UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
Commission File Number - 1-6026
THE MIDLAND COMPANY
Incorporated in Ohio
I.R.S. Employer Identification No. 31-0742526
7000 Midland Boulevard
Amelia, Ohio 45102-2607
Tel. (513) 943-7100
Securities registered pursuant to Section 12(b) of the Act:
Common stock - no par value. - American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all other
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_____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock held by
nonaffiliates, which includes shares held by executive officers and directors,
of the registrant as of March 16, 1998 was $251,911,000.
Number of shares of common stock outstanding as of March 16, 1998 -
3,100,446.
Documents Incorporated by Reference
Annual Report to Shareholders for the year ended December 31, 1997 is
incorporated by reference into Parts I, II and IV.
Registrant's Proxy Statement dated March 6, 1998 is incorporated by
reference into Parts III and IV.
1
<PAGE>
THE MIDLAND COMPANY
FORM 10-K
DECEMBER 31, 1997
Certain statements contained in this report that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by
the safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Midland
Company undertakes no obligation to update any forward-looking statements to
reflect events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which The Midland Company intends to
pursue to achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors.
Factors which might cause deviations from the forward-looking statements
include, without limitations, the following: 1) changes in the laws or
regulations affecting the operations of the Company or any of its
subsidiaries; 2) changes in the business tactics or strategies of the Company
or any of its subsidiaries; 3) acquisition(s) of assets or of new or
complementary operations, or divestiture of any segment of the existing
operations of the Company or any of its subsidiaries; 4) changing market
forces or litigation which necessitate, in Management's judgment, changes in
plans, strategy or tactics of the Company or its subsidiaries and 5) adverse
weather conditions, fluctuations in the investment markets, changes in the
retail marketplace or fluctuations in interest rates, any one of which might
materially affect the operations of the Company and/or its subsidiaries.
2
<PAGE>
PART I
ITEM 1. Business.
Incorporated by reference from the inside cover and pages 2 through 11 and 28
(Note 17) of the Registrant's 1997 Annual Report to Shareholders. The number
of persons employed by the Registrant was approximately 805 at December 31,
1997.
Property and Casualty Loss Reserves
The Company's consolidated financial statements include the estimated liability
(reserves) for unpaid losses and loss adjustment expenses (LAE) of its property
and casualty insurance subsidiaries. The liability is presented net of amounts
recoverable from salvage and subrogation and includes amounts recoverable from
reinsurance for which receivalbes are recognized.
The Company establishes reserves for losses that have been reported to the
Company and certain legal expenses on the "case basis" method. The Company
estimates claims incurred but not reported ("IBNR") and other adjustment
expenses using statistical procedures. The Company accrues salvage and
subrogation recoveries using the "case basis" method for large claims and
statistical procedures for smaller claims.
The Company's objective is to set reserves that are adequate; that is, the
amounts originally recorded as reserves should at least equal the amounts
ultimately expected to be required to settle losses. The Company's reserves
aggregate its best estimates of the total ultimate cost of claims that have been
incurred but have not yet been paid. The estimates are based on past claims
experience and reflect current claims trends as well as social, legal and
economic conditions, including inflation. The reserves are not discounted.
The Company reviews its loss and loss adjustment expense reserve development on
a regular basis to determine whether the reserving assumptions and methods are
appropriate. Reserves initially determined are compared to the amounts
ultimately paid. The Company regularly makes statistical estimates of the
projected amounts necessary to settle outstanding claims, compares these
estimates to the recorded reserves and adjusts the reserves as necessary. The
adjustments are reflected in current operations.
There are no material differences between the loss and LAE liability reported in
the accompanying consolidated financial statements in accordance with generally
accepted accounting principles ("GAAP") and that reported in the annual
statements filed with state insurance departments in accordance with statutory
accounting practices ("SAP").
The following table provides an analysis of changes in loss and LAE reserves for
1997, 1996 and 1995 (net of reinsurance amounts) for the Company. Based on the
information available during and at the end of each of the respective years,
operations were charged $5,230,000 in 1997 and $3,771,000 in 1996 as a result of
an increase in the estimated amounts needed to settle prior years' claims.
Operations were credited $7,347,000 in 1995 for such estimates. Such reserve
adjustments, which affected current operations during each of the years,
resulted from developed losses from prior years being different than were
anticipated when the liability for losses and loss adjustment expense were
originally estimated. These development trends have been considered in
establishing the current year liabilities.
3
<PAGE>
(Amounts in 000's)
---------------------------------------
1997 1996 1995
---------------------------------------
Balance at January 1 $ 88,992 $ 61,497 $ 52,078
Less reinsurance recoverables 24,208 13,785 14,597
---------------------------------------
Net balance at January 1 64,784 47,712 37,481
---------------------------------------
Incurred related to:
Current year 163,035 166,554 141,887
Prior years 5,230 3,771 (7,347)
---------------------------------------
Total incurred 168,265 170,325 134,540
---------------------------------------
Paid related to:
Current year 113,841 121,782 105,269
Prior years 37,307 31,471 19,040
---------------------------------------
Total paid 151,148 153,253 124,309
---------------------------------------
Net balance at
December 31 81,901 64,784 47,712
Plus reinsurance recoverables 26,433 24,208 13,785
---------------------------------------
Balance at December 31 $108,334 $ 88,992 $ 61,497
---------------------------------------
Analysis of Loss and LAE Reserve Development
The next table presents the development of the estimated liability for the ten
years prior to 1997. The top line of the table illustrates the estimated
liability for unpaid losses and LAE recorded at the balance sheet date for each
of the indicated years. This liability represents the estimated amount of losses
and LAE for claims arising in all prior years that were unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company.
The upper portion of the table shows the re-estimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimate was increased or decreased as more information became known about
the frequency and severity of claims for individual years. Conditions and
trends that have affected development of the liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
The "Net Reserve Re-estimated" section of the table shows the cumulative
redundancy (deficiency) developed with respect to the previously recorded
liability for all years as of the end of 1997. For example, the Company's 1990
reserve of $16,570,000 has been re-estimated as of year-end 1997 to be
$13,589,000, indicating a redundancy of $2,981,000.
The lower section of the table shows the cumulative amount paid with respect to
the previously recorded liability as of the end of each succeeding year. For
example, as of December 31, 1997, the Company had paid $13,550,000 of the
currently estimated $13,589,000 of losses and LAE that have been incurred as of
the end of 1990; thus an estimated $39,000 of losses incurred as of the end of
1990 remain unpaid as of the current financial statement date.
The Company's reserve development has been unfavorable beginning in 1995 due to
the Company's expansion into certain areas of commercial lines insurance. These
developments have been considered in establishing the current year liabilities.
4
<PAGE>
<TABLE>
Analysis of Loss and Loss Adjustment Expense Development
(Amounts in 000's)
Year Ended
December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses, Net of
Reinsurance $12,553 $12,464 $15,732 $16,570 $19,089 $20,405 $27,744 $37,481 $47,712 $64,784 $ 81,901
Net Reserve Re-estimated
as of:
One Year Later 12,148 11,609 15,167 15,492 17,160 18,425 25,668 30,134 51,483 70,014
Two Years Later 12,456 11,534 15,043 14,859 15,699 18,451 22,686 32,074 53,467
Three Years Later 12,351 11,292 14,397 13,841 15,202 16,871 21,154 31,880
Four Years Later 12,374 11,024 13,773 13,929 14,497 16,616 20,966
Five Years Later 12,165 10,886 13,758 13,663 14,393 16,505
Six Years Later 12,172 10,926 13,754 13,598 14,373
Seven Years Later 12,211 10,962 13,722 13,589
Eight Years Later 12,235 10,948 13,741
Nine Years Later 12,235 10,967
Ten Years Later 12,235
Net Cumulative
Redundancy
(Deficiency) $ 318 $ 1,497 $ 1,991 $ 2,981 $ 4,716 $ 3,900 $ 6,778 $ 5,601 $(5,755) $(5,230)
==================================================================================================
Net Cumulative
Amount of
Reserve Paid
Through:
One Year Later $ 9,825 $ 8,659 $11,210 $11,117 $10,937 $11,730 $ 9,684 $19,040 $31,471 $37,307
Two Years Later 11,270 9,644 12,902 12,488 12,685 14,397 18,445 26,471 41,785
Three Years Later 11,644 10,461 13,355 12,965 13,588 15,923 19,930 29,237
Four Years Later 12,011 10,668 13,465 13,208 14,171 16,312 20,427
Five Years Later 12,067 10,739 13,595 13,471 14,307 16,381
Six Years Later 12,103 10,825 13,689 13,530 14,331
Seven Years Later 12,152 10,915 13,704 13,550
Eight Years Later 12,232 10,930 13,703
Nine Years Later 12,235 10,929
Ten Years Later 12,235
Net Reserve - December 31 $20,405 $27,744 $37,481 $47,712 $64,784 $ 81,901
Reinsurance Recoverables 2,780 6,220 14,597 13,785 24,208 26,433
----------------------------------------------------------
Gross Reserve-December 31 $23,185 $33,964 $52,078 $61,497 $88,992 $108,334
==========================================================
Net Re-estimated Reserve $16,505 $20,966 $31,880 $53,467 $70,014
Re-estimated Reinsurance 2,249 4,700 12,416 15,448 26,160
-----------------------------------------------
Gross Re-estimated Reserve $18,754 $25,666 $44,296 $68,915 $96,174
===============================================
Gross Cumulative Redundancy (Deficiency) $ 4,431 $ 8,298 $ 7,782 $(7,418) $(7,182)
================================================
4
</TABLE>
Reinsurance
The Company reinsures certain levels of risk with other insurance companies and
cedes varying portions of its written premiums to such reinsurers. In addition,
the Company pays a percentage of earned premiums to reinsurers in return for
coverage against catastrophic losses. To the Company's knowledge, none of its
reinsurers are experiencing financial difficulties. Furthermore, the Company
monitors concentrations of credit risk arising from similar geographic regions,
activities or economic characteristics of the reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The composition of
its reinsurers has not changed significantly in recent years. The Company has
not experienced any uncollectible reinsurance amounts or coverage disputes with
its reinsurers in over ten years.
ITEM 2. Properties.
Incorporated by reference to the inside front cover and pages 2 through
11 of the Registrant's 1997 Annual Report to Shareholders.
ITEM 3. Legal Proceedings.
Reference is made to Item 3 of the December 31, 1995 Registrant's Form
10-K concerning criminal litigation against M/G Transport Services,
Inc., a subsidiary of the Registrant. Upon Motion, the Court dismissed
six of the remaining eight counts against M/G, four of the six
remaining counts against one former employee and all of the remaining
counts against two former employees. The United States has appealed.
On October 31, 1997, M/G was fined $250,000 and placed on two years'
probation on the two remaining counts. The Company does not expect any
additional fines unless the United States is successful in its appeal.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None during the fourth quarter.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters. Incorporated by reference to pages 12, 28 (Note 18) and 32 of
the Registrant's 1997 Annual Report to Shareholders. The number of
holders of the Company's common stock at December 31, 1997 was
approximately 1,340. The Company's common stock is registered on the
American Stock Exchange (MLA).
ITEM 6. Selected Financial Data.
Incorporated by reference to page 13 of the Registrant's 1997 Annual
Report to Shareholders.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference to pages 14 through 16 of the Registrant's
1997 Annual Report to Shareholders.
ITEM 8. Financial Statements and Supplementary Data.
Incorporated by reference to pages 12 and 17 through 30 of the
Registrant's 1997 Annual Report to Shareholders.
ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
6
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
Incorporated by reference to the Registrant's Proxy Statement dated
March 6, 1998.
Executive Officers of the Company -
J. P. Hayden, Jr. - Age 68 - Chairman and Chief Executive Officer
Michael J. Conaton - Age 64 - President and Chief Operating Officer
J. P. Hayden, III - Age 45 - Senior Executive Vice President
John W. Hayden - Age 40 - Senior Executive Vice President
John R. LaBar - Age 66 - Vice President and Secretary
Robert W. Hayden - Age 59 - Vice President
John I. Von Lehman - Age 45 - Executive Vice President and
Chief Financial Officer
W. Todd Gray - Age 30 - Treasurer
J. P. Hayden, Jr. and Robert W. Hayden are brothers. J. P. Hayden, III
and John W. Hayden are sons of J. P. Hayden, Jr.
The Board of Directors of The Midland Company voted at their regular
meeting on March 5, 1998 to elect the following new executive officers effective
with the Company's Annual Shareholders' Meeting on April 9, 1998. Mr. J. P.
Hayden, III was elected Chairman and Chief Operating Officer of The Midland
Company. Mr. John W. Hayden was elected President and Chief Executive Officer
of The Midland Company. Mr. J. P. Hayden, Jr. was elected Chairman of the
Executive Committee of the Board. Mr. Michael J. Conaton was elected Vice
Chairman of the Board.
During 1997, W. Todd Gray was elected Treasurer. Mr. Gray joined
Midland in 1994 and served as Internal Audit Manager and, more recently,
Assistant Treasurer. Prior to that he was with a national accounting firm.
During 1996, J. P. Hayden, III and John W. Hayden (formerly Vice
Presidents) were elected Senior Executive Vice Presidents. Also in 1996,
John I. Von Lehman (formerly Vice President, Treasurer and Chief Financial
Officer) was elected Executive Vice President and Chief Financial Officer.
The officers listed above have served in the positions indicated for
the past five years (except as noted above).
ITEM 11. Executive Compensation.
Incorporated by reference to the Registrant's Proxy Statement dated
March 6, 1998.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference to the Registrant's Proxy Statement dated
March 6, 1998.
ITEM 13. Certain Relationships and Related Transactions.
Incorporated by reference to the Registrant's Proxy Statement dated
March 6, 1998.
7
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements.
Incorporated by reference in Part II of this report:
Data pertaining to The Midland Company and Subsidiaries -
Report of Independent Public Accountants.
Consolidated Balance Sheets, December 31, 1997 and 1996.
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(a) 2. Financial Statement Schedules.
Included in Part IV of this report:
Data pertaining to The Midland Company and Subsidiaries - Page
Independent Auditors' Consent and Report on
Schedules. 12
Schedule I - Summary of Investments - Other Than
Investments in Related Parties - December 31, 1997 13
Schedule II - Condensed Financial Information of
Registrant 14-18
Schedule III - Supplementary Insurance Information
for the Years Ended December 31, 1997, 1996 and 1995 19
Schedule IV - Reinsurance for the Years Ended
December 31, 1997, 1996 and 1995 20
Schedule V - Valuation and Qualifying Accounts for the
Years Ended December 31, 1997, 1996 and 1995 21
Schedule VI - Supplemental Information Concerning Property-
Casualty Insurance Operations for the Years Ended
December 31, 1997, 1996 and 1995 22
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(a) 3. Exhibits.
3. Articles of Incorporation and Code of Regulations - Filed as
Exhibit 3 to the Registrant's 1980 Annual Report on Form
10-K, and incorporated herein by reference.
10.1 The Midland Company 1992 Employee Incentive Stock Plan
and The Midland Company Stock Option Plan for Non-Employee
Directors and The Midland Company 1972 Stock Options Plan-
Incorporated by reference to Registrant's Statement 33-48511
on Form S-8.
