<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
---------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
----------------- ---------------
Commission file number 2-39895
------------------------------------------
Midland Enterprises Inc.
----------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 04-2284434
----------------------- ----------------------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 Pike Street; Cincinnati, Ohio 45202
------------------------------------ ----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 513-721-4000
--------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
---------------------------- ------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
---------------------------------------------------------------------
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS). AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT. (THE AGGREGATE MARKET VALUE SHALL BE
COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE
AVERAGE BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE
WITHIN 60 DAYS PRIOR TO THE DATE OF FILING.)
Not Applicable
---------------------------------------------------------------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE (APPLICABLE
ONLY TO CORPORATE REGISTRANTS).
March 2, 1998 - 15 1/2 Shares
---------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF
INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE
DOCUMENT IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS;
(2) ANY PROXY OR INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED
PURSUANT TO RULE 424(b) OR (c) UNDER THE SECURITIES ACT OF 1933. (THE
LISTED DOCUMENTS SHOULD BE CLEARLY DESCRIBED FOR IDENTIFICATION
PURPOSES.)
The Registrant meets the conditions set forth in General Instruction J
----------------------------------------------------------------------
(1) (a) and (b) of Form 10-K and is therefore filing this Form 10-K
-------------------------------------------------------------------
with the reduced disclosure format.
-----------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS
--------
(a) GENERAL
-------
Midland Enterprises Inc. (the "Registrant"), incorporated under the laws of the
State of Delaware in 1961, is a wholly-owned subsidiary of Eastern Enterprises
("Eastern") of Weston, Massachusetts. The Registrant is primarily engaged,
through wholly-owned subsidiaries, in the operation of a fleet of towboats,
tugboats and barges, principally on the Ohio and Mississippi Rivers and their
tributaries, the Gulf Intracoastal Waterway and in the Gulf of Mexico. The
Registrant's barge line subsidiaries transport bulk commodities, a major portion
of which is coal. The Registrant, through other subsidiaries, also performs
repair work on marine equipment and operates two coal dumping terminals, a
phosphate rock and phosphate chemical fertilizer terminal, and a marine fuel
supply facility.
Substantially all of the barges, towboats and tugboats operated by the
Registrant's barge line subsidiaries are owned by and chartered from the
Registrant. Approximately half of the Registrant's equipment is mortgaged or
leased and the payments under related charter agreements with its subsidiaries
are pledged to secure long-term debt or to meet lease payments.
The Registrant's barge line subsidiaries are The Ohio River Company ("ORCO"),
Orgulf Transport Co. ("Orgulf"), Red Circle Transport Co. ("Red Circle"), and
Orsouth Transport Co.("Orsouth"). The Registrant's other principal subsidiaries,
all of whose outstanding stock is owned by the Registrant, are Eastern
Associated Terminals Company ("EATCO"), Hartley Marine Corp. ("Hartley"), The
Ohio River Terminals Company ("ORTCO") and West Virginia Terminals, Inc.
(b) INDUSTRY SEGMENTS
-----------------
Registrant's only reportable industry segment is barge transportation.
(c) (1) (i) PRINCIPAL SERVICES AND MARKETS
------------------------------
ORCO is the largest of the Registrant's subsidiaries, accounting for 57% of the
Registrant's total 1997 tonnage transported. ORCO operates principally on the
Ohio River and certain of its tributaries. The principal commodity transported
by ORCO is coal, primarily for electric utilities. Grain, stone, sand, gravel,
iron, steel, scrap, and coke are the other groups of commodities which ORCO
carries in significant amounts. ORCO leases office facilities in Cincinnati,
Ohio.
Orgulf operates principally on the Mississippi and Ohio Rivers, and the Illinois
Waterway, transporting principally coal, primarily for electric utilities, and
grain. Stone, gravel, scrap, steel, coke and ores constitute the other
significant commodities transported.
Orsouth operates principally on the Tennessee-Tombigbee and Gulf Intracoastal
Waterways, and on the Black Warrior and Mississippi Rivers, transporting
principally coal and ores.
Red Circle is engaged primarily in the offshore transportation of phosphate rock
in the Gulf of Mexico and grain from Louisiana to Puerto Rico. EATCO operates a
terminal on leased land at Tampa, Florida. Hartley operates shipyard facilities
at Paducah, Kentucky, sells fuel at Point Pleasant, West Virginia, and provides
towing services principally on the Ohio River and its tributaries. ORTCO owns
and operates a coal dumping facility in Huntington, West Virginia. West Virginia
Terminals, Inc. leases and operates a coal dumping facility in Kenova, West
Virginia.
1
<PAGE> 3
Tonnage transported by the Registrant's subsidiaries was 57.0 million in 1997,
65.5 million in 1996 and 66.2 million in 1995. Tonnage in 1997 declined 13% from
1996 primarily as a result of the non-renewal of several multi-year utility coal
contracts, unplanned plant outages for several customer accounts, and lower
demand from export coal and grain markets. Tonnage in 1996 declined 1% from 1995
as a result of reduced non-coal tonnage due in part to the late grain harvest
and weak demand for barge towing on the lower Mississippi River.
The following table summarizes the ton miles of cargo transported by the
Registrant's subsidiaries for the period 1995 - 1997:
<TABLE>
<CAPTION>
TON MILES TRANSPORTED (IN BILLIONS)
-----------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Coal......................... 13.6 15.7 15.2
Grain....................... 4.5 4.8 5.2
Other*...................... 15.0 15.6 16.4
----------- ------------ ------------
Total Ton miles............. 33.1 36.1 36.8
=========== ============ ============
</TABLE>
* Other includes sand, stone, gravel, iron, scrap, steel, coke, phosphate,
towing for others, and other dry cargo.
Ton miles are the product of tons and distance transported. In 1997, ton miles
declined 8% due to the lower tonnage, as discussed above, partially offset by
longer average hauls, particularly for coal. Ton miles in 1996 declined 2% from
the record level set in 1995 due to a 1% decline in tonnage and slightly shorter
average trip lengths. In addition to changes in ton miles transported,
Registrant's revenues and net earnings are affected by other factors such as
competitive conditions, weather and the segment of the river system traveled. In
1997, river navigation was significantly affected by record flooding, ice and
lock repairs which slowed production and reduced tonnage levels, as capacity was
constrained, and operating costs were increased. See "Seasonality and
Competition".
(c) (1) (ii) STATUS OF PRODUCT OR SEGMENT
----------------------------
No significant new product, service or segment requiring a material amount of
assets was developed.
(c) (1) (iii) RAW MATERIALS
-------------
The only significant raw material required by the Registrant is the diesel fuel
to operate towboats. Diesel fuel is purchased from a variety of sources and the
Registrant regards the availability of diesel fuel as adequate for presently
planned operations.
(c) (1) (v) SEASONALITY
-----------
Due to the freezing of some northern rivers and waterways during winter months,
increased coal consumption by electric utilities during the summer months, and
the fall harvest of grain, winter month revenues tend to be lower than revenues
for the remainder of the year.
