10-K405 1 THE MIDLAND COMPANY Annual Report on Form 10-K to the Securities and Exchange Commission for the Year Ended December 31, 1994 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, 1994 Commission File Number - 1-6026 THE MIDLAND COMPANY Incorporated in Ohio I.R.S. Employer Identification No. 31-0742526 537 E. Pete Rose Way Cincinnati, Ohio 45202 Tel. (513) 721-3777 Securities registered pursuant to Section 12(b) of the Act: Common stock - no par value. - American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. 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_____ The aggregate market value of the voting common stock held by nonaffiliates, which includes shares held by executive officers and directors, of the registrant as of March 10, 1995 was $146,195,088. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Number of shares of common stock outstanding as of March 10, 1995 - 3,045,731. Documents Incorporated by Reference Annual Report to Shareholders for the year ended December 31, 1994 is incorporated by reference into Parts I, II and IV. Registrant's Proxy Statement dated March 17, 1995 is incorporated by reference into Parts III and IV. THE MIDLAND COMPANY FORM 10-K DECEMBER 31, 1994 PART I ITEM 1. Business. Incorporated by reference in pages 1 through 12 and 25 (Note 13) of the Registrant's 1994 Annual Report to Shareholders. The number of persons employed by the Registrant was approximately 750 at December 31, 1994. ITEM 2. Properties. Incorporated by reference in pages 1 through 12 of the Registrant's 1994 Annual Report to Shareholders. ITEM 3. Legal Proceedings. M/G Transport Services, Inc., a subsidiary of the Registrant, is a named defendant in a criminal case commenced on February 16, 1995, in the United States District Court for the Southern District of Ohio. The case is styled: United States of America vs. M/G Transport Services, et al. The case arises out of allegations that M/G's employees discharged or permitted the discharge of bilge water, ash and other refuse into the inland waterways over a period of years. Seven former employees have also been indicted. The Government may seek fines against the Company which could total $4.2 million if M/G Transport Services, Inc. is convicted on all nine counts. M/G disputes the allegations which give rise to the indictments, and intends to vigorously defend itself. 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 26 (Note 14) and 29 of the Registrant's 1994 Annual Report to Shareholders. ITEM 6. Selected Financial Data. Incorporated by reference to page 13 of the Registrant's 1994 Annual Report to Shareholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference to pages 14 and 15 of the of the Registrant's 1994 Annual Report to Shareholders. ITEM 8. Financial Statements and Supplementary Data. Incorporated by reference to pages 16 through 27 and page 29 of the Registrant's 1994 Annual Report to Shareholders. ITEM 9. Disagreements on Accounting and Financial Disclosures. None. PART III ITEM 10.Directors and Executive Officers of the Registrant. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 1995. PART III (Continued) Executive Officers of the Company - J. P. Hayden, Jr. - Age 65 - Chairman and Chief Executive Officer Michael J. Conaton - Age 61 - President and Chief Operating Officer John R. LaBar - Age 63 - Vice President and Secretary Robert W. Hayden - Age 56 - Vice President John I. Von Lehman - Age 42 - Vice President, Treasurer and Chief Financial Officer Thomas J. Rohs - Age 53 - Vice President J. P. Hayden, III - Age 42 - Vice President John W. Hayden - Age 37 - Vice President Michael L. Flowers - Age 43 - Vice President, Assistant Secretary and Chief In-House Counsel J. P. Hayden, Jr. and Robert W. Hayden are brothers. J. P. Hayden, III and John W. Hayden are sons of J. P. Hayden, Jr. During 1991, Michael L. Flowers (formerly Assistant Secretary) was elected Vice President. The officers listed above have served in the positions indicated for the past five years (except as noted above). ITEM 11.Executive Compensation. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 1995. ITEM 12.Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 1995. ITEM 13.Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's Proxy Statement dated March 17, 1995. 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: Data pertaining to The Midland Company and Subsidiaries - Report of Independent Public Accountants. Consolidated Balance Sheets, December 31, 1994 and 1993. Consolidated Statements of Income and Retained Earnings for the Years Ended December 31, 1994, 1993 and 1992. Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules. Included in Part IