FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended________September 30, 1996_______________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_______________________
Commission file number_________________1-6026__________________________
__________________________The Midland Company__________________________
_________(Exact name of registrant as specified in its charter)________
___Incorporated in Ohio___________ ____________31-0742526_____________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7000 Midland Boulevard, Amelia, Ohio 45102-2607
(Address of principal executive offices)
(Zip Code)
(513) 943-7100
(Registrant's telephone number, including area code)
NA
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes ___X___ . No _______ .
The number of common shares outstanding as of September 30, 1996 was
3,017,131.
<PAGE>
PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
Sept. 30, Dec. 31,
ASSETS 1996 1995
-------------- --------------
CASH $ 3,674,000 $ 6,385,000
-------------- --------------
MARKETABLE SECURITIES 362,336,000 367,054,000
-------------- --------------
RECEIVABLES:
Accounts receivable 128,787,000 94,677,000
Less allowance for losses 1,332,000 1,362,000
-------------- --------------
Net 127,455,000 93,315,000
-------------- --------------
INVENTORY - SPORTSWEAR DIVISION 16,575,000 6,954,000
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT - AT COST 127,000,000 131,616,000
Less accumulated depreciation 43,918,000 45,767,000
-------------- --------------
Property, Plant and Equipment - Net 83,082,000 85,849,000
-------------- --------------
DEFERRED INSURANCE POLICY ACQUISITION COSTS 46,030,000 43,146,000
-------------- --------------
OTHER ASSETS 2,526,000 2,000,000
-------------- --------------
TOTAL $ 641,678,000 $ 604,703,000
============== ==============
See notes to the consolidated financial statements.
<PAGE>
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
Sept. 30, Dec. 31,
LIABILITIES & SHAREHOLDERS' EQUITY 1996 1995
-------------- --------------
NOTES PAYABLE WITHIN ONE YEAR:
Banks $ 20,000,000 $ 31,000,000
Commercial paper 6,261,000 4,620,000
-------------- --------------
Total 26,261,000 35,620,000
-------------- --------------
ACCOUNTS PAYABLE - TRADE 4,893,000 5,449,000
-------------- --------------
OTHER PAYABLES AND ACCRUALS 72,519,000 68,045,000
-------------- --------------
CURRENT PORTION OF LONG-TERM DEBT 3,057,000 2,986,000
-------------- --------------
UNEARNED INSURANCE PREMIUMS 211,800,000 190,948,000
-------------- --------------
INSURANCE LOSS RESERVES 98,428,000 68,347,000
-------------- --------------
DEFERRED FEDERAL INCOME TAX 14,134,000 14,243,000
-------------- --------------
LONG-TERM DEBT 60,169,000 62,470,000
-------------- --------------
SHAREHOLDERS' EQUITY:
Common stock (issued and outstanding:
3,017,000 shares at September 30, 1996
and 3,020,000 shares at December 31, 1995
after deducting treasury stock of 626,000
shares and 623,000 shares, respectively) 911,000 911,000
Additional paid-in capital 15,429,000 15,362,000
Retained earnings 132,872,000 139,350,000
Net unrealized gain on marketable securities 19,725,000 19,716,000
Treasury stock - at cost (16,853,000) (16,575,000)
Unvested restricted stock awards (1,667,000) (2,169,000
-------------- --------------
Total 150,417,000 156,595,000
-------------- --------------
TOTAL $ 641,678,000 $ 604,703,000
============== ==============
See notes to the consolidated financial statements.
