-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SyiH7owQ/i1xL3NFt6KGUM3LSJZWWTXBfD+nUpdIh1LwHd8+NvHn9PccTH8nuGZp /ORoCu9E+Ku0U2dOXYpBuw== 0000066025-01-000003.txt : 20010402 0000066025-01-000003.hdr.sgml : 20010402 ACCESSION NUMBER: 0000066025-01-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDLAND CO CENTRAL INDEX KEY: 0000066025 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310742526 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06026 FILM NUMBER: 1586673 BUSINESS ADDRESS: STREET 1: 7000 MIDLAND BLVD STREET 2: P O BOX 125 CITY: AMELIA STATE: OH ZIP: 45102-2607 BUSINESS PHONE: 5139437100 MAIL ADDRESS: STREET 2: P O BOX 1256 CITY: CINCINNATI STATE: OH ZIP: 45201 10-K 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2000 Commission File Number - 1-6026 THE MIDLAND COMPANY Incorporated in Ohio I.R.S. Employer Identification No. 31-0742526 7000 Midland Boulevard Amelia, Ohio 45102-2607 Tel. (513) 943-7100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value. Indicate by check mark whether the registrant (1) has filed all other reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes__X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting and non-voting common stock held by nonaffiliates, which includes shares held by executive officers and directors, of the registrant as of March 13, 2001 was $283,896,000 based on a closing price of $31.875 per share. As of March 13, 2001, 8,906,549 shares of no par value common stock were issued and outstanding. Documents Incorporated by Reference Portions of the Annual Report to Shareholders for the year ended December 31, 2000 are incorporated by reference into Parts I, II and IV. Portions of the Registrant's Proxy Statement dated March 13, 2001 to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 12, 2001 are incorporated by reference into Part III. 1 THE MIDLAND COMPANY FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 Certain statements contained in this report that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbors created by that Act. Reliance should not be placed on forward- looking statements because they involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to differ materially from those expressed or implied. Any forward-looking statement speaks only as of the date made. The Midland Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. Statements concerning expected financial performance, on-going business strategies and possible future action which The Midland Company intends to pursue to achieve strategic objectives constitute forward-looking information. Implementation of these strategies and the achievement of such financial performance are each subject to numerous conditions, uncertainties and risk factors. Factors which might cause deviations from the forward looking statements include, without limitation the following: 1) changes in the laws or regulations affecting the operations of the Company or any of its subsidiaries; 2) changes in the business tactics or strategies of the Company or any of its subsidiaries; 3) acquisition(s) of assets or of new or complementary operations, or divestiture of any segment of the existing operations of the Company or any of its subsidiaries; 4) changing market forces or litigation which necessitate, in management's judgment, changes in plans, strategy or tactics of the Company or its subsidiaries and 5) adverse weather conditions, fluctuations in the investment markets, changes in retail marketplace or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. 2 PART I ITEM 1. Business. Incorporated by reference from the inside cover and pages 2 through 5, 7 through 17, 20 through 25 and pages 37 and 38 (Note 16) of the Registrant's 2000 Annual Report to Shareholders. The number of persons employed by the Registrant was approximately 1,000 at December 31, 2000. Property and Casualty Loss Reserves The Company's consolidated financial statements include the estimated liability (reserves) for unpaid losses and loss adjustment expenses (LAE) of its property and casualty insurance subsidiaries. The liability is presented net of amounts recoverable from salvage and subrogation and includes amounts recoverable from reinsurance for which receivables are recognized. The Company establishes reserves for losses that have been reported to the Company and certain legal expenses on the "case basis" method. The Company estimates claims incurred but not reported ("IBNR") and other adjustment expenses using statistical procedures. The Company accrues salvage and subrogation recoveries using the "case basis" method for large claims and statistical procedures for smaller claims. The Company's objective is to set reserves that are adequate; that is, the amounts originally recorded as reserves should at least equal the amounts ultimately expected to be required to settle losses. The Company's reserves aggregate its best estimates of the total ultimate cost of claims that have been incurred but have not yet been paid. The estimates are based on past claims experience and reflect current claims trends as well as social, legal and economic conditions, including inflation. The reserves are not discounted. The Company reviews its loss and loss adjustment expense reserve development on a regular basis to determine whether the reserving assumptions and methods are appropriate. Reserves initially determined are compared to the amounts ultimately paid. The Company regularly makes statistical estimates of the projected amounts necessary to settle outstanding claims, compares these estimates to the recorded reserves and adjusts the reserves as necessary. The adjustments are reflected in current operations. The principle reason for differences between the loss and LAE liability reported in the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") and that reported in the annual statements filed with state insurance departments in accordance with statutory accounting practices ("SAP") relates to the reporting of reinsurance recoverables as receivables for GAAP purposes and as a reduction in reserves for SAP purposes. The following table provides an analysis of changes in loss and LAE reserves for 2000, 1999 and 1998 (net of reinsurance amounts) for the Company. Based on the information available during and at the end of 2000, 1999 and 1998, operations were credited $6,952,000, $10,178,000 and $2,120,000 in 2000, 1999 and 1998, respectively, as a result of a decrease in the estimated amounts needed to settle prior years' claims. Such reserve adjustments, which effected reported results of current operations during each of the years, resulted from developed losses from prior years being different than were anticipated when the liability for losses and loss adjustment expense were originally estimated. These development trends have been considered in establishing the current year liabilities. 3 Changes in Loss and LAE Reserves: (amounts in 000's) 2000 1999 1998 ----------------------------------- Balance at January 1 $113,439 $108,697 $108,334 Less reinsurance recoverables 24,114 20,430 26,433 ----------------------------------- Net balance at January 1 89,325 88,267 81,901 ----------------------------------- Incurred related to: Current year 242,689 211,066 208,811 Prior years (6,952) (10,178) (2,120) ----------------------------------- Total incurred 235,737 200,888 206,691 ----------------------------------- Paid related to: Current year 186,498 159,045 157,530 Prior years 43,542 40,785 42,795 ----------------------------------- Total paid 230,040 199,830 200,325 ----------------------------------- Net balance at December 31 95,022 89,325 88,267 Plus reinsurance recoverables 16,720 24,114 20,430 ----------------------------------- Balance at December 31 $111,742 $113,439 $108,697 =================================== Analysis of Loss and LAE Reserve Development The next table presents the development of the estimated liability for the ten years prior to 2000. The top line of the table illustrates the estimated liability for unpaid losses and LAE recorded at the balance sheet date at the end of each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate was increased or decreased as more information became known about the frequency and severity of claims for individual years. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The table shows the cumulative redundancy (deficiency) developed with respect to the previously recorded liability for all years as of the end of 2000. For example, the Company's 1994 reserve of $37,481,000 has been re-estimated as of year-end 2000 to be $31,130,000, indicating a redundancy of $6,351,000. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of December 31, 2000, the Company had paid $30,846,000 of the currently estimated $31,130,000 of losses and LAE that had been incurred as of the end of 1994; thus an estimated $284,000 of losses incurred as of the end of 1994 remain unpaid as of the current financial statement date. In using this information, it should be noted that this table does not present accident or policy year development data which readers may be more accustomed to analyzing. Each amount in each column includes amounts applicable to the year over the column and all prior years. For example, the amounts included in the 1993 column include amounts related to 1993 and all prior years. The Company's reserve development is unfavorable for 1995 and 1996 due to the Company's expansion into certain areas of commercial lines insurance. However, reserve development is favorable for 1997 through 1999 due to a reduction in the aforementioned commercial lines business combined with an overall strengthening of reserves. 4 Analysis of Loss and Loss Adjustment Expense Development (Amounts in 000's) Year Ended December 31 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -------------------------------------------------------------------------------------------------- Reserve for Unpaid Losses, Net of Reinsurance $16,570 $19,089 $20,405 $27,744 $37,481 $47,712 $64,784 $81,901 $88,267 $89,325 $95,022 Net Reserve Re-estimated as of: One Year Later 15,492 17,160 18,425 25,668 30,134 51,483 70,014 79,781 78,089 82,373 Two Years Later 14,859 15,699 18,451 22,686 32,074 53,467 67,310 77,148 77,774 Three Years Later 13,841 15,202 16,871 21,154 31,880 52,418 66,442 76,110 Four Years Later 13,929 14,497 16,616 20,966 31,734 51,688 66,060 Five Years Later 13,663 14,393 16,505 20,688 31,155 51,087 Six Years Later 13,598 14,373 16,445 20,629 31,130 Seven Years Later 13,589 14,361 16,441 20,962 Eight Years Later 13,579 14,354 16,542 Nine Years Later 13,576 14,414 Ten Years Later 13,576 Net Cumulative Redundancy (Deficiency) $ 2,994 $ 4,675 $ 3,863 $ 6,782 $ 6,351 $(3,375) $(1,276) $ 5,791 $10,493 $ 6,952 ========================================================================================== Net Cumulative Amount of Reserve Paid Through: One Year Later $11,117 $10,937 $11,730 $ 9,684 $19,040 $31,471 $37,307 $42,795 $40,785 $43,532 Two Years Later 12,488 12,685 14,397 18,445 26,471 41,785 51,461 57,677 55,959 Three Years Later 12,965 13,588 15,923 19,930 29,237 47,434 58,716 65,610 Four Years Later 13,208 14,171 16,312 20,427 30,425 49,596 61,913 Five Years Later 13,471 14,307 16,381 20,558 30,770 50,051 Six Years Later 13,530 14,331 16,420 20,598 30,846 Seven Years Later 13,550 14,356 16,435 20,953 Eight Years Later 13,574 14,354 16,542 Nine Years Later 13,576 14,414 Ten Years Later 13,576 Net Reserve - December 31 $20,405 $27,744 $37,481 $47,712 $64,784 $81,901 $88,267 $89,325 $95,022 Reinsurance Recoverables 2,780 6,220 14,597 13,785 24,208 26,433 20,430 24,114 16,720 ---------------------------------------------------------------------------------- Gross Reserve-December 31 $23,185 $33,964 $52,078 $61,497 $88,992 $108,334 $108,697 $113,439 $111,742 ================================================================================== Net Re-estimated Reserve $16,542 $20,962 $31,130 $51,087 $66,060 $ 76,110 $ 77,774 $ 82,373 Re-estimated Reinsurance $ 2,254 $ 4,700 $12,124 $14,760 $24,685 $ 24,564 $ 18,001 $ 22,237 ------------------------------------------------------------------------ Gross Re-estimated Reserve $18,796 $25,662 $43,254 $65,847 $90,745 $100,674 $ 95,775 $104,610 ======================================================================== Gross Cumulative Redundancy (Deficiency) $ 4,389 $ 8,302 $ 8,824 $(4,350) $(1,753)$ 7,660 $ 12,922 $ 8,829 ========================================================================
5 Seasonality and Reinsurance Incurred losses, and thus the results of operations, for the Company are dependent in some respect on seasonal weather patterns. The Company reinsures certain levels of risk with other insurance companies and cedes varying portions of its written premiums to such reinsurers. In addition, the Company pays a percentage of earned premiums to reinsurers in return for coverage against catastrophic losses. To the Company's knowledge, none of its reinsurers are experiencing financial difficulties. Furthermore, the Company monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The composition of its reinsurers has not changed significantly in recent years. The Company has not experienced any uncollectible reinsurance amounts or coverage disputes with its reinsurers in over ten years. Significant Customer As indicated in Note 16 to the Company's 2000 consolidated financial statements, in 2000 and 1999, revenues (including amounts that are ultimately ceded to reinsurers) from one customer amounted to $77,395,000 and $64,621,000, respectively. That customer is Conseco Inc. which merged with Greentree Financial Corporation during 1999. ITEM 2. Properties. The Company owns its 275,000 square foot principal offices located in Amelia, Ohio. The Company's insurance subsidiaries lease office space in Montgomery, Alabama, Atlanta, Georgia, St. Louis, Missouri, Auburn Hills, Michigan and Grand Rapids, Michigan. The Company's transportation subsidiaries lease offices in Metairie, Louisiana. ITEM 3. Legal Proceedings. None. ITEM 4. Submission of Matters to a Vote of Security Holders. None during the fourth quarter. PART II ITEM 5. Market for the Registrant's Common Stock and Related Security Holder Matters. Incorporated by reference to pages 37 (Note 15) and 40 of the Registrant's 2000 Annual Report to Shareholders. The number of holders of the Company's common stock at December 31, 2000 was approximately 2,109. The Company's common stock is registered on the National Market (MLAN). ITEM 6. Selected Financial Data. Incorporated by reference to "Six Year Financial Summary Data" on pages 18 and 19 of the Registrant's 2000 Annual Report to Shareholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference to pages 20 through 25 of the Registrant's 2000 Annual Report to Shareholders. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Incorporated by reference to "Market Risk" section of Management's Discussion and Analysis of Financial Conditions and Results from Operations on pages 24 and 25 of the Registrant's 2000 Annual Report to Shareholders. ITEM 8. Financial Statements and Supplementary Data. Incorporated by reference to pages 26 through 40 of the Registrant's 2000 Annual Report to Shareholders. ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures. None. 6 PART III ITEM 10. Directors and Executive Officers of the Registrant. Incorporated by reference to the Registrant's Proxy Statement dated March 13, 2001. ITEM 11. Executive Compensation. Incorporated by reference to the Registrant's Proxy Statement dated March 13, 2001. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's Proxy Statement dated March 13, 2001. ITEM 13. Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's Proxy Statement dated March 13, 2001. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements. Incorporated by reference in Part II of this report: Independent Auditors' Report. Consolidated Balance Sheets, December 31, 2000 and 1999. Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules. Included in Part IV of this report: Page ---- Independent Auditors' Consent and Report on Schedules. 11 Schedule I - Summary of Investments - Other Than Investments in Related Parties - December 31, 2000 12 Schedule II - Condensed Financial Information of Registrant 13-17 Schedule III - Supplementary Insurance Information for the Years Ended December 31, 2000, 1999 and 1998 18 Schedule IV - Reinsurance for the Years Ended December 31, 2000, 1999 and 1998 19 Schedule V - Valuation and Qualifying Accounts for the Years Ended December 31, 2000, 1999 and 1998 20 Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations for the Years Ended December 31, 2000, 1999 and 1998 21 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions, are inapplicable or the information is included in the financial statements or notes thereto. 7 PART IV (Continued) Page ---- (a) 3. Exhibits. 3.1 Articles of Incorporation - Filed as Exhibit 3(i) to the Registrant's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference. 3.2 Code of Regulations (Amended and Restated) - Filed as Exhibit 3(ii) to the Registrant's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference. 10.1 The Midland Company 1992 Employee Incentive Stock Plan (Amended and Restated)* - Filed herewith as Exhibit 10.1. 10.2 The Midland Company 1972 Stock Option Plan* - Incorporated by Reference to Registrant's Registration Statement No. 33-48511 on Form S-8. 10.3 Annual Incentive Plan* - Filed herewith as Exhibit 10.3. 10.4 Consulting Agreements with J. P. Hayden, Jr., Michael J. Conaton, John R. LaBar and Robert W. Hayden - Filed herewith as Exhibits 10.4(a)*, 10.4(b)*, 10.4(c)* and 10.4(d)*. 10.5 Employee Retention Agreements with Joseph P. Hayden III, John W. Hayden, John I. Von Lehman and Paul T. Brizzolara - Filed herewith as Exhibits 10.5(a)*, 10.5(b)*, 10.5(c)* and 10.5(d)*. 10.6 The Midland Guardian Co. Salaried Employees 401(k) Savings Plan, The Midland Company 2000 Associate Discount Stock Purchase Plan and The Midland Company Stock Option Plan for Non-Employee Directors - Incorporated by Reference to Registrant's Registration Statement No. 333-40560 on Form S-8. 13. 2000 Annual Report to Shareholders filed herewith. 21. Subsidiaries of the Registrant. 22 22. Published Report Regarding Matters Submitted to Vote of Security Holders - Incorporated by Reference to the Registrant's Proxy Statement dated March 13, 2001. 23. Independent Auditors' Consent - Included in Consent and Report on Schedules referred to under Item 14(a)2 above. * Management Compensatory Plan or Arrangement (b) Reports on Form 8-K - None during 2000. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MIDLAND COMPANY Signature Title Date /S/J. P. Hayden, III Chairman of the Board and March 28, 2001 (J. P. Hayden, III) Chief Operating Officer /S/John W. Hayden President and March 28, 2001 (John W. Hayden) Chief Executive Officer /S/John I. Von Lehman Executive Vice President, March 28, 2001 (John I. Von Lehman) Chief Financial and Accounting Officer and Secretary 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. THE MIDLAND COMPANY Signature Title Date /S/James E. Bushman Director and Member March 28, 2001 (James E. Bushman) of Audit Committee /S/James H. Carey Director and Member March 28, 2001 (James H. Carey) of Audit Committee /S/Michael J. Conaton Director March 28, 2001 (Michael J. Conaton) /S/Jerry A. Grundhofer Director March 28, 2001 (Jerry A. Grundhofer) /S/J. P. Hayden, Jr. Chairman of the Executive March 28, 2001 (J. P. Hayden, Jr.) Committee of the Board and Director /S/J. P. Hayden, III Chairman of the Board, March 28, 2001 (J. P. Hayden, III) Chief Operating Officer and Director /S/John W. Hayden President, Chief Executive March 28, 2001 (John W. Hayden) Officer and Director /S/Robert W. Hayden Director March 28, 2001 (Robert W. Hayden) /S/William T. Hayden Director March 28, 2001 (William T. Hayden) /S/William J. Keating Director March 28, 2001 (William J. Keating) /S/John R. LaBar Director March 28, 2001 (John R. LaBar) /S/David B. O'Maley Director March 28, 2001 (David B. O'Maley) /S/John M. O'Mara Director and Member March 28, 2001 (John M. O'Mara) of Audit Committee /S/Glenn E. Schembechler Director and Member March 28, 2001 (Glenn E. Schembechler) of Audit Committee /S/Marie Francis Thrailkill, Director March 28, 2001 OSU Ed.D. (Marie Francis Thrailkill, OSU Ed.D.) /S/John I. Von Lehman Executive Vice President, March 28, 2001 (John I. Von Lehman) Chief Financial and Accounting Officer, Secretary and Director 10 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES To the Shareholders of The Midland Company: We consent to the incorporation by reference in Registration Statements No. 33-64821 on Form S-3 and Nos. 33-48511 and 333-40560 on Form S-8 of The Midland Company of our report dated February 8, 2001, incorporated by reference in this Annual Report on Form 10-K, and our report (appearing below) on the financial statement schedules of The Midland Company for the year ended December 31, 2000. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedules of The Midland Company and its subsidiaries, listed in Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Deloitte & Touche LLP Cincinnat, Ohio 45201-5340 March 23, 2001 11 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule I - Summary of Investments Other than Investments in Related Parties December 31, 2000 Column A Column B Column C Column D - -------------------------------------------------------------------------------------------------------- Amount at Which Shown in the Balance Type of Investment Cost Value Sheet - -------------------------------------------------------------------------------------------------------- Fixed maturity securities, available-for-sale: Bonds: United States Government and government agencies and authorities $ 79,535,000 $82,044,000 $ 82,044,000 States, municipalities and political subdivisions 172,824,000 176,121,000 176,121,000 Mortgage-backed securities 74,122,000 75,234,000 75,234,000 Foreign governments 4,589,000 4,406,000 4,406,000 Public utilities 6,785,000 6,702,000 6,702,000 All other corporate bonds 118,125,000 117,772,000 117,772,000 --------------------------------------------- Total 455,980,000 462,279,000 462,279,000 --------------------------------------------- Equity securities, available-for-sale: Common stocks: Public utilities 1,823,000 2,266,000 2,266,000 Banks, trusts and insurance companies 8,502,000 66,163,000 66,163,000 Industrial, miscellaneous and all other 42,543,000 60,105,000 60,105,000 Nonredeemable preferred stocks 21,597,000 23,268,000 23,268,000 --------------------------------------------- Total 74,465,000 151,802,000 151,802,000 --------------------------------------------- Accrued interest and dividends 7,823,000 XXXXXXX 7,823,000 --------------------------------------------- Mortgage loans on real estate 8,016,000 XXXXXXX 8,016,000 --------------------------------------------- Short-term investments 62,737,000 XXXXXXX 62,737,000 --------------------------------------------- Total Investments $609,021,000 XXXXXXX $692,657,000 =============================================
12 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 2000 and 1999 ASSETS 2000 1999 ------------- ------------- Cash $ 68,000 $ 148,000 ------------- ------------- Marketable Securities Available for Sale (at market value): Debt Securities (cost, $353,000 in 2000 and $122,000 in 1999) 353,000 122,000 Equity (cost, $342,000 in 2000 and also in 1999) 2,964,000 2,696,000 ------------- ------------- Total 3,317,000 2,818,000 ------------- ------------- Receivables - Net 16,152,000 11,042,000 ------------- ------------- Intercompany Receivables 16,902,000 9,637,000 ------------- ------------- Property, Plant and Equipment (at cost): 37,480,000 37,315,000 Less Accumulated Depreciation 9,114,000 7,289,000 ------------- ------------- Net 28,366,000 30,026,000 ------------- ------------- Other Assets 6,571,000 5,558,000 ------------- ------------- Investments in Subsidiaries (at equity) 278,755,000 250,179,000 ------------- ------------- Total Assets $350,131,000 $309,408,000 ============= ============= 13 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 2000 and 1999 LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 ------------- ------------- Notes Payable Within One Year: Banks (including current portion of long-term debt) $ 39,706,000 $ 21,297,000 Commercial Paper 6,020,000 5,550,000 ------------- ------------- Total 45,726,000 26,847,000 ------------- ------------- Other Payables and Accruals 4,009,000 6,634,000 ------------- ------------- Long - Term Debt 17,219,000 17,925,000 ------------- ------------- Shareholders' Equity: Common Stock - No Par (issued and outstanding: 9,000,000 shares at December 31, 2000 and 9,516,000 shares at December 31, 1999 after deducting treasury stock of 1,928,000 shares and 1,412,000 shares, respectively) 911,000 911,000 Additional Paid - in Capital 19,838,000 18,583,000 Retained Earnings 239,679,000 207,005,000 Accumulated Other Comprehensive Income 54,396,000 49,388,000 Treasury Stock (at cost) (30,404,000) (15,786,000) Unvested Restricted Stock Awards (1,243,000) (2,099,000) ------------- ------------- Total 283,177,000 258,002,000 ------------- ------------- Total Liabilities and Shareholders' Equity $350,131,000 $309,408,000 ============= ============= 14 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Statements of Income Information For the Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 ------------- ------------- ------------- Revenues: Dividends from Subsidiaries $ 13,529,000 $ 9,000,000 $ 3,000,000 All Other Income, Primarily Charges to Subsidiaries 6,317,000 6,359,000 6,934,000 ------------- ------------- ------------- Total Revenues 19,846,000 15,359,000 9,934,000 ------------- ------------- ------------- Expenses: Interest Expense 3,745,000 3,391,000 3,971,000 Depreciation and Amortization 2,458,000 3,973,000 2,701,000 All Other Expenses 2,975,000 1,786,000 2,303,000 ------------- ------------- ------------- Total Expenses 9,178,000 9,150,000 8,975,000 ------------- ------------- ------------- Income Before Federal Income Tax 10,668,000 6,209,000 959,000 Provision (Credit) for Federal Income Tax (1,053,000) (1,023,000) (1,023,000) ------------- ------------- ------------- Income Before Change in Undistributed Income of Subsidiaries 11,721,000 7,232,000 1,982,000 Change in Undistributed Income of Subsidiaries 23,742,000 23,947,000 24,950,000 ------------- ------------- ------------- Net Income $ 35,463,000 $ 31,179,000 $ 26,932,000 ============= ============= ============= 15 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Condensed Statements of Cash Flows Information For the Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 ------------- ------------- ------------- Cash Flows from Operating Activities: Net income $ 35,463,000 $ 31,179,000 $ 26,932,000 Adjustments to reconcile net income to net cash provided by operating activities: Increase in undistributed income of subsidiaries (23,742,000) (23,947,000) (24,950,000) Increase in receivables (4,631,000) (1,170,000) (1,922,000) Increase (decrease) in other payables and accruals (2,723,000) 2,422,000 153,000 Depreciation and amortization 2,458,000 3,973,000 2,701,000 Decrease (increase) in other assets (1,013,000) 8,004,000 (1,142,000) Other - net 2,000 19,000 251,000 ------------- ------------- ------------- Net Cash Provided by Operating Activities 5,814,000 20,480,000 2,023,000 ------------- ------------- ------------- Cash Flows from Investing Activities: Acquisition of property, plant and equipment (259,000) (279,000) (1,657,000) Change in investments (excluding unrealized appreciation/ depreciation) (232,000) 373,000 1,943,000 Sale of property, plant and equipment and other real estate - net 24,000 214,000 5,969,000 ------------- ------------- ------------- Net Cash Provided by (Used in) Investing Activities (467,000) 308,000 6,255,000 ------------- ------------- ------------- Cash Flows from Financing Activities: Increase (decrease) in short - term borrowings 19,470,000 4,028,000 (8,269,000) Purchase of treasury stock (15,432,000) (3,709,000) (1,271,000) Net change in intercompany accounts (6,489,000) (12,080,000) 2,968,000 Dividends paid (2,747,000) (2,515,000) (1,746,000) Decrease in long - term debt (1,297,000) (8,760,000) (1,458,000) Issuance of treasury stock 1,068,000 2,300,000 1,358,000 ------------- ------------- ------------- Net Cash Used in Financing Activities (5,427,000) (20,736,000) (8,418,000) ------------- ------------- ------------- Net Increase (Decrease) in Cash (80,000) 52,000 (140,000) Cash at Beginning of Year 148,000 96,000 236,000 ------------- ------------- ------------- Cash at End of Year $ 68,000 $ 148,000 $ 96,000 ============= ============= ============= 16 THE MIDLAND COMPANY (Parent Only) Schedule II - Condensed Financial Information of Registrant Notes to Condensed Financial Information For the Years Ended December 31, 2000 and 1999 The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 2000 Annual Report to Shareholders. Total debt of the Registrant (parent only) consists of the following: DECEMBER 31, 2000 1999 ------------ ------------ Short - Term Bank Borrowings $39,000,000 $20,000,000 Commercial Paper 6,020,000 5,550,000 Mortgage Notes: 7.10% - Due January 1, 2001 - 642,000 6.83% - Due December 20, 2005 17,925,000 18,580,000 ------------ ------------ Total Debt $62,945,000 $44,772,000 ============ ============ See Notes 6 and 7 to the consolidated financial statements included in the 2000 Annual Report to Shareholders for further information on the Company's outstanding debt at December 31, 2000. The amount of debt that becomes due during each of the next five years is as follows: 2001 - $706,000; 2002 - $756,000; 2003 - $810,000; 2004 - $865,000; 2005 - $930,000; 2006 and thereafter - $13,858,000. 17 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule III - Supplementary Insurance Information For the Years Ended December 31, 2000, 1999 and 1998 (Amounts in 000's) Column A Column B Column C Column D Column E Column F Column G Future Policy Deferred Benefits, Other Policy Policy Losses, Claims and Net Acquisition Claims and Unearned Benefits Premium Investment Cost Loss Expenses Premiums Payable Revenue Income (1) --------------------------------------------------------------------------- 2000 Manufactured Housing $ 67,026 $228,665 $309,943 $20,787 Other Insurance 24,548 128,520 146,177 11,272 Unallocated Amounts 135,887 25 Inter-segment Elimination (1,310) --------------------------------------------------------------------------- Total $ 91,574 $135,887 $357,185 $ - $456,120 $30,774 =========================================================================== 1999 Manufactured Housing $ 60,112 $215,437 $283,332 $15,526 Other Insurance 25,056 97,401 117,659 10,631 Unallocated Amounts 133,713 19 Inter-segment Elimination (884) --------------------------------------------------------------------------- Total $ 85,168 $133,713 $312,838 $ - $400,991 $25,292 =========================================================================== 1998 Manufactured Housing $ 44,317 $192,323 $258,638 $14,875 Other Insurance 19,645 62,792 116,840 9,923 Unallocated Amounts 125,496 34 Inter-segment Elimination (924) --------------------------------------------------------------------------- Total $ 63,962 $125,496 $255,115 $ - $375,478 $23,908 =========================================================================== Column H Column I Column J Column K Benefits, Amortization of Claims, Losses Deferred Policy Other and Settlement Acquisition Operating Premiums Expenses Costs Expenses (1) Written -------------------------------------------------------- 2000 Manufactured Housing $156,517 $ 94,940 $ 41,684 $323,165 Other Insurance 84,163 42,113 29,071 153,682 (2) Unallocated Amounts Inter-segment Elimination ------------------------------------------- ---------- Total $240,680 $137,053 $ 70,755 $476,847 =========================================== ========== 1999 Manufactured Housing $133,436 $ 82,302 $ 40,079 $306,446 Other Insurance 70,929 31,910 26,462 137,049 (2) Unallocated Amounts Inter-segment Elimination -------------------------------------------- ---------- Total $204,365 $114,212 $ 66,541 $443,495 ============================================ ========== 1998 Manufactured Housing $137,483 $ 71,288 $ 33,133 $283,020 Other Insurance 72,532 31,881 21,176 110,987 (2) Unallocated Amounts Inter-segment Elimination -------------------------------------------- ---------- Total $210,015 $103,169 $ 54,309 $394,007 ============================================ ========== Notes to Schedule III: - ---------------------- (1) Net investment income is allocated to insurance segments based upon a combination of premium cash flow and equity data. Other operating expenses include expenses directly related to the segments and expenses allocated to the segments based on historical usage factors. (2) Includes other property and casualty insurance and accident and health insurance ($7,632, $3,632 and $2,237 for 2000, 1999 and 1998, respectively).
18 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule IV - Reinsurance For the Years Ended December 31, 2000, 1999 and 1998 Column A Column B Column C Column D Column E Column F Ceded to Assumed Percentage of Gross Other from Other Net Amount Assumed Amount Companies Companies Amount to Net ----------------------------------------------------------------------------------- 2000 - ---- Life Insurance in Force $731,201,000 $415,567,000 $55,023,000 $370,657,000 14.8% =================================================================================== Insurance Premiums and Other Considerations: Life and Health Insurance $ 20,693,000 $ 11,403,000 $ 1,331,000 $ 10,621,000 12.5% Property & Liability Insurance 434,565,000 30,766,000 41,700,000 445,499,000 9.4% ----------------------------------------------------------------------------------- Total Premiums $455,258,000 $ 42,169,000 $43,031,000 $456,120,000 9.4% =================================================================================== 1999 - ---- Life Insurance in Force $507,134,000 $233,506,000 $23,359,000 $296,987,000 7.9% =================================================================================== Insurance Premiums and Other Considerations: Life and Health Insurance $ 14,315,000 $ 6,346,000 $ 333,000 $ 8,302,000 4.0% Property & Liability Insurance 409,506,000 55,620,000 38,803,000 392,689,000 9.9% ----------------------------------------------------------------------------------- Total Premiums $423,821,000 $ 61,966,000 $39,136,000 $400,991,000 9.8% =================================================================================== 1998 - ---- Life Insurance in Force $416,892,000 $167,412,000 $ 1,895,000 $251,375,000 0.8% =================================================================================== Insurance Premiums and Other Considerations: Life and Health Insurance $ 10,374,000 $ 4,058,000 $ 111,000 $ 6,427,000 1.7% Property & Liability Insurance 394,166,000 60,573,000 35,458,000 369,051,000 9.6% ----------------------------------------------------------------------------------- Total Premiums $404,540,000 $ 64,631,000 $35,569,000 $375,478,000 9.5% ===================================================================================
19 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule V - Valuation and Qualifying Accounts For the Years Ended December 31, 2000, 1999 and 1998 ADDITIONS CHARGED BALANCE AT (CREDITED) TO BALANCE BEGINNING COSTS AND DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD - -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2000: Allowance For Losses $807,000 $ 84,000 $ 65,000 (1) $826,000 YEAR ENDED DECEMBER 31, 1999: Allowance For Losses $753,000 $192,000 $138,000 (1) $807,000 YEAR ENDED DECEMBER 31, 1998: Allowance For Losses $753,000 $176,000 $176,000 (1) $753,000 NOTES: (1) Accounts written off are net of recoveries. 20 THE MIDLAND COMPANY AND SUBSIDIARIES Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations For the Years Ended December 31, 2000, 1999 and 1998 (Amounts in 000's) Column A Column B Column C Column D Column E Column F Column G Reserves for Deferred Unpaid Claims Discount, Affiliation Policy and Claim if any, Net with Acquisition Adjustment Deducted in Unearned Earned Investment Registrant Costs Expenses Column C Premiums Premiums Income - ------------------------------------------------------------------------------------------------------------ Consolidated Property-Casualty Subsidiaries 2000 $ 82,575 $ 129,596 $ - $ 308,282 $ 445,499 $ 28,589 =========== =========== ========== =========== =========== =========== 1999 $ 76,031 $ 128,467 $ - $ 281,442 $ 392,689 $ 23,746 =========== =========== ========== =========== =========== =========== 1998 $ 59,736 $ 121,154 $ - $ 236,171 $ 369,051 $ 22,468 =========== =========== ========== =========== =========== =========== Column H Column I Column J Column K Claims and Claim Adjustment Expenses Amortization Incurred of Deferred Paid Claims Related to Policy and Claim Current Prior Acquisition Adjustment Premiums Year Years Costs Expenses Written - ------------------------------------------------------------------------------------------ Consolidated Property-Casualty Subsidiaries 2000 $ 242,689 $ (6,952) $ 130,275 $ 230,040 $469,215 =========== ========== =========== =========== ========= 1999 $ 211,066 $ (10,178) $ 108,689 $ 199,830 $439,863 =========== ========== =========== =========== ========= 1998 $ 208,811 $ (2,120) $ 100,190 $ 200,325 $391,770 =========== ========== =========== =========== ========= Note: Certain amounts above will not agree with Schedule III because other insurance amounts in Schedule III include life and accident and health insurance.
