PROSPECTUS
[[LOGO]]
$75,000,000
Midland Enterprises Inc.
6.25% First Preferred Ship Mortgage Bonds Due 2008
The 6.25% First Preferred Ship Mortgage Bonds due 2008 (the "Bonds") are
being offered (the "Offering") by Midland Enterprises Inc. (the "Company").
Interest on the Bonds will be payable semiannually on April 1 and October 1
of each year, commencing April 1, 1999. The Bonds will mature on October 1,
2008. The Bonds will be redeemable as a whole or in part, on a pro rata basis,
at the option of the Company, at any time at a redemption price equal to the
greater of (i) 100% of their principal amount or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted to the date of redemption on a semi-annual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as
defined), plus accrued interest to the date of redemption. See "Description of
the Bonds -- Optional Redemption."
The Bonds will be secured by a first preferred ship mortgage on certain
vessels having an aggregate fair value of not less than 133 1/3% of the
principal amount of the Bonds outstanding and by an assignment of monies payable
to the Company under a charter. The Bonds will be direct, senior secured
obligations of the Company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Public Underwriting Proceeds to the
(1) Discounts and Company (3)
Commissions (2)
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Per Bond........................................................ 99.311% .650% 98.661%
Total........................................................... $74,483,250 $487,500 $73,995,750
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(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriter (as defined) against
certain liabilities, including liabilities under the Securities Act (as
defined). See "Plan of Distribution."
(3) Before deduction of expenses payable by the Company, estimated at $248,625.
The Bonds are offered by Donaldson, Lufkin & Jenrette Securities Corporation
(the "Underwriter") subject to prior sale, when, as and if delivered to and
accepted by the Underwriter and subject to certain other prior conditions
including the right of the Underwriter to reject any order in whole or in part.
It is expected that delivery of the Bonds will be made in book-entry form
through the facilities of The Depository Trust Company ("DTC"), against payment
therefor in immediately available funds, on or about September 29, 1998.
Donaldson, Lufkin & Jenrette
The date of this Prospectus is September 24, 1998
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THE UNDERWRITER PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE BONDS. SPECIFICALLY,
THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR
AND PURCHASE THE BONDS IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and the Commission's Regional
Offices at 75 Park Place, Room 1288, New York, New York 10017, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and
copies may be obtained at prescribed rates from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such reports
and other information may also be accessed electronically by means of the
Commission's site on the World Wide Web, at http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Bonds to which this Prospectus
relates. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Bonds, reference is made to the Registration
Statement, including the exhibits thereto. The Registration Statement may be
inspected by anyone without charge at the principal office of the Commission in
Washington, D.C., and copies of all or part of it may be obtained from the
Commission upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1997, and Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998
and June 30, 1998, respectively, heretofore filed with the Commission pursuant
to the Exchange Act are hereby incorporated by reference in this Prospectus.
All other documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the Offering shall be deemed to be incorporated by reference
and to be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed incorporated document
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as modified or superseded, to constitute a part of
this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated by reference in this Prospectus,
other than exhibits to such documents (unless such exhibits have been
specifically incorporated by reference therein). Requests for such copies should
be directed to Secretary, Midland Enterprises Inc., 300 Pike Street, P.O. Box
1460, Cincinnati, Ohio 45201, telephone (513) 721-4000.
The Company does not prepare annual or quarterly reports to shareholders
and no such reports will be furnished to holders of the Bonds.
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As used herein, references to "Midland" or the "Company" are to Midland
Enterprises Inc., a Delaware corporation, and its consolidated subsidiaries.
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SUMMARY
The following summary information is qualified in its entirety by the
detailed information and financial statements appearing elsewhere in this
Prospectus and in the documents, financial statements and information
incorporated by reference in this Prospectus.
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This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act concerning
projected future financial performance or concerning expected plans or future
operations. The Company cautions that actual results and developments may differ
materially from such projections or expectations. All statements other than
statements of historical facts included in this prospectus, including without
limitation, certain statements under "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and
located elsewhere herein regarding the Company's financial position and business
strategy, may constitute forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. 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 economic conditions, including interest rates and the
value of the dollar versus other currencies, changes in fuel prices and
regulatory and court decisions. All of these factors are difficult to predict
and are generally beyond the control of the Company.
THE COMPANY
Midland owns and operates the second largest fleet of towboats and barges
for the transport of dry bulk commodities on the US inland river system. The
Company, through its barge line subsidiaries, is primarily engaged in the
operation of a fleet of approximately 2,400 barges and 87 tugboats and towboats,
principally on the Ohio and Mississippi Rivers and their tributaries, on the
Gulf Intracoastal Waterway and in the Gulf of Mexico. Midland transports a range
of dry bulk commodities, the major portion of which is coal for use by electric
utilities. Midland, through other subsidiaries, also performs repair work on
marine equipment and operates two coal dumping terminals, a phosphate rock and
phosphate fertilizer terminal and a marine fuel supply facility, which together
account for approximately 10% of its consolidated revenues.
Midland, incorporated in 1961, and its predecessors have been engaged in
barge transportation for over 70 years. The Company is a wholly-owned subsidiary
of Eastern Enterprises ("Eastern"), a Massachusetts unincorporated voluntary
association which is also engaged in the distribution of natural gas through a
wholly-owned subsidiary, Boston Gas Company ("Boston Gas"). Eastern's common
stock is listed on the New York, Pacific and Boston Stock Exchanges. Midland's
principal executive offices are located at 300 Pike Street, Cincinnati, Ohio
45202 and its telephone number is (513) 721-4000.
THE OFFERING
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Issuer..................................................... Midland Enterprises Inc.
Securities Offered......................................... $75,000,000 6.25% First Preferred Ship Mortgage Bonds due
2008.
Optional Redemption........................................ The Bonds will be redeemable as a whole or in part, on a pro rata
basis, at the option of the Company, at any time at a redemption
price equal to the greater of (i) 100% of their principal amount or
(ii) the sum of the present values of the remaining scheduled
payments of principal and interest thereon discounted to the date
of redemption on a semi-annual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Adjusted Treasury
Rate plus accrued interest to the date of redemption.
Use of Proceeds............................................ The net proceeds to the Company from the sale of the Bonds will
be used for the purchase of new and used river barges, renewal
and upgrade of the Company's towboats, and purchase of other
marine related property, machinery and equipment. Pending such
uses, the proceeds may be advanced to Eastern for short-term
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THE OFFERING (continued)
investment, in which event the Company will receive interest
payments from Eastern based on the applicable Federal rate as
defined in the Internal Revenue Code (currently, 5.75% per annum).
Security................................................... Mortgage on vessels having an aggregate fair value of at least
133-1/3% of the principal amount of Bonds outstanding and
assignment of charter hire from Orgulf Transport Co. ("Orgulf"),
a wholly-owned subsidiary of the Company.
Restrictive Covenants...................................... The Bonds will be subject to various covenants, including
limitations on liens on any property of the Company and its Barge
Line Subsidiaries (as defined) and a restriction on the disposition
of securities of, and a debt limitation applicable to, Barge Line
Subsidiaries.