<PAGE>
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE NINE AND THREE-MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Nine-Mos. Ended Sept. 30, Three-Mos. Ended Sept. 30,
-----------------------------------------------------
1996 1995 1996 1995
REVENUES: ------------- ------------- ------------ ------------
Insurance $224,543,000 $208,958,000 $75,731,000 $71,122,000
Transportation 25,706,000 22,207,000 9,485,000 8,158,000
Sportswear 19,670,000 25,971,000 12,075,000 14,381,000
Other 413,000 676,000 109,000 365,000
------------- ------------- ------------ ------------
Total 270,332,000 257,812,000 97,400,000 94,026,000
------------- ------------- ------------ ------------
COSTS AND EXPENSES:
Insurance:
Losses and loss
adjustment expenses 133,735,000 101,426,000 45,984,000 33,405,000
Commissions and other
policy acquisition
costs 61,771,000 61,036,000 20,898,000 19,977,000
Operating and
administrative expenses 30,108,000 27,533,000 10,769,000 10,927,000
Transportation operating
expenses 24,587,000 19,570,000 7,157,000 7,335,000
Sportswear operating
expenses 22,607,000 33,243,000 11,696,000 18,058,000
Interest expense 4,480,000 3,025,000 1,562,000 800,000
Other operating and
administrative expenses 2,503,000 2,852,000 524,000 756,000
------------- ------------- ------------ ------------
Total 279,791,000 248,685,000 98,590,000 91,258,000
------------- ------------- ------------ ------------
INCOME (LOSS) BEFORE FEDERAL
INCOME TAX (9,459,000) 9,127,000 (1,190,000) 2,768,000
------------- ------------- ------------ ------------
PROVISION (CREDIT) FOR
FEDERAL INCOME TAX (4,475,000) 2,197,000 (796,000) 616,000
------------- ------------- ------------ ------------
NET INCOME (LOSS) $ (4,984,000) $ 6,930,000 $ (394,000) $ 2,152,000
============= ============= ============ ============
EARNINGS (LOSS) PER SHARE
OF COMMON STOCK $ (1.62) $ 2.26 $ (.13) $ .71
============= ============= ============ ============
CASH DIVIDENDS PER SHARE
OF COMMON STOCK $ .495 $ .465 $ .165 $ .155
============= ============= ============ ============
See notes to the consolidated financial statements.
<PAGE>
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
1996 1995
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,984,000) $ 6,930,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,471,000 6,535,000
Increase in net accounts receivable (34,140,000) (18,323,000)
Increase in insurance loss reserves 30,081,000 5,961,000
Increase in unearned insurance premiums 20,852,000 30,897,000
Increase in inventory-sportswear division (9,621,000) (3,148,000)
Increase in other accounts payable and accruals 3,888,000 20,197,000
Increase in deferred insurance policy
acquisition costs (2,884,000) (6,079,000)
Decrease (increase) in other assets (526,000) 257,000
Decrease in deferred federal income tax (114,000) (118,000)
Other-net 1,198,000 103,000
-------------- --------------
Net cash provided by operating activities 10,221,000 43,212,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (104,882,000) (115,782,000)
Sale of marketable securities 68,060,000 42,197,000
Maturity of marketable securities 32,081,000 20,805,000
Decrease in cash equivalent marketable securities 7,750,000 22,613,000
Acquisition of property, plant and equipment (3,986,000) (24,882,000)
Sale of property, plant and equipment 1,309,000 853,000
-------------- --------------
Net cash provided by (used in) investing
activities 332,000 (54,196,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in net short-term borrowings (9,359,000) 15,697,000
Repayment of long-term debt (1,979,000) (1,593,000)
Dividends paid (1,464,000) (1,376,000)
Purchase of treasury stock (491,000) (1,143,000)
Issuance of treasury stock 280,000 52,000
Payment of capitalized lease obligations (251,000) (227,000)
-------------- --------------
Net cash provided by (used in) financing
activities (13,264,000) 11,410,000
-------------- --------------
NET INCREASE (DECREASE) IN CASH (2,711,000) 426,000
CASH AT BEGINNING OF PERIOD 6,385,000 4,036,000
-------------- --------------
CASH AT END OF PERIOD $ 3,674,000 $ 4,462,000
============== ==============
See notes to the consolidated financial statements.
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Midland
Company and subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Financial information as of December 31, 1995
has been derived from the audited consolidated financial statements of the
Company. Revenue and operating results for the three and nine-month periods
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996. For further information,
refer to the audited consolidated financial statements and footnotes thereto for
the year ended December 31, 1995 included in the Company's Annual Report on
Form 10-K.
Certain reclassifications (minor in nature) have been made to the 1995 amounts
to conform to 1996 classifications.
