<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarter Ended March 31, 1999
or
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- -----------------------
Commission File Number 2-39895
-------
MIDLAND ENTERPRISES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2284434
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 PIKE STREET, CINCINNATI, OHIO 45202
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 513-721-4000
------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
- --------------------------------------------------------------------------------
The number of shares of common stock of Midland Enterprises Inc. outstanding as
of the date of this report was 15 1/2, all held by Eastern Enterprises.
Registrant meets the conditions set forth in general instructions H(1) (a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
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1
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
--------------------------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
REVENUES $ 61,326 $ 62,658
-------- --------
OPERATING COSTS AND EXPENSES:
Operating expenses $ 44,424 $ 43,159
Depreciation and amortization 6,100 5,816
Selling, general & administrative expenses 3,074 3,134
Overhead allocation from Parent 775 750
Taxes, other than income 3,812 3,712
-------- --------
$ 58,185 $ 56,571
-------- --------
OPERATING EARNINGS $ 3,141 $ 6,087
-------- --------
OTHER INCOME (EXPENSE):
Interest income from Parent $ 671 $ 904
Interest income other 12 20
Other, net (10) 95
-------- --------
$ 673 $ 1,019
-------- --------
INTEREST EXPENSE:
Long-term debt $ 3,250 $ 3,302
Other, including amortization of
debt expense 58 47
-------- --------
$ 3,308 $ 3,349
-------- --------
Earnings before income taxes $ 506 $ 3,757
Provision for Income taxes 228 1,369
-------- --------
Earnings before extraordinary item $ 278 $ 2,388
Extraordinary item, net of tax - (1,465)
-------- --------
NET EARNINGS $ 278 $ 923
======== ========
</TABLE>
The accompany notes are an integral
part of these financial statements.
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2
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
------------------------------
MARCH 31, DEC. 31, MARCH 31,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 86 $ 86 $ 25,059
Receivables -
Trade, net 16,786 17,765 15,711
Parent 65,055 56,572 -
Other 2,743 2,965 1,250
Materials, supplies & fuel 7,298 6,940 8,412
Prepaid expenses 1,332 1,866 1,302
-------- -------- --------
TOTAL CURRENT ASSETS $ 93,300 $ 86,194 $ 51,734
-------- -------- --------
PROPERTY AND EQUIPMENT, AT COST $679,238 $679,014 $657,154
Less-accumulated depreciation 355,751 350,015 338,314
-------- -------- --------
NET PROPERTY AND EQUIPMENT $323,487 $328,999 $318,840
-------- -------- --------
OTHER ASSETS:
Deferred pension charges $ 15,372 $ 15,198 $ 14,520
Other 6,558 5,857 4,845
-------- -------- --------
TOTAL OTHER ASSETS $ 21,930 $ 21,055 $ 19,365
-------- -------- --------
TOTAL ASSETS $438,717 $436,248 $389,939
======== ======== ========
</TABLE>
The accompany notes are an integral
part of these financial statements.
<PAGE> 4
3
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
-------------------------------
MARCH 31, DEC. 31, MARCH 31,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long - term debt $ 4,841 $ 4,742 $ 4,451
Accounts payable Parent - - 11,277
Accounts payable trade 10,515 11,204 21,132
Reserve for insurance claims 10,855 10,739 11,990
Interest payable 6,475 3,755 4,238
Taxes payable 3,503 3,663 3,773
Accrued expenses 4,341 4,080 3,977
Other current liabilities 6,819 7,448 10,092
-------- -------- --------
TOTAL CURRENT LIABILITIES $ 47,349 $ 45,631 $ 70,930
-------- -------- --------
LONG-TERM DEBT $146,253 $147,448 $ 82,787
-------- -------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes $ 65,601 $ 64,012 $ 58,915
Unamortized investment tax credits 2,024 2,116 2,407
Post-retirement health care 9,387 9,058 8,740
Coal miners retiree health care -- -- 3,250
Other reserves 2,032 1,981 2,171
-------- -------- --------
TOTAL RESERVES AND DEFERRED CREDITS $ 79,044 $ 77,167 $ 75,483
-------- -------- --------
STOCKHOLDER'S EQUITY:
Common stock, $100 par value -
Authorized shares - 1,000
Issued shares - 15 1/2 $ 1 $ 1 $ 1
Capital in excess of par value 52,519 52,519 52,519
Retained earnings 113,551 113,482 108,219
-------- -------- --------
TOTAL STOCKHOLDER'S EQUITY $166,071 $166,002 $160,739
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $438,717 $436,248 $389,939
======== ======== ========
</TABLE>
The accompany notes are an integral
part of these financial statements.