(c) (1) (vi) WORKING CAPITAL
---------------
No unusual working capital requirements are normally encountered.
2
<PAGE> 4
(c) (1) (vii) CUSTOMERS
---------
In 1997, one customer, The Cincinnati Gas and Electric Co., accounted for
approximately 10% of the Registrant's consolidated revenues from a multi-year
coal transportation agreement between the Registrant and the customer. No other
customer, or group of customers under common control, accounted for more than
10% of revenues in 1997, 1996 or 1995. On the basis of past experience and its
competitive position, the Registrant considers that the loss of several of its
subsidiaries' largest customers simultaneously, while possible, is unlikely to
happen. The Registrant's subsidiaries have multi-year transportation and
terminalling contracts which expire at various dates from February 1999 through
December 2007. During 1997, approximately 44% of the Registrant's consolidated
revenues resulted from these contracts. A substantial portion of the contracts
provide for rate adjustments based on changes in various costs, including diesel
fuel costs, and, additionally, contain "force majeure" clauses which excuse
performance by the parties to the contracts when performance is prevented by
circumstances beyond their reasonable control. Some of these contracts have
provisions for termination for specified causes, such as material breach of the
contract, environmental restrictions on the burning of coal, or loss by the
customer of an underlying commodity supply contract. Penalties for termination
for such causes are not generally specified. However, some contracts provide
that in the event of an uncured material breach by Registrant's subsidiary which
results in termination of the contract, Registrant's subsidiary would be
responsible for reimbursing its customer for the differential between the
contract price and the cost of substituted performance.
(c) (1) (viii) BACKLOG
-------
The backlog of transportation and terminalling business under multi-year
contracts is summarized in the next table:
<TABLE>
<CAPTION>
December 31, 1997 1996
------------ ------------
<S> <C> <C>
Tons (in millions) 123.2 140.0
Revenues (in millions) $412.1 $465.1
Portions of revenue backlog not expected to be filled
within the current fiscal year 66% 73%
</TABLE>
The 1997 revenue backlog (which is based on contracts that extend beyond
December 31, 1998) is shown at prices current as of December 31, 1997 which are
subject to escalation/de-escalation provisions. Since services under many of the
multi-year contracts are based on customer requirements, Registrant has
estimated its backlog based on its forecast of the requirements of these
contract customers. The 12% decline in tonnage backlog from 1996 mainly reflects
the elapsing terms of current multi-year contracts as they draw closer to
maturity, including those excluded from the calculation as they enter their
final year. Partially offsetting these reductions are new multi-year agreements
entered into by the Registrant's subsidiaries. The decrease in the revenue
backlog is consistent with the reduction in backlog tonnage. Electric utilities,
which traditionally have entered into multi-year transportation and coal supply
agreements, have shortened the term of some agreements for a variety of reasons
including the Clean Air Act requirements and the trend towards deregulation of
the electric power industry. These factors have also led to changes in the
sourcing of coal by utilities, leading to changes in traffic patterns.
(c) (1) (ix) GOVERNMENT CONTRACTS
--------------------
The Registrant has no material portion of business subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
Government.
3
<PAGE> 5
(c) (1) (x) COMPETITION
-----------
Registrant's inland marine transportation business competes on the basis of
price, service and equipment availability. Registrant's primary competitors
include other barge lines and railroads, including one integrated rail-barge
carrier. There are a number of companies offering transportation services on the
waterways served by the Registrant. A shortage of grain supplies and sharply
higher grain prices slowed demand in late 1996 and market rates softened. In
1997, a stronger U.S. dollar and increased competition from non U.S. suppliers
to the world markets slowed U.S. exports of grain and coal, which weakened
demand for barges. Coupled with an increased availability of new equipment, a
temporary imbalance of supply and demand has been created, which has led to more
intense competition and decreased spot rates.
Improvements in operating efficiencies have permitted barge operators to
maintain relatively low rate structures. Consequently, the barge industry has
generally been able to retain its competitive position with alternative methods
of transportation for bulk commodities when the origin and destination of such
movements are contiguous to navigable waterways.
Many railroads operating in areas served by the inland waterways compete for
cargoes carried by river barges. In many cases, these railroads offer unit train
service (pursuant to which an entire train is committed to the customer) and
dedicated equipment service (pursuant to which equipment is set aside for the
exclusive use of a particular customer) for coal, grain and other bulk
commodities. In addition, rates charged by both railroads and river barge
operators are sometimes designed to reflect special circumstances and
requirements of the individual shippers. As a result, it is difficult to compare
rates charged for movements of the various commodities between specific points.
Towboats, such as those which comprise the Registrant's fleet, are capable of
moving in one tow (barge configuration) approximately 22,500 tons of cargo
(equivalent to 225 one hundred-ton capacity railroad cars) on the Ohio River and
on the upper Mississippi River and approximately 60,000 tons (equivalent to 600
one hundred-ton capacity railroad cars) on the lower Mississippi River, where
there are no locks to transit. Barge costs per ton mile are generally below
those of railroads.
(c) (1) (xi) RESEARCH
--------
No significant amount was spent during the last fiscal year on research to
improve existing services or develop new services. The task of improving and
developing services is a continuing assignment of various operating departments
of Registrant's subsidiaries, but such efforts are not segregated and would not
generally be regarded as research activities.
(c) (1) (xii) COMPLIANCE WITH ENVIRONMENTAL STATUTES
--------------------------------------
The Registrant and/or its subsidiaries are subject to the provisions of the
Federal Water Pollution Control Act, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Superfund Amendment and
Reauthorization Act, the Resource Conservation and Recovery Act of 1976, and the
Oil Pollution Act of 1990, which permit the Coast Guard and the Environmental
Protection Agency to assess penalties and clean-up costs for oil, hazardous
substance, and hazardous waste discharges. Some of these acts also allow third
parties to seek damages for losses caused by such discharges. Compliance with
these acts has had no material effect on the Registrant's capital expenditures,
earnings, or competitive position; and no such effect is anticipated.
(c) (1) (xiii) EMPLOYEES
---------
As of December 31, 1997, Registrant and its subsidiaries employed approximately
1,400 persons, of whom approximately 32% are represented by labor unions.
4
<PAGE> 6
(d) FOREIGN OPERATIONS
------------------
Registrant does not engage in material operations in foreign countries, and no
material portion of Registrant's revenues is derived from customers in foreign
countries.
ITEM 2. PROPERTIES
----------
(a) As of December 31, 1997, the Registrant's floating equipment consisted
of 2,302 barges and 87 boats. See "Principal Services and Markets" for other
owned or leased properties.
Capital expenditures for the Registrant in 1997 totaled approximately
$26 million. These expenditures were made principally for the purchase of new
barges and for renewal of equipment.
(b) Not applicable.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Information with respect to certain legal proceedings may be found in Note 11 of
Notes to Consolidated Financial Statements. Such information is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not required.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
---------------------------------------------------------------------
MATTERS
-------
The Registrant's common stock is held solely by Eastern and is not traded in any
market. Dividends were declared in the amount of $12,467,373 in 1997 and
$22,947,933 in 1996.