2. EARNINGS PER SHARE
Earnings per share (EPS) of common stock are computed by dividing net income by
the weighted average number of shares and share equivalents (which considers
stock options and restricted stock awards) outstanding during the period. Such
weighted average numbers outstanding used for EPS calculations were as follows:
For Primary EPS For Fully Diluted EPS
----------------- -----------------------
Nine months ended September 30:
1996 3,072,000 3,075,000
=========== ===========
1995 3,071,000 3,078,000
=========== ===========
3. INCOME TAXES
The federal income tax provisions (credits) for the three and nine-month periods
ended September 30, 1996 and 1995 are different from amounts derived by applying
the statutory tax rates to income before federal income tax as follows:
Nine-Mos. Ended September 30, Three-Mos. Ended September 30,
----------------------------- ------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Federal income tax
(credit) at
statutory rate $(3,311,000) $ 3,194,000 $(417,000) $ 968,000
Add (deduct) the
tax effect of:
Tax exempt interest
and excludable
dividend income (1,301,000) (1,162,000) (416,000) (406,000)
Investment tax
credits (127,000) (131,000) (42,000) (43,000)
Other - net 264,000 296,000 79,000 97,000
------------ ------------ ---------- ----------
Provision (credit)
for federal
income tax $(4,475,000) $ 2,197,000 $(796,000) $ 616,000
============ ============ ========== ==========
4. CONTINGENCIES
As discussed in Note 11 of the Company's financial statements for the year ended
December 31, 1995, there are certain potential or actual legal claims pending
against the Company; the most recent related significant activities are
described in Part I, Management's Discussion and Analysis and Part II, Item 1 of
this Form 10-Q.
5. ACCOUNTING FOR STOCK BASED COMPENSATION
The Company has not adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" and continues to account for stock
based compensation under APB Opinion No. 25.
6. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $4,438,000 and $3,866,000 in the first nine months
of 1996 and 1995, respectively. No income taxes were paid in the first nine
months of 1996 and $4,971,000 in income taxes were paid during the first nine
months of 1995. In January, 1995, the Company issued 48,950 shares of treasury
stock under a restricted stock award program that relieved treasury stock by
approximately $1,262,000 and also increased additional paid-in capital by
approximately $855,000.
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
The Midland Company:
We have reviewed the accompanying consolidated balance sheet of The Midland
Company and subsidiaries as of September 30, 1996, and the related consolidated
statements of income for the three and nine-month periods ended September 30,
1996 and 1995 and of cash flows for the nine-month periods ended September 30,
1996 and 1995. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Midland Company and
subsidiaries as of December 31, 1995, and the related consolidated statements of
income and retained earnings and of cash flows for the year then ended (not
presented herein); and in our report dated February 15, 1996, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1995 is fairly stated, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
Deloitte & Touche LLP
Cincinnati, Ohio
October 17, 1996
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
A detailed discussion of the Company's liquidity and capital resources
is included in the 1995 Annual Report on Form 10-K. Except as discussed below,
no significant changes have taken place since that date and, accordingly, the
discussion is not repeated herein.
Due primarily to heavier than normal weather related losses during the
first half of 1996 and heavy losses from Hurricanes Fran and Bertha in the third
quarter of 1996, the property and casualty unit of American Modern Insurance
Group, the Company's insurance subsidiary, reported a pre-tax underwriting loss
of $16.5 million during the first nine months of 1996 as compared to an
underwriting profit of $4.9 million during the first nine months of 1995. These
severe catastrophic losses adversely impacted the year-to-date and third quarter
operating results in 1996 relative to the comparable 1995 periods. Both written
premiums and earned premiums increased slightly during the first nine months and
third quarter of 1996 as compared to the comparable periods in 1995. Insurance
losses and loss adjustment expenses increased during the first nine months and
third quarter of 1996 relative to the comparable 1995 periods due to the
previously mentioned heavy weather related catastrophic losses. Insurance
operating and administrative expenses increased during the first nine months of
1996 as compared to the nine month 1995 period due to unusually high litigation
costs incurred during the first half of 1996.
Transportation revenues increased during the first nine months and third
quarter of 1996 as compared to the comparable periods in 1995 due to an increase
in loadings as well as improved affreightment rates. Transportation expenses
increased during the first nine months of 1996 as compared to the first nine
months of 1995 due to the increase in revenues and unusually high litigation
costs incurred during the first half of 1996. Transportation expenses decreased
slightly during the third quarter of 1996 as compared to the third quarter of
1995 due to higher litigation costs in the third quarter of 1995. Excluding
litigation costs, the operating performance of this division during the first
nine months of 1996 improved as compared to the performance achieved during the
related 1995 nine month period.
