SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by Registrant [ X ]
Filed by Party other than the Registration [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 24 0.14a-11(c) or 240.14a-12
THE SOMERSET GROUP, INC.
(Name of Registrant as Specified in its Charter)
THE SOMERSET GROUP, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction
applies:
....................................................................
2) Aggregate number of securities to which transaction
applies:
....................................................................
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
....................................................................
4) Proposed maximum aggregate value of transaction:
....................................................................
5) Total fee paid:
....................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
1) Amount Previously Paid:
....................................................................
2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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(FRONT)
THE SOMERSET GROUP, INC. This proxy is solicited on behalf of the
2800 Firstr Indiana Plaza Board of Directors of the Corporation.
Indianapolis, Indiana 46204
The undersigned hereby appoints Joseph
M. Richter and Sharon J. Sanford, and each
of them, attorneys-in-fact and proxies, with
full power of substitution, to vote as
designated below all shares of The Somerset
Group, Inc. (the "Corporation") which the
undersigned would be entitled to vote if
personally present at the Annual Meeting of
Shareholders to be held on April 26, 2000
at 9:00 a.m., EST, and at any adjournment
thereof.
1. Election of Directors
__ For all nominees listed below __ Withhold Authority
(except as marked to the to vote for all nominees
contrary below)
Nominees for a term of three years:
Douglas W. Huemme, Malcolm Archhibald Leslie and Kevin McKinney
(Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.)
- ------------------------------------------------------------------------------
2. In their discretion, the Proxies are authorized to vote such other business
as may properly come before the meeting.
(continued and to be signed on other side.)
(BACK)
This proxy when properly executed will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, this proxy will be
voted FOR Proposal 1.
The undersigned acknowledges receipt from The Somerset Group, Inc. prior to
the execution of this proxy, of notice of the meeting, a proxy statement,
and an Annual Report to Shareholders.
Please sign exactly as name appears below. When shares are held as joint
tenants, both should sign. When signing as attorney, executor,
admionistrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
Signature ____________________________ _________________________________
(Signature if held jointly)
Dated: ______________ , 2000
PLease mark, sign, date and return the proxy card
promptly using the enclosed envelope.
REVOCABLE PROXY
THE SOMERSET GROUP, INC.
135 North Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
March 24, 2000
Dear Shareholder:
The Directors and Officers of The Somerset Group, Inc. join me in extending to
you a cordial invitation to attend the annual meeting of our shareholders.
This meeting will be held on Wednesday, April 26, 2000, at 9:00 a.m., EST, in
the First Indiana Plaza Conference Center, Ohio and Pennsylvania Streets,
Seventh Floor, Indianapolis, Indiana.
We hope you plan to attend the annual meeting where we will review our past
performance and our plans for the future.
The formal notice of the annual meeting and the proxy statement appear on the
following pages. After reading the proxy statement, please mark, sign, and
return the enclosed proxy card to assure that your votes on the business matters
of the meeting will be recorded. Returning the proxy does not affect your right
to vote in person on all matters brought before the meeting.
Sincerely,
Robert H. McKinney
Chairman
THE SOMERSET GROUP, INC.
135 North Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of The Somerset Group, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of the shareholders of The
Somerset Group, Inc. will be held on Wednesday, April 26, 2000, at 9:00 a.m.,
EST, in the First Indiana Plaza Conference Center, Ohio and Pennsylvania Streets
Seventh Floor, Indianapolis, Indiana, to consider and take action on the
following matters:
1. Election of Directors. The election of directors as set forth in the Proxy
Statement.
2. Other Business. The transaction of such other business as properly may come
before the meeting and any adjournments thereof.
Only shareholders of record at the close of business on March 3, 2000 are
entitled to vote at the meeting or any adjournment thereof.
By order of the Board of Directors
Sharon J. Sanford
Secretary
March 24, 2000
IMPORTANT
PLEASE MARK, SIGN AND RETURN THE ENCLOSED PROXY. NO POSTAGE IS NECESSARY IF
MAILED IN THE UNITED STATES.
THE SOMERSET GROUP, INC.
135 North Pennsylvania Street
Suite 2800
Indianapolis, Indiana 46204
(317) 269-1285
PROXY STATEMENT
The accompanying proxy is solicited by the Board of Directors of The Somerset
Group, Inc. (the ACorporation@) for use at the annual meeting of shareholders to
be held on Wednesday, April 26, 2000, at 9:00 a.m., EST, in the First Indiana
Plaza Conference Center, Ohio and Pennsylvania Streets, Seventh Floor,
Indianapolis, Indiana, and any adjournments thereof (the AAnnual Meeting@). The
Notice of Annual Meeting of Shareholders, this Proxy Statement and accompanying
form of proxy are first being sent or given to shareholders on or about March
24, 2000.
The election of directors will be determined by a plurality of the shares
present in person or represented by proxy. The holder of each outstanding share
of Common Stock is entitled to vote for as many persons as there are directors
to be elected. Any other matter to come before the Annual Meeting will be
approved if the votes cast at the Annual Meeting (in person or represented by
proxy) in favor of such proposal exceed the votes opposing such proposal. An
abstention, non-vote, or broker non-vote will not change the number of votes
cast for or against the election of any director.
A proxy in the enclosed form, if properly executed, duly returned to the
Corporation and not revoked, will be voted in accordance with the instructions
contained therein. The shares represented by executed but unmarked proxies will
be voted FOR the three persons nominated for election as directors referred to
herein. If any other matters are properly brought before the Annual Meeting,
the persons named in the enclosed form of proxy will vote the shares represented
thereby on such matters in accordance with their best judgment. Other than the
election of directors, the Board of Directors has no knowledge of any matters to
be presented for action by the shareholders at the Annual Meeting.