The payment of dividends is subject to the restrictions described in Note 4 of
Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Not required. Reference Management Narrative Analysis following Item 7. The
Registrant meets the conditions set forth in General Instruction J (1) (a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
5
<PAGE> 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
1997 COMPARED TO 1996
- ---------------------
Revenues in 1997 decreased 11% due to weak demand from export coal and grain,
lower contractual requirements for utility and industrial coal customers, and
fewer barges. Weak demand depressed spot rates on nearly all commodities and
traffic patterns were disrupted, reducing operational efficiency. Operating
conditions in 1997 were worse than those experienced in 1996, as navigation was
negatively impacted by record flooding on the Ohio River early in the year, and
later by long traffic delays related to repairs to various key locks throughout
the river system. These uncontrollable events resulted in higher operating costs
and lower fleet productivity than in 1996. Also, as a result of the weaker
markets, the Registrant slowed its fleet replacement program and did not renew
expiring charters of outside barges. These decisions, in addition to production
delays which postponed the delivery of new barges expected in the latter part of
1997, reduced the size of the Registrant's barge fleet.
Tonnage and ton miles decreased 13% and 8%, respectively, reflecting the weak
market and operational issues discussed previously, although a change in
business mix and customer sourcing resulted in 5% longer average hauls. Coal
tonnage and ton miles declined 17% and 14%, respectively, from the record levels
of 1996, while non-coal tonnage decreased 5% with related ton miles down 4% from
1996. Domestic coal volume, primarily for electric utilities, declined due to
the non-renewal of several multi-year contracts, unplanned plant outages and
milder temperatures. Export coal demand weakened as the strong U.S. dollar
effectively raised the prices of domestic supplies higher than those of foreign
competitors. Despite an ample grain harvest, the anticipated surge in
transportation volume and pricing for grain exports was short lived, as much of
the harvest was put in storage due to weak demand and the relative strength of
the U.S. dollar.
Ongoing improvement programs to lower vessel operating costs and administrative
expenses partially offset the higher operating costs discussed above. Operating
levels at the Registrant's terminals were also lower, reflecting the reduced
demand for coal transportation. As a result of the adverse market and
operational issues discussed above, operating earnings decreased by $23.8
million from 1996.
In 1997, net interest expense decreased by $.8 million due mainly to lower
long-term debt balances and reduced debt premiums.
The combination of the items as discussed above decreased net earnings by $14.0
million as compared to 1996.
1996 COMPARED TO 1995
- ---------------------
Revenues and operating earnings increased $5.5 million and $0.6 million,
respectively, in 1996 over 1995, primarily reflecting continued strong demand
for coal and a favorable rate structure carried over from 1995, particularly on
non-coal commodities. Severe winter icing and flooding during the first quarter,
and numerous tropical storms in the Gulf of Mexico, resulted in higher operating
costs and lower fleet productivity than in 1995.
Tonnage transported in 1996 declined 1%, with related ton miles down nearly 2%,
reflecting shorter average hauls due to weak foreign demand for coal and a late
grain harvest. Coal tonnage and ton miles increased 1% and 3%, respectively,
over 1995, reflecting significantly increased shipments of domestic spot coal,
while coal under multi-year contracts for utilities declined due to the
non-renewal of several contracts. Non-coal tonnage and ton miles declined 6%
from 1995, mainly as a result of weaker barge demand on the Mississippi River.
Ongoing programs to increase fleet productivity and control costs were offset by
adverse operating conditions and traffic pattern inefficiencies resulting from
the reduced export tonnage. Fuel costs increased in 1996 due to rising fuel
prices that averaged 20% above 1995 levels.
Other income declined from 1995 due to lower average interest rates in 1996 and
higher capital expenditures which decreased cash and interest bearing advances
with Parent. Interest expense included $0.4 million associated with the early
retirement of long-term debt in 1996.
6
<PAGE> 8
Including the pretax items and operating results discussed above, earnings
before extraordinary item for 1996 were nearly unchanged from 1995.
In 1995, the Registrant recorded a pretax charge of $4.6 million representing
the estimated undiscounted liability for health care and death benefit premiums
imposed by the Coal Industry Retiree Health Act of 1992 ("Coal Act"). As
described in Note 11 of Notes to Consolidated Financial Statements, this charge
was reported as an extraordinary item of approximately $3.0 million, net of tax.
No payments have been made from this reserve.
FORWARD-LOOKING INFORMATION
- ---------------------------
This report and other Registrant reports and statements issued or made from time
to time contain certain "forward-looking statements" concerning projected future
financial performance or concerning expected plans or future operations. The
Registrant cautions that actual results and developments may differ materially
from such projections or expectations.
Investors should be aware of important factors that could cause actual results
to differ materially from the forward-looking projections or expectations. These
factors include, but are not limited to: the effects of strategic initiatives on
earnings and cash flow, changes in market conditions for barge transportation,
adverse weather and operating conditions on the inland waterways, changes in
interest rates and the value of the dollar versus other currencies, regulatory
and court decisions, and developments with respect to the Registrant's
previously-disclosed Coal Act liabilities. All of these factors are difficult to
predict and are generally beyond the control of the Registrant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Capital expenditures of $25.7 million, debt payments, and dividends were funded
from cash provided from operating activities in 1997. The increase in accounts
payable at December 31, 1997, reflects amounts established for the purchase of
capital assets in process at year end and timing of invoice flow from vendors.
Capital expenditures for 1998 are budgeted at approximately $50 million, the
majority of which pertains to purchase commitments for new hopper barges for
delivery during 1998.
OTHER MATTERS
- -------------
Management has assessed the impact of the year 2000 issue with respect to
information systems and has initiated an enterprise wide action plan to modify
and test system programs which management believes will provide year 2000
compliance. Management expects the program modifications to be completed by
December 31, 1998. Spending for these modifications is being expensed as
incurred and is not expected to have a material impact on future operating
results or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Information with respect to this item appears on page F-1 of this report. Such
information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
---------------------
None
7
<PAGE> 9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Not required.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Not required.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Not required.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Not required.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) (1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
Information with respect to these items appears on page F-1 of this report. Such
information is incorporated herein by reference.
(3) LIST OF EXHIBITS
----------------
3.1 Certificate of Incorporation of Midland Enterprises Inc.
(filed as Exhibit 3.1 to Registration Statement of Midland
Enterprises Inc. on Form S-1 Registration No. 2-39895, as
filed May 5, 1971).(1)
3.2 By-Laws of Midland Enterprises Inc. (filed as Exhibit 3.2
to Annual Report of Midland Enterprises Inc. on Form 10-K
for the year ended December 31, 1984).(1)
4.1 Indenture between Midland Enterprises Inc. and State Street
Bank and Trust Company dated as of April 1, 1988 (filed
as Exhibit 4.2 to Registration Statement No. 33-20789).(1)
4.2 Indenture between Midland Enterprises Inc. and State Street
Bank and Trust Company dated as of April 2, 1990 (filed
as Exhibit 4.2 to Registration Statement No. 33-32120).(1)
(NOTE: The Registrant agrees to furnish to the Securities
and Exchange Commission upon request a copy of any
instrument with respect to any long-term debt of the
Registrant.)