<PAGE> 5
4
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
--------------------------
FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net earnings $ 278 $ 923
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Extraordinary charge for early
retirement of debt, net of tax -- 1,465
Depreciation and amortization 6,100 5,816
Deferred and current income taxes 1,469 1,036
Other changes in assets and liabilities:
Trade and other receivables 980 2,006
Materials, supplies & fuel (358) 326
Accounts payable (689) 2,933
Accrued expenses and other current liabilities 2,428 1,084
Other 261 27
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 10,469 $ 15,616
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures $ (719) $(17,608)
(Increase) decrease in Parent receivable (8,483) 78,222
Proceeds from asset dispositions 37 566
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ (9,165) $ 61,180
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Repayment of long-term debt $ (1,096) $(51,133)
Cash dividends paid to Parent (208) (692)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES $ (1,304) $(51,825)
-------- --------
Net increase in cash and cash equivalents $ -- $ 24,971
Cash and cash equivalents at beginning of period 86 88
-------- --------
Cash and cash equivalents at end of year period $ 86 $ 25,059
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------
Cash paid during the period for:
Interest, net of amounts capitalized $ 417 $ 2,997
Income taxes $ (1,239) $ 332
</TABLE>
The accompany notes are an integral
part of these financial statements.
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5
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
(1) ACCOUNTING POLICIES
It is Midland Enterprises Inc.'s (the Registrant'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 the
Registrant's operations. All such adjustments were of a normal, recurring
nature.
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, the 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.
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 Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. However, the
disclosures herein when read with the annual report for 1998 filed on Form
10-K are adequate to make the information presented not misleading.
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6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
- ----------------------
Lower coal shipments by electric utility customers and reduced demand for
industrial raw materials negatively affected revenues as compared to a year ago.
As a result, market rates for spot business remained weak. Fuel adjustment
mechanisms contained in multi-year contracts further reduced revenues due to a
17% decline in fuel prices as compared to a year ago. These factors combined to
reduce first quarter revenues 2% as compared to 1998.
Although first quarter tonnage transported by the Registrant declined nearly 5%
from 1998, related ton miles increased 2% due to longer average trip lengths.
Coal tonnage declined 7%, reflecting lower demand by Ohio River-based utilities.
However, coal ton miles increased 5% due to additional utility coal tonnage
destined to the Gulf and demand by industrial accounts. Non-coal tonnage and
related ton miles were virtually unchanged from the prior year.
Operating conditions during the quarter, although less severe than 1998, were
still quite disruptive at times. Heavy ice on the Illinois and mid-Mississippi
rivers in January and flooding along the Lower Mississippi River in February
increased operating costs, damaged vessels and delayed shipments. Operating
expenses in the first quarter, despite lower fuel costs, increased 3% over 1998.
Higher costs associated with crew labor, vessel maintenance and depreciation on
new equipment were the major contributing factors. As a result, first quarter
operating earnings declined $2.9 million as compared to the same period in 1998.
Due to the reduced operating earnings as discussed above, and slightly lower
interest income from parent, earnings before extraordinary item declined $2.1
million, or 88%, from 1998.
In March 1998, the Registrant recognized an extraordinary loss of $2.3 million
or $1.5 million net of tax, on the early extinguishment of $50 million of First
Preferred Ship Mortgage bonds due 2008. Net earnings after the extraordinary
item declined $.6 million as compared to last year.
<PAGE> 8
7
YEAR 2000 ISSUES
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STATE OF READINESS
The Registrant has assessed the impact of the year 2000 issue with respect to
its Information Technology ("IT") systems and non-IT (embedded chip technology)
issues as well as the Registrant's exposure to significant third party risks.
Accordingly, the Registrant has completed substantial elements of an
enterprise-wide project plan to replace or modify existing systems and
technology as required. To help assure itself that its major customers and
critical vendors are also addressing these issues, the Registrant is actively
seeking written confirmation of third party readiness.
With respect to IT systems, the Registrant has accomplished a significant
portion of its project plan. The Registrant has purchased and is operating a
year 2000 compliant mainframe computer and has since tested, modified or
replaced where appropriate, substantially all mainframe-based "mission critical"
programs including the Registrant's core applications for traffic & dispatch,
customer information and most financial systems. The Registrant has also
identified all server and personal computer based programs and hardware possibly
impacted. Replacement or modifications have been completed for substantially all
of these systems except Accounts Receivable and several administrative systems,
which are scheduled for completion by mid-1999.
With respect to non-IT systems, the Registrant's major operating assets and
their sub-systems were reviewed for embedded chip technology. Based on this
review and actions taken, management believes year 2000 issues in regard to
internal chip technology will not impair its operating assets.
COST OF YEAR 2000 ISSUES
The Registrant expects that the cost of year 2000 compliance will approximate
$2.3 million as detailed in the following chart. This includes the cost of
purchased software and hardware, consulting, as well as internal staff deployed
to this project. Based on management's current estimates, the future costs are
expected to be substantially complete by the end of the second quarter of 1999.