Execution of a proxy given in response to this solicitation will not affect a
shareholder=s right to attend and to vote in person at the Annual Meeting.
Presence at the Annual Meeting of a shareholder who has signed a proxy does not
in itself revoke the proxy. Any shareholder giving a proxy may revoke it at any
time before it is voted by giving notice thereof to the Corporation in writing
or at the Annual Meeting or by providing a proxy bearing a later date.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record as of the close of business on March 3, 2000 will be
entitled to vote at the Annual Meeting. The Corporation has only one class of
stock, its common stock, of which 2,804,105 shares were outstanding as of the
close of business on March 3, 2000.
The following table shows, as of March 3, 2000, the number and percentage of
shares of common stock owned beneficially by (i) each person who owned
beneficially more than 5% of the issued and outstanding common stock of the
Corporation and (ii) executive officers and directors as a group:
<TABLE>
Name and Address Percent
of Beneficial Amount and Nature of of
Owner Beneficial Ownership Class
<S> <C> <C>
Robert H. McKinney
135 N. Pennsylvania St., Suite 2800
Indianapolis, Indiana 46204 1,234,923(1) 42.8%
Marni McKinney
135 N. Pennsylvania St., Suite 2800
Indianapolis, Indiana 46204 1,234,923(1) 42.8%
Marvin C. Schwartz
c/o Neuberger & Berman
605 Third Avenue
New York, New York 10158 186,718(2) 6.5%
All executive officers and directors
as a group (11 persons) 1,537,712(3) 52.4%
</TABLE>
Unless otherwise noted, the above named persons have sole voting power and sole
investment power.
(1) These shares are beneficially owned by a group consisting of Robert H.
McKinney and Marni McKinney. Robert H. McKinney is deemed to be a beneficial
owner as specified in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the AExchange Act@), of 556,233 shares held by a limited partnership
established by Mr. McKinney for the benefit of his children, including Marni
McKinney and Kevin K. McKinney. The total held by the group also includes
63,230 shares owned directly by Mr. McKinney, 28,362 shares owned of record by
his wife, and 29,188 shares subject to options granted under the Corporation=s
Stock Incentive Plans. The total held by the group also includes 477,038 shares
held in two irrevocable trusts of which Marni McKinney is the Trustee and which
were established by Mr. McKinney for the benefit of his children. The above
number also includes 36,840 shares which Ms. McKinney owns individually and
44,032 shares subject to options granted under the Corporation=s Stock Incentive
Plans.
(2) This information is taken from the Schedule 13D Report dated February 26,
1992, and filed by the shareholder with the Securities and Exchange Commission
concerning shares held by it. It does not reflect any changes in those
shareholdings which may have occurred since the date of such filing.
(3) Includes 101,097 shares subject to options granted under the Corporation=s
Stock Incentive Plans and 29,697 shares subject to options granted under the
1991 Director Stock Option Plan.
PROPOSAL NO. 1: ELECTION OF DIRECTORS
Three directors are to be elected. Douglas W. Huemme, Malcolm Archibald Leslie
and Kevin K. McKinney have been nominated for a term of three years and until
their successors are elected and qualified. Those three persons are members of
the present Board of Directors. The other directors listed in the table below
will continue in office until expiration of their terms. If, at the time of the
2000 Annual Meeting any of such nominees should be unable or decline to serve,
the discretionary authority provided in the proxy may be exercised to vote for a
substitute or substitutes. The Board of Directors has no reason to believe that
any substitute nominee or nominees will be required.
The Board of Directors unanimously recommends the election of the following
nominees:
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since March 3, 2000 Class
The NOMINEES for election are:
Douglas W. Huemme, Age 58 1990 14,066 (1) (2)
Chairman and Chief Executive
Officer, Lilly Industries, Inc.,
industrial coatings; Director,
Meridian Mutual Insurance Co.
and Alltrista Corporation;
formerly Vice President and
Group Executive - Chemicals
Group, Whittaker Corporation.
Malcolm Archibald Leslie, Age 50 1997 4,689(3) (2)
Private investor; formerly General
Partner of CID Equity Partners,
private venture capital firm;
formerly Director -
International Treasury, Cummins
Engine Company, Inc., manufacturer of
diesel engines.
Kevin K. McKinney, Age 42 1990 25,917(4) (2)
Vice President of the Corporation;
Publisher of NUVO Newsweekly
and Chairman and President of
NUVO, Inc.; formerly President,
Mid America Media; formerly
Chairman, Indianapolis Extra, Ltd.
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since March 3, 2000 Class
Directors whose terms expire
in 2001:
Gary L. Light, Age 62 1997 5,689(3) (2)
President, E.V.A. Investors, Inc.;
formerly Vice Chairman and Chief
Financial Officer of Sofmor Danck,
Inc.
Robert H. McKinney, Age 74 1985 1,234,923(3) 42.8%
Chairman of the Corporation;
Chairman of First Indiana Corporation;
Chairman of the Executive Committee,
First Indiana Bank; formerly, Chief
Executive Officer of the Corporation
and Chief Executive Officer of First
Indiana Corporation; retired Partner
of Bose McKinney & Evans, attorneys;
Director of First Indiana Corporation;
Chairman, Federal Home Loan Bank
Board (1977-1979).