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SUMMARY FINANCIAL AND OPERATING INFORMATION
(Amounts, Except Ratios and Total Ton Miles, in Thousands)
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Unaudited
Six Months
Years Ended December 31, Ended June 30
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1997 1996 1995 1998 1997
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Revenues................................................ $269,259 $301,880 $296,339 $127,821 $132,495
Operating Earnings...................................... $ 34,613 $ 58,415 $ 57,828 $ 13,808 $ 14,531
Net Earnings............................................ $ 16,623 $ 30,597 $ 27,559 $ 7,494 $ 6,401
Ratio of Earnings to Fixed Charges(1)................... 2.70x 3.96x 3.90x 2.62x 2.29x
Total Tonnage Transported............................... 57,000 65,500 66,200 29,500 27,400
Total Ton Miles (in millions)........................... 33,100 36,100 36,800 15,600 16,200
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Unaudited
June 30, 1998
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Actual As Adjusted(2)
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Amount Percent Amount Percent
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Obligations Under Capital Leases................................. $ 13,950 5.7% $ 13,950 4.3%
First Preferred Ship Mortgage Bonds.............................. 67,511 27.4 142,511 44.4
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Total Long-Term Debt (less
current portion)............................................ $ 81,461 33.1% $156,461 48.7%
Stockholder's Equity........................................ 164,502 66.9 164,502 51.3
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Total Capitalization........................................ $245,963 100.0% $320,963 100.0%
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(1) Earnings used to calculate the ratio of earnings to fixed charges equal the
sum of income before income taxes plus fixed charges. Fixed charges consist
of interest, amortization of debt expense and one-third of long-term
rentals.
(2) To reflect the sale of the Bonds offered hereby.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the Bonds will be used for
the purchase of new and used river barges, renewal and upgrade of the Company's
towboats, and purchase of other marine related property, machinery and
equipment. Pending such uses, the proceeds may be advanced to Eastern for
short-term investment, in which event the Company will receive interest payments
from Eastern based on the applicable Federal rate as defined in the Internal
Revenue Code of 1986, as amended (currently, 5.75% per annum).
CAPITALIZATION
The consolidated capitalization of the Company at June 30, 1998 and as
adjusted to give effect to the sale of the Bonds offered hereby is set forth
below. This table should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes included elsewhere in this Prospectus.
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Unaudited
June 30, 1998
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(Dollars in Thousands)
Outstanding Pro Forma As Adjusted
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Amount Percent Amount Percent
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Long-Term Debt (less current
portion): (1)(2)
First Preferred Ship Mortgage Bonds
8.1%-9.85% Medium Term Notes,
Series A due 2002-2012..................... $ 67,511 27.4% $ 67,511 21.0%
6.25% First Preferred Ship Mortgage
Bonds due 2008............................. -- -- 75,000 23.4
Obligations Under Capital Leases................. 13,950 5.7 13,950 4.3
-------- ----- -------- -----
Total Long-Term Debt........................ $ 81,461 33.1% $156,461 48.7%
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Stockholder's Equity:
Common Stock, $100 par value
Authorized 1,000 shares
Issued 15-1/2shares........................... $ 1 0.0% $ 1 0.0%
Capital in excess of par value................... 52,519 21.4 52,519 16.4
Retained Earnings............................... 111,982 45.5 111,982 34.9
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Total Stockholder's Equity....................... 164,502 66.9 164,502 51.3
-------- ----- -------- =====
Total Consolidated Capitalization................... $245,963 100.0% $320,963 100.0%
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(1) See Note 3 of Notes to the Company's Unaudited Interim Financial Statements.
(2) As of June 30, 1998, current maturities of long-term debt were $4,545,000.
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SELECTED FINANCIAL DATA
The following selected financial information for each of the three years in
the period ended December 31, 1997 and the six months ended June 30, 1998 and
1997 (with the exception of the ratios of earnings to fixed charges) has been
summarized from the Consolidated Financial Statements contained herein. This
information should be read in conjunction with the Consolidated Financial
Statements, related Notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included herein.
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Unaudited
Six Months
Ended
Years Ended December 31, June 30,
-------------------------------- ----------
1997 1996 1995 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
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Statement of Earnings Data (for period)
Revenues.............................................. $269,259 $301,880 $296,339 $127,821 $132,495
Operating Costs and Expenses:
Operating expenses................................ 183,929 189,357 183,462 87,315 92,849
Other expenses.................................... 50,717 54,108 55,049 26,698 25,115
Operating Earnings.................................... 34,613 58,415 57,828 13,808 14,531
Other Income (Expense):
Interest income................................... 4,315 4,461 5,156 1,047 2,065
Other............................................. (84) 2 332 184 (97)
Interest Expense...................................... 13,757 14,715 15,175 5,432 6,914
Earnings before Income Taxes.......................... 25,087 48,163 48,141 9,607 9,585
Provision for Income Taxes............................ 8,464 17,566 17,592 3,475 3,184
Net Earnings(1)....................................... 16,623 30,597 27,559 7,494 6,401
Ratio of Earnings to Fixed Charges (2)................ 2.70x 3.96x 3.90x 2.62x 2.29x
Balance Sheet Data (at end of period)
Total Current Assets.................................. 96,265 93,647 125,774 28,317 101,048
Total Assets.......................................... 423,295 417,791 426,012 369,267 415,215
Total Current Liabilities............................. 56,264 51,863 60,654 48,952 47,674
Current Portion of Long-Term Debt..................... 4,351 3,986 3,684 4,545 4,183
Long-Term Debt........................................ 132,142 137,313 144,903 81,461 135,084
Stockholder's Equity.................................. 160,508 156,287 148,906 164,502 157,887
Other Financial Data (for period)
Net Cash from Operations.............................. 43,849 54,675 68,605 12,460 17,770
Capital Expenditures.................................. 25,700 47,851 20,900 26,540 2,363
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(1) Net earnings are after extraordinary items consisting in 1995 of a reserve
of $2,990,000 (after taxes) to provide for the Company's estimated
undiscounted obligations under the Coal Industry Retiree Health Benefit
Act of 1992 (the "Coal Act"), and in 1998 of a loss of $1,465,000 (after
taxes) on the early retirement of $50 million of 9.9% debt in March and a
credit of $2,827,000 (after taxes) to reverse the reserve as a result of
the Supreme Court decision in the Company's favor with respect to the Coal
Act in June. See "Business -- Legal Proceedings."
(2) Earnings used to calculate the ratio of earnings to fixed charges equal
the sum of income before income taxes plus fixed charges. Fixed charges
consist of interest, amortization of debt expense and one-third of total
long-term rentals.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read together with the
Consolidated Financial Statements and Notes thereto that are included elsewhere
in this Prospectus.
Overview
The Company, through its wholly-owned barge line subsidiaries, is primarily
engaged in the operation of a fleet of towboats, tugboats and barges,
principally on the Ohio and Mississippi Rivers and their tributaries, on the
Gulf Intracoastal Waterway and in the Gulf of Mexico. The Company, through other
subsidiaries, also performs repair work on marine equipment and operates two
coal dumping terminals, a phosphate rock and phosphate fertilizer terminal, and
a marine fuel supply facility.
The market for marine transportation is cyclical and weather conditions can
have a significant impact on customer demand as well as on operating conditions.
During 1997, and through the first six months of 1998, the industry experienced
a broad range of adverse weather and economic factors as discussed below in
"-- Results of Opererations", that affected the Company's operating results.
Although operating earnings in 1997 decreased 41% from the record earnings in
1996, Midland generated $57.3 million of earnings before interest, taxes,
depreciation and amortization, or over 6 times net interest expense, in 1997 and
$25.5 million for the first six months of 1998. The Company achieved these
earnings through continued cost reduction and productivity initiatives,
development of new business opportunities, renewal of certain expiring contracts
and continued barge fleet replacement, acquiring approximately 160 new barges
during this period.