- ----------
(1) Not filed herewith. In accordance with Rule 12-b-32 of the General Rules and
Regulations under the Securities Act of 1934, reference is made to the document
previously filed with the Commission.
(b) REPORTS ON FORM 8-K
-------------------
There were no reports on Form 8-K filed in the fourth quarter of 1997.
8
<PAGE> 10
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.
MIDLAND ENTERPRISES INC.
(Registrant)
BY: R. FAILLO
---------------
R. FAILLO
VICE PRESIDENT, FINANCE AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
DATE MARCH 2, 1998
---------------
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 indicated on the 2nd day of March, 1998.
BY: F. C. RASKIN BY: R. FAILLO
---------------------- ----------------------
F. C. RASKIN R. FAILLO
PRESIDENT; DIRECTOR VICE PRESIDENT, FINANCE AND TREASURER
(PRINCIPAL EXECUTIVE OFFICER) (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
BY: P. E. HUBBARD BY: S. A. FRASHER
---------------------- ----------------------
P. E. HUBBARD S. A. FRASHER
SENIOR VICE PRESIDENT, SALES SENIOR VICE PRESIDENT, OPERATIONS;
AND MARKETING; DIRECTOR DIRECTOR
Supplemental information to be furnished with reports filed pursuant to Section
15 (3) of the Act by Registrants Which Have Not Registered Securities Pursuant
to Section 12 of the Act.
No annual reports to security holders covering the Registrant's last fiscal year
nor any proxy materials have been sent to the Registrant's security holders.
9
<PAGE> 11
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(INFORMATION REQUIRED BY ITEMS 8 AND 14 (a) (1) AND (2) OF FORM 10-K)
PAGE
NUMBER
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Statements of Earnings for the years
ended December 31, 1997, 1996 and 1995 F-3
Consolidated Balance Sheets -- December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholder's Equity for
the years ended December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
SCHEDULE:
II - Valuation and Qualifying Accounts and Reserves F-18
Schedules other than that listed above have been omitted as the information has
been included in the consolidated financial statements and related notes, or is
not applicable or not required.
F-1
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Midland Enterprises Inc.:
We have audited the accompanying consolidated balance sheets of MIDLAND
ENTERPRISES INC. (a Delaware corporation and a wholly-owned subsidiary of
Eastern Enterprises) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1997. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Midland Enterprises Inc. and
subsidiaries as of 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.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
January 20, 1998
F-2
<PAGE> 13
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(000 OMITTED)
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES (NOTE 1) ........................... $ 269,259 $ 301,880 $ 296,339
--------- --------- ---------
OPERATING COSTS AND EXPENSES:
Operating expenses ..................... $ 183,929 $ 189,357 $ 183,462
Depreciation and amortization (Note 6) . 22,675 22,554 22,897
Selling, general and administrative
expenses .......................... 11,337 12,329 11,983
Overhead allocation from Parent (Note 1) 2,900 2,549 2,830
Taxes, other than income ............... 13,805 16,676 17,339
--------- --------- ---------
$ 234,646 $ 243,465 $ 238,511
--------- --------- ---------
OPERATING EARNINGS .......................... $ 34,613 $ 58,415 $ 57,828
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income from Parent (Note 1) ... $ 4,242 $ 3,483 $ 4,404
Interest income other .................. 73 978 752
Gain (loss) on sale of assets and
other, net ........................ (84) 2 332
--------- --------- ---------
$ 4,231 $ 4,463 $ 5,488
--------- --------- ---------
INTEREST EXPENSE:
Long-term debt ......................... $ 13,530 $ 14,043 $ 14,624
Other, including amortization of
debt expense ...................... 227 672 551
--------- --------- ---------
$ 13,757 $ 14,715 $ 15,175
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES ................ $ 25,087 $ 48,163 $ 48,141
PROVISION FOR INCOME TAXES (NOTE 5) ......... 8,464 17,566 17,592
--------- --------- ---------
EARNINGS BEFORE EXTRAORDINARY ITEM .......... $ 16,623 $ 30,597 $ 30,549
Extraordinary item net of tax (Note 11) ..... -- -- (2,990)
--------- --------- ---------
NET EARNINGS ................................ $ 16,623 $ 30,597 $ 27,559
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 14
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
------
<TABLE>
<CAPTION>
(000 OMITTED)
1997 1996
-------- --------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents (Note 1) ........ $ 88 $ 91
Receivables -
Trade, less allowance of $665,000
in 1997 and $685,000 in 1996 ......... 18,207 18,226
Parent (Notes 1 and 4) ............... 66,945 63,863
Other ................................ 565 1,263
Materials, supplies and fuel (Note 1) ..... 8,738 8,176
Prepaid expenses .......................... 1,722 2,028
-------- --------
Total current assets ................. $ 96,265 $ 93,647
-------- --------
PROPERTY AND EQUIPMENT, AT COST (NOTES 4 AND 6):
Towboats and barges ....................... $590,100 $580,546
Terminals and other facilities ............ 46,139 44,402
Land ...................................... 4,727 4,612
-------- --------
Total property and equipment, at cost $640,966 $629,560
Less - accumulated depreciation ........... 333,489 323,120
-------- --------
Net property and equipment ........... $307,477 $306,440
-------- --------
OTHER ASSETS:
Deferred pension charges (Note 2) ......... $ 14,520 $ 13,587
Unamortized debt expense, deferred
maintenance and other (Notes 1 and 6) ... 5,033 4,117
-------- --------
Total other assets ................... $ 19,553 $ 17,704
-------- --------
TOTAL ASSETS ......................... $423,295 $417,791
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 15
<TABLE>
<CAPTION>
MIDLAND ENTERPRISES INC. AND SUSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
(000 OMITTED)
1997 1996
---------------- -----------------
CURRENT LIABILITIES:
<S> <C> <C> <C>
Current portion of long-term debt (Note 4)................... $ 4,351 $ 3,986
Accounts payable............................................. 18,199 11,224
Reserve for insurance claims (Note 1)........................ 11,980 11,881
Accrued expenses............................................. 4,495 5,616
Interest payable............................................. 3,944 4,063
Other taxes payable.......................................... 3,221 4,119
Income taxes payable (Note 5)................................ 955 1,123
Other current liabilities.................................... 9,119 9,851
------------ ------------
Total current liabilities................................. $ 56,264 $ 51,863
------------ ------------
LONG-TERM DEBT (NOTE 4)......................................... $ 132,142 $ 137,313
------------ ------------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes (Note 5).............................. $ 57,940 $ 54,594
Unamortized investment tax credits (Note 5)................. 2,515 2,999
Post-retirement health care (Note 3)........................ 8,569 8,798
Coal miners retiree health care (Note 11)................... 3,300 3,500
Other reserves.............................................. 2,057 2,437
------------ ------------
Total reserves and deferred credits...................... $ 74,381 $ 72,328
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 11)
STOCKHOLDER'S EQUITY (NOTE 4):
Common stock, $100 par value -
Authorized shares - 1,000
Issued shares -15 1/2.................................... $ 1 $ 1
Capital in excess of par value.............................. 52,519 52,519
Retained earnings........................................... 107,988 103,767
------------ ------------