Michael L. Smith, Age 51 1988 14,222(6) (2)
Executive Vice President and Chief
Financial Officer, Anthem, Inc., a
health benefits management company;
Director of First Indiana
Corporation, FinishMaster, Inc.
and First Internet Bank of
Indiana; formerly Senior Vice
President, Finance, Anthem, Inc.;
Chief Operating Officer and Chief
Financial Officer of American
Health Network; President of
Somerset Financial Services, a
division of the Corporation; and
Chairman, Director, President and
Chief Executive Officer, Mayflower
Group, Inc., diversified
transportation services.
Directors whose terms expire
in 2002:
Patrick J. Early, Age 42 1998 59,639(7) 2.0%
President and Chief Operating
Officer of the Corporation and
President of Somerset Financial
Services, a Division of the
Corporation; formerly President of
Whipple & Company; Certified
Public Accountant, Certified
Financial Planner, and Personal
Financial Specialist.
Name, Age, Principal Common Stock
Occupation(s) and Beneficially Percent
Business Experience Director Owned on of
During Past 5 Years Since March 3, 2000 Class
William L. Elder, Age 77 1986 136,376(8) 4.6%
Director of Chamber of Commerce
Building Corp.; Formerly Chairman
of Southern Indiana Commerce
Corporation; formerly President
of Southern Indiana Railway,
Inc.; formerly Director of
Merchants National Corporation, a
bank holding company, and Merchants
National Bank and Trust Company.
Marni McKinney, Age 43 1987 1,234,923(9) 42.8%
Vice Chairman and Chief Executive
Officer of the Corporation; Vice
Chairman, Director and Chief
Executive Officer of
First Indiana Corporation and
Chairman of First Indiana Bank;
formerly President and
Chief Executive Officer of the
Corporation (1996-1999);
formerly President and Chief
Operating Officer of the
Corporation (1993-1995);
formerly Vice President and
Director of Strategic Planning of,
First Indiana Bank; formerly Vice
President of First Indiana
Corporation.
______________
(1) Includes 7,815 shares subject to options granted under the 1991 Director
Stock Option Plan.
(2) The number of shares represents less than 1% of the outstanding shares of
the Corporation.
(3) Includes 4,689 shares subject to options granted under the 1991 Director
Stock Option Plan.
(4) Includes 18,665 shares owned directly and 7,252 shares subject to options
granted under the Corporation=s Stock Incentive Plans. Mr. McKinney is a
son of Robert H. McKinney and a brother of Marni McKinney.
(5) See note (1) to the table under heading AVoting Securities and Principal
Holders Thereof@ above.
(6) Includes 7,970 shares which Mr. Smith owns individually and 6,252 shares
subject to options granted under the 1991 Director Stock Option Plan.
(7) Includes 54,639 shares which Mr. Early owns individually and 5,000 shares
subject to options granted under the Corporation=s Stock Incentive Plans.
(8) Includes 130,124 shares which Mr. Elder owns individually and 6,252 shares
subject to options granted under the 1991 Director Stock Option Plan.
(9) See note (1) to the table under heading AVoting Securities and Principal
Holders Thereof@ above. Ms. McKinney is a daughter of Robert H. McKinney
and a sister of Kevin K. McKinney.
The Board of Directors met ten times during the Corporation=s last fiscal year.
All directors attended in excess of 75% of the aggregate of (1) the total
number of meetings of the Board of Directors and (2) the total number of
meetings held by all committees on which he or she served.
Nominees for election as a director of the Corporation are selected by the
Board of Directors.
Certain Committees of the Board of Directors
Among other committees, the Board of Directors has an Audit Committee and a
Compensation Committee.
The functions of the Audit Committee are: (1) to review audits of the
accounting records of the Corporation and its financial statements performed by
independent auditors, (2) to confer with the independent auditors and officers
of the Corporation regarding accounting and financial statements and internal
controls, (3) to recommend to the Board the engagement or discharge of the
independent auditors and (4) to perform such other functions as the committee
deems necessary or desirable. The members of the Audit Committee are: Gary L.
Light (Chairman), William L. Elder and Malcolm A. Leslie. The Committee met
twice during the last fiscal year of the Corporation.
The functions of the Compensation Committee are to review and make
recommendations to the Board of Directors with respect to the compensation,
including stock and other incentives, of the officers and key employees of the
Corporation and its subsidiaries, and to review other policy matters. The
members of the Compensation Committee are: William L. Elder (Chairman), Douglas
W. Huemme and Michael L. Smith. The committee met twice during the last fiscal
year of the Corporation.
Compensation of Directors
During the Corporation=s last fiscal year, directors who are not salaried
officers received a quarterly fee of $1,500 per quarter, a fee of $750 for each
Board meeting attended, and a fee of $400 for each Board committee meeting
attended.
The Corporation=s 1991 Director Stock Option Plan provides for the issuance of
non-qualified options to purchase 1,563 shares to each outside director of the
Corporation on August 14, 1991 and thereafter on the date of each annual meeting
of shareholders. No option is exercisable during the period of one year
following the date of grant of such option, and options granted under the plan
must specify an exercise price of not less than 100% of the market price of the
shares at the date of grant.