Results of Operations
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Weak demand for export coal and grain continued to place downward pressure
on spot and contract renewal rates compared to 1997. The strengthening of the
U.S. dollar and the economic problems in Southeast Asia have contributed to
export market weakness. Increased demand for domestic coal by electric utility
and industrial customers mostly offset such export market weakness. However,
fuel prices, which continued to decline, lowered rates in multi-year contracts
that contain fuel price adjustment clauses. As a result of these factors, year
to date revenues declined by 4% compared to 1997.
El Nino related storms in 1998, particularly in the Southeast and Gulf
regions, continued to cause high water conditions and intermittent traffic
delays. This resulted in increased vessel costs similar to the level caused by
the record flooding on the Ohio River in the comparable period in 1997. In
addition, fleet efficiency was negatively impacted by the lack of southbound
export tonnage to the Gulf, as replacement tonnage did not produce equivalent
pattern efficiency. Lower fuel costs partially offset the higher operating
costs. As a result of these operational factors and the lower revenues discussed
above, operating earnings declined 5% year to date compared to last year.
Tonnage increased 8%, while related ton miles declined 4% year to date
compared to 1997. The increased tonnage, with lower ton miles, reflects the
Company's efforts to replace reduced long-haul export tonnage with shorter haul
domestic movements. Coal tonnage increased 14% for the first half, with coal
tonnage under multi-year contracts to utility and industrial customers
increasing over 28% year to date. The reduced spot and export coal tonnage
partially offset those increases. Non-coal tonnage was 3% lower than 1997 year
to date, due to significantly lower grain shipments partially offset by
increased aggregate tonnage and towing for others.
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As a result of the lower operating earnings discussed above, partially
offset by lower net interest expense, earnings before extraordinary items
declined by $.3 million year to date compared to 1997.
In March 1998, the Company recognized an extraordinary loss of $2.3 million
pretax or $1.5 million net of tax, on the early retirement of $50 million of
First Preferred Ship Mortgage Bonds due 2008. In June of 1998, the U.S. Supreme
Court upheld Eastern Enterprises' challenge to the constitutionality of the Coal
Act as applied to Eastern. Consequently, as discussed in Note 2 of Notes to
Unaudited Interim Financial Statements, the Company reversed its Coal Act
reserve resulting in an extraordinary gain of $4.3 million pre-tax or $2.8
million net of tax in the second quarter of 1998.
As a result of the above items, net earnings improved by $1.1 million,
compared to 1997 year to date.
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 Company 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 Company'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 Company'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 $0.8 million due mainly to lower
long-term debt balances and reduced debt premiums.
The combination of the items 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, led to higher operating
costs and lower fleet productivity than in 1995.
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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 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.
Including the pretax items and operating results discussed above, earnings
before the extraordinary item for 1996 were nearly unchanged from 1995.
In 1995, the Company recorded a pretax charge of $4.6 million representing
the estimated undiscounted liability for health care and death benefit premiums
imposed by the 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. The charge was subsequently reversed as
a result of the Supreme Court decision in the Company's favor in June 1998. See
"Business -- Legal Proceedings."
Seasonality
The Company's results of operations are affected by seasonal factors. 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.
Liquidity and Capital Resources
Capital expenditures for 1997 totaled approximately $26 million and are
budgeted at approximately $48 million for 1998, the majority of which pertains
to purchase commitments for new dry cargo barges for delivery during 1998.
Capital expenditures in 1997, debt payments, and dividends were funded from cash
provided from operating activities. The increase in accounts payable at December
31, 1997, reflected amounts established for the purchase of capital assets in
process at year end and timing of invoice flow from vendors. The Company plans
to fund the capital expenditures in 1998 with cash provided from operating
activities as well as from the proceeds of the Bonds.
In March of 1998, the Company utilized a receivable from Eastern to redeem
$50 million of its 9.90% First Preferred Ship Mortgage Bonds due 2008. In
connection with the extinguishment of this debt, the Company recognized an
extraordinary charge of $2.3 million before taxes ($1.5 million net of taxes).
In the second quarter of 1998, the Company entered into treasury rate lock
agreements in order to hedge the interest rate on the debt anticipated to be
issued in connection with the Offering. Upon issuance of the Bonds, any gain or
loss realized on the treasury rate lock agreements will be amortized to interest
expense over the term of the related debt.
As of June 30, 1998, the Company had $68 million in indebtedness
outstanding under its 8.1%-9.85% Medium Term Notes, Series A due 2002-2012 (the
"Series A Notes"), which are secured by approximately 531 of the Company's
barges and by assignment of rentals for that equipment payable to the Company by
its subsidiaries. In addition, the Bonds offered hereby will be secured by
approximately 433 of the Company's barges and 3 towboats, and by assignment of
rentals for that equipment payable to the Company by one of its subsidiaries.
The indenture relating to the Bonds and the indenture relating to the Series A
Notes contain various negative covenants as described below
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in "Description of the Bonds -- Certain Restrictions." In addition, the
indenture relating to the Series A Notes contains restrictions on indebtedness
of, and dividends and advances by, the Company.
The Company also had approximately $18 million in obligations under capital
leases for barges at June 30, 1998. Principal payments due amount to $4.4
million in 1998, $4.8 million in 1999, $5.3 million in 2000, $4.2 million in
2001, $1.7 million in 2002 and $.3 million thereafter.
The Company may borrow up to $50 million under Eastern's $100 million
credit agreement with a syndicate of banks through December 31, 2001. The
Company currently has no borrowings outstanding under this agreement.
Computer Systems and Year 2000
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 is also surveying critical suppliers and customers to
determine the status of their year 2000 compliance programs. Management expects
the program modifications to be completed by December 31, 1998 and spending for
these modifications is being expensed as incurred. At this time, the Company has
not determined the total cost of modifying its software. However, management
does not believe that these costs will have a material impact on its operating
results or financial condition.
BUSINESS
General
Midland owns and operates the second largest fleet of towboats and barges
for the transport of dry bulk commodities on the US inland river system. The
Company, through its barge line subsidiaries, is primarily engaged in the
operation of a fleet of approximately 2,400 barges and 87 tugboats and towboats,
principally on the Ohio and Mississippi Rivers and their tributaries, on the
Gulf Intracoastal Waterway and in the Gulf of Mexico. Midland transports a range
of dry bulk commodities, the major portion of which is coal for use by electric
utilities. Midland, 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, which
together account for approximately 10% of its consolidated revenues.
Midland, incorporated in 1961, and its predecessors have been engaged in
barge transportation for over 70 years. Midland is a wholly-owned subsidiary of
Eastern, a Massachusetts unincorporated voluntary association which is also
engaged in the distribution of natural gas through its wholly-owned subsidiary
Boston Gas. Eastern's common stock is listed on the New York, Pacific and Boston
Stock Exchanges.
Principal Services and Markets
Barge Transportation. The Company's primary area of operations is barge
transportation conducted through its four wholly-owned barge-line subsidiaries,
The Ohio River Company ("ORCO"), Orgulf, Orsouth Transport Co. ("Orsouth") and
Red Circle Transport Co. ("Red Circle"). Inland marine transportation plays a
significant role in the delivery of raw materials and products for a variety of
different industries such as energy, agriculture and manufacturing. In addition,
the delivery of commodities such as coal, grain, aggregates, scrap and other
bulk cargoes using barge transportation can be accomplished at a significantly
lower cost than other modes of transportation.