Total stockholder's equity............................... $ 160,508 $ 156,287
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..................... $ 423,295 $ 417,791
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE> 16
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(OOO OMITTED EXCEPT SHARES OUTSTANDING)
<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF RETAINED
OUTSTANDING PAR VALUE EARNINGS TOTAL
---------------------------- ----------- ---------- ---------
SHARES AMOUNT
--------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994: 15.5 $ 1 $ 52,519 $ 96,386 $ 148,906
Net earnings......................... 0.0 0 0 27,559 27,559
Dividends to Parent ................. 0.0 0 0 (27,559) (27,559)
--------- --------- --------- --------- ---------
BALANCE DECEMBER 31, 1995: 15.5 $ 1 $ 52,519 $ 96,386 $ 148,906
Net earnings ........................ 0.0 0 0 30,597 30,597
Dividends to Parent 0.0 0 0 (22,948) (22,948)
Pension liability adjustment, net ... 0.0 0 0 (268) (268)
--------- --------- --------- --------- ---------
BALANCE DECEMBER 31, 1996: 15.5 $ 1 $ 52,519 $ 103,767 $ 156,287
Net earnings ........................ 0.0 0 0 16,623 16,623
Dividends to Parent ................. 0.0 0 0 (12,467) (12,467)
Pension liability adjustment, net ... 0.0 0 0 65 65
--------- --------- --------- --------- ---------
BALANCE DECEMBER 31, 1997: 15.5 $ 1 $ 52,519 $ 107,988 $ 160,508
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 17
<TABLE>
<CAPTION>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(000 OMITTED)
1997 1996 1995
-------- ------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings................................................... $ 16,623 $ 30,597 $ 27,559
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary provision for coal miners
retiree health care, net of tax ........................ - - 2,990
Depreciation and amortization ............................. 22,675 22,554 22,897
Deferred and current income taxes ......................... 3,178 (2) 157
Net (gain) loss on sale of assets ......................... 42 (35) (475)
Other changes in assets and liabilities:
Trade and other receivables ........................... 19 6,804 (389)
Materials, supplies and fuel .......................... (562) (199) 322
Accounts payable....................................... 6,975 (6,292) 5,811
Accrued expenses and other current liabilities (2,771) (2,473) 9,879
Post-retirement health care (229) 72 14
Other.................................................. (2,101) 3,649 (160)
-------- -------- --------
Net cash provided by operating activities $ 43,849 $ 54,675 $ 68,605
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................................... $(25,700) $(47,851) $(20,900)
(Increase) decrease in Parent receivable .................. (3,082) (3,505) 1,508
Proceeds from other asset dispositions .................... 2,138 1,548 3,561
-------- -------- --------
Net cash used by investing activities ......................... $(26,644) $(49,808) $(15,831)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ............................... $ (4,806) $ (7,288) $ (3,575)
Cash dividends paid to Parent ............................. (12,467) (22,948) (27,559)
Other...................................................... 65 (268) -
-------- -------- --------
Net cash used by financing activities ......................... $(17,208) $(30,504) $(31,134)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... $ (3) $(25,637) $ 21,640
-------- -------- --------
Cash and cash equivalents at beginning of year ................ 91 25,728 4,088
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 88 $ 91 $ 25,728
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $ 13,582 $ 14,167 $ 14,629
Income taxes............................................. $ 5,293 $ 17,450 $ 17,087
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 18
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SIGNIFICANT ACCOUNTING POLICIES
Midland Enterprises Inc. (the "Company") is a wholly-owned subsidiary of Eastern
Enterprises ("Eastern") of Weston, Massachusetts. The Company's principal
business is barge transportation of bulk commodities on the Ohio and Mississippi
Rivers and their tributaries. The major commodity transported is coal, which
accounts for nearly two thirds of the Company's tonnage, the majority of which
is transported to various electric utilities in the eastern half of the United
States. The Company also provides bulk terminalling and shipyard repair services
at select locations which accounts for approximately 10% of its consolidated
revenues. A substantial amount of the Company's revenues relate to spot or
annual contracts for transportation and terminalling. Approximately 44% of the
Company's revenues are derived from multi-year transportation and terminalling
contracts.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany balances and transactions have been
eliminated. The significant accounting policies followed by the Company and its
subsidiaries are described below:
(a) Cash equivalents - Cash equivalents are comprised of highly
liquid investment instruments with original maturities of
three months or less. Such short-term investments are
classified as investments available for sale and are valued
at market in accordance with SFAS No. 115. Unrealized
gains/losses on investments available for sale are
immaterial.
(b) Transactions with Parent - Parent receivables represent
advances to Eastern which bear interest at the applicable
Federal rate as defined in the Internal Revenue Code: 5.9%
in 1997, 5.75% in 1996, and 6.4% in 1995. The Company was
also charged a corporate overhead allocation from its parent
computed on several factors including direct corporate
management time, revenues, capitalization and employees,
which management believes is a reasonable method of
allocation.
(c) Materials, supplies and fuel - Materials, supplies and fuel
are stated at the lower of cost (first-in, first-out or
average) or market.
(d) Unamortized debt expense - Unamortized debt expense
represents fees and discounts incurred in obtaining
long-term debt. Such costs are being amortized over the
terms of the respective bond issues.
(e) Accounting for income on tows in progress - The Company
recognizes income on tows in progress on the percentage of
completion method by relating the number of miles completed
to date to the total miles to be traveled.
(f) Reserve for insurance claims - The Company is self-insured
for personal injury and property claims, which are insured
above a deductible amount of $600,000 per occurrence. The
Company's estimate of liability for the self-insured claims
is included in the reserve for insurance claims in the
Consolidated Balance Sheets. Payments made for losses
incurred are netted against the related liability for the
loss.
(g) Reclassifications - Certain reclassifications of previously
reported amounts have been made to conform with current
classifications.
F-8
<PAGE> 19
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Environmental matters - Accruals for environmental matters
are recorded in operating expenses when it is probable that
a liability has been incurred and the amount of the
liability can be reasonably estimated. Accrued liabilities
are exclusive of claims against third parties and are not
discounted.
(i) Impairment of long-lived assets - The recoverability of
long-lived assets is evaluated by the Company on a
continuing basis. In the event that facts and circumstances
indicate that the cost of an asset may be impaired, an
evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
Based on such evaluations, there were no impairment charges
in 1997.
(j) Deferred maintenance - The Company defers the cost of engine
overhauls on certain towboats and amortizes these costs over
the estimated life of the repair, which generally range from
2 to 4 years.