Certain Transactions
In 1996, the Corporation purchased from First Indiana Bank (the" Bank") all of
the outstanding capital stock of One Investment Corporation (AOne Investment@),
a wholly-owned subsidiary of the Bank that owned all of the outstanding capital
stock of One Insurance Agency, Inc. ("One Insurance"). As a result of this
transaction, and through a multi-year operating agreement that the Corporation
entered into with First Indiana Corporation and the Bank, the Corporation is
providing non-FDIC-insured investment and insurance products and services to the
Bank's customers, and the Bank is focusing its efforts on delivering traditional
banking services. During the year ended December 31, 1999, the Corporation paid
to the Bank $113,350 in accordance with the terms of the purchase agreement and
the operating agreement. Robert H. McKinney and Marni McKinney are officers,
directors and shareholders of First Indiana Corporation and/or the Bank, the
Corporation is a substantial shareholder of First Indiana Corporation, and
Michael L. Smith is a director of First Indiana Corporation and the Bank.
EXECUTIVE COMPENSATION
The following Report of the Compensation Committee, as well as the
following Performance Graph, shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement
into any of the Corporation=s filings under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, except to the
extent that the Corporation specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
Report of the Compensation Committee on Executive Compensation
Policy and Performance Measures
The Compensation Committee endeavors to compensate the Corporation=s executive
officers fairly with a view toward attracting, retaining and motivating highly-
qualified individuals. This objective is balanced carefully against that of
increasing and preserving shareholder value.
To that end, in determining executive officer compensation, the Compensation
Committee considers the revenue, profitability and return to shareholders for
the Corporation generally, as well as various measures of the Corporation=s and
individual executive officers= performance. Specifically, the committee
considers return on equity employed in the Corporation=s various operations,
growth in revenues, and return on revenues. The Compensation Committee views
these factors in total, and does not assign greater or lesser weight to any one
measure of performance.
Executive officer compensation, like that of other of the Corporation=s
employees, is comprised of a base salary and incentives tied to the profit-
ability of the Corporation. Base salaries are established by taking into
consideration the factors outlined above, as well as individual performance, and
salaries and incentives offered by other companies to their professional service
providers and executives. Information regarding compensation provided by other
companies is compiled by the members of the Compensation Committee informally,
through service as directors for other companies, and through general knowledge
received by virtue of their status as leaders in the professional community
generally.
Incentive compensation is provided in the form of year-end contributions to all
employees' accounts in the Corporation=s Profit Sharing and 401(k) Savings Plan,
the amount of which are determined depending on the profitability of the
Corporation. Additionally, the Compensation Committee typically considers
granting stock options to various executive officers, including the Named
Executive Officers, on a yearly basis. Stock options were granted to certain
executive officers in 1999. The Compensation Committee views the grant of stock
options as an important tool for encouraging executive officers to strive to
increase shareholder value, as all compensation derived from the stock options
will be tied directly to the performance of the Corporation's stock.
CEO Performance
Ms. McKinney serves as the Chief Executive Officer of the Corporation. Like the
salaries of the Corporation=s other executive officers, Ms. McKinney=s salary is
derived from an evaluation of her individual performance and salaries paid to
others holding positions with other companies commensurate to Ms. McKinney=s.
Additionally, since Ms. McKinney's efforts have a significant impact on the
Corporation's long-term achievement, special emphasis is placed on measures of
the Corporation's performance, including return on equity, growth in revenues,
and return on revenues. Also, the Compensation Committee meets separately with
the Chairman for his candid evaluation of Ms. McKinney's performance during the
preceding year and her contributions to the performance of the Corporation. The
Corporation's performance with regard to these measures in 1998 resulted in an
increase in Ms. McKinney's salary for 1999.
Compensation Committee
William L. Elder, Chairman
Douglas W. Huemme
Michael L. Smith
[The remainder of this page is intentionally left blank]
Performance Graph
The following line graph compares the cumulative total shareholder return on the
common stock of the Corporation over the last five fiscal years with the
cumulative total return of the NASDAQ Stock Market Index and the cumulative
total return of the NASDAQ Financial Stocks Index over the same period.
<TABLE>
Dec June Dec. June Dec. June Dec. June Dec. June Dec.
1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The $100 $109 $142 $201 $205 $305 $413 $448 $335 $412 $396
Somerset
Group,
Inc.
NASDAQ $100 $125 $141 $160 $174 $195 $213 $258 $300 $367 $542
Stock
Market
Index
NASDAQ $100 $118 $145 $154 $186 $225 $284 $293 $276 $304 $272
Financial
Stocks
Index
</TABLE>
* Assumes that the value of the investment in the Corporation=s stock and
each index was $100 on December 31, 1994 and that all dividends were
reinvested.
Summary
The following table sets forth the compensation awarded to, earned by, or paid
during the last three fiscal years to the chief executive officer and the three
executive officers other than the chief executive officer whose cash
compensation in 1999 exceeded $100,000 (collectively, the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
Long-Term Compensation
Annual Compensation Awards
Name and Restricted Securities All
Principal Other Annual Stock Underlying Other
Position Year Salary Bonus Compensation Awards Options # mpensation
<C> <C> <C> <C> <C> <C> <C> <C>
Marni 1999 110,133 -- -- -- 8,000 $6,804(2)
McKinney(1) 1998 100,000 -- 31,000 -- 4,000 7,691
President 1997 80,000 20,000 58,288 -- 6,250 4,800
and Chief
Executive
Officer
Patrick J. 1999 222,008 -- -- -- 5,000(5)11,998(2)
Early(1)(3) 1998 227,500 -- -- -- 2,500 10,442
President
of Somerset
Financial
Services
Division
Robert S. 1999 183,767 -- -- -- 5,000(5) 9,813(2)
Kaspar(4) 1998 176,166 -- -- -- 2,500 9,420
Executive 1997 109,560 10,000 -- -- 3,125 7,096
VicePresident,
Business
Development
Joseph M. 1999 108,400 5,000 -- -- 5,000(5) 5,712(2)
Richter 1998 100,951 -- -- -- 2,500 7,362
Executive 1997 97,846 6,000 -- -- 4,375 7,512
Vice President,
Finance and
Treasurer
</TABLE>
__________________
(1) Effective January 16, 2000, Ms. McKinney became Vice Chairman and Chief
Executive Officer of the Corporation, and Mr. Early became President and Chief
Operating Officer. These two officers held the offices shown in this table
during 1999.
(2) Consists of (i) the Corporation's contributions to the Corporation's
retirement plan during 1999 for the accounts of Ms. McKinney, Mr. Early, Mr.
Kaspar, and Mr. Richter in the amounts of $5,804, $9,850, $8,013 and $4,752,
respectively, and (ii) the Corporation's matching contributions to the
Corporation's Employee Stock Purchase Plan during 1999 for the accounts of Ms.
McKinney, Mr. Early, Mr. Kaspar, and Mr. Richter in the amounts of $1,000,
$2,148, $1,800 and $960, respectively.
(3) Mr. Early was employed by the Corporation beginning on January 20, 1998.
Accordingly, no compensation information is given for Mr. Early as to 1997.
(4) Mr. Kaspar resigned to pursue other opportunities effective January 16,
2000.
(5) Options for 2,500 of the shares specified here for each of Messrs. Early,
Kaspar and Richter were originally granted in 1998 and disclosed in the
Corporation's 1999 Proxy Statement, but were amended and repriced in 1999. See
"Report of the Compensation Committee on Option Repricings" for more
information.
Stock Options
The following table sets forth certain information with respect to stock options
granted to the Named Executive Officers during the last fiscal year. The
Potential Realizable Value columns on the right of this table assume that the
value of the underlying stock will appreciate each year at the specified
percentages.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term
Number of % of Total
Securities Options to
Underlying Employees Exercise or
Options in Fiscal Base Price Expriation
Name Granted Year 1999 ($/Share) Date 5% 10%
<C> <C> <C> <C> <C> <C> <C>
Marni McKinney 2,449 4.0% $16.375 2-16-09 $25,219 $63,836
5,551 9.1% 18.01 2-16-04 16,036 46,406
Patrick J. 2,500 4.1% 16.375 2-16-04 11,310 24,993
Early
Robert S. 2,500 4.1% 16.375 2-16-04 11,310 24,993
Kaspar
Joseph M. 2,500 4.1% 16.375 2-16-04 11,310 24,993
Richter
</TABLE>
The following table sets forth on an aggregate basis each exercise of stock
options during fiscal year 1999 by each of the Named Executive Officers and the
1999 year-end value of the unexercised options of each such executive officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End at FY-End
Shares
Acquired on
Name Exercise Value
# Realized Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Marni
McKinney -- -- 34,481 9,551 $282,003 $6,189
Patrick J.
Early -- -- -- 5,000 -- 13,750
Robert S.
Kaspar -- -- 3,125 5,000 5,454 13,750
Joseph M.
Richter -- -- 10,625 5,000 64,678 13,750
</TABLE>
Report of the Compensation Committee on Option Repricings
In February 1999, the Compensation Committee reviewed the status of certain
stock options held by the Corporation's executive officers and employees under
the 1998 Stock Incentive Plan. At that time, the committee noted that as a
result of a decline in the quoted market price of the Corporation's common
stock, options granted on February 18, 1998 bore exercise prices in excess of
the current market price for the Corporation's common stock.
It has been, and continues to be, the philosophy of the Corporation to provide
stock options and similar incentives as a tool to attract and retain talented,
quality employees, and to provide performance incentives to those employees.
The Compensation Committee recognizes that the Corporation faces keen
competition for its professionals, managers and other employees, and that the
failure to provide competitive equity-based compensation could require the
Corporation to pay significantly higher cash salaries and bonuses to attract and
retain personnel - which could adversely affect the Corporation=s stock price.
Thus, in order to restore the incentive nature of those outstanding options
possessing an exercise price in excess of the market price, the Compensation
Committee recommended to the full Board of Directors, and the Board of
Directors unanimously approved, a repricing of certain options previously
granted on February 18, 1998.
As a result of this action, options for 51,813 shares held by three executive
officers and 21 employees were amended so their terms would directly correspond
to the terms of the additional options granted on February 17, 1999. When
originally granted, the repriced options bore an exercise price of $23.625 and
expired on February 18,2003. As amended, the repriced options bear an exercise
price of $16.375, which is equal to the market price on February 17, 1999, the
date of repricing, and expire on February 17, 2004. Additionally, the vesting
schedules for the repriced options were amended so that any progress toward
vesting attained since the date of original grant was lost.
[The remainder of this page is intentionally left blank]
The following table sets forth a description of the repricing of options held by
certain of the Named Executive Officers. The options granted under the 1998
Stock Incentive Plan to Ms. McKinney were not repriced.
OPTION REPRICINGS(1)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of Market Length of
Securities Price of Exercise Original Term
Underlying Stock at Price at Remaining at
Options Time of Time of New Date of
Repriced Repricing or Repricing or Exercise Repricing
Date or Amended Amendment Amendment Price Amendment (2)
Patrick J.
Early 2-19-99 2,500 $16,375 $23.625 $16.375 48 months
Robert S.
Kaspar 2-19-99 2,500 16,375 23.625 16.375 48 months
Joseph M.
Richter 2-19-99 2,500 16,375 23.625 16.375 48 months
</TABLE>
(1) The Corporation has not repriced options at any time prior to 1999.