8
<PAGE>
PART IV (Continued)
10.2 A description of the Company's Profit Sharing Plan, Salaried
Employees' Non-Qualified Savings Plan and the Supplemental
Retirement Plan - Incorporated by reference to the
Registrant's Proxy Statement dated March 6, 1998.
11. Computation of Consolidated Net Income Per Share for the
years ended December 31, 1997, 1996 and 1995. 23
13. Annual Report to security holders - Incorporated by
reference to the Registrant's 1997 Annual Report to
Shareholders.
21. Subsidiaries of the Registrant. 24
22. Published Report Regarding Matters Submitted to Vote of
Security Holders - Incorporated by Reference to the
Registrant's Proxy Statement dated March 6, 1998.
23. Independent Auditors' Consent - Included in Consent and
Report on Schedules referred to under Item 14(a)2 above.
27. Financial Data Schedule
(b) Reports on Form 8-K - A Form 8-K was filed on October 14, 1997
in connection with the September 29, 1997 sale of the Company's
Sportswear operation.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE MIDLAND COMPANY
Signature Title Date
S/ J. P. Hayden, Jr. Chairman and March 5, 1998
(J. P. Hayden, Jr.) Chief Executive Officer
S/ John I. Von Lehman Executive Vice President March 5, 1998
(John I. Von Lehman) and Chief Financial,
Accounting Officer
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
THE MIDLAND COMPANY
Signature Title Date
S/ George R. Baker Director March 5, 1998
(George R. Baker)
S/ James E. Bushman Director and Member March 5, 1998
(James E. Bushman) of Audit Committee
S/ James H. Carey Director and Member March 5, 1998
(James H. Carey) of Audit Committee
S/ Michael J. Conaton President, Chief Operating March 5, 1998
(Michael J. Conaton) Officer and Director
S/ J. P. Hayden, Jr. Chairman, Chief Executive March 5, 1998
(J. P. Hayden, Jr.) Officer and Director
S/ J. P. Hayden, III Senior Executive Vice March 5, 1998
(J. P. Hayden, III) Presidnet and Director
S/ John W. Hayden Senior Executive Vice March 5, 1998
(John W. Hayden) President and Director
S/ Robert W. Hayden Vice President and Director March 5, 1998
(Robert W. Hayden)
S/ William T. Hayden Director March 5, 1998
(William T. Hayden)
S/ William J. Keating Director March 5, 1998
(William J. Keating)
S/ William McD. Kite Director March 5, 1998
(William McD. Kite)
S/ John R. LaBar Vice President, Secretary March 5, 1998
(John R. LaBar) and Director
S/ John M. O'Mara Director and Member March 5, 1998
(John M. O'Mara) of Audit Committee
S/ John R. Orther Director and Member March 5, 1998
(John R. Orther) of Audit Committee
S/ William F. Plettner Director March 5, 1998
(William F. Plettner)
S/ Glenn E. Schembechler Director and Member March 5, 1998
(Glenn E. Schembechler) of Audit Committee
S/ John I. Von Lehman Executive Vice President, March 5, 1998
(John I. Von Lehman) Chief Financial, Accounting
Officer and Director
11
<PAGE>
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
To the Shareholders of The Midland Company:
We consent to the incorporation by reference in Registration Statements No.
33-64821 on Form S-3 and No. 33-48511 on Form S-8 of The Midland Company of
our report dated February 12, 1998, incorporated by reference in this Annual
Report on Form 10-K, and our report (appearing below) on the financial
statement schedules of The Midland Company for the year ended December 31,
1997.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedules of The
Midland Company and its subsidiaries, listed in Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
S/Deloitte & Touche, LLP
Deloitte & Touche, LLP
Cincinnati, Ohio
March 23, 1998
12
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule I - Summary of Investments -
Other than Investments in Related Parties
December 31, 1997
Column A Column B Column C Column D
- --------------------------------------------------------------------------------
Amount at
which shown
in the balance
Type of Investment Cost Value sheet
- --------------------------------------------------------------------------------
Fixed maturity securities,
available-for-sale:
Bonds:
United States Government and
government agencies and
authorities $195,066,000 $197,864,000 $197,864,000
States, municipalities and
political subdivisions 83,997,000 86,877,000 86,877,000
Mortgage-backed securities 7,902,000 7,948,000 7,948,000
Foreign governments 511,000 510,000 510,000
Public utilities 1,407,000 1,403,000 1,403,000
All other corporate bonds 67,150,000 68,436,000 68,436,000
-------------------------------------------
Total 356,033,000 363,038,000 363,038,000
-------------------------------------------
Equity securities, available-for-sale:
Common stocks:
Public utilities 1,149,000 1,452,000 1,452,000
Banks, trusts and insurance
companies 5,126,000 52,157,000 52,157,000
Industrial, miscellaneous
and all other 25,179,000 38,696,000 38,696,000
Nonredeemable preferred stocks 2,257,000 2,269,000 2,269,000
-------------------------------------------
Total 33,711,000 94,574,000 94,574,000
-------------------------------------------
Accrued interest and dividends 5,685,000 5,685,000 5,685,000
-------------------------------------------
Short-term investments 35,532,000 35,532,000 35,532,000
-------------------------------------------
Total investments $430,961,000 $498,829,000 $498,829,000
===========================================
13
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheet Information
December 31, 1997 and 1996
ASSETS 1997 1996
-----------------------------
Cash $ 236,000 $ 267,000
-----------------------------
Marketable Securities (at market value):
Fixed Income (cost, $2,427,000 in 1997
and $427,000 in 1996) 2,427,000 427,000
Equity (cost, $354,000 in 1997 and
$362,000 in 1996) 2,456,000 1,343,000
-----------------------------
Total 4,883,000 1,770,000
-----------------------------
Receivables - Net 7,010,000 6,801,000
-----------------------------
Intercompany Receivables -- 6,822,000
-----------------------------
Property, Plant and Equipment (at cost) 35,878,000 33,635,000
Less Accumulated Depreciation 3,552,000 2,090,000
-----------------------------
Net 32,326,000 31,545,000
-----------------------------
Investments in Real Estate 14,779,000 18,868,000
-----------------------------
Other Assets 3,720,000 2,434,000
-----------------------------
Investment in Subsidiaries (at equity) 197,206,000 153,965,000
-----------------------------
Total $ 260,160,000 $ 222,472,000
=============================
14
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Balance Sheet Information
December 31, 1997 and 1996
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
-----------------------------
Notes Payable within One Year:
Banks (including current portion of
long-term debt) $ 25,425,000 $ 28,824,000
Commercial Paper 5,791,000 4,700,000
-----------------------------
Total 31,216,000 33,524,000
-----------------------------
Other Payables and Accruals 3,403,000 1,593,000
-----------------------------
Intercompany Payables 501,000 --
-----------------------------
Long-Term Debt 28,014,000 27,667,000
-----------------------------
Shareholders' Equity:
Common Stock - No Par (issued and outstanding:
3,111,000 shares at December 31, 1997 and
3,042,000 shares at December 31, 1996 after
deducting treasury stock of 532,000 shares
and 601,000 shares, respectively) 911,000 911,000
Additional Paid-In Capital 15,359,000 14,846,000
Retained Earnings 153,797,000 138,423,000
Net Unrealized Gain on Marketable Securities 44,123,000 23,587,000
Treasury Stock (at cost) (14,704,000) (16,621,000)
Unvested Restricted Stock Awards (2,460,000) (1,458,000)
-----------------------------
Total 197,026,000 159,688,000
-----------------------------
Total Liabilities and Shareholders' Equity $ 260,160,000 $ 222,472,000
=============================
15
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Income Information
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
-----------------------------------------
Revenues:
Dividends from Subsidiaries $ 8,900,000 $ 20,500,000 $ 35,117,000
All Other Income, Primarily Charges
to Subsidiaries 7,746,000 7,876,000 9,434,000
-----------------------------------------
Total Revenues 16,646,000 28,376,000 44,551,000
-----------------------------------------
Expenses:
Interest Expense 4,775,000 5,101,000 5,248,000
Depreciation, Amortization and
Impairment 6,195,000 2,548,000 4,884,000
All Other Expenses 833,000 2,033,000 1,727,000
-----------------------------------------
Total Expenses 11,803,000 9,682,000 11,859,000
-----------------------------------------
Income Before Federal Income Tax 4,843,000 18,694,000 32,692,000
Provision (Credit) for Federal
Income Tax (1,599,000) (654,000) (902,000)
-----------------------------------------
Income Before Change in Undistributed
Income of Subsidiaries 6,442,000 19,348,000 33,594,000
Change in Undistributed Income of
Subsidiaries:
From Continuing Operations 17,925,000 (15,605,000) (17,546,000)
From Discontinued Operations (6,817,000) (2,675,000) (6,496,000)
-----------------------------------------
Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000
=========================================
16
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Condensed Statements of Cash Flows Information
For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
-----------------------------------------
Cash Flows from Operating Activities:
Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000
Loss from discontinued operations 6,817,000 2,675,000 6,496,000
-----------------------------------------
Income from continuing operations 24,367,000 3,743,000 16,048,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Decrease (increase) in
undistributed income of
subsidiaries (17,925,000) 15,605,000 17,546,000
Depreciation, amortization and
impairment 6,195,000 2,548,000 4,884,000
Increase in other assets (1,286,000) (1,359,000) (1,044,000)
Decrease (increase) in receivables 134,000 689,000 (3,995,000)
Increase in other
payables & accruals 1,575,000 90,000 871,000
Other - net 36,000 28,000 166,000
-----------------------------------------
Net cash provided by
operating activities 13,096,000 21,344,000 34,476,000
-----------------------------------------
Cash Flows from Investing Activities:
Acquisition of property, plant &
equipment (2,617,000) (1,516,000) (28,060,000)
Capital contributions to subsidiaries (12,326,000) -- (2,999,000)
Sale of property, plant & equipment 535,000 66,000 599,000
Change in investments (excluding
unrealized appreciation/depreciation) (1,991,000) 7,690,000 5,379,000
-----------------------------------------
Net cash provided by (used in)
investing activities (16,399,000) 6,240,000 (25,081,000)
-----------------------------------------
Cash Flows from Financing Activities:
Net change in intercompany accounts 7,323,000 (21,363,000) (35,029,000)
Increase (decrease) in long-term debt 948,000 (767,000) 20,551,000
Increase (decrease) in short-term
borrowings (2,909,000) (2,920,000) 8,074,000
Dividends paid (2,677,000) (1,962,000) (1,844,000)
Net issuance (purchase) of
treasury stock 587,000 (545,000) (1,091,000)
-----------------------------------------
Net cash provided by (used in)
financing activities 3,272,000 (27,557,000) (9,339,000)
-----------------------------------------
Net Increase (Decrease) in Cash (31,000) 27,000 56,000
Cash at Beginning of Year 267,000 240,000 184,000
-----------------------------------------
Cash at End of Year $ 236,000 $ 267,000 $ 240,000
=========================================
17
<PAGE>
THE MIDLAND COMPANY (Parent Only)
Schedule II - Condensed Financial Information of Registrant
Notes to Condensed Financial Information
For the Years Ended December 31, 1997 and 1996
The accompanying condensed financial information should be read in conjunction
with the consolidated financial statements and notes included in the
Registrant's 1997 Annual Report to shareholders.
Total debt of the Registrant (parent only) consists of the following:
DECEMBER 31,
---------------------------
1997 1996
---------------------------
Short-Term Bank Borrowings $ 24,000,000 $ 28,000,000
Commercial Paper 5,791,000 4,700,000
Mortgage Notes:
7.20% - Due January 1, 2001 1,773,000 --
6.92% - Due December 20, 2005 19,768,000 20,304,000
5.82% - Due December 1, 2003 7,898,000 8,187,000
---------------------------
Total Debt $ 59,230,000 $ 61,191,000
===========================
See Note 9 to the consolidated financial statements included in the 1997 Annual
Report to Shareholders for further information on the Company's outstanding debt
at December 31, 1997.
The amount of debt that becomes due during each of the next five years is as
follows: 1998 - $1,425,000; 1999 - $1,524,000; 2000 - $1,639,000;
2001 - $1,070,000; 2002 - $1,142,000.
18
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule III - Supplementary Insurance Information
For the Years Ended December 31, 1997, 1996 and 1995
(Amounts in 000's)
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Future
Policy Other Benefits, Amortization
Deferred Benefits, Policy Claims, of Deferred
Policy Losses, Claims and Net Losses and Policy Other
Acquisition Claims and Unearned Benefits Premium Investment Settlement Acquisition Operating Premiums
Cost Loss Expenses Premiums Payable Revenue Income(1) Expenses Costs Expenses Written
------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Property &
Casualty $52,198 $116,898 $222,530 $305,198 $20,018 $168,265 $78,762 $45,003 $342,308
Life & A&H 3,392 3,236 17,810 5,961 1,195 2,898 2,418 515 2,738(2)
Other 119 3,600(3)
------------------------------------------------------------------------------------------------------------------------
Total $55,590 $120,134 $240,340 $ - $311,159 $21,332 $171,165 $81,180 $49,118 $345,046
========================================================================================================================
1996
Property &
Casualty $42,308 $ 92,940 $190,071 $275,529 $17,161 $170,325 $79,100 $37,624 $289,144
Life & A&H 3,034 2,890 18,346 5,085 1,045 2,101 2,433 485 2,178(2)
Other 63 3,246(3)
------------------------------------------------------------------------------------------------------------------------
Total $45,342 $ 95,830 $208,417 $ - $280,614 $18,269 $172,426 $81,533 $41,355 $291,322
========================================================================================================================
1995
Property &
Casualty $40,352 $ 66,394 $176,499 $258,867 $15,103 $134,540 $78,487 $38,356 $284,485
Life & A&H 2,794 1,953 14,449 4,139 949 1,671 2,033 401 2,763(2)
Other 55 718(3)
------------------------------------------------------------------------------------------------------------------------
Total $43,146 $ 68,347 $190,948 $ - $263,006 $16,107 $136,211 $80,520 $39,475 $287,248
========================================================================================================================
Notes to Schedule III:
(1) Investment income amounts for the above insurance segments represent investment income on the actual investment securities in
each such segment. Investment expenses, which are deducted from investment income, and other operating expenses, include both
expenses incurred directly in the insurance segments and expenses allocated to and among the insurance segments based on
historical usage factors.
(2) Amounts represent accident and health insurance written premiums only.
(3) Expenses relate to Parent and Agency Operations with related revenues of $3,219, $1,602 and $618 in 1997, 1996 and 1995,
respectively, which are not depicted in the above schedule.
