998 1997
<S> <C> <C> <C>
Revenue and income $16,953,000 $13,598,000 $12,780,000
========== ========== ==========
Net income $ 3,523,000 $ 2,924,000 $ 2,555,000
========== ========== ==========
Income per share:
Basic $1.23 $.99 $.87
Diluted $1.21 $.97 $.86
</TABLE>
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. SHORT-TERM INVESTMENTS
Short-term investments are stated at fair value and are available-for-sale. At
December 31, 1999, the Company did not have any short-term investments. All
investments were sold during 1999 for a loss of $124,000 that reduced investment
income. Investments at December 31, 1998, 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
========= ===== ======= =========
</TABLE>
NOTE 5. ALLOWANCES FOR DOUBTFUL ACCOUNTS
Activity concerning the allowances for doubtful accounts for the three years
ended December 31, 1999 was as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1999 1998 1997
Balance at beginning of period $138,000 $153,000 $118,000
Additions (recoveries) charged
(credited)to costs and expenses (108,000) 10,000 149,000
Uncollectible accounts written off,
net of recoveries (25,000) (114,000)
------- -------- --------
Balance at end of period $30,000 $138,000 $153,000
======= ======= ========
Amount classified as a reduction of trade
accounts, notes, and other receivables $30,000 $138,000 $ 53,000
Amount classified as a reduction of other
assets, notes receivable -- -- 100,000
------ -------- --------
$30,000 $138,000 $153,000
======= ======== =======
</TABLE>
NOTE 6. INVESTMENT IN FIRST INDIANA CORPORATION
The Company's percentage ownership in First Indiana was as follows:
(Shares adjusted for First Indiana's stock splits.)
First Indiana
Shares Shares Percentage
As of: Owned Outstanding Ownership
December 31, 1999 2,758,467 12,513,344 22.0%
December 31, 1998 2,758,467 12,703,294 21.7%
December 31, 1997 2,717,967 12,668,191 21.5%
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's equity in earnings of First Indiana was as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1999 1998 1997
Equity in earnings of First Indiana
based on percentage of ownership $4,986,000 $4,122,000 $3,815,000
Equity in First Indiana's gain on sale
of subsidiary sold to the Company,
contained in equity in earnings -- -- (15,000)
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 of 3 to 25 years -- 8,000 83,000
--------- --------- ---------
Total equity in earnings $4,986,000 $4,130,000 $3,883,000
========= ========= =========
</TABLE>
At December 31, 1999, 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, 1999, 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, 1999 and 1998 were $24,735,000 and
$21,829,000, respectively.
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% 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.
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. OTHER ASSETS
Note receivable at December 31, 1998, consisted of a balance of $240,000 on a
promissory note in connection with the sale of assets. The note was paid in
full in 1999.
Goodwill is stated net of accumulated amortization. The amounts represent cost
of assets purchased in excess of their fair value and include consideration paid
for exclusive operating agreements, client lists, and other intangible assets.
Amounts paid are being amortized to expense over 15 and 20 years and consisted
of the following:
<TABLE>
<S> <C> <C> <C> <C>
1999 1998
Life Amount Life Amount
First Indiana Investor Services:
Original amount paid (1996) 15 yrs. $1,188,000 15 yrs. $1,188,000
Additional purchase price paid
under an agreement for payment
if profits exceeded
pre-determined amounts 13 yrs. 101,000 13 yrs. 101,000
---------------------------------------
1,289,000 1,289,000
Paradym Technologies, Inc. 15 yrs. 141,000 ---
McGee, Rice & Wheat, Inc. 20 yrs. 2,066,000 ---
---------------------------------------
3,496,000 1,289,000
Less accumulated amortization (344,000) (215,000)
---------------------------------------
$3,152,000 $1,074,000
=======================================
</TABLE>
Other assets consisted of the following:
December 31,
1999 1998
Investment in split-dollar life insurance $497,000 $495,000
Organizational costs --- 189,000
------- -------
$497,000 $684,000
======= =======
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. As discussed in Note 2,
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 was charged to expense as a change in accounting principle in 1999.
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments at December 31,
1999 and 1998 approximate their carrying value as reflected in the consolidated
balance sheets, except for the investment in First Indiana. The Company's
financial instruments include cash and cash equivalents, short-term investments,
and notes receivable. The investment in First Indiana had a fair value of
$59,997,000 and $55,169,000 at December 31, 1999 and 1998, respectively.