(2) The term of the options was extended on the date of repricing to match the
original five-year period, and the vesting schedule was extended on the date of
repricing to match the original vesting period.
Compensation Committee
William L. Elder, Chairman
Douglas W. Huemme
Michael L. Smith
Employment Agreement with Mr. Early
Mr. Early is the only Named Executive Officer party to an employment agreement
with the Corporation. This agreement specifies Mr. Early=s duties and
compensation, and provides protection to the Corporation by inclusion of
noncompetition and confidentiality provisions. Mr. Early is also party to a
separate noncompetition agreement with the Corporation.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the next annual meeting
must be received by the Corporation for inclusion in the proxy statement and
form of proxy relating to that meeting no later than November 27, 2000. Any
such proposals should be sent to the attention of the Secretary of the
Corporation. Shareholder proposals not included in the Corporation=s 2001 proxy
solicitation materials must, in order to be considered at the 2001 Annual
Meeting, be submitted in writing to the Secretary of the Corporation at least
sixty days before the date of the 2001 Annual Meeting, or, if the 2001 Annual
Meeting is held prior to March 27, 2001, within ten days after notice of the
Annual Meeting is mailed to shareholders. The Board of Directors of the
Corporation will review any shareholder proposals that are filed as required,
and will determine whether such proposals meet applicable criteria for
inclusion in its 2001 proxy solicitation materials or consideration at the 2001
Annual Meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
certain of the Corporation=s officers, and its directors and persons who own
more than 10% of the Corporation=s Common Stock, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Such
officers, directors and greater than 10% shareholders are required by Securities
and Exchange Commission regulations to furnish the Corporation with copies of
all Section 16(a) forms they file. Based solely on review of the copies of such
forms furnished to the Corporation, the Corporation believes that during 1999,
all Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% beneficial owners were met.
FINANCIAL STATEMENTS AND OTHER INFORMATION
The Corporation=s financial statements for the fiscal year ended December 31,
1999, were audited by KPMG LLP (AKPMG@). Representatives of KPMG are expected
to attend the Annual Meeting, with the opportunity to make a statement if they
desire to do so, and will be available to respond to appropriate questions.
The Annual Report of the Corporation for the year ended December 31, 1999,
including audited financial statements, has been mailed to the shareholders.
The Annual Report is not to be considered as proxy solicitation material.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before this
Annual Meeting. However, if other matters should come before the meeting, it is
the intention of each person named in the proxy to vote such proxy in accordance
with his or her judgment on such matters.
EXPENSES OF SOLICITATION
The entire expense of preparing, assembling, printing and mailing the proxy form
and material used in the solicitation of proxies will be paid by the Corp-
oration. The solicitation will not be made by specially engaged employees or
paid solicitors. In addition to the use of the mails, solicitation may be made
by employees of the Corporation by telephone, telegraph, cable or personal
interview.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. Therefore, shareholders who
do not expect to attend in person are urged to execute and return the proxy.
For the Board of Directors
Sharon J. Sanford
Secretary
March 24, 2000
Maintaining the Momentum
The Somerset Group
Annual Report
1999
FINANCIAL HGHLIGHTS
At and for the Years Ended December 31,
<TABLE>
<S> <C> <C> <C>
1999 1998 1997
Revenue and income $15,303,000 $11,786,000 $11,125,000
Operating expenses 10,162,000 7,785,000 7,558,000
--------- --------- ---------
Income before income taxes 5,141,000 4,001,000 3,567,000
Income taxes 1,634,000 1,136,000 1,031,000
--------- --------- ---------
Net income before accounting change 3,507,000 2,865,000 2,536,000
--------- --------- ---------
Net income 3,392,000 2,865,000 2,536,000
--------- --------- ---------
Earnings per share - basic $1.20 $.99 $.87
Earnings per share - diluted $1.18 $.97 $.86
Assets:
Current assets $3,392,000 $2,865,000 $2,536,000
Investment in First Indiana Corporation 39,010,000 36,104,000 32,406,000
All other 4,610,000 2,455,000 2,701,000
---------- ---------- ----------
Total assets $47,309,000 $44,773,000 $42,460,000
========== ========== ==========
Shareholders' equity $36,371,000 $35,463,000 $33,460,000
========== ========== ==========
Return on revenue and income 22.2% 24.3% 22.8%
Return on average assets 7.4% 6.6% 6.2%
Return on average shareholders' equity 9.4% 8.3% 7.8%
Book value per share $12.97 $12.26 $11.55
</TABLE>
Historical amounts have been restated for a merger on January 20, 1998.
All per share amounts have veen adjusted for a five-for-four stock split
that was effective February 26, 1997.
SHAREHOLDER INFORMATION
Annual Meeting Registrar and Transfer Agent
The Annual Meeting of Shareholders will be held Harris Trust and Savings Bank
Wednesday, April 26, 2000 a.m. EST at First 311 west Monroe Street,11thFl
Indiana Plaza, 7th Floor Conference Center. Chicago, Illinois 60606
135 N. Pennsylvania St., Indianapolis, Indiana 800/573-4048
Capital Stock Independent Auditors
The Somerset Group, Inc, stock is traded on the KPMG LLP
NASDAQ National Market System under the Indianapolis, Indiana
symbol :"SOMR"
Table of Contents
A letter to the shareholders 2
Selected financial data 4
Management's discussion and analysis 5
Independent auditors' report 10
Consolidated statements of income 11
Consolidated balance sheets 12
Consolidated statements of cash flows 13
Consolidated statements of shareholders' equity 14
Statement of management responsibility 15
Notes to consolidated financial statements 16
Summarized consolidated financial statements
of first indiana corporation 27
Board of directors 30
Operating companies and management 31
Shareholder Information 32
Letter to Shareholders
February 2000
Dear shareholders:
We are pleased to report that The Somerset Group, Inc. completed
another successful year of enhanced earnings and strategic growth in 1999,
maintaining the momentum established in the prior two years.