</TABLE>
19
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule IV - Reinsurance
For the Years Ended December 31, 1997, 1996 and 1995
Column A Column B Column C Column D Column E Column F
Ceded to Assumed Percentage of
Gross Other from Other Net Amount Assumed
Amount Companies Companies Amount to Net
--------------------------------------------------------------------
<C> <C> <C> <C> <C>
1997
Life Insurance in Force $371,298,000 $170,668,000 $200,630,000 0.0%
====================================================================
Insurance Premiums and
Other Considerations:
Life Insurance $ 5,724,000 $ 2,310,000 $ 120,000 $ 3,534,000 3.4%
Health Insurance 4,394,000 2,061,000 94,000 2,427,000 3.9%
Property & Liability Insurance 375,610,000 98,406,000 27,994,000 305,198,000 9.2%
--------------------------------------------------------------------
Total Premiums $385,728,000 $102,777,000 $28,208,000 $311,159,000 9.1%
====================================================================
1996
Life Insurance in Force $327,473,000 $163,604,000 $ 5,730,000 $169,599,000 3.4%
====================================================================
Insurance Premiums and
Other Considerations:
Life Insurance $ 4,703,000 $ 2,140,000 $ 481,000 $ 3,044,000 15.8%
Health Insurance 3,450,000 1,932,000 523,000 2,041,000 25.6%
Property & Liability Insurance 346,919,000 92,674,000 21,284,000 275,529,000 7.7%
--------------------------------------------------------------------
Total Premiums $355,072,000 $ 96,746,000 $22,288,000 $280,614,000 7.9%
====================================================================
1995
Life Insurance in Force $231,956,000 $122,038,000 $18,127,000 $128,045,000 14.2%
====================================================================
Insurance Premiums and
Other Considerations:
Life Insurance $ 3,232,000 $ 1,475,000 $ 779,000 $ 2,536,000 30.7%
Health Insurance 2,185,000 1,410,000 828,000 1,603,000 51.7%
Property & Liability Insurance 301,388,000 60,567,000 18,046,000 258,867,000 7.0%
--------------------------------------------------------------------
Total Premiums $306,805,000 $ 63,452,000 $19,653,000 $263,006,000 7.5%
====================================================================
</TABLE>
20
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule V - Valuation and Qualifying Accounts
for the Years Ended December 31, 1997, 1996 and 1995
ADDITIONS
CHARGED
BALANCE AT (CREDITED) TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997:
Allowance For Losses $ 799,000 $ 184,000 $ 230,000 (1) $ 753,000
YEAR ENDED DECEMBER 31, 1996:
Allowance For Losses $ 863,000 $ (50,000) $ 14,000 (1) $ 799,000
YEAR ENDED DECEMBER 31, 1995:
Allowance For Losses $ 1,014,000 $ 443,000 $ 594,000 (1) $ 863,000
NOTES:
(1) Accounts written off are net of recoveries.
(2) 1996 and 1995 amounts have been changed from amounts previously reported.
Amounts related to the disposal in 1997 of one of the Company's business
segments have been excluded.
21
<PAGE>
<TABLE>
THE MIDLAND COMPANY AND SUBSIDIARIES
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations
For the Years Ended December 31, 1997, 1996 and 1995
(Amounts in 000's)
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
Claims and
Claim
Reserves Adjustment
for Unpaid Expenses Amortization
Deferred Claims Discount, Incurred of Deferred Paid Claims
Affiliation Policy and Claim if any, Net Related to Policy and Claim
with Acquisition Adjustment Deducted in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
Registrant Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written
- ------------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Property-
Casualty
Subsidiaries
1997 $52,198 $116,898 $ - $222,530 $305,198 $20,018 $163,035 $ 5,230 $78,762 $151,148 $342,308
===================================================================================================================
1996 $42,308 $ 92,940 $ - $190,071 $275,529 $17,161 $166,554 $ 3,771 $79,100 $153,253 $289,144
===================================================================================================================
1995 $40,352 $ 66,394 $ - $176,499 $258,867 $15,103 $141,887 $(7,347) $78,487 $124,309 $284,485
===================================================================================================================
</TABLE>
22
<PAGE>
EXHIBIT (11)
THE MIDLAND COMPANY
AND SUBSIDIARIES
Exhibit (11) - Computation of Consolidated Net Income Per Share
For the Years Ended December 31, 1997, 1996 AND 1995
1997 1996 1995
-----------------------------------------
Consolidated Net Income:
Income From Continuing Operations $ 24,367,000 $ 3,743,000 $ 16,048,000
Income (Loss) From Discontinued
Operations (6,817,000) (2,675,000) (6,496,000)
-----------------------------------------
Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000
=========================================
Calculation of Basic Earnings (Loss)
Per Share of Common Stock:
Weighted Average Common Shares
Outstanding, Excluding The
Dilutive Effect Of Stock Options
And Stock Awards 2,985,000 2,948,000 2,952,000
-----------------------------------------
Basic Earnings (Loss) Per Share Of
Common Stock (average shares
outstanding divided by income):
Continuing Operations $ 8.16 $ 1.27 $ 5.44
Discontinued Operations (2.28) (0.91) (2.20)
-----------------------------------------
Total $ 5.88 $ 0.36 $ 3.24
=========================================
Calculation Of Dilutive Earnings
(Loss) Per Share Of Common Stock:
Adjusted Weighted Average Common
Shares Outstanding, Including
The Dilutive Effect Of Stock
Options And Stock Awards 3,097,000 3,033,000 3,072,000
-----------------------------------------
Dilutive Earnings (Loss) Per Share
Of Common Stock (adjusted average
shares outstanding divided
by income):
Continuing Operations $ 7.88 $ 1.23 $ 5.22
Discontinued Operations (2.21) (0.88) (2.11)
-----------------------------------------
Total $ 5.67 $ 0.35 $ 3.11
=========================================
23
<PAGE>
THE MIDLAND COMPANY 1997 ANNUAL REPORT
THE MIDLAND COMPANY
Midland was founded in 1938 as a consumer finance company by the late J. Page
Hayden, Sr. and H. R. LaBar. Today, Midland has two primary subsidiaries -
Insurance and Transportation. Midland is a publicly traded company on the
American Stock Exchange (MLA).
American Modern Insurance Group, Inc.
American Modern Insurance Group, Inc. (AMIG) is an insurance holding company
licensed in all 50 states through its six property and casualty companies and
two credit life companies. AMIG has traditionally specialized in writing
physical damage insurance and related coverages on manufactured housing . AMIG
has expanded to other areas of insurance including Homeowners, Lower Valued
Homes, Dwelling Fire, Mortgage Fire, Collateral Protection, Watercraft,
Long-Haul Truck, Commercial and Excess and Surplus Lines.
M/G Transport Services, Inc.
M/G Transport currently charters barges and brokers freight for the movement of
commodities on the inland waterways. M/G owned a fleet of 276 dry cargo jumbo
hopper barges at December 31, 1997. The barges are primarily used by the
Company's brokerage operation.
<PAGE>
FINANCIAL HIGHLIGHTS
THE MIDLAND COMPANY AND SUBSIDIARIES
For the Years Ended December 31, 1997 1996 1995
Revenues from Continuing Operations $375,430,000 $337,738,000 $313,227,000
============= ============= =============
Income from Continuing Operations $ 24,367,000 $ 3,743,000 $ 16,048,000
Loss from Discontinued Operations (6,817,000) (2,675,000) (6,496,000)
------------- ------------- -------------
Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000
============= ============= =============
Basic Earnings (Loss) Per Common Share:
Continuing Operations $ 8.16 $ 1.27 $ 5.44
Discontinued Operations (2.28) (.91) (2.20)
------------- ------------- -------------
Total $ 5.88 $ .36 $ 3.24
============= ============= =============
Diluted Earnings (Loss) Per Common Share:
Continuing Operations $ 7.88 $ 1.23 $ 5.22
Discontinued Operations (2.21) (.88) (2.11)
------------- ------------- -------------
Total $ 5.67 $ .35 $ 3.11
============= ============= =============
Cash Dividends Per Common Share $ .70 $ .66 $ .62
============= ============= =============
Book Value Per Common Share $ 63.32 $ 52.49 $ 51.85
============= ============= =============
Common Shares Outstanding 3,111,000 3,042,000 3,020,000
============= ============= =============
TABLE OF CONTENTS
Financial Highlights 1
Chairman's Letter 2-3
A Tribute to Retiring Directors 4-5
American Modern Insurance Group, Inc. 6-9
M/G Transport Services, Inc. 10-11
Quarterly Data 12
Selected Consolidated Financial Data 13
Management's Discussion and Analysis 14-16
Income Statements 17
Balance Sheets 18-19
Cash Flows 20
Notes to Financial Statements 21-29
Report of Independent Public Accountants 30
Management's Report 30
Officers and Directors 31
Officers of Subsidiary Companies and Other Information 32
1
<PAGE>
CHAIRMAN'S LETTER
We are pleased to report to you that 1997 was a dynamic and rewarding
year for your Company. Consolidated earnings from operations were the highest
in Midland's history. Your Company's insurance and river transportation
subsidiaries experienced excellent profitability in 1997. At the same time,
Management made the strategic decision to divest the sportswear operation and,
as a result, this operation was sold during the third quarter of 1997.
Operating results have been restated to separately report the Company's
continuing and discontinued operations. We believe that Midland's 1997
operating income from continuing operations is indicative of the earnings
potential of the Company.
FINANCIAL RESULTS
Midland posted net income from continuing operations for the 12 months
ended December 31, 1997 of $24,367,000, $7.88 per share (as calculated on a
diluted basis) on revenues of $375,430,000. This compares to net income from
continuing operations for the same period in 1996 of $3,743,000, $1.23 per
share, on revenues of $337,738,000.
Net income from continuing operations included after-tax realized
investment capital gains of $.88 per share in 1997 and $.58 per share in 1996.
Loss from discontinued operations for the 12 months ended December 31,
1997 was $(6,817,000), $(2.21) per share, compared to $(2,675,000), $(.88) per
share in 1996.
Consolidated net income, including both continuing and discontinued
operations, was $5.67 per share for the 12 months ended December 31, 1997
compared to $.35 per share in 1996.
SHAREHOLDERS' EQUITY
Midland's shareholders' equity grew by 20 percent in 1997 to $63.32 per
share. It is gratifying to note that shareholders' equity per share has
increased at a compounded annual growth rate of 14 percent over the last three
years.
Your Board of Directors, at its March 1997 meeting, approved an increase
in the cash dividend paid to shareholders from 66 cents to 70 cents per share
on an annualized basis. This is the eleventh consecutive year that your Board
has increased the dividend.
INSURANCE
By almost any measure, 1997 was a great year for American Modern
Insurance Group, Inc. (AMIG), Midland's wholey owned insurance subsidiary.
AMIG generated record levels of premium volume, underwriting profits, net
investment income and net capital gains in 1997. AMIG's return on average
shareholders' equity
This page includes a picture with the following caption:
(from left) J. P. Hayden, Jr., Chairman and Chief Executive
Officer, and Michael J. Conaton, President and Chief Operating Officer.
2
<PAGE>
was 15.1 percent in 1997.
Net premiums written for AMIG's property and casualty operations
increased at a compounded annual growth rate of 18 percent over the past five
years. This growth has come from both AMIG's traditional manufactured housing
channel as well as through a select group of other niche product lines.
With a return to favorable weather patterns throughout the United States
in 1997, AMIG's property and casualty companies' ratio of losses and expenses
to premiums earned (combined ratio) improved to 95.8% in 1997 as compared to
104.3% in 1996. AMIG has reported combined ratios below 100% in seven of the
last eight years.
INSURANCE INVESTMENT PORTFOLIO
As a result of strong cash flow from operations along with appreciation
in the market value of AMIG's investment holdings, AMIG's investment portfolio
also reached record levels in 1997, increasing by $96 million to $494 million
in market value at year end. Likewise, AMIG's pre-tax investment income
increased to record levels, totaling $21.3 million in 1997 plus an additional
$4.2 million in pre-tax realized capital gains. AMIG's portfolio, at market
value, is invested approximately 80 percent in high-quality fixed income
securities and 20 percent in equity securities.
RIVER TRANSPORTATION
Midland's river transportation subsidiaries, M/G Transport Services,
Inc. and MGT Services, Inc. (M/G), experienced tremendous success in 1997.
M/G's net profits were $3.1 million, 60 percent ahead of the prior year.
These results represented an 18.5 percent return on its average shareholder
equity and made 1997 M/G's most profitable year since 1989.
M/G continues to operate its business within niche markets in a
somewhat concentrated geographical area. This mix of business has been
historically profitable for M/G and M/G's Management anticipates continued
success as M/G moves forward.
DISCONTINUED OPERATIONS
As previously reported, CS Crable Sportswear, Inc., the Company's
sportswear subsidiary, sold substantially all of its assets on September 29,
1997. The results of operations and loss on disposal for these operations are
reported separately as discontinued operations.
The proceeds from the sale, approximately $13.3 million, were primarily
used to reduce Midland's short-term borrowings. More importantly, this
divestiture will afford Management the opportunity to focus on its core
businesses and to utilize Midland's capital base to support the Company's
profitable operations.
BOARD OF DIRECTORS MATTERS
On pages 4 and 5 of this year's annual report, we pay tribute to three
directors who are retiring from your Company's Board in March of 1998. Each
of these directors has provided immeasurable value to Midland with their
guidance and oversight over many years. It is noteworthy that two of these
directors, Mr. William F. Plettner and Mr. John Orther, have served as
directors since the Company first went public in 1961 and also served extended
terms as executive officers of the Company. Mr. William McD. Kite has served
as a director since 1966 while also serving as Midland's Chief Outside Legal
Counsel for many years.
We are also quite pleased to announce the election of a new director,
Mr. James E. Bushman, President and CEO of Cast-Fab Technologies, Inc., who
joined Midland's Board of Directors in December of 1997. Mr. Bushman brings
many years of successful business experience to your Board and we certainly
look forward to his assistance in the years ahead.
LOOKING TO THE FUTURE
We begin 1998 with much enthusiasm from what we accomplished in 1997 and
for what we plan to accomplish in the new year. In the areas of insurance and
related financial services and in river transportation, our growth strategies
are built on the financial strength and stability of the Company. We
continually strive to provide the very best service to our current and future
customers. We are optimistic about our future because we have talented and
dedicated employees with a demonstrated expertise to successfully exploit
niche markets. In conclusion, all of Management extends a sincere thanks to
you, our shareholders, for your continued trust and support.
S/ J. P. Hayden, Jr.
J. P. Hayden, Jr.
Chairman and Chief Executive Office
February 12, 1998
3
<PAGE>
A TRIBUTE TO RETIRING DIRECTORS
"It is with great pride that we pay tribute to three
very special members of Midland's Board of Directors
who will retire from the Board on March 5, 1998. As
you will note in the captions below, these three
individuals have served on your Company's Board for a
combined total of over 100 years. We will miss their
guidance and insight from a business perspective and,
from a personal perspective, I, like the other members
on your Board, will miss their friendship and the
warmth and vitality of their spirit.
"We are pleased to honor each of them with the title
of Director Emeritus."
J. P. Hayden, Jr.
Chairman of the Board and
Chief Executive Officer
William McD. Kite
Mr. Kite has served as a member of Midland's Board for
33 years. Through these years, Mr. Kite also served
as Midland's Chief Outside Legal Counsel as a partner
with the law firm of Cohen, Todd, Kite and Stanford.
In his service as Chief Outside Counsel and as a
member of Midland's Board, Bill Kite has always
provided Management with sound advice and judgment.