21 EX-10 2 0002.txt Exhibit 10.1 THE MIDLAND COMPANY 1992 Incentive Stock Plan As Amended and Restated as of January 27, 2000 ARTICLE 1. OBJECTIVES The purpose of The Midland Company Amended and Restated Incentive Stock Plan is to advance the interests of the Company and its subsidiaries by providing its officers and key management personnel with an additional incentive, to encourage their proprietary interest in the success of the Company through stock ownership and monetary payments based upon the value of the Company's Shares and to encourage employees to remain in the Company's employ. ARTICLE 2. DEFINITIONS For purposes of this Plan, the following terms shall have the following meanings: 2.1 "Approved Retirement" means a Retirement approved by the Company pursuant to Company procedures. 2.2 "Award" means any form of Stock Option, Stock Appreciation Right, Restricted Stock Award or Performance Share Award granted under this Plan. 2.3 "Award Certificate" means a written certificate setting forth the terms of an Award. 2.4 "Award Date" means the date designated by the Committee as the date upon which an Award is granted. 2.5 "Award Period" or "Term" means the period beginning on an Award Date and ending on the expiration date of such Award. 2.6 "Board" means the Board of Directors of the Company. 2.7 "Change of Control" means the first to occur of the following events: (A) The "acquisition" after the date hereof by any "Person" (as such term is defined below) of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act of any securities of the Company (the "Voting Securities") which, when added to the Voting Securities then "Beneficially Owned" by such Person, would result in such Person "Beneficially Owning" thirty-three and one-third percent (33-1/3%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that for purposes of this Section 2.7 a Person shall not be deemed to have made an acquisition of Voting Securities if such Person: (i) acquires Voting Securities as a result of a stock split, stock dividend or other corporate restructuring in which all stockholders of the class of such Voting Securities are treated on a pro rata basis; (ii) is generally engaged in the business of underwriting securities and acquires the Voting Securities (the "Underwriting Securities") pursuant to the terms of an underwriting agreement (an "Underwriting Agreement") to which the Company and such underwriter are parties and which Underwriting Agreement is in accordance with Rule 10b-7 promulgated under the Exchange Act or to cover over allotments created in connection with a distribution of Voting Securities pursuant to an Underwriting Agreement; (iii) acquires the Voting Securities directly from the Company; (iv) as a result of a redemption or purchase of Voting Securities by the Company, becomes the Beneficial Owner of more than the permitted percentage of Voting Securities by the Company pursuant to a reduction of the number of Voting Securities outstanding resulting in an increase in the proportional number of shares Beneficially Owned by such Person; (v) is the Company or any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary") or (vi) acquires Voting Securities in connection with a "Non-Control Transaction" (as defined in Section 2.18 below). (B) The individuals who, as of January 1, 2000, are members of the Board of Directors of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds (2/3) of the Board of Directors of the Company; provided, however, that if either the election of any new director or the nomination for election of any new director by the Company's stockholders was approved by a vote of at least two- thirds (2/3) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any election contest or Proxy Contest. (C) Approval by shareholders of the Company of: (i) a merger, consolidation or reorganization involving the Company (a "Business Combination") other than a Non-Control Transaction; or (ii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because thirty-three and one-third percent (33-1/3%) or more of the then outstanding Voting Securities is Beneficially Owned by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Subsidiary or (ii) any corporation which, immediately prior to its acquisition of such interest, is owned directly or indirectly by the shareholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. 2.8 "Code" means the Internal Revenue Code of 1986, as amended, or any successor legislation. 2.9 "Common Stock" means the common stock, no par value, of the Company. 2.10 "Company" means The Midland Company. 2.11 "Director" means a member of the Board. 2.12 "Disability" means a physical or mental condition resulting from bodily injury, disease or mental disorder which renders the individual incapable of engaging in any employment similar to that which the individual performed for the Company. The determination as to whether the individual is totally and permanently disabled shall be made on medical evidence by a licensed physician designated by the Company or on evidence that the individual is eligible for disability benefits either under the Social Security Act or under any insured long term disability plan or program maintained by the Company. The effective date of the disability shall be determined by the Company. 2.13 "Effective Date" means April 9, 1992. 2.14 "Eligible Employee" means any individual who performs services for the Company and is treated as an employee by the Company for federal income tax purposes. In the event an individual not treated as an employee for federal income tax purposes by the Company is reclassified as an employee by the Internal Revenue Service, such individual shall be treated as an Eligible Employee as of the date the Company receives notice of the individual's reclassification from the Internal Revenue Service, and shall not be considered an Eligible Employee as of any prior date. 2.15 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.16 "Fair Market Value" means the last closing price for a Share on the Nasdaq National Market. If the Shares are not so traded or reported, Fair Market Value shall be set under procedures established by the Committee. 2.17 "Incentive Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code or any successor provision. 2.18 "Non-Control Transaction" means a Business Combination in which: (A) The shareholders of the Company, immediately before the Business Combination, own, directly or indirectly immediately following the Business Combination, at least sixty-seven percent (67%) of the combined voting power for the election of directors generally of the outstanding securities of the corporation resulting from the Business Combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before the Business Combination; (B) The individuals who were members of the Board of Directors of the Company immediately prior to the execution of the agreement providing for the Business Combination constitute at least two-thirds (2/3) of the members of the Board of Directors of the Surviving Corporation; or (C) No Person (other than the Company or any Subsidiary, a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements or any trust forming a part thereof maintained by the Company, the Surviving Corporation, or any Subsidiary) who, immediately prior to the Business Combination, did not have Beneficial Ownership of thirty-three and one-third percent (33-1/3%) or more of the then outstanding Voting Securities, upon consummation of the Business Combination, shall be the Beneficial Owner of thirty-three and one-third percent (33-1/3%) or more of the combined voting power for the election of directors generally of the Surviving Corporation's then outstanding securities. 2.19 "Nonqualified Option" means any Stock Option that is not an Incentive Option. 2.20 "Officer" means a person who is considered to be an officer of the Company under Rule 16a-1(f) promulgated under the Exchange Act. 2.21 "Option Price" or "Exercise Price" means the price per share at which Common Stock may be purchased upon the exercise of an Option or an Award. 2.22 "Participant" means a person to whom an Award has been made pursuant to this Plan. 2.23 "Performance Share Award" means the right to receive either Shares or cash of an equivalent value, or a combination of both, at the end of the Performance Period. 2.24 "Performance Period" means the period designated in a Performance Share Award. 2.25 "Person" means any individual, corporation, partnership, firm, joint venture, association, limited liability company, limited liability partnership, joint-stock company, trust, unincorporated organization, governmental, judicial or regulatory body, business unit, division or other entity. 2.26 "Restricted Stock" means Shares issued pursuant to a Restricted Stock Award which are subject to the restrictions set forth in the related Award Certificate. 2.27 "Restricted Stock Award" means an award of a fixed number of Shares to a Participant which is subject to forfeiture provisions and other conditions set forth in the Award Certificate. 2.28 "Retirement" means the latest to occur of termination of (i) employment (other than by death or Disability) by an employee who is at least 65 years of age, or 55 years of age with at least ten years of employment with the Company or a Subsidiary; (ii) service on the Board; or (iii) service as a consultant to the Company. Retirement shall not include termination of the employment of an employee who is 55 years of age with at least ten years of employment with the Company or a Subsidiary if the termination is initiated by the Company or Subsidiary. 2.29 "Share" means one share of the Company's Common Stock. 2.30 "Stock Appreciation Right" or "SAR" means the right to receive, for each unit of the SAR, cash and/or Shares equal in value to the excess of the Fair Market Value of one Share on the date of exercise of the SAR over the reference price per Share established on the date the SAR was granted. 2.31 "Stock Option" or "Option" means the right to purchase Shares of Common Stock. 2.32 "Subsidiary" means any subsidiary corporation as defined in Section 424 of the Code. ARTICLE 3. ADMINISTRATION 3.1 The Committee. The Plan shall be administered by the Compensation Committee designated by the Board of Directors of the Company (the "Committee"). The Committee shall be comprised of two or more directors each of whom shall be (i) a "Non-Employee Director" as defined in Rule 16b-3 promulgated under the Exchange Act and (ii) an "outside director" to the extent required by Section 162(m) of the Code ("Section 162(m)"), as such Rule and Section may be amended, superseded or interpreted hereafter. 3.2 Awards. The Committee is authorized to grant Stock Options, Stock Appreciation Rights, Restricted Stock and Performance Share Awards. In particular, the Committee shall have the authority: (A) to select the Eligible Employees to whom Awards may be granted; (B) to delegate the authority to grant Awards to Eligible Employees provided that the Committee must grant Awards and determine all terms of Awards to Officers; (C) to determine the types and combinations of Awards to be granted; (D) to determine the number of Shares or monetary units which may be subject to each Award; (E) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award, including, but not limited to, the term, Exercise Price, exercisability, method of exercise, any restriction or limitation on transfer, any vesting schedule or acceleration, or any forfeiture provisions or waiver, regarding any Award, and the related Shares, based on such factors as the Committee shall determine; and (F) to modify or waive any restrictions or limitations contained in, and grant extensions to the terms of, or accelerate the vesting of, any outstanding Awards, as long as such modifications, waivers, extensions or accelerations are not inconsistent with the terms of this Plan; provided, however, that no such changes shall impair the rights of any Participant without his or her consent. 3.3 Guidelines. The Committee is authorized to adopt, alter and repeal administrative rules, guidelines and practices governing this Plan and perform all acts, including the delegation of its administrative responsibilities, as it deems advisable, to construe and interpret the terms and provisions of this Plan and any Award issued under this Plan and to otherwise supervise the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any related Award Certificate in the manner and to the extent it deems necessary to carry this Plan into effect. 3.4 Delegation of Authority. The Committee may delegate its authority to Officers of the Company and its administrative duties to Officers or employees of the Company except for matters relating to the executive Officers. 3.5 Decisions Final. Any action, decision, interpretation or determination by or at the direction of the Committee concerning the application or administration of this Plan shall be final and binding upon all persons and need not be uniform with respect to its determination of recipients, amount, timing, form, terms or provisions. No member of the Committee shall be liable for any action or determination taken or made in good faith with respect to this Plan or any Award granted hereunder, and to the extent not prohibited by law, all members of the Committee shall be indemnified by the Company for any liability and expenses which may occur through any claim or cause of action. ARTICLE 4. SHARES SUBJECT TO PLAN Subject to adjustments as provided in Article 13, the number of Shares which may be issued under this Plan shall not exceed One Million Six Hundred Fifty Thousand (1,650,000) Shares. If any Award granted under this Plan shall expire, terminate or be canceled for any reason without having been exercised in full, the number of unacquired Shares subject to such Award shall again be available for future grants. The Committee may make such other determinations regarding the counting of Shares issued pursuant to this Plan as it deems necessary or advisable, provided that such determinations shall not be prohibited by law. The repricing of an Option shall be treated as a cancellation of the Option and the grant of a new Option. ARTICLE 5. TERMS OF OPTIONS Subject to specific provisions relating to Incentive Options set forth in Article 8, each Option shall be for a Term of from one to ten years from the Award Date and may not be exercised during the first twelve months of the Term of said Option. The right of exercise under the vesting schedule shall be cumulative and shall be exercisable in whole or in part. The Committee will establish the vesting schedule for options, which may include vesting related to individual or Company performance, and impose other conditions upon exercise for any particular Option or groups of Options. ARTICLE 6. EXERCISE OF OPTIONS Any person entitled to exercise an Option in whole or in part, may do so by delivering a written notice of exercise to the Company, attention Corporate Secretary, at its principal office. The written notice shall specify the number of Shares for which an Option is being exercised and the Award Date of the Option being exercised and shall be accompanied by full payment of the Option Price for the Shares being purchased unless the Committee authorizes payment in installments. ARTICLE 7. PAYMENT OF OPTION PRICE In the sole discretion of the Committee, payment of the Option Price may be made in cash, by the tender of Shares which have been owned at least six months and which have a Fair Market Value equal to the Option Price, by a reduction in the number of Shares issuable upon exercise or by any combination of the foregoing. ARTICLE 8. INCENTIVE OPTIONS AND NONQUALIFIED OPTIONS 8.1 Nature of Options. The Committee in its discretion may designate whether an Option is to be considered an Incentive Option or a Nonqualified Option. The Committee may grant both an Incentive Option and a Nonqualified Option to the same individual. However, where both an Incentive Option and a Nonqualified Option are awarded at one time, such Options shall be deemed to have been awarded in separate grants, shall be clearly identified, and in no event will the exercise of one such Option affect the right to exercise the other such Option. 8.2 Terms Applicable to Incentive Options. Any option designated by the Committee as an Incentive Option will be subject to the general provisions applicable to all Options granted under this Plan. In addition, the Incentive Option shall be subject to the following specific provisions: (A) At the time the Incentive Option is granted, if the Eligible Employee owns, directly or indirectly, stock representing more than 10% of (i) the total combined voting power of all classes of stock of the Company, or (ii) a corporation that owns 50% or more of the total combined voting power of all classes of stock of the Company, then: (i) The Option Price must equal at least 110% of the Fair Market Value on the Award Date; and (ii) The Term of the Option shall not be greater than five years from the Award Date. (B) The aggregate Fair Market Value of Shares (determined at the Award Date) with respect to which Incentive Options are exercisable by an Eligible Employee for the first time during any calendar year under this Plan or any other plan maintained by the Company shall not exceed $100,000 as determined with respect to the Option Price. 8.3 Nonqualified Options. If any Option is not granted, exercised, or held pursuant to the provisions noted immediately above, it will be considered to be a Nonqualified Option to the extent that the grant is in conflict with these restrictions. ARTICLE 9. STOCK APPRECIATION RIGHTS 9.1 Grant. A Stock Appreciation Right may be granted either with or without reference to all or any part of a Stock Option. A "Tandem SAR" is an SAR granted with reference to a Stock Option (the "Reference Option"). A "Non-Tandem SAR" is an SAR granted without reference to a Stock Option. If the Reference Option is a Nonqualified Option, a Tandem SAR may be granted at or after the date of the Reference Option; if the Reference Option is an Incentive Option, the Award Date of a Tandem SAR must be the same as the Award Date of the Reference Option. Any SAR shall have such terms and conditions, not inconsistent with this Plan, as are established by the Committee in connection with the Award. 9.2 Term. A Tandem SAR shall terminate and no longer be exercisable upon the termination of its Reference Option. A Non-Tandem SAR may have a Term no longer than 20 years from its Award Date. 9.3 Exercise. A Tandem SAR may only be exercisable at the times and, in whole or in part, to the extent that its Reference Option is exercisable. The exercise of a Tandem SAR shall automatically result in the surrender of the applicable portion of its Reference Option. A Non-Tandem SAR shall be exercisable in whole or in part as provided in its Award Certificate. Written notice of any exercise must be given in the form prescribed by the Committee. 9.4 Payment. For purposes of payment of an SAR, the reference price per Share shall be the Option Price of the Reference Option in the case of a Tandem SAR and shall be the Fair Market Value of a Share on the Award Date in the case of a Non-Tandem SAR. The Committee shall determine the form of payment. ARTICLE 10. RESTRICTED STOCK AWARDS 10.1 Grants of Restricted Stock Awards. The Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock Award shall specify the number of Shares to be issued to the Participant, the date of such issuance, the price, if any, to be paid for such Shares by the Participant and the restrictions imposed on such Shares. The Committee may grant Awards of Restricted Stock subject to the attainment of specified performance goals, continued employment or such other limitations or restrictions as the Committee may determine. 10.2 Terms and Conditions of Restricted Stock Awards. Restricted Stock Awards shall be subject to the following provisions: (A) Shares of Restricted Stock may be issued immediately upon grant or upon vesting as determined by the Committee. (B) If Shares of Restricted Stock are issued immediately upon grant, the Committee may require the Participant to deliver a stock power, endorsed in blank, relating to the Restricted Stock covered by such an Award. The Committee may also require that the certificates evidencing Restricted Stock be held in custody by the Company until the restrictions on them shall have lapsed. (C) Unless otherwise determined by the Committee at the time of grant, Participants receiving Restricted Stock Awards shall not be entitled to dividend or voting rights for the Restricted Shares until they are fully vested. ARTICLE 11. PERFORMANCE SHARE AWARDS 11.1 Performance Share Awards. (A) The Committee may, in its discretion, grant Performance Share Awards to Eligible Employees. The Committee shall determine the Eligible Employees to whom and the time or times at which Performance Share Awards shall be granted, the number of Shares or the amount of cash to be awarded to any person, the duration of the period during which, and the conditions under which, a Participant's Performance Share Award will vest, and the other terms and conditions of the Performance Share Award in addition to those set forth in Section 11.2. (B) The Committee may condition the grant or vesting of a Performance Share Award upon the attainment of specified performance goals; the appreciation in the Fair Market Value, book value or other measure of value of the Shares; the performance of the Company based on earnings or cash flow; or such other factors or criteria as the Committee shall determine. 11.2 Terms and Conditions of Performance Share Awards. Performance Share Awards shall be subject to the following terms and conditions: (A) Unless otherwise determined by the Committee at the time of the grant of the Award, amounts equal to dividends declared during the Performance Period with respect to any Shares covered by a Performance Share Award will not be paid to the Participant until they are full vested. (B) Subject to the provisions of the Award Certificate and this Plan, at the expiration of the Performance Period, share certificates, cash or both as the Committee may determine shall be delivered to the Participant, or his or her legal representative or guardian, in a number or an amount equal to the vested portion of the Performance Share Award. (C) Subject to the applicable provisions of the Award Certificate and this Plan, upon termination of a Participant's employment with the Company or a Subsidiary for any reason during the Performance Period for a given Award, the Performance Share Award in question will vest or be forfeited in accordance with the terms and conditions established by the Committee. (D) Unless otherwise determined by the Committee at the time of grant, Participants receiving Performance Share Awards shall not be entitled to voting rights for the Shares underlying such Performance Share Awards, if any, until they are fully vested. ARTICLE 12. TRANSFERABILITY OF AWARDS Awards and the benefits payable under this Plan shall not be transferable by the Participant during his or her lifetime and may not be assigned, exchanged, pledged, transferred or otherwise encumbered or disposed of except by a domestic relations order incident to a divorce within the meaning of Section 1041(a) of the Code, or by will or the laws of descent and distribution. Awards shall be exercisable during a Participant's lifetime only by the Participant or by the Participant's guardian or legal representative. Notwithstanding the above, the Committee may, with respect solely to particular Nonqualified Options, establish or modify the terms of the Option to allow the Option to be transferred at the request of the grantee of the Option to trusts established by the grantee or as to which the grantee is a grantor or to family members of the grantee or otherwise for personal and tax planning purposes of the grantee. If the Committee allows such transfer, such Options shall not be exercisable for a period of six months following the action of the Committee. ARTICLE 13. ADJUSTMENTS TO SHARES AND AWARD PRICE 13.1 In the event of changes in the outstanding Common Stock of the Company as a result of stock dividends, stock splits, reverse stock splits, recapitalizations, combinations of Shares or exchanges of Shares, the number and class of Shares for all purposes covered by this Plan and number and class of Shares and price per share for each Award covered under this Plan and each outstanding Award shall be correspondingly adjusted by the Committee. 13.2 The Committee shall make appropriate adjustments in the Exercise Price to reflect any spin-off of assets, extraordinary dividends or other distributions to shareholders. 13.3 All outstanding Awards shall become immediately exercisable in full and/or fully vested in the case of Performance Share Awards and Restricted Stock Awards if a Change in Control of the Company occurs. For purposes of the Restricted Stock Awards and Performance Share Awards, all Awards shall be fully vested at the target amount without any adjustments based on actual performance. Each outstanding Award shall terminate as of a date fixed by the Committee provided that not less than 20 days' written notice of the date of expiration shall be given to each holder of an Award and each such holder shall have the right during such period following notice to exercise the Award as to all or any part of the Shares. ARTICLE 14. TERMINATION OF AWARDS 14.1 Termination of Awards. All Awards issued under this Plan shall terminate as follows: (A) During any period of continuous employment with the Company or a Subsidiary or continuous service on the Board, an Award will be terminated only if it is fully exercised or in the case of a Performance Share Award and Restricted Stock Award is fully vested, or if it has expired by its terms or by the terms of this Plan. (B) In the event of the Retirement, other than an Approved Retirement, death or Disability of a Participant, any Award held by such Participant, unless otherwise determined by the Committee at grant, shall be fully vested and may thereafter be exercised by the Participant or by the Participant's beneficiary or legal representative, for a period of one year following termination of employment, in the case of death or Disability, and 90 days in the case of Retirement, or such longer period as the Committee may specify at or after grant in all cases other than Incentive Options, or until the expiration of the stated Term of such Award, whichever period is shorter. The Performance Share Awards and the Restricted Stock Awards shall vest at the target amount without any adjustments based on actual performance or at the level established by the Committee. (C) Unless otherwise determined by the Committee at or after grant, if a Participant's employment by the Company or a Subsidiary or service as a member of the Board terminates for any reason other than death, Disability, Approved Retirement or Retirement, the Award will terminate on the earlier to occur of the stated expiration date (after giving effect to a Change of Control, if any) or the date of termination of employment or service as a member of the Board. (D) Notwithstanding Section 14.1(B) and 14.1(C), upon the Approved Retirement of an Eligible Employee, Awards held by such Eligible Employee shall be fully vested and Options may thereafter be exercised by the Participant or by the Participant's beneficiary or legal representative and shall terminate on the earlier of their original expiration date or three (3) years following such Approved Retirement; provided, however, that any Option granted as an Incentive Option with a termination date determined by this Section 14.1 shall be converted into a Nonqualified Option for all purposes. In the event of Approved Retirement, if the Eligible Employee continues to provide service on the Board or as a consultant, after the Approved Retirement, the following shall apply: (i) The Options and Stock Appreciation Rights shall be fully vested and Options may thereafter be exercised by the Participant or by the Participant's beneficiary or legal representative as provided above and shall terminate on the earlier of their original expiration date or three (3) years from the date services cease to be rendered to the Company; and (ii) The Performance Share Awards and Restricted Stock Awards shall not be vested as provided above, but rather shall vest at the earlier of the original vesting date or three (3) years from the date services cease to be rendered to the Company. The Performance Share Awards and Restricted Stock Awards shall vest at the target amount without any adjustments based on actual performance or at the level established by the Committee. 14.2 Acceleration of Vesting and Extension of Exercise Period Upon Termination of Employment. (A) Notwithstanding anything contained in this Article 14, upon the termination of employment of a Participant for reasons other than death, Disability or Retirement, the Committee may, in its sole discretion, accelerate the vesting of all or part of any Awards held by such terminated Participant, or transferred by the Participant in accordance with Article 12, so that such Awards are fully or partially exercisable as of the date of termination of employment, and may also extend the permitted exercise period of such Awards for up to five years from the date of termination, but in no event longer than the original expiration date of such Award. (B) Except as provided in Article 13, in no event will the continuation of the exercisability of an Award beyond the date of termination of employment allow the Eligible Employee, or his or her beneficiaries or heirs, to accrue additional rights under this Plan, or to purchase more Shares through the exercise of an Award than could have been purchased on the date that employment was terminated. ARTICLE 15. AMENDMENT OR DISCONTINUANCE OF PLAN 15.1 Amendment. The Committee may at any time amend this Plan; provided, however, that no amendments by the Committee shall, without further approval of the shareholders of the Company: (A) Change the definition of Eligible Employees; (B) Except as provided in Article 13 hereof, increase the number of shares which may be subject to Awards granted under the Plan; (C) Cause the Plan or any Award granted under the Plan to fail to be excluded from the $1 million deduction limitation imposed by Section 162(m) of the Code, or to fail to qualify as an "Incentive Option" as defined by Section 422 of the Code if the Committee intended for such Award to qualify as an "Incentive Option." 15.2 Discontinuance. The Board may at any time suspend or discontinue this Plan. 15.3 Limitations. No amendment or discontinuance of the Plan shall alter or impair any Award granted under the Plan without the consent of the holder thereof. ARTICLE 16. GENERAL PROVISIONS 16.1 Shareholder Approval. This Plan shall not become effective unless it shall have been approved by the affirmative vote of a majority of the votes cast at a shareholders' meeting of the Company prior to December 31, 2000. If shareholder approval is not received by such date, awards granted pursuant to this Plan shall be null and void. 16.2 Leaves of Absence. For purposes of this Plan, any leave of absence approved by the Company shall not be deemed to be a termination of employment. 16.3 Securities Laws. Notwithstanding anything to the contrary contained in this Plan, the Company shall not be obligated to issue Shares to a Participant pursuant to any Option, Award or other grant under this Plan, unless at the time of such issuance the Shares are registered, exempt, or the subject matter of an exempt transaction under both federal and applicable state securities laws. 16.4 No Right to Continued Employment. Neither the establishment of this Plan nor the granting of any Award hereunder shall confer upon any Participant any right to continue in the employ of the Company or any Subsidiary, or interfere in any way with the right of the Company or any Subsidiary to terminate such employment at any time. 16.5 Other Plans. The value of, or income arising from, any Awards issued under this Plan shall not be treated as compensation for purposes of any pension, profit sharing, life insurance, disability or other retirement or welfare benefit plan now maintained or hereafter adopted by the Company or any Subsidiary, unless such plan specifically provides to the contrary. 16.6 Withholding of Taxes. The Company may deduct from any payment to be made pursuant to this Plan, or to otherwise require, prior to the issuance or delivery of any Shares or the payment of any cash to a Participant, payment by the Participant of any federal, state, local or foreign taxes required by law to be withheld. The Committee may permit any such withholding obligation to be satisfied by reducing the number of Shares otherwise deliverable or by accepting the delivery of previously owned Shares. Any fraction of a Share required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant. 16.7 Reimbursement of Taxes. The Committee may provide in its discretion that the Company may reimburse a Participant for federal, state, local and foreign tax obligations incurred as a result of the grant or exercise of an Award issued under this Plan. 16.8 Governing Law. This Plan and actions taken in connection with it shall be governed by the laws of the State of Ohio, without giving effect to the conflict of law provisions thereof. Any litigation involving or arising under this Plan shall be maintained solely in the Common Pleas Court of Clermont County, Ohio or in the United States District Court for the Southern District of Ohio. 16.9 Liability. No employee of the Company nor member of the Committee or the Board shall be liable for any action or determination taken or made in good faith with respect to the Plan or any Award granted hereunder and, to the fullest extent not prohibited by law, all employees and members shall be indemnified by the Company for any liability and expenses which may occur through any claim or cause of action arising under or in connection with this Plan or any Awards granted under this Plan. 16.10 Certificates for Shares. Certificates for Shares purchased through exercise of Options or acquired through the exercise of other Awards will be issued in regular course after exercise of the Award and payment, if necessary, therefor as called for by the terms of the Award, but in no event shall the Company be obligated to issue certificates more often than once each quarter. No persons holding an Award or entitled to exercise an Award granted under this Plan shall have any rights or privileges of a shareholder of the Company with respect to any Shares issuable upon exercise of such Award until certificates representing such Shares shall have been issued and delivered. No Shares shall be issued and delivered upon exercise of an Award unless and until the Company, in the opinion of its counsel, has complied with all applicable registration requirements of the Securities Act of 1933 and any applicable state securities laws and with any applicable listing requirements of any national securities exchange on which the Company securities may then be listed as well as any other requirements of law. 16.11 Term. This Plan shall continue in effect until the expiration of all Awards granted under the Plan unless terminated earlier in accordance with Article 15; provided, however, that no Incentive Options shall be granted ten years after the Effective Date. EX-10 3 0003.txt Exhibit 10.3 THE MIDLAND COMPANY TOTAL REWARDS INCENTIVE PLANS The Midland Company Total Rewards Incentive Plan (the "Plan") is adopted effective the 2000 fiscal year of The Midland Company (the "Company") and its subsidiaries and/or its affiliates, Midland-Guardian Co., MG Transport Service, Inc. and American Modern Insurance Group and such other subsidiaries as may be designated by the Company from time to time. The Plan is established and maintained by the Company for the purpose of encouraging eligible employees of the Company and its subsidiaries to become engaged in and share in the success of the Company. 1. Participants Participants shall be all employees of the Company and its subsidiaries who are employed as of December 31 of any calendar year, subject to the exceptions noted below. The Company may choose to expand or contract the number of Participants eligible to participate in the Plan as its sole discretion. 2. Amount of Annual Incentive The amount of any incentive payable to eligible employees shall be discretionary as determined by the Company. 3. Eligibility Participants will be eligible to receive the incentive described in Section 2 if they are employed as of the day of the calendar year on which the incentive is paid. Participants who leave the employment of The Midland Company before the date the incentive is paid, whether involuntarily or voluntarily, are ineligible to receive payment of the incentive. Participants hired after September 30th of any calendar year are ineligible to receive payment of any incentive for the calendar year in which they are hired. Participants hired after December 31, but prior to September 30th, are eligible to receive a pro rated amount of any incentive payable for the calendar year in which they are hired, based on the number of days worked during such calendar year. 4. Employee Performance Criteria The foregoing notwithstanding, no incentive will be paid to an otherwise eligible employee who is placed on probation at any time during the calendar year for which the incentive is payable. Further, if any otherwise eligible employee receives a performance review results in a rating of below "Meets Expectations" any incentive otherwise payable for any calendar year, or portion thereof, in which such rating is effective, shall be reduced by 40%. 5. Requirement of Company Profitability Regardless of the performance of any of the subsidiaries or business units of the Company, no incentive shall be paid to any otherwise eligible Participant in the event the Company does not earn a profit as determined by the Company's Board of Directors for a calendar year. 6. Determinations as to Incentive Payments All determinations as to a Participant's eligibility to receive an incentive, the payment of an incentive for the Company or any of its subsidiaries or business units or any other matters related to the Plan shall be determined solely in the Company's discretion and the Company's decision shall be final and binding with respect to all Participants and other parties involved in the Plan. 7. Amendment of Termination The Company may amend or terminate any incentive plan at its sole discretion and the Company's decision shall be final and binding with respect to such determinations. THE MIDLAND COMPANY By: /s/John I Von Lehman Date: January 3, 2000 EX-10 4 0004.txt Exhibit 10.4(a) J. P. HAYDEN, JR. CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made and entered into between J. P. HAYDEN, JR. ("Hayden") and THE MIDLAND COMPANY ( "Midland"). W I T N E S S E T H: Midland desires to engage Hayden to render the consulting services subject to the terms and conditions of this Agreement because of Hayden's valuable experience in operating the business. Hayden is willing to perform such consulting services for the fees and upon and subject to the terms and conditions set forth in this Agreement. Accordingly, Midland and Hayden agree as follows: 1. Term. The term of this Agreement (the "Term") shall be for a period of 5.75 years commencing on April 1, 2000 and expiring on December 31, 2005 (the "Expiration Date"). 2. Consulting Services. During the term of this Agreement, Hayden's duties include, at the request of Midland: (a) consulting with officers of Midland during regular business hours, and (b) promoting the good will of Midland by being available to attend and attending insurance-related conferences and functions as a representative of Midland. Hayden shall devote only such time and attention to the business of Midland as may be reasonably necessary to perform Hayden's duties under this Agreement, up to a maximum of twenty (20) hours per month. 3. Consulting Fees. a. Fee. In consideration of the consulting services to be performed by Hayden, Midland agrees to pay to Hayden the following annual amounts: Year Consulting ------ ------------ 2000 $543,750 2001 $600,000 2002 $500,000 2003 $400,000 2004 $300,000 2005 $200,000 Midland shall pay such amounts in equal monthly installments on or before the fifteenth (15th) of each month. b. Other Consideration. Hayden shall receive additional consideration as follows: i. Midland shall continue to pay its share of the premiums (or $585,856 per year) under the Split Dollar Life Insurance on the lives of Hayden and his spouse until the death of the survivor, provided, however, (x) Midland shall only be obligated to pay such premiums for a period of ten (10) years, (y) Midland may, at any time after the sixteenth (16th) anniversary date of the policy, request a return of all premiums Midland paid into the policy and (z) Midland may also take advantage of any premium reduction or minimum payment options under such policy provided Midland pays the equivalent of the sum of $585,856 for ten (10) years with such sum reduced by any special dividends, demutualization distributions or other policy distributions; ii. The Midland Health Insurance Plan shall be available at normal employee rates during the Term and after the Term. Hayden's coverage shall be secondary to Medicare after he reaches age 65, and Hayden's spouse shall be covered until she reaches age 65 at which time her coverage shall be secondary to Medicare; iii. During the Term, a car shall be provided by Midland consistent with the program in effect at the commencement of this Agreement; iv. Use of the Midland plane shall be available secondary to Midland's business use during the Term; v. During the Term, Midland shall continue to pay club dues for the clubs Hayden was a member (and Midland was paying such dues for such clubs) at the commencement date of this Agreement; vi. No director fees shall be paid during the Term vii. Any existing stock options or stock grants of Hayden may be exercised at the earlier of the normal expiration date during the Term or for a period of three (3) years after the later of (x) the Expiration Date of this Agreement or (y) the date of retirement of Hayden as a member of the Board of Directors. Any future awards while a director during (or after the Term) will be equal to the stock awards of an outside director; viii. Midland shall provide Hayden with an office in headquarters building during the Term; ix. During the Term, Midland shall provide payment for Hayden's estate planning and annual tax preparation consistent with the current level of fees that were being paid at the commencement date of this Agreement; and x. On April 1, 2001, Midland shall provide for the payment in a single lump sum of Hayden's benefit from the Nonqualified Self-Directed Retirement Plan, and an additional payment equal to 45.6% of the benefit to provide for the payment of any federal, state and local income tax due on the payment of the benefit. 4. Proprietary Property; Confidential Information. For purposes of this Agreement, the following definition shall be used: a. Proprietary Property. The term "Proprietary Property" includes any and all ideas, creations, developments, improvements, inventions, trade secrets, patents, copyrights, trademarks, trade names, logos, processes, computer programs, databases, spread sheets, documentation, models, methodologies, strategies, material works or authorship, know-how and methods of applying and putting into practice any such items that are created, developed or discovered by or for Midland or are acquired or licensed on a proprietary technical information generally known in the business in which Midland operates, even if disclosed to Hayden or known or developed by Hayden as a consequence of or through Hayden's performance of services under this Agreement. b. Confidential Information. The term "Confidential Information" includes any and all information which relates to Midland's products and services (including their development, marketing and sale), the financial, marketing and other aspects of Midland's operations, and the intellectual property and business and other rights which it owns, licenses or otherwise has the right to use, which is not generally known outside Midland (other than to Midland's customers or suppliers or other third parties in connection with their business with Midland) and which is disclosed or accessible to or known or developed by Hayden as a consequence of or through Hayden's performance of services hereunder or prior performance of services for Midland. It includes, but is not limited to, memoranda, files, books and records, financial and accounting methodologies, catalogs, lists of customers or prospects, price lists, advertising and promotional materials, packaging design, business plans, operating policies and manuals, internal controls, policies, procedures and guidelines, and other business information and records used in the conduct of business (whether intangible - including written documents, magnetic tapes, disks or other media - or intangible form), agreements and understandings between Midland and third parties, and trade secrets, software and other licenses, source codes and object codes, designs, drawings, plans and other such information and rights, intangible or otherwise, whether or not such information comes within the term "Proprietary Property". c. Rights to Proprietary Property. Hayden agrees that, except as Midland may otherwise expressly agree in writing, (i) Hayden shall have no rights and shall acquire no rights to any Proprietary Property that comes, or has come, within Hayden's knowledge or possession through or as a consequence of Hayden's performance of services hereunder or prior to the effective time of this Agreement, and (ii) any information or other property that is, or has been, invented, created, discovered, written, developed, furnished or produced by Hayden, solely or jointly, wholly or partly, while performing services for Midland hereunder or prior to the effective time of this Agreement or with information proprietary to Midland (the "Developments"), shall be the exclusive property of Midland, and Hayden shall have no right, title or interest of any kind in and to the Developments, including any results or proceeds therefrom. Hayden hereby sells, transfers and assigns to Midland all right, title and interest which Hayden may be deemed to have in and to the Developments, including the right to patent, register copyrights for or obtain legal protection for the Developments, and agrees to communicate promptly and disclose to Midland, in such from as Midland requests, all information, details and data pertaining to any Developments. At any time during or subsequent to the term of this Agreement, upon the request and at the election and expense of Midland, Hayden will patent, register copyrights for or obtain other legal protection for, or permit Midland to patent, register copyrights for or obtain other legal protection for, any Developments and execute any and all assignments, instruments of transfer, or other documents that Midland deems necessary or appropriate to transfer to Midland all rights in or to the Developments or to evidence Midland's ownership of such rights or any of them. d. Use and Disclosure. Except as may be otherwise expressly authorized in writing by Midland, Hayden shall not use any Proprietary Property or Confidential Information except for the benefit of Midland and shall not disclose any Confidential Information to any other person. As used in this Agreement, unless the context otherwise requires the term "person" includes, but is not limited to, any individual, partnership, association, firm, corporation, trust, unincorporated organization, joint venture or other entity. This restriction on use and disclosure applies without limitation as to time or place. e. Applicability to Midland and its Affiliates. For purposes of this Section 4, and Sections 5, 6 and 7 of this Agreement, references to Midland shall be deemed to include Midland and any corporations or other business entities affiliated with it. 5. Midland Property. Following the Expiration Date of this Agreement, Hayden shall promptly return to Midland all property of Midland in the possession or control of Hayden (and any and all copies thereof) including, without limitation, all Proprietary Property and Confidential Information. 6. Non-Competition. During the period commencing on the date of this Agreement and ending five (5) years after the expiration of this Agreement (the "Restricted Period"), Hayden shall not, either on Hayden's own account or for any other person or entity, directly or indirectly, (a) engage in any activities or render any services which are similar or reasonably related to those performed for or rendered to or on behalf of Midland during the term of this Agreement or the two-year period preceding the date of this Agreement (together, the "Extended Term"), to any business which competes with Midland in any place where Midland is engaged or, to the knowledge of Hayden, intends to engage in business or (b) owns a greater than five percent equity interest in or be connected with the management, operation or control of any such business, but the foregoing shall not be deemed to exclude Hayden from acting as a director, officer or employee of or a consultant to other business for the benefit of Midland with the consent of Midland's Board of Directors. 7. Non-Solicitation. During the Restricted Period, Hayden shall not directly or indirectly: (a) attempt to induce, or assist others to attempt to induce, any person who was or was actively negotiating to become a customer of Midland at any time during the Extended Term, to reduce or terminate such customer's business with Midland or to direct any of its business that is then being or may be done with Midland to any other person; (b) attempt to induce, or assist others to attempt to induce, any employee of Midland to terminate his or her employment with Midland; and (c) whether in an individual capacity or as the owner, partner, employee or agent of any entity, employ or offer employment to any person who is or was employed by Midland during the Extended Term unless such person shall cease to have been employed by Midland in any capacity for a period of at least one year. 8. Survival. Sections 4, 5, 6, 7, 8 and 9 shall survive the termination of this Agreement. In the event Midland is acquired or merges with another entity, this Agreement shall survive unless otherwise agreed to in writing by Midland and Hayden. 9. Remedies for Breach of Agreement. If Hayden commits a breach or threatens to commit a breach of any of the provisions of this Agreement, Midland shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without having to prove the inadequacy of the available remedies at law or irreparable injury, it being acknowledged and agreed to between Midland and Hayden that any such breach or threatened breach will cause irreparable injury to Midland and that money damages may not provide an adequate remedy to Midland. In addition, Midland may take and pursue all such other actions and remedies as may be available to Midland at law or in equity and shall be entitled to such damages as Midland can show Midland has sustained by reason of such breach, together with court costs and attorneys' fees. 10. Expenses. Midland agrees to reimburse Hayden for all his reasonable out-of-pocket expenses incurred by Hayden in connection with the performance of the duties under this Agreement. 11. Title: Relationship of Parties. Hayden may hold himself out as a consultant to Midland. Hayden is retained by Midland only for the purposes and to the extent set forth in this Agreement, and Hayden's relation to Midland under this Agreement shall be that of an independent contractor and not that of an employee, partner or joint venturer. Hayden acknowledges that he is solely responsible for all withholding, social security and other taxes with respect to the consulting fees paid to him under this Agreement. 12. Independent Judgment. Nothing in this Agreement shall be construed to interfere with or otherwise affect the rendering of services by Hayden under this Agreement in accordance with Hayden's independent and professional judgment and in accordance with Hayden's own means and mode of performance. 13. Indemnity. Each party ("Indemnifying Party") agrees to indemnify and hold harmless the other party (the "Injured Party") from and against any damages, liabilities, actions, suits or other claims and from reasonable attorneys' fees and costs incurred by the Injured Party in defending against same with respect to the discharge of the Injured Party's duties and responsibilities under this Agreement unless such liability arose out of the Injured Party's gross negligence. 14. Trusts. The obligations under this Agreement (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control, as defined in the Consulting Agreements Rabbi Trust (the "Rabbi Trust"), through the Rabbi Trust and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid within thirty (30) days of the effective date of the Change of Control. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as may be required by the Rabbi Trust. The right of Hayden or his designated beneficiary to receive a distribution under this Agreement shall be an unsecured claim against the general assets of Midland, and neither Hayden nor a designated beneficiary shall have any rights in or against any specific assets of Midland. All amounts to be paid to fulfill the obligations under this Agreement shall constitute general assets of Midland and may be disposed of by Midland at such time and for such purposes as it may deem appropriate. 15. Tax Gross-Up Payment. a. Amount of Payments. In the event of a Change of Control, benefits under any plan or other agreement including this Agreement in which Hayden participates are accelerated and distributed prior to the time such benefits would otherwise have been distributed under such plan, Midland shall pay Hayden the following additional amounts (the "Gross-Up Payment"): i. The amount of the Excise Tax, if any, imposed on Hayden by Section 4999 of the Internal Revenue Code of 1986. ii. The amount of any federal, state and local income tax due to any payments to Hayden under i above. iii. After the payments are made in i and ii above, an additional amount shall be paid to Hayden grossing up all payments made pursuant to Section 16 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in i and ii above. b. Calculation of Payment. For purposes of determining the amount of the Gross-Up Payment payable pursuant to a above, Consultant shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross- Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. c. Payment is an Estimate. The Gross-Up Payment provided for in this Section 16 shall be an estimate. Midland will cause its independent auditors to make an estimate of the liability and Gross-Up Payment within 60 days of the Change of Control (a copy of which is to be furnished to Consultant as soon as possible), and Midland shall pay to Consultant the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Consultant shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability, and such excess shall constitute a loan by Midland to Consultant, payable on the 5th day after demand by Midland (together with interest from the date Consultant received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). d. Subsequent IRS Review. In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by Midland's auditors, Consultant shall promptly notify Midland, and Midland shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Consultant by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Consultant by Midland (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and the payments provided for in this Section 16) within 10 days of the date that the Internal Revenue Service makes such an assessment. e. Interpretation. The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by Midland's independent auditors and acceptable to Consultant. 16. Entire Agreement. This Agreement supersedes any and all other understandings and agreements, either oral or in writing, between Midland and Hayden with respect to the subject matter of this Agreement and constitutes the sole and only agreement between Midland and Hayden with respect to the subject matter. No change or modification of this agreement shall be valid or binding upon Midland and Hayden unless the change or modification is in writing and signed by Midland and Hayden. 17. Legal Construction. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable for any reason, such invalid or unenforceable provisions shall not affect the validity or enforceability of the remaining provisions of this Agreement which shall remain in full force and effect. 18. Parties Bound. This Agreement shall be binding upon and shall inure to the benefit of Midland and Hayden and their respective successors and assigns. Hayden shall not assign any of its rights under this Agreement without the prior written consent of Midland. Midland shall not assign any of its rights under this Agreement to any person or entity without the prior written consent of Hayden. 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same agreement. 20. Governing Law. This Agreement shall be governed by, construed under, and enforced in accordance with the laws of the State of Ohio. 21. Headings; Gender; Number. The headings contained in this Agreement are for convenience only and shall not be construed as substantive provisions of this Agreement. Singular words shall include the plural and plural words shall include the singular, unless the context requires otherwise. 22. Other Activities. Hayden may get involved in other activities which do not materially interfere from a time standpoint with the duties of Hayden hereunder. 23. Effective Date. This Consulting Agreement shall be dated as of July 1, 2000, to be effective as of the first day of the Term of this Agreement. This Agreement restates and thereby supersedes any Consulting Agreement previously executed by the parties, and the parties agree that any prior Consulting Agreement shall be of no further effect. /s/J. P. Hayden, Jr. J. P. Hayden, Jr. The Midland Company By: /s/John I. Von Lehman Its: Executive Vice President EX-10 5 0005.txt Exhibit 10.4b MICHAEL J. CONATON CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made and entered into between MICHAEL J. CONATON ("Conaton") and THE MIDLAND COMPANY ( "Midland"). W I T N E S S E T H: Midland desires to engage Conaton to render the consulting services subject to the terms and conditions of this Agreement because of Conaton's valuable experience in operating the business. Conaton is willing to perform such consulting services for the fees and upon and subject to the terms and conditions set forth in this Agreement. Accordingly, Midland and Conaton agree as follows: 1. Term. The term of this Agreement (the "Term") shall be for a period of 5.75 years commencing on April 1, 2000 and expiring on December 31, 2005 (the "Expiration Date"). 2. Consulting Services. During the term of this Agreement, Conaton's duties include, at the request of Midland: (a) consulting with officers of Midland during regular business hours, and (b) promoting the good will of Midland by being available to attend and attending insurance-related conferences and functions as a representative of Midland. Conaton shall devote only such time and attention to the business of Midland as may be reasonably necessary to perform Conaton's duties under this Agreement, up to a maximum of twenty (20) hours per month. 3. Consulting Fees. a. Fee. In consideration of the consulting services to be performed by Conaton, Midland agrees to pay to Conaton the following annual amounts: Year Consulting ------ ------------ 2000 $300,000 2001 $300,000 2002 $250,000 2003 $200,000 2004 $100,000 2005 $ 50,000 Midland shall pay such amounts in equal monthly installments on or before the fifteenth (15th) of each month. b. Other Consideration. Conaton shall receive additional consideration as follows: i. The Midland Health Insurance Plan shall be available at normal employee rates during the Term and after the Term. Conaton's coverage shall be secondary to Medicare after he reaches age 65, and Conaton's spouse shall be covered until she reaches age 65 at which time her coverage shall be secondary to Medicare; ii. During the Term, a car shall be provided by Midland consistent with the program in effect at the commencement of this Agreement; iii. Use of the Midland plane shall be available secondary to Midland's business use; iv. During the Term, Midland shall continue to pay club dues for the clubs Conaton was a member (and Midland was paying such dues for such clubs) at the commencement date of this Agreement; v. No director fees shall be paid during the Term; vi. Any existing stock options or stock grants of Conaton may be exercised at the earlier of the normal expiration date during the Term or for a period of three (3) years after the later of (x) the Expiration Date of this Agreement or (y) the date of retirement of Conaton as a member of the Board of Directors. Any future awards while a director during (or after the Term) will be equal to the stock awards of an outside director; vii. Midland shall provide Conaton with an office in headquarters building during the Term; viii. During the Term, Midland shall provide payment for Conaton's estate planning and annual tax preparation consistent with the current level of fees that were being paid at the commencement date of this Agreement; and ix. On April 1, 2001, Midland shall provide for the payment in a single lump sum of Conaton's benefit from the Nonqualified Self-Directed Retirement Plan, and an additional payment equal to 45.6% of the benefit to provide for the payment of any federal, state and local income tax due on the payment of the benefit. 4. Proprietary Property; Confidential Information. For purposes of this Agreement, the following definition shall be used: a. Proprietary Property. The term "Proprietary Property" includes any and all ideas, creations, developments, improvements, inventions, trade secrets, patents, copyrights, trademarks, trade names, logos, processes, computer programs, databases, spread sheets, documentation, models, methodologies, strategies, material works or authorship, know-how and methods of applying and putting into practice any such items that are created, developed or discovered by or for Midland or are acquired or licensed on a proprietary technical information generally known in the business in which Midland operates, even if disclosed to Conaton or known or developed by Conaton as a consequence of or through Conaton's performance of services under this Agreement. b. Confidential Information. The term "Confidential Information" includes any and all information which relates to Midland's products and services (including their development, marketing and sale), the financial, marketing and other aspects of Midland's operations, and the intellectual property and business and other rights which it owns, licenses or otherwise has the right to use, which is not generally known outside Midland (other than to Midland's customers or suppliers or other third parties in connection with their business with Midland) and which is disclosed or accessible to or known or developed by Conaton as a consequence of or through Conaton's performance of services hereunder or prior performance of services for Midland. It includes, but is not limited to, memoranda, files, books and records, financial and accounting methodologies, catalogs, lists of customers or prospects, price lists, advertising and promotional materials, packaging design, business plans, operating policies and manuals, internal controls, policies, procedures and guidelines, and other business information and records used in the conduct of business (whether intangible - including written documents, magnetic tapes, disks or other media - or intangible form), agreements and understandings between Midland and third parties, and trade secrets, software and other licenses, source codes and object codes, designs, drawings, plans and other such information and rights, intangible or otherwise, whether or not such information comes within the term "Proprietary Property". c. Rights to Proprietary Property. Conaton agrees that, except as Midland may otherwise expressly agree in writing, (i) Conaton shall have no rights and shall acquire no rights to any Proprietary Property that comes, or has come, within Conaton's knowledge or possession through or as a consequence of Conaton's performance of services hereunder or prior to the effective time of this Agreement, and (ii) any information or other property that is, or has been, invented, created, discovered, written, developed, furnished or produced by Conaton, solely or jointly, wholly or partly, while performing services for Midland hereunder or prior to the effective time of this Agreement or with information proprietary to Midland (the "Developments"), shall be the exclusive property of Midland, and Conaton shall have no right, title or interest of any kind in and to the Developments, including any results or proceeds therefrom. Conaton hereby sells, transfers and assigns to Midland all right, title and interest which Conaton may be deemed to have in and to the Developments, including the right to patent, register copyrights for or obtain legal protection for the Developments, and agrees to communicate promptly and disclose to Midland, in such from as Midland requests, all information, details and data pertaining to any Developments. At any time during or subsequent to the term of this Agreement, upon the request and at the election and expense of Midland, Conaton will patent, register copyrights for or obtain other legal protection for, or permit Midland to patent, register copyrights for or obtain other legal protection for, any Developments and execute any and all assignments, instruments of transfer, or other documents that Midland deems necessary or appropriate to transfer to Midland all rights in or to the Developments or to evidence Midland's ownership of such rights or any of them. d. Use and Disclosure. Except as may be otherwise expressly authorized in writing by Midland, Conaton shall not use any Proprietary Property or Confidential Information except for the benefit of Midland and shall not disclose any Confidential Information to any other person. As used in this Agreement, unless the context otherwise requires the term "person" includes, but is not limited to, any individual, partnership, association, firm, corporation, trust, unincorporated organization, joint venture or other entity. This restriction on use and disclosure applies without limitation as to time or place. e. Applicability to Midland and its Affiliates. For purposes of this Section 4, and Sections 5, 6 and 7 of this Agreement, references to Midland shall be deemed to include Midland and any corporations or other business entities affiliated with it. 5. Midland Property. Following the Expiration Date of this Agreement, Conaton shall promptly return to Midland all property of Midland in the possession or control of Conaton (and any and all copies thereof) including, without limitation, all Proprietary Property and Confidential Information. 6. Non-Competition. During the period commencing on the date of this Agreement and ending five (5) years after the expiration of this Agreement (the "Restricted Period"), Conaton shall not, either on Conaton's own account or for any other person or entity, directly or indirectly, (a) engage in any activities or render any services which are similar or reasonably related to those performed for or rendered to or on behalf of Midland during the term of this Agreement or the two-year period preceding the date of this Agreement (together, the "Extended Term"), to any business which competes with Midland in any place where Midland is engaged or, to the knowledge of Conaton, intends to engage in business or (b) owns a greater than five percent equity interest in or be connected with the management, operation or control of any such business, but the foregoing shall not be deemed to exclude Conaton from acting as a director, officer or employee of or a consultant to other business for the benefit of Midland with the consent of Midland's Board of Directors. 7. Non-Solicitation. During the Restricted Period, Conaton shall not directly or indirectly: (a) attempt to induce, or assist others to attempt to induce, any person who was or was actively negotiating to become a customer of Midland at any time during the Extended Term, to reduce or terminate such customer's business with Midland or to direct any of its business that is then being or may be done with Midland to any other person; (b) attempt to induce, or assist others to attempt to induce, any employee of Midland to terminate his or her employment with Midland; and (c) whether in an individual capacity or as the owner, partner, employee or agent of any entity, employ or offer employment to any person who is or was employed by Midland during the Extended Term unless such person shall cease to have been employed by Midland in any capacity for a period of at least one year. 8. Survival. Sections 4, 5, 6, 7, 8 and 9 shall survive the termination of this Agreement. In the event Midland is acquired or merges with another entity, this Agreement shall survive unless otherwise agreed to in writing by Midland and Conaton. 9. Remedies for Breach of Agreement. If Conaton commits a breach or threatens to commit a breach of any of the provisions of this Agreement, Midland shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without having to prove the inadequacy of the available remedies at law or irreparable injury, it being acknowledged and agreed to between Midland and Conaton that any such breach or threatened breach will cause irreparable injury to Midland and that money damages may not provide an adequate remedy to Midland. In addition, Midland may take and pursue all such other actions and remedies as may be available to Midland at law or in equity and shall be entitled to such damages as Midland can show Midland has sustained by reason of such breach, together with court costs and attorneys' fees. 10. Expenses. Midland agrees to reimburse Conaton for all his reasonable out-of-pocket expenses incurred by Conaton in connection with the performance of the duties under this Agreement. 11. Title: Relationship of Parties. Conaton may hold himself out as a consultant to Midland. Conaton is retained by Midland only for the purposes and to the extent set forth in this Agreement, and Conaton's relation to Midland under this Agreement shall be that of an independent contractor and not that of an employee, partner or joint venturer. Conaton acknowledges that he is solely responsible for all withholding, social security and other taxes with respect to the consulting fees paid to him under this Agreement. 12. Independent Judgment. Nothing in this Agreement shall be construed to interfere with or otherwise affect the rendering of services by Conaton under this Agreement in accordance with Conaton's independent and professional judgment and in accordance with Conaton's own means and mode of performance. 13. Indemnity. Each party ("Indemnifying Party") agrees to indemnify and hold harmless the other party (the "Injured Party") from and against any damages, liabilities, actions, suits or other claims and from reasonable attorneys' fees and costs incurred by the Injured Party in defending against same with respect to the discharge of the Injured Party's duties and responsibilities under this Agreement unless such liability arose out of the Injured Party's gross negligence. 14. Rabbi Trusts. The obligations under this Agreement (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control, as defined in the Consulting Agreements Rabbi Trust (the "Rabbi Trust"), through the Rabbi Trust and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid within thirty (30) days of the effective date of the Change of Control. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as may be required by the Rabbi Trust. The right of Conaton or his designated beneficiary to receive a distribution under this Agreement shall be an unsecured claim against the general assets of Midland, and neither Conaton nor a designated beneficiary shall have any rights in or against any specific assets of Midland. All amounts to be paid to fulfill the obligations under this Agreement shall constitute general assets of Midland and may be disposed of by Midland at such time and for such purposes as it may deem appropriate. 15. Tax Gross-Up Payment. a. Amount of Payment. In the event of a Change of Control, benefits under any plan or other agreement including this Agreement in which Conaton participates are accelerated and distributed prior to the time such benefits would otherwise have been distributed under such plan, Midland shall pay Conaton the following additional amounts (the "Gross-Up Payment"): i. The amount of the Excise Tax, if any, imposed on Conaton by Section 4999 of the Internal Revenue Code of 1986. ii. The amount of any federal, state and local income tax due to any payments to Conaton under i above. iii. After the payments are made in i and ii above, an additional amount shall be paid to Conaton grossing up all payments made pursuant to this Section 16 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in i and ii above. b. Calculation of Payment. For purposes of determining the amount of the Gross-Up Payment payable pursuant to a above, Conaton shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. c. Payment is an Estimate. The Gross-Up Payment provided for in this Section 16 shall be an estimate. Midland will cause its independent auditors to make an estimate of the liability and Gross-Up Payment within 60 days of the Change of Control (a copy of which is to be furnished to Conaton as soon as possible), and Midland shall pay to Conaton the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Conaton shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability, and such excess shall constitute a loan by Midland to Conaton, payable on the 5th day after demand by Midland (together with interest from the date Conaton received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). d. Subsequent IRS Review. In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by Midland's auditors, Conaton shall promptly notify Midland, and Midland shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Conaton by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Conaton by Midland (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and the payments provided for in this Section 16) within 10 days of the date that the Internal Revenue Service makes such an assessment. e. Interpretation. The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by Midland's independent auditors and acceptable to Conaton. 16. Entire Agreement. This Agreement supersedes any and all other understandings and agreements, either oral or in writing, between Midland and Conaton with respect to the subject matter of this Agreement and constitutes the sole and only agreement between Midland and Conaton with respect to the subject matter. No change or modification of this agreement shall be valid or binding upon Midland and Conaton unless the change or modification is in writing and signed by Midland and Conaton. 17. Legal Construction. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable for any reason, such invalid or unenforceable provisions shall not affect the validity or enforceability of the remaining provisions of this Agreement which shall remain in full force and effect. 18. Parties Bound. This Agreement shall be binding upon and shall inure to the benefit of Midland and Conaton and their respective successors and assigns. Conaton shall not assign any of its rights under this Agreement without the prior written consent of Midland. Midland shall not assign any of its rights under this Agreement to any person or entity without the prior written consent of Conaton. 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same agreement. 20. Governing Law. This Agreement shall be governed by, construed under, and enforced in accordance with the laws of the State of Ohio. 21. Headings; Gender; Number. The headings contained in this Agreement are for convenience only and shall not be construed as substantive provisions of this Agreement. Singular words shall include the plural and plural words shall include the singular, unless the context requires otherwise. 22. Other Activities. Conaton may get involved in other activities which do not materially interfere from a time standpoint with the duties of Conaton hereunder. 23. Effective Date. This Consulting Agreement shall be dated as of July 1, 2000, to be effective as of the first day of the Term of this Agreement. This Agreement restates and thereby supersedes any Consulting Agreement previously executed by the parties, and the parties agree that any prior Consulting Agreement shall be of no further effect. /s/Michael J. Conaton Michael J. Conaton The Midland Company By: /s/John I. Von Lehman Its: Executive Vice President EX-10 6 0006.txt Exhibit 10.4(c) REES LABAR CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made and entered into between REES LABAR ("LaBar") and THE MIDLAND COMPANY ( "Midland"). W I T N E S S E T H: Midland desires to engage LaBar to render the consulting services subject to the terms and conditions of this Agreement because of LaBar's valuable experience in operating the business. LaBar is willing to perform such consulting services for the fees and upon and subject to the terms and conditions set forth in this Agreement. Accordingly, Midland and LaBar agree as follows: 1. Term. The term of this Agreement (the "Term") shall be for a period of four (4) years commencing on January 1, 1999 and expiring on December 31, 2002 (the "Expiration Date"). 2. Consulting Services. During the term of this Agreement, LaBar's duties include, at the request of Midland: (a) consulting with officers of Midland during regular business hours, and (b) promoting the good will of Midland by being available to attend and attending insurance-related conferences and functions as a representative of Midland. LaBar shall devote only such time and attention to the business of Midland as may be reasonably necessary to perform his duties under this Agreement, up to a maximum of twenty (20) hours per month. 3. Consulting Fees. a. Fee. In consideration of the consulting services to be performed by LaBar, Midland agrees to pay to LaBar the following annual amounts: Year Consulting ------ ------------ 1999 $150,000 2000 $120,000 2001 $ 90,000 2002 $ 60,000 Midland shall pay such amounts in equal monthly installments on or before the fifteenth (15th) of each month. b. Other Consideration. LaBar shall receive additional consideration as follows: i. Midland shall continue to pay its share of the premiums (or $277,420 per year) under the Split Dollar Life Insurance on the lives of LaBar and his spouse until the death of the survivor, provided, however, (x) Midland shall only be obligated to pay such premiums for a period of ten (10) years, (y) Midland may, at any time after the sixteenth (16th) anniversary date of the policy, request a return of all premiums Midland paid into the policy and (z) Midland may also take advantage of any premium reduction or minimum payment options under such policy provided Midland pays the equivalent of the sum of $277,420 for ten (10) years with such sum reduced by any special dividends, demutualization distributions or other policy distributions. ii. The Midland Health Insurance Plan shall be available at normal employee rates during the Term and after the Term. LaBar's coverage shall be secondary to Medicare after he reaches age 65, and LaBar's spouse shall be covered until she reaches age 65 at which time her coverage shall be secondary to Medicare; iii. During the Term, a car shall be provided by Midland consistent with the program in effect at the commencement of this Agreement; iv. Use of the Midland plane shall be available secondary to Midland's business use during the Term; v. During the Term, Midland shall continue to pay club dues for the clubs LaBar was a member (and Midland was paying such dues for such clubs) at the commencement date of this Agreement; vi. No director fees shall be paid during the Term; vii. Any existing stock options or stock grants of LaBar may be exercised at the earlier of the normal expiration date during the Term or for a period of three (3) years after the later of (x) the Expiration Date of this Agreement or (y) the date of retirement of LaBar as a member of the Board of Directors. Any future awards while a director during (or after the Term) will be equal to the stock awards of an outside director; viii. Midland shall provide LaBar with an office in headquarters building during the Term; ix. During the Term, Midland shall provide payment for LaBar's estate planning and annual tax preparation consistent with the current level of fees that were being paid at the commencement date of this Agreement; and x. On April 1, 2001, Midland shall provide for the payment in a single lump sum of the actuarial equivalent of LaBar's benefit from The Midland Company Supplemental Retirement Plan, and an additional payment equal to 45.6% of the benefit to provide for the payment of any federal, state and local income tax due on the payment of the benefit. 4. Proprietary Property; Confidential Information. For purposes of this Agreement, the following definition shall be used: a. Proprietary Property. The term "Proprietary Property" includes any and all ideas, creations, developments, improvements, inventions, trade secrets, patents, copyrights, trademarks, trade names, logos, processes, computer programs, databases, spread sheets, documentation, models, methodologies, strategies, material works or authorship, know-how and methods of applying and putting into practice any such items that are created, developed or discovered by or for Midland or are acquired or licensed on a proprietary technical information generally known in the business in which Midland operates, even if disclosed to LaBar or known or developed by LaBar as a consequence of or through LaBar's performance of services under this Agreement. b. Confidential Information. The term "Confidential Information" includes any and all information which relates to Midland's products and services (including their development, marketing and sale), the financial, marketing and other aspects of Midland's operations, and the intellectual property and business and other rights which it owns, licenses or otherwise has the right to use, which is not generally known outside Midland (other than to Midland's customers or suppliers or other third parties in connection with their business with Midland) and which is disclosed or accessible to or known or developed by LaBar as a consequence of or through LaBar's performance of services hereunder or prior performance of services for Midland. It includes, but is not limited to, memoranda, files, books and records, financial and accounting methodologies, catalogs, lists of customers or prospects, price lists, advertising and promotional materials, packaging design, business plans, operating policies and manuals, internal controls, policies, procedures and guidelines, and other business information and records used in the conduct of business (whether intangible - including written documents, magnetic tapes, disks or other media - or intangible form), agreements and understandings between Midland and third parties, and trade secrets, software and other licenses, source codes and object codes, designs, drawings, plans and other such information and rights, intangible or otherwise, whether or not such information comes within the term "Proprietary Property". c. Rights to Proprietary Property. LaBar agrees that, except as Midland may otherwise expressly agree in writing, (i) LaBar shall have no rights and shall acquire no rights to any Proprietary Property that comes, or has come, within LaBar's knowledge or possession through or as a consequence of LaBar's performance of services hereunder or prior to the effective time of this Agreement, and (ii) any information or other property that is, or has been, invented, created, discovered, written, developed, furnished or produced by LaBar, solely or jointly, wholly or partly, while performing services for Midland hereunder or prior to the effective time of this Agreement or with information proprietary to Midland (the "Developments"), shall be the exclusive property of Midland, and LaBar shall have no right, title or interest of any kind in and to the Developments, including any results or proceeds therefrom. LaBar hereby sells, transfers and assigns to Midland all right, title and interest which LaBar may be deemed to have in and to the Developments, including the right to patent, register copyrights for or obtain legal protection for the Developments, and agrees to communicate promptly and disclose to Midland, in such from as Midland requests, all information, details and data pertaining to any Developments. At any time during or subsequent to the term of this Agreement, upon the request and at the election and expense of Midland, LaBar will patent, register copyrights for or obtain other legal protection for, or permit Midland to patent, register copyrights for or obtain other legal protection for, any Developments and execute any and all assignments, instruments of transfer, or other documents that Midland deems necessary or appropriate to transfer to Midland all rights in or to the Developments or to evidence Midland's ownership of such rights or any of them. d. Use and Disclosure. Except as may be otherwise expressly authorized in writing by Midland, LaBar shall not use any Proprietary Property or Confidential Information except for the benefit of Midland and shall not disclose any Confidential Information to any other person. As used in this Agreement, unless the context otherwise requires the term "person" includes, but is not limited to, any individual, partnership, association, firm, corporation, trust, unincorporated organization, joint venture or other entity. This restriction on use and disclosure applies without limitation as to time or place. e. Applicability to Midland and its Affiliates. For purposes of this Section 4, and Sections 5, 6 and 7 of this Agreement, references to Midland shall be deemed to include Midland and any corporations or other business entities affiliated with it. 5. Midland Property. Following the Expiration Date of this Agreement, LaBar shall promptly return to Midland all property of Midland in the possession or control of LaBar (and any and all copies thereof) including, without limitation, all Proprietary Property and Confidential Information. 6. Non-Competition. During the period commencing on the date of this Agreement and ending five (5) years after the expiration of this Agreement (the "Restricted Period"), LaBar shall not, either on LaBar's own account or for any other person or entity, directly or indirectly, (a) engage in any activities or render any services which are similar or reasonably related to those performed for or rendered to or on behalf of Midland during the term of this Agreement or the two-year period preceding the date of this Agreement (together, the "Extended Term"), to any business which competes with Midland in any place where Midland is engaged or, to the knowledge of LaBar, intends to engage in business or (b) owns a greater than five percent equity interest in or be connected with the management, operation or control of any such business, but the foregoing shall not be deemed to exclude LaBar from acting as a director, officer or employee of or a consultant to other business for the benefit of Midland with the consent of Midland's Board of Directors. 7. Non-Solicitation. During the Restricted Period, LaBar shall not directly or indirectly: (a) attempt to induce, or assist others to attempt to induce, any person who was or was actively negotiating to become a customer of Midland at any time during the Extended Term, to reduce or terminate such customer's business with Midland or to direct any of its business that is then being or may be done with Midland to any other person; (b) attempt to induce, or assist others to attempt to induce, any employee of Midland to terminate his or her employment with Midland; and (c) whether in an individual capacity or as the owner, partner, employee or agent of any entity, employ or offer employment to any person who is or was employed by Midland during the Extended Term unless such person shall cease to have been employed by Midland in any capacity for a period of at least one year. 8. Survival. Sections 4, 5, 6, 7, 8 and 9 shall survive the termination of this Agreement. In the event Midland is acquired or merges with another entity, this Agreement shall survive unless otherwise agreed to in writing by Midland and LaBar. 9. Remedies for Breach of Agreement. If LaBar commits a breach or threatens to commit a breach of any of the provisions of this Agreement, Midland shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without having to prove the inadequacy of the available remedies at law or irreparable injury, it being acknowledged and agreed to between Midland and LaBar that any such breach or threatened breach will cause irreparable injury to Midland and that money damages may not provide an adequate remedy to Midland. In addition, Midland may take and pursue all such other actions and remedies as may be available to Midland at law or in equity and shall be entitled to such damages as Midland can show Midland has sustained by reason of such breach, together with court costs and attorneys' fees. 10. Expenses. Midland agrees to reimburse LaBar for all his reasonable out-of-pocket expenses incurred by LaBar in connection with the performance of the duties under this Agreement. 11. Title: Relationship of Parties. LaBar may hold himself out as a consultant to Midland. LaBar is retained by Midland only for the purposes and to the extent set forth in this Agreement, and LaBar's relation to Midland under this Agreement shall be that of an independent contractor and not that of an employee, partner or joint venturer. LaBar acknowledges that he is solely responsible for all withholding, social security and other taxes with respect to the consulting fees paid to him under this Agreement. 12. Independent Judgment. Nothing in this Agreement shall be construed to interfere with or otherwise affect the rendering of services by LaBar under this Agreement in accordance with LaBar's independent and professional judgment and in accordance with LaBar's own means and mode of performance. 13. Indemnity. Each party ("Indemnifying Party") agrees to indemnify and hold harmless the other party (the "Injured Party") from and against any damages, liabilities, actions, suits or other claims and from reasonable attorneys' fees and costs incurred by the Injured Party in defending against same with respect to the discharge of the Injured Party's duties and responsibilities under this Agreement unless such liability arose out of the Injured Party's gross negligence. 14. Rabbi Trusts. The obligations under this Agreement (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control, as defined in the Consulting Agreements Rabbi Trust (the "Rabbi Trust"), through the Rabbi Trust and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid within thirty (30) days of the effective date of the Change of Control. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as may be required by the Rabbi Trust. The right of LaBar or his designated beneficiary to receive a distribution under this Agreement shall be an unsecured claim against the general assets of Midland, and neither LaBar nor a designated beneficiary shall have any rights in or against any specific assets of Midland. All amounts to be paid to fulfill the obligations under this Agreement shall constitute general assets of Midland and may be disposed of by Midland at such time and for such purposes as it may deem appropriate. 15. Tax Gross-Up Payment. a. Amount of Payment. In the event of a Change of Control, benefits under any plan or other agreement including this Agreement in which LaBar participates are accelerated and distributed prior to the time such benefits would otherwise have been distributed under such plan, Midland shall pay LaBar the following additional amounts (the "Gross-Up Payment"): i. The amount of the Excise Tax, if any, imposed on LaBar by Section 4999 of the Internal Revenue Code of 1986. ii. The amount of any federal, state and local income tax due to any payments to LaBar under i above. iii. After the payments are made in i and ii above, an additional amount shall be paid to LaBar grossing up all payments made pursuant to this Section 16 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in i and ii above. b. Calculation of Payment. For purposes of determining the amount of the Gross-Up Payment payable pursuant to a above, Consultant shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. c. Payment is an Estimate. The Gross-Up Payment provided for in this Section 16 shall be an estimate. Midland will cause its independent auditors to make an estimate of the liability and Gross-Up Payment within 60 days of the Change of Control (a copy of which is to be furnished to Consultant as soon as possible), and Midland shall pay to Consultant the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Consultant shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability, and such excess shall constitute a loan by Midland to Consultant, payable on the 5th day after demand by Midland (together with interest from the date Consultant received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). d. Subsequent IRS Review. In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by Midland's auditors, Consultant shall promptly notify Midland, and Midland shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Consultant by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Consultant by Midland (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and the payments provided for in this Section 16) within 10 days of the date that the Internal Revenue Service makes such an assessment. e. Interpretation. The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by Midland's independent auditors and acceptable to Consultant. 16. Entire Agreement. This Agreement supersedes any and all other understandings and agreements, either oral or in writing, between Midland and LaBar with respect to the subject matter of this Agreement and constitutes the sole and only agreement between Midland and LaBar with respect to the subject matter. No change or modification of this agreement shall be valid or binding upon Midland and LaBar unless the change or modification is in writing and signed by Midland and LaBar. 17. Legal Construction. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable for any reason, such invalid or unenforceable provisions shall not affect the validity or enforceability of the remaining provisions of this Agreement which shall remain in full force and effect. 18. Parties Bound. This Agreement shall be binding upon and shall inure to the benefit of Midland and LaBar and their respective successors and assigns. LaBar shall not assign any of its rights under this Agreement without the prior written consent of Midland. Midland shall not assign any of its rights under this Agreement to any person or entity without the prior written consent of LaBar. 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same agreement. 20. Governing Law. This Agreement shall be governed by, construed under, and enforced in accordance with the laws of the State of Ohio. 21. Headings; Gender; Number. The headings contained in this Agreement are for convenience only and shall not be construed as substantive provisions of this Agreement. Singular words shall include the plural and plural words shall include the singular, unless the context requires otherwise. 22. Other Activities. LaBar may get involved in other activities which do not materially interfere from a time standpoint with the duties of LaBar hereunder. 23. Effective Date. This Consulting Agreement shall be dated as of July 1, 2000, to be effective as of the first day of the Term of this Agreement. This Agreement restates and thereby supersedes any Consulting Agreement previously executed by the parties, and the parties agree that any prior Consulting Agreement shall be of no further effect. /s/ Rees LaBar Rees LaBar The Midland Company By: /s/John I. Von Lehman Its: Executive Vice President EX-10 7 0007.txt Exhibit 10.4(d) ROBERT W. HAYDEN CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made and entered into between ROBERT W. HAYDEN ("Hayden") and THE MIDLAND COMPANY ( "Midland"). W I T N E S S E T H: Midland desires to engage Hayden to render the consulting services subject to the terms and conditions of this Agreement because of Hayden's valuable experience in operating the business. Hayden is willing to perform such consulting services for the fees and upon and subject to the terms and conditions set forth in this Agreement. Accordingly, Midland and Hayden agree as follows: 1. Term. The term of this Agreement (the "Term") shall be for a period of four (4) years commencing on February 1, 1999 and expiring on January 31, 2003 (the "Expiration Date"). 2. Consulting Services. During the term of this Agreement, Hayden's duties include, at the request of Midland: (a) consulting with officers of Midland during regular business hours, and (b) promoting the good will of Midland by being available to attend and attending insurance-related conferences and functions as a representative of Midland. Hayden shall devote only such time and attention to the business of Midland as may be reasonably necessary to perform Hayden's duties under this Agreement, up to a maximum of twenty (20) hours per month. 