NOTE 9. INCOME TAXES
Income tax expense (benefit) attributable to income before cumulative effect
of change in accounting principle consisted of:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
Current: 1999 1998 1997
Federal $ 162,000 $ 321,000 $ (147,000)
State and local 24,000 58,000 (20,000)
------- ------- -------
186,000 379,000 (167,000)
-------- ------- --------
Deferred:
Federal 1,260,000 659,000 1,033,000
State and local 188,000 98,000 165,000
--------- ------- ---------
1,448,000 757,000 1,198,000
Total:
Federal 1,422,000 980,000 886,000
State and local 212,000 156,000 145,000
--------- ------- --------
Total income tax expense on income before
cumulative effect of change in
accounting principle $1,634,000 $1,136,000 $1,031,000
========= ========= =========
</TABLE>
Income tax expense attributable to income before cumulative effect of change in
accounting principle differed from the amounts computed by applying the federal
income tax rate of 34% to the pretax income as a result of the following:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1999 1998 1997
Federal income tax at statutory
rate of 34% $1,748,000 $1,360,000 $1,213,000
Add tax effect of:
State and local income taxes,
net of federal income tax benefit 140,000 106,000 132,000
Dividends received deduction
(First Indiana) ( 390,000) (359,000) (296,000)
Other 136,000 29,000 (18,000)
-------- --------- ---------
$1,634,000 $1,136,000 $1,031,000
========= ========= =========
</TABLE>
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability at December 31, 1999 and 1998 consist of:
<TABLE>
<S> <C> <C>
December 31,
Deferred tax assets: 1999 1998
Allowance for doubtful accounts $ 11,000 $ 53,000
Unrealized investment losses -- 12,000
Accrued liabilities -- 7,000
Merger expenses 57,000 --
------ ------
Total deferred tax assets $ 68,000 $ 72,000
====== ======
Deferred tax liabilities:
Investment in First Indiana $10,084,000 $8,951,000
Office furniture and equipment 26,000 12,000
---------- ---------
Total deferred tax liabilities $10,110,000 $8,963,000
========== =========
Net deferred tax liabilities $10,042,000 $8,891,000
Amount classified as current $ (11,000) $ --
Amount classified as long-term 10,053,000 8,891,000
---------- ---------
$10,042,000 $8,891,000
========== =========
</TABLE>
The Company made income tax payments of $177,000 and $61,000 during the years
ended December 31, 1999 and 1998, respectively, and received income tax refunds
of $125,000 during the year ended December 31, 1997.
NOTE 10. INTERIM QUARTERLY RESULTS (UNAUDITED)
(Dollars in thousands except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Annual
Commissions, fees, and
investment income $3,662 $2,008 $2,001 $2,646 $10,317
Equity in earnings of
First Indiana 1,006 1,095 1,460 1,425 4,986
Operating expenses (2,536) (2,314) (2,416) (2,896) (10,162)
-----------------------------------------
Income before income taxes
and cumulative effect of
change in accounting principle 2,132 789 1,045 1,175 5,141
Income tax expense 726 195 286 427 1,634
-----------------------------------------
Income before cumulative effect
of change in accounting
principle 1,406 594 759 748 3,507
Cumulative effect of change
in accounting principle (115) --- --- --- (115)
-----------------------------------------
Net income $1,291 $ 594 $ 759 $ 748 $3,392
=========================================
Income per share - basic $ .45 $ .21 $ .27 $ .27 $ 1.20
=========================================
Income per share - diluted $ .44 $ .21 $ .27 $ .26 $ 1.18
=========================================
</TABLE>
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
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
=========================================
</TABLE>
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 11. 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
four 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, investment and wealth
management, and management consulting services for entrepreneurs, their
businesses, families, and individuals. Revenue and income for services is
primarily on a fee basis; as an hourly fee or a quoted flat fee. No products are
sold and only minimal 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.
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Paradym Technologies, Inc.
This 100 percent owned subsidiary, which commenced operations on January 4,1999,
provides information technology consulting services, including corporate
Internet, network systems and software, and accounting systems design and
support. Revenue and income for services is primarily on a fee basis; as an
hourly fee or a quoted flat fee.
There were no material 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.
(Dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
First
Somerset Somerset Indiana
Group Financial Investor Paradym
Management Services Services Technologies
Year Ended December 31, 1999 Division Division Division Inc. Consolidated
Beginning equity employed $33,022 $ 842 $1,274 $ 325 $35,463
Assets $39,902 $5,208 $1,502 $ 697 $47,309
Revenue and income:
Fee based revenue - external customers $ -- $7,717 $ -- $1,398 $9,115
Commission revenue - external customers -- -- 1,113 -- 1,113
------------------------------------------------
Total fees and commissions -- 7,717 1,113 1,398 10,228
Equity earnings from First Indiana 4,986 -- -- -- 4,986
Investment income - external sources 72 16 -- 1 89
-----------------------------------------------
Total revenue and income 5,058 7,733 1,113 1,399 15,303
-----------------------------------------------
Expenses:
Salaries, wages, commissions, & benefits 546 5,672 609 862 7,689
General and administrative expenses 299 841 181 153 1,474
Occupancy expenses 24 362 21 42 449
Advertising and marketing 10 170 8 13 201
Depreciation and amortization (1) 17 185 111 36 349
-----------------------------------------------
Total expenses 896 7,230 930 1,106 10,162
-----------------------------------------------
Income before income taxes and cumulative
effect change in accounting principle 4,162 503 183 293 5,141
-----------------------------------------------
Income tax expense:
Current provision (192) 202 67 109 186
Deferred provision (1) 1,429 17 -- 2 1,448
-----------------------------------------------
1,237 219 67 111 1,634
-----------------------------------------------
Income before cumulative effect of change
in accounting principle 2,925 284 116 182 3,507
Cumulative effect of change in accounting
principle, net (2) -- (115) -- -- (115)
-----------------------------------------------
Net income $ 2,925 $ 169 $ 116 $ 182 $3,392
===============================================
</TABLE>
(1) A significant non-cash expense
(2) Unusual non-recurring expense
-32-
<TABLE>
Somerset Somerset First Indiana
Group Financial Investor
Management Services Services
<S> <C> <C> <C> <C>
Year Ended December 31, 1998 Division Division Division Consolidated
Beginning equity employed $31,421 $ 824 $1,215 $33,460
Assets $41,208 $2,217 $1,348 $44,773
Revenue and income:
Fee based revenue - external customers -- $6,386 -- $ 6,386
Commission revenue - external customers -- -- 941 941
------ ----- ------ ------
Total fees and commissions 7,327
Equity earnings from First Indiana
Corporation 4,130 -- -- 4,130
Investment income - external sources 329 -- -- 329
----- ----- ---- ------
Total revenue and income 4,459 6,386 941 11,786
----- ----- ---- ------
Expenses:
Salaries, wages, commissions,
and benefits 503 4,802 544 5,849
General and administrative expenses 172 684 142 998
Occupancy expenses 25 303 19 347
Advertising and marketing 12 130 10 152
Depreciation and amortization (1) 19 143 110 272
Interest expense 4 4
Merger expenses (2) 95 68 -- 163
--- ----- ---- -----
Total expenses 826 6,134 825 7,785
---- ----- ---- -----
Income before income taxes 3,633 252 116 4,001
----- ----- ---- -----
Income tax expense:
Current provision (benefit) (87) 423 43 379
Deferred provision (1) 1,083 (327) 1 757
----- ----- ---- -----
996 96 44 1,136
----- ----- ---- -----
Net income $2,637 $ 156 $ 72 $2,865
===== ==== === =====
(1) A significant non-cash expense
(2) Unusual non-recurring expenses
Year Ended December 31, 1997
Beginning equity employed $29,592 $ 761 $1,244 $31,597
Assets $39,628 $1,487 $1,345 $42,460
Revenue and income:
Fee based revenue - external customers $ -- $5,765 $ -- $ 5,765
Commission revenue - external customers 1,084 1,084
------ ----- ----- ------
Total fees and commissions 6,849
Equity earnings from First Indiana
Corporation 3,883 -- -- 3,883
Investment income - external sources 369 24 -- 393
----- ----- ----- ------
Total revenue and income 4,252 5,789 1,084 11,125
----- ----- ----- ------
Expenses:
Salaries, wages, commissions, and benefits 756 4,788 446 5,990
General and administrative expenses 133 541 208 882
Occupancy expenses 23 264 18 305
Advertising and marketing 6 78 12 96
Depreciation and amortization (1) 19 127 100 246
Interest expense -- 39 -- 39
----- ----- ----- -----
Total expenses 937 5,837 784 7,558
----- ----- ----- -----
Income before income taxes 3,315 (48) 300 3,567
----- ----- ----- -----
Income tax expense:
Current provision (benefit) (142) (131) 106 (167)
Deferred provision (1) 1,069 126 3 1,198
927 (5) 109 1,031
----- ----- ----- -----
Net income $2,388 $ (43) $ 191 $2,536
===== ===== ===== =====
-33-
</TABLE>
(1) A significant non-cash expense
Note 12. Stock-Based Compensation
The Company has two types of stock-based compensation plans: stock options
and stock grants, as described below. The Company has applied Accounting
Principles Board ("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.
