<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 June 30, 1999
-------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 2-39895
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MIDLAND ENTERPRISES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2284434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 PIKE STREET, CINCINNATI, OHIO 45202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 513-721-4000
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- --------------------------------------------------------------------------------
(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 For the Six Months Ended
-------------------------- ------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $65,783 $65,163 $127,109 $127,821
------- ------- -------- --------
OPERATING COSTS AND EXPENSES:
Operating expenses $46,286 $44,156 $ 90,710 $ 87,315
Depreciation and amortization 6,065 5,921 12,165 11,737
Selling, general & administrative 3,055 3,030 6,129 6,164
Overhead allocation from Parent 775 750 1,550 1,500
Taxes, other than income 3,866 3,585 7,678 7,297
------- ------- -------- --------
$60,047 $57,442 $118,232 $114,013
------- ------- -------- --------
OPERATING EARNINGS $ 5,736 $ 7,721 $ 8,877 $ 13,808
------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest income from Parent $ 725 $ 86 $ 1,396 $ 990
Interest income other 6 37 18 57
Gain on sale of assets
and other, net 91 89 81 184
------- ------- -------- --------
$ 822 $ 212 $ 1,495 $ 1,231
------- ------- -------- --------
INTEREST EXPENSE:
Long-term debt $ 3,217 $ 2,044 $ 6,467 $ 5,346
Other, including amortization
of debt expense 61 39 119 86
------- ------- -------- --------
$ 3,278 $ 2,083 $ 6,586 $ 5,432
------- ------- -------- --------
EARNINGS BEFORE INCOME TAXES $ 3,280 $ 5,850 $ 3,786 $ 9,607
PROVISION FOR INCOME TAXES 1,231 2,106 1,459 3,475
------- ------- -------- --------
EARNINGS BEFORE EXTRAORDINARY ITEMS $ 2,049 $ 3,744 $ 2,327 $ 6,132
------- ------- -------- --------
EXTRAORDINARY ITEMS, NET OF TAX:
Credit for coal miners retiree
health care $ -- $ 2,827 $ -- $ 2,827
Loss on early retirement of
debt -- -- -- (1,465)
------- ------- -------- --------
NET EARNINGS $ 2,049 $ 6,571 $ 2,327 $ 7,494
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
<PAGE> 3
2
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
------------------------------------
June 30, Dec. 31, June 30,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 86 $ 86 $ 65
Receivables -
Trade, net 17,185 17,765 16,556
Parent 59,745 56,572 --
Other 2,813 2,965 1,273
Materials, supplies & fuel 7,438 6,940 7,497
Prepaid expenses 3,571 1,866 2,926
-------- -------- --------
TOTAL CURRENT ASSETS $ 90,838 $ 86,194 $ 28,317
-------- -------- --------
PROPERTY AND EQUIPMENT, AT COST $686,528 $679,014 $664,262
Less-accumulated depreciation 361,710 350,015 342,831
-------- -------- --------
NET PROPERTY AND EQUIPMENT $324,818 $328,999 $321,431
-------- -------- --------
OTHER ASSETS:
Deferred pension charges $ 15,372 $ 15,198 $ 14,520
Other 6,019 5,857 4,999
-------- -------- --------
TOTAL OTHER ASSETS $ 21,391 $ 21,055 $ 19,519
-------- -------- --------
TOTAL ASSETS $437,047 $436,248 $369,267
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
<PAGE> 4
3
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
-------------------------------------
June 30, Dec. 31, June 30,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long - term debt $ 4,969 $ 4,742 $ 4,545
Accounts payable Parent -- -- 2,436
Accounts payable trade 11,114 11,204 10,465
Reserve for insurance claims 9,647 10,739 11,918
Interest payable 3,691 3,755 2,649
Taxes payable 4,603 3,663 3,175
Accrued expenses 4,032 4,080 3,923
Other current liabilities 7,063 7,448 9,841
-------- -------- --------
TOTAL CURRENT LIABILITIES $ 45,119 $ 45,631 $ 48,952
-------- -------- --------
LONG-TERM DEBT $145,134 $147,448 $ 81,461
-------- -------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes $ 66,917 $ 64,012 $ 61,063
Unamortized investment tax credits 1,934 2,116 2,306
Post-retirement health care 9,307 9,058 8,873
Coal miners retiree health care -- -- --
Other reserves 2,052 1,981 2,110
-------- -------- --------
TOTAL RESERVES AND DEFERRED CREDITS $ 80,210 $ 77,167 $ 74,352
-------- -------- --------
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 114,064 113,482 111,982
-------- -------- --------
TOTAL STOCKHOLDER'S EQUITY $166,584 $166,002 $164,502
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $437,047 $436,248 $369,267
======== ======== ========
</TABLE>
The accompanying 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)
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FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 2,327 $ 7,494
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Extraordinary items, net -- (1,362)
Depreciation and amortization 12,165 11,737
Deferred and current income taxes 3,398 949
Net (gain) loss on sale of assets (91) 2
Other changes in assets and liabilities:
Trade receivables 581 1,651
Materials, supplies & fuel (498) 1,241
Accounts payable (90) (7,734)
Accrued expenses and other current liabilities (1,142) 332
Other (1,547) (1,850)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 15,103 $ 12,460
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (8,260) $(26,540)
(Increase) decrease in Parent receivable (3,173) 69,381
Proceeds from asset dispositions 162 725
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $(11,271) $ 43,566
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt $ (2,087) $(52,549)
Cash dividends paid to Parent (1,745) (3,500)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES $ (3,832) $(56,049)
-------- --------
Net decrease in cash and cash equivalents $ -- $ (23)
Cash and cash equivalents at beginning of period 86 88
-------- --------
Cash and cash equivalents at end of period $ 86 $ 65
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, net of amounts capitalized $ 5,884 $ 6,631
Income taxes $ (1,970) $ 2,468
</TABLE>
The accompanying notes are an integral
part of these financial statements.