Total tonnage amounted to 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 certain multi-year utility coal contracts,
unplanned plant outages for several customers, and lower demand from export coal
and grain markets. Tonnage in
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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
Company for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Ton Miles Transported
Years Ended December 31,
1997 1996 1995
---- ---- ----
(in billions)
<S> <C> <C> <C>
Coal............................................. 13.6 15.7 15.2
Grain............................................ 4.5 4.8 5.2
Other (1)........................................ 15.0 15.6 16.4
---- ---- ----
Total Ton Miles............................. 33.1 36.1 36.8
</TABLE>
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(1) 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, total
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.
Midland's largest market segment and primary strategic focus is coal
transportation, principally on the Ohio River and primarily for electric
utilities in the eastern half of the United States. In 1997, coal represented
62% of its total tonnage but only 41% of total ton miles, due to the relatively
short-haul nature of most coal deliveries. Other coal transportation markets
served by Midland include coal used for industrial processes such as steel
making and coal exported to international markets.
Grain transportation, which primarily serves the export trade, is another
key market segment for Midland and plays an important role in the overall supply
and demand balance for the barge industry fleet generally. Grain movements are
equipment intensive due to the length of the trip down the Mississippi River to
the Gulf and back again. Midland's strategy for grain markets, which represented
14% of total ton miles in 1997, will continue to be balanced between providing
transportation for large, domestic grain customers, and, depending on demand and
availability of equipment, serving export trades as well.
Midland is also pursuing other commodity transportation markets such as the
growing number of river-served steel mini-mills. These high-efficiency,
steel-making facilities are being built on rivers in order to take advantage of
low-cost barge transportation for their large bulk shipments of raw materials in
and finished products out. The Company also transports other dry cargo such as
fertilizer and aggregates.
Orco and Orgulf are the largest of the Company's subsidiaries and accounted
for 57% and 33%, respectively, of the Company's total tonnage in 1997. Orco
operates principally on the Ohio River and certain of its tributaries
transporting principally coal, primarily for electric utilities and industrial
users. Orgulf operates principally on the Mississippi and Ohio Rivers and on the
Illinois Waterway, transporting coal, grain, aggregates, scrap, ores and steel
products. Orsouth operates principally on the Tennessee-Tombigbee and Gulf
Intracoastal Waterways, and on the Black Warrior and Mississippi Rivers,
transporting principally coal, ores and wood products. Red Circle is engaged
primarily in the offshore transportation of phosphate rock in the Gulf of Mexico
and grain from Louisiana to Puerto Rico.
Other Operations. In addition to its barge transport operations, the
Company also operates terminal facilities, a midstream fueling service and
shipyard repair facilities through Eastern Associated Terminals Company
("EATCO"),
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Hartley Marine Corp. ("Hartley"), The Ohio River Terminals Company ("ORTCO") and
West Virginia Terminals, Inc. ("West Virginia Terminals"). EATCO operates a
terminal on leased land in 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, and West
Virginia Terminals operates a coal dumping facility in Kenova, West Virginia.
Customers
In 1997, one customer, The Cincinnati Gas and Electric Co., accounted for
approximately 10% of the Company's consolidated revenues under a multi-year coal
transportation agreement between ORCO 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.
Multi-Year Contracts
The Company's multi-year contracts expire at various dates from February
1999 through December 2007. During 1997, approximately 44% of the Company'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 the Company's
subsidiary that results in termination of the contract, the Company's subsidiary
would be responsible for reimbursing its customer for the differential between
the contract price and the cost of substituted performance.
Backlog. The backlog of transportation and terminalling business under
multi-year contracts is summarized in the following 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, the Company 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 Company'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.
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<PAGE>
Raw Materials
The only significant raw material required by the Company is diesel fuel to
operate its towboats. Diesel fuel is purchased from a variety of sources, and
the Company regards the availability of diesel fuel as adequate for currently
planned operations.
Competition
The Company's inland marine transportation business competes on the basis
of price, service and equipment availability. The Company's primary competitors
include other barge lines and railroads. There are a number of companies
offering transportation services on the waterways served by the Company. 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, an imbalance of supply and demand was created,
which 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 Company'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.
Properties
As of June 30, 1998, the Company's floating equipment consisted of
approximately 2,400 dry cargo barges and 87 towboats and tugboats. Substantially
all of the barges, towboats and tugboats operated by the Company's barge line
subsidiaries are owned by and chartered from the Company. Approximately 42%
(including the equipment to be mortgaged as security under the Bonds) of the
Company'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 capital lease payments.
The Company's subsidiaries also own and operate shore facilities in Tampa,
Florida, Paducah, Kentucky and Huntington, West Virginia.
Employees
As of June 30, 1998, the Company had approximately 1,300 employees, of whom
approximately 30% are represented by labor unions. These unions include the
United Steelworkers of America, the American Maritime Officers, the Seafarers
International Union and an independent labor union.
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<PAGE>
The Company has not experienced any labor problems having a material
adverse effect on its financial position or results of operations.
Environmental Matters
The Company and certain of 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 Company's capital expenditures,
earnings, or competitive position, and no such effect is anticipated.
Legal Proceedings
In 1993, Midland's parent, Eastern, received notice from the Social
Security Administration indicating that Eastern was responsible for health care
and death benefit premiums for a certain group of retired coal miners and their
beneficiaries under the Coal Act. In 1995, 1996 and 1997 Eastern received
further notices from the Social Security Administration for an additional group
of retired coal miners and their beneficiaries. In 1993 and 1995, Eastern
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 Eastern. A portion of the assignments to Eastern was
allegedly due to Eastern's relationship to a predecessor entity of Midland which
is no longer in business. Eastern asserted a claim against Peabody Holding
Company, Inc. ("Peabody"), to which Eastern sold its coal subsidiaries in 1987,
that any liabilities under the Coal Act should be borne by Peabody and such
subsidiaries. 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.
Eastern'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, Eastern's petition for a writ of certiorari in the
Supreme Court was granted, and in June 1998 the Supreme Court reversed the
decision of the First Circuit Court of Appeals and held that the Coal Act was
unconstitutional as applied to Eastern. Accordingly, in June 1998, the Company
reversed $4,350,000 ($2,827,000 after tax) of the reserve established in 1995.
The Company is a party to various other legal actions ensuing in the
ordinary course of its business. The Company believes that the resolution of
these legal actions will not have a material adverse effect on its financial
position or results of operations.
EASTERN ENTERPRISES
All of the outstanding capital stock of the Company is owned by Eastern, an
unincorporated voluntary association formed under the laws of The Commonwealth
of Massachusetts in 1929. Eastern's principal subsidiaries are Midland and
Boston Gas, which is a regulated utility that distributes natural gas in and
around Boston, Massachusetts. Eastern provides management and other staff
services to Midland and Boston Gas. It is the policy of Eastern that each
operation should be financially independent, and, to that end, each of the
principal subsidiaries is financed primarily through its own funded debt which
is not guaranteed by Eastern.
Eastern's common stock is listed on the New York, Boston and Pacific Stock
Exchanges.
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<PAGE>
DESCRIPTION OF THE BONDS
The Bonds have been authorized in an aggregate principal amount of
$75,000,000 and will be issued under an Indenture of First Preferred Ship
Mortgage dated as of September 29, 1998 (the "Indenture") between the Company
and The Chase Manhattan Bank, as trustee (the "Trustee"), a copy of which is
filed as an Exhibit to the Registration Statement of which this Prospectus is a
part. The following brief summary of certain provisions of the Indenture uses
terms defined in the Indenture and is qualified in its entirety by the
Indenture, to which reference is hereby made. Unless otherwise defined herein,
all such terms shall have the meanings ascribed to them in the Indenture. Unless
otherwise indicated, references in italics are to Articles, Sections or clauses
of the Indenture. Wherever particular provisions of the Indenture are referred
to, such provisions are incorporated by reference as a part of the statements
made and the statements are qualified in their entirety by such reference.