For the year ended December 31, 1999, Somerset achieved net income of
$3,392,000, or $1.18 per diluted share, a 22 percent increase over $.97 per
diluted share in 1998. Net income for 1999 included a charge against
earnings of $115,000, or $.04 per diluted share, representing the cumulative
effect of an accounting change adopted in 1999. Excluding this one-time
charge, 1999 earnings were $3,507,000, or $1.22 per diluted share, a 26
percent increase over 1998 earnings.
The earnings increase was a result of a 30 percent increase in revenue
and equity income that amounted to $15,303,000, compared with 1998 revenue
and equity income of $11,786,000. Revenue from fees and commissions increased
40 percent in 1999 to $10,228,000 from $7,327,000 in 1998, with all operating
segments contributing to the revenue growth. Equity income from First
Indiana Corporation increased 21 percent over 1998. First Indiana posted
record earnings in 1999 as a result of its continuing strategy to focus on
the rapidly growing Central Indiana market and to build customer
relationships, with the goal of earning 100 percent of First Indiana Bank's
customers' business.
Our growth occurred from both internal and external sources.
Internally, the Somerset Financial Services division continued to add new
clients throughout the year, and the number of services provided to its
existing client base grew as well. Another division, First Indiana Investor
Services, which markets mutual funds, annuities, and other investment
products primarily to customers of First Indiana Bank, recorded significant
revenue improvement during the year.
On the external front, we completed a merger with McGee, Rice & Wheat,
an Indianapolis-based certified public accounting firm, on September 1, 1999.
This merger symbolizes our commitment to Somerset's growth as a comprehensive
financial services company. This well-established accounting firm brings over
1,300 clients and 20 experienced certified public accountants and other
professionals to Somerset's financial services practice. The transaction
marks Somerset's second acquisition of a certified public accounting firm
since 1998, when we acquired Whipple & Company and formed Somerset Financial
Services.
In January 1999, we formed Paradym Technologies, Inc., an information
technology company, by combining our resources with those acquired from two
other companies. The formation of Paradym was in response to our clients'
needs for advice on competing in today's digital age. Paradym specializes in
Internet services, web page design, and network design. Paradym's management
team concentrated on growth into electronic commerce ventures throughout
1999, with a view toward assisting Somerset's clients with their expansion
into the rapidly growing world of e-commerce.
Somerset's Board of Directors made key management changes at the end of
1999 to facilitate the Corporation's growth. Marni McKinney, Chief Executive
Officer, was elected Vice Chairman, and Patrick J. Early, President of
Somerset Financial Services, was elected to the additional post of President
and Chief Operating Officer of The Somerset Group. Marni represents the
third generation of McKinney family members at the helm of Somerset and its
predecessor companies.
Today's technologically charged world calls for forward-thinking
companies. As a comprehensive financial services provider offering management
advisory services, tax consulting, accounting, health care consulting,
investment and wealth management, network design and support, Internet
services, and banking and trust services through First Indiana Bank, the
Company is well positioned to meet the needs of our clients in an
increasingly competitive and information-based world. Like many of our
customers, both Somerset and First Indiana are locally based, family-
operated, and entrepreneurial. We believe that the shared philosophy of our
companies and clients brings something different to the market in an age
where the emphasis is on mass production and standardized decisions. This
philosophy has served Somerset well, and we look forward to reporting our
progress throughout 2000.
Thank you for your continued support.
Robert H. McKinney Marni McKinney Patrick J. Early
Chairman Vice Chairman and President and
Chief executive officer Chief Operating Officer
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 of First Indiana 4,986 4,130 3,883 3,003 3,938
Gross profit of consruction 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 in First Indiana 39,010 36,104 32,406 29,746 27,549
Market value-investment in 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 veen restated for a merger that occurred
January 20, 1998.
(2) The construction operations were sold in June 1995.
(3) 1999 net income ws reduced $115,000 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:
<TABLE>
1999 1998
-------------------------------------------
Quarter High Low High Low
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First - ended March 31 $17.125 $15.750 $25.625 $19.250
Second - ended June 30 $20.125 $14.625 $24.250 $21.000
Third - ended September 30 $22.500 $19.188 $25.000 $17.875
Fourth - ended December 31 $19.750 $17.750 $18.875 $15.750
</TABLE>
As of March 3, 2000 there were 196 shareholders of record and aproximately 850
beneficial owners.
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.
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.
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.
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.
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.
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.
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.
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.
KPMG LLP
Indianapolis, Indiana
February 11, 2000
Consolidated Statements of Income
The Somerset Group, Inc.
<TABLE>
Year Ended December 31,
1999 1998 1997
Revenue and income:
<S> <C> <C> <C>
Fees and commissions $10,228,000 $ 7,327,000 $ 6,849,000
Equity in earnings of First Indiana
Corporation 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,
and benefits 7,689,000 5,849,000 5,990,000
General and 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.
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
Consolidated Statements of Cash Flow
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.
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.