(2) RETIREMENT AND EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries, through various Company-administered plans and
union-administered plans, provide retirement benefits for substantially all of
their employees. Normal retirement age is 65, but provision is made for earlier
retirement. Benefits under non-union plans are based on salary or wages and
years of service, while benefits under union plans are based on negotiated
amounts and years of service.
The funding of retirement and employee benefit plans is in accordance with the
requirements of the plans and collective bargaining agreements and, where
applicable, is in sufficient amount to satisfy the "Minimum Funding Standards"
of the Employee Retirement Income Security Act of 1974.
The net pension cost for these plans and agreements charged to income was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
(000 OMITTED)
<S> <C> <C> <C>
Company-administered plans $ 35 $ 4 $ 86
Multi-employer union retirement and welfare plans 270 293 294
-------- -------- --------
TOTAL NET PENSION COST $ 305 $ 297 $ 380
======== ======== ========
The net pension cost for Company-administered plans
consisted of:
1997 1996 1995
-------- -------- --------
(000 OMITTED)
Service cost $ 1,451 $ 1,318 $ 1,280
Interest cost on projected benefit obligation 2,230 2,021 1,821
Actual return on plan assets (12,255) (4,543) (7,094)
Net amortization and deferral 8,609 1,208 4,079
-------- -------- --------
TOTAL NET PENSION COST $ 35 $ 4 $ 86
======== ======== ========
</TABLE>
F-9
<PAGE> 20
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) RETIREMENT AND EMPLOYEE BENEFIT PLANS (CONTINUED)
The assumptions used to determine the annual pension expense and the projected
benefit obligation at the end of the year were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Assumed discount rate 7.5% 7.5% 7.5%
Assumed rate of compensation increase 4.8% 4.8% 4.8%
Expected rate of return on plan assets 8.5% 8.5% 8.5%
</TABLE>
The following table sets forth the funded status of the Company-administered
plans and amounts recognized in the consolidated balance sheets as of December
31, 1997 and 1996 respectively, utilizing actuarial measurement dates as of
October 1, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------- --------
(000 OMITTED)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including:
<S> <C> <C>
Vested benefits $ 23,637 $ 19,120
Non-vested benefits 3,073 2,502
-------- --------
26,710 21,622
Effect of future salary increases 5,955 4,961
-------- --------
Projected benefit obligations for services
rendered to date $ 32,665 $ 26,583
======== ========
Plan assets at fair value, primarily listed
stocks and bonds $ 57,123 $ 45,929
Less - Projected benefit obligations 32,665 26,583
-------- --------
Excess of plan assets over projected benefit
obligations 24,458 19,346
Unrecognized net obligation at December 31, 1985
amortized over 13 - 15 years (154) (228)
Unrecognized net actuarial gain (11,576) (7,272)
Unrecognized prior service cost 1,529 1,491
Amounts contributed to plans during fourth quarter 48 26
Unfunded accumulated benefits (614) (730)
-------- --------
NET PENSION ASSETS $ 13,691 $ 12,633
======== ========
</TABLE>
Certain of the Company's subsidiaries participate in one or more multi-employer
pension plans, and contribute to such plans in amounts required by the
applicable union contracts. Contribution levels are negotiated between the
subsidiaries and the unions. A subsidiary would be required under the Federal
law to compute its liability for, and accelerate its funding of, its
proportionate share of a multi-employer plan's unfunded vested benefits (if any)
upon its withdrawal from, or the termination of, such a plan.
F-10
<PAGE> 21
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries, through various Company-administered plans and
other union retirement and welfare plans under collective bargaining agreements,
provide certain health care and life insurance benefits for retired employees.
The Company's employees, who are participants in the pension plans, become
eligible for these benefits if they reach retirement age while working for the
Company.
The net post-retirement benefit cost of these plans and agreements charged to
expense was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996 1995
------- ------ ------
(000 OMITTED)
<S> <C> <C> <C>
Service cost $ 106 $ 113 $ 126
Interest cost on accumulated benefit obligation 876 852 733
Net amortization and deferral 92 71 51
------ ------ ------
Net periodic post-retirement benefit costs $1,074 $1,036 $ 910
====== ====== ======
</TABLE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets as of December 31, 1997
and 1996 (using a measurement date of October 1, 1997 and 1996):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
(000 OMITTED)
Accumulated benefit obligation:
<S> <C> <C>
Retirees $ 11,535 $ 9,134
Fully eligible plan participants 2,174 2,008
Other active plan participants 1,559 1,649
-------- --------
$ 15,268 $ 12,791
Plan assets at fair value - -
-------- --------
Accumulated benefit obligation in excess of
plan assets $ 15,268 $ 12,791
Unrecognized net (loss)/gain (8,071) (5,531)
Unrecognized prior service cost 1,372 1,538
-------- --------
Post-retirement health care reserve $ 8,569 $ 8,798
======== ========
</TABLE>
The weighted average discount rate used in determining the accumulated benefit
obligation was 7.5%. A 7% increase in cost of covered health care benefits has
been assumed for 1997 and 1996. The health care inflation rate is assumed to be
7% through 1999, 6% in 2000 and 5% thereafter. A one percentage point increase
in the assumed health care cost trend would have increased the net periodic
post-retirement benefit cost by $90,000 in 1997 and $61,000 in 1996 and the
accumulated post-retirement benefit obligation by $1,194,000 and $792,000 in
1997 and 1996, respectively.
F-11
<PAGE> 22
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM OBLIGATIONS AND CREDIT AGREEMENTS
(a) Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1996
--------- ---------
(000 OMITTED)
First Preferred Ship Mortgage Bonds -
<S> <C> <C> <C> <C> <C>
9.9% Series, payable in annual amounts of
$5,000,000 beginning in 1999 to 2008 $ 50,000 $ 50,000
8.1%-9.85% Medium Term Notes, Series A,
due 2002-2012 68,000 68,000
--------- ---------
Total Mortgage Bonds $ 118,000 $ 118,000
--------- ---------
Obligations under Capital Leases and Other -
BA Leasing & Capital Corporation (Successor
to Wells Fargo Leasing Corporation) $ 4,082 $ 5,146
Security Pacific Equipment Leasing, Inc. 10,534 12,397
Westinghouse Credit Corporation 6,086 7,358
Other (including unamortized debt discount) (679) (746)
--------- ---------
$ 20,023 $ 24,155
--------- ---------
Less:
Current portion of long-term debt included above $ 4,351 $ 3,986
Monies on deposit (d) 1,530 856
--------- ---------
$ 5,881 $ 4,842
--------- ---------
TOTAL LONG-TERM DEBT $ 132,142 $ 137,313
========= =========
</TABLE>
The First Preferred Ship Mortgage Bonds and obligations under capital leases are
secured by approximately half of the Company's towboats and barges and by
assignment of rentals for that equipment payable to the Company by its
subsidiaries. The 9.9% Series Bonds are callable beginning April 1, 1998.