He has guided the Company through the many difficult
business challenges that your Company has successfully
handled over the years.
This page includes a picture of William McD. Kite.
4
<PAGE>
John R. Orther
Mr. Orther was one of the Company's first Board
Members after the Company had a public stock offering
in 1961. John Orther joined Midland on February 1,
1954. He worked in the Company's financial department
and served Midland in the capacity of Financial Vice
President during the 1960's and up until the time of
his departure in 1969. Mr. Orther helped provide
Midland with financial guidance through a critical
time of the Company's development and continued to
serve Midland as a member of the Company's Board of
Directors and Audit Committee.
This page includes a picture of John R. Orther.
William F. Plettner
Mr. Plettner's association and service to Midland
spans over five decades. Bill Plettner has served as
a member of Midland's Board of Directors since 1961,
the year of the Company's first public stock offering.
More importantly, he began his business career with
Midland in 1946 and, from that time forward, he played
a very fundamental role in developing new areas of
enterprise that would contribute to the growth and
profitability of the Company. Mr. Plettner served in
the capacity of President and Chief Operating Officer
of The Midland Company from 1980 to 1988 and as Vice
Chairman in 1989.
This page includes a picture of William F. Plettner.
5
<PAGE>
AMERICAN MODERN INSURANCE GROUP, INC.
We are pleased to report that 1997 was an extremely successful year for
American Modern Insurance Group, Inc. (AMIG), Midland's wholly owned insurance
subsidiary, as operating profits and revenues reached record-setting levels.
AMIG is licensed in all fifty states through its six property and casualty
companies and two credit life companies.
The property and casualty companies continued their strong growth in 1997, as
net premiums written increased by approximately 18% over 1996. American
Modern Insurance Group's net underwriting income reached an all-time high in
1997. The combined ratio (the ratio of losses and expenses to premiums
earned) for 1997 was 95.8%, which compares most favorably with an estimated
industry result of 101.8%. This favorable ratio comes despite incurring
after-tax losses of approximately $3.7 million from the spring flooding that
took place in the Ohio River Valley. AMIG's combined ratio has been below
100% in seven of the last eight years, an outstanding performance record by
any measure.
American Modern Insurance Group's weather-related catastrophe losses were at
their lowest level since 1993, decreasing by 60% from 1996 levels. The
industry's $3.0 billion of catastrophe losses in 1997 was at its lowest level
since 1988. Nevertheless, the Company remains committed to the management of
exposure to natural catastrophes through the expanded utilization of the
available catastrophe modeling technologies.
Once again, AMIG experienced strong results from its traditional physical
damage insurance and related coverages for manufactured housing. AMIG also
achieved growth and profitability in its other specialty personal lines
insurance
This page includes a picture with the following caption:
(From left) John W. Hayden, Vice Chairman and Kurt Schwamberger,
President and Chief Operating Officer, AMIG
6
<PAGE>
products such as Low Value Dwellings, Watercraft, Recreational Vehicles and
Collectible Autos. As many companies reduce rates and move to alternative
distribution channels in an attempt to achieve the "low cost provider" status,
AMIG remains committed to sound underwriting procedures and the effective
utilization of its multiple channels of product distribution.
AMIG's Financial Services Division offers a variety of products to financial
institutions and their customers. This division provides valuable services to
its customers through its unique comprehension of their needs. Net written
premiums for the Financial Services Division increased by approximately 22%
over 1996. Additionally, strategies are now in place to distribute Watercraft
and Recreational Vehicle products through AMIG's existing finance business
partners.
Ameritrac, American Modern Insurance Group's in-house loan and lease tracking
service, continued to grow during 1997. Ameritrac now tracks and services
approximately 1.3 million loan and lease accounts for more than 40 financial
institutions. During 1997, Ameritrac expanded its services to include flood
determinations, agent portfolio conversions, direct mail marketing and payment
processing through electronic fund transfers. In 1998, Ameritrac plans to
continue to develop and offer new services to its many clients.
Refocusing the direction of the Commercial Lines Division was a clearly
defined objective in 1997. While operating results have not yet reached the
standards AMIG has established, AMIG is pleased to report that significant
progress has been made. AMIG has strengthened and reorganized the Commercial
Lines underwriting and claims operations. Future focus will be on improving
underwriting profitability and product development that build on synergies
between our commercial and personal lines operations.
As always, American Modern Insurance Group remains committed to providing
superior service to its policyholders. An example of this commitment can be
found in AMIG's personal lines claims department. The 111 in-house adjusters
and 123 field staff adjusters are continuing to handle claims in a timely and
efficient manner. In fact, during 1997, AMIG was able to handle 82% of all
claims with its own staff and settle 87% of all property claims within 30 days
of being reported.
AMIG continues to invest in technology as a competitive tool enabling it to
deliver products and services efficiently and economically. Recent
developments in the
This page includes two pictures with the following captions:
(From left) Kenneth G. Boberg, Executive Vice President and Chief
Financial Officer, and Ronald L. Crippin, Executive Vice President, AMIG
(From left) AMIG Senior Vice Presidents, Thomas A. Knighten,
Robert E. Hilliard, and Werner E. Kruck
7
<PAGE>
use of imaging will bring improved customer service, claim
processing and underwriting through AMIG's "VISION" System. AMIG is now
capable of delivering insurance policy quotes for property and casualty
policies and credit life policies to agents using the Internet. Because
technology continues to change at such a rapid pace, AMIG has invested in
independent consulting expertise to help assess its current status and to help
it plan for the future.
American Modern Insurance Group is in the process of becoming "Year 2000"
compliant. Most of this effort has been completed over the past several years
as part of new development and normal system maintenance. To this end, a
formal "Year 2000" task force has been established to create and monitor the
Company's "Year 2000" policy.
The American Modern Insurance Group's investment portfolio continues to be
conservatively invested in equity and high-quality fixed income securities.
AMIG has no investments in real estate or high risk derivative products. The
fixed income portfolio maintains a weighted average quality of approximately
AA to AAA and the current average maturity of the fixed income portfolio is
approximately 4.1 years. The value of the portfolio has continued to grow
through the generation of significant cash flow from operations as well as
market appreciation on the portfolio. In addition, the portfolio generated
approximately $4.2 million in net pre-tax capital gains in 1997.
We wish to thank AMIG's many business partners and acknowledge the impact of
their contributions to the Company's success over the past year and the
prospects for the future. Management would also like to thank all of the
employees of American Modern Insurance Group, for without their dedication,
AMIG's success would not have been possible.
This page includes a picture with the following caption:
(From left) AMIG Senior Vice Presidents, Charles J. Jenkins,
James P. Romerill, and Patrick M. Gallagher
This page also includes a five year bar chart with the following data (amounts
in millions):
AMIG NET WRITTEN PREMIUM
1993 $182.883
1994 240.348
1995 291.808
1996 296.095
1997 349.220
8
<PAGE>
AMERICAN MODERN INSURANCE GROUP, INC.
INVESTMENT PORTFOLIO
This page includes three five year bar charts with the following data:
MARKET VALUES (000's)
1993 1994 1995 1996 1997
-----------------------------------------------------
Governments $ 73,834 $101,320 $155,648 $172,153 $201,363
Municipals 66,215 64,112 94,548 71,492 88,187
Corporates 11,182 31,162 35,972 41,099 78,958
Cash Equivalents 43,838 43,782 31,941 50,509 33,105
Equities 23,538 26,738 40,830 63,445 92,332
NET INVESTMENT INCOME (000's):
Operations Capital Gains
------------ ---------------
1993 $10,069 $3,735
1994 11,070 2,190
1995 16,399 2,373
1996 18,446 2,689
1997 21,432 4,170
UNREALIZED GAINS (000's):
Equities Fixed Income
------------ --------------
1993 $7,774 $ 6,814
1994 6,605 (5,128)
1995 16,018 1,962
1996 26,005 2,415
1997 51,895 7,005
- -------------------------------------------------------------------------------
ANNUALIZED TOTAL RETURN
(Total Return is the rate of return on a portfolio that takes into consideration
both interest income and dividends plus the change in the market value.)
Periods Ending December 31, 1997
-------------------------------------------------
1 Year 3 Year 5 Year
- -------------------------------------------------------------------------------
EQUITIES:
AMIG 57.6% 45.8% 27.5%
S&P 500 Index 33.4% 31.2% 20.3%
FIXED INCOME:
AMIG Before Tax 8.0% 8.3% 6.4%
AMIG After Tax 5.6% 5.8% 4.6%
After Tax Lehman Brothers
Intermediate Government/
Corporate Index 5.0% 5.8% 4.3%
The average maturity and duration of AMIG's Fixed Income Portfolio was 4.1 years
and 3.4, respectively, at December 31, 1997.
9
<PAGE>
M/G TRANSPORT SERVICES, INC.
The Midland Company's transportation subsidiaries, M/G Transport Services,
Inc. and MGT Services, Inc. (M/G), completed their third successful year since
restructuring in December of 1994. At that time, M/G decided to concentrate
on niche affreightment markets where it could provide superior service. M/G's
gross revenues have increased at a 7.4% compounded annual growth rate and pre-
tax income has increased at a 40.9% compounded annual growth rate. Return on
average equity for the three years succeeding M/G's restructuring has been
18.5% (1997), 11.3% (1996) and 8.1% (1995).
M/G experienced flood-related hardships on the lower Mississippi River in the
first and second quarters of 1997. M/G's Management is pleased with this
year's results and feels that the operational structure affords M/G the
flexibility to react to these weather-related problems that are an inevitable
part of the business.
As of December 31, 1997, M/G either owned or had under a long-term capital
lease 276 jumbo hopper barges. Of the 276 barges, 133 were covered and the
remaining 143 barges were open tops. As of December 31, 1997, the average age
of M/G's 276
This page includes a picture with the following caption:
(from left) Jack L. Lordo, Vice President, J. P. Hayden, III, President and
Chief Operating Officer, and Raymond R. Ludmann, Treasurer, M/G Transport
Services, Inc.
10
<PAGE>
barges was 12 years. This represents a relatively newer fleet
compared to the majority of other independent barge lines.
It has been M/G's operating philosophy to charter, on an as-needed basis,
barges to augment its fleet. As of December 31, 1997, M/G had 139 barges on
charter resulting in a total of 415 jumbo hopper barges under management. Of
the 139 barges on charter, 97 can be returned at M/G's discretion. This
philosophy allows M/G to more effectively control its invested capital.
As an indication of M/G's dedication and commitment to the barge affreightment
market and to its valued customers, M/G acquired 66 new barges in the last 18
months, requiring a capital investment of $18.1 million. These acquisitions
were primarily funded using internally generated capital. At the present
time, M/G is contemplating the acquisition of additional barges in order to
maintain fleet size and to provide for moderate growth.
M/G's Managment feels that it is operationally and financially well poised to
take advantage of strategic growth opportunities as might occur. It is M/G's
goal to be a valued partner with all of its business relationships by
providing operational flexibility to meet our customers' changing needs.
Once again, M/G would like to sincerely thank its employees for their hard
work and continued dedication to the success of M/G. Without a strong customer
and employee base, M/G would not have achieved the above successes.
This page includes a picture with the following caption:
Caption #2: (from left) J. Kevin Jennings, Executive Vice President and
Thomas C. Terrell, III, President, MGT Services, Inc.
11
<PAGE>
QUARTERLY DATA
THE MIDLAND COMPANY AND SUBSIDIARIES
First Quarter Second Quarter Third Quarter Fourth Quarter
------------------------------------------------------------
1997
Revenues from
continuing
operations $ 90,027,000 $ 92,783,000 $ 92,949,000 $ 99,671,000
===========================================================
Income from
continuing
operations $ 4,265,000 $ 5,047,000 $ 6,112,000 $ 8,943,000
Loss from
discontinued
operations (1,175,000) (1,067,000) (4,575,000) -
-----------------------------------------------------------
Net income $ 3,090,000 $ 3,980,000 $ 1,537,000 $ 8,943,000
===========================================================
Basic earnings (loss) per share:
Continuing
operations $ 1.43 $ 1.70 $ 2.04 $ 2.99
Discontinued
operations (.39) (.36) (1.53) -
-----------------------------------------------------------
Total $ 1.04 $ 1.34 $ .51 $ 2.99
===========================================================
Diluted earnings (loss) per share:
Continuing
operations $ 1.39 $ 1.64 $ 1.97 $ 2.88
Discontinued
operations (.38) (.35) (1.48) -
-----------------------------------------------------------
Total $ 1.01 $ 1.29 $ .49 $ 2.88
===========================================================
Dividends per
common share $ .175 $ .175 $ .175 $ .175
===========================================================
Price range of
common stock
(AMEX) 37 1/4 - 44 1/4 38 - 50 49 1/4 - 57 1/2 57 1/8 - 64 1/2
===========================================================
1996
Revenues from
continuing
operations $ 80,318,000 $ 85,019,000 $ 85,325,000 $ 87,076,000
===========================================================
Income from
continuing
operations $ (4,091,000) $ 1,911,000 $ (373,000) $ 6,296,000
Loss from
discontinued
operations (1,153,000) (1,257,000) (21,000) (244,000)
-----------------------------------------------------------
Net income (loss) $ (5,244,000) $ 654,000 $ (394,000) $ 6,052,000
===========================================================
Basic earnings (loss) per share:
Continuing
operations $ (1.39) $ .64 $ (.12) $ 2.14
Discontinued
operations (.39) (.42) (.01) (.09)
-----------------------------------------------------------
Total $ (1.78) $ .22 $ (.13) $ 2.05
===========================================================
Diluted earnings (loss) per share:
Continuing
operations $ (1.39) $ .61 $ (.12) $ 2.06
Discontinued
operations (.39) (.40) (.01) (.09)
-----------------------------------------------------------
Total $ (1.78) $ .21 $ (.13) $ 1.97
===========================================================
Dividends per
common share $ .165 $ .165 $ .165 $ .165
===========================================================
Price range of
common stock
(AMEX) 46 - 50 1/2 38 - 50 3/8 36 1/2 - 45 5/8 33 3/4 - 39 1/4
===========================================================
Note: The sum of the quarterly reported diluted earnings per share may not
equal the full year as each is computed independently.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
THE MIDLAND COMPANY AND SUBSIDIARIES
Years Ended
December 31, 1997 1996 1995 1994 1993
------------------------------------------------------------------
Revenues From
Continuing
Operations $375,430,000 $337,738,000 $313,227,000 $273,987,000 $232,965,000
==================================================================
Income From
Continuing
Operations $ 24,367,000 $ 3,743,000 $ 16,048,000 $ 11,637,000 $ 20,337,000
Loss From
Discontinued
Operations (6,817,000) (2,675,000) (6,496,000) (2,218,000) (2,365,000)
------------------------------------------------------------------
Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000 $ 9,419,000 $ 17,972,000(a)
==================================================================
Basic Earnings (Loss) Per Common Share:
Continuing
Operations $ 8.16 $ 1.27 $ 5.44 $ 3.92 $ 6.84
Discontinued
Operations (2.28) (.91) (2.20) (.75) (.80)
------------------------------------------------------------------
Total $ 5.88 $ .36 $ 3.24 $ 3.17 $ 6.04(a)
==================================================================
Diluted Earnings (Loss) Per Common Share:
Continuing
Operations $ 7.88 $ 1.23 $ 5.22 $ 3.82 $ 6.61
Discontinued
Operations (2.21) (.88) (2.11) (.73) (.76)
------------------------------------------------------------------
Total $ 5.67 $ .35 $ 3.11 $ 3.09 $ 5.85(a)
==================================================================
Marketable
Securities $498,829,000 $400,462,000 $367,054,000 $278,088,000 $224,614,000
==================================================================
Total
Assets $760,463,000 $655,979,000 $600,905,000 $479,497,000 $433,263,000
==================================================================
Unearned
Insurance
Premiums $240,340,000 $208,417,000 $190,948,000 $158,316,000 $118,802,000
==================================================================
Insurance
Loss
Reserves $120,134,000 $ 95,830,000 $ 68,347,000 $ 57,715,000 $ 42,607,000
==================================================================
Long-Term
Debt $ 62,518,000 $ 62,470,000 $ 65,456,000 $ 47,091,000 $ 56,522,000
==================================================================
Shareholders'
Equity $197,026,000 $159,688,000 $156,595,000 $132,437,000 $133,110,000
==================================================================
Book Value
Per Common
Share $ 63.32 $ 52.49 $ 51.85 $ 44.19 $ 44.39
==================================================================
Cash Dividends
Per Common
Share $ .70 $ .66 $ .62 $ .58 $ .54
==================================================================
Common Shares
Outstanding 3,111,000 3,042,000 3,020,000 2,997,000 2,999,000
==================================================================
(a) Includes a credit of $4,867,000 (per common share: basic - $1.63;
diluted - $1.58) for the cumulative effect of a change in accounting from the
adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", effective January 1, 1993.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE MIDLAND COMPANY AND SUBSIDIARIES____________________________________________
REPORTABLE SEGMENTS
The discussions of Results of Operations and Liquidity and Capital
Resources are grouped according to the Company's three reportable business
segments: Insurance, Transportation and Other. A description of the operations
of each of these segments, along with a brief discussion of the Discontinued
Operations, is included below.
Insurance
The Company's insurance operations consist primarily of six property and
casualty companies and two credit life companies operating as American Modern
Insurance Group (AMIG). AMIG is collectively licensed through its subsidiaries
to write business in all 50 states plus the District of Columbia. The majority
of AMIG's business is physical damage insurance on manufactured homes, generally
written for a term of 12 months with coverages similar to conventional
homeowner's insurance policies. Other insurance products include Lower Valued
Homes, Dwelling Fire, Homeowners, Mortgage Fire, Collateral Protection,
Watercraft, Long-Haul Trucking, Commercial and Excess and Surplus Lines.
Transportation
M/G Transport Services, Inc. and MGT Services, Inc. (M/G), the Company's
transportation subsidiaries, operate a freight brokerage business. M/G arranges
for the movement of dry bulk commodities such as petroleum coke, iron ores,
barite, fertilizers, sugar and aggregates on the lower Mississippi River and its
tributaries.
Other
The Other segment consists primarily of miscellaneous activities that
are considered immaterial.
Discontinued Operations
On September 29, 1997, the Company's sportswear subsidiary, CS Crable
Sportswear, Inc., sold substantially all of its assets to Brazos, Inc., a
subsidiary of Brazos Sportswear, Inc. The assets were sold for approximately
$13.3 million in cash resulting in an after-tax loss on the disposal of
approximately $3.3 million. The cash proceeds from this transaction were
primarily used to reduce the Company's short-term bank borrowings. The results
of operations and the related loss on disposal for these operations are
categorized in the consolidated financial statements as "Discontinued
Operations" and reported separately from continuing operations. Management
does not expect any future activity in regard to this subsidiary to have a
material impact on the consolidated financial results of the Company.
RESULTS OF OPERATIONS
1997 Compared to 1996
Consolidated Midland
Income from continuing operations for 1997 increased to $24,367,000,
$7.88 per share (calculated on a diluted basis), from $3,743,000, $1.23 per
share, in 1996. Included in income from continuing operations are after-tax
capital gains of $2,710,000, $.88 per share, in 1997 and $1,748,000, $.58 per
share, in 1996.
The Company reported a loss from discontinued operations for 1997 of
$(6,817,000), $(2.21) per share. This compares to a loss of $(2,675,000),
$(.88) per share, in 1996.
Consolidated net income, including both continuing and discontinued
operations, increased to $17,550,000, $5.67 per share, in 1997 from $1,068,000,
$.35 per share, in 1996.
Consolidated revenues from continuing operations increased 11.2% to
$375,430,000 from $337,738,000 in 1996.
These improved results are indicative of the strong financial
performances generated by the Company's insurance and transportation
subsidiaries.
Insurance
AMIG reported record profits in 1997. Premium production, underwriting
profits, net investment income and capital gains all reached new highs in 1997.
These record-setting levels resulted in a return on average equity of 15.1% for
AMIG.
Net written premium within the property and casualty operations
increased over $50 million, or 18%, to $342 million. This premium growth was
primarily the result of volume increases from the manufactured home, park and
dealer and collateral protection product lines. Premium rate increases also
contributed to AMIG's premium growth, but to a much lesser degree than volume
increases. The strong growth in net written premium production also resulted
in increases in the December 31, 1997 balances of receivables, deferred
insurance policy acquisition costs, commissions payable, unearned premiums, loss
reserves and other payables compared to the prior year end.
The growth in net written premium also resulted in increases in
operating and administrative costs. Commission expenses, on the other hand,
remained flat due to increases in ceding commissions received by AMIG (which
were included as offsets to commission expenses).
AMIG's property and casualty operations generated pre-tax underwriting
income of $12,938,000 in 1997 compared to a pre-tax loss of $(11,806,000) in the
prior year. The property and casualty companies' ratio of losses and expenses
to premiums earned (combined ratio) improved to 95.8% in 1997 from 104.3% in
the prior year. This combined ratio compares favorably to the estimated industry
average combined ratio for 1997 of 102%. The improved underwriting results were
primarily the result of more favorable weather patterns throughout the United
States in 1997. AMIG's
14
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (cont.)
weather related losses in 1997 were at their lowest level since 1993. The 1996
underwriting results were negatively impacted by catastrophic weather related
losses ranging from severe winter storms and flooding during the first part of
the year to Hurricanes Fran and Bertha which caused heavy damage along the
eastern United States during the third quarter of 1996. As a result of the
above, the insurance losses and loss adjustment expenses actually decreased in
1997 while earned premiums increased by nearly 11%.
AMIG's net investment income (before taxes and excluding capital gains)
increased by approximately 17% to $21.3 million in 1997 from $18.3 million in
1996. This increase was primarily the result of the growth in the insurance
investment portfolio. The investment portfolio increased by $96 million to $494
million in market value at December 31, 1997. This growth is due primarily to
three factors: 1) cash flow from underwriting, 2) investment income and capital
gains generated from the portfolio itself, and 3) unrealized appreciation in the
market value of the securities. The gross unrealized appreciation on marketable
securities increased to $58,901,000 from $28,426,000 at the prior year-end. The
increase in the unrealized appreciation was largely responsible for the increase
in the deferred federal income tax liability in 1997.
Transportation
1997 was M/G's most profitable year since 1989. M/G's net profits
improved to $3.1 million from $1.9 million in 1996. These favorable results
translate to an 18.5% return on average equity for 1997.
M/G's revenues increased 3% to $34.9 million in 1997. This increase was
due primarily to an overall increase in the volume of loadings and total tonnage
hauled. Pricing per ton-mile actually decreased slightly in 1997 compared to
1996. Transportation operating expenses decreased due to an overall decrease in
litigation related charges in 1997 compared to 1996.
1996 Compared to 1995
Consolidated Midland
Income from continuing operations for 1996 was $3,743,000, $1.23 per
share (calculated on a diluted basis), compared to $16,048,000, $5.22 per share,
in 1995. Included in income from continuing operations are after-tax capital
gains of $1,748,000, $.58 per share, and $1,542,000, $.50 per share, for 1996
and 1995, respectively.
The Company reported a loss from discontinued operations for 1996 of
$(2,675,000), $(.88) per share. This compares to a loss of $(6,496,000),
$(2.11) per share, in 1995.
Consolidated net income, including both continuing and discontinued
operations, was $1,068,000, $.35 per share, in 1996 compared to $9,552,000,
$3.11 per share, in 1995.
Consolidated revenues from continuing operations increased 7.8% to
$337,738,000 from $313,227,000 in 1995.
Insurance
AMIG concluded 1996 on a profitable basis even though its operations
were severely impacted by numerous adverse occurrences throughout most of 1996.
As a result of these catastrophic losses, coupled with the adverse development
of several commercial lines claims, AMIG experienced a larger than normal
increase in insurance losses and loss adjustment expenses in 1996 compared to
1995. Also in 1996, AMIG expensed approximately $3.4 million (pre-tax) in
litigation costs related to the settlement of a class action lawsuit in Alabama
and Mississippi. This combination of higher-than-normal losses and unusual
litigation expenses resulted in a higher-than-normal combined ratio (ratio of
losses and expenses to premiums earned) for AMIG's property and casualty
insurance companies of 104.3% in 1996 as compared to 97.2% in 1995. Both written
and earned premiums increased in 1996 to record levels. This increase in
premium production in 1996 over 1995 was due to the overall growth of all of
AMIG's existing insurance products as well as expansion into other areas of
insurance.
Transportation
M/G's revenues increased 11% and pre-tax income increased 25% in 1996 as
compared to 1995 levels. This increase, coupled with the related increases in
expenses, was due primarily to an overall increase in tonnage hauled. These
favorable results were achieved even though M/G expensed $1.8 million (pre-tax)
more in litigation costs in 1996 than in 1995 related to the operations of the
transportation subsidiary sold in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Midland and Parent Company Operations
As of December 31, 1997, $611,861,000 of Midland's $760,463,000 in total
assets (80%) was comprised of marketable securities, short-term investments,
receivables and cash. Liabilities that generally represent cash requirements
over various periods in the future included claim liabilities, accrued
commissions, short-term borrowings and other payables and totaled $234,399,000
at December 31, 1997. Management expects that the cash and other liquid
investments coupled with the future collection of receivables will be readily
available to match these cash requirements.
The parent Company relies primarily on dividends from its subsidiaries
to assist in servicing its debt, paying its operating expenses and paying
dividends to Company stockholders. The payment of dividends to the parent
Company from the Company's subsidiaries is restricted by state regulatory
agencies and/or covenants contained in debt agreements. Such restrictions,
however, have not had, and are not expected to have, a significant impact on the
parent Company's liquidity or its ability to meet its long or short-term
operating, financing or capital obligations.
15
<PAGE>
Capital expenditures, other than for barge acquisitions, amounted to
$7,638,000, $4,403,000 and $28,130,000 for 1997, 1996 and 1995, respectively.
A large percentage of the 1995 capital expenditures related to the construction
of the Company's new corporate headquarters. The total cost of this facility
amounted to approximately $29 million. As of December 31, 1997 the Company and
its subsidiaries had no material commitments for capital expenditures.
The Company issues commercial paper, generally below the bank prime
borrowing rates. The Company has $50 million of conventional short-term credit
lines available at costs generally not exceeding prime borrowing rates.
Additional short-term lines are available to the Company at the discretion of
various lending institutions with comparable rates. AMIG has a $40 million
long-term credit facility available on a revolving basis at various rates.
Total interest bearing debt outstanding at December 31, 1997 amounted to
$92.3 million. The Company intends to service its existing debt with internally
generated funds.
The net cash generated from operating activities from continuing
operations was $80,025,000, $46,460,000, and $70,811,000 in 1997, 1996 and 1995,
respectively. This positive cash flow is the direct result of the favorable cash
flow from operations generated by each of the Company's operating subsidiaries.
Insurance
AMIG generates substantial cash inflows primarily from premiums,
investment income and proceeds from maturities of portfolio fixed income
securities. The principal cash outflows for the insurance operations relate to
the payment of claims, commissions, premium taxes, operating expenses, income
taxes and the purchase of marketable securities. Cash flow from insurance
operations is expected to remain sufficiently positive to meet future operating
requirements and to provide for reasonable dividends to its parent Company.
In each of the years presented, funds generated from the insurance
operating activities were used primarily to purchase investment grade marketable
securities, accounting for the majority of the cash used in investing
activities.
Transportation
M/G also generates positive cash flow from operating activities. The
primary cash inflow comes from its affreightment revenue. The primary outflows
of cash relate to the payment of barge charter costs, debt service obligations,
operating expenses, income taxes and the acquisition of capital equipment. Like
the insurance operations, cash flow from the transportation operations is
expected to remain sufficiently positive to meet future operating and capital
requirements while providing for reasonable dividends to its parent Company.
The transportation subsidiaries acquired 25 barges in 1996 and 41 barges
in 1997. The total cost of these 66 barges was approximately $18.1 million. As
consideration for these acquisitions, M/G Transport exchanged four of its
towboats in 1996 and paid $11.9 million in 1997. These acquisitions were
financed primarily with internally generated capital and short-term bank
borrowings. M/G Transport is currently evaluating its capital equipment
needs for 1998 and beyond. Consideration is being given to acquiring, by
purchase or lease, additional barges to augment its current fleet. Capital for
such acquisitions will likely be generated through a combination of internally
generated funds and traditional long-term bank financing.
OTHER MATTERS
Year 2000 Compliance
The Company has, and will continue to make, certain investments in its
software systems and applications to address the Company's year 2000 compliance.
The Company began addressing the year 2000 compliance issue several years ago
in connection with a business driven upgrade to the mainframe operating system.
The Company has formed a Task Force, comprised of operational and management
level employees, to continuously assess, from both an internal and an external
perspective, year 2000 compliance. Management intends to dedicate the necessary
resources to ensure that all mission critical internal systems are year 2000
compliant prior to the December 31, 1999 deadline. The financial impact to the
Company has not been, and is not anticipated to be, material to its financial
position or the results of its operations.
Impact of Inflation
Management does not consider the impact of the change in prices due to
inflation to be material in the analysis of the Company's overall operations.
Private Securities Reform Act of 1995
Forward Looking Statements Disclosure
This Report contains forward looking statements. For purposes of this
Report, a "Forward Looking Statement", within the meaning of the Securities
Reform Act of 1995, is any statement concerning the year 1998 and beyond. The
actions and performance of the Company and its subsidiaries could deviate
materially from what is contemplated by the forward looking statements contained
in this Report. Factors which might cause deviations from the forward looking
statements include, without limitations, the following: 1)changes in the laws
or regulations affecting the operations of the Company or any of its
subsidiaries; 2) changes in the business tactics or strategies of the Company or
any of its subsidiaries; 3) acquisition(s) of assets or of new or complementary
operations, or divestiture of any segment of the existing operations of the
Company or any of its subsidiaries; 4) changing market forces or litigation
which necessitate, in Management's judgment, changes in plans, strategy or
tactics of the Company or its subsidiaries and 5)adverse weather conditions,
fluctuations in the investment markets, changes in the retail marketplace or
fluctuations in interest rates, any one of which might materially affect the
operations of the Company and/or its subsidiaries.