<TABLE>
<CAPTION>
($ Millions) Cost to Date Expected Future Cost
- ------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C>
Capital $1.0 $0.3
Expense $0.8 $0.2
</TABLE>
RISK OF YEAR 2000 ISSUES
The Registrant has assessed the most reasonably likely worst case year 2000
scenario. Given the Registrant's efforts to minimize the risk of internal year
2000 issues, the Registrant believes its most reasonably likely worst case
scenario would involve infrastructure disruption through failure of third party
services. These could include, without limit: lock and dam operations, rail
services for river served docks and terminals, telecommunications, electricity
and banking services. Major delays to river traffic and customers could result
in the loss of Registrant revenues dependent on their duration. In such
instances, the Registrant would have to enact disaster recovery plans, use
alternate service providers and seek other routes of navigation to the extent
possible.
<PAGE> 9
8
REGISTRANT'S CONTINGENCY PLAN
The Registrant is in the process of preparing a contingency plan, which it
expects to complete by June 30, 1999. Toward this effort, the Registrant has
assessed third party risk with a plan intended to assure critical suppliers,
services and customers are actively working on or have achieved year 2000
compliance. The Registrant has identified its critical areas of third party risk
to include providers of telecommunications and electricity services, rail
services to river served docks, diesel fuel to power towboats, banking services
to execute business transactions and river navigation through the operation of
locks and dams. The Registrant is actively seeking written confirmation from
these service providers and others as to their year 2000 readiness. Most written
and verbal responses received thus far describe programs in place that are near
completion or ongoing with projected completion dates by the first half of 1999.
Many third parties, while confident of their programs, do not make 100%
guarantees or assurances.
To the extent the Registrant believes that any supplier of its critical goods or
services poses significant risk of year 2000 failure, the Registrant expects to
locate backup providers by the end of the third quarter 1999 to help assure
continuity of supply.
Management is continuing its pursuit of these issues and assessing risk and
alternatives as required and believes its actions and planning efforts are
appropriate to address its year 2000 concerns. However, management cannot
guarantee that such actions will prevent all or any year 2000 issue disruptions
to the business, its customers or suppliers. The Registrant cautions that
forward looking statements contained in the year 2000 discussion should be read
in conjunction with the Registrant's disclosure statement regarding such
information.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures and dividends paid to Parent in the first quarter of 1999
were funded from cash provided by operating activities. Capital expenditures for
1999 are estimated at $42 million, the majority of which pertains to purchase
commitments for new barge purchases. These purchases will be funded with cash
provided from operating activities and the receivable with parent.
The decline in cash and cash equivalents and the accounts payable parent reflect
the reclassification of these balances to the receivable with parent account
along with the remaining proceeds of the $75 million debt issuance in 1998. The
decline in accounts payable trade mainly reflects reduced amounts owed on barge
construction in progress. The decrease in other current liabilities reflects
lower amounts owed for healthcare, equipment charter and other barging services.
<PAGE> 10
9
FORWARD-LOOKING INFORMATION
- ---------------------------
This report and other Registrant reports and statements issued or made from time
to time contain certain "forward-looking statements" concerning projected future
financial performance or concerning expected plans or future operations. The
Registrant cautions that actual results and developments may differ materially
from such projections or expectations.
Investors should be aware of important factors that could cause actual results
to differ materially from the forward-looking projections or expectations. These
factors include, but are not limited to: the effects of strategic initiatives on
earnings and cash flow, changes in market conditions for barge transportation,
adverse weather and operating conditions on the inland waterways, the timetable
for and cost to complete the Registrant's year 2000 plans, the impact of third
parties' year 2000 issues, 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 Registrant.
<PAGE> 11
10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed in the first quarter of 1999.
<PAGE> 12
11
SIGNATURE
---------
It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary for a fair
statement of results for the period reported, but such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of Midland's operations. All accounting policies have been
applied in a manner consistent with prior periods. Such financial information
is subject to year end adjustments and annual audit by independent public
accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDLAND ENTERPRISES INC.
BY: /s/ R. FAILLO
---------------------------
R. FAILLO
VICE PRESIDENT
FINANCE AND TREASURER;
PRINCIPAL FINANCIAL OFFICER
DATE: APRIL 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 20,197
<ALLOWANCES> 668
<INVENTORY> 7,298
<CURRENT-ASSETS> 93,300
<PP&E> 679,238
<DEPRECIATION> 355,751
<TOTAL-ASSETS> 438,717
<CURRENT-LIABILITIES> 47,349
<BONDS> 146,253
0
0
<COMMON> 1
<OTHER-SE> 166,070
<TOTAL-LIABILITY-AND-EQUITY> 438,717
<SALES> 0
<TOTAL-REVENUES> 61,326
<CGS> 0
<TOTAL-COSTS> 54,336
<OTHER-EXPENSES> 3,176
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,308
<INCOME-PRETAX> 506
<INCOME-TAX> 228
<INCOME-CONTINUING> 278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