3. Consulting Fees. a. Fee. In consideration of the consulting services to be performed by Hayden, Midland agrees to pay to Hayden the following annual amounts: Year Normal Consulting Supplemental Early Retirement Consulting ------ ------------------- ------------------------------------------ 1999 $150,000 $75,000 2000 $120,000 $75,000 2001 $ 90,000 $75,000 2002 $ 60,000 $75,000 Midland shall pay such amounts in equal monthly installments on or before the fifteenth (15th) of each month. b. Other Consideration. Hayden shall receive additional consideration as follows: i. Midland shall continue to pay its share of the premiums (or $235,269 per year) under the Split Dollar Life Insurance on the lives of Hayden and his spouse until the death of the survivor, provided, however, (x) Midland shall only be obligated to pay such premiums for a period of ten (10) years, (y) Midland may, at any time after the sixteenth (16th) anniversary date of the policy, request a return of all premiums Midland paid into the policy and (z) Midland may also take advantage of any premium reduction or minimum payment options under such policy provided Midland pays the equivalent of the sum of $235,269 for ten (10) years with such sum reduced by any special dividends, demutualization distributions or other policy distributions; ii. The Midland Health Insurance Plan shall be available at normal employee rates during the Term and after the Term. Hayden's coverage shall be secondary to Medicare after he reaches age 65, and Hayden's spouse shall be covered until she reaches age 65 at which time her coverage shall be secondary to Medicare; iii. During the Term, a car shall be provided by Midland consistent with the program in effect at the commencement of this Agreement; iv. Use of the Midland plane shall be available secondary to Midland's business use during the Term; v. During the Term, Midland shall continue to pay club dues for the clubs Hayden was a member (and Midland was paying such dues for such clubs) at the commencement date of this Agreement; vi. No director fees shall be paid during the Term; vii. Any existing stock options or stock grants of Hayden may be exercised at the earlier of the normal expiration date during the Term or for a period of three (3) years after the later of (x) the Expiration Date of this Agreement or (y) the date of retirement of Hayden as a member of the Board of Directors. Any future awards while a director during (or after the Term) will be equal to the stock awards of an outside director; viii. Midland shall provide Hayden with an office in headquarters building during the Term; ix. During the Term, Midland shall provide payment for Hayden's estate planning and annual tax preparation consistent with the current level of fees that were being paid at the commencement date of this Agreement; and x. On April 1, 2001, Midland shall provide for the payment in a single lump sum of the actuarial equivalent of Hayden's benefit from The Midland Company Supplemental Retirement Plan, and an additional payment equal to 45.6% of the benefit to provide for the payment of any federal, state and local income tax due on the payment of the benefit. 4. Proprietary Property; Confidential Information. For purposes of this Agreement, the following definition shall be used: a. Proprietary Property. The term "Proprietary Property" includes any and all ideas, creations, developments, improvements, inventions, trade secrets, patents, copyrights, trademarks, trade names, logos, processes, computer programs, databases, spread sheets, documentation, models, methodologies, strategies, material works or authorship, know-how and methods of applying and putting into practice any such items that are created, developed or discovered by or for Midland or are acquired or licensed on a proprietary technical information generally known in the business in which Midland operates, even if disclosed to Hayden or known or developed by Hayden as a consequence of or through Hayden's performance of services under this Agreement. b. Confidential Information. The term "Confidential Information" includes any and all information which relates to Midland's products and services (including their development, marketing and sale), the financial, marketing and other aspects of Midland's operations, and the intellectual property and business and other rights which it owns, licenses or otherwise has the right to use, which is not generally known outside Midland (other than to Midland's customers or suppliers or other third parties in connection with their business with Midland) and which is disclosed or accessible to or known or developed by Hayden as a consequence of or through Hayden's performance of services hereunder or prior performance of services for Midland. It includes, but is not limited to, memoranda, files, books and records, financial and accounting methodologies, catalogs, lists of customers or prospects, price lists, advertising and promotional materials, packaging design, business plans, operating policies and manuals, internal controls, policies, procedures and guidelines, and other business information and records used in the conduct of business (whether intangible - including written documents, magnetic tapes, disks or other media - or intangible form), agreements and understandings between Midland and third parties, and trade secrets, software and other licenses, source codes and object codes, designs, drawings, plans and other such information and rights, intangible or otherwise, whether or not such information comes within the term "Proprietary Property". c. Rights to Proprietary Property. Hayden agrees that, except as Midland may otherwise expressly agree in writing, (i) Hayden shall have no rights and shall acquire no rights to any Proprietary Property that comes, or has come, within Hayden's knowledge or possession through or as a consequence of Hayden's performance of services hereunder or prior to the effective time of this Agreement, and (ii) any information or other property that is, or has been, invented, created, discovered, written, developed, furnished or produced by Hayden, solely or jointly, wholly or partly, while performing services for Midland hereunder or prior to the effective time of this Agreement or with information proprietary to Midland (the "Developments"), shall be the exclusive property of Midland, and Hayden shall have no right, title or interest of any kind in and to the Developments, including any results or proceeds therefrom. Hayden hereby sells, transfers and assigns to Midland all right, title and interest which Hayden may be deemed to have in and to the Developments, including the right to patent, register copyrights for or obtain legal protection for the Developments, and agrees to communicate promptly and disclose to Midland, in such from as Midland requests, all information, details and data pertaining to any Developments. At any time during or subsequent to the term of this Agreement, upon the request and at the election and expense of Midland, Hayden will patent, register copyrights for or obtain other legal protection for, or permit Midland to patent, register copyrights for or obtain other legal protection for, any Developments and execute any and all assignments, instruments of transfer, or other documents that Midland deems necessary or appropriate to transfer to Midland all rights in or to the Developments or to evidence Midland's ownership of such rights or any of them. d. Use and Disclosure. Except as may be otherwise expressly authorized in writing by Midland, Hayden shall not use any Proprietary Property or Confidential Information except for the benefit of Midland and shall not disclose any Confidential Information to any other person. As used in this Agreement, unless the context otherwise requires the term "person" includes, but is not limited to, any individual, partnership, association, firm, corporation, trust, unincorporated organization, joint venture or other entity. This restriction on use and disclosure applies without limitation as to time or place. e. Applicability to Midland and its Affiliates. For purposes of this Section 4, and Sections 5, 6 and 7 of this Agreement, references to Midland shall be deemed to include Midland and any corporations or other business entities affiliated with it. 5. Midland Property. Following the Expiration Date of this Agreement, Hayden shall promptly return to Midland all property of Midland in the possession or control of Hayden (and any and all copies thereof) including, without limitation, all Proprietary Property and Confidential Information. 6. Non-Competition. During the period commencing on the date of this Agreement and ending five (5) years after the expiration of this Agreement (the "Restricted Period"), Hayden shall not, either on Hayden's own account or for any other person or entity, directly or indirectly, (a) engage in any activities or render any services which are similar or reasonably related to those performed for or rendered to or on behalf of Midland during the term of this Agreement or the two-year period preceding the date of this Agreement (together, the "Extended Term"), to any business which competes with Midland in any place where Midland is engaged or, to the knowledge of Hayden, intends to engage in business or (b) owns a greater than five percent equity interest in or be connected with the management, operation or control of any such business, but the foregoing shall not be deemed to exclude Hayden from acting as a director, officer or employee of or a consultant to other business for the benefit of Midland with the consent of Midland's Board of Directors. 7. Non-Solicitation. During the Restricted Period, Hayden shall not directly or indirectly: (a) attempt to induce, or assist others to attempt to induce, any person who was or was actively negotiating to become a customer of Midland at any time during the Extended Term, to reduce or terminate such customer's business with Midland or to direct any of its business that is then being or may be done with Midland to any other person; (b) attempt to induce, or assist others to attempt to induce, any employee of Midland to terminate his or her employment with Midland; and (c) whether in an individual capacity or as the owner, partner, employee or agent of any entity, employ or offer employment to any person who is or was employed by Midland during the Extended Term unless such person shall cease to have been employed by Midland in any capacity for a period of at least one year. 8. Survival. Sections 4, 5, 6, 7, 8 and 9 shall survive the termination of this Agreement. In the event Midland is acquired or merges with another entity, this Agreement shall survive unless otherwise agreed to in writing by Midland and Hayden. 9. Remedies for Breach of Agreement. If Hayden commits a breach or threatens to commit a breach of any of the provisions of this Agreement, Midland shall have the right to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction without having to prove the inadequacy of the available remedies at law or irreparable injury, it being acknowledged and agreed to between Midland and Hayden that any such breach or threatened breach will cause irreparable injury to Midland and that money damages may not provide an adequate remedy to Midland. In addition, Midland may take and pursue all such other actions and remedies as may be available to Midland at law or in equity and shall be entitled to such damages as Midland can show Midland has sustained by reason of such breach, together with court costs and attorneys' fees. 10. Expenses. Midland agrees to reimburse Hayden for all his reasonable out-of-pocket expenses incurred by Hayden in connection with the performance of the duties under this Agreement. 11. Title: Relationship of Parties. Hayden may hold himself out as a consultant to Midland. Hayden is retained by Midland only for the purposes and to the extent set forth in this Agreement, and Hayden's relation to Midland under this Agreement shall be that of an independent contractor and not that of an employee, partner or joint venturer. Hayden acknowledges that he is solely responsible for all withholding, social security and other taxes with respect to the consulting fees paid to him under this Agreement. 12. Independent Judgment. Nothing in this Agreement shall be construed to interfere with or otherwise affect the rendering of services by Hayden under this Agreement in accordance with Hayden's independent and professional judgment and in accordance with Hayden's own means and mode of performance. 13. Indemnity. Each party ("Indemnifying Party") agrees to indemnify and hold harmless the other party (the "Injured Party") from and against any damages, liabilities, actions, suits or other claims and from reasonable attorneys' fees and costs incurred by the Injured Party in defending against same with respect to the discharge of the Injured Party's duties and responsibilities under this Agreement unless such liability arose out of the Injured Party's gross negligence. 14. Rabbi Trusts. The obligations under this Agreement (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control, as defined in the Consulting Agreements Rabbi Trust (the "Rabbi Trust"), through the Rabbi Trust and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid within thirty (30) days of the effective date of the Change of Control. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as may be required by the Rabbi Trust. The right of Hayden or his designated beneficiary to receive a distribution under this Agreement shall be an unsecured claim against the general assets of Midland, and neither Hayden nor a designated beneficiary shall have any rights in or against any specific assets of Midland. All amounts to be paid to fulfill the obligations under this Agreement shall constitute general assets of Midland and may be disposed of by Midland at such time and for such purposes as it may deem appropriate. 15. Tax Gross-Up Payment. a. Amount of Payment. In the event of a Change of Control, benefits under any plan or other agreement including this Agreement in which Hayden participates are accelerated and distributed prior to the time such benefits would otherwise have been distributed under such plan, Midland shall pay Hayden the following additional amounts (the "Gross-Up Payment"): i. The amount of the Excise Tax, if any, imposed on Hayden by Section 4999 of the Internal Revenue Code of 1986. ii. The amount of any federal, state and local income tax due to any payments to Hayden under i above. iii. After the payments are made in i and ii above, an additional amount shall be paid to Hayden grossing up all payments made pursuant to this Section 16 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in i and ii above b. Calculation of Payment. For purposes of determining the amount of the Gross-Up Payment payable pursuant to a above, Consultant shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. c. Payment is an Estimate. The Gross-Up Payment provided for in this Section 16 shall be an estimate. Midland will cause its independent auditors to make an estimate of the liability and Gross-Up Payment within 60 days of the Change of Control (a copy of which is to be furnished to Consultant as soon as possible), and Midland shall pay to Consultant the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Consultant shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability, and such excess shall constitute a loan by Midland to Consultant, payable on the 5th day after demand by Midland (together with interest from the date Consultant received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). d. Subsequent IRS Review. In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by Midland's auditors, Consultant shall promptly notify Midland, and Midland shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Consultant by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Consultant by Midland (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and the payments provided for in this Section 16) within 10 days of the date that the Internal Revenue Service makes such an assessment. e. Interpretation. The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by Midland's independent auditors and acceptable to Consultant. 16. Entire Agreement. This Agreement supersedes any and all other understandings and agreements, either oral or in writing, between Midland and Hayden with respect to the subject matter of this Agreement and constitutes the sole and only agreement between Midland and Hayden with respect to the subject matter. No change or modification of this agreement shall be valid or binding upon Midland and Hayden unless the change or modification is in writing and signed by Midland and Hayden. 17. Legal Construction. If any provision of this Agreement shall be found by any court of competent jurisdiction to be invalid or unenforceable for any reason, such invalid or unenforceable provisions shall not affect the validity or enforceability of the remaining provisions of this Agreement which shall remain in full force and effect. 18. Parties Bound. This Agreement shall be binding upon and shall inure to the benefit of Midland and Hayden and their respective successors and assigns. Hayden shall not assign any of its rights under this Agreement without the prior written consent of Midland. Midland shall not assign any of its rights under this Agreement to any person or entity without the prior written consent of Hayden. 19. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same agreement. 20. Governing Law. This Agreement shall be governed by, construed under, and enforced in accordance with the laws of the State of Ohio. 21. Headings; Gender; Number. The headings contained in this Agreement are for convenience only and shall not be construed as substantive provisions of this Agreement. Singular words shall include the plural and plural words shall include the singular, unless the context requires otherwise. 22. Other Activities. Hayden may get involved in other activities which do not materially interfere from a time standpoint with the duties of Hayden hereunder. 23. Effective Date. This Consulting Agreement shall be dated as of July 1, 2000, to be effective as of the first day of the Term of this Agreement. This Agreement restates and thereby supersedes any Consulting Agreement previously executed by the parties, and the parties agree that any prior Consulting Agreement shall be of no further effect. /s/ Robert W. Hayden Robert W. Hayden The Midland Company By: /s/John I. Von Lehman Its: Executive Vice President EX-10 8 0008.txt Schedule 10.5(a) EMPLOYEE RETENTION AGREEMENT (J. P. Hayden, III) THIS EMPLOYEE RETENTION AGREEMENT (the "Agreement") is made as of this 22nd day of May, 2000 between The Midland Company, an Ohio corporation (herein after referred to as the "Company") and J. P. Hayden, III (hereinafter referred to as the "Employee"). RECITALS WHEREAS, the industries within which the Company operates continue to consolidate, and the Company may be a merger or acquisition candidate; WHEREAS, the Company desires to provide some protection to certain key executives in the event of a "Change of Control." AGREEMENT NOW, THEREFORE, Company adopts the following Employee Retention Agreement. Section 1. Definitions. For the purposes of this Agreement, the following definitions shall be used: 1.1 "Cause" shall mean that the Employee has been terminated from employment because of one of the following: 1.1.1 The Employee committed a felony. 1.1.2 The Employee committed an act of fraud or embezzlement against the Company. 1.1.3 The Employee committed a willful or substantial violation of Company policy. 1.2 "Change of Control" shall mean the first to occur of the following events: 1.2.1 The "acquisition" after the date hereof by any "Person" (as such term is defined below) of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), of any securities of the Company (the "Voting Securities") which, when added to the Voting Securities then "Beneficially Owned" by such Person, would result in such Person "Beneficially Owning" 33-1/3% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that for purposes of this Section 1.2, a Person shall not be deemed to have made an acquisition of Voting Securities if such Person: (A) acquires Voting Securities as a result of a stock split, stock dividend or other corporate restructuring in which all stockholders of the class of such Voting Securities are treated on a pro rata basis; (B) is generally engaged in the business of underwriting securities and acquires the Voting Securities (the "Underwriting Securities") pursuant to the terms of an underwriting agreement (an "Underwriting Agreement") to which the Company and such underwriter are parties and which Underwriting Agreement is in accordance with Rule 10b-7 promulgated under the 1934 Act or to cover over allotments created in connection with a distribution of Voting Securities pursuant to an Underwriting Agreement; (C) acquires the Voting Securities directly from the Company; (D) as a result of a redemption or purchase of Voting Securities by the Company, becomes the Beneficial Owner of more than the permitted percentage of Voting Securities by the Company pursuant to a reduction of the number of Voting Securities outstanding resulting in an increase in the proportional number of shares Beneficially Owned by such Person; (E) is the Company or any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary") or (F) acquires Voting Securities in connection with a "Non-Control Transaction" (as defined below). 1.2.2 The individuals who, as of January 1, 2000, are members of the Board of Directors of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board of Directors of the Company; provided, however, that if either the election of any new director or the nomination for election of any new director by the Company's stockholders was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any election contest or Proxy Contest. 1.2.3 Approval by shareholders of the Company of: 1.2.3.1 A merger, consolidation or reorganization involving the Company (a "Business Combination") other than a Non-Control Transaction; or 1.2.3.2 An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33-1/3% or more of the then outstanding Voting Securities is Beneficially Owned by (x) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Subsidiary or (y) any corporation which, immediately prior to its acquisition of such interest, is owned directly or indirectly by the shareholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. 1.3 "Disability" shall mean a physical or mental condition of an Employee resulting from bodily injury, disease or mental disorder which renders the Employee incapable of engaging in any employment for profit or other compensation. 1.4 "Good Reason" shall mean a voluntary resignation by the Employee which is based upon one of the following: 1.4.1 A determination by the Employee made in good faith that as a result of a Change of Control and a change in circumstances thereafter significantly affecting the Employee's position or title, the Employee has been rendered substantially unable to carry out, or have been substantially hindered in the performance of, any of the Employee's authorities, powers, functions, responsibilities or duties in respect of the Company immediately prior to the Change of Control, which situation is not remedied within 10 calendar days after receipt by the Company of written notice from the Employee of such determination; 1.4.2 A reduction in the Employee's annual base salary (including any deferrals); 1.4.3 A change in any Company bonus plan in which the Employee participates which results in a reduction in the Employee's reward opportunities thereunder in terms of the maximum bonus that the Employee may earn, or a change in the performance targets applicable thereunder (unless such change in the performance target applies to all employees generally), in either case which adversely affects the Employee's ability to qualify for the maximum bonus; 1.4.4 Action by the Company requiring the Employee be based in any place more than 50 miles from the location of the Employee's employment immediately prior thereto, or that the travel in connection with the Employee's employment is required to a materially greater degree than was customary for the Employee immediately before the Change of Control; 1.4.5 The failure by the Company to provide Employee with benefits substantially similar in terms of benefit levels to those provided to the Employee immediately prior to the Change of Control (other than a failure which is the result of a reduction or change in benefits that applies to employees generally); 1.4.6 A reduction in the number of vacation days available to the Employee annually; 1.4.7 A material breach by the Company of this Agreement; or 1.4.8 A failure or refusal by a successor to assume the obligations of the Company under this Agreement. 1.5 "Non-Control Transaction" shall mean a Business Combination in which: 1.5.1 The shareholders of the Company, immediately before the Business Combination, own, directly or indirectly immediately following the Business Combination, at least 67% of the combined voting power for the election of directors generally of the outstanding securities of the corporation resulting from the Business Combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before the Business Combination; 1.5.2 The individuals who were members of the Board of Directors of the Company immediately prior to the execution of the agreement providing for the Business Combination constitute at least two-thirds of the members of the Board of Directors of the Surviving Corporation; or 1.5.3 No Person (other than the Company or any Subsidiary, a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements or any trust forming a part thereof maintained by the Company, the Surviving Corporation, or any Subsidiary) who, immediately prior to the Business Combination, did not have Beneficial Ownership of 33-1/3% or more of the then outstanding Voting Securities, upon consummation of the Business Combination, shall be the Beneficial Owner of 33-1/3% or more of the combined voting power for the election of directors generally of the Surviving Corporation's then outstanding securities. Section 2. Change of Control. If a Change of Control occurs while this Agreement is in effect and one of the events described in Section 2.1 below occurs, the Employee shall be entitled to receive the compensation described in Section 2.2 below. 2.1 The events that will trigger the payment of compensation described in Section 2.2 are the following: 2.1.1 Within 12 months of the date of the Change of Control, Employee voluntarily resigns employment for Good Reason; or 2.1.2 Within 24 months of the date of the Change of Control, Employee's employment is terminated by the Company for a reason other than death, Disability or Cause. 2.2 If a Change of Control and one of the events described in Section 2.1 occur, Employee shall be entitled to receive the following compensation ("Change of Control Compensation"): 2.2.1 The Company shall pay Employee in cash a single lump sum payment in an amount equal to 3.0 times the sum of (A) Employee's annual base salary (including any deferrals) at the rate in effect immediately preceding the date of the Change of Control and (B) the "Bonus Amount" which shall be equal to the targeted annual bonus paid or payable to Employee (including any amounts which were or will be deferred) in respect of the fiscal year in which the Change of Control occurs, regardless of whether the target would have been met, exceeded or not met. The payment provided for in this Section 2.2.1 shall be made not later than 30 days after the date of the termination of such employment. 2.2.2 This paragraph is not intended as a limitation on any benefits Employee may be entitled to under any plans, policies or programs of the Company. For a period of 36 months from the date of termination of such employment, the Company, at the Company's expense, shall provide Employee with health, medical, dental, long-term disability and life insurance coverage and any other fringe benefits to the same extent to which Employee was covered under the Company's group plans, policies and programs (and any supplemental plans) on the date immediately preceding the date of a Change of Control. To the extent Employee is not eligible under the terms of the applicable plan, the Company shall provide other substantially similar coverage. To the extent the Employee is eligible for benefits under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"), all COBRA benefits shall be in addition to the period of benefits provided above. The Employee shall receive these benefits subject to the same terms and conditions of other eligible individuals including the payment of all deductibles and co-payments. The Company's obligation with respect to such benefits shall be satisfied to the extent that Employee obtains similar benefits pursuant to a subsequent employer's benefit plan. Also, Employee shall have the option to have assigned to Employee at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Company and relating specifically to Employee. Further, in the event of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2, Employee shall receive (i) if the Employee is a participant in The Midland-Guardian Co. Salaried Employees Pension Plan ("Pension Plan") the value of 3 additional years of service under the Pension Plan as determined by using an interest rate and mortality table prescribed by Regulation Section 1.417(e)-1(d) or its successor provision and the value of 3 additional years of service if he is also a participant in The Midland Company Supplemental Retirement Plan; (ii) if Employee is a participant in The Midland-Guardian Co. Self-Directed Retirement Plan the value of 3 additional calendar years of Company contributions equal to 5% of the Employee's compensation at the time of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2 and the value of 3 additional calendar years of contributions if he is also a participant in The Midland-Guardian Co. Nonqualified Self-Directed Retirement Plan; or (iii) if Employee is a participant in The Midland-Guardian Co. Salaried Employees 401(k) Savings Plan (the "401(k) Plan") the value of 3 additional years of 401(k) contributions and Company matching contributions that would have been made under the 401(k) Plan and the value of 3 additional years of contributions if Employee is also a participant in The Midland-Guardian Co. Salaried Employees Nonqualified Savings Plan. 2.2.3 If requested, the Company will pay the cost of outplacement services for the benefit of Employee, provided, however, the amount payable by the Company for such services shall not exceed $25,000. The Employee can elect to receive this payment in cash in a single lump sum in lieu of applying it to the cost of outplacement services. 2.2.4 If more than one Change of Control shall occur during the term of this Agreement, Employee will be entitled to Change of Control Compensation only once. 2.3 The Change of Control Compensation provided in this Agreement shall be offset by any other severance pay to which Employee shall be entitled under any other Company plan, program or policy which is specifically designated by the Company for the purpose of providing severance. 2.4 In addition to the Change of Control Compensation, Employee shall also be entitled to the following upon termination of the Employee's employment or the Employee's resignation for the reasons provided in Section 2.1. 2.4.1 A lump sum cash payment in an amount equal to the amount of any unpaid base salary through the termination of such employment. 2.4.2 A lump sum in an amount equal to a pro-rata portion of the annual Bonus Amount, based on the number of days which have elapsed in the fiscal year in which termination of such employment occurs. This pro rated amount shall be based on the target amount regardless of actual performance. The Bonus Amount shall be determined by multiplying the target bonus by the number of days worked divided by 365. 2.4.3 A lump sum cash payment in an amount equal to any accrued (but not taken) vacation calculated through the effective date of termination of such employment. 2.4.4 Any other payments or benefits which employees are entitled to receive under the Company's plans, programs, and policies in effect upon termination of such employment. 2.4.5 The payments provided in Section 2.4 shall be made not later than 30 days after the date of the termination of such employment. 2.5 All amounts paid to Employee under this Agreement shall be subject to withholding for federal, state, local and Federal Insurance Contributions Act ("FICA") taxes and such other payroll deductions as required pursuant to any applicable law and regulation. 2.6 All payments due under any other plan, program or policy of the Company including, but not limited to, stock options, stock awards and nonqualified plans shall be paid in accordance with the terms of the applicable plan. Section 3. Gross-Up Payment 3.1 In the event of a Change of Control, the Company shall pay to Employee at the time specified below, an additional amount (the "Gross-Up Payment"). The Gross-Up Payment shall be the following: 3.1.1 The amount of the Excise Tax, if any, imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code"). 3.1.2 The amount of any federal, state and local income tax due on any payments made to the Employee under Section 3.1.1 above. 3.1.3 After the payments are made in Section 3.1.1 and 3.1.2 above, an additional amount shall be paid to the Employee grossing up all payments made pursuant to this Section 3.1 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in Sections 3.1.1 and 3.1.2 above. 3.2 For purposes of determining the amount of the Gross-Up Payment payable pursuant to Section 3.1 above, Employee shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. 3.3 The Gross-Up Payment provided for in this Section 3 shall be an estimate. The Company will cause its independent auditors to make an estimate of Excise Tax liability and Gross-Up Payment within 60 days of all payments made pursuant to Section 2.2, Section 2.4 and Section 3.1 (a copy of which is to be furnished to Employee as soon as possible), and the Company shall pay to Employee the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Employee shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability and such excess shall constitute a loan by the Company to Employee, payable on the 5th day after demand by the Company (together with interest from the date Employee received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). 3.4 In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by the Company's auditors, Employee shall promptly notify the Company and the Company shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Employee by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Employee by the Company (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and other tax liability and the payments provided for in this Section 3) within 10 days of the date that the Internal Revenue Service makes such an assessment. 3.5 The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by the Company's independent auditors and acceptable to Employee. Section 4. Rabbi Trust. The Change of Control Compensation in Section 2.2, the amounts described in Section 2.4 and the Gross-Up Payment in Section 3.1 (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control through the Retention Agreements Rabbi Trust (the "Rabbi Trust") and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid as prescribed in this Agreement and the Rabbi Trust. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as required by the Rabbi Trust. The right of the Employee to receive a distribution under this Agreement shall be an unsecured claim against the general assets of the Company and Employee shall have no rights in or against any specific assets of the Company. Section 5. Terms; Survival of Certain Provisions. This Agreement shall continue in full force and effect unless terminated or modified by the parties. Any termination or expiration of this Agreement or suspension or termination of Employee's employment by the Company notwithstanding, the provisions of this Agreement which are intended to continue and survive shall so continue and survive. This Agreement and all rights shall inure to the benefit of the Company, its successors and assigns. Section 6. Legal Fees and Related Expenses. Following a Change of Control, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Employee as a result of a Change of Control, including all fees related to obtaining or enforcing any right or benefit in connection with termination of employment following a Change of Control. Section 7. Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment (other than as expressly set forth in Section 2.) Section 8. Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns. The Company shall have the right to assign its rights hereunder to any successor in interest, whether by merger, consolidation, sale of assets, or otherwise as long as such assignment provides that all payments under this Agreement are still due. Section 9. Governing Law; Jurisdiction. It is understood and agreed that the construction and interpretation of this Agreement shall, at all times and in all respects, be governed by the laws of the State of Ohio, without giving effect to the conflict of law provisions thereof. Any litigation involving or arising under this Agreement shall be maintained solely in the Common Pleas Court of Clermont County, Ohio or in the United States District Court for the Southern District of Ohio. Section 10. Right of Continued Employment. Nothing contained in this Agreement shall be construed as a contract of employment or shall be deemed to give an Employee the right to be retained in the employ of the Company or any other interest in the assets, business or affairs of the Company. An Employee shall not have a security interest in any assets of the Company used to make any payment under this Agreement. Section 11. Amendment or Termination. This Agreement may be amended or terminated by a written instrument executed by the Company. After a Change of Control and prior to the time all benefit payments have been made, the Company may amend or terminate this Agreement prior to the time all benefit payments under the Agreement have been made upon written approval of the Employee or beneficiaries. Except as provided above, this Agreement may not be amended or terminated by the Company for 30 months following a Change of Control. Section 12. Headings. The headings of paragraphs are included herein solely for the convenience of reference and, if there is any conflict between such headings and the text of this Agreement, the text shall be controlling. IN WITNESS WHEREOF, the Company and Employee have signed this Agreement as of the day and year first written above. THE MIDLAND COMPANY EMPLOYEE: BY: /s/John I. Von Lehman /s/J. P. Hayden, III John I. Von Lehman J. P. Hayden, III ITS: Executive Vice President Date: 5/22/00 Date: 5/22/00 EX-10 9 0009.txt Exhibit 10.5(b) EMPLOYEE RETENTION AGREEMENT (John W. Hayden) THIS EMPLOYEE RETENTION AGREEMENT (the "Agreement") is made as of this 22nd day of May, 2000 between The Midland Company, an Ohio corporation (hereinafter referred to as the "Company") and John W. Hayden (hereinafter referred to as the "Employee"). RECITALS WHEREAS, the industries within which the Company operates continue to consolidate, and the Company may be a merger or acquisition candidate; WHEREAS, the Company desires to provide some protection to certain key executives in the event of a "Change of Control." AGREEMENT NOW, THEREFORE, Company adopts the following Employee Retention Agreement. Section 1. Definitions. For the purposes of this Agreement, the following definitions shall be used: 1.1 "Cause" shall mean that the Employee has been terminated from employment because of one of the following: 1.1.1 The Employee committed a felony. 1.1.2 The Employee committed an act of fraud or embezzlement against the Company. 1.1.3 The Employee committed a willful or substantial violation of Company policy. 1.2 "Change of Control" shall mean the first to occur of the following events: 1.2.1 The "acquisition" after the date hereof by any "Person" (as such term is defined below) of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), of any securities of the Company (the "Voting Securities") which, when added to the Voting Securities then "Beneficially Owned" by such Person, would result in such Person "Beneficially Owning" 33-1/3% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that for purposes of this Section 1.2, a Person shall not be deemed to have made an acquisition of Voting Securities if such Person: (A) acquires Voting Securities as a result of a stock split, stock dividend or other corporate restructuring in which all stockholders of the class of such Voting Securities are treated on a pro rata basis; (B) is generally engaged in the business of underwriting securities and acquires the Voting Securities (the "Underwriting Securities") pursuant to the terms of an underwriting agreement (an "Underwriting Agreement") to which the Company and such underwriter are parties and which Underwriting Agreement is in accordance with Rule 10b-7 promulgated under the 1934 Act or to cover over allotments created in connection with a distribution of Voting Securities pursuant to an Underwriting Agreement; (C) acquires the Voting Securities directly from the Company; (D) as a result of a redemption or purchase of Voting Securities by the Company, becomes the Beneficial Owner of more than the permitted percentage of Voting Securities by the Company pursuant to a reduction of the number of Voting Securities outstanding resulting in an increase in the proportional number of shares Beneficially Owned by such Person; (E) is the Company or any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary") or (F) acquires Voting Securities in connection with a "Non-Control Transaction" (as defined below). 1.2.2 The individuals who, as of January 1, 2000, are members of the Board of Directors of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board of Directors of the Company; provided, however, that if either the election of any new director or the nomination for election of any new director by the Company's stockholders was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any election contest or Proxy Contest. 1.2.3 Approval by shareholders of the Company of: 1.2.3.1 A merger, consolidation or reorganization involving the Company (a "Business Combination") other than a Non-Control Transaction; or 1.2.3.2 An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33-1/3% or more of the then outstanding Voting Securities is Beneficially Owned by (x) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Subsidiary or (y) any corporation which, immediately prior to its acquisition of such interest, is owned directly or indirectly by the shareholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. 1.3 "Disability" shall mean a physical or mental condition of an Employee resulting from bodily injury, disease or mental disorder which renders the Employee incapable of engaging in any employment for profit or other compensation. 1.4 "Good Reason" shall mean a voluntary resignation by the Employee which is based upon one of the following: 1.4.1 A determination by the Employee made in good faith that as a result of a Change of Control and a change in circumstances thereafter significantly affecting the Employee's position or title, the Employee has been rendered substantially unable to carry out, or have been substantially hindered in the performance of, any of the Employee's authorities, powers, functions, responsibilities or duties in respect of the Company immediately prior to the Change of Control, which situation is not remedied within 10 calendar days after receipt by the Company of written notice from the Employee of such determination; 1.4.2 A reduction in the Employee's annual base salary (including any deferrals); 1.4.3 A change in any Company bonus plan in which the Employee participates which results in a reduction in the Employee's reward opportunities thereunder in terms of the maximum bonus that the Employee may earn, or a change in the performance targets applicable thereunder (unless such change in the performance target applies to all employees generally), in either case which adversely affects the Employee's ability to qualify for the maximum bonus; 1.4.4 Action by the Company requiring the Employee be based in any place more than 50 miles from the location of the Employee's employment immediately prior thereto, or that the travel in connection with the Employee's employment is required to a materially greater degree than was customary for the Employee immediately before the Change of Control; 1.4.5 The failure by the Company to provide Employee with benefits substantially similar in terms of benefit levels to those provided to the Employee immediately prior to the Change of Control (other than a failure which is the result of a reduction or change in benefits that applies to employees generally); 1.4.6 A reduction in the number of vacation days available to the Employee annually; 1.4.7 A material breach by the Company of this Agreement; or 1.4.8 A failure or refusal by a successor to assume the obligations of the Company under this Agreement. 1.5 "Non-Control Transaction" shall mean a Business Combination in which: 1.5.1 The shareholders of the Company, immediately before the Business Combination, own, directly or indirectly immediately following the Business Combination, at least 67% of the combined voting power for the election of directors generally of the outstanding securities of the corporation resulting from the Business Combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before the Business Combination; 1.5.2 The individuals who were members of the Board of Directors of the Company immediately prior to the execution of the agreement providing for the Business Combination constitute at least two-thirds of the members of the Board of Directors of the Surviving Corporation; or 1.5.3 No Person (other than the Company or any Subsidiary, a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements or any trust forming a part thereof maintained by the Company, the Surviving Corporation, or any Subsidiary) who, immediately prior to the Business Combination, did not have Beneficial Ownership of 33-1/3% or more of the then outstanding Voting Securities, upon consummation of the Business Combination, shall be the Beneficial Owner of 33-1/3% or more of the combined voting power for the election of directors generally of the Surviving Corporation's then outstanding securities. Section 2. Change of Control. If a Change of Control occurs while this Agreement is in effect and one of the events described in Section 2.1 below occurs, the Employee shall be entitled to receive the compensation described in Section 2.2 below. 2.1 The events that will trigger the payment of compensation described in Section 2.2 are the following: 2.1.1 Within 12 months of the date of the Change of Control, Employee voluntarily resigns employment for Good Reason; or 2.1.2 Within 24 months of the date of the Change of Control, Employee's employment is terminated by the Company for a reason other than death, Disability or Cause. 2.2 If a Change of Control and one of the events described in Section 2.1 occur, Employee shall be entitled to receive the following compensation ("Change of Control Compensation"): 2.2.1 The Company shall pay Employee in cash a single lump sum payment in an amount equal to 3.0 times the sum of (A) Employee's annual base salary (including any deferrals) at the rate in effect immediately preceding the date of the Change of Control and (B) the "Bonus Amount" which shall be equal to the targeted annual bonus paid or payable to Employee (including any amounts which were or will be deferred) in respect of the fiscal year in which the Change of Control occurs, regardless of whether the target would have been met, exceeded or not met. The payment provided for in this Section 2.2.1 shall be made not later than 30 days after the date of the termination of such employment. 2.2.2 This paragraph is not intended as a limitation on any benefits Employee may be entitled to under any plans, policies or programs of the Company. For a period of 36 months from the date of termination of such employment, the Company, at the Company's expense, shall provide Employee with health, medical, dental, long-term disability and life insurance coverage and any other fringe benefits to the same extent to which Employee was covered under the Company's group plans, policies and programs (and any supplemental plans) on the date immediately preceding the date of a Change of Control. To the extent Employee is not eligible under the terms of the applicable plan, the Company shall provide other substantially similar coverage. To the extent the Employee is eligible for benefits under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"), all COBRA benefits shall be in addition to the period of benefits provided above. The Employee shall receive these benefits subject to the same terms and conditions of other eligible individuals including the payment of all deductibles and co-payments. The Company's obligation with respect to such benefits shall be satisfied to the extent that Employee obtains similar benefits pursuant to a subsequent employer's benefit plan. Also, Employee shall have the option to have assigned to Employee at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Company and relating specifically to Employee. Further, in the event of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2, Employee shall receive (i) if the Employee is a participant in The Midland-Guardian Co. Salaried Employees Pension Plan ("Pension Plan") the value of 3 additional years of service under the Pension Plan as determined by using an interest rate and mortality table prescribed by Regulation Section 1.417(e)-1(d) or its successor provision and the value of 3 additional years of service if he is also a participant in The Midland Company Supplemental Retirement Plan; (ii) if Employee is a participant in The Midland-Guardian Co. Self-Directed Retirement Plan the value of 3 additional calendar years of Company contributions equal to 5% of the Employee's compensation at the time of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2 and the value of 3 additional calendar years of contributions if he is also a participant in The Midland-Guardian Co. Nonqualified Self-Directed Retirement Plan; or (iii) if Employee is a participant in The Midland-Guardian Co. Salaried Employees 401(k) Savings Plan (the "401(k) Plan") the value of 3 additional years of 401(k) contributions and Company matching contributions that would have been made under the 401(k) Plan and the value of 3 additional years of contributions if Employee is also a participant in The Midland-Guardian Co. Salaried Employees Nonqualified Savings Plan. 2.2.3 If requested, the Company will pay the cost of outplacement services for the benefit of Employee, provided, however, the amount payable by the Company for such services shall not exceed $25,000. The Employee can elect to receive this payment in cash in a single lump sum in lieu of applying it to the cost of outplacement services. 2.2.4 If more than one Change of Control shall occur during the term of this Agreement, Employee will be entitled to Change of Control Compensation only once. 2.3 The Change of Control Compensation provided in this Agreement shall be offset by any other severance pay to which Employee shall be entitled under any other Company plan, program or policy which is specifically designated by the Company for the purpose of providing severance. 2.4 In addition to the Change of Control Compensation, Employee shall also be entitled to the following upon termination of the Employee's employment or the Employee's resignation for the reasons provided in Section 2.1. 2.4.1 A lump sum cash payment in an amount equal to the amount of any unpaid base salary through the termination of such employment. 2.4.2 A lump sum in an amount equal to a pro-rata portion of the annual Bonus Amount, based on the number of days which have elapsed in the fiscal year in which termination of such employment occurs. This pro rated amount shall be based on the target amount regardless of actual performance. The Bonus Amount shall be determined by multiplying the target bonus by the number of days worked divided by 365. 2.4.3 A lump sum cash payment in an amount equal to any accrued (but not taken) vacation calculated through the effective date of termination of such employment. 2.4.4 Any other payments or benefits which employees are entitled to receive under the Company's plans, programs, and policies in effect upon termination of such employment. 2.4.5 The payments provided in Section 2.4 shall be made not later than 30 days after the date of the termination of such employment. 2.5 All amounts paid to Employee under this Agreement shall be subject to withholding for federal, state, local and Federal Insurance Contributions Act ("FICA") taxes and such other payroll deductions as required pursuant to any applicable law and regulation. 2.6 All payments due under any other plan, program or policy of the Company including, but not limited to, stock options, stock awards and nonqualified plans shall be paid in accordance with the terms of the applicable plan. Section 3. Gross-Up Payment 3.1 In the event of a Change of Control, the Company shall pay to Employee at the time specified below, an additional amount (the "Gross-Up Payment"). The Gross-Up Payment shall be the following: 3.1.1 The amount of the Excise Tax, if any, imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code"). 3.1.2 The amount of any federal, state and local income tax due on any payments made to the Employee under Section 3.1.1 above. 3.1.3 After the payments are made in Section 3.1.1 and 3.1.2 above, an additional amount shall be paid to the Employee grossing up all payments made pursuant to this Section 3.1 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in Sections 3.1.1 and 3.1.2 above. 3.2 For purposes of determining the amount of the Gross-Up Payment payable pursuant to Section 3.1 above, Employee shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. 3.3 The Gross-Up Payment provided for in this Section 3 shall be an estimate. The Company will cause its independent auditors to make an estimate of Excise Tax liability and Gross-Up Payment within 60 days of all payments made pursuant to Section 2.2, Section 2.4 and Section 3.1 (a copy of which is to be furnished to Employee as soon as possible), and the Company shall pay to Employee the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Employee shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability and such excess shall constitute a loan by the Company to Employee, payable on the 5th day after demand by the Company (together with interest from the date Employee received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). 3.4 In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by the Company's auditors, Employee shall promptly notify the Company and the Company shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Employee by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Employee by the Company (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and other tax liability and the payments provided for in this Section 3) within 10 days of the date that the Internal Revenue Service makes such an assessment. 3.5 The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by the Company's independent auditors and acceptable to Employee. Section 4. Rabbi Trust. The Change of Control Compensation in Section 2.2, the amounts described in Section 2.4 and the Gross-Up Payment in Section 3.1 (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control through the Retention Agreements Rabbi Trust (the "Rabbi Trust") and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid as prescribed in this Agreement and the Rabbi Trust. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as required by the Rabbi Trust. The right of the Employee to receive a distribution under this Agreement shall be an unsecured claim against the general assets of the Company and Employee shall have no rights in or against any specific assets of the Company. Section 5. Terms; Survival of Certain Provisions. This Agreement shall continue in full force and effect unless terminated or modified by the parties. Any termination or expiration of this Agreement or suspension or termination of Employee's employment by the Company notwithstanding, the provisions of this Agreement which are intended to continue and survive shall so continue and survive. This Agreement and all rights shall inure to the benefit of the Company, its successors and assigns. Section 6. Legal Fees and Related Expenses. Following a Change of Control, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Employee as a result of a Change of Control, including all fees related to obtaining or enforcing any right or benefit in connection with termination of employment following a Change of Control. Section 7. Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment (other than as expressly set forth in Section 2.) Section 8. Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns. The Company shall have the right to assign its rights hereunder to any successor in interest, whether by merger, consolidation, sale of assets, or otherwise as long as such assignment provides that all payments under this Agreement are still due. Section 9. Governing Law; Jurisdiction. It is understood and agreed that the construction and interpretation of this Agreement shall, at all times and in all respects, be governed by the laws of the State of Ohio, without giving effect to the conflict of law provisions thereof. Any litigation involving or arising under this Agreement shall be maintained solely in the Common Pleas Court of Clermont County, Ohio or in the United States District Court for the Southern District of Ohio. Section 10. Right of Continued Employment. Nothing contained in this Agreement shall be construed as a contract of employment or shall be deemed to give an Employee the right to be retained in the employ of the Company or any other interest in the assets, business or affairs of the Company. An Employee shall not have a security interest in any assets of the Company used to make any payment under this Agreement. Section 11. Amendment or Termination. This Agreement may be amended or terminated by a written instrument executed by the Company. After a Change of Control and prior to the time all benefit payments have been made, the Company may amend or terminate this Agreement prior to the time all benefit payments under the Agreement have been made upon written approval of the Employee or beneficiaries. Except as provided above, this Agreement may not be amended or terminated by the Company for 30 months following a Change of Control. Section 12. Headings. The headings of paragraphs are included herein solely for the convenience of reference and, if there is any conflict between such headings and the text of this Agreement, the text shall be controlling. IN WITNESS WHEREOF, the Company and Employee have signed this Agreement as of the day and year first written above. THE MIDLAND COMPANY EMPLOYEE: BY: /s/John I. Von Lehman /s/ John W. Hayden John I. Von Lehman John W. Hayden ITS: Executive Vice President Date: 5/22/00 Date: 5/22/00 EX-10 10 0010.txt Exhibit 10.5(c) EMPLOYEE RETENTION AGREEMENT (John I. Von Lehman) THIS EMPLOYEE RETENTION AGREEMENT (the "Agreement") is made as of this 18th day of May, 2000 between The Midland Company, an Ohio corporation (hereinafter referred to as the "Company") and John I. Von Lehman (hereinafter referred to as the "Employee"). RECITALS WHEREAS, the industries within which the Company operates continue to consolidate, and the Company may be a merger or acquisition candidate; WHEREAS, the Company desires to provide some protection to certain key executives in the event of a "Change of Control." AGREEMENT NOW, THEREFORE, Company adopts the following Employee Retention Agreement. Section 1. Definitions. For the purposes of this Agreement, the following definitions shall be used: 1.1 "Cause" shall mean that the Employee has been terminated from employment because of one of the following: 1.1.1 The Employee committed a felony. 1.1.2 The Employee committed an act of fraud or embezzlement against the Company. 1.1.3 The Employee committed a willful or substantial violation of Company policy. 1.2 "Change of Control" shall mean the first to occur of the following events: 1.2.1 The "acquisition" after the date hereof by any "Person" (as such term is defined below) of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), of any securities of the Company (the "Voting Securities") which, when added to the Voting Securities then "Beneficially Owned" by such Person, would result in such Person "Beneficially Owning" 33-1/3% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that for purposes of this Section 1.2, a Person shall not be deemed to have made an acquisition of Voting Securities if such Person: (A) acquires Voting Securities as a result of a stock split, stock dividend or other corporate restructuring in which all stockholders of the class of such Voting Securities are treated on a pro rata basis; (B) is generally engaged in the business of underwriting securities and acquires the Voting Securities (the "Underwriting Securities") pursuant to the terms of an underwriting agreement (an "Underwriting Agreement") to which the Company and such underwriter are parties and which Underwriting Agreement is in accordance with Rule 10b-7 promulgated under the 1934 Act or to cover over allotments created in connection with a distribution of Voting Securities pursuant to an Underwriting Agreement; (C) acquires the Voting Securities directly from the Company; (D) as a result of a redemption or purchase of Voting Securities by the Company, becomes the Beneficial Owner of more than the permitted percentage of Voting Securities by the Company pursuant to a reduction of the number of Voting Securities outstanding resulting in an increase in the proportional number of shares Beneficially Owned by such Person; (E) is the Company or any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary") or (F) acquires Voting Securities in connection with a "Non-Control Transaction" (as defined below). 1.2.2 The individuals who, as of January 1, 2000, are members of the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board of Directors of the Company; provided, however, that if either the election of any new director or the nomination for election of any new director by the Company's stockholders was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any election contest or Proxy Contest. 1.2.3 Approval by shareholders of the Company of: 1.2.3.1 A merger, consolidation or reorganization involving the Company (a "Business Combination") other than a Non-Control Transaction; or 1.2.3.2 An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33-1/3% or more of the then outstanding Voting Securities is Beneficially Owned by (x) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Subsidiary or (y) any corporation which, immediately prior to its acquisition of such interest, is owned directly or indirectly by the shareholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. 1.3 "Disability" shall mean a physical or mental condition of an Employee resulting from bodily injury, disease or mental disorder which renders the Employee incapable of engaging in any employment for profit or other compensation. 1.4 "Good Reason" shall mean a voluntary resignation by the Employee which is based upon one of the following: 1.4.1 A determination by the Employee made in good faith that as a result of a Change of Control and a change in circumstances thereafter significantly affecting the Employee's position or title, the Employee has been rendered substantially unable to carry out, or have been substantially hindered in the performance of, any of the Employee's authorities, powers, functions, responsibilities or duties in respect of the Company immediately prior to the Change of Control, which situation is not remedied within 10 calendar days after receipt by the Company of written notice from the Employee of such determination; 1.4.2 A reduction in the Employee's annual base salary (including any deferrals); 1.4.3 A change in any Company bonus plan in which the Employee participates which results in a reduction in the Employee's reward opportunities thereunder in terms of the maximum bonus that the Employee may earn, or a change in the performance targets applicable thereunder (unless such change in the performance target applies to all employees generally), in either case which adversely affects the Employee's ability to qualify for the maximum bonus; 1.4.4 Action by the Company requiring the Employee be based in any place more than 50 miles from the location of the Employee's employment immediately prior thereto, or that the travel in connection with the Employee's employment is required to a materially greater degree than was customary for the Employee immediately before the Change of Control; 1.4.5 The failure by the Company to provide Employee with benefits substantially similar in terms of benefit levels to those provided to the Employee immediately prior to the Change of Control (other than a failure which is the result of a reduction or change in benefits that applies to employees generally); 1.4.6 A reduction in the number of vacation days available to the Employee annually; 1.4.7 A material breach by the Company of this Agreement; or 1.4.8 A failure or refusal by a successor to assume the obligations of the Company under this Agreement. 1.5 "Non-Control Transaction" shall mean a Business Combination in which: 1.5.1 The shareholders of the Company, immediately before the Business Combination, own, directly or indirectly immediately following the Business Combination, at least 67% of the combined voting power for the election of directors generally of the outstanding securities of the corporation resulting from the Business Combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before the Business Combination; 1.5.2 The individuals who were members of the Board of Directors of the Company immediately prior to the execution of the agreement providing for the Business Combination constitute at least two-thirds of the members of the Board of Directors of the Surviving Corporation; or 1.5.3 No Person (other than the Company or any Subsidiary, a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements or any trust forming a part thereof maintained by the Company, the Surviving Corporation, or any Subsidiary) who, immediately prior to the Business Combination, did not have Beneficial Ownership of 33-1/3% or more of the then outstanding Voting Securities, upon consummation of the Business Combination, shall be the Beneficial Owner of 33-1/3% or more of the combined voting power for the election of directors generally of the Surviving Corporation's then outstanding securities. Section 2.. Change of Control. If a Change of Control occurs while this Agreement is in effect and one of the events described in Section 2.1 below occurs, the Employee shall be entitled to receive the compensation described in Section 2.2 below. 2.1 The events that will trigger the payment of compensation described in Section 2.2 are the following: 2.1.1 Within 12 months of the date of the Change of Control, Employee voluntarily resigns employment for Good Reason; or 2.1.2 Within 24 months of the date of the Change of Control, Employee's employment is terminated by the Company for a reason other than death, Disability or Cause. 2.2 If a Change of Control and one of the events described in Section 2.1 occur, Employee shall be entitled to receive the following compensation ("Change of Control Compensation"): 2.2.1 The Company shall pay Employee in cash a single lump sum payment in an amount equal to 3.0 times the sum of (A) Employee's annual base salary (including any deferrals) at the rate in effect immediately preceding the date of the Change of Control and (B) the "Bonus Amount" which shall be equal to the targeted annual bonus paid or payable to Employee (including any amounts which were or will be deferred) in respect of the fiscal year in which the Change of Control occurs, regardless of whether the target would have been met, exceeded or not met. The payment provided for in this Section 2.2.1 shall be made not later than 30 days after the date of the termination of such employment. 2.2.2 This paragraph is not intended as a limitation on any benefits Employee may be entitled to under any plans, policies or programs of the Company. For a period of 36 months from the date of termination of such employment, the Company, at the Company's expense, shall provide Employee with health, medical, dental, long-term disability and life insurance coverage and any other fringe benefits to the same extent to which Employee was covered under the Company's group plans, policies and programs (and any supplemental plans) on the date immediately preceding the date of a Change of Control. To the extent Employee is not eligible under the terms of the applicable plan, the Company shall provide other substantially similar coverage. To the extent the Employee is eligible for benefits under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"), all COBRA benefits shall be in addition to the period of benefits provided above. The Employee shall receive these benefits subject to the same terms and conditions of other eligible individuals including the payment of all deductibles and co-payments. The Company's obligation with respect to such benefits shall be satisfied to the extent that Employee obtains similar benefits pursuant to a subsequent employer's benefit plan. Also, Employee shall have the option to have assigned to Employee at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Company and relating specifically to Employee. Further, in the event of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2, Employee shall receive (i) if the Employee is a participant in The Midland-Guardian Co. Salaried Employees Pension Plan ("Pension Plan") the value of 3 additional years of service under the Pension Plan as determined by using an interest rate and mortality table prescribed by Regulation Section 1.417(e)-1(d) or its successor provision and the value of 3 additional years if he is also a participant in The Midland Company Supplemental Retirement Plan; (ii) if Employee is a participant in The Midland-Guardian Co. Self-Directed Retirement Plan the value of 3 additional calendar years of Company contributions equal to 5% of the Employee=s compensation at the time of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2 and the value of 3 additional calendar years of contributions if he is also a participant in The Midland-Guardian Co. Nonqualified Self-Directed Retirement Plan; or (iii) if Employee is a participant in The Midland-Guardian Co. Salaried Employees 401(k) Savings Plan (the "401(k) Plan") the value of 3 additional years of 401(k) contributions and Company matching contributions that would have been made under the 401(k) Plan and the value of 3 additional years of contributions if Employee is also a participant in The Midland-Guardian Co. Salaried Employees Nonqualified Savings Plan. 2.2.3 If requested, the Company will pay the cost of outplacement services for the benefit of Employee, provided, however, the amount payable by the Company for such services shall not exceed $25,000. The Employee can elect to receive this payment in cash in a single lump sum in lieu of applying it to the cost of outplacement services. 2.2.4 If more than one Change of Control shall occur during the term of this Agreement, Employee will be entitled to Change of Control Compensation only once. 2.3 The Change of Control Compensation provided in this Agreement shall be offset by any other severance pay to which Employee shall be entitled under any other Company plan, program or policy which is specifically designated by the Company for the purpose of providing severance. 2.4 In addition to the Change of Control Compensation, Employee shall also be entitled to the following upon termination of the Employee's employment or the Employee's resignation for the reasons provided in Section 2.1. 2.4.1 A lump sum cash payment in an amount equal to the amount of any unpaid base salary through the termination of such employment. 2.4.2 A lump sum in an amount equal to a pro-rata portion of the annual Bonus Amount, based on the number of days which have elapsed in the fiscal year in which termination of such employment occurs. This pro rated amount shall be based on the target amount regardless of actual performance. The Bonus Amount shall be determined by multiplying the target bonus by the number of days worked divided by 365. 2.4.3 A lump sum cash payment in an amount equal to any accrued (but not taken) vacation calculated through the effective date of termination of such employment. 2.4.4 Any other payments or benefits which employees are entitled to receive under the Company's plans, programs, and policies in effect upon termination of such employment. 2.4.5 The payments provided in Section 2.4 shall be made not later than 30 days after the date of the termination of such employment. 2.5 All amounts paid to Employee under this Agreement shall be subject to withholding for federal, state, local and Federal Insurance Contributions Act ("FICA") taxes and such other payroll deductions as required pursuant to any applicable law and regulation. 2.6 All payments due under any other plan, program or policy of the Company including, but not limited to, stock options, stock awards and nonqualified plans shall be paid in accordance with the terms of the applicable plan. Section 3. Gross-Up Payment. 3.1 In the event of a Change of Control, the Company shall pay to Employee at the time specified below, an additional amount (the "Gross-Up Payment"). The Gross-Up Payment shall be the following: 3.1.1 The amount of the Excise Tax, if any, imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code"). 3.1.2 The amount of any federal, state and local income tax due on any payments made to the Employee under Section 3.1.1 above. 3.1.3 After the payments are made in Section 3.1.1 and 3.1.2 above, an additional amount shall be paid to the Employee grossing up all payments made pursuant to this Section 3.1 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in Sections 3.1.1 and 3.1.2 above. 3.2 For purposes of determining the amount of the Gross-Up Payment payable pursuant to Section 3.1 above, Employee shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. 3.3 The Gross-Up Payment provided for in this Section 3 shall be an estimate. The Company will cause its independent auditors to make an estimate of Excise Tax liability and Gross-Up Payment within 60 days of all payments made pursuant to Section 2.2, Section 2.4 and Section 3.1 (a copy of which is to be furnished to Employee as soon as possible), and the Company shall pay to Employee the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Employee shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability and such excess shall constitute a loan by the Company to Employee, payable on the 5th day after demand by the Company (together with interest from the date Employee received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). 3.4 In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by the Company's auditors, Employee shall promptly notify the Company and the Company shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Employee by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Employee by the Company (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and other tax liability and the payments provided for in this Section 3) within 10 days of the date that the Internal Revenue Service makes such an assessment. 3.5 The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by the Company's independent auditors and acceptable to Employee. Section 4. Rabbi Trust. The Change of Control Compensation in Section 2.2, the amounts described in Section 2.4 and the Gross-Up Payment in Section 3.1 (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control through the Retention Agreements Rabbi Trust (the "Rabbi Trust") and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid as prescribed in this Agreement and the Rabbi Trust. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as required by the Rabbi Trust. The right of the Employee to receive a distribution under this Agreement shall be an unsecured claim against the general assets of the Company and Employee shall have no rights in or against any specific assets of the Company. Section 5. Terms; Survival of Certain Provisions. This Agreement shall continue in full force and effect unless terminated or modified by the parties. Any termination or expiration of this Agreement or suspension or termination of Employee's employment by the Company notwithstanding, the provisions of this Agreement which are intended to continue and survive shall so continue and survive. This Agreement and all rights shall inure to the benefit of the Company, its successors and assigns. Section 6. Legal Fees and Related Expenses. Following a Change of Control, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Employee as a result of a Change of Control, including all fees related to obtaining or enforcing any right or benefit in connection with termination of employment following a Change of Control. Section 7. Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment (other than as expressly set forth in Section 2). Section 8. Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns. The Company shall have the right to assign its rights hereunder to any successor in interest, whether by merger, consolidation, sale of assets, or otherwise as long as such assignment provides that all payments under this Agreement are still due. Section 9. Governing Law; Jurisdiction. It is understood and agreed that the construction and interpretation of this Agreement shall, at all times and in all respects, be governed by the laws of the State of Ohio, without giving effect to the conflict of law provisions thereof. Any litigation involving or arising under this Agreement shall be maintained solely in the Common Pleas Court of Clermont County, Ohio or in the United States District Court for the Southern District of Ohio. Section 10. Right of Continued Employment. Nothing contained in this Agreement shall be construed as a contract of employment or shall be deemed to give an Employee the right to be retained in the employ of the Company or any other interest in the assets, business or affairs of the Company. An Employee shall not have a security interest in any assets of the Company used to make any payment under this Agreement. Section 11. Amendment or Termination. This Agreement may be amended or terminated by a written instrument executed by the Company. After a Change of Control and prior to the time all benefit payments have been made, the Company may amend or terminate this Agreement prior to the time all benefit payments under the Agreement have been made upon written approval of the Employee or beneficiaries. Except as provided above, this Agreement may not be amended or terminated by the Company for 30 months following a Change of Control. Section 12. Headings. The headings of paragraphs are included herein solely for the convenience of reference and, if there is any conflict between such headings and the text of this Agreement, the text shall be controlling. IN WITNESS WHEREOF, the Company and Employee have signed this Agreement as of the day and year first written above. THE MIDLAND COMPANY EMPLOYEE: BY: /s/J. P. Hayden III /s/ John I. Von Lehman J. P. Hayden III John I. Von Lehman ITS: Chairman Date: 5/18/00 Date: 5/22/00 EX-10 11 0011.txt Exhibit 10.5(d) EMPLOYEE RETENTION AGREEMENT (Paul T. Brizzolara) THIS EMPLOYEE RETENTION AGREEMENT (the "Agreement") is made as of this 18th day of May, 2000 between The Midland Company, an Ohio corporation (hereinafter referred to as the "Company") and Paul T. Brizzolara (hereinafter referred to as the "Employee"). RECITALS WHEREAS, the industries within which the Company operates continue to consolidate, and the Company may be a merger or acquisition candidate; WHEREAS, the Company desires to provide some protection to certain key executives in the event of a "Change of Control." AGREEMENT NOW, THEREFORE, Company adopts the following Employee Retention Agreement. Section 1. Definitions. For the purposes of this Agreement, the following definitions shall be used: 1.1 "Cause" shall mean that the Employee has been terminated from employment because of one of the following: 1.1.1 The Employee committed a felony. 1.1.2 The Employee committed an act of fraud or embezzlement against the Company. 1.1.3 The Employee committed a willful or substantial violation of Company policy. 1.2 "Change of Control" shall mean the first to occur of the following events: 1.2.1 The "acquisition" after the date hereof by any "Person" (as such term is defined below) of "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), of any securities of the Company (the "Voting Securities") which, when added to the Voting Securities then "Beneficially Owned" by such Person, would result in such Person "Beneficially Owning" 33-1/3% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that for purposes of this Section 1.2, a Person shall not be deemed to have made an acquisition of Voting Securities if such Person: (A) acquires Voting Securities as a result of a stock split, stock dividend or other corporate restructuring in which all stockholders of the class of such Voting Securities are treated on a pro rata basis; (B) is generally engaged in the business of underwriting securities and acquires the Voting Securities (the "Underwriting Securities") pursuant to the terms of an underwriting agreement (an "Underwriting Agreement") to which the Company and such underwriter are parties and which Underwriting Agreement is in accordance with Rule 10b-7 promulgated under the 1934 Act or to cover over allotments created in connection with a distribution of Voting Securities pursuant to an Underwriting Agreement; (C) acquires the Voting Securities directly from the Company; (D) as a result of a redemption or purchase of Voting Securities by the Company, becomes the Beneficial Owner of more than the permitted percentage of Voting Securities by the Company pursuant to a reduction of the number of Voting Securities outstanding resulting in an increase in the proportional number of shares Beneficially Owned by such Person; (E) is the Company or any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by the Company (a "Subsidiary") or (F) acquires Voting Securities in connection with a "Non-Control Transaction" (as defined below). 1.2.2 The individuals who, as of January 1, 2000, are members of the Board of Directors of the Company (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board of Directors of the Company; provided, however, that if either the election of any new director or the nomination for election of any new director by the Company's stockholders was approved by a vote of at least two- thirds of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any election contest or Proxy Contest. 1.2.3 Approval by shareholders of the Company of: 1.2.3.1 A merger, consolidation or reorganization involving the Company (a "Business Combination") other than a Non-Control Transaction; or 1.2.3.2 An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because 33-1/3% or more of the then outstanding Voting Securities is Beneficially Owned by (x) a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements (or any trust forming a part thereof) maintained by the Company or any Subsidiary or (y) any corporation which, immediately prior to its acquisition of such interest, is owned directly or indirectly by the shareholders of the Company in the same proportion as their ownership of stock in the Company immediately prior to such acquisition. 1.3 "Disability" shall mean a physical or mental condition of an Employee resulting from bodily injury, disease or mental disorder which renders the Employee incapable of engaging in any employment for profit or other compensation. 1.4 "Good Reason" shall mean a voluntary resignation by the Employee which is based upon one of the following: 1.4.1 A determination by the Employee made in good faith that as a result of a Change of Control and a change in circumstances thereafter significantly affecting the Employee's position or title, the Employee has been rendered substantially unable to carry out, or have been substantially hindered in the performance of, any of the Employee's authorities, powers, functions, responsibilities or duties in respect of the Company immediately prior to the Change of Control, which situation is not remedied within 10 calendar days after receipt by the Company of written notice from the Employee of such determination; 1.4.2 A reduction in the Employee's annual base salary (including any deferrals); 1.4.3 A change in any Company bonus plan in which the Employee participates which results in a reduction in the Employee's reward opportunities thereunder in terms of the maximum bonus that the Employee may earn, or a change in the performance targets applicable thereunder (unless such change in the performance target applies to all employees generally), in either case which adversely affects the Employee's ability to qualify for the maximum bonus; 1.4.4 Action by the Company requiring the Employee be based in any place more than 50 miles from the location of the Employee's employment immediately prior thereto, or that the travel in connection with the Employee's employment is required to a materially greater degree than was customary for the Employee immediately before the Change of Control; 1.4.5 The failure by the Company to provide Employee with benefits substantially similar in terms of benefit levels to those provided to the Employee immediately prior to the Change of Control (other than a failure which is the result of a reduction or change in benefits that applies to employees generally); 1.4.6 A reduction in the number of vacation days available to the Employee annually; 1.4.7 A material breach by the Company of this Agreement; or 1.4.8 A failure or refusal by a successor to assume the obligations of the Company under this Agreement. 1.5 "Non-Control Transaction" shall mean a Business Combination in which: 1.5.1 The shareholders of the Company, immediately before the Business Combination, own, directly or indirectly immediately following the Business Combination, at least 67% of the combined voting power for the election of directors generally of the outstanding securities of the corporation resulting from the Business Combination (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before the Business Combination; 1.5.2 The individuals who were members of the Board of Directors of the Company immediately prior to the execution of the agreement providing for the Business Combination constitute at least two-thirds of the members of the Board of Directors of the Surviving Corporation; or 1.5.3 No Person (other than the Company or any Subsidiary, a trustee or other fiduciary holding securities under one or more employee benefit plans or arrangements or any trust forming a part thereof maintained by the Company, the Surviving Corporation, or any Subsidiary) who, immediately prior to the Business Combination, did not have Beneficial Ownership of 33-1/3% or more of the then outstanding Voting Securities, upon consummation of the Business Combination, shall be the Beneficial Owner of 33-1/3% or more of the combined voting power for the election of directors generally of the Surviving Corporation's then outstanding securities. Section 2. Change of Control. If a Change of Control occurs while this Agreement is in effect and one of the events described in Section 2.1 below occurs, the Employee shall be entitled to receive the compensation described in Section 2.2 below. 2.1 The events that will trigger the payment of compensation described in Section 2.2 are the following: 2.1.1 Within 12 months of the date of the Change of Control, Employee voluntarily resigns employment for Good Reason; or 2.1.2 Within 24 months of the date of the Change of Control, Employee's employment is terminated by the Company for a reason other than death, Disability or Cause. 2.2 If a Change of Control and one of the events described in Section 2.1 occur, Employee shall be entitled to receive the following compensation ("Change of Control Compensation"): 2.2.1 The Company shall pay Employee in cash a single lump sum payment in an amount equal to 2.0 times the sum of (A) Employee's annual base salary (including any deferrals) at the rate in effect immediately preceding the date of the Change of Control and (B) the "Bonus Amount" which shall be equal to the targeted annual bonus paid or payable to Employee (including any amounts which were or will be deferred) in respect of the fiscal year in which the Change of Control occurs, regardless of whether the target would have been met, exceeded or not met. The payment provided for in this Section 2.2.1 shall be made not later than 30 days after the date of the termination of such employment. 2.2.2 This paragraph is not intended as a limitation on any benefits Employee may be entitled to under any plans, policies or programs of the Company. For a period of 24 months from the date of termination of such employment, the Company, at the Company's expense, shall provide Employee with health, medical, dental, long-term disability and life insurance coverage and any other fringe benefits to the same extent to which Employee was covered under the Company's group plans, policies and programs (and any supplemental plans) on the date immediately preceding the date of a Change of Control. To the extent Employee is not eligible under the terms of the applicable plan, the Company shall provide other substantially similar coverage. To the extent the Employee is eligible for benefits under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"), all COBRA benefits shall be in addition to the period of benefits provided above. The Employee shall receive these benefits subject to the same terms and conditions of other eligible individuals including the payment of all deductibles and co-payments. The Company's obligation with respect to such benefits shall be satisfied to the extent that Employee obtains similar benefits pursuant to a subsequent employer's benefit plan. Also, Employee shall have the option to have assigned to Employee at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Company and relating specifically to Employee. Further, in the event of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2, Employee shall receive (i) if the Employee is a participant in The Midland-Guardian Co. Salaried Employees Pension Plan ("Pension Plan") the value of 2 additional years of service under the Pension Plan as determined by using an interest rate and mortality table prescribed by Regulation Section 1.417(e)-1(d) or its successor provision and the value of 2 years of additional years of service if he is also a participant in The Midland Company Supplemental Retirement Plan; (ii) if Employee is a participant in The Midland-Guardian Co. Self-Directed Retirement Plan the value of 2 additional calendar years of Company contributions equal to 5% of the Employee's compensation at the time of the occurrence of one of the events described in Section 2.1.1 or Section 2.1.2 and the value of 2 additional calendar years of contributions if he is also a participant in The Midland-Guardian Co. Nonqualified Self-Directed Retirement Plan; or (iii) if Employee is a participant in The Midland-Guardian Co. Salaried Employees 401(k) Savings Plan (the "401(k) Plan") the value of 2 additional years of 401(k) contributions and Company matching contributions that would have been made under the 401(k) Plan and the value of 2 additional years of contributions if Employee is also a participant in The Midland-Guardian Co. Salaried Employees Nonqualified Savings Plan. 2.2.3 If requested, the Company will pay the cost of outplacement services for the benefit of Employee, provided, however, the amount payable by the Company for such services shall not exceed $25,000. The Employee can elect to receive this payment in cash in a single lump sum in lieu of applying it to the cost of outplacement services. 2.2.4 If more than one Change of Control shall occur during the term of this Agreement, Employee will be entitled to Change of Control Compensation only once. 2.3 The Change of Control Compensation provided in this Agreement shall be offset by any other severance pay to which Employee shall be entitled under any other Company plan, program or policy which is specifically designated by the Company for the purpose of providing severance. 2.4 In addition to the Change of Control Compensation, Employee shall also be entitled to the following upon termination of the Employee's employment or the Employee's resignation for the reasons provided in Section 2.1. 2.4.1 A lump sum cash payment in an amount equal to the amount of any unpaid base salary through the termination of such employment. 2.4.2 A lump sum in an amount equal to a pro-rata portion of the annual Bonus Amount, based on the number of days which have elapsed in the fiscal year in which termination of such employment occurs. This pro rated amount shall be based on the target amount regardless of actual performance. The Bonus Amount shall be determined by multiplying the target bonus by the number of days worked divided by 365. 2.4.3 A lump sum cash payment in an amount equal to any accrued (but not taken) vacation calculated through the effective date of termination of such employment. 2.4.4 Any other payments or benefits which employees are entitled to receive under the Company's plans, programs, and policies in effect upon termination of such employment. 2.4.5 The payments provided in Section 2.4 shall be made not later than 30 days after the date of the termination of such employment. 2.5 All amounts paid to Employee under this Agreement shall be subject to withholding for federal, state, local and Federal Insurance Contributions Act ("FICA") taxes and such other payroll deductions as required pursuant to any applicable law and regulation. 2.6 All payments due under any other plan, program or policy of the Company including, but not limited to, stock options, stock awards and nonqualified plans shall be paid in accordance with the terms of the applicable plan. Section 3. Gross-Up Payment 3.1 In the event of a Change of Control, the Company shall pay to Employee at the time specified below, an additional amount (the "Gross-Up Payment"). The Gross-Up Payment shall be the following: 3.1.1 The amount of the Excise Tax, if any, imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code"). 3.1.2 The amount of any federal, state and local income tax due on any payments made to the Employee under Section 3.1.1 above. 3.1.3 After the payments are made in Section 3.1.1 and 3.1.2 above, an additional amount shall be paid to the Employee grossing up all payments made pursuant to this Section 3.1 such that the additional amount paid is sufficient to pay the Excise Tax and the federal, state and local income taxes being reimbursed in Sections 3.1.1 and 3.1.2 above. 3.2 For purposes of determining the amount of the Gross-Up Payment payable pursuant to Section 3.1 above, Employee shall be deemed to pay (i) federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is made; and (ii) state and local income taxes at the highest marginal rate of taxation in the calendar year in which the Gross-Up Payment is made (but based on the rates of taxation of the states and localities with respect to which the Gross-Up Payment will be taxable), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. 3.3 The Gross-Up Payment provided for in this Section 3 shall be an estimate. The Company will cause its independent auditors to make an estimate of Excise Tax liability and Gross-Up Payment within 60 days of all payments made pursuant to Section 2.2, Section 2.4 and Section 3.1 (a copy of which is to be furnished to Employee as soon as possible), and the Company shall pay to Employee the Gross-Up Payment in cash in a lump sum within 30 days of such estimate. In the event that the amount of the estimated Excise Tax and other tax liability exceeds the amount of the actual Excise Tax and other tax liability, Employee shall promptly repay the portion of the Gross-Up Payment attributable to the reduced Excise Tax and other tax liability and such excess shall constitute a loan by the Company to Employee, payable on the 5th day after demand by the Company (together with interest from the date Employee received the Gross-Up Payment at the rate provided in Section 1274(b)(2)(B) of the Code). 3.4 In the event the Internal Revenue Service subsequently makes a determination resulting in an Excise Tax and other tax liability in excess of the estimate as determined by the Company's auditors, Employee shall promptly notify the Company and the Company shall have the right at its expense, to contest and participate. If any additional Excise Tax and other tax liability is assessed in respect of Employee by the Internal Revenue Service, such additional Excise Tax and other tax liability, plus any penalties and interest assessed, shall be paid to Employee by the Company (together with an amount sufficient for all other federal, state and local taxes on the additional Excise Tax and other tax liability and the payments provided for in this Section 3) within 10 days of the date that the Internal Revenue Service makes such an assessment. 3.5 The interpretation of matters relating to the Gross-Up Payment shall be made by tax counsel selected by the Company's independent auditors and acceptable to Employee. Section 4. Rabbi Trust. The Change of Control Compensation in Section 2.2, the amounts described in Section 2.4 and the Gross-Up Payment in Section 3.1 (i) shall accelerate, (ii) shall be entirely funded upon a Change of Control through the Retention Agreements Rabbi Trust (the "Rabbi Trust") and as prescribed in Rev. Proc. 92-64, and (iii) shall be paid as prescribed in this Agreement and the Rabbi Trust. No other provisions shall be made with respect to segregating assets of the Company for payment of any distributions under this Agreement except as required by the Rabbi Trust. The right of the Employee to receive a distribution under this Agreement shall be an unsecured claim against the general assets of the Company and Employee shall have no rights in or against any specific assets of the Company. Section 5. Terms; Survival of Certain Provisions. This Agreement shall continue in full force and effect unless terminated or modified by the parties. Any termination or expiration of this Agreement or suspension or termination of Employee's employment by the Company notwithstanding, the provisions of this Agreement which are intended to continue and survive shall so continue and survive. This Agreement and all rights shall inure to the benefit of the Company, its successors and assigns. Section 6. Legal Fees and Related Expenses. Following a Change of Control, the Company shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) incurred by the Employee as a result of a Change of Control, including all fees related to obtaining or enforcing any right or benefit in connection with termination of employment following a Change of Control. Section 7. Mitigation. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent employment (other than as expressly set forth in Section 2.) Section 8. Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns. The Company shall have the right to assign its rights hereunder to any successor in interest, whether by merger, consolidation, sale of assets, or otherwise as long as such assignment provides that all payments under this Agreement are still due. Section 9. Governing Law; Jurisdiction. It is understood and agreed that the construction and interpretation of this Agreement shall, at all times and in all respects, be governed by the laws of the State of Ohio, without giving effect to the conflict of law provisions thereof. Any litigation involving or arising under this Agreement shall be maintained solely in the Common Pleas Court of Clermont County, Ohio or in the United States District Court for the Southern District of Ohio. Section 10. Right of Continued Employment. Nothing contained in this Agreement shall be construed as a contract of employment or shall be deemed to give an Employee the right to be retained in the employ of the Company or any other interest in the assets, business or affairs of the Company. An Employee shall not have a security interest in any assets of the Company used to make any payment under this Agreement. Section 11. Amendment or Termination. This Agreement may be amended or terminated by a written instrument executed by the Company. After a Change of Control and prior to the time all benefit payments have been made, the Company may amend or terminate this Agreement prior to the time all benefit payments under the Agreement have been made upon written approval of the Employee or beneficiaries. Except as provided above, this Agreement may not be amended or terminated by the Company for 30 months following a Change of Control. Section 12. Headings. The headings of paragraphs are included herein solely for the convenience of reference and, if there is any conflict between such headings and the text of this Agreement, the text shall be controlling. IN WITNESS WHEREOF, the Company and Employee have signed this Agreement as of the day and year first written above. THE MIDLAND COMPANY EMPLOYEE: BY: /s/John I. Von Lehman /s/ Paul T. Brizzolara John I. Von Lehman Paul T. Brizzolara ITS: Executive Vice President Date: 5/18/00 Date: 5/18/00 EX-13 12 0012.txt COMPANY PROFILE The Midland Company is a highly focused provider of specialty insurance products and services through its American Modern Insurance Group (American Modern) subsidiary, which contributes approximately 94 percent of the company's revenues. In addition, Midland has a profitable investment in a niche river transportation business, M/G Transport Services, Inc., (M/G). American Modern is a specialty insurance leader in the manufactured housing market and also offers other specialty insurance products and services through diverse distribution channels. The company focuses on four key strategies to achieve long-term growth objectives, including organic growth in current markets; targeted strategic acquisitions; strategic alliances; and the expansion of low-risk fee income business. The company's strong operating performance in 2000 represented the fourth consecutive year that Midland achieved record-breaking results. Management remains committed to a focus on specialized products, multiple distribution channels, underwriting discipline, expert claims management, the reduction of earnings volatility via risk management and the strategic deployment of technology to achieve its ongoing growth and profitability objectives. Midland will continue to differentiate itself from the competition in 2001 and beyond, making itself an indispensable partner to its customers in chosen markets. The Midland Company's Mission To be an indispensable partner to customers within chosen markets by providing value-adding specialty products and services delivered by the best professionals in the industry. FINANCIAL HIGHLIGHTS THE MIDLAND COMPANY AND SUBSIDARIES For the Years Ended December 31, (Amounts in thousands, except per share data) 2000 1999 % Change - ------------------------------------------------------------------------------- Operating Performance Revenues $534,422 $469,126 13.9% Income Before Federal Income Tax $ 50,699 $ 43,713 15.9% Operating Income (After-Tax) $ 31,755 $ 28,913 9.8% Capital Gains (After-Tax) $ 3,708 $ 2,266 63.6% Net Income $ 35,463 $ 31,179 13.7% Per Share Data Net Income-Basic $ 3.91 $ 3.42 14.3% Average Shares Outstanding-Basic 9,066 9,111 Operating Income (Excludes Capital Gains)-Diluted $ 3.39 $ 3.06 10.8% Net Income-Diluted $ 3.78 $ 3.30 14.5% Average Shares Outstanding-Diluted 9,379 9,463 Cash Dividends $ .30 $ .27 11.1% Book Value $ 31.46 $ 27.11 16.0% Financial Position Total Assets $993,850 $888,057 11.9% Shareholders' Equity $283,177 $258,002 9.8% Performance Ratios Combined Ratio (AMIG Property and Casualty Companies) 96.2% 94.4% Return on Beginning Equity 13.7% 12.5% This page includes three bar charts with the following data: REVENUES (Continuing Operations) dollars in millions 96 97 98 99 00 Revenues $337.7 $373.8 $442.4 $469.1 $534.4 Caption: Midland's revenue growth from continuing operations remained strong in 2000, totaling $534.4 million, a 13.9 percent increase over 1999. Growth in property and casualty earned premium and investment income, were the primary factors. NET INCOME AND NET OPERATING INCOME PER SHARE (Continuing Operations) 96 97 98 99 00 Operating Income $0.22 $2.33 $2.42 $3.06 $3.39 Net Income 0.41 2.63 2.86 3.30 3.78 Caption: Midland established a record for the fourth consecutive year in 2000, with net operating income of $31.8 million, or $3.39 per share, and net income (including capital gains) of $35.5 million, or $3.78 per share. BOOK VALUE PER SHARE 96 97 98 99 00 Book Value Per Share $17.50 $21.11 $26.61 $27.11 $31.46 Caption: Midland's book vlaue increased 16 percent in 2000 and has grown at a compounded rate of more than 12 percent over the last five and ten years. 1 LETTER TO SHAREHOLDERS In the pursuit of dreams and goals, preparation is an indispensable ally to vision. In 2000, the unmistakable hand of careful preparation was manifested in the actions and achievements of The Midland Company. It was evident in our ability to produce continuous and profitable growth in the face of a steep decline in the sale of new manufactured homes. It was apparent in our immediate and decisive response to an opportunity to enter the motorsports insurance marketplace. And, it was rewarded in the forging of strong new business relationships with key agency partners. The Midland story is like a book that keeps building momentum with each passing chapter. The chapter just concluded kept the promise of those before it, while the chapters we are writing for 2001 and 2002 lay a solid foundation for specialty insurance leadership in our chosen markets for many generations of policyholders to come. RECORD PERFOMANCE UNDERSCORES EFFECTIVE STRATEGIES The year 2000 ended much as it began, with quarterly earnings records and results that significantly outperformed the property and casualty insurance industry in both growth and profitability. However, to look at something in its entirety often ignores the significance of its component parts. A closer look at the chapters within the Midland "book" reveals an interesting story of achievement in 2000 and in our positioning for future success. While we continued to set performance records and outdistance the competition, it was anything but "business as usual" during a year in which we aggressively pursued new product opportunities and established key new business relationships. Some of our tactical plans evolved in 2000 to reflect new challenges and opportunities within our targeted markets. But, we did not waver from the core strategies and operational framework that enabled us to produce record results and deliver on our promise of being an indispensable partner to both business partners and policyholders alike. FOURTH CONSECUTIVE YEAR OF RECORD OPERATING EPS The momentum we carried into 2000 was evident in yet another year of record results for the company. Net operating income grew 10.8% on a per share basis to $31.8 million, or $3.39 per share (diluted), compared with $28.9 million, or $3.06 per share (diluted), in 1999, on a 13.9% increase in revenue to $534.4 million from $469.1 million. Net income (including capital gains) rose 14.5% on a per share basis to a record $35.5 million, or $3.78 per share (diluted), with return on beginning equity at 13.7% in 2000, as compared to a projected 6.5% for the property and casualty industry. Midland's total shareholders' equity reached $283.2 million in 2000, with book value per share increasing 16% to $31.46 from $27.11 in 1999. Book value per share has grown at a compounded annual rate of 12.7% over the last five years. DISTRIBUTION FLEXIBILITY DRIVES 2000 SUCCESS The success of our specialty insurance operations, through the companies of American Modern Insurance Group, was driven by the strength of relationships cultivated over the years in our multi-channel distribution network. Our outstanding 2000 results demonstrated that we have achieved an important degree of insulation against the impacts of flat or decreasing new manufactured housing sales by fostering and developing new relationships with key general agent partners and by enhancing existing relationships in all channels of distribution. Despite cyclical challenges in our Point of Sale and This page includes a bar chart with the following data: MIDLAND'S COMPOUNDED ANNUAL GROWTH RATE IN OPERATING EARNINGS PER SHARE 10 YR 12.4% 5 YR 16.6% 1 YR 10.8% Caption: Midland's operating earnings per share has grown at a compounded annual rate of 16.6 percent during the last five years. 2 Lender channels of distribution, we were able to maintain the kind of growth and profitability that reaffirm the viability of our strategic direction and bode well for the future of your company. Our success in 2000 and, more specifically, beyond 2000, was enhanced in August when we reached agreement with GuideOne Insurance to reinsure its motorcycle, watercraft and snowmobile business and, eventually, write the business on our own paper. That decision has helped reinforce relationships with many of our current business partners and has produced encouraging new relationships with thousands of producers interested in writing our other specialty products. So then, it was a prosperous and rewarding year for all of Midland's operations. Direct and assumed written premium for our property and casualty operations grew 6.1% to $501.0 million in 2000. Credit Life premium rose 87.3% to $39.7 million. Manufactured housing direct and assumed written premium reached $338.6 million in 2000, an increase of 4.4% over 1999, in a year that saw manufactured housing shipments decline by an estimated 30% from the prior year. EMPHASIS ON UNDERWRITING: COMBINED RATIO OF 96.2% American Modern's commitment to risk management and underwriting discipline was again reflected in the company's 2000 underwriting profits. For the fourth consecutive year, American Modern reported a combined ratio of less than 97.0%, with a combined ratio of 96.2% in 2000 compared to 94.4% in 1999. While weather-related catastrophe losses in 2000 were modest by recent standards, we did experience an increase in non-catastrophe weather-related losses and a slight increase in our fire loss ratio. Over the last four years, the company's average combined ratio of 95.8% has set an enviable standard, far better than averages for the rest of the property and casualty industry. INVESTMENT INCOME RISES 21.7% Midland continues to utilize disciplined investment strategies that focus on balancing current income and total return, while maintaining an emphasis on safety and liquidity. During 2000, the market value of American Modern's invested assets grew 13.6% to $693.1 million, while pre-tax investment income increased 21.7 percent to $30.8 million for the year. The outstanding portfolio growth in 2000 was primarily due to the investment of more than $70 million of cash flow from operations. M/G TRANSPORT DELIVERS A 16.1% RETURN ON EQUITY M/G Transport, our transportation subsidiary, realized significant earnings growth in 2000 thanks to increased demand for barite and the return to more normal shipping patterns for petroleum coke. M/G contributed total revenue in 2000 of $33.1 million while pre-tax operating profits increased to $2.8 million in 2000 from $1.8 million in 1999. Cash generated from M/G Transport operations was $4.7 million compared with $4.1 million in 1999. These operating results produced an impressive 16.1% return on beginning equity for M/G in 2000. M/G continues to successfully meet the needs of a market niche, making it a profitable investment for The Midland Company. EVOLVING VALUE CHAIN PUTS THE FOCUS ON POLICYHOLDERS At the heart of our growth strategies lies our conviction that we can continue to effectively achieve organic growth within the markets we currently serve, even as those markets mature and become more attractive This page contains a bar chart with the following data: MIDLAND'S COMPOUNDED ANNUAL GROWTH RATE IN BOOK VALUE 10 YR 12.1% 5 YR 12.7% 1 YR 16.0% Caption: Strong growth in Midland's book value in 2000 of 16 percent exceeded the Company's 10-year average of 12.1 percent. 3 to our competition. But, to achieve that goal, we must assume an ever increasing share of the responsibility-in cooperation with our business partners-for the implementation of strategies that will deepen our understanding of policyholder needs and desires. Only then can we effectively enhance individual relationships with them, improve retention and, in the end, deliver shareholder value to you. What's driving this renewed emphasis on the policyholder? Like most industries, the insurance industry has traditionally developed systems designed to serve policyholders through intermediaries, with no provision for direct access by the policyholder. But, with the advent of the Internet, that has changed irrevocably. We now must design systems that anticipate the access requirements of both the intermediary and the policyholder...systems that give customers the real-time capability for self-servicing their policy needs while reinforcing their connectivity with the agents who serve them. TRAINING AND TECHNOLOGY FUEL CONNECTIVITY Customer centricity is more than just friendly customer service. It's an attitude that pervades each and every customer encounter and at its core lies the belief that each customer is unique and deserving of individual attention... that lasting relationships are forged from a series of encounters that clearly put the customer's priorities before our own. Actions taken in 2000 brought us closer to that objective. Specialization and extensive training within our Customer Care area equipped associates to respond more effectively to policyholder needs. Internet based reporting of claims and policy change requests gave customers another flexible service alternative. Also, by setting the framework in 2000 for better data capture in 2001 and beyond, we are systematically enhancing the infrastructure to deliver affordable value to policyholders directly through our own associates and indirectly through collaboration with business partners. We are passionate about enhancing our relationship with policyholders. And, that passion glows bright in our implementation of strategies that streamline processes and create efficiencies. To that end, we will continue to reallocate resources into the strategic and selective implementation of Customer Relationship Management methodologies and focused Policyholder Advocacy functions in the years ahead. 2001: A CYBERSPACE ODYSSEY As envisioned many years ago, the dawning of the new millennium finds us on the verge of a liberating new odyssey through space. And, while the mysteries of outer space still tickle our curiosities and dreams, it's the practical reality of cyberspace that now satisfies our need for exploration and discovery. It's a voyage into efficiency and convenience that Midland has taken very seriously. Through the harnessing of the energies and imaginations of our associates, we have prepared well for 2001 and beyond. We have delivered Web- based policyholder inquiry capabilities to our producers and have offered them the convenience of on-line access to policy and marketing forms. Beginning in 2001, we will provide Web-based access to quoting and processing systems for various specialty products and move in the direction of enhanced self-service capabilities for agents and policyholders alike. PRPARED TO DELIVER ON THE PROMISE OF THE FUTURE As we prepare to deliver on more and more of the promise of the future, we remain vigilant in protecting This page contains a bar chart with the following data: AMERICAN MODERN'S PROPERTY & CASUALTY COMPOUNDED ANNUAL PREMIUM GROWTH 10 YR American Modern 14.6 Industry 4.0 Caption: Over the last 10 years, American Modern's premiums grew at over three times the industry average. American Modern's "true" specialty orientation and effective multi-channel distributions strategies have helped it consistently outperform the property and casualty industry. 4 and enhancing the assets that have driven our successes in the past. Our people, products, services and business partners continue to provide the impetus for the profitable growth that lets us deliver enhanced shareholder value to you. They are the main reasons why, with the 6.7% increase approved in January 2001, the Midland Board of Directors has been able to increase the indicated annual dividend to shareholders for 15 consecutive years. This represents a compound annual growth rate of 11% during that time. To underscore our confidence in the company's long-term strategies and to take advantage of what we believed to be an undervaluation of Midland's stock in the market, management repurchased 500,000 shares of Midland stock through December 31, 2000, at an average purchase price below book value. And, at its January 2001 meeting, the Board of Directors authorized management to repurchase an additional 500,000 shares of Midland common stock, reflecting continuing optimism over the company's future. We thank you for your continued confidence and support. And, while we take pride in celebrating your company's achievements in 2000, we take even greater pride in an organization that has embraced an ambitious vision of the future...an organization that has effectively commingled values with the demands of a constantly evolving marketplace. We are prepared to meet the inevitable challenges of that future through an uncompromised commitment to the building of indispensable relationships with business partners, policyholders, associates and shareholders alike. It is on that foundation and with that incredible array of talent that we face the future with confidence and clarity of purpose. This page includes a photo with the following caption: From left, Joseph P. Hayden III, Chaiman and Chief Operating Officer and John W. Hayden, President and Chief Executive Officer 5 SUSTAINABLE SUCCESS IS THE LEGACY OF VISIONARY LEADERSHIP AND UNCOMPROMISED PRINCIPLE Someone certainly must have realized the importance of vision and principle long before it became a staple at Midland. But, no one, in our experience, better epitomized the confluence of vision and principle than did J. P. Hayden, Jr., Chairman of the Executive Committee of the Board, and Michael J. Conaton, formerly Vice Chairman of the Board, who both retired from their daily activities on April 1, 2000. Mr. Hayden served the company for 50 years, starting as a loan collector for the small finance company and rising to its Chairman and CEO. Mr. Conaton joined the company in 1961 as its Treasurer and along the way, served as Chief Financial Officer and its President before retiring as its Vice- Chairman. The two also played major roles in helping to constantly redefine the company's vision in light of rapidly changing marketplace dynamics during the last two decades of the twentieth century. That vision included the transition of Midland to a publicly held specialty company and our focus on manufactured housing business, which remains the foundation of our insurance operations. No words can convey the respect and admiration we feel for what they have accomplished at Midland. But, more than "what" they accomplished, it's "how" they went about doing it, with integrity, purpose and responsibility to others that truly distinguishes them and their legacy to all of us. They have created a template for success that will serve us well into the twenty-first century. They viewed themselves as stewards of the business for the benefit of all of its stakeholders. Their roles included their self imposed sense of obligation for making the workplace and the community better places. They passed along a group of core values that serve as the foundation for the way business should be conducted between us and our associates, our business partners, and our customers. We hold ourselves accountable to these standards. It is with the benefit of their vision and tutelage that we confidently accept that responsibility and, once again, thank them for the legacy of professionalism, honesty, innovation and success that will set the standards of excellence for many generations to come at Midland. And, it is why we acknowledge, with sincere personal and professional gratitude, the remarkable achievements of these two men and note their contributions to Midland's emergence as a leader in the specialty insurance market. As protectors of our corporate values and stewards of creative thinking, they have served as mentors and role models for us, the next generation of Midland leadership. This page includes a photo with thefollowing caption: From left, J.P. Hayden, Jr., Chairman of the Executive Committee of the Board and formerly Midland chairman and CEO; and Michael J. Conaton, formerly President and Vice Chairman of the Board 6 AMERICAN MODERN INSURANCE GROUP A SPECIALTY INSURANCE COMPANY WITH A DEFENSIBLE NICHE The Midland Company derives approximately 94 percent of its revenue from American Modern, a national leader in providing specialty insurance products and services. American Modern has served the manufactured housing sector for more than 35 years with efficiency, effectiveness and unmatched understanding of the specialty insurance needs of agents and policyholders alike. While manufactured housing products comprise the largest portion of American Modern's business, the company also has a strong presence in other specialty lines, including watercraft, motorcycle, recreational vehicle, homeowners, lower valued homes, warranty products, dwelling fire, mortgage fire, collateral protection, specialty 7 automobile, credit life, long-haul truck, commercial and excess and surplus lines. With the knowledge that current customers form the foundation for future growth, the company renewed its commitment to customers in 2000 - "staying in touch with its future" - through key initiatives in customer service. These strategies are part of the company's value creation strategy-ways to build the business base and distinguish American Modern from its competition. REACHING KEY MARKETS THROUGH MULTIPLE DISTRIBUTION CHANNELS Quality service requires that American Modern understand not only policyholders, but the distributors of its products as well. The company's extensive reach, through multiple channels of distribution, has provided customers with convenient entry points that satisfy virtually any insurance shopper's needs while enabling the company to cross-sell products and develop multi-layered relationships. American Modern distributes products through licensed agents, dealers, manufacturers, lenders and others. It's a wide net, and one that is tended with care. While the company nurtures existing distribution channels, it also looks for new partners. A HIGHLY FOCUSED "TRUE" SPECIALTY COMPANY During 2000, direct and assumed written premium reached $338.6 million in the manufactured housing segment, an increase of 4.4% over 1999. That increase came despite an estimated 30% drop in manufactured home shipments, a declining availability of manufactured housing financing and changes in emphasis for some key lending partners - testament both to the challenges American Modern faces and the value with which policyholders view American Modern. To paraphrase an old adage: like time, markets wait for no one. One example is the rapid evolution of the manufactured housing market toward multi- sectional homes on private property, which led to the introduction of a new American Modern Land Home product in key states to serve this growing need. While initial results in 2000 were modest, American Modern is expanding its rollout of the product in 2001 and fine-tuning it to meet market needs, with the expectation that it will be available in 13 states by the end of the year. GROWTH THROUGH STRATEGIC ALLIANCE Strategic alliances with key partners have opened doors to new manufactured housing This page includes a bar chart with the following data: AMERICAN MODERN PREMIUM VOLUME (dollars in millions) YR 00 540.7 YR 99 493.2 YR 98 457.6 YR 97 435.0 YR 96 399.1 Caption: American Modern's direct and assumed written premiums grew 6.1 percent in 2000 to $540.7 million. 8 markets for American Modern. For example, a strategic alliance with GEICO enabled the auto insurance leader to serve their customer base with the narrow specialty focus that is a hallmark of American Modern. Also, strategic alliances with businesses such as GuideOne Insurance during 2000 and early 2001 positioned American Modern for continued opportunity in the years ahead. TOP-LINE GROWTH OF 9.7% REFLECTS PRODUCT DIVERSITY American Modern's diverse array of specialty product and services resulted in top-line growth of 9.7% for the year, which includes the contribution of the company's fee-based businesses, credit life and property and casualty insurance premiums written. American Modern's non-mobile home property and casualty insurance premiums were up 26% for the fourth quarter and 10% for the year. This growth was directly influenced by new relationships in the market, especially with GuideOne Insurance. The agreement with GuideOne not only opened new motorsports markets to American Modern, but also expanded the reach of its other specialty products through thousands of producers who wrote GuideOne's motorcycle, watercraft and snowmobile policies. American Modern also set the stage for continued growth in its recreational vehicle line. During 2000, the company introduced products and services that complement core competencies. RV Guard, for example, covers the mechanical breakdown of motor homes and travel trailers, providing an extended service contract, roadside assistance and a network of preferred service providers. RV Dealer's Choice is another program that introduced a new level of flexibility and choice to recreational vehicle dealers who have differing insurance needs. Watercraft also was positioned strategically for growth during 2000 and beyond. American Modern expanded its watercraft line both organically and through its new GuideOne relationship. Our First Choice boat insurance program appears poised to garner additional market share in 2001, while our newly named Jetsport personal watercraft program has enhanced features that respond to agent and customer needs. The expansion of the company's suite of home and dwelling products- named HomeSuite Property Protection Solutions-is expected to play a key role in future growth with the introduction in 2001 of a new EZChoiceH3 product aimed at homeowners who don't meet the This page includes a pie chart with the following data: AMERICAN MODERN P&C DISTRIBUTION MIX (Gross Written Premiums) Point of Sale 134.4 Lender 170.5 Agency 117.0 Strategic Alliances 15.5 Financial Services 36.9 All Other 28.8 Caption: American Modern has developed strong relationships in multiple distribution channels, including agency, lender, dealer and manufacturer. These indispensable partnerships provide customers with flexible access to American Modern's specialty products. 10 underwriting criteria of the standard market. A disciplined approach to underwriting has positioned American Modern's commercial lines operations to sustain controlled growth even as other carriers are exiting the marketplace. Commercial programs are individually tailored to meet the needs of the customer. Superior customer service, loss prevention and claim services add to the differentiation of American Modern commercial products in the specialty marketplace. CREDIT LIFE PREMIUM UP 87.3% In the financial services arena, American Modern integrated multiple divisions to strengthen core competencies and achieve new synergy. American Modern's new Financial Services Division unites credit life, bank, credit union, mortgage lender programs and Ameritrac loan tracking services under one umbrella, creating streamlined service for financial institutions. The new structure allows American Modern to respond quickly to consolidation within the financial services industry, developing new accounts and further cultivating existing relationships. This structure-combined with quality relationships and deep expertise-helped grow credit life premiums 87.3% in 2000 to $39.7 million. Ameritrac also took key steps to redefine its brand position to create awareness outside of the manufactured housing segment, creating new opportunities and new paths to profits. TRAINING AND WEB-BASED SEVICES In 2000, changes in alignment and responsibility empowered champions throughout the organization who could effectively develop and implement strategies that would strengthen relationships at customer contact points and deliver added value to all of our targeted audiences. New tools-including Web-based modernLINK services-also have brought American Modern closer to the customer. The roll-out of modernLINK technology began late in 2000 and will continue during 2001, helping to enhance producer services and, eventually, to facilitate policyholder interaction. A new Data Model in 2001 also will enable a more achievable focus on customer centricity, providing the information resources needed to build one-on- one relationships with policyholders and to respond quickly to changes in the marketplace. Training, too, plays a large role in serving the needs of customers. American Modern knows the specific risks of each niche, and works closely This page includes a pie chart with the following data (amounts in millions): AMERICAN MODERN PRODUCT MIX (Gross Written Premiums) Manufactured Homes 338.6 Park & Dealer 31.9 Site Built Dwelling 25.1 Collateral Protection 22.9 Watercraft 15.5 Mortgage Fire 14.1 Long Haul Truck 12.2 Motor Sport 6.4 Credit Life & Related 39.7 All Other 34.4 Caption: American Modern is a leader in the manufactured housing isurance market. American Modern also offers customers a variety of other specialty products and services. 12 with agents to provide coverage that is as unique as the policyholder. American Modern always has provided best-in-class training, and continued that commitment during 2000. The horizon remains bright for 2001, with efforts focused on training at the retailer level, the agent level and, of course, at the associate level. The company recognizes that superior training and ongoing support have helped make the company an indispensable partner to its customers. DIFFERENTIATION THROUGH PRODUCT CLAIM AND EXCELLENCE American Modern stands behind all of its products with superior claim service that is fast, efficient and personal. During 2000, 89% of claims were closed in 30 days or less. And, following Christmas-time tornadoes in Alabama, 82% of claims reported to the Tuscaloosa catastrophe office were settled in less than seven days. The Claims team didn't stop there, however. They proactively searched the company's customer files to identify and then contact policyholders who might need assistance following the storms. The Claims team also strengthened "customer connections" in 2000 by implementing other initiatives designed to recognize policyholder needs. For example, they developed a dedicated Auto Unit, with expertise in accident claims. And, they introduced 24/7 accessibility to claims adjusters to help policyholders through emergency situations. American Modern staff adjusters handled more than 90% of the company's claims in 2000, ensuring fast and cost-effective settlement. STAYING IN TOUCH WITH OUR FUTURE In recognizing American Modern as one of the top 50 property and casualty insurance companies in the country for the second straight year, the Ward's Financial Group reinforced what many have known all along. Namely, that the company's commitment to conservative investment strategies, disciplined underwriting and a strong sense of corporate values continues to deliver the kind of consistent reliability that meets shareholder, agent, policyholder and employee expectations year in and year out. Staying in touch with the future has reaped rewards on American Modern's top and bottom lines, and in the value its business partners place on their relationship with the company. Staying in touch with its future - while remaining true to the past and mindful of the present - has ensured staying power for American Modern Insurance Group in its selected markets. This page includes a pie chart with the following data: AMERICAN MODERN'S P&C STATUTORY UNDERWRITING MARGIN (10 Year Average) 2000 American Modern 4.6% Industry -6.5% Caption: American Modern's underwriting discipline is evident in its 2000 statutory combined ratio of 95.2 percent, the fourth consecutive year below 97.0 percent. Proper pricing and risk management have resulted in an underwriting profit in 10 of the last 11 years. 14 CUSTOMER CARE CONNECTIONS We have a theme in Customer Care. It's only four words long. But those four words-"More than Just Service"-say a lot about the culture of our company and our commitment to our customers. Naturally, serving customers is important. But we believe that service is even more effective when you're able to build positive relationships...relationships that can help you truly connect with your customers and can transcend minor bumps in the road. Of course, wishful thinking seldom makes anything worthwhile happen. That's why we've created a Policyholder Services team totally dedicated to customer satisfaction...a team that gains depth of experience and understanding by dealing only with policyholders. That's why we conduct regular policyholder surveys to understand customer thoughts and feelings...information and attitudes that can help us develop new services and products to meet their needs. And that's why we've created a Policyholder Advocacy Department to represent the best interests of our customers throughout the organization and to deliver added value in any way possible. "More than Just Service" is an unshakable attitude. It's a way of life that puts the policyholder squarely in the center of our universe...a universe that revolves around our ability to establish lasting relationships with those who mean the most to our success. -Bob Fulcher Senior Vice President, Customer Care 9 TECHNOLOGY CONNECTIONS The emphasis we've placed on process management over the last few years has helped us squeeze inefficiencies out of the organization and, in turn, commit a higher percentage of our discretionary budget to the development and leveraging of technological solutions. For example, our WebGen services have already begun to facilitate improvements in the efficient delivery of policy services to customers. And we've only just begun. Down the road, our agents will have the option to pass a variety of self-servicing capabilities along to their customers for even more "real time" response to needs and questions. Our goal in the delivery of technological solutions is quite simple: We are going to deliver a suite of services that can give our agents a differentiable advantage in serving our customers' needs. We've taken giant steps in the last couple of years to carefully nurture that vision...to translate it into competitive deliverables that match up well with our agents'and customers' needs. And, all that preparation is about to come into fruition in 2001 and beyond. -John Campbell Chief Information Officer 11 CLAIM CONNECTIONS Catastrophes are predictably unpredictable. So, they don't always strike when it's convenient for our claims team. As a matter of fact, they seem to gravitate toward holidays and vacations. And yet, responding to them is neither a hardship nor just a duty for us. It's a mission. And, while each person in our company has a critical role in the success of our mission, we're the lucky ones who get to deliver on the promise we made to our customer. We enjoy one of those rare professions that regularly offers up the opportunity to help someone in need...to really make a difference on a personal and emotional level. So, when it comes to claim service, "good enough" isn't good enough for us. That's why, when those tragic storms struck Alabama in mid-December, we used our policy files to go looking for customers in ravaged areas rather than waiting for them to call us. That's why our Catastrophe Team postponed their own holiday plans to close all but a handful of the claims before Christmas. And, that's why, more than ever, we're developing systems, standards and solutions that give our customers fast access, compassionate service and quick settlement when they need a helping hand. -Dave McNutt Senior Vice President, Claims 13 PRODUCER CONNECTIONS There's no doubt that, as a company, we're doing more to get close to our policyholders...to get to know their individual needs and preferences. But, no matter what we do in 2001 or several years from now, our strongest customer bond will always be through our agent...the thousands of local professionals who do "customer relationship management" simply by living their lives as active community participants in PTA meetings, high school sporting events and church festivals across the United States. If we've been guilty of anything in the past, it has been to rely too much on our business partners to build and maintain customer relationships on their own. But, we're working hard to change that...to take a more active role in supporting our agents' efforts by providing more tools, better information and enhanced training to help them build strong relationships that endure the test of time. Some people think that true customer connectivity can only occur on a direct basis, with the company and the policyholder talking to each other. Well, I think our agents have disproved that myth. So, it's our job to develop proactive customer-centric strategies that complement their efforts rather than compete with them. -Kevin Morreale Senior Vice President, Sales 15 AMERICAN MODERN INSURANCE GROUP INVESTMENT PORTFOLIO This page contiains two bar charts with the following data: MARKET VALUES (dollars in millions) 96 97 98 99 00 Government $172.2 $201.4 $177.1 $140.5 $156.8 Municipal 71.5 88.2 168.4 170.9 178.9 Corporate 41.1 79.0 79.3 121.0 133.9 Cash Equivilants 51.7 34.6 29.3 38.6 62.3 Equities 63.4 92.3 132.8 125.3 146.0 Other 0 0 0 11.8 11.4 PRE-TAX INVESTMENT INCOME (dollars in millions) 96 97 98 99 00 Capital Gains $ 2.7 $ 4.2 $ 6.4 $ 3.5 $ 4.6 Operations 19.0 22.2 24.7 26.0 31.8 Caption: American Modern manages its investment portfolio with a focus on both total return and current income. Market value for the portfolio increased to $693.1 million in 2000 from $610.4 million at year-end 1999. Pre-tax investment income rose 21.7 percent in 2000 to $30.8 million from $25.3 million in 1999. After-tax capital gains increased in 2000 to $3.7 million, or 39 cents per dilluted share, compared with $2.3 million, or 24 cents per dilluted share, in 1999. Net unrealized capital gains increased in 2000 to $74.1 million from $66.7 million in 1999. ANNUALIZED TOTAL RETURN (Total return is the rate of return on a portfolio that takes into consideration both interest income and dividends plus the change in the market value.) Periods Ending December 31, 2000 -------------------------------- 1 Year 3 Year 5 Year -------------------------------- Equities TOTAL RETURN: American Modern Composite 1.3% 11.7% 22.8% American Modern Excluding Investment In Firstar -6.9% 14.3% 18.0% American Modern Firstar Only 14.1% 9.1% 31.1% S&P 500 -9.1% 12.3% 18.3% Fixed Income TOTAL RETURN: American Modern After Tax 7.9% 4.7% 4.5% After Tax Lehman Brothers Intermediate Government/Corporate Index 7.6% 3.9% 3.8% Fixed Income PRE-TAX equivalent YIELD as of DECEMBER 31, 2000 6.3% AVERAGE MATURITY AS OF DECEMBER 31, 2000 5.1 years DURATION AS OF DECEMBER 31, 2000 3.6 years 16 M/G TRANSPORT M/G Transport and its sales and marketing arm, MGT Services Inc., continue to successfully fill a profitable niche in the transportation marketplace and today account for 6 percent of Midland's total revenues. Collectively known as M/G, this barge affreightment subsidiary of Midland operates in New Orleans, Louisiana. In 2000, M/G's pre-tax earnings increased to $2.8 million from $1.8 million in 1999, a 56% increase. The dramatic growth was primarily due to increases in the shipment of petroleum coke, barite and sugar. Rising oil prices played a key role in the results, as the demand for barite-a lubricating mud used in oil drilling-increased significantly. Another factor was the return to more traditional shipping patterns for petroleum coke, creating a greater overlap with M/G's geographical service area. With oil prices likely to remain strong in 2001, management remains confident that M/G will continue to produce positive results that will contribute to Midland's earnings and operating cash flow. EFFICIENCY IS THE HALLMARK OF M/G M/G provides superior service to large industrial clients, transporting dry cargo such as petroleum coke, barite, sugar, iron ore, grain, steel pipe and other dry commodities. The operations are concentrated on the Lower Mississippi River and westbound on the Gulf Intercoastal Waterway. As of December 31, 2000, M/G serves its customers with a fleet of 219 jumbo hopper barges, owned or leased by the company. M/G supplements its fleet by chartering equipment or renting space from other operators as necessary to meet customer needs, thus providing operating flexibility. M/G has been and continues to be a sound investment for Midland, in particular because of its efficient operations. The company generted $33.1 million in revenue and $4.7 million in cash flow in 2000, with an experienced staff of 15 employees who know how to efficiently exploit the niche market in which they operate. The company remains attuned to market conditions and will respond with acquisitions as necessary to meet customer demand. This page contains a bar chartwith the following data: M/G TRANSPORT RETUN ON BEGINNING EQUITY YR 00 16.1% YR 99 6.1% YR 98 15.9% YR 97 20.0% 17 SIX YEAR FINANCIAL SUMMARY DATA THE MIDLAND COMPANY AND SUBSIDARIES For the Years Ended December 31, (Amounts in thousands, except per share data) 2000 1999 1998 1997 1996 1995 - --------------------------------------------- -------------------------------------------------------------- Income Statement Data Revenues: Insurance: Premiums earned $456,120 $400,991 $375,478 $311,159 $280,614 $263,006 Net investment income 30,774 25,292 23,908 21,332 18,269 16,107 Net realized investment gains 4,646 3,486 6,354 4,170 2,690 2,373 Other insurance income 8,784 6,793 2,508 1,557 1,602 618 Transportation 33,119 31,327 33,059 34,933 34,064 30,371 Other 979 1,237 1,055 617 499 752 ------------------------------------------------------------- Total 534,422 469,126 442,362 373,768 337,738 313,227 ------------------------------------------------------------- Costs and Expenses: Insurance: Losses and loss adjustment expenses 240,680 204,365 210,015 171,163 172,426 136,211 Commissions and other policy acquisition costs 137,053 114,212 103,169 79,518 81,533 80,520 Operating and administrative expenses 70,755 66,541 54,309 49,118 41,355 39,475 Transportation operating expenses 28,828 29,255 28,287 30,079 31,163 28,033 Interest expense 4,132 4,067 4,991 4,983 4,829 3,037 Other operating and administrative expenses 2,305 6,973 4,064 4,204 3,115 3,462 ------------------------------------------------------------- Total 483,753 425,413 404,835 339,065 334,421 290,738 ============================================================= Income from Continuing Operations Before Federal Income Tax 50,669 43,713 37,527 34,703 3,317 22,489 Provision (Credit) for Federal Income Tax 15,206 12,534 10,595 10,336 (426) 6,441 ------------------------------------------------------------- Income from Continuing Operations 35,463 31,179 26,932 24,367 3,743 16,048 Loss from Discontinued Operations(a) - - - (6,817) (2,675) (6,496) ------------------------------------------------------------- Net Income $ 35,463 $ 31,179 $ 26,932 $ 17,550 $ 1,068 $ 9,552 ============================================================= Basic Earnings (Loss) Per Share of Common Stock(c): Continuing operations $ 3.91 $ 3.42 $ 2.99 $ 2.72 $ .42 $ 1.81 Discontinued operations - - - (.76) (.30) (.73) ------------------------------------------------------------- Total $ 3.91 $ 3.42 $ 2.99 $ 1.96 $ .12 $ 1.08 ============================================================= Diluted Earnings (Loss) Per Share of Common Stock(c): Continuing operations $ 3.78 $ 3.30 $ 2.86 $ 2.63 $ .41 $ 1.74 Discontinued operations - - - (.74) (.29) (.70) ------------------------------------------------------------- Total $ 3.78 $ 3.30 $ 2.86 $ 1.89 $ .12 $ 1.04 ============================================================= Cash Dividends Per Share of Common Stock(c): $ .30 $ .27 $ .25 $ .23 $ .22 $ .21 ============================================================= 18 THE MIDLAND COMPANY AND SUBSIDARIES For the Years Ended December 31, (Amounts in thousands, except per share data) 2000 1999 1998 1997 1996 1995 - ---------------------------------------------- -------------------------------------------------------------- Balance Sheet Data Total Cash and Marketable Securities $701,048 $620,957 $593,857 $504,106 $403,804 $373,275 Total Assets 993,850 888,057 837,220 760,463 655,979 600,905 Total Debt 85,045 69,838 76,085 92,309 95,170 101,076 Unearned Insurance Premiums 357,185 312,838 255,115 240,340 208,417 190,948 Insurance Loss Reserves 135,887 133,713 125,496 120,134 95,830 68,347 Shareholders' Equity 283,177 258,002 248,832 197,026 159,688 156,595 Book Value Per Share(c) $ 31.46 $ 27.11 $ 26.61 $ 21.11 $ 17.50 $ 17.28 Common Shares Outstanding(c) 9,000 9,516 9,352 9,334 9,126 9,060 Other Data Midland Consolidated Operating Income from Continuing Operations(b) $ 31,755 $ 28,913 $ 22,802 $ 21,657 $ 1,995 $ 14,506 ============================================================== Operating Income Per Share from Continuing Operations(Diluted)(b,c) $ 3.39 $ 3.06 $ 2.42 $ 2.33 $ .22 $ 1.57 ============================================================== AMIG's Property and Casualty Operations Direct and Assumed Written Premiums $500,984 $472,041 $446,248 $422,982 $387,165 $376,330 Net Written Premium 469,215 439,863 391,770 342,310 290,355 285,306 Loss and Loss Adjustment Expense Ratio (GAAP) 52.9% 51.2% 56.1% 55.1% 61.8% 52.0% Underwriting Expense Ratio (GAAP) 43.3% 43.2% 40.8% 40.7% 42.5% 45.2% Combined Ratio (GAAP) 96.2% 94.4% 96.9% 95.8% 104.3% 97.2% Statutory Capital and Surplus 235,521 220,080 217,091 164,128 124,131 113,189 Net Written Premium to Statutory Surplus 2.0x 2.0x 1.8x 2.1x 2.3x 2.5x M/G Transport's Transportation Operations Net Revenues $ 33,119 $ 31,327 $ 33,059 $ 34,933 $ 34,064 $ 30,371 Net Income 2,338 1,169 2,994 3,126 1,938 1,585 Total Assets 28,878 31,683 41,576 44,544 41,458 48,375 Shareholders' Equity 10,054 11,245 19,075 19,081 15,658 34,219 Footnotes: (a) On September 29, 1997, the Company's sportswear subsidiary sold substantially all of its assets to Brazos, Inc., a subsidiary of Brazos Sportswear, Inc. The assets were sold for approximately $13.3 million in cash resulting in an after-tax loss on the disposal of approximately $3.3 million. (b) Represents income from continuing operations excluding net realized investment gains or losses, net of federal income taxes. (c) Previously reported share information has been adjusted to reflect a three-for-one common stock split effective May 21, 1998.