16
<PAGE>
CONSOLIDATED INCOME STATEMENTS
THE MIDLAND COMPANY AND SUBSIDIARIES
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Revenues:
Insurance:
Premiums earned $311,159,000 $280,614,000 $263,006,000
Net investment income 21,332,000 18,269,000 16,107,000
Net realized investment gains 4,170,000 2,690,000 2,373,000
Other insurance income 3,219,000 1,602,000 618,000
Transportation 34,933,000 34,064,000 30,371,000
Other 617,000 499,000 752,000
-------------------------------------------
Total 375,430,000 337,738,000 313,227,000
-------------------------------------------
Costs and Expenses:
Insurance:
Losses and loss adjustment
expenses 171,163,000 172,426,000 136,211,000
Commissions and other policy
acquisition costs 81,180,000 81,533,000 80,520,000
Operating and administrative
expenses 49,118,000 41,355,000 39,475,000
Transportation operating expenses 30,079,000 31,163,000 28,033,000
Interest expense 4,983,000 4,829,000 3,037,000
Other operating and administrative
expenses 4,204,000 3,115,000 3,462,000
-------------------------------------------
Total 340,727,000 334,421,000 290,738,000
-------------------------------------------
Income from Continuing Operations
Before Federal Income Tax 34,703,000 3,317,000 22,489,000
-------------------------------------------
Provision (Credit) for Federal
Income Tax 10,336,000 (426,000) 6,441,000
-------------------------------------------
Income from Continuing Operations 24,367,000 3,743,000 16,048,000
-------------------------------------------
Discontinued Operations:
Loss from discontinued operations
less related income tax credits
of $1,881,000, $1,411,000 and
$3,477,000 in 1997, 1996 and
1995, respectively (3,492,000) (2,675,000) (6,496,000)
Loss on disposal of assets less
related income tax credit of
$1,790,000 (3,325,000) - -
-------------------------------------------
Loss from Discontinued Operations (6,817,000) (2,675,000) (6,496,000)
-------------------------------------------
Net Income $ 17,550,000 $ 1,068,000 $ 9,552,000
===========================================
Basic Earnings (Loss) Per Share of Common Stock:
Continuing operations $ 8.16 $ 1.27 $ 5.44
Discontinued operations (2.28) (.91) (2.20)
-------------------------------------------
Total $ 5.88 $ .36 $ 3.24
===========================================
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing operations $ 7.88 $ 1.23 $ 5.22
Discontinued operations (2.21) (.88) (2.11)
-------------------------------------------
Total $ 5.67 $ .35 $ 3.11
===========================================
Cash Dividends Per Share of
Common Stock $ .70 $ .66 $ .62
===========================================
See notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
THE MIDLAND COMPANY AND SUBSIDIARIES
December 31, 1997 1996
- ------------------------------------------------------------------------------
ASSETS
Cash $ 5,277,000 $ 3,342,000
---------------------------------
Marketable Securities:
Fixed income (cost, $397,033,000 in
1997 and $333,259,000 in 1996) 404,038,000 335,675,000
Equity (cost, $33,928,000 in 1997
and $30,931,000 in 1996) 94,791,000 64,787,000
---------------------------------
Total 498,829,000 400,462,000
---------------------------------
Receivables:
Accounts receivable 59,492,000 54,673,000
Less allowance for losses 753,000 799,000
---------------------------------
Net 58,739,000 53,874,000
---------------------------------
Reinsurance Recoverables and Prepaid
Reinsurance Premiums 49,016,000 52,805,000
---------------------------------
Property, Plant and Equipment:
Original cost 111,418,000 95,656,000
Less accumulated depreciation
and amortization 39,806,000 35,201,000
---------------------------------
Net 71,612,000 60,455,000
---------------------------------
Investments in Real Estate 14,779,000 18,868,000
---------------------------------
Deferred Insurance Policy
Acquisition Costs 55,590,000 45,342,000
---------------------------------
Net Assets of Discontinued Operations - 16,518,000
---------------------------------
Other Assets 6,621,000 4,313,000
---------------------------------
Total Assets $760,463,000 $655,979,000
=================================
See notes to consolidated financial statements.
18
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
December 31, 1997 1996
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes Payable Within One Year:
Banks $ 24,000,000 $ 28,000,000
Commercial paper 5,791,000 4,700,000
---------------------------------
Total 29,791,000 32,700,000
---------------------------------
Insurance Commissions Payable 19,033,000 13,821,000
---------------------------------
Other Payables and Accruals 49,998,000 39,259,000
---------------------------------
Funds Held Under Reinsurance Agreements and
Reinsurance Payables 15,443,000 26,949,000
---------------------------------
Unearned Insurance Premiums 240,340,000 208,417,000
---------------------------------
Insurance Loss Reserves 120,134,000 95,830,000
---------------------------------
Deferred Federal Income Tax 26,180,000 16,845,000
---------------------------------
Long-Term Debt 62,518,000 62,470,000
---------------------------------
Shareholders' Equity:
Common stock (issued and outstanding:
3,111,000 shares at December 31, 1997
and 3,042,000 shares at December 31,
1996 after deducting treasury stock
of 532,000 shares and 601,000 shares,
respectively) 911,000 911,000
Additional paid-in capital 15,359,000 14,846,000
Retained earnings 153,797,000 138,423,000
Net unrealized gain on marketable
securities 44,123,000 23,587,000
Treasury stock (at cost) (14,704,000) (16,621,000)
Unvested restricted stock awards (2,460,000) (1,458,000)
---------------------------------
Total 197,026,000 159,688,000
---------------------------------
Total Liabilities and
Shareholders' Equity $760,463,000 $655,979,000
=================================
19
<PAGE>
THE MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1997 1996 1995
- -------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 17,550,000 $ 1,068,000 $ 9,552,000
Loss from discontinued operations 6,817,000 2,675,000 6,496,000
-------------------------------------------
Income from continuing operations 24,367,000 3,743,000 16,048,000
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 10,269,000 7,939,000 7,895,000
Increase in unearned insurance
premiums 31,923,000 17,469,000 32,632,000
Increase in insurance loss
reserves 24,304,000 27,483,000 10,632,000
Increase (decrease) in funds
held under reinsurance
agreements and reinsurance
payables (11,506,000) 6,330,000 17,662,000
Increase in other accounts
payable and accruals 11,240,000 5,905,000 498,000
Increase in deferred insurance
policy acquisition costs (10,248,000) (2,196,000) (5,493,000)
Increase (decrease) in
insurance commissions payable 5,212,000 (1,935,000) 2,282,000
Increase in net accounts
receivable (4,865,000) (3,474,000) (5,152,000)
Decrease (increase) in
reinsurance recoverables and
prepaid reinsurance premiums 3,789,000 (14,000,000) (2,393,000)
Increase in other assets (2,308,000) (2,335,000) (1,314,000)
Increase (decrease) in
deferred federal income tax (1,725,000) 519,000 (1,950,000)
Other-net (427,000) 1,012,000 (536,000)
-------------------------------------------
Net cash provided by
continuing operations 80,025,000 46,460,000 70,811,000
Net cash used in
discontinued operations (2,104,000) (8,973,000) (2,501,000)
-------------------------------------------
Net cash provided by operating
activities 77,921,000 37,487,000 68,310,000
-------------------------------------------
Cash Flows from Investing Activities:
Purchase of marketable securities (207,474,000) (138,486,000) (152,166,000)
Sale of marketable securities 84,517,000 84,887,000 44,503,000
Maturity of marketable securities 41,165,000 42,041,000 27,791,000
Acquisition of property, plant and
equipment (19,538,000) (4,403,000) (28,130,000)
Decrease (increase) in cash
equivalent marketable securities 15,404,000 (17,445,000) 17,222,000
Proceeds from sale of discontinued
operations 13,330,000 - -
Sale of property, plant and
equipment 1,561,000 1,453,000 1,159,000
-------------------------------------------
Net cash used in investing
activities (71,035,000) (31,953,000) (89,621,000)
-------------------------------------------
Cash Flows from Financing Activities:
Issuance of long-term debt 3,712,000 - 20,800,000
Repayment of long-term debt (3,289,000) (2,647,000) (2,128,000)
Decrease in net short-term
borrowings (2,909,000) (2,920,000) 8,074,000
Dividends paid (2,677,000) (1,962,000) (1,844,000)
Net issuance (purchase) of
treasury stock 587,000 (545,000) (1,091,000)
Payment of capitalized lease
obligations (375,000) (339,000) (307,000)
-------------------------------------------
Net cash provided by (used in)
financing activities (4,951,000) (8,413,000) 23,504,000
-------------------------------------------
Net Increase (Decrease) in Cash 1,935,000 (2,879,000) 2,193,000
Cash at Beginning of Period 3,342,000 6,221,000 4,028,000
-------------------------------------------
Cash at End of Period $ 5,277,000 $ 3,342,000 $ 6,221,000
===========================================
Supplemental Disclosures:
The Company paid interest of $6,148,000, $5,820,000, and $4,998,000 and income
taxes of $4,655,000, $930,000 and $7,251,000 in 1997, 1996 and 1995,
respectively.
See notes to the consolidated financial statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE MIDLAND COMPANY AND SUBSIDIARIES
Years Ended December 31, 1997, 1996 and 1995
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company operates in three business segments: Insurance,
Transportation and Other, with the most significant business activities being in
insurance. The Company writes insurance business throughout the nation with
larger concentrations in the Southern and Southeastern states. Such business
consists primarily of physical damage insurance on manufactured homes featuring
coverages similar to conventional homeowners insurance policies.
The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to use numerous estimates and assumptions. The accompanying
consolidated financial statements include estimates for items such as insurance
loss reserves, income taxes and various other liability accounts. Actual results
could differ from those estimates. Policies that affect the more significant
elements of the consolidated financial statements are summarized below.
Principles of Consolidation--The consolidated financial statements
include the accounts of the Company and all subsidiary companies. Material
intercompany balances and transactions have been eliminated.
Marketable Securities--Marketable securities are categorized as debt
securities (cash equivalents, debt instruments and preferred stocks having
scheduled redemption provisions) and equity securities (common and preferred
stocks which do not have redemption provisions). The Company classifies all
debt and equity securities as available-for-sale and carries such investments
at market value. Unrealized gains or losses on investments, net of related
income taxes, are included in shareholders' equity. Realized gains and losses
on sales of investments are recognized in income on a specific identification
basis.
Property and Depreciation--Property, plant and equipment are recorded at
cost. Depreciation and amortization are generally calculated using accelerated
methods over the estimated useful lives of the respective properties (buildings
and equipment - 15 to 35 years, furniture and equipment - 5 to 7 years, and
vessels and barges - 20 to 30 years).
Federal Income Tax--Deferred federal income taxes are recognized to
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for federal income tax purposes. Investment tax credits previously
allowed on property and equipment additions were deferred in the year of tax
benefit and are being amortized against future operations over the estimated
useful lives of the related properties. The Company files a consolidated
federal income tax return which includes all subsidiaries.
Insurance Income--Premiums for physical damage and credit accident and
health insurance, net of premiums ceded to reinsurers, are recognized as income
on a pro-rata basis over the lives of the policies. Credit life premiums are
recognized as income over the lives of the policies using a sum-of-the-digits
method. The Company does not consider anticipated investment income in
determining premium deficiencies (if any) on short-term contracts. Policy
acquisition costs, primarily commission expenses and premium taxes, are
capitalized and expensed over the terms of the related policies on the same
basis as the related premiums are earned. Selling and administrative expenses
which are not primarily related to premiums written are expensed as incurred.
Insurance Loss Reserves--Unpaid insurance losses and loss adjustment
expenses include an amount determined from reports on individual cases and an
amount, based on past experience, for losses incurred but not reported. Such
liabilities are necessarily based on estimates and, while management believes
that the amounts are fairly stated, the ultimate liability may be in excess of
or less than the amounts provided. The methods of making such estimates and for
establishing the resulting liabilities are continually reviewed and any
adjustments resulting therefrom are included in earnings currently. Insurance
loss reserves also include an amount for claim drafts issued but not yet paid.
Allowance for Losses--Provisions for losses on receivables are made in
amounts deemed necessary to maintain adequate reserves to cover possible future
losses.
21
<PAGE>
Statements of Cash Flows--For purposes of the statements of cash flows,
the Company defines cash as cash held in operating accounts at financial
institutions. The amounts reported in the statements of cash flows for the
purchase, sale or maturity of marketable securities do not include cash
equivalents.
Fair Value of Financial Instruments--The book values of cash,
receivables, short-term notes payable, trade accounts payable and any financial
instruments included in other assets and accrued liabilities approximate their
fair values principally because of the short-term maturities of these
instruments. The fair value of investments is considered to be the market value
which is based on quoted market prices. The fair value of long-term debt is
estimated using interest rates that are currently available to the Company for
issuance of debt with similar terms and maturities.
Stock Option and Award Plans--The Company has various plans which
provide for granting options and common stock to certain employees and
independent directors of the Company and its subsidiaries. The Company accounts
for compensation expense related to such transactions using the "intrinsic
value" based method under the provisions of Accounting Principles Board Opinion
No. 25.
Recently Issued Accounting Standards--The Financial Accounting Standards
Board issued Statements of Financial Accounting Standards Nos. 130 and 131
"Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information", respectively, during 1997. These
statements are effective and will be adopted by the Company for fiscal years
beginning after December 15, 1997. Adoption of these standards will not impact
the reported results of operations or financial position of the Company but will
require additional disclosure.
Reclassifications--Certain previously reported amounts in the
accompanying consolidated financial statements have been reclassified to conform
to the current year's classifications.
2. DISCONTINUED OPERATIONS
On September 29, 1997, the Company's sportswear subsidiary, CS Crable
Sportswear, Inc., sold substantially all of its assets to Brazos, Inc., a
subsidiary of Brazos Sportswear, Inc. The assets were sold for approximately
$13.3 million in cash resulting in an after-tax loss on the disposal of
approximately $3.3 million. The results of operations and the related loss on
disposal for these operations are categorized in the consolidated financial
statements as "Discontinued Operations" and reported separately from continuing
operations. There have been no material financial results from this
discontinued unit since the aforementioned date of sale. Revenues related to
the discontinued operations amounted to $22.8 million, $32.8 million and $37.7
million for 1997, 1996 and 1995, respectively.
3. MARKETABLE SECURITIES
Thousands of Dollars
Gross Unrealized Market
1997 Cost Gains Losses Value
- -------------------------------------------------------------------
Debt Securities:
Governments $195,577 $ 2,965 $ 168 $198,374
Municipals 83,997 2,890 10 86,877
Corporates 76,459 1,418 90 77,787
Cash
Equivalents 35,532 - - 35,532
----------------------------------------------
Total 391,565 7,273 268 398,570
Equity Securities 33,711 61,672 809 94,574
Accrued Interest
and Dividends 5,685 - - 5,685
----------------------------------------------
Total Marketable
Securities $430,961 $68,945 $1,077 $498,829
==============================================
Thousands of Dollars
Gross Unrealized Market
1996 Cost Gains Losses Value
- -------------------------------------------------------------------
Debt Securities:
Governments $169,020 $ 1,437 $ 974 $169,483
Municipals 68,675 1,807 98 70,384
Corporates 40,219 340 97 40,462
Cash
Equivalents 50,936 - - 50,936
----------------------------------------------
Total 328,850 3,584 1,169 331,265
Equity Securities 30,770 34,283 426 64,627
Accrued Interest
and Dividends 4,570 - - 4,570
----------------------------------------------
Total Marketable
Securities $364,190 $37,867 $1,595 $400,462
==============================================
22
<PAGE>
At December 31, 1997 and 1996, the market value of the Company's
investment in the common stock of Star Banc Corporation, which exceeded 10% of
the Company's shareholders' equity, was $47.1 million and $25.1 million,
respectively.