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
Marni McKinney Patrick J. Early Joseph M. Richter
Vice Chairman and President and Chief Financial Officer
Chief Executive Officer Chief Operating Officer
Notes to Consolidated Financial Statements
Note 1. Nature of Operations and Summary of Significant Accounting Policies
The Somerset Group, Inc. (The "Company" or "Somerset") is a nondiversified,
unitary savings and loan holding company. Its major asset at December 31,
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
nondiversified unitary savings and loan holding company whose primary
subsidiary is a federally chartered stock savings bank. It operates retail
banking and mortgage and consumer loan offices throughout Indiana and
mortgage and consumer loan offices in seven other states. Somerset's
investment in First Indiana Corporation is stated at cost, adjusted for its
share of undistributed earnings, and includes adjustments under the purchase
method of accounting. Capital changes of First Indiana Corporation are
reflected as a separate component of consolidated retained earnings.
(f) Office Furniture and Equipment: Office furniture and equipment are
stated at historical cost for financial reporting purposes. Depreciation is
determined using the straight-line method based upon the estimated useful
lives of the individual assets. Both straight-line and accelerated methods
are used for income tax purposes.
(g) Employee Benefit Plans: 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.
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,
1999 1998 1997
(unaudited)
<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>
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>
Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
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>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
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%
The Company's equity in earnings of First Indiana was as follows:
<TABLE>
Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
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.
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>
1999 1998
Life Amount Life Amount
<S> <C> <C> <C> <C>
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.
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>
Year Ended December 31,
<S> <C> <C> <C>
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
========= ========= =========
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:
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>
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>
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter Annual
<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ======
1998
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.
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.
<TABLE>
(Dollars in thousands)
Somerset Somerset First Indiana
Group Financial Investor Paradym
Management Services Services Technologies
Year Ended December 31, 1999 Division Division Division Inc. Consolidated
---------- -------- -------- ---------- -----------
<S> <c? <C> <C> <C> <C>
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 Corporation 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,
and benefits 546 5,672 609 862 7,689
General and admin-
istrative 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 of 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 expenses
<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
===== ===== ===== =====
</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>
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.
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.
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>
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>
First Indiana Corporation
(Dollars in Thousands)
<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>
Board of Directors
DIRECTORS
Robert H. McKinney
Chairman, The Somerset Group, Inc.
Chairman, First Indiana Corporation
Marni McKinney
Vice Chairman and Chief Executive Officer
The Somerset Group, Inc.
Vice Chairman and Chief Executive Officer
First Indiana Corporation
Chairman, First Indiana Bank
Patrick J. Early
President and Chief Operating Officer
The Somerset Group, Inc.
President, Somerset Financial Services
William L. Elder
Chairman Emeritus
Southern Indiana Commerce
Corporation
Douglas W. Huemme
Chairman and Chief Executive Officer
Lilly Industries, Inc.
Malcolm Archibald Leslie
Private Investor
Gary L. Light
President
E.V.A. Investors, Inc.
Kevin K. McKinney
Vice President, The Somerset Group, Inc.
Publisher, NUVO Newsweekly
Michael L. Smith
Executive Vice President and Chief Financial Officer
Anthem, Inc.
Operating Companies and Management
CORPORATE OFFICE
135 North Pennsylvania Street, Suite 2800
Indianapolis, IN 46204
Telephone 317.269.1285
CORPORATE OFFICERS
Robert H. McKinney
Chairman
Marni McKinney
Vice Chairman and
Chief Executive Officer
Patrick J. Early
President and
Chief Operating Officer
Joseph M. Richter
Executive Vice President, Finance
and Treasurer
Kevin K. McKinney
Vice President
Sharon J. Sanford
Secretary
Somerset FINANCIAL SERVICES
Patrick J. Early
President
Michael J. McCaslin
Managing Director
Robert C. Phillips
Managing Director
Dennis R. Reinoehl
Managing Director
Roy R. Rice
Managing Director
Steven J. Riddle
Managing Director
Robert G. Wheat
Managing Director
Paradym Technologies, Inc.
John R. Curtis
President
First Indiana Investor SERVICES
Donald P. Feldhaus
Vice President
First Indiana CORPORATION
Robert H. McKinney
Chairman of the Corporation and Chairman
of the Executive Committee of First Indiana Bank
Marni McKinney
Vice Chairman and Chief Executive Officer of the
Corporation and Chairman of First Indiana Bank
Owen B. Melton, Jr.
President and Chief Operating Officer
of the Corporation and President and
Chief Executive Officer of First Indiana Bank
First Indiana BANK
David L. Gray
Financial Management Group
Senior Vice President
David A. Lindsey
Consumer Finance Group
Senior Vice President
Merrill E. Matlock
Commercial and Mortgage Banking Group
Senior Vice President
Timothy J. O'Neill
Correspondent Banking Services and Secondary Marketing Group
Senior Vice President
Edward E. Pollack
Technology and Operations Group
Senior Vice President
Kenneth L. Turchi
Retail Banking, Marketing, and Strategic Planning Group
Senior Vice President
Ralph G. Nowak
FirstTrust Indiana
President and Chief Investment Officer
Shareholder Information
Annual Meeting
The Annual Meeting of Shareholders will be held
Wednesday, April 26, 2000 at 9:00 a.m. EST at
First Indiana Plaza, 7th Floor Conference Center,
135 N. Pennsylvania St., Indianapolis, Indiana
Capital Stock
The Somerset Group, Inc. stock is traded on the
NASDAQ National Market System under the
symbol "SOMR"
Registrar and Transfer Agent
Harris Trust and Savings Bank
311 West Monroe Street, 11th Floor
Chicago, Illinois 60606
800.573.4048
Independent Auditors
KPMG LLP
Indianapolis, Indiana