Under the most restrictive of the mortgage indentures, the Company, (a) may not
pay dividends, reacquire its common stock or make any advances or loans to its
stockholder or subsidiaries of its stockholder except to the extent of the sum
of (i) Consolidated Net Earnings after December 31, 1988, (ii) the net proceeds
of the sale of stock of the Company after December 31, 1988, and (iii) the
amount of $50,000,000 with respect to any advances or loans to its stockholder
or to subsidiaries of its stockholder, (b) is required to maintain Consolidated
Net Current Assets at least equal to $1,250,000, and (c) may not incur or permit
any of its subsidiaries to incur additional Senior Unsecured Funded Debt except
for refunding unless immediately thereafter Consolidated Net Tangible Assets
will aggregate at least 150% of (i) Consolidated Senior Unsecured Funded Debt
(excluding therefrom unsecured loans or advances to the Company from its
stockholder) plus (ii) Consolidated Senior Secured Funded Debt (all terms as
defined in the applicable indenture). Under these agreements, $29,050,000 of
retained earnings at December 31, 1997 are available for additional dividends to
Eastern.
Included in obligations under capital leases is $20,702,000 of barge lease
obligations having a weighted average interest rate of 10%. Minimum lease
payments under these agreements are due in installments through 2003; principal
payments due for the next five years amount to $4,351,000 in 1998, $4,793,000 in
1999, $5,280,000 in 2000, $4,228,000 in 2001, $1,695,000 in 2002, and $335,000
thereafter.
F-12
<PAGE> 23
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM OBLIGATIONS AND CREDIT AGREEMENTS (CONTINUED)
(b) Credit Agreements
Eastern maintains a credit agreement with a group of banks which provides for
the borrowing by Eastern and certain subsidiaries of up to $100,000,000 at any
time through December 31, 2001. The Company's maximum available borrowings under
the credit agreement are $50,000,000. The agreement requires a facility fee of
1/8 of 1% of the commitment. The Registrant had no borrowings outstanding under
this agreement in 1996 or 1997. The interest rate for borrowings is the agent
bank's prime rate or, at borrower's option, various alternatives.
(c) Consolidated Five Year Sinking Funds and Maturities
The aggregate annual sinking fund requirements and current maturities of
long-term debt, including capital leases, for the next five years amount to
$4,351,000 in 1998, $9,793,000 in 1999, and $10,280,000 in 2000, $9,228,000 in
2001, and $9,695,000 in 2002.
(d) Deposited Monies
Monies on deposit with trustee are netted against long-term debt. In accordance
with the provision of certain bond indentures, these amounts represent deposits
with the bond trustee for the equipment mortgaged under the bond indenture and
subsequently retired from service. It is the Company's intention to repurchase
its own bonds with these funds to be used for sinking fund requirements.
(5) INCOME TAXES
The Company and its subsidiaries are members of an affiliated group of companies
which files a consolidated Federal Income Tax return with Eastern. The Companies
follow the policy, established for the group, of providing for Federal Income
Taxes which would be payable on a separate company basis. For financial
reporting purposes, investment tax credits were deferred and are being amortized
to income over the book life of the related property and equipment.
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- -------
(000 OMITTED)
Current:
<S> <C> <C> <C>
Federal $ 5,564 $16,071 $15,569
State (227) 1,035 1,028
------- ------- -------
Total Current Provision $ 5,337 $17,106 $16,597
Deferred:
Federal $ 3,301 $ 460 $ 765
State (174) - 230
------- ------- -------
Total Deferred Provision $ 3,127 $ 460 $ 995
------- ------- -------
Total Provision $ 8,464 $17,566 $17,592
======= ======= =======
</TABLE>
F-13
<PAGE> 24
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
The following reconciles the statutory U.S. Federal Income Tax provision to the
recorded income tax provision:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(000 OMITTED)
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Computed provision for income taxes
at statutory Federal rate $ 8,781 $ 16,857 $ 16,850
Increase (decrease) from statutory
rate resulting principally from:
State taxes, net of Federal benefit (261) 673 817
Nondeductible expenses 47 40 53
Non taxable interest - (126) (128)
Other, net (103) 122 -
-------- -------- --------
Provision for income taxes $ 8,464 $ 17,566 $ 17,592
======== ======== ========
</TABLE>
Significant items making up deferred tax liabilities and deferred tax assets
including amounts classified as current, as of December 31, 1997 and 1996, are
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(000 OMITTED)
Assets:
<S> <C> <C>
Post-retirement benefits $ 2,914 $ 2,989
Other 6,758 7,859
-------- --------
Total Deferred Tax Assets 9,672 10,848
Liabilities:
Accelerated depreciation (61,014) (58,836)
Other (5,900) (6,092)
-------- --------
Total Deferred Tax Liabilities $(66,914) $(64,928)
-------- --------
TOTAL DEFERRED TAXES $(57,242) $(54,080)
======== ========
</TABLE>
F-14
<PAGE> 25
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY AND EQUIPMENT
(a) Depreciation and Amortization - Depreciation and amortization are
provided using the straight-line method over the estimated useful
lives of property and equipment which range from 2 to 40 years.
Depreciation and amortization as a percentage of average depreciable
assets was 3.6% in 1997 and 3.7% in 1996, respectively.
(b) Maintenance & Repairs - The costs of routine maintenance and repairs
are charged to expense as incurred. Major renovations and renewals,
which benefit future periods or extend the life of the asset, are
capitalized and amortized over their estimated useful lives.
(c) Interest During Construction - The Company reflects as an element of
cost in all major construction projects the estimated cost of borrowed
funds employed during the period of construction. Capitalized interest
is amortized over the estimated useful life of the property or
equipment.
(d) The following is the property value of leased barges under capitalized
leases:
<TABLE>
<CAPTION>
1997 1996
------- --------
(000 OMITTED)
Assets:
<S> <C> <C>
Leased Barges $ 55,887 $ 56,411
Less: Accumulated Depreciation (45,624) (43,063)
-------- --------
TOTAL LEASED BARGES UNDER CAPITALIZED LEASES $ 10,263 $ 13,348
======== ========
</TABLE>
(7) COMMITMENTS
The Company has entered into purchase commitments for new hopper barges to be
delivered during 1998 totaling approximately $46 million.
The Company and its subsidiaries lease certain facilities, vessels and equipment
under long-term operating leases which expire on various dates through 2079. The
minimum rental commitment for noncancelable operating leases at December 31,
1997 is as follows:
MINIMUM
YEARS ENDING ANNUAL RENTAL
------------ -------------
(000 OMITTED)
1998 $ 2,231
1999 2,220
2000 1,964
2001 1,909
2002 - 2079 5,673
------
TOTAL $ 13,997
==========
(8) SIGNIFICANT CUSTOMERS
In 1997, one utility customer, The Cincinnati Gas and Electric Co., accounted
for approximately 10% of the Company's total consolidated operating revenues. In
addition, amounts due from Cincinnati Gas and Electric Co. comprised
approximately 11% of the Company's trade accounts receivable as of December 31,
1997. No other customer, or group of customers under common control, accounted
for more than 10% of revenues in 1997, 1996 or 1995.
F-15
<PAGE> 26
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
Cash, trade receivables and accounts payable: The carrying amounts approximate
fair value because of the short maturity of these instruments.