Included in the determination of net income are the following (amounts
in 000's):
1997 1996 1995
----------------------------------------
Gross Realized Gains $ 6,165 $ 5,024 $ 3,045
Gross Realized Losses (1,995) (2,335) (672)
Other Investment Income 22,268 19,338 17,038
Investment Expenses (836) (891) (639)
----------------------------------------
Net Investment Income
and Realized Gains $25,602 $21,136 $18,772
========================================
The cost and approximate market value of debt securities held at
December 31, 1997, summarized by contractual maturities, are shown below.
Actual maturities may differ from contractual maturities when there exists a
right to call or prepay obligations with or without call or prepayment penalties
(amounts in 000's).
Market
Cost Value
------------------------
Under 1 year $ 70,783 $ 70,864
1-5 years 181,102 183,698
6-10 years 114,861 118,299
Over 10 years 24,819 25,709
------------------------
Total $391,565 $398,570
========================
4. RECEIVABLES
Accounts receivable at December 31, 1997 and 1996 are generally due
within one year and consist of the following (amounts in 000's):
1997 1996
---------------------
Insurance $49,975 $45,273
Transportation 5,912 4,102
Other 3,605 5,298
---------------------
Total $59,492 $54,673
=====================
5. PROPERTY, PLANT AND EQUIPMENT
At December 31, 1997 and 1996, property, plant and equipment stated at
original cost consist of the following (amounts in 000's):
1997 1996
-----------------------
Land $ 1,241 $ 1,241
Buildings, Improvements,
Fixtures, etc. 52,860 49,713
Transportation Equipment 57,317 44,702
-----------------------
Total $111,418 $95,656
=======================
Total rent expense related to the rental of equipment included in the
accompanying consolidated statements of income is $4,582,000 in 1997, $4,867,000
in 1996 and $3,470,000 in 1995. Future rentals under non-cancelable operating
leases will be approximately $2,008,000 in 1998.
6. INVESTMENTS IN REAL ESTATE
Investments in real estate relate to the former corporate headquarters
of the Company and the manufacturing facilities of CS Crable Sportswear, Inc.,
the Company's discontinued operations. Such headquarters and facilities are
subject to leasing arrangements with options to purchase. These properties are
carried at their estimated net realizable value. After-tax impairment
provisions of $975,000 and $991,000 were recognized (based on estimated current
market values) in the 1997 consolidated income statement and were included in
"Other Operating and Administrative Expenses" and "Discontinued Operations -
Loss on Disposal of Assets...", respectively.
7. DEFERRED INSURANCE POLICY
ACQUISITION COSTS
Acquisition costs incurred and capitalized during 1997, 1996 and 1995
amounted to $91.4 million, $83.7 million and $86.0 million, respectively.
Amortization of deferred acquisition costs was $81.2 million, $81.5 million and
$80.5 million for 1997, 1996 and 1995, respectively.
23
<PAGE>
8. NOTES PAYABLE TO BANKS
At December 31, 1997 and 1996, the Company had conventional lines of
credit with commercial banks of $50,000,000 and $45,000,000, respectively. The
lines of credit in use under these agreements at December 31, 1997 and 1996
amounted to $21,000,000 and $25,000,000, respectively. Borrowings under these
lines of credit constitute senior debt. Commitment fees are currently required
by the lending institutions to maintain these credit agreements.
Additionally, at December 31, 1997 and 1996, the Company had other
short-term bank borrowings outstanding of $3,000,000. These borrowings also
constitute senior debt.
The aforementioned notes payable, together with outstanding commercial
paper, had weighted average interest rates of 5.73% and 5.95% at December 31,
1997 and 1996, respectively.
9. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 is summarized as follows
(amounts in 000's):
1997 1996
-------------------
Equipment Obligations, Due Through -
6.54% July 1, 2000 $ 2,090 $ 2,470
6.35% December 31, 1998 5,280 6,160
5.90% October 31, 1998 3,717 4,337
*7.01% December 31, 2003 1,355 --
7.20% January 1, 2001 1,773 --
Mortgage Notes, Due Through -
6.92% December 20, 2005 19,768 20,304
5.82% December 1, 2003 7,898 8,187
Unsecured Notes Under a $40 million
Credit Facility, Payments
Beginning 2000 -
*6.81% November 1, 2004 20,000 20,000
Capitalized Lease Obligations 637 1,012
-------------------
Total obligations 62,518 62,470
Less current maturities 11,420 3,079
-------------------
Total $51,098 $59,391
===================
*Rates in effect on December 31, 1997. The interest rates on the borrowings
are adjusted quarterly to the LIBOR rate plus a margin ranging from 1% to 1.2%.
Equipment and real estate obligations are collateralized by
transportation equipment and real estate with a net book value of approximately
$51,900,000.
The aggregate amount of repayment requirements on long-term debt and
capitalized leases for the five years subsequent to 1997 are (amounts in 000's):
1998 - $11,420; 1999 - $2,345; 2000 - $3,203; 2001 - $6,321; 2002 - $6,412.
At December 31, 1997 and 1996, the carrying value approximated the fair
value of the Company's long-term debt.
10. FEDERAL INCOME TAX
The provision for federal income tax is summarized as follows (amounts
in 000's):
1997 1996 1995
-----------------------------------------
Current provision (credit) $12,061 $ (945) $ 7,974
Deferred provision (credit) (1,725) 519 (1,533)
Total continuing operations 10,336 (426) 6,441
Discontinued operations (3,671) (1,411) (3,477)
-----------------------------------------
Total $ 6,665 $(1,837) $ 2,964
=========================================
The federal income tax provision related to income from continuing
operations for the years ended December 31, 1997, 1996 and 1995 is different
from amounts derived by applying the statutory tax rates to income before
federal income tax as follows (amounts in 000's):
1997 1996 1995
-----------------------------------------
Federal income tax
at statutory rate $12,146 $ 1,161 $ 7,871
Tax effect of:
Tax exempt interest and
excludable dividend
income (1,793) (1,574) (1,392)
Business meals and
entertainment expenses 106 151 144
Investment tax credits (366) (169) (175)
Other--net 243 5 (7)
-----------------------------------------
Provision (credit) for
federal income tax $10,336 $ (426) $ 6,441
=========================================
24
<PAGE>
Significant components of the Company's net deferred federal income tax
liability are summarized as follows (amounts in 000's):
1997 1996
-------------------
Deferred tax liabilities:
Deferred insurance policy
acquisition costs $18,450 $14,970
Unrealized gain on
marketable securities 23,745 12,685
Accelerated depreciation 7,585 6,808
Investment tax credits 590 955
Other 271 1,005
-------------------
Sub-total 50,641 36,423
-------------------
Deferred tax assets:
Unearned insurance premiums 14,808 12,187
Pension expense 3,383 3,022
Insurance loss reserves 3,136 2,009
Other 3,134 2,360
-------------------
Sub-total 24,461 19,578
-------------------
Deferred federal income tax $26,180 $16,845
===================
11. REINSURANCE
The Company reinsures certain levels of risk with other insurance
companies and cedes varying portions of its written premiums to such reinsurers.
Failure of reinsurers to honor their obligations could result in losses to the
Company as reinsurance contracts do not relieve the Company from its obligations
to policyholders. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. In
addition, the Company pays a percentage of earned premiums to reinsurers in
return for coverage against catastrophic losses. The Company also assumes a
limited amount of business on certain reinsurance contracts. Related premiums
and loss reserves are recorded based on records supplied by the ceding
companies.
A reconciliation of direct to net premiums, on both a written and an
earned basis for the property and casualty companies, is as follows (amounts
in 000's):
Direct Assumed Ceded Net
---------------------------------------------
1997
Written $388,484 $34,497 $(80,673) $342,308
Earned 375,610 27,994 (98,406) 305,198
1996
Written $357,207 $28,747 $(96,810) $289,144
Earned 346,919 21,284 (92,674) 275,529
1995
Written $348,187 $27,320 $(91,022) $284,485
Earned 301,388 18,046 (60,567) 258,867
12. INSURANCE LOSS RESERVES
Activity in the liability for unpaid insurance losses and loss
adjustment expenses (excluding claim checks issued but not yet paid) for the
property and casualty companies is summarized as follows (amounts in 000's):
1997 1996 1995
---------------------------------
Balance at January 1 $ 88,992 $61,497 $52,078
Less reinsurance
recoverables 24,208 13,785 14,597
---------------------------------
Net Balance at January 1 64,784 47,712 37,481
---------------------------------
Incurred related to:
Current year 163,035 166,554 141,887
Prior years 5,230 3,771 (7,347)
---------------------------------
Total incurred 168,265 170,325 134,540
---------------------------------
Paid related to:
Current year 113,841 121,782 105,269
Prior years 37,307 31,471 19,040
---------------------------------
Total paid 151,148 153,253 124,309
---------------------------------
Net balance at
December 31 81,901 64,784 47,712
Plus reinsurance
recoverables 26,433 24,208 13,785
---------------------------------
Balance at December 31 $108,334 $88,992 $61,497
=================================
The amounts of recoveries pertaining to reinsurance contracts that were
deducted from losses incurred during 1997, 1996 and 1995 were $52,182,000,
$71,133,000 and $47,152,000, respectively.
25
<PAGE>
13. BENEFIT PLANS
The Company has a qualified pension plan which provides for the payment
of annual benefits to substantially all employees upon retirement. Such
benefits are based on years of service and the employee's highest compensation
during five consecutive years of employment. The Company's funding policy is to
contribute annually an amount sufficient to satisfy ERISA funding standards.
Contributions are intended to provide not only for benefits attributed to
service to date but also for benefits expected to be earned in the future.
The following table sets forth the plan's funded status (amounts
in 000's):
1997 1996
-----------------------
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$15,904 in 1997 and
$13,949 in 1996 $16,637 $14,773
=======================
Projected benefit obligation for
service rendered to date $22,461 $20,849
Plan assets at fair value, primarily
U.S. bonds and listed stocks 22,588 19,774
-----------------------
Plan assets more (less) than
projected benefit obligation 127 (1,075)
Unrecognized net assets at
January 1, 1987 being
recognized over 18 years (1,113) (1,278)
Unrecognized prior service cost 408 529
Unrecognized net loss (gain) (3,988) (2,162)
-----------------------
Pension liability included in
Other Payables and Accruals $(4,566) $(3,986)
=======================
Net pension cost included the following (amounts in 000's):
1997 1996 1995
--------------------------------
Service cost--benefits
earned during the year $ 1,124 $ 1,037 $ 843
Interest cost on projected
benefit obligation 1,588 1,469 1,381
Actual return on plan
assets--(gain) (3,628) (2,691) (3,144)
Net amortization and
deferral 1,530 1,289 1,836
--------------------------------
Net periodic pension
plan cost $ 614 $ 1,104 $ 916
================================
Total pension cost was $1,222,000 in 1997, $1,956,000 in 1996 and
$1,365,000 in 1995. Included in the above amounts is a supplemental pension
plan expense of $608,000 in 1997, $852,000 in 1996 and $449,000 in 1995. These
amounts represent expenses accrued for supplemental pension benefits in excess
of Internal Revenue Code Section 415 limitations.
The supplemental pension plan is unfunded. The Company has recognized a
liability of $3,363,000 related to this plan and the plan has an accumulated
benefit obligation of $4,905,000 and a projected benefit obligation of
$6,268,000 at December 31, 1997 (1996: $2,800,000; $3,900,000 and $7,200,000).
The discount rates used in determining the plans' actuarial present
value of the projected benefit obligation were 7-1/2% in 1997 and 1996 and
7-1/4% in 1995. The rate of increase in future compensation levels used in
determining the actuarial present value of the plans' projected benefit
obligation was 5 1/2% in 1997, 1996 and 1995. The expected long-term rate of
return on assets was 8% in all three years.
26
<PAGE>
14. STOCK OPTION AND AWARD PLANS
Under the Company's stock option plans, all of the outstanding stock
options at December 31, 1997 were exercisable non-qualified options and had an
exercise price of not less than 100% of the fair market value of the common
stock on the date of grant. A summary of stock option transactions follows:
1997 1996 1995
-------------- -------------- ---------------
Avg. Avg. Avg.
(000's) Option (000's) Option (000's) Option
Shares Price Shares Price Shares Price
Outstanding,
beginning
of year 152 $29.31 219 $25.76 216 $24.69
Exercised (12) 25.02 (67) 17.72 (2) 21.16
Expired (9) 26.78 -- -- (4) 26.94
Granted 9 37.88 -- -- 9 50.75
------------------------------------------------
Outstanding,
end of year 140 $30.39 152 $29.31 219 $25.76
================================================
Information regarding such outstanding options at December 31, 1997
follows:
Weighted Average Outstanding Weighted
Remaining Life Options Average Price
- --------------------------------------------------------
One year 46,400 $26.01
Three years 75,400 29.76
Seven years 18,000 44.31
-------------------------
Total 139,800 $30.39
=========================
The Company implemented a restricted stock award program during 1993.
Under this program, grants of the Company's common stock will vest after an
incentive period, conditioned upon the recipient's employment throughout the
period. During the vesting period, shares issued are nontransferable, but the
shares are entitled to all of the rights of outstanding shares. In 1993, 1995
and 1997, 32,000, 49,000 and 65,000 shares, respectively, were awarded under the
program and 24,000, 42,000 and 58,000 shares, respectively, remain outstanding
at December 31, 1997. The value of the awards is being amortized as
compensation expense over a five year vesting period.
The difference in net income for 1997, 1996 or 1995 computed using APB
Opinion No. 25 and using Financial Accounting Standards No. 123 for options
granted after 1994 (9,000 in 1997 and 9,000 in 1995) is insignificant.
15. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
(the "Statement") was issued and adopted in 1997 and requires companies to
change the method of calculating earnings per share (EPS). The Statement
requires a dual presentation of basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution of shares issuable under the
Company's stock option plan and issued under the award plan. Diluted EPS
amounts reported herein equal previously reported EPS amounts.
The following table is a reconciliation of the number of shares used to
compute Basic and Diluted earnings per share. There was no adjustment necessary
to the income used in the Basic or Diluted calculations for the years ended
December 31, 1997, 1996 or 1995.