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Midland Company (the Company or Midland), through its wholly owned subsidiaries, is primarily a specialty property and casualty insurance company, with more than 60 percent of its premium volume related to insuring manufactured housing. In addition, Midland owns a barge chartering and freight brokerage operation that accounts for approximately 6 percent of its consolidated revenues. LINES OF BUSINESS AND REPORTABLE STATEMENTS The discussions of Results of Operations and Liquidity and Capital Resources are grouped according to Midland's three reportable segments: manufactured housing insurance, other insurance and transportation. A description of the operations of each of these lines of business is included below. Insurance (Manufactured Housing and Other Insurance) The Company's specialty insurance operations are conducted through American Modern Insurance Group (American Modern), a wholly-owned subsidiary of the Company and a holding company which controls six property and casualty insurance companies, two credit life insurance companies and five licensed insurance agencies. Other subsidiaries of American Modern offer warranty and extended service products, loan origination services and operate Ameritrac, American Modern's proprietary loan and lease tracking service. American Modern is licensed, through its subsidiaries, to write insurance premium in all 50 states and the District of Columbia. The majority of American Modern's business relates to physical damage insurance and related coverages on manufactured homes, generally written for a term of 12 months with coverages similar to conventional homeowner's insurance policies. Other insurance products include watercraft, motorcycle, recreational vehicle, homeowners, lower value homes, warranty products, dwelling fire, mortgage fire, collateral protection, specialty automobile, credit life, long-haul truck, commercial and excess and surplus lines. Transportation M/G Transport Services, Inc. and MGT Services, Inc. (collectively M/G Transport), the Company's transportation subsidiaries, charter barges and broker freight for the movement of dry bulk commodities such as petroleum coke, ores, barite, fertilizers, sugar and other dry cargos primarily on the lower Mississippi River and its tributaries. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Insurance Insurance Premiums Direct and assumed written premiums generated from American Modern's property and casualty and life insurance subsidiaries for the year ended December 31, 2000 increased 9.6% to $540.7 million from $493.2 million in 1999. Net earned premiums for the year increased 13.7% to $456.1 million from $401.0 million in 1999. The difference in growth rates between the direct and assumed written premiums and net earned premiums is due primarily to the impact of multi-year policies generated in prior periods coupled with changes in the levels of premiums ceded under a quota share reinsurance treaty. The growth in direct and assumed written premiums is due to volume increases in manufactured home and related coverages premium, all other property and casualty specialty insurance products and credit life direct and assumed written premium. Manufactured home and related coverages direct and assumed written premium increased 4.4% to $338.6 million in 2000 from $324.4 million in 1999. This increase was achieved in spite of an approximate 30% decrease in manufactured housing shipments in 2000. Direct and assumed written premiums of all other property and casualty specialty insurance products increased 10% to $162.4 million in 2000 from $147.7 million in 1999. Direct and assumed written credit life premium increased 87.7% to $39.7 million in 2000 from $21.2 million in 1999. Premium rate increases also contributed to American Modern's overall direct and assumed premium growth, but to a lesser degree than volume increases. 20 Other Insurance Income (Fee Income) American Modern's other insurance income increased to $8.8 million in 2000 from $6.8 million in 1999. This increase is primarily the result of the growth of American Modern's warranty, loan facilitation and agency fee businesses. Investment Income and Realized Capital Gains American Modern's net investment income (before taxes and excluding net realized capital gains) increased 21.7% to $30.8 million in 2000 from $25.3 million in 1999. The increase in investment income was primarily the result of the investment of positive cash flow generated from underwriting and investment activities coupled with a higher interest rate environment in 2000 compared to 1999. American Modern's investment portfolio increased 13.6% to $693.1 million in market value at December 31, 2000. This increase in the market value of the investment portfolio was the result of the investment of positive cash flow from underwriting activities, investment income, net realized capital gains generated from the portfolio and a $7.4 million increase in the unrealized appreciation in the market value of securities held. The increase in unrealized appreciation was primarily the result of the unrealized appreciation in American Modern's fixed income securities of $15.0 million and the increase in the market value of American Modern's investment in the common stock of Firstar Corporation. The market value of American Modern's investment in Firstar Corporation increased to $54.3 million at December 31, 2000 from $49.3 million at December 31, 1999. After-tax net realized capital gains increased to $3.0 million, $0.31 per share (diluted) in 2000, from $2.3 million, $0.24 per share (diluted) in 1999. Losses and Loss Adjustment Expenses (LAE) Insurance Losses and LAE increased 17.8% to $240.7 million in 2000 from $204.4 million in 1999. This increase was due to the continued growth in net earned premium plus increases in non-catastrophe weather related losses and fire-related losses. Catastrophe losses decreased in 2000 compared to 1999 with a catastrophe loss ratio of only 2.6% in 2000 compared to 5.6% in 1999. The overall after-tax impact of catastrophes was $7.4 million in 2000 as compared to $12.9 million in 1999. Commissions, Other Policy Acquisition Costs and Other Operating and Administration Expenses Commissions, other policy acquisition costs and other operating and administrative expenses increased 14.9% to $207.8 million in 2000 from $180.8 million in 1999. This increase is due primarily to the continued growth in net earned premiums and other insurance income coupled with an increase in the commission ratio due to a change in a quota share reinsurance agreement. Overall Property and Casualty Underwriting Results American Modern's property and casualty operations generated pre-tax underwriting income (property and casualty insurance premiums less losses, commissions and operating expenses) of $17.0 million in 2000 compared to $22.1 million in 1999. This resulted in a combined ratio of 96.2% in 2000 compared to 94.4% in 1999. The reasons for the change in the combined ratio have been described above. Transportation Transportation revenues increased 5.7% to $33.1 million in 2000 from $31.3 million in 1999. The increase was primarily due to increased demand for sugar and barite (a drilling mud used by offshore refineries) and to a one-time capital gain of $1.0 million from the sale of transportation equipment. Transportation's pre-tax profit increased, excluding the capital gain of $1.0 million, from $1.8 million in 1999 to $2.8 million in 2000 due primarily to the increased revenues from the shipment of sugar and barite commodities and changes in the shipping patterns in 2000 when compared to 1999. Corporate During 2000, Midland recorded a gain of $7.4 million from the curtailment and settlement of a portion of its pension plan. This gain was offset by excise taxes on the withdrawal of a portion of overfunded pension assets and by one-time expenses related to consulting agreements with retired executives. The net result of these transactions, exclusive of the excise tax, were included in the income statement as other operating and administrative expenses. The excise tax component was included in the Provision for Federal Income Tax. The net impact of these transactions was a net after-tax charge to earnings in 2000 of less than $200,000, or two cents per share on a dilutive basis. 21 YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Insurance Insurance Premiums Direct and assumed written premiums generated from American Modern's property and casualty and life insurance subsidiaries for the year ended December 31, 1999 increased 7.8% to $493.2 million from $457.6 million in 1998. Net earned premiums for the year increased 6.8% to $401.0 million from $375.5 million in 1998. The difference in growth rates between the direct and assumed written premiums and net earned premiums is due primarily to the growth in the amount of multi-year credit life insurance premium produced in 1999 compared to 1998. The growth in direct and assumed written premiums is primarily the result of volume increases in manufactured home and related coverages premium. Manufactured home and related coverages direct and assumed written premium increased 9.1% to $324.4 million in 1999 from $297.3 million in 1998. Direct and assumed written premiums of all other specialty insurance products (both property and casualty and life) increased approximately 5.3% to $168.8 million in 1999 from $160.3 million in 1998. This increase is due primarily to an overall increase in the volume of direct and assumed written premium produced by American Modern's credit life companies. In total, direct and assumed written credit life premium increased 72.2% to $21.2 million in 1999 from $12.3 million in 1998. Premium rate increases also contributed to American Modern's overall direct and assumed premium growth, but to a lesser degree than volume increases. Other Insurance Income (Fee Income) American Modern's other insurance income increased to $6.8 million in 1999 from $2.5 million in 1998. The increase is primarily the result of the growth of American Modern's warranty, loan facilitation and agency fee businesses. Investment Income and Realized Capital Gains American Modern's net investment income (before taxes and excluding net realized capital gains) increased 5.8% to $25.3 million in 1999 from $23.9 million in 1998. The increase in investment income was primarily the result of the investment of positive cash flow generated from underwriting activities and the continued growth of American Modern's investment portfolio. American Modern's investment portfolio increased $23.4 million to $610.4 million in market value at December 31, 1999. This increase in the market value of the investment portfolio was the result of the investment of positive cash flow from underwriting activities and investment income and net realized capital gains generated from the portfolio, offset, in part, by a $31.2 million decrease in the unrealized appreciation in the market value of securities held. The decrease in unrealized appreciation was primarily the result of a significant decline in the market value of American Modern's investment in the common stock of Firstar Corporation. The market value of American Modern's investment in Firstar Corporation declined to $49.3 million at December 31, 1999 from $72.4 million at December 31, 1998. After-tax net realized capital gains decreased to $2.3 million, $0.24 per share (diluted) in 1999, from $4.1 million, $0.44 per share (diluted) in 1998. Losses and Loss Adjustment Expenses (LAE) Insurance Losses and LAE decreased 2.7% to $204.4 million in 1999 from $210.0 million in 1998. This decrease was achieved despite the increase in earned premium and is due primarily to a decrease in the level of weather- related catastrophe losses, net of reinsurance, in 1999 compared to 1998. Although the number of weather-related catastrophes dropped to 27 in 1999 from 37 in 1998, their gross impact was much more severe in 1999, primarily because of Hurricane Floyd. The Company's catastrophe reinsurance program, however, substantially mitigated the financial impact of Hurricane Floyd and other catastrophes in 1999. Net weather-related catastrophe losses (after the effects of reinsurance recoveries and related reinstatement premiums) amounted to $19.8 million, on a pre-tax basis, representing 5.9 percentage points of the 94.4% combined ratio (ratio of losses and expenses as a percent of earned premiums) for the property and casualty operations in 1999. This compares to net weather- related catastrophe losses in 1998 totaling $33.9 million, on a pre-tax basis, representing approximately 9.2 percentage points of the 96.9% combined ratio for the property and casualty operations. 22 Commissions, Other Policy Acquisition Costs and Other Operating and Administration Expenses Commissions, other policy acquisition costs and other operating and administrative expenses increased 14.8% to $180.8 million in 1999 from $157.5 million in 1998. This increase is due primarily to the aforementioned continued growth in net earned premiums and other insurance income coupled with the effects of improvements in the underlying loss experience and changes in the level of reinsurance activities. Overall Property and Casualty Underwriting Results American Modern's property and casualty operations generated a pre-tax underwriting income (property and casualty insurance premiums less losses, commissions and operating expenses) of $22.1 million in 1999 compared to $11.1 million in 1998. This resulted in a combined ratio of 94.4% in 1999 compared to 96.9% in 1998. Transportation Transportation revenues decreased 5.2% to $31.3 million in 1999 from $33.1 million in 1998. The decrease was primarily the result of a reduced demand for the petroleum coke and barite (a drilling mud used by offshore refineries) products that affected shipping patterns in 1999 compared to 1998. In total, transportation's pre-tax profits decreased to $1.8 million in 1999 from $4.4 million in 1998. LIQUIDITY AND CAPITAL RESOURCES Holding Company Operations Midland and American Modern are holding companies which rely primarily on dividends and management fees from their subsidiaries to assist in servicing their debt, paying their operating expenses and paying dividends to their respective stockholders. The payment of dividends to these holding companies from many of American Modern's insurance subsidiaries is restricted by state regulatory agencies. Such restrictions, however, have not had, and are not expected to have, a significant impact on the Company's or American Modern's liquidity or their ability to meet their long or short-term operating, financing or capital obligations. Midland issues commercial paper, generally below the bank prime borrowing rates, and has $52 million of conventional short-term credit lines available at costs, not exceeding prime borrowing rates. Additional short-term borrowing lines are available at the discretion of various lending institutions with comparable rates. Outstanding interest bearing debt, not allocable to either the insurance or transportation operations, as of December 31, 2000 amounted to approximately $62.9 million. The December 31, 2000 balance of outstanding interest bearing debt consisted of $6.0 million in commercial paper, $17.9 million in mortgage obligations and $39.0 million in other short- term borrowings under conventional lines of credit. These short-term borrowings increased $19 million from $20 million in 1999 due primarily to the $13.9 million paid to acquire the Company's common stock coupled with the $6.1 million used to fund the Company's non-qualified pension plan. Expenditures for the acquisition of businesses and property, plant and equipment, other than for barge acquisitions discussed below, amounted to $3.8 million, $3.2 million and $4.9 million for years ended December 31, 2000, 1999 and 1998, respectively. The Company declared $2.8 million in dividends payable to its shareholders during 2000 compared to $2.6 million in 1999. The 500,000 shares of the Company's common stock authorized for repurchase by the Company's Board of Directors in October, 1999 was completed in 2000 at a total cost of $13.9 million and an average purchase price of $27.71 per share well below our book value per share. In January, 2001, the Company's Board of Directors authorized the repurchase of an additional 500,000 shares of the Company's common stock. 23 Insurance American Modern generates cash inflows primarily from insurance premiums, investment income, proceeds from sale of marketable securities and maturities of debt security investments. The principal cash outflows for the insurance operations relate to the payment of claims, commissions, premium taxes, operating expenses, income taxes, dividends to the Company and the purchase of marketable securities. In each of the years presented, funds generated from the insurance operating activities were used primarily to purchase investment grade marketable securities, accounting for the majority of the cash used in investing activities. The insurance products written by the Company's insurance subsidiaries are primarily property-related coverages that result in relatively rapid claim payments. The average maturity and duration of American Modern's debt security investment portfolio as of December 31, 2000 was approximately 5.1 years and 3.6 years, respectively, which management believes provides adequate asset/liability matching. American Modern also has a $40 million long-term credit facility available on a revolving basis at various rates. As of December 31, 2000, $20 million was outstanding on this credit facility. Cash flow from the insurance operations is expected to remain sufficiently positive to meet American Modern's future operating requirements and to provide for reasonable dividends to the Company. As of December 31, 2000, American Modern's property and casualty statutory surplus was $235.5 million resulting in a premium to surplus ratio of 2.0 for the year ended December 31, 2000. Transportation M/G Transport generates its cash inflows primarily from affreightment revenue. The primary outflows of cash relate to the payment of barge charter costs, debt service obligations, operating expenses, income taxes, dividends to the Company and the acquisition of capital equipment. Like the insurance operations, cash flow from the transportation operations is expected to remain sufficiently positive to meet future operating requirements while providing for reasonable dividends to the Company. The transportation subsidiaries entered into a seven-year lease in 2000 and a fifteen-year lease in 1999 on transportation equipment. Aggregate rental payments under these two leases over the next fourteen years will approximate $8.7 million. There were no other barge acquisitions during 2000 and 1999 and there are currently no commitments for any future barge acquisitions. Any future acquisitions would likely be financed through a combination of internally generated funds, external borrowings or lease transactions. As of December 31, 2000, the transportation subsidiaries had $2.1 million of collateralized equipment obligations outstanding. OTHER MATTERS Market Risk Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. The Company's market risk exposures are substantially related to American Modern's investment portfolio and changes in interest rates and equity prices. Each risk is defined in more detail as follows: Interest rate risk is the risk that American Modern will incur economic losses due to adverse changes in interest rates. The risk arises from many of American Modern's investment activities, as American Modern invests substantial funds in interest-sensitive assets. American Modern manages the interest rate risk inherent in its investment assets relative to the interest rate risk inherent in its liabilities. One of the measures American Modern uses to quantify this exposure is duration. By definition, duration is a measure of the sensitivity of the fair value of a fixed income portfolio to changes in interest rates. Based upon the 3.6 year duration of American Modern's fixed income portfolio at December 31, 2000, management estimates that a 100 basis point increase in interest rates ("rate shock") would decrease the market value of its $543.8 million debt security portfolio by approximately 3.6% or $19.6 million. 24 Equity price risk is the risk that American Modern will incur economic losses due to adverse changes in a particular stock or stock index. American Modern's equity exposure consists primarily of declines in the value of its equity security holdings. At December 31, 2000, American Modern had approximately $149.4 million in equity holdings, including $54.3 million of Firstar Corporation common stock. A 10% decrease in the market value of Firstar Corporation's common stock would decrease the fair value of its equity portfolio by approximately $5.4 million. At December 31, 2000, American Modern's remaining portfolio of equity securities had a beta coefficient (a measure of stock price volatility) of approximately 1.10. This means that, in general, if the S&P Index decreases by 10%, management estimates that the fair value of the remaining equity portfolio will decrease by approximately 11.0%. The active management of market risk is integral to American Modern's operations. American Modern has investment guidelines that define the overall framework for managing market and other investment risks, including the accountabilities and controls over these activities. Other Comprehensive Income For the Company, the only difference between net income and comprehensive income is the net change in unrealized gain on marketable securities. For the years ended December 31, 2000 and 1998, such net unrealized gains in equity securities increased (net of income tax effects) by $5.0 million and $26.4 million, respectively. For the year ended December 31, 1999, the net unrealized gains in equity securities decreased (net of income tax effects) by $21.1 million. For fixed income securities, the net unrealized gains increased by $1.6 million and $9.8 million for the years ended December 31, 2000 and 1998, respectively. For the year ended December 31, 1999, the net unrealized decreased by $11.8 million to a net unrealized loss. Impact of Inflation Management does not consider the impact of the change in prices due to inflation to be material in the analysis of the Company's overall operations. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" during 1998. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years beginning January 1, 2001. Adoption of SFAS 133 will not have a material impact on the reported results of operations or financial position of the Company. PRIVATE SECURITIES REFORM ACT OF 1995-FORWARD LOOKING STATEMENTS DISCLOSURE This Report contains forward-looking statements. For purposes of this Report, a "Forward Looking Statement", within the meaning of the Securities Reform Act of 1995, is any statement concerning the year 2001 and beyond. The actions and performance of the Company and its subsidiaries could deviate materially from what is contemplated by the forward-looking statements contained in this Report. Factors which might cause deviations from the forward looking statements include, without limitations, the following: 1) changes in the laws or regulations affecting the operations of the Company or any of its subsidiaries, 2) changes in the business tactics or strategies of the Company or any of its subsidiaries, 3) acquisition(s) of assets or of new or complementary operations, or divestiture of any segment of the existing operations of the Company or any of its subsidiaries, 4) changing market forces or litigation which necessitate, in management's judgment, changes in plans, strategy or tactics of the Company or its subsidiaries and 5) adverse weather conditions, fluctuations in the investment markets, changes in the retail marketplace or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. Any forward-looking statement speaks only as of the date made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. 25 CONSOLIDATED STATEMENTS OF INCOME THE MIDLAND COMPANY AND SUBSIDARIES Years Ended December 31, (Amounts in thousands, except per share data) 2000 1999 1998 - --------------------------------------- ------------------------------------ Revenues: Insurance: Premiums earned $456,120 $400,991 $375,478 Net investment income 30,774 25,292 23,908 Net realized investment gains 4,646 3,486 6,354 Other insurance income 8,784 6,793 2,508 Transportation 33,119 31,327 33,059 Other 979 1,237 1,055 ------------------------------------ Total 534,422 469,126 442,362 ------------------------------------ Costs and Expenses: Insurance: Losses and loss adjustment expenses 240,680 204,365 210,015 Commissions and other policy acquisition costs 137,053 114,212 103,169 Operating and administrative expenses 70,755 66,541 54,309 Transportation operating expenses 28,828 29,255 28,287 Interest expense 4,132 4,067 4,991 Other operating and administrative expenses 2,305 6,973 4,064 ------------------------------------ Total 483,753 425,413 404,835 ------------------------------------ Income Before Federal Income Tax 50,669 43,713 37,527 Provision for Federal Income Tax 15,206 12,534 10,595 ------------------------------------ Net Income $ 35,463 $ 31,179 $ 26,932 ==================================== Basic Earnings Per Share of Common Stock: $ 3.91 $ 3.42 $ 2.99 ==================================== Diluted Earnings Per Share of Common Stock: $ 3.78 $ 3.30 $ 2.86 ==================================== Cash Dividends Per Share of Common Stock $ .30 $ .27 $ .25 ==================================== See notes to consolidated financial statements. 26 CONSOLIDATED BALANCE SHEETS THE MIDLAND COMPANY AND SUBSIDARIES December 31, (Amounts in thousands) 2000 1999 - -------------------------------------- ----------------------------------- ASSETS Marketable Securities: Fixed income (cost, $534,038 in 2000 and $488,492 in 1999) $540,337 $479,772 Equity (cost, $74,983 in 2000 and $46,400 in 1999) 152,320 131,087 ----------------------- Total 692,657 610,859 ----------------------- Cash 8,391 10,098 ----------------------- Accounts Receivable-Net 70,396 60,426 ----------------------- Reinsurance Recoverables and Prepaid Reinsurance Premiums 46,030 43,151 ----------------------- Property, Plant and Equipment-Net 56,976 62,585 ----------------------- Deferred Insurance Policy Acquisition Costs 91,574 85,168 ----------------------- Other Assets 27,826 15,770 ----------------------- Total Assets $993,850 $888,057 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY Unearned Insurance Premiums $357,185 $312,838 ----------------------- Insurance Loss Reserves 135,887 133,713 ----------------------- Insurance Commissions Payable 22,181 20,291 ----------------------- Funds Held Under Reinsurance Agreements and Reinsurance Payables 2,803 3,097 ----------------------- Long-Term Debt 40,025 44,288 ----------------------- Other Notes Payable: Banks 39,000 20,000 Commercial paper 6,020 5,550 ----------------------- Total 45,020 25,550 ----------------------- Deferred Federal Income Tax 32,938 28,171 ----------------------- Other Payables and Accruals 74,634 62,107 ----------------------- Commitments and Contingencies - - ----------------------- Shareholders' Equity: Common stock (issued and outstanding: 9,000 shares at December 31, 2000 and 9,516 shares at December 31, 1999 after deducting treasury stock of 1,928 shares and 1,412 shares, respectively) 911 911 Additional paid-in capital 19,838 18,583 Retained earnings 239,679 207,005 Accumulated other comprehensive income 54,396 49,388 Treasury stock (at cost) (30,404) (15,786) Unvested restricted stock awards (1,243) (2,099) ----------------------- Total 283,177 258,002 ----------------------- Total Liabilities and Shareholders' Equity $993,850 $888,057 ======================= See notes to consolidated financial statements. 27 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands) Years Ended December 31, 2000, 1999, and 1998 - --------------------------------------------------------------------------- Accumulated Unvested Additional Other Compre Restricted Compre- Common Paid-In Retained hensiv Treasury Stock hensive Stock Capital Earnings Income Stock Awards Total Income - ------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1998 $911 $15,359 $153,797 $44,123 $(14,704) $(2,460) $197,026 Comprehensive income: Net income 26,932 26,932 $26,932 Increase in unrealized gain on marketable securities, net of related income tax effect of $14,207 26,384 26,384 26,384 --------- Total comprehensive income $53,316 ========= Purchase of treasury stock (1,271) (1,271) Issuance of treasury stock for options exercised and other employee benefit plans 620 738 1,358 Cash dividends declared (2,331) (2,331) Amortization and cancellation of unvested restricted stock awards (32) (56) 822 734 ------------------------------------------------------------------------- Balance, December 31, 1998 911 15,947 178,398 70,507 (15,293) (1,638) 248,832 Comprehensive income: Net income 31,179 31,179 $31,179 Decrease in unrealized gain on marketable securities, net of related income tax effect of $(11,373) (21,119) (21,119) (21,119) -------- Total comprehensive income $10,060 ======== Purchase of treasury stock (3,709) (3,709) Issuance of treasury stock for options exercised and other employee benefit plans 315 1,985 2,300 Cash dividends declared (2,572) (2,572) Federal income tax benefit related to the exercise or granting of stock awards 940 940 Restricted stock awards 1,411 1,266 (2,677) Amortization and cancellation of unvested restricted stock awards (30) (35) 2,216 2,151 ------------------------------------------------------------------------- Balance, December 31, 1999 911 18,583 207,005 49,388 (15,786) (2,099) 258,002 Comprehensive income: Net income 35,463 35,463 $35,463 Increase in unrealized gain on marketable securities, net of related income tax effect of $2,661 5,008 5,008 5,008 -------- Total comprehensive income $40,471 ======== Purchase of treasury stock (15,432) (15,432) Issuance of treasury stock for options exercised and other employee benefit plans 109 959 1,068 Cash dividends declared (2,789) (2,789) Federal income tax benefit related to the exercise or granting of stock awards 479 479 Revaluation of stock options relating to a plan amendment 776 776 Amortization and cancellation of unvested restricted stock awards (109) (145) 856 602 ------------------------------------------------------------------------- Balance, December 31, 2000 $911 $19,838 $239,679 $54,396 $(30,404) $(1,243) $283,177 ========================================================================= See notes to consolidated financial statements.