<PAGE> 6
5
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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.
<PAGE> 7
6
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
- ----------------------
Demand for transportation services in the second quarter improved over the first
quarter of 1999, on the strength of increased shipments of non-coal commodities,
particularly grain. Second quarter ton miles increased 4% over 1998 and were 3%
greater than last year for the first six months. However, continued weak demand
for spot and export coal and high utility coal stockpiles slowed shipments and
contributed to lower rate levels and reduced margins as compared to last year.
Overall, rates per ton mile declined 5% for the quarter and 4% year-to-date, due
to the market factors discussed above, tonnage mix changes, and contractual pass
through provisions contained in multi-year contracts related to lower fuel
prices. Fuel prices declined 5% in the second quarter and 12% year to date, as
compared to 1998. As a result, consolidated revenues increased 1% for the
quarter, but declined 1% compared to the first six months of 1998.
Tonnage transported by the Registrant increased 1% in the second quarter but
declined 2% for the first six months as compared to last year. Coal tonnage
declined 4% for the second quarter and 5% year to date compared to 1998, mainly
for the reasons cited above. However, ton miles from coal movements year to date
were up 1% from longer average hauls. Non-coal tonnage increased 8% and 4% for
the second quarter and year to date, respectively as compared to last year as a
result of increased shipments of grain.
During the first quarter of 1999, heavy ice on the Illinois and mid-Mississippi
rivers and flooding along the Lower Mississippi River increased operating costs,
damaged vessels and delayed shipments. Operating conditions during the second
quarter were near normal, but high water levels did restrict barge loading and
tow sizes in some areas. Operating expenses, despite lower fuel costs, increased
5% in the second quarter and 4% for the first six months in comparison to 1998.
Higher costs associated with crew labor, port expenses, vessel maintenance, and
insurance contributed to the increase. As a result of the lower margins and
increased costs, operating earnings declined $2.0 million and $4.9 million in
the second quarter, and year to date, respectively, as compared to the same
periods in 1998.
The reduced operating earnings combined with higher net interest expense
associated with increased long-term debt in 1999, was offset by .7 million in
interest from parent. As a result, earnings before extraordinary items declined
$1.7 million in the second quarter and $3.8 million year to date compared to
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. In June of 1998, the U. S. Supreme Court
upheld Eastern Enterprises' challenge to the constitutionality of the Coal
Industry Retiree Health Benefit Act of 1992 ("Coal Act") as applied to Eastern.
Consequently, the Registrant reversed its Coal Act reserve resulting in an
extraordinary gain of $4.3 million pre-tax or $2.8 million net in the second
quarter of 1998.
As a result of the operating and extraordinary items discussed above, net
earnings after the extraordinary item declined $4.5 million and $5.2 million, as
compared to last year, for the second quarter and first six months,
respectively.
<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 nearly all 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 has
communicated with all critical third parties and has obtained or 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, all mainframe-based "mission critical" programs
including the Registrant's core applications for traffic & dispatch, customer
information and 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. The registrant is near programming completion of a
new accounts receivable system, which is scheduled for production rollout by the
end of the third quarter 1999. Data / voice communication and e-mail systems
have also been tested and replaced where necessary.
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 with 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
$2.3 million as detailed in the following chart. This includes the cost of
purchased software and hardware, consulting, as well as internal staff deployed
to this project. Based on management's current estimates, the future costs are
expected to be substantially complete by the end of the third quarter of 1999.
($ Millions) Cost to Date Expected Future Cost
- --------------------------------------------------------------------------------
Capital $1.1 $0.2
Expense $0.8 $0.2
<PAGE> 9
8
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.
REGISTRANT'S CONTINGENCY PLAN
The Registrant has substantially completed preparation of a contingency plan,
and expects to have it fully complete by September 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 of
mid 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, dividends paid to Parent and long-term debt payments in
the first six months of 1999 were funded from cash provided by operating
activities. Total planned capital expenditures for 1999 are projected at $20
million, the majority of which pertains to purchases of new barges. In addition,
the Registrant intends to enter into a series of long-term operating leases for
up to 100 additional new hopper barges in the third and fourth quarters of 1999,
the terms of which are still under negotiation with a selected financial
institution.
<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.
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 second quarter of
1999.
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10
SIGNATURE
---------
It is Midland's opinion that the financial information contained in this report
reflects all normal, recurring adjustments necessary to present a fair statement
of results for the periods 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, Midland 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: JULY 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 20,666
<ALLOWANCES> 668
<INVENTORY> 7,438
<CURRENT-ASSETS> 90,838
<PP&E> 686,528
<DEPRECIATION> 361,710
<TOTAL-ASSETS> 437,047
<CURRENT-LIABILITIES> 45,119
<BONDS> 145,134
0
0
<COMMON> 1
<OTHER-SE> 166,583
<TOTAL-LIABILITY-AND-EQUITY> 437,047
<SALES> 0
<TOTAL-REVENUES> 127,109
<CGS> 0
<TOTAL-COSTS> 110,532
<OTHER-EXPENSES> 6,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,586
<INCOME-PRETAX> 3,786
<INCOME-TAX> 1,459
<INCOME-CONTINUING> 2,327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,327
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