During the second quarter of 1996, AMIG reached a settlement agreement
on a class-action lawsuit involving insurance written in Alabama and Mississippi
and M/G Transport settled a civil lawsuit that was related to alleged discharge
of bilge water, ash and other refuse into the inland waterways. M/G Transport
is still awaiting sentencing in the related criminal case. In the first six
months of this year, M/G Transport expensed approximately $3,600,000 (pre-tax)
as compared to $258,000 (pre-tax) during the comparable 1995 period and AMIG
expensed approximately $2,400,000 (pre-tax) as compared to only $100,000
(pre-tax) during the comparable 1995 six month period related to litigation.
Sportswear revenues and related expenses decreased during the first nine
months and third quarter of 1996 as compared to the comparable periods in 1995
due to a decrease in orders related to the spring, summer and fall apparel
lines. However, the operating performance of this subsidiary improved during
the first nine months and third quarter of 1996 as compared to the prior 1995
periods due to a reduction in operating expenses. The performance of this
subsidiary in 1996 is in line with Management's expectations.
Part of the proceeds from sale and maturity of marketable securities
were used to reduce short-term bank borrowings and, after additional unrealized
appreciation, marketable securities decreased slightly.
Accounts receivable increased due to the growth of the Company's
insurance subsidiaries. The growth in net written premiums caused an increase
in premium receivables and the Company's increased reinsurance activities caused
an increase in reinsurance receivables. Accounts receivable were also unusually
high at September 30, 1996 due to approximately $10 million in losses from
Hurricane Fran which are recoverable under the Company's reinsurance agreements.
Sportswear inventories are subject to seasonal variation and increased
primarily due to the need to build inventory levels for the winter and spring
production orders.
Unearned insurance premiums increased due to the increase in the
Company's insurance writings. The increase in insurance loss reserves is due to
the increase in insurance revenues and the high losses from Hurricane Fran in
September, 1996.
M/G Transport Services, Inc. acquired 16 barges in 1996 for a total cost
of $4.6 million. These acquisitions were financed by the disposal of two of
M/G Transport's towboats valued at $5 million. M/G Transport has also committed
to the purchase of 50 barges in 1997 for a total cost of $14.5 million. It is
currently anticipated that these barges will be financed with internally
generated capital.
<PAGE>
PART II. OTHER INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
SEPTEMBER 30, 1996
Item 1. Legal Proceedings
Reference is made to Item 1 of the March 31, 1996 Registrant's Form
10-Q concerning criminal and related civil litigation against M/G
Transport Services, Inc., a subsidiary of the Registrant.
Sentencing in the criminal litigation has not yet occurred. The civil
litigation was settled in an out of court agreement during the second
quarter of 1996.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibit 15 - Letter Re: Unaudited Interim Financial Information
b.) Exhibit 27 - Financial Data Schedule
c.) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MIDLAND COMPANY
Date ___October 17, 1996_____ s/Michael J. Conaton________________________
Michael J. Conaton, President
and Chief Operating Officer
Date ___October 17, 1996_____ s/John I. Von Lehman________________________
John I. Von Lehman, Executive Vice President
and Treasurer and Chief Financial Officer
EXHIBIT 15
LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
The Midland Company:
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of The Midland Company and subsidiaries for the periods ended
September 30, 1996 and 1995, as indicated in our report dated October 17, 1996;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, is
incorporated by reference in Registration Statements No. 33-64821 on Form S-3
and No. 33-48511 on Form S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Cincinnati, Ohio
October 17, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,674,000
<SECURITIES> 362,336,000
<RECEIVABLES> 128,787,000
<ALLOWANCES> 1,332,000
<INVENTORY> 16,575,000
<CURRENT-ASSETS> 0
<PP&E> 127,000,000
<DEPRECIATION> 43,918,000
<TOTAL-ASSETS> 641,678,000
<CURRENT-LIABILITIES> 0
<BONDS> 60,169,000
<COMMON> 911,000
0
0
<OTHER-SE> 149,506,000
<TOTAL-LIABILITY-AND-EQUITY> 641,678,000
<SALES> 19,631,000
<TOTAL-REVENUES> 270,332,000
<CGS> 16,685,000
<TOTAL-COSTS> 256,133,000
<OTHER-EXPENSES> 2,503,000
<LOSS-PROVISION> (10,000)
<INTEREST-EXPENSE> 4,480,000
<INCOME-PRETAX> (9,459,000)
<INCOME-TAX> (4,475,000)
<INCOME-CONTINUING> (4,984,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,984,000)
<EPS-PRIMARY> (1.62)
<EPS-DILUTED> (1.62)
</TABLE>