28 CONSOLIDATED STATEMENTS OF CASH FLOWS THE MIDLAND COMPANY AND SUBSIDARIES Years Ended December 31, (Amounts in thousands) 2000 1999 1998 - -------------------------------------- ------------------------------------ Cash Flows from Operating Activities: Net income $ 35,463 $ 31,179 $ 26,932 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 9,151 10,287 8,798 Net gains from sale of investments (4,646) (3,486) (6,354) Increase in unearned insurance premiums 44,347 57,723 14,775 Increase in other accounts payable and accruals 13,375 4,002 7,417 Decrease (increase) in other assets (9,919) 5,402 (2,947) Increase in accounts receivable-net (9,861) (632) (602) Increase in deferred insurance policy acquisition costs (6,406) (21,206) (8,372) Decrease (increase) in reinsurance recoverables and prepaid reinsurance premiums (2,879) (9,196) 15,061 Increase in insurance loss reserves 2,174 8,217 5,362 Increase (decrease) in deferred federal income tax 2,105 239 (1,082) Increase in insurance commissions payable 1,890 19 1,239 Decrease in funds held under reinsurance agreements and reinsurance payables (294) (11,527) (819) Other-net (1,626) 1,725 698 ------------------------------ Net cash provided by operating activities 72,874 72,746 60,106 ------------------------------ Cash Flows from Investing Activities: Purchase of marketable securities (258,485) (207,321) (277,853) Sale of marketable securities 167,923 130,296 191,014 Maturity of marketable securities 45,316 35,913 35,034 Decrease (increase) in cash equivalent marketable securities (24,051) (9,588) 6,937 Acquisition of property, plant and equipment (3,833) (3,173) (4,948) Proceeds from sale of property, plant and equipment 2,924 345 6,003 Net cash used in business acquisitions (2,471) (2,636) - ------------------------------ Net cash used in investing activities (72,677) (56,164) (43,813) ------------------------------ Cash Flows from Financing Activities: Increase (decrease) in net short-term borrowings 19,470 4,028 (8,269) Purchase of treasury stock (15,432) (3,709) (1,271) Repayment of long-term debt (4,263) (10,275) (8,358) Dividends paid (2,747) (2,515) (1,746) Issuance of treasury stock 1,068 2,300 1,358 Issuance of long-term debt - - 403 ------------------------------ Net cash used in financing activities (1,904) (10,171) (17,883) ------------------------------ Net Increase (Decrease) in Cash (1,707) 6,411 (1,590) Cash at Beginning of Period 10,098 3,687 5,277 ------------------------------ Cash at End of Period $ 8,391 $ 10,098 $ 3,687 ============================== Interest Paid $ 4,200 $ 4,008 $ 4,946 Income Taxes Paid $ 12,457 $ 11,500 $ 10,690 See notes to consolidated financial statements. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE MIDLAND COMPANY AND SUBSIDARIES Years Ended December 31, 2000, 1999 and 1998 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company operates generally in two industries-insurance and transportation with the most significant business activities being in insurance. The accounting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to use numerous estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The accompanying consolidated financial statements include estimates for items such as insurance loss reserves, income taxes, various other liability accounts and deferred insurance policy acquisition costs. Actual results could differ from those estimates. Policies that affect the more significant elements of the consolidated financial statements are summarized below. Principles of Consolidation-The consolidated financial statements include the accounts of the Company and all subsidiary companies. Material intercompany balances and transactions have been eliminated. Marketable Securities-Marketable securities are categorized as fixed income securities (cash equivalents, debt instruments and preferred stocks having scheduled redemption provisions) and equity securities (common, convertible and preferred stocks which do not have redemption provisions). The Company classifies all fixed income and equity securities as available-for-sale and carries such investments at market value. Unrealized gains or losses on investments, net of related income taxes, are included in shareholders' equity as an item of accumulated other comprehensive income. Realized gains and losses on sales of investments are recognized in income on a specific identification basis. Property and Depreciation-Property, plant and equipment are recorded at cost. Depreciation and amortization are generally calculated using accelerated methods over the estimated useful lives of the respective properties (buildings and equipment - 15 to 35 years, furniture and equipment - 3 to 7 years, and barges - 20 years). Federal Income Tax-Deferred federal income taxes are recognized to reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. The Company continually reviews deferred tax assets to determine the necessity of a valuation allowance. The Company files a consolidated federal income tax return which includes all subsidiaries. Insurance Income-Premiums for physical damage and other property and casualty related coverages, net of premiums ceded to reinsurers, are recognized as income on a pro-rata basis over the lives of the policies. Credit accident and health and credit life premiums are recognized as income over the lives of the policies using the mean method and the sum-of-the-digits method, respectively. The Company generally does not consider anticipated investment income in determining premium deficiencies (if any) on short-term contracts. Policy acquisition costs, primarily commission expenses and premium taxes, are capitalized and expensed over the terms of the related policies on the same basis as the related premiums are earned. Selling and administrative expenses that are not primarily related to premiums written are expensed as incurred. Insurance Loss Reserves-Unpaid insurance losses and loss adjustment expenses include an amount determined from reports on individual cases and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the amounts are fairly stated, the ultimate liability may be in excess of or less than the amounts provided. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and any adjustments resulting therefrom are included in earnings currently. Insurance loss reserves also include an amount for claim drafts issued but not yet paid. Allowance for Losses-Provisions for losses on receivables are made in amounts deemed necessary to maintain adequate reserves to cover probable future losses. Reinsurance-The Company reinsures certain levels of risk with other insurance companies and cedes varying portions of its written premiums to such reinsurers. Failure of reinsurers to honor their obligations could result in losses to the Company as reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers 30 to minimize its exposure to significant losses from reinsurer insolvencies. In addition, the Company pays a percentage of earned premiums to reinsurers in return for coverage against catastrophic losses. The Company also assumes a limited amount of business on certain reinsurance contracts. Related premiums and loss reserves are recorded based on records supplied by the ceding companies. Transportation Revenues-Revenues for river transportation activities are recognized when earned based on contractual rates and the stage of transportation on inland waterway. Statements of Cash Flows-For purposes of the statements of cash flows, the Company defines cash as cash held in operating accounts at financial institutions. The amounts reported in the statements of cash flows for the purchase, sale or maturity of marketable securities do not include cash equivalents. Fair Value of Financial Instruments-The book values of cash, receivables, short-term notes payable, trade accounts payable and any financial instruments included in other assets and accrued liabilities approximate their fair values principally because of the short-term maturities of these instruments. The fair value of investments is considered to be the market value which is based on quoted market prices. The fair value of long-term debt is estimated using interest rates that are currently available to the Company for issuance of debt with similar terms and maturities. Stock Option and Award Plans-The Company has various plans which provide for granting options and common stock to certain employees and independent directors of the Company and its subsidiaries. The Company accounts for compensation expense related to such transactions using the "intrinsic value" based method under the provisions of Accounting Principles Board Opinion No. 25 and its related interpretations. New Accounting Standards-The Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" during 1998. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for fiscal years beginning January 1, 2001. Adoption of SFAS 133 will not have a material impact on the reported results of operations or financial position of the Company. Reclassifications-Certain previously reported amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year's classifications. 2. MARKETABLE SECURITIES Thousands of Dollars ------------------------------------------------ Gross Unrealized Market 2000 Cost Gains Losses Value - ----------------------------------------------------------------------------- Debt Securities: Governments $150,852 $ 3,923 $ 405 $154,370 Municipals 172,824 3,639 342 176,121 Corporates 132,304 1,962 2,478 131,788 Cash Equivalents 62,737 - - 62,737 Other-Notes Receivable 8,016 - - 8,016 Accrued Interest 7,305 - - 7,305 ----------------------------------------------- Total 534,038 9,524 3,225 540,337 ----------------------------------------------- Equity Securities 74,465 82,945 5,608 151,802 Accrued Dividends 518 - - 518 ----------------------------------------------- Total 74,983 82,945 5,608 152,320 ----------------------------------------------- Total Marketable Securities $609,021 $92,469 $8,833 $692,657 =============================================== Thousands of Dollars ----------------------------------------------- Gross Unrealized Market 1999 Cost Gains Losses Value - ---------------------------------------------------------------------------- Debt Securities: Governments $140,514 $ 255 $ 2,323 $138,446 Municipals 171,926 658 4,169 168,415 Corporates 122,413 16 3,157 119,272 Cash Equivalents 38,674 - - 38,674 Other-Notes Receivable 8,655 - - 8,655 Accrued Interest 6,310 - - 6,310 ----------------------------------------------- Total 488,492 929 9,649 479,772 ----------------------------------------------- Equity Securities 45,970 85,980 1,293 130,657 Accrued Dividends 430 - - 430 ----------------------------------------------- Total 46,400 85,980 1,293 131,087 ----------------------------------------------- Total Marketable Securities $534,892 $86,909 $10,942 $610,859 =============================================== At December 31, 2000 and 1999, the market value of the Company's investment in the common stock of Firstar Corporation, which exceeded 10% of the Company's shareholders' equity, was $57.2 million and $52.0 million, respectively. 31 The following is investment information summarized by investment category (amounts in 000's): 2000 1999 1998 ---------------------------------- Investment Income: Interest on Fixed Maturities $29,560 $ 26,152 $24,565 Dividends on Equity Securities 3,465 2,132 1,624 Other (898) (1,719) (1,221) ---------------------------------- Total 32,127 26,565 24,968 Less Investment Expenses (1,122) (1,117) (884) ---------------------------------- Net Investment Income $31,005 $ 25,448 $24,084 ================================== Net Realized Investment Gains: Fixed Income: Gross Realized Gains $ 539 $ 404 $ 4,420 Gross Realized Losses (3,800) (1,956) (371) Equity Securities: Gross Realized Gains 16,197 7,290 5,683 Gross Realized Losses (8,290) (2,252) (3,378) ---------------------------------- Net Realized Investment Gains $ 4,646 $ 3,486 $ 6,354 ================================== Change in Unrealized Investment Gains: Fixed Income $15,019 $(18,167) $ 2,443 Equity Securities (7,350) (14,325) 38,148 ---------------------------------- Change in Unrealized Investment Gains $ 7,669 $(32,492) $ 40,591 ================================== The cost and approximate market value of debt securities held at December 31, 2000, summarized by contractual maturities, are shown below. Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties (amounts in 000's). Market Cost Value -------------------------- One year or less $102,383 $102,346 After one year through five years 189,408 191,661 After five years through ten years 205,016 207,903 After 10 years 37,231 38,427 -------------------------- Total $534,038 $540,337 ========================== 3. ACCOUNTS RECEIVABLE-NET Accounts receivable at December 31, 2000 and 1999 are generally due within one year and consist of the following (amounts in 000's): 2000 1999 -------------------------- Insurance $61,143 $55,509 Transportation 4,319 4,453 Other 5,760 1,271 -------------------------- Total 71,222 61,233 Less Allowance for Losses 826 807 ========================== Accounts Receivable-Net $70,396 $60,426 ========================== 4. PROPERTY, PLANT AND EQUIPMENT-NET At December 31, 2000 and 1999, property, plant and equipment stated at original cost consist of the following (amounts in 000's): 2000 1999 -------------------------- Land $ 1,341 $ 1,341 Buildings, Improvements, Fixtures, etc. 63,339 59,933 Transportation Equipment 44,301 51,214 -------------------------- Total 108,981 112,488 Less Accumulated Depreciation and Amortization 52,005 49,903 -------------------------- Property, Plant and Equipment-Net $56,976 $62,585 ========================== Total rent expense related to the rental of equipment included in the accompanying consolidated statements of income is (amounts in 000's) $7,219 in 2000, $6,566 in 1999 and $5,496 in 1998. Future rentals under non-cancelable operating leases are approximately (amounts in 000's): $3,054 - 2001; $2,835 - 2002; $1,444 - 2003; $804 - 2004; $718 - 2005 and $5,473 - thereafter. 32 5. DEFERRED INSURANCE POLICY ACQUISITION COSTS Acquisition costs incurred and capitalized during 2000, 1999 and 1998 amounted to $143.5 million, $135.4 million and $111.5 million, respectively. Amortization of deferred acquisition costs was $137.1 million, $114.2 million and $103.2 million for 2000, 1999 and 1998, respectively. 6. NOTES PAYABLE TO BANKS At December 31, 2000 and 1999, the Company had conventional lines of credit with commercial banks of $52 million and $47 million, respectively. The lines of credit in use under these agreements at December 31, 2000 and 1999 amounted to $31 million and $18 million, respectively. Borrowings under these lines of credit constitute senior debt. Annual commitment fees of $81,000 are currently paid to the lending institutions to maintain these credit agreements. Additionally, at December 31, 2000 and 1999, the Company had other short-term bank borrowings outstanding of $8 million and $2 million, respectively. These borrowings also constitute senior debt. The aforementioned notes payable, together with outstanding commercial paper, had weighted average interest rates of 6.86% and 6.69% at December 31, 2000 and 1999, respectively. 7. LONG-TERM DEBT Long-term debt at December 31, 2000 and 1999 is summarized as follows (amounts in 000's): 2000 1999 ------------------------ Equipment Obligations, Due Through- 6.45% July 1, 2000 $ - $ 1,330 7.10% January 1, 2001 - 642 6.79% September 30, 2003 - 936 6.50% October 31, 2003 2,100 2,800 Mortgage Notes, Due Through- 6.83% December 20, 2005 17,925 18,580 Unsecured Notes Under a $40 million Credit Facility, Payments Beginning 2004- *7.84% November 1, 2007 20,000 20,000 ------------------------ Total Obligations 40,025 44,288 Current Maturities 1,406 3,554 ------------------------ Non Current Portion $38,619 $40,734 ======================== *Rate in effect on December 31, 2000. The interest rate on this borrowing is adjusted quarterly to the LIBOR rate plus a margin of 1%. Equipment and real estate obligations are collateralized by transportation equipment and real estate with a net book value of $29,596,000 at December 31, 2000. The aggregate amount of repayment requirements on long-term debt for the five years subsequent to 2000 are (amounts in 000's): 2001 - $1,406; 2002 - $1,456; 2003 - $1,510; 2004 - $5,865; 2005 - $5,930; 2006 and thereafter - $23,858. At December 31, 2000 and 1999, the carrying value approximated the fair value of the Company's long-term debt. 8. FEDERAL INCOME TAX The provision for federal income tax is summarized as follows (amounts in 000's): 2000 1999 1998 --------------------------------- Current provision $13,100 $12,295 $11,677 Deferred provision (credit) 2,106 239 (1,082) --------------------------------- Total $15,206 $12,534 $10,595 ================================= The federal income tax provision for the years ended December 31, 2000, 1999 and 1998 is different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (amounts in 000's): 2000 1999 1998 --------------------------------- Federal income tax at statutory rate $17,734 $15,300 $13,134 Tax effect of: Tax exempt interest and excludable dividend income (3,397) (3,131) (2,354) Excise tax on reversion of pension assets 529 - - Other-net 340 365 (185) --------------------------------- Provision for federal income tax $15,206 $12,534 $10,595 ================================= 33 Significant components of the Company's net deferred federal income tax liability are summarized as follows (amounts in 000's): 2000 1999 ----------------------- Deferred tax liabilities: Deferred insurance policy acquisition costs $28,945 $26,876 Unrealized gain on marketable securities 29,240 26,579 Accelerated depreciation 7,281 7,274 Other 1,284 319 ------------------------ Sub-total 66,750 61,048 ------------------------ Deferred tax assets: Unearned insurance premiums 21,467 19,744 Pension expense 3,915 5,099 Insurance loss reserves 3,125 3,141 Other 5,305 4,893 ------------------------ Sub-total 33,812 32,877 ------------------------ Deferred federal income tax $32,938 $28,171 ======================== For 2000, $479,000 of income tax benefits applicable to deductible compensation related to stock options exercised were credited to shareholders' equity. 9. REINSURANCE A reconciliation of direct to net premiums, on both a written and an earned basis for the property and casualty companies, is as follows (amount in 000's): Direct Assumed Ceded Net ----------------------------------------- 2000 -------- Written $455,951 $45,033 $(31,769) $469,215 Earned 434,565 41,700 (30,766) 445,499 1999 -------- Written $432,263 $39,778 $(32,178) $439,863 Earned 409,506 38,803 (55,620) 392,689 1998 -------- Written $409,812 $36,436 $(54,478) $391,770 Earned 394,166 35,458 (60,573) 369,051 The amounts of recoveries pertaining to reinsurance contracts that were deducted from loses incurred during 2000, 1999 and 1998 were (amounts in 000's): $14,286, $62,003 and $28,674, respectively. 10. INSURANCE LOSS RESERVES Activity in the liability for unpaid insurance losses and loss adjustment expenses (excluding claim checks issued but not yet paid) for the property and casualty companies is summarized as follows (amounts in 000's): 2000 1999 1998 --------------------------------- Balance at January 1 $113,439 $108,697 $108,334 Less reinsurance recoverables 24,114 20,430 26,433 --------------------------------- Net balance at January 1 89,325 88,267 81,901 --------------------------------- Incurred related to: Current year 242,689 211,066 208,811 Prior years (6,952) (10,178) (2,120) --------------------------------- Total incurred 235,737 200,888 206,691 --------------------------------- Paid related to: Current year 186,498 159,045 157,530 Prior years 43,542 40,785 42,795 --------------------------------- Total paid 230,040 199,830 200,325 --------------------------------- Net balance at December 31 95,022 89,325 88,267 Plus reinsurance recoverables 16,720 24,114 20,430 --------------------------------- Balance at December 31 $111,742 $113,439 $108,697 ================================= 11. BENEFIT PLANS The Company has a qualified pension plan which provides for the payment of annual benefits to participants upon retirement. Such benefits are based on years of service and the participant's highest compensation during five consecutive years of employment. The Company's funding policy is to contribute annually an amount sufficient to satisfy ERISA funding standards. Contributions are intended to provide not only for benefits attributed to service to date but also for benefits expected to be earned in the future. During 2000, the participants of the qualified pension plan were given a one-time election to opt out of the qualified pension plan and enroll in a qualified self-directed defined contribution retirement plan. As a result, the Company recorded a curtailment/settlement gain of approximately $7.4 million, which is included in Other Operating and Administrative Expenses. All new employees are automatically enrolled in the qualified self-directed defined contribution retirement plan. The Company contributed $1.2 million to the qualified self- directed retirement plan for the year ended December 31, 2000. 34 The Company has a qualified 401(k) savings plan and a funded non- qualified savings plan. The Company contributed $821,000, $669,000 and $320,000 to the qualified 401(k) savings plan for the years 2000, 1999 and 1998, respectively. The Company also has a unfunded non-qualified defined benefit pension plan. The following tables, which include amounts related to both the qualified and non-qualified pension plans, illustrate (1) a reconciliation of the plans' benefit obligation, assets and funded status, (2) the weighted average assumptions used and (3) the components of the net periodic benefit cost (amounts in 000's except for percentages): 2000 1999 ------------------------- Qualified plan Change in benefit obligation: Benefit obligation at beginning of year $ 26,448 $ 25,864 Service cost 884 1,475 Interest cost 1,853 1,961 Actuarial (gain)/loss 2,381 (2,045) Curtailments (4,229) - Settlements (11,068) - Benefits paid (661) (807) ------------------------- Benefit obligation at end of year $ 15,608 $ 26,448 ========================= Change in plan assets: Fair value of plan assets at beginning of year $ 32,368 $ 25,937 Actual return on plan assets (371) 7,238 Employer contributions (reversion) (3,565) - Settlements (11,068) - Benefits paid (661) (807) ------------------------- Fair value of plan assets at end of year $ 16,703 $ 32,368 ========================= Funded status: Funded status at end of year $ 1,095 $ 5,920 Unrecognized net actuarial (gain)/loss (3,384) (13,938) Unrecognized prior service cost 358 1,296 Unrecognized net transition asset obligation asset (358) (783) ------------------------- Accrued benefit cost $ (2,289) $ (7,505) ========================= 2000 1999 ------------------------- Non-qualified plan Benefit obligation at beginning of year $ 7,095 $ 7,985 Service cost 88 139 Interest cost 213 566 Plan amendments - (658) Actuarial (gain)/loss 1,343 (848) Curtailments (1,486) - Transfer of obligation to successor plan (6,120) - Gross benefits paid (55) (89) ------------------------- Benefit obligation at end of year (accumulated benefit obligation of $986 and $6,321, respectively) $ 1,078 $ 7,095 ========================= Funded status $(1,078) $(7,095) Unrecognized actuarial (gain)/loss 31 1,563 Unrecognized prior service cost 100 413 ------------------------- Accrued benefit cost $ (947) $(5,119) ========================= 2000 1999 1998 ----------------------------------- Qualified and non-qualified plans Weighted-average assumptions as of December 31: Discount rate 7.75% 7.75% 7.00% Expected return on plan assets 9.40% 8.00% 8.00% Rate of compensation increase 4.25% 5.50% 5.50% Components of net periodic benefit cost: Service cost $ 972 $ 1,614 $ 1,369 Interest cost 2,066 2,527 2,334 Expected return on assets (2,266) (1,663) (1,510) Amortization of: Transition asset (113) (165) (165) Prior service cost 55 114 106 Actuarial (gain)/loss (107) 133 152 ---------------------------------- Net periodic benefit cost 607 2,560 2,286 Curtailment credit (4,333) - - Settlement credit (3,063) - - ---------------------------------- Total net periodic benefit cost (credit) $(6,789) $ 2,560 $ 2,286 ================================== 35 12. STOCK OPTION AND AWARD PLANS Under the Company's stock option plans, all of the outstanding stock options at December 31, 2000 were non-qualified options and had an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. 229,400 of these stock options were exercisable at December 31, 2000 and 38,450 options become exercisable each year in 2001 through 2004. A summary of stock option transactions follows: 2000 1999 1998 --------------------------------------------------- Wtd. Wtd. Wtd. Avg. Avg. Avg. (000's) Option (000's) Option (000's) Option Shares Price Shares Price Shares Price --------------------------------------------------- Outstanding, beginning of year 246 $12.49 380 $10.07 420 $10.13 Exercised (39) 9.00 (164) 9.38 (40) 10.65 Expired (7) 22.75 - - - - Granted 183 22.75 30 26.09 - - -------- -------- -------- Outstanding, end of year 383 $17.55 246 $12.49 380 $10.07 =================================================== Weighted avg. fair value of options granted $ 8.72 $ 8.64 ========= ========= Information regarding such outstanding options at December 31, 2000 follows: Outstanding Remaining Options Life (000's) Price - ---------------------------------------------------- One year 123 $ 9.00 Two years 18 16.71 Four years 18 16.92 Six years 18 12.63 Eight years 30 26.09 Nine years 176 22.75 ----- Total outstanding 383 ===== Weighted average price $17.55 ======== The Company implemented a restricted stock award program during 1993. Under this program, grants of the Company's common stock will vest after a five- year incentive period, conditioned upon the recipient's employment throughout the period. During the vesting period, shares issued are nontransferable, but the shares are entitled to all of the rights of outstanding shares. In 1993, 96,000 shares were initially awarded under the program and 71,000 shares were eventually distributed in 1998. In 1995, 147,000 shares were awarded and 124,000 shares were eventually distributed in 2000. In 1997 and 1999, 195,000 and 119,500 shares, respectively, were also awarded and 163,000 and 109,000 shares, respectively, remain outstanding at December 31, 2000. The value of the awards is being amortized as compensation expense over a five-year vesting period. In 2000, the Company established a performance stock award program. Under this program, shares vest after a three-year performance measurement period and will only be awarded if pre-established performance levels have been achieved. Shares are awarded at no cost and the recipient must have been employed throughout the entire three-year performance period. The 2000 grant could result in a maximum of 50,000 shares being awarded under this program in 2003. The value of these shares is charged to expense over the performance period. The Company applies APB opinion 25 and related interpretations in accounting for the stock option plans. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS No. 123, the Company's 2000 and 1999 net income and earnings per share would have been reduced to the pro forma amounts indicated below (1998 would not have been affected) (amounts in 000's, except per share data): 2000 1999 ------------------------ Net Income As reported $35,463 $31,179 Pro forma $35,157 $31,011 Net Income per Common Share-basic As reported $3.91 $3.42 Pro forma $3.88 $3.40 Net Income per Common Share-diluted As reported $3.78 $3.30 Pro forma $3.75 $3.28 The fair values of the 2000 and 1999 option grants were estimated on the date of the grant using the Black-Scholes option-pricing model with the following (weighted average) assumptions: dividend yields of 1.3%, expected volatility of 27.1% and 26.6%, risk-free interest rates of 6.7% and 4.7% and expected lives of 7 years, respectively. At December 31, 2000, 896,000 common shares are authorized for future option award or stock grants. 36 13. EARNINGS PER SHARE The following table is a reconciliation of the number of shares used to compute Basic and Diluted earnings per share. No adjustments are necessary to the income used in the Basic or Diluted calculations for the years ended December 31, 2000, 1999 or 1998. Shares in 000's ------------------------------ 2000 1999 1998 ------------------------------ Shares used in basic EPS calculation (shares outstanding) 9,066 9,111 9,018 Effect of dilutive stock options 114 122 228 Effect of dilutive restricted stock grants 174 230 166 Effect of dilutive performance stock awards 25 - - ------------------------------ Shares used in diluted EPS calculation 9,379 9,463 9,412 ============================== On April 9, 1998, the Company approved a three-for-one stock split effective May 21, 1998 for holders of record on April 30, 1998. Accordingly, the number of shares have been adjusted for the prior periods to reflect the impact of this stock split and previously reported per share amounts have been restated. At December 31, 2000 and 1999, 30,000 stock options at a price of $26.09 were outstanding and were not comprehended in the computation of diluted earnings per share because their price was greater than the average market value of the common stock. All outstanding stock options at December 31, 1998 had exercise prices that were less than the average market price of the Company's common stock and, therefore, were included in the computation of diluted earnings per share. 14. CONTINGENCIES Various litigation and claims against the Company and its subsidiaries are in process and pending. Based upon a review of open matters with legal counsel, Management believes that the outcome of such matters will not have a material effect upon the Company's consolidated financial position or results of operations. 15. SHAREHOLDERS' EQUITY In 1998, The Midland Company effected a three-for-one stock split and increased its number of shares of common stock authorized without par value (stated value of $.083 a share) to 20,000,000 shares from 5,000,000 shares. The Company also has 500,000 shares of preferred stock authorized, without par value, none of which have been issued. In October 1999 the Company's Board of Directors authorized the repurchase of up to 500,000 shares of the Company's common stock all of which was repurchased by the end of 2000. In January, 2001, the Company's Board of Directors authorized the repurchase of an additional 500,000 shares through April of 2002. The insurance subsidiaries are subject to state regulations which limit by reference to statutory investment income and policyholders' surplus the dividends that can be paid to their parent company without prior regulatory approval. Dividend restrictions vary between the companies as determined by the laws of the domiciliary states. Under these restrictions, the maximum dividends that may be paid by the insurance subsidiaries in 2001 without regulatory approval total approximately $28,014,000; such subsidiaries paid cash dividends of $5,350,000 in 2000 and $5,900,000 in 1999. Net income as determined in accordance with statutory accounting practices, which differ in certain respects from accounting principles generally accepted in the United States of America, for the Company's insurance subsidiaries was $30,854,000, $21,652,000 and $22,583,000 for 2000, 1999 and 1998, respectively. Shareholders' equity on the same basis was $245,904,000 and $229,710,000 at December 31, 2000 and 1999. 16. INDUSTRY SEGMENTS The Company operates in several industries and Company management reviews operating results by several different classifications (e.g., product line, legal entity, distribution channel). Reportable segments are determined based upon revenues and/or operating profits and include manufactured housing insurance, all other insurance and transportation. Manufactured housing insurance includes primarily insurance similar to homeowners insurance for manufactured houses. All other insurance includes various personal lines such as site-built dwelling, collateral protection and watercraft insurance, as well as commercial lines such as manufactured housing park and dealer insurance. The Company writes insurance throughout the United States with larger concentrations in the southern and southeastern states. Transportation includes barge chartering and freight brokerage operations primarily on the lower Mississippi River and its tributaries. 37 Listed below is financial information required to be reported for each industry segment. Certain amounts are allocated and certain amounts are not allocated (e.g., assets and investment gains) to each segment for management review. Operating segment information based upon how it is reviewed by the Company is as follows for the years ended December 31, 2000, 1999 and 1998 (amounts in 000's): Manufactured Unallocated Corporate Housing Other Insurance and All Intersegment Insurance Insurance Amounts Transportation Other Elimination Total - ------------------------------------------------------------------------------------------------------------------- 2000 - ---- Revenues-External customers $309,943 $154,961 $33,119 $ 748 $498,771 Net investment income 20,787 11,272 $ 25 741 $ (1,820) 31,005 Net realized investment gains n/a n/a 4,646 4,646 Interest expense n/a n/a 1,841 484 3,853 (2,046) 4,132 Depreciation and amortization 2,251 1,125 2,727 3,048 9,151 Income before taxes 37,589 15,364 (2,044) 3,606 (3,846) 50,669 Income tax expense 11,390 3,796 (392) 1,268 (856) 15,206 Acquisition of fixed assets and businesses n/a n/a 5,987 58 259 6,304 Identifiable assets n/a n/a 912,008 28,878 70,543 (17,579) 993,850 1999 - ---- Revenues-External customers $283,332 $124,452 $31,327 $ 1,081 $440,192 Net investment income 15,526 10,631 $ 19 177 391 $(1,296) 25,448 Net realized investment gains n/a n/a 3,486 3,486 Interest expense n/a n/a 1,406 517 3,490 (1,346) 4,067 Depreciation and amortization 2,120 931 2,945 4,291 10,287 Income before taxes 45,370 6,678 (1,122) 1,806 (9,019) 43,713 Income tax expense 14,219 1,169 (304) 637 (3,187) 12,534 Acquisition of fixed assets and businesses n/a n/a 5,452 84 273 5,809 Identifiable assets n/a n/a 812,791 31,683 58,021 (14,438) 888,057 1998 - ---- Revenues-External customers $258,638 $119,348 $33,059 $ 879 $411,924 Net investment income 14,875 9,923 $ 34 323 262 $(1,333) 24,084 Net realized investment gains n/a n/a 6,354 6,354 Interest expense n/a n/a 1,461 795 4,097 (1,362) 4,991 Depreciation and amortization 1,989 918 3,190 2,701 8,798 Income before taxes 31,609 11,207 (2,598) 4,389 (7,080) 37,527 Income tax expense 10,039 2,774 (909) 1,395 (2,704) 10,595 Acquisition of fixed assets n/a n/a 2,805 561 1,582 4,948 Identifiable assets n/a n/a 747,451 41,576 57,165 (8,972) 837,220 The amounts shown for manufactured housing insurance, other insurance and unallocated insurance comprise the consolidated amounts for Midland's insurance operations subsidiary, American Modern Insurance Group, Inc. Intersegment revenues were not significant for 2000, 1999 or 1998. In 2000, 1999 and 1998, revenues from one customer amounted to $77,395,000, $64,621,000 and $61,865,000, respectively.
38 INDEPENDENT AUDITOR'S REPORT DELOITTE & TOUCHE Cincinnati, Ohio To the Shareholders of The Midland Company: We have audited the accompanying consolidated balance sheets of The Midland Company and its subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Midland Company and its subsidiaries at December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/Deloitte & Touche LLP Deloitte & Touche LLP Cincinnati, Ohio February 8, 2001 MANAGEMENT'S REPORT The consolidated financial statements and accompanying notes of The Midland Company and its subsidiaries are the responsibility of the Company's management, and have been prepared in conformity with accounting principles generally accepted in the United States of America. They necessarily include amounts that are based on management's best estimates and judgments. Other financial information contained in this annual report is presented on a basis consistent with the financial statements. In order to maintain the integrity, objectivity and fairness of data in these financial statements, the Company has developed and maintains a comprehensive internal control structure which is supplemented by a program of internal audits. Management believes that the Company's internal control structure is adequate to provide reasonable, but not absolute, assurance that assets are safeguarded and the objectives of accuracy and fair presentation of financial data are met in all material respects. The financial statements have been audited by Deloitte & Touche LLP, Certified Public Accountants, in accordance with accounting principles generally accepted in the United States of America, including sufficient tests of the accounting records to enable them to express an informed opinion as to whether the financial statements, considered in their entirety, present fairly the Company's financial position and results of operations in conformity with generally accepted accounting principles. Deloitte & Touche LLP reviews the results of its audit both with management and with the Audit Committee. The Audit Committee, comprised entirely of outside Directors, meets periodically with management, internal auditors and independent auditors (separately and jointly) to assure that each is fulfilling its responsibilities. 39 QUARTERLY DATA THE MIDLAND COMPANY AND SUBSIDIARIES 2000 1999 - ------------------------------------------------------------------------------ ------------------------------------------------- (Amounts in thousands, First Second Third Fourth First Second Third Fourth excepte per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------ ------------------------------------------------- Revenues $128,741 $132,443 $135,793 $137,445 $114,084 $116,347 $117,845 $120,847 ================================================ ================================================== Net income $ 9,183 $ 7,330 $ 7,925 $ 11,025 $ 7,860 $ 5,211 $ 7,250 $ 10,858 ================================================ ================================================== Basic earnings per common $ 1.00 $ .80 $ .88 $ 1.23 $ .86 $ .57 $ .80 $ 1.19 share ================================================ ================================================== Diluted earnings per common $ .97 $ .78 $ .83 $ 1.20 $ .83 $ .55 $ .77 $ 1.15 ================================================ ================================================== Dividends per common share $ .0750 $ .0750 $ .0750 $ .0750 $ .0675 $ .0675 $ .0675 $ .0675 ================================================ ================================================== Price range of common stock (Nasdaq): High $ 23.97 $ 27.25 $ 27.44 $ 30.50 $ 27.75 $ 29.31 $ 26.88 $ 23.50 ================================================ ================================================== Low $ 18.50 $ 20.52 $ 24.25 $ 25.13 $ 22.13 $ 19.25 $ 21.00 $ 19.88 ================================================ ================================================== Note: The sum of the quarterly reported diluted earnings per share may not equal the full year as each is computed independently. The Company's stock began trading on the Nasdaq National Market on June 2, 1999 under the symbol "MLAN". Prior to that date Midland shares traded on the American Stock Exchange under the symbol "MLA".
OTHER INFORMATION TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS Fifth Third Bank Deloitte & Touche LLP 38 Fountain Square, Mail Drop #10AT66-3212 250 East Fifth Street Cincinnati, Ohio 45263 Cincinnati, Ohio 45202 SHAREHOLDERS' MEETING The next meeting of the shareholders will be held at 10:00 a.m. on Thursday, April 12, 2001 at the Company's offices, 7000 Midland Boulevard, Amelia, Ohio 45102. MARKET REGISTRANT'S COMMON STOCK The Midland Company Common Stock is traded on the NASDAQ National Market System. The symbol is MLAN. DIVIDEND REINVESTMENT PLAN The Plan provides for the acquisition of additional shares of the Company without brokerage fees through automatic dividend reinvestment. Enrollment forms and information about the Plan are available from Fifth Third Bank (1-800-837-2755). FORM 10-K A copy of the Company's 2000 Annual Report to the Securities and Exchange Commission on Form 10-K may be obtained by writing to the Company - Attention: Chief Financial Officer or from the Company's website www.midlandcompany.com. FINANCIAL INFORMATION For financial information visit us on the internet at www.nasdaq.com or www.midlandcompany.com 40 OFFICERS AND DIRECTORS THE MIDLAND COMPANY AND SUBSIDIARIES BOARD OF DIRECTORS James E. Bushman (a) (b) (c) President and Chief Executive Officer Cast-Fab Technologies, Inc. James H. Carey (a) (b) Corporate Director/Advisor Michael J. Conaton (c) Vice Chairman Jerry A. Grundhofer (d) President and Chief Executive Officer Firstar Corporation J. P. Hayden, Jr. (c) Chairman of the Executive Committee of the Board Formerly Chairman and Chief Executive Officer of the Company J. P. Hayden III (c) Chairman and Chief Operating Officer John W. Hayden (c) President and Chief Executive Officer Robert W. Hayden Formerly Vice President of the Company William T. Hayden (d) Attorney William J. Keating (b) (c) Formerly Chairman, Chief Executive Officer and Publisher-Cincinnati Enquirer and Formerly Chairman of the Board-Associated Press John R. LaBar Formerly Vice President and Secretary of the Company David B. O'Maley (b) (d) Chairman, President and CEO Ohio National Financial Services John M. O'Mara (a) (c) Corporate Director/Financial Consultant Glenn E. Schembechler (a) Professor Emeritus University of Michigan Francis Marie Thrailkill, OSU Ed.D. President-College of Mount St. Joseph John I. Von Lehman Executive Vice President, Chief Financial Officer and Secretary (a) Member of Audit Committee (b) Member of Compensation Committee (c) Member of Executive Committee (d) Member of Governance Committee OFFICERS J. P. Hayden III Chairman and Chief Operating Officer John W. Hayden President and Chief Executive Officer John I. Von Lehman Executive Vice President, Chief Financial Officer and Secretary Paul T. Brizzolara Executive Vice President Chief Legal Officer and Assistant Secretary Elizabeth E. Baldock Vice President-Human Resourses and Learning W. Todd Gray Treasurer Michael L. Flowers Vice President and Assistant Secretary Mark E. Burke Director of Taxation Ronald L. Gramke Assistant Treasurer Edward J. Heskamp Assistant Treasurer Mary Ann C. Pettit Assistant Secretary Geraldine M. Stigall Assistant Secretary EX-22 13 0013.txt THE MIDLAND COMPANY AND SUBSIDIARIES Exhibit (21) - Subsidiaries of the Registrant December 31, 2000 The subsidiaries of the Registrant as of December 31, 2000, all of which are included in the consolidated financial statements, are as follows: Percentage State of of Voting Incorporation Stock Owned ------------- ----------- M/G Transport Services, Inc. Ohio 100 Midland - Guardian Co. Ohio 100 MGT Services, Inc. Ohio 100 SUBSIDIARIES OF MIDLAND - GUARDIAN CO.: American Modern Insurance Group, Inc. Ohio 100 Marbury Agency, Inc. Ohio 100 SUBSIDIARIES OF AMERICAN MODERN INSURANCE GROUP, INC.: American Modern Home Insurance Company Ohio 100 American Family Home Insurance Company Florida 100 American Modern Life Insurance Company Ohio 100 Lloyds Modern Corporation Texas 100 American Modern Home Service Company Ohio 100 Modern Services Group, Inc. Ohio 100 SUBSIDIARIES OF AMERICAN MODERN HOME INSURANCE CO.: American Modern Lloyds Insurance Company Texas 100 American Southern Home Insurance Company Florida 100 American Western Home Insurance Company Oklahoma 100 G.U.I.C. Insurance Company Ohio 100 SUBSIDIARY OF AMERICAN WESTERN HOME INSURANCE CO.: Modern Life Insurance Company of Arizona, Inc. Arizona 100 SUBSIDIARY OF MODERN SERVICES GROUP, INC.: Sunbelt General Agency, Inc. Alabama 100 The Atlas Insurance Agency, Inc. Ohio 100 Midwest Enterprises, Inc. Florida 100 Manufactured Homes Acceptance Corporation Ohio 100 MHAC Insurance Agency, Inc. Ohio 100 Service Sentry Warranty Corporation Ohio 100 North American Insurance Agency Corporation Michigan 100 AMH Insurance Agency of Georgia, Inc. Georgia 100 The name of three wholly - owned subsidiaries of The Midland Company are not shown above as such individual listing is not required. -----END PRIVACY-ENHANCED MESSAGE-----