There were no stock grants issued or outstanding during 1999. The amounts
charged for the stock grants and taxes were $31,000 and $395,000 in 1998 and
1997, respectively.
Had compensation cost for the stock options granted in 1999, 1998, and 1997
been determined based on the fair value at the grant date consistent with the
methods of Federal Accounting Standards Board ("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:
<TABLE>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Net Income:
As reported $3,392,000 $2,865,000 $2,536,000
Pro forma $3,218,000 $2,810,000 $2,507,000
Basic earnings per share:
As reported $1.20 $.99 $.87
Pro forma $1.14 $.97 $.86
Diluted earnings per share:
As reported $1.18 $.97 $.86
Pro forma $1.12 $.95 $.85
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 1999 1998 1997
Dividend yield 1.00% 1.20% 1.15%
Expected volatility 54% 59% 47%
Risk-free interest rate 6.0% 5.43% 6.11%
Expected option life 5 yrs. 5 yrs. 5 yrs.
</TABLE>
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.
Certain incentive stock option grants, issued February 18, 1998, were amended
on February 19, 1999. The amendments changed the exercise price, the term of
the option, and the exercise dates. The effect of the amendments were to
change the 1998 option grants to correspond exactly with the terms of
additional option grants issued on February 19, 1999. Option grants for 1998
for 51,813 shares, held by 24 officers and key employees, were amended. The
original grants bore an exercise price equal to the market price on February
18, 1998, of $23.63 per share and were amended to the market price on
February 17, 1999, of $16.375 per share.
The following summary reflects changes in the options outstanding during the
three years ended December 31, 1999.
<TABLE>
Officers' Weighted
and Key Average
Employees' Directors' Price Per
Plan Plan Share
<C> <C> <C>
<S> ---------------------------------------
Balance at January 1, 1997 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 18.49
Options exercised (13,595) (4,689) 4.81
------- ------
Balance at December 31, 1998 158,598 34,386 15.33
Options granted 58,112 7,815 16.36
Options expired (1,000) -- 16.38
Options exercised (28,439) (10,941) 8.58
------ ------
Balance at December 31, 1999 187,271 31,260 15.40
======= ======
</TABLE>
-35-
Outstanding option shares at December 31, 1999, by exercise price per share,
were as follows:
<TABLE>
<S> <C> <C> <C>
Officers'
and Key
Price Per Employees' Directors'
Share Plans Plan
------------------------------------------
$ 5.84 5,469 --
8.32 10,938 --
8.48 12,501 1,563
11.20 17,188 --
12.80 -- 4,689
15.50 -- 7,815
15.80 9,500 --
16.25 -- *7,815
16.375 *111,175 --
17.375 12,500 --
24.25 -- 9,378
25.99 *8,000 --
------- ------
187,271 31,260
======= =======
</TABLE>
*Options not exercisable at December 31, 1999; 119,175 option shares
issued to Officers and Key Employees, and 7,815 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, 1999.
Reserved for future stock options and stock grants at December 31, 1999 were
73,948 shares under the Officers and Key Employees' Plans and 12,492 shares
under the Directors' Stock Option Plan.
Note 13. Retirement Plans
The Company maintained a retirement plan for all employees during 1998 and
1997. The plan was a SAR-SEP and was qualified for income tax deferral under
Internal Revenue Service Code Section 408(k). Under the plan, employee
contributions and employer matching contributions were deferred for income
tax purposes. All amounts were contributed to trusteed Individual Retirement
Accounts established by the participants.
-36-
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 and $53,000 during the years ended
December 31, 1998 and 1997, 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). Contributions made to the plan for all plan
participants were $245,000, $126,000, and $129,000 during the years ended
December 31, 1999, 1998, and 1997, respectively.