The Bonds will be delivered only in fully registered form in a minimum
denomination of $1,000 and in integral multiples thereof. The Bonds in the
several denominations are interchangeable without service charge, subject to the
limitations provided in the Indenture. Interest will be payable semiannually on
April 1 and October 1 to the registered holders of the Bonds of record at the
close of business on the preceding March 15 or September 15, as the case may be,
commencing April 1, 1999. The Bonds mature on October 1, 2008. Principal of and
premium, if any, and interest on the Bonds will be payable, and the transfer of
the Bonds will be registrable, at the principal office of the Trustee in New
York City. In addition, payment of interest may, at the option of the Company,
be made by check mailed to the address of the holder entitled thereto as it
appears in the Bond Register. (Article Two and Article Three)
The Company does not plan to apply for listing of the Bonds on any national
securities exchange and trading in the Bonds after the initial public offering
may be relatively inactive.
The Indenture does not restrict or require the Company to redeem or permit
holders to cause a redemption of the Bonds in the event of (i) a consolidation,
merger, sale of assets or other similar transaction that may adversely affect
the creditworthiness of the Company or any successor or combined entity, (ii) a
change in control of the Company or (iii) except to the extent of restrictions
on liens on property of the Company and its Barge Line Subsidiaries, a highly
leveraged transaction involving the Company whether or not involving a change in
control.
Optional Redemption
The Bonds will be redeemable as a whole or in part, on a pro rata basis, at
the option of the Company, at any time upon not less than 30 nor more than 60
days, notice to each Holder of the Bonds, at a redemption price equal to the
greater of (i) 100% of the principal amount of such Bonds or (ii) as determined
by an Independent Investment Banker, the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date of redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Adjusted Treasury Rate, plus accrued and unpaid
interest thereon to the date of redemption. Unless the Company defaults in
payment of the redemption price, on and after the Redemption Date, interest will
cease to accrue on the Bonds or portions thereof called for redemption. (Section
203 and Article Fourteen)
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<PAGE>
Security and Release Provisions
The Indenture will create as security for the Bonds a first preferred ship
mortgage on Vessels having an aggregate fair value of not less than 1331/3% of
the principal amount of Bonds outstanding. It is expected that these Vessels
will include approximately 433 barges and 3 towboats. The Company currently
uses, and intends to continue to use, these Vessels on the inland waterways of
the United States. The lien of the Indenture will constitute a first "preferred
mortgage" lien on each of the Vessels under Chapter 313 of Title 46 of the
United States Code ("Chapter 313"), as amended, having the effect and with the
priority provided by Chapter 313. The Indenture does not prohibit any use of the
Vessels in foreign waters; however, the equipment is designed primarily for use
in the United States waters referred to above.
On or before the time each Vessel is subjected to the lien of the
Indenture, it will be chartered by the Company under a charter (the "Charter")
with Orgulf. As additional security for the Bonds, the Company will assign to
the Trustee by an assignment to be dated the date of the Closing (as defined)
certain moneys payable to it under the Charter. The Charter will have a term of
10 years and will provide for aggregate, annual payments sufficient to enable
the Company to meet when due its obligations under the Bonds.
Each Vessel will be assigned an Original Release Price which will be a
specified amount set forth in the Indenture equal to 75% of its appraised fair
value to the Company as of the Issue Date. Each Vessel also will be assigned a
Release Percentage which shall be equal to the ratio of its Original Release
Price divided by the amount of the Bonds initially issued. The Release Prices
will change over time in proportion to the reduction in principal amount of the
Bonds. (Sections 902 and 1109). The Company may release any Vessel from the
first preferred ship mortgage lien and Charter upon (i) (a) substitution of cash
alone deposited with the Trustee, (b) cash plus other Vessel(s) whose then fair
value, when taken with such cash, equals or exceeds the Release Price of the
Vessel to be released, or (c) Vessel(s) alone whose then fair value equals or
exceeds the Release Price of the Vessel to be released. (Section 1101)
Insurance proceeds received with respect to a Vessel which has become an
actual, constructive or agreed total loss are treated under the Indenture as if
the particular Vessel were being released so that proceeds, if any, in excess of
the Release Price of such Vessel are payable to the Company and the balance
(equal to the Release Price) is retained by the Trustee, subject to gradual
repayment to the Company as the Bonds are paid down and the Release Prices
reduced. (Sections 1101 and 1105)
The Trustee shall invest Deposited Moneys in such Investment Securities as
the Company may request, which shall be United States government obligations,
prime commercial paper, certificates of deposit, time deposits in banks or trust
companies or securities of any investment fund, trust, mutual fund or other
investment entity, the assets of which are primarily invested in such
securities. (Section 1106) Deposited Moneys shall be paid to the Company if the
Company shall subject to the lien of the Indenture one or more additional
Vessels and may also be used at the direction of the Company to buy the Bonds in
the market. The amount which may be paid to the Company shall be the greater of
75% of the fair value of such a Vessel or its Original Release Price. (Sections
1105 and 1106)
Certain Restrictions
Prohibitions Against Liens. The Company and its Barge Line Subsidiaries
will be restricted from assuming or permitting to exist any mortgage, pledge,
lien or encumbrance upon any of their property, other than, among other things,
(i) Existing Leases and the Existing Mortgage and charters referred to therein,
(ii) the lien of the Indenture and the Charter, (iii) liens on vessels provided
that the principal amount of such indebtedness secured by such liens
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<PAGE>
when incurred does not exceed 80% of the Fair Value of the vessels plus cash, if
any, deposited as additional security for such indebtedness, (iv) subject to the
last sentence under "Disposition of Securities of and Debt Limitation on Barge
Line Subsidiaries" below, in the case of Barge Line Subsidiaries, liens upon
stock of any Subsidiary or upon property (other than vessels) owned by the
Company or any Subsidiary created or assumed upon or in connection with the
acquisition of such property or to secure indebtedness of the Company or any
Subsidiary for money borrowed, and (v) certain liens arising in the ordinary
course of business. (Section 1312)
Disposition of Securities of and Debt Limitation on Barge Line
Subsidiaries. The Company will be restricted from (a) selling, transferring or
disposing of any stock or indebtedness of any Barge Line Subsidiary, (b)
permitting any Barge Line Subsidiary to issue stock to any person other than the
Company or (c) permitting any Barge Line Subsidiary to consolidate or merge into
or sell all of its assets to anyone other than the Company or another Barge Line
Subsidiary, except that the stock or properties of any Barge Line Subsidiary may
be disposed of as an entirety for a consideration deemed to be fair to the
Company by its Board of Directors. Barge Line Subsidiaries will be restricted
from incurring Funded Debt, in excess of $1,000,000 other than (i) to
the Company or a Subsidiary and (ii) secured debt referred to above in clause
(iii) under "Prohibitions Against Liens." (Section 1319)
Consolidation, Merger or Sale. The Company will not consolidate or merge
with any other corporation or sell or transfer all or substantially all of its
assets to another corporation, unless the successor corporation assumes all of
the Company's obligations under the Indenture and the Bonds and after giving
effect to such transaction, no Event of Default or event which after notice or
lapse of time or both would become an Event of Default, shall have occurred and
be continuing. (Section 801)
Modification of the Indenture; Waivers
The Indenture will contain provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Bonds at the time outstanding, to modify the Indenture
or any supplemental indenture or the rights of the holders of the Bonds;
provided that such modification shall not (i) change the Stated Maturity of any
principal or interest on any Bonds, or reduce the principal amount thereof or
premium thereon, or reduce the rate or extend the time of payment of interest
thereon, without the consent of the holders of each Bond so affected or (ii)
reduce the aforesaid percentage of the Bonds, the consent of the holders of
which is required for any such modification, without the consent of the holders
of all Bonds then outstanding. (Section 1202)
Events of Default
An Event of Default will be defined in the Indenture as being: (i) default
for 30 days in payment of any interest; (ii) default in payment of principal (or
premium, if any) when due; (iii) default in performance of any other covenant in
the Indenture for 90 days after written notice thereof; (iv) certain unstayed or
unsatisfied judgment defaults; and (v) certain events in bankruptcy, insolvency
or reorganization of the Company. (Section 501)
The holders of a majority in principal amount of the Bonds at the time
outstanding may waive any past default under the Indenture, except a default in