Shares in 000's
---------------------------
1997 1996 1995
---------------------------
Shares used in basic
EPS calculation
(shares outstanding) 2,985 2,948 2,952
Effect of dilutive
stock options 55 53 100
Effect of dilutive restricted
stock grants 57 32 20
---------------------------
Shares used in diluted
EPS calculation 3,097 3,033 3,072
===========================
Options to purchase 18,000 shares of common stock at prices ranging from
$50.13 to $50.75 per share were outstanding as of December 31, 1997, 1996 and
1995. Such options were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the common stock.
16. CONTINGENCIES
Various litigation and claims against the Company and its subsidiaries
are in process and pending. Based upon a review of open matters with legal
counsel, Management believes that the outcome of such matters would not have a
material effect upon the Company's consolidated financial position or results of
operations.
27
<PAGE>
17. INDUSTRY SEGMENTS
Listed below is financial information required to be reported for each
industry segment. In 1997, revenues from one customer amounted to $41,011,000.
No single customer accounted for 10% or more of consolidated revenues in either
1996 or 1995. Interest expense includes intercompany interest not eliminated
for purposes of segment reporting.
Thousands of Dollars
1997 1996 1995
-----------------------------------
Total segment revenues
Insurance $340,871 $303,986 $283,141
Transportation 35,326 34,910 31,385
Other 617 2,250 3,647
Intersegment revenues (1,384) (3,408) (4,946)
-----------------------------------
Total continuing
operations $375,430 $337,738 $313,227
===================================
Operating profit
Insurance $ 39,410 $ 8,649 $ 26,930
Transportation 5,247 3,747 3,352
Other (2,641) (842) 191
Interest expense (4,983) (4,829) (3,037)
Intersegment interest
expense (2,330) (3,408) (4,947)
-----------------------------------
Total continuing
operations $ 34,703 $ 3,317 $ 22,489
===================================
Acquisition of fixed assets
Insurance $ 3,555 $ 2,440 $ --
Transportation 13,366 6,326 170
Corporate and other 2,617 1,603 27,960
-----------------------------------
Total continuing
operations $ 19,538 $ 10,369 $ 28,130
===================================
Depreciation and amortization
Insurance $ 2,442 $ 2,903 $ --
Transportation 3,157 2,488 3,004
Corporate and other 4,670 2,548 4,891
-----------------------------------
Total continuing
operations $ 10,269 $ 7,939 $ 7,895
===================================
Identifiable assets
Insurance $660,464 $551,498 $494,638
Transportation 44,544 41,458 48,375
Corporate and other 62,055 94,924 87,203
Intersegment
receivables (6,600) (31,901) (29,311)
-----------------------------------
Total $760,463 $655,979 $600,905
===================================
18. SHAREHOLDERS' EQUITY
The Midland Company has 5,000,000 shares of common stock authorized
without par value (stated value of $.25 a share), including 646,000 shares at
December 31, 1997 reserved for future issuance under the Company's stock option
and award plans. The Company also has 500,000 shares of preferred stock
authorized, without par value, none of which have been issued.
Covenants included in the borrowing agreements of M/G Transport
Services, Inc. limit its payment of dividends to The Midland Company. Under the
most restrictive of such covenants, $11,552,000 of its $18,500,000 of
shareholder's equity was not available for distribution to the Company at
December 31, 1997.
The insurance subsidiaries are subject to state regulations which limit
by reference to statutory investment income and policyholders' surplus the
dividends that can be paid to their parent company without prior regulatory
approval. Dividend restrictions vary between the companies as determined by the
laws of the domiciliary states. Under these restrictions, the maximum dividends
that may be paid to the Company from its insurance subsidiaries in 1998 without
regulatory approval total approximately $22,000,000; such subsidiaries paid
cash dividends of $1,240,000 in 1997, $4,375,000 in 1996 and $1,060,000 in 1995.
Net income as determined in accordance with statutory accounting
practices for the Company's insurance subsidiaries was $17,538,000, $5,396,000
and $13,367,000 for 1997, 1996 and 1995, respectively. Shareholders' equity
on the same basis was $173,181,000 and $131,913,000 at December 31, 1997 and
1996.
28
<PAGE>
Activity in the Shareholders' equity accounts is summarized as follows
(amounts in 000's):
Net
Unrealized Unvested
Additional Gain on Restricted
Common Paid-In Retained Marketable Treasury Stock
Stock Capital Earnings Securities Stock Awards Total
-------------------------------------------------------------------
Balance,
January 1,
1995 $911 $14,607 $131,675 $ 2,754 $(16,648) $ (862) $132,437
Net income 9,552 9,552
Purchase of
treasury stock (1,143) (1,143)
Cash dividends
declared (1,877) (1,877)
Exercise of
stock options (12) 64 52
Changes in
unrealized gain
on investments,
net of tax 16,962 16,962
Restricted stock
awards 855 1,262 (2,117) --
Amortization and
cancellation of
unvested
restricted
stock awards (88) (110) 810 612
-------------------------------------------------------------------
Balance,
December 31,
1995 911 15,362 139,350 19,716 (16,575) (2,169) 156,595
Net income 1,068 1,068
Purchase of
treasury stock,
net 111 (1,810) (1,699)
Cash dividends
declared (1,995) (1,995)
Exercise of
stock options (620) 1,774 1,154
Changes in
unrealized gain
on investments,
net of tax 3,871 3,871
Amortization and
cancellation of
unvested
restricted
stock awards (7) (10) 711 694
-------------------------------------------------------------------
Balance,
December 31,
1996 911 14,846 138,423 23,587 (16,621) (1,458) 159,688
Net income 17,550 17,550
Purchase of
treasury stock,
net 124 160 284
Cash dividends
declared (2,176) (2,176)
Exercise of
stock options (32) 335 303
Changes in
unrealized gain
on investments,
net of tax 20,536 20,536
Restricted stock
awards 626 1,808 (2,434) --
Amortization and
cancellation of
unvested
restricted
stock awards (205) (386) 1,432 841
-------------------------------------------------------------------
Balance,
December 31,
1997 $911 $15,359 $153,797 $44,123 $(14,704) $(2,460) $197,026
===================================================================
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
THE MIDLAND COMPANY AND SUBSIDIARIES
Deloitte &
Touche LLP
Cincinnati, Ohio
To the Shareholders of The Midland Company:
We have audited the accompanying consolidated balance sheets of The
Midland Company and its subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and of cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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, such consolidated financial statements present fairly,
in all material respects, the financial position of The Midland Company and its
subsidiaries at December 31, 1997 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
S/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 12, 1998
MANAGEMENT'S REPORT
The consolidated financial statements and accompanying notes of The
Midland Company and its subsidiaries are the responsibility of the Company's
management, and have been prepared in conformity with generally accepted
accounting principles. They necessarily include amounts that are based on
management's best estimates and judgments. Other financial information
contained in this annual report is presented on a basis consistent with the
financial statements.
In order to maintain the integrity, objectivity and fairness of data in
these financial statements, the Company has developed and maintains a
comprehensive internal control structure which is supplemented by a program of
internal audits. Management believes that the Company's internal control
structure is adequate to provide reasonable, but not absolute, assurance that
assets are safeguarded and the objectives of accuracy and fair presentation of
financial data are met in all material respects.
The financial statements have been audited by Deloitte & Touche LLP,
Certified Public Accountants, in accordance with generally accepted auditing
standards, including sufficient tests of the accounting records to enable them
to express an informed opinion as to whether the financial statements,
considered in their entirety, present fairly the Company's financial position
and results of operations in conformity with generally accepted accounting
principles. Deloitte & Touche LLP reviews the results of its audit both with
management and with the Audit Committee.
The Audit Committee, comprised entirely of outside Directors, meets
periodically with management, internal auditors and independent auditors
(separately and jointly) to assure that each is fulfilling its
responsibilities.
30
<PAGE>
OFFICERS AND DIRECTORS
THE MIDLAND COMPANY AND SUBSIDIARIES
BOARD OF DIRECTORS
George R. Baker u J. P. Hayden, Jr.
Corporate Director / Advisor Chairman and Chief Executive Officer
James E. Bushman n Michael J. Conaton
President and Chief Executive Officer President and Chief Operating Officer
Cast-Fab Technologies, Inc.
J. P. Hayden, III
James H. Carey u n Senior Executive Vice President
Corporate Director/Advisor
John W. Hayden
Michael J. Conaton Senior Executive Vice President
President and Chief Operating Officer
John I. Von Lehman
J. P. Hayden, Jr. Executive Vice President
Chairman and Chief Executive Officer and Chief Financial Officer
J. P. Hayden, III John R. LaBar
Senior Executive Vice President Vice President and Secretary
John W. Hayden Robert W. Hayden
Senior Executive Vice President Vice President
Robert W. Hayden W. Todd Gray
Vice President Treasurer
William T. Hayden Charles J. Jenkins
Attorney Vice President-Management
Information Systems
William J. Keating u
Formerly Chairman, Chief Executive Michael L. Flowers
Officer and Publisher-Cincinnati Vice President, Assistant
Enquirer and Formerly Chairman of Secretary and Chief In-House
the Board-Associated Press Counsel
William McD. Kite Paul T. Brizzolara
Member Assistant Vice President,
Cohen, Todd, Kite & Stanford, LLC Assistant Chief In-House Counsel
and Assistant Secretary
John R. LaBar
Vice President and Secretary Henry N. Thoman
Assistant Vice President and
John M. O'Mara n Assistant Chief In-House Counsel
Corporate Director/Financial Consultant
Mark E. Burke
John R. Orther n Director of Taxation
Certified Public Accountant
Ronald L. Gramke
William F. Plettner Assistant Treasurer
Formerly Vice Chairman and
President of the Company Edward J. Heskamp
Assistant Treasurer
Glenn E. Schembechler n
Professor Emeritus Mary Ann C. Pettit
University of Michigan Assistant Secretary
John I. Von Lehman Geraldine M. Stigall
Executive Vice President Assistant Secretary
and Chief Financial Officer
n Member of Audit Committee
u Member of Compensation Committee
31
<PAGE>
SUBSIDIARY OFFICERS OF
THE MIDLAND COMPANY
AMERICAN MODERN INSURANCE GROUP, INC.
Vice Chairman
John W. Hayden
President and Chief Operating Officer
Kurt R. Schwamberger
Executive Vice President and Chief
Financial Officer
Kenneth G. Boberg
Executive Vice President
Ronald L. Crippin
Senior Vice President
Patrick M. Gallagher
Robert E. Hilliard
Charles J. Jenkins
Thomas A. Knighten
Werner E. Kruck
James P. Romerill
Vice President and Treasurer
James P. Tierney
M/G TRANSPORT SERVICES, INC.
President and Chief Operating Officer
J. P. Hayden, III
Vice President
Jack L. Lordo
Treasurer
Raymond R. Ludmann
MGT SERVICES, INC.
President
Thomas C. Terrell, III
Executive Vice President
J. Kevin Jennings
Vice President
James R. Jarvis
Robbie M. Uvanni
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS GENERAL AND TAX COUNSEL
Fifth Third Bank Deloitte & Touche LLP Cohen, Todd, Kite &
38 Fountain Square, 250 East Fifth Street Stanford, LLC
Mail Drop #1090F5 Cincinnati, Ohio 45202 525 Vine Building
Cincinnati, Ohio 45263 Cincinnati, Ohio 45202
SHAREHOLDERS' MEETING
The next meeting of the shareholders will be held at 10:00 a.m. on Thursday,
April 9, 1998 at the Company's offices, 7000 Midland Boulevard, Amelia, Ohio
45102.
DIVIDEND REINVESTMENT PLAN
The Plan provides for the acquisition of additional shares of the Company
without brokerage fees through automatic dividend reinvestment. Enrollment
forms and information about the Plan are available from Fifth Third Bank
(1-800-837-2755).
FORM 10-K
A copy of the Company's 1997 Annual Report to the Securities and Exchange
Commission on Form 10-K may be obtained by writing to the Company - Attention:
Chief Financial Officer.
32
<PAGE>
Exhibit (21)
THE MIDLAND COMPANY AND SUBSIDIARIES
Exhibit (21) - Subsidiaries of the Registrant
December 31, 1997
The subsidiaries of the Registrant as of December 31, 1997, all of which
are included in the consolidated financial statements, are as follows:
Percentage
State of of Voting
Incorporation Stock Owned
-------------------------------
M/G Transport Services, Inc. Ohio 100
Midland-Guardian Co. Ohio 100
MGT Services, Inc. Ohio 100
M/G Sportswear, Inc. Ohio 100
SUBSIDIARY OF M/G TRANSPORT SERVICES, INC.
MGA Transport Company Ohio 100
SUBSIDIARIES OF MIDLAND-GUARDIAN CO.
American Modern Insurance Group, Inc. Ohio 100
Marbury Agency, Inc. Ohio 100
SUBSIDIARIES OF AMERICAN MODERN INSURANCE
GROUP, INC.
American Modern Home Insurance Company Ohio 100
American Family Home Insurance Company Florida 100
The Atlas Insurance Agency, Inc. Ohio 100
American Modern Life Insurance Company Ohio 100
Midwest Enterprises, Inc. Florida 100
Lloyds Modern Corporation Texas 100
American Modern Home Service Company Ohio 100
SUBSIDIARIES OF AMERICAN MODERN HOME INSURANCE CO.
American Modern Lloyds Insurance Company Texas 100
American Southern Home Insurance Company Florida 100
American Western Home Insurance Company Oklahoma 100
G.U.I.C. Insurance Company Pennsylvania 100
SUBSIDIARY OF AMERICAN WESTERN HOME INSURANCE CO.
Modern Life Insurance Company of Arizona, Inc. Arizona 100
SUBSIDIARY OF MIDWEST ENTERPRISES, INC.
Sunbelt General Agency, Inc. Alabama 100
The names of two wholly-owned subsidiaries of The Midland Company are not
shown above as such individual listing is not required.
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 368,506,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 94,791,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 498,829,000
<CASH> 40,809,000
<RECOVER-REINSURE> 26,433,000
<DEFERRED-ACQUISITION> 55,590,000
<TOTAL-ASSETS> 760,463,000
<POLICY-LOSSES> 120,134,000
<UNEARNED-PREMIUMS> 240,340,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 34,476,000
<NOTES-PAYABLE> 92,309,000
<COMMON> 911,000
0
0
<OTHER-SE> 196,115,000
<TOTAL-LIABILITY-AND-EQUITY> 760,463,000
311,159,000
<INVESTMENT-INCOME> 21,332,000
<INVESTMENT-GAINS> 4,170,000
<OTHER-INCOME> 38,769,000
<BENEFITS> 171,163,000
<UNDERWRITING-AMORTIZATION> 81,180,000
<UNDERWRITING-OTHER> 49,118,000
<INCOME-PRETAX> 34,703,000
<INCOME-TAX> 10,336,000
<INCOME-CONTINUING> 24,367,000
<DISCONTINUED> (6,817,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,550,000
<EPS-PRIMARY> 5.88
<EPS-DILUTED> 5.67
<RESERVE-OPEN> 88,992,000
<PROVISION-CURRENT> 163,038,000
<PROVISION-PRIOR> 5,230,000
<PAYMENTS-CURRENT> 113,841,000
<PAYMENTS-PRIOR> 37,307,000
<RESERVE-CLOSE> 108,334,000
<CUMULATIVE-DEFICIENCY> (7,182,000)
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