Note 14. Commitments and Contingencies
The Company, in the normal course of business, is involved in various claims
and contingencies. After taking into consideration legal counsel's
evaluation and the extent of insurance coverage, management is of the opinion
that the outcome of claims and contingencies will not result in any ultimate
liability material to the consolidated financial statements.
-37-
Note 15. Summarized financial statements of First Indiana Corporation
Summarized consolidated financial information is presented below and on the
following two pages for First Indiana. This 22 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 1999 annual report for First Indiana is available upon
request.
First Indiana Corporation
(Dollars in Thousands)
<TABLE>
December 31,
<S> <C> <C>
1999 1998
Assets
Cash and cash equivalents $ 61,441 $57,653
Investments 103,169 113,291
Mortgage-backed securities - net 54,734 29,680
Loans receivable - net 1,673,422 1,518,543
Premises and equipment 17,071 18,546
Accrued interest receivable 13,554 11,680
Real estate owned 1,227 2,204
Prepaid expenses and other assets 55,156 44,393
-------- ---------
Total Assets $1,979,774 $1,795,990
========= =========
Liabilities and Shareholders' Equity
Liabilities
Deposits $1,312,115 $1,227,918
Federal Home Loan Bank (FHLB) advances 366,854 327,247
Short-term borrowings 98,754 54,219
Accrued interest payable 5,605 2,646
Advances by borrowers for taxes and insurance 1,377 1,958
Other liabilities 17,966 16,032
--------- ---------
Total Liabilities 1,802,671 1,630,020
Shareholders' Equity 177,103 165,970
-------- --------
Total Liabilities and Shareholders' Equity $1,979,774 $1,795,990
========= =========
</TABLE>
-38-
First Indiana Corporation
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C>
Year Ended December 31,
1999 1998 1997
Interest Income $146,426 $136,931 $128,385
------- ------- -------
Interest Expense
Deposits 54,473 54,935 49,936
FHLB advances 18,309 15,348 12,288
Short-term borrowings 2,793 2,797 2,127
------ ------ ------
Total Interest Expense 75,575 73,080 64,351
------ ------ ------
Net Interest Income 70,851 63,851 64,034
Provision for loan losses 9,410 9,780 10,700
------ ------ ------
Net Interest Income After
Provision for Loan Losses 61,441 54,071 53,334
------ ------ ------
Non-Interest Income
Sale of loans 7,417 9,418 4,932
Loan servicing income 1,220 1,635 2,767
Loan fees 3,626 3,092 2,358
Customer fee income 5,296 4,107 3,704
Other 9,399 4,424 3,189
------ ------ ------
Total Non-Interest Income 26,958 22,676 16,950
------ ------ ------
Non-Interest Expense
Salary and benefits 28,152 22,701 19,916
Net occupancy 2,942 2,983 2,852
Deposit insurance 712 691 693
Real estate owned operations - net 537 858 652
Other 20,003 18,523 16,991
------ ------ ------
Total Non-Interest Expense 52,346 45,756 41,104
------ ------ ------
Earnings Before Income Taxes 36,053 30,991 29,180
Income Taxes 13,320 11,844 11,436
------ ------ ------
Net Earnings $ 22,733 $19,147 $17,744
====== ====== ======
</TABLE>
-39-
First Indiana Corporation
(Dollars in Thousands)
Summarized Consolidatedd Statements of Cash Flows
<TABLE>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 22,733 $ 19,147 $ 17,744
Adjustments to reconcile net earnings to net
Cash provided (used) by operating activities
(Gain) Loss on sales of assets and deposits (11,992) (10,181) (5,148)
Amortization 2,104 2,368 864
Depreciation 2,524 2,211 2,022
Provision for loan losses 9,410 9,780 10,700
Net sale of loans held for resale 88,578 (31,944) (28,700)
Net change in all other assets
and liabilities (15,010) (17,765) (6,197)
------ ------ -----
Net Cash (Used) Provided by
Operating Activities 98,347 (26,384) (8,715)
------ ------ -----
Cash Flows from Investing Activities
Proceeds - sales of investments
available for sale 147,486 20,399 14,991
Proceeds - sales of
investment securities 55,752 23,483 --
Proceeds - maturities of
investment securities 3,143 25,855 20,932
Purchase of investment securities (144,898) (47,375) (39,912)
Origination of loans and mortgage-backed
securities - net of collections (306,488) (125,399) (117,069)
Proceeds from sale of loans 70,195 9,567 5,274
Purchase of premises and equipment (2,965) (6,810) (2,291)
Other - net (81,395) (28,333) 7,555
------ ------ -----
Net Cash (Used) Provided by
Investing Activities (259,170) (128,613) (110,520)
------- ------- -------
Cash Flows from Financing Activities
Net change in deposits 204,137 120,363 12,069
Net change in short-term borrowings 44,535 (21,532) 45,698
Net change in FHLB advances 39,607 69,789 41,992
Purchase of treasury stock (5,299) (2,242) (132)
Dividends paid (6,532) (6,125) (5,065)
Other - net (111,837) 2,166 1,286
------- ------ ------
Net Cash Provided (Used) by
Financing Activities 164,611 162,419 95,848
------- ------- ------
Increase (Decrease) in Cash
and Cash Equivalents $ 3,788 $ 7,422 $ (23,387)
======= ====== ======
</TABLE>
-40-
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1999
Part IV - Item 14(b) - Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the year ended
December 31, 1999, and to the date of this report.