the payment of interest or principal or premium. (Section 522) The holders of a
majority in principal amount of the Bonds at the time outstanding may annul a
declaration that all Bonds are due and payable immediately but only if all
defaults have been remedied and all payments due (other than by acceleration)
have been made. (Section 501) The Indenture will provide that the Trustee may
withhold notice to the holders of any default (except in the payment of
principal of, or interest or premium on, the Bonds) if the Trustee considers it
in the interest of the holders to do so. (Section 602) If an Event of Default
shall have happened and be continuing, either the Trustee or the holders of 25%
in principal amount of the Bonds at the time outstanding may declare the
principal of all the Bonds to be due and payable. (Section 501)
Other than the right to payment of the principal and premium (if any) and
interest on any Bond, the holder thereof may not enforce any right under the
Indenture unless he has given written notice of default and the continuance
thereof to the Trustee and unless the holders of at least 25% principal amount
of the Bonds at the time outstanding have
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<PAGE>
requested enforcement thereof by the Trustee and offered reasonable indemnity
therefor and the Trustee has failed to proceed with such enforcement for a
period of 60 days after receipt of such request. (Section 520) Subject to such
indemnification, the holders of a majority in principal amount of the Bonds at
the time outstanding shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, provided that the
Trustee shall have the right to decline to follow any such direction if the
Trustee is advised by counsel that the action so directed may not lawfully be
taken or if the Trustee determines that such action would involve the Trustee in
personal liability. (Section 519)
The Company will be required to file with the Trustee annually a
certificate as to the absence of defaults under the terms of the Indenture.
(Section 1304)
Concerning the Trustee
The Chase Manhattan Bank is the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Bonds.
Certain Definitions
"Adjusted Treasury Rate" means, with respect to any date of redemption, the
rate per annum equal to the semi-annual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such date of redemption, plus 0.45%.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Bonds to be redeemed that would be utilized,
at the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of comparable maturity to the
remaining term of such Bonds.
"Comparable Treasury Price" means, with respect to any date of redemption,
(i) the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such date of redemption, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities," or (ii) if such release (or any successor release) is
not published or does not contain such prices on such business day, (A) the
average of the Reference Treasury Dealer Quotations, or (B) if the Trustee
obtains fewer than three such Reference Treasury Dealer Quotations, the average
of all such Reference Treasury Dealer Quotations.
"Independent Investment Banker" means an independent investment banking
institution of national standing appointed by the Trustee after consultation
with the Company.
"Issue Date" means the date on which the Bonds are originally issued.
"Reference Treasury Dealer" means, for the Bonds, Donaldson, Lufkin &
Jenrette Securities Corporation, and its successors; provided, however, that if
the foregoing shall not be a primary U.S. Government securities dealer in New
York City (a "Primary Treasury Dealer"), the Company shall substitute therefor
another Primary Treasury Dealer.
"Reference Treasury Dealer Quotations" means, with respect to the Reference
Treasury Dealer and any date of redemption, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by the Reference Treasury Dealer at 5:00 p.m. on the
third business day preceding such date of redemption.
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<PAGE>
Book-entry, Delivery and Form
Except as set forth below, the Bonds will be issued in registered, global
form in minimum denominations of $1,000 and in integral multiples thereof. The
Bonds will be issued at the closing of the Offering (the "Closing") only against
payment in immediately available funds.
The Bonds initially will be represented by one or more Bonds in registered
global form without interest coupons (the "Global Bonds"). The Global Bonds will
be deposited upon issuance with the Trustee as custodian for DTC, in New York,
New York, and registered in the name of DTC or its nominee, in each case for
credit to an account of a direct or indirect participant in DTC as described
below.
Except as set forth below, the Global Bonds may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Bonds may not be exchanged for Bonds
in certificated form except in the limited circumstances described below. See
"--Exchange of Book-Entry Bonds for Certificated Bonds." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Bonds will not be entitled to receive physical delivery of Certificated Bonds
(as defined).
Transfers of beneficial interests in the Global Bonds will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
Initially, the Trustee will act as Paying Agent and Bond Registrar. The
Bonds may be presented for registration of transfer and exchange at the offices
of the Bond Registrar.
Depositary Procedures
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures are
solely within the control of the respective settlement systems and are subject
to changes by them from time to time. The Company takes no responsibility for
these operations and procedures and urges investors to contact the system or
their participants directly to discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchaser), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and Indirect Participants.
-19-
<PAGE>
DTC has also advised the Company that, pursuant to procedures established
by it, (i) upon deposit of the Global Bonds, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the principal
amount of the Global Bonds and (ii) ownership of interests in the Global Bonds
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Bonds).
Investors in the Global Bonds may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations which are Participants in such system.
All interests in a Global Bond may be subject to the procedures and
requirements of DTC. The laws of some states require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to transfer beneficial interests in a Global Bond to such persons
will be limited to that extent. Because DTC can act only on behalf of
Participants, which in turn act on behalf of Indirect Participants and certain
banks, the ability of a person having beneficial interests in a Global Bond to
pledge such interests to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such interests, may be affected
by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interests in the Global Bonds will not
have the Bonds registered in their names, will not receive physical delivery of
the Bonds in certificated form and will not be considered the registered owners
or "Holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and premium, if any, and interest
on a Global Bond registered in the name of DTC or its nominee will be payable to
DTC in its capacity as the registered Holder under the Indenture. Under the
terms of the Indenture, the Company and the Trustee will treat the persons in
whose names the Bonds, including the Global Bonds, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, neither the Company, the Trustee nor any
agent of the Company or the Trustee has or will have any responsibility or
liability for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Bonds, or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect Participant's
records relating to the beneficial ownership interests in the Global Bonds or
(ii) any other matter relating to the actions and practices of DTC or any of its
Participants or Indirect Participants. DTC has advised the Company that its
current practice, upon receipt of any payment in respect of securities such as
the Bonds (including principal and interest), is to credit the accounts of the
relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in the principal amount of beneficial
interest in the relevant security as shown on the records of DTC unless DTC has
reason to believe it will not receive payment on such payment date. Payments by
the Participants and the Indirect Participants to the beneficial owners of the
Bonds will be governed by standing instructions and customary practices and will
be the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the Trustee or the Company. Neither the
Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Bonds, and the Company
and the Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Interests in the Global Bonds are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System, and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants. See "--Same Day
Settlement and Payment." Transfers between Participants in DTC will be effected
in accordance with DTC's procedures, and will be settled in same day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of the Bonds only at the direction of one or more Participants
to whose account DTC has credited the interests in the Global Bonds and
-20-
<PAGE>
only in respect of such portion of the aggregate principal amount of the Bonds
as to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Bonds, DTC reserves the right
to exchange the Global Bonds for legended Bonds in certificated form, and to
distribute such Bonds to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Bonds among Participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
nor any of their respective agents will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of its
obligations under the rules and procedures governing their operations.