Long-term debt: The fair value of long-term debt is estimated using discounted
cash flow analyses based on the current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 are as follows:
CARRYING FAIR
AMOUNT VALUE
----------- -----------
(000 OMITTED)
DECEMBER 31, 1997
Long-term debt $115,791 $130,451
DECEMBER 31, 1996
Long-term debt $116,398 $137,940
(10) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table summarizes the Company's reported unaudited consolidated
quarterly results of operations for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- ------- -------
(000 OMITTED)
1997
- ----
<S> <C> <C> <C> <C>
Revenues $64,382 $68,113 $67,650 $69,114
Operating earnings $ 5,425 $ 9,104 $10,060 $10,024
Net earnings $ 2,126 $ 4,275 $ 5,125 $ 5,097
1996
- ----
Revenues $75,879 $77,000 $74,497 $74,504
Operating earnings $14,011 $15,612 $14,663 $14,129
Net earnings $ 7,377 $ 8,086 $ 7,791 $ 7,343
</TABLE>
F-16
<PAGE> 27
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EXTRAORDINARY ITEM - COAL MINERS RETIREE HEALTH CARE
In 1993, Midland's Parent, Eastern Enterprises ("Parent"), received notice from
the Social Security Administration claiming that the Parent is responsible for
health care and death benefit premiums for a certain group of retired coal
miners and their beneficiaries under the federal Coal Industry Retiree Health
Benefit Act of 1992 ("Coal Act"). In 1995, 1996, and 1997 the Parent received
further notices from the Social Security Administration for an additional group
of retired coal miners and their beneficiaries. In 1993 and 1995, the Parent
recorded extraordinary charges to provide for its estimated undiscounted
obligations under the Coal Act with respect to the retired coal miners and their
beneficiaries assigned to the Parent as discussed in the Parent's 1996 Annual
Report. A portion of the assignments to the Parent is allegedly due to the
Parent's relationship to a predecessor entity of Midland which is no longer in
business.
The Parent's constitutional challenge to the Coal Act failed in the First
Circuit Court of Appeals, which affirmed the federal district court's finding of
constitutionality. However, the Parent's petition for a writ of certiorari in
the Supreme Court was granted and oral argument will be heard in March 1998. The
Parent has asserted a claim against Peabody Holding Company, Inc. ("Peabody"),
to which the Parent sold its coal subsidiaries in 1987, that any liabilities
under the Coal Act should be borne by Peabody and such subsidiaries. The Parent
has posted security to delay payment of premiums pending the final outcome of
its constitutional challenge. The Parent is also aware of several other lawsuits
challenging the constitutionality of the Coal Act.
In 1995, Midland recorded a reserve of $4,600,000 ($2,990,000 after-tax) to
provide for its estimated undiscounted obligations under the Coal Act. This
after-tax amount of $2,990,000 was properly reflected as an extraordinary item.
No additional reserve was recorded for 1996 or 1997, as the impact of the
additional notices received in 1996 was offset by a decrease in the estimated
rate of medical inflation. As of December 31, 1997 and 1996, $1.3 million and
$1.1 million, respectively, of this reserve is included in Other current
liabilities. Midland's obligation could range from a nominal amount to more than
$8 million depending on the outcome of challenges to the constitutionality of
the Coal Act or other factors including administrative review of assigned
individuals, the availability of transfers from the Abandoned Mine Reclamation
Fund to pay for the health care premiums of unassigned miners and their
beneficiaries, the setting of premiums, medical inflation rates, Medicare
reimbursements, other changes in government health care programs, and possible
changes in the terms of, or repeal of, the Coal Act.
F-17
<PAGE> 28
SCHEDULE II
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(000 OMITTED)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
------------------ ----------
Charges
for which
Balance Charged Charged Reserves Balance
Beginning Costs & to Other Were End of
Of Year Expenses Accounts Created Year
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
1997
- ----
Allowances and reserves deducted
from assets-
Allowance for doubtful accounts $ 685 -- -- $ (20) $ 665
======== ======== ======== ======== ========
Reserves included in liabilities -
Reserve for environmental expenses 915 -- -- (158) 757
Reserve for insurance claims 11,881 6,248 (530) (5,619) 11,980
Reserve for post-retirement
health care 8,798 1,073 -- (1,302) 8,569
Reserve for employee benefits 4,840 6,083 -- (6,440) 4,483
Reserve for coal miners retiree
health care 4,600 -- -- -- 4,600
-------- -------- -------- -------- --------
TOTAL OTHER RESERVES $ 31,034 $ 13,404 $ (530) $(13,519) $ 30,389
======== ======== ======== ======== ========
1996
- ----
Allowances and reserves deducted
from assets-
Allowance for doubtful accounts $ 685 -- -- -- $ 685
======== ======== ======== ======== ========
Reserves included in liabilities -
Reserve for environmental expenses 1,051 -- (17) (119) 915
Reserve for insurance claims 13,037 6,596 1,972 (9,724) 11,881
Reserve for post-retirement
health care 8,727 1,036 -- (965) 8,798
Reserve for employee benefits 3,339 6,570 -- (5,069) 4,840
Reserve for coal miners retiree
health care 4,600 -- -- -- 4,600
-------- -------- -------- -------- --------
TOTAL OTHER RESERVES $ 30,754 $ 14,202 $ 1,955 $(15,877) $ 31,034
======== ======== ======== ======== ========
1995
- ----
Allowances and reserves deducted
from assets-
Allowance for doubtful accounts $ 469 $ 268 -- $ (52) $ 685
======== ======== ======== ======== ========
Reserves included in liabilities -
Reserve for environmental expenses 754 -- 297 -- 1,051
Reserve for insurance claims 8,809 8,063 5,876 (9,711) 13,037
Reserve for post-retirement
health care 8,713 910 -- (896) 8,727
Reserve for employee benefits 2,292 6,177 240 (5,370) 3,339
Reserve for coal miners retiree
health care -- 4,600 -- -- 4,600
-------- -------- -------- -------- --------
TOTAL OTHER RESERVES $ 20,568 $ 19,750 $ 6,413 $(15,977) $ 30,754
======== ======== ======== ======== ========
</TABLE>
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 88
<SECURITIES> 0
<RECEIVABLES> 86,382
<ALLOWANCES> 665
<INVENTORY> 8,738
<CURRENT-ASSETS> 96,265
<PP&E> 640,966
<DEPRECIATION> 333,489
<TOTAL-ASSETS> 423,295
<CURRENT-LIABILITIES> 56,264
<BONDS> 132,142
0
0
<COMMON> 1
<OTHER-SE> 160,507
<TOTAL-LIABILITY-AND-EQUITY> 423,295
<SALES> 0
<TOTAL-REVENUES> 269,259
<CGS> 0
<TOTAL-COSTS> 219,900
<OTHER-EXPENSES> 10,515
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,757
<INCOME-PRETAX> 25,087
<INCOME-TAX> 8,464
<INCOME-CONTINUING> 16,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,623
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