-41-
Exhibit 3
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1999
Amended Articles of Incorporation and Amended and Restated Bylaws Thereto
Amended Articles of Incorporation
No amendments to the Article of Incorporation were made during the year ended
December 31, 1999. The Articles of Incorporation are incorporated by reference
to Exhibit 3 of Form 10-K annual report of the Registrant for the year ended
December 31, 1998, under commission file number 0-14227.
Amended and Restated Bylaws
The amended and restated bylaws are incorporated by reference to Exhibit 3 of
Form 10-K annual report of the Registrant for the year ended December 31, 1997.
No changes occurred in the years ended December 31, 1999 and 1998.
-42-
Exhibit 21
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1999
Subsidiaries of the Registrant
The following corporations are subsidiaries of the Registrant:
Percent
Ownership Name
100% Paradym Technologies, Inc.
135 N. Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
22.0% First Indiana Corporation
135 N. Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
-43-
Exhibit 22
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1999
Definitive Proxy Statement for Annual Meeting of Shareholders - April 26, 2000
The Registrant's Notice of Annual Meeting, Proxy Statement and Form of Proxy are
incorporated into this Form 10-K by reference to file number 0-14227 for such
information previously filed with the Commission.
-44-
Exhibit 23
KPMG LLP
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, Indiana 46204-2452
The Board of Directors and Shareholders
The Somerset Group, Inc.:
We consent to incorporation by reference in the registration statements (No. 33-
44548 and 333-68391) on Form S-8 of The Somerset Group, Inc. of our report dated
February 11, 2000, relatng to the consolidated balance sheets of The Somerset
Group, Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which report
appears in the December 31, 1999 annual report on Form 10-K of The Somerset
Group, Inc.
s/KPMG LLP
KPMG LLP
Indianapolis, Indiana
March 20, 2000
-45-
Exhibit 99
THE SOMERSET GROUP, INC.
FORM 10-K ANNUAL REPORT
Year Ended December 31, 1999
First Indiana Corporation Form 10-K Annual Report Year Ended December 31, 1999
First Indiana Corporation's Form 10-K annual report for the year ended December
31, 1999 is incorporated herein by reference to the First Indiana Corporation's
Form 10-K annual report filed separately with the Commission under file number
0-14354.
-46-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,043,000
<SECURITIES> 0
<RECEIVABLES> 2,539,000
<ALLOWANCES> 30,000
<INVENTORY> 00
<CURRENT-ASSETS> 3,689,000
<PP&E> 2,000,000
<DEPRECIATION> 1,039,000
<TOTAL-ASSETS> 47,309,000
<CURRENT-LIABILITIES> 885,000
<BONDS> 00
0
0
<COMMON> 1,862,000
<OTHER-SE> 34,509,000
<TOTAL-LIABILITY-AND-EQUITY> 47,309,000
<SALES> 10,228,000
<TOTAL-REVENUES> 15,303,000
<CGS> 10,162,000
<TOTAL-COSTS> 10,162,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,141,000
<INCOME-TAX> 1,634,000
<INCOME-CONTINUING> 3,507,000
<DISCONTINUED> 0
<EXTRAORDINARY> (115,000)
<CHANGES> 0
<NET-INCOME> 3,392,000
<EPS-BASIC> 1.20
<EPS-DILUTED> 1.18
</TABLE>