Exchange of Book-Entry Bonds for Certificated Bonds
A Global Bond is exchangeable for definitive Bonds in registered
certificated form ("Certificated Bonds") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global Bonds
and the Company thereupon fails to appoint a successor depositary or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to cause
the issuance of the Certificated Bonds or (iii) there shall have occurred and be
continuing a Default or Event of Default with respect to the Bonds. In addition,
beneficial interests in a Global Bond may be exchanged for Certificated Bonds
upon request but only upon prior written notice given to the Trustee by or on
behalf of DTC in accordance with the Indenture. In all cases, Certificated Bonds
delivered in exchange for any Global Bond or beneficial interests therein will
be registered in the names, and issued in any approved denominations, requested
by or on behalf of the depositary (in accordance with its customary procedures).
Exchange of Certificated Bonds for Book-Entry Bonds
Bonds issued in certificated form may not be exchanged for beneficial
interests in any Global Bond unless the transferor first delivers to the Trustee
a written certificate (in the form provided in the Indenture).
Same Day Settlement and Payment
The Indenture will provide that payments in respect of the Bonds
represented by the Global Bonds (including principal, premium, if any, and
interest) be made at the office or agency of the Company maintained for that
purpose, provided, however, that at the option of the Company, payments may be
made by mailing a check to each Holder's registered address or to such other
address as the Holder may specify. The Bonds represented by the Global Bonds
are expected to trade in the DTC's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such Bonds will, therefore, be
required by the DTC to be settled in immediately available funds. The Company
expects that secondary trading in any certificated Bonds will also be settled in
immediately available funds.
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement between
the Company and the Underwriter (the "Underwriting Agreement"), the Underwriter
has agreed to purchase from the Company, and the Company has agreed to sell to
the Underwriter, all of the Bonds offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
to purchase and accept delivery of the Bonds offered hereby are subject to
approval by its counsel of certain legal matters and to certain other
-21-
<PAGE>
conditions. The Underwriter is obligated to purchase and accept delivery of all
of the Bonds offered hereby if any are purchased.
The Underwriter initially proposes to offer the Bonds in part directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and in part to certain dealers at such price less a concession
not in excess of 0.40% of the principal amount of the Bonds. The Underwriter may
allow, and such dealers may re-allow, to certain other dealers a concession not
in excess of 0.25% of the principal amount of the Bonds. After the initial
offering of the Bonds, the public offering price and other selling terms may be
changed by the Underwriter at any time without notice.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriter may be required to make in respect thereof.
The Bonds are a new issue of securities with no established trading market.
The Company does not intend to apply for listing of the Bonds on any securities
exchange or the Nasdaq National Market. The Company has been advised by the
Underwriter that the Underwriter intends to make a market in the Bonds; however,
it is not obligated to do so, and it may discontinue any such market making at
any time without notice. Therefore, no assurance can be given as to the
liquidity of the Bonds.
In connection with the Offering, the Underwriter may engage in transactions
that stabilize, maintain or otherwise affect the price of the Bonds.
Specifically, the Underwriter may over-allot the Offering, creating a syndicate
short position. The Underwriter may bid for and purchase the Bonds in the open
market to cover such syndicate short positions or to stabilize the price of the
Bonds. These activities may stabilize or maintain the market price of the Bonds
above independent market levels. The Underwriter is not required to engage in
these activities, and may end these activities at any time.
VALIDITY OF THE BONDS
The validity of the Bonds offered hereby is being passed upon for the
Company by Thomas J. Schmidt, Jr., Esq., Vice President, General Counsel and
Secretary of the Company and Ropes & Gray, Boston, Massachusetts, and for the
Underwriter by Choate, Hall & Stewart (a partnership including professional
corporations), Boston, Massachusetts. Thomas J. Schmidt, Jr., Ropes & Gray and
Choate, Hall & Stewart are not passing upon the security afforded by the
Indenture and will rely on the opinion of Thompson Coburn, St. Louis, Missouri,
for such matter and all matters relating to admiralty law.
EXPERTS
The financial statements and schedules included or incorporated by
reference in this Prospectus have been examined by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
-22-
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
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
Unaudited Interim Financial Statements F-18
Notes to Unaudited Interim Financial Statements F-22
SCHEDULE:
II - Valuation and Qualifying Accounts and Reserves F-23
</TABLE>
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>
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>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(000 OMITTED)
<TABLE>
<CAPTION>
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>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(000 OMITTED)
<TABLE>
<CAPTION>
ASSETS
------
Current assets: 1997 1996
-------- --------
<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................................ $ 6,265 $ 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>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDER'S EQUITY
(000 OMITTED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current liabilities:
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
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(000 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>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(000 OMITTED)
<TABLE>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
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>
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.
F-8
<PAGE>
(1) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Reclassifications - Certain reclassifications of previously reported
amounts have been made to conform with current classifications.
(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
======== ======= =======
</TABLE>
The net pension cost for Company-administered plans consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(000 Omitted)
<S> <C> <C> <C>
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>
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)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including:
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>
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)
<S> <C> <C>
Accumulated benefit obligation:
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>
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)
<S> <C> <C>
First Preferred Ship Mortgage Bonds -
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.
F-12
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) LONG-TERM OBLIGATIONS AND CREDIT AGREEMENTS (Continued)
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.
(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)
<S> <C> <C> <C>
Current:
Federal $5,564 $ 16,071 $15,569
State (227) 1,035 1,028
------ -------- -------
Total Current Provisions $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>
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>
Year 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)
<S> <C> <C>
Assets:
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>
(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.
F-14
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) PROPERTY AND EQUIPMENT (Continued)
(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)
<S> <C> <C>
Assets:
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:
<TABLE>
<CAPTION>
Minimum
Years Ending Annual Rental
------------ -------------
(000 Omitted)
<S> <C>
1998 $ 2,231
1999 2,220
2000 1,964
2001 1,909
2002-2079 5,673
-------
Total $13,997
=======
</TABLE>
(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.
(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.
F-15
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
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:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------ -----
(000 Omitted)
<S> <C> <C>
December 31, 1997
Long-term debt $115,791 $130,451
December 31, 1996
Long-term debt $116,398 $137,940
</TABLE>
(10) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table summaries 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>
(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.
F-16
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) Extraordinary Item - Coal Miners Retiree Health Care (Continued)
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>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(000 OMITTED)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $65,163 $68,113 $127,821 $132,495
------- ------- -------- --------
Operating costs and expenses:
Operating expenses............................... $44,156 $46,323 $ 87,315 $ 92,849
Depreciation and amortization.................... 5,921 5,667 11,737 11,323
Selling, general & administrative................ 3,030 2,880 6,164 5,386
Overhead allocation from Parent.................. 750 725 1,500 1,450
Taxes, other than income......................... 3,585 3,415 7,297 6,956
------- ------- -------- --------
$57,442 $59,010 $114,013 $117,964
------- ------- -------- --------
Operating earnings $ 7,721 $ 9,103 $ 13,808 $ 14,531
------- ------- -------- --------
Other income (expense):
Interest income from Parent...................... $ 86 $ 1,034 $ 990 $ 2,051
Interest income other ........................... 37 4 57 14
Gain (Loss) on sale of assets
and other, net................................. 89 (44) 184 (97)
------- ------- -------- --------
$ 212 $ 994 $ 1,231 $ 1,968
------- ------- -------- --------
Interest expense:
Long-term debt................................... $ 2,044 $ 3,406 $ 5,346 $ 6,819
Other, including amortization
of debt expense................................ 39 51 86 95
------- ------- -------- --------
$ 2,083 $ 3,457 $ 5,432 $ 6,914
------- ------- -------- --------
Earnings before income taxes........................ $ 5,850 $ 6,640 $ 9,607 $ 9,585
Provision for income taxes.......................... 2,106 2,365 3,475 3,184
------- ------- -------- --------
Earnings before extraordinary items................. $ 3,744 $ 4,275 $ 6,132 $ 6,401
------- ------- -------- --------
Extraordinary items, net of tax:
Credit for coal
miners retiree health care (Note 2)............ $ 2,827 $ - 2,827 $ -
Loss on early retirement of
debt (Note 3).................................. - - (1,465) -
------- ------- -------- --------
Net earnings........................................ $ 6,571 $ 4,275 7,494 $ 6,401
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
ASSETS
------
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 65 $ 58
Receivables
Trade, net.................................... 16,556 17,016
Parent........................................ - 73,576
Other......................................... 1,273 1,325
Materials, supplies & fuel....................... 7,497 7,992
Prepaid expenses................................. 2,926 1,081
-------- --------
Total current assets................................ $ 28,317 $101,048
-------- --------
Property and equipment, at cost..................... $664,262 $623,720
Less-accumulated depreciation.................... 342,831 327,255
-------- --------
Net property and equipment.......................... $321,431 $296,465
-------- --------
Other assets:
Deferred pension charges......................... $ 14,520 $ 13,845
Other............................................ 4,999 3,857
-------- --------
Total other assets.................................. $ 19,519 $ 17,702
-------- --------
Total assets........................................ $369,267 $415,215
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDER'S EQUITY
(000 OMITTED)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.......................... $ 4,545 $ 4,183
Accounts payable Parent.................................... 2,436 -
Accounts payable trade..................................... 10,465 10,043
Reserve for insurance claims............................... 11,918 13,326
Interest payable........................................... 2,649 4,009
Taxes payable.............................................. 3,175 1,518
Accrued expenses........................................... 3,923 4,888
Other current liabilities.................................. 9,841 9,707
-------- --------
Total current liabilities..................................... $ 48,952 $ 47,674
-------- --------
Long-term debt................................................ $ 81,461 $135,084
-------- --------
Reserves and deferred credits:
Deferred income taxes...................................... $ 61,063 $ 57,552
Unamortized investment tax credits......................... 2,306 2,747
Post-retirement health care................................ 8,873 8,763
Coal miners retiree health care............................ - 3,400
Other reserves............................................. 2,110 2,108
-------- --------
Total reserves and deferred credits........................... $ 74,352 $ 74,570
-------- --------
Stockholder's equity:
Common stock, $100 par value 0
Authorized shares - 1,000
Issued shares - 15 1/2................................... $ 1 $ 1
Capital in excess of par value............................. 52,519 52,519
Retained earnings.......................................... 111,982 105,367
-------- --------
Total Stockholder's equity.................................... $164,502 $157,887
-------- --------
Total liabilities and stockholder's equity.................... $369,267 $415,215
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 OMITTED)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................................... $ 7,494 $ 6,401
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Extraordinary items, net...................................... (1,362) -
Depreciation and amortization................................. 11,737 11,323
Deferred and current income taxes............................. 949 (730)
Net loss on sale of assets.................................... 2 40
Other changes in assets and liabilities
Trade and other receivables.............................. 1,651 (288)
Materials, supplies & fuel............................... 1,241 184
Accounts payable......................................... (7,734) (1,181)
Accrued expenses and other current liabilities 332 484
Other.................................................... (1,850) 1,537
-------- --------
Net cash provided by operating activities............................... $ 12,460 $ 17,770
-------- --------
Cash flows from investing activities:
Capital expenditures............................................... $(26,540) $ (2,363)
Decrease (increase) in Parent receivable........................... 69,381 (9,713)
Proceeds from asset dispositions................................... 725 1,106
-------- --------
Net cash provided (used) in investing activities........................ $ 43,566 $(10,970)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt........................................ $(52,549) $ (2,032)
Cash dividends paid to Parent...................................... (3,500) (4,801)
-------- --------
Net cash used in financing activities................................... $(56,049) $ (6,833)
-------- --------
Net decrease in cash and cash equivalents............................... $ (23) $ (33)
Cash and cash equivalents at beginning of period........................ 88 91
-------- --------
Cash and cash equivalents at end of period.............................. $ 65 $ 58
======== ========
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Interest, net of amounts capitalized.......................... $ 6,631 $ 6,839
Income taxes.................................................. $ 2,468 $ 3,575
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
Notes to Unaudited Interim Financial Statements
June 30, 1998
(1) ACCOUNTING POLICIES
It is Midland's opinion that the financial information contained in this report
reflects all adjustments necessary to present a fair statement of the results
for the periods reported, but such results are not necessarily indicative of
results to be expected for the year, due to the somewhat seasonal nature of
Midland's operations. All such adjustments were of a normal, recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Prospectus pursuant to the rules and
regulations of the Commission. However, the disclosures herein when read with
the annual report to 1997 filed on Form 10-K are adequate to make the
information presented not misleading.
(2) COAL MINERS RETIREE HEALTH CARE
On June 25, 1998, the U.S. Supreme Court ruled that the Coal Industry Retiree
Health Benefit Act of 1992 (the "Coal Act") is unconstitutional as applied to
Midland's parent, Eastern Enterprises.
In 1995, the Company had established a reserve of $4.6 million to fund its
portion of Eastern's liability under the Coal Act. As a result of the Supreme
Court's decision, the Company reversed this reserve, less associated expenses,
resulting in an extraordinary gain of $4.3 million pre-tax or $2.8 million net
in the second quarter of 1998.
(3) DEBT
In March 1998, the Company utilized the receivable from Parent to call $50
million of 9.9% First Preferred Ship Mortgage Bonds, due 2008. In extinguishing
this debt, the Company recognized an extraordinary charge of $2.3 million pretax
or $1.5 million net.
The Company has entered into forward treasury rate lock agreements in order to
hedge the interest rate on long-term debt anticipated to be issued in late 1998.
The treasury rate locks are for $75 million at a 10-year treasury rate of 5.68%
with a final determination date of September 29, 1998. Upon issuance of the
debt, any gain or loss associated with the treasury rate lock agreements will be
amortized to interest expense over the term of the related debt.
F-22
<PAGE>
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-
Reserves 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 -
Reserves 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
======= ======= ====== ======== =======
</TABLE>
F-23
<PAGE>
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>
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-24
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized. This Prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any securities other than
the securities to which it relates or any offer to sell or the solicitation of
an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Prospectus nor any offer
or sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company or its subsidiaries
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................................. 2
Incorporation of Certain Documents by
Reference........................................... 2
Summary............................................... 3
Use of Proceeds....................................... 5
Capitalization........................................ 5
Selected Financial Data............................... 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................... 7
Business.............................................. 10
Eastern Enterprises................................... 13
Description of the Bonds ............................. 14
Underwriting.......................................... 19
Validity of the Bonds................................. 20
Experts............................................... 20
Index to Financial Statements......................... F-1
</TABLE>
================================================================================
================================================================================
$75,000,000
MIDLAND ENTERPRISES INC.
6.25% First Preferred Ship Mortgage
Bonds due 2008
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
September 24, 1998
================================================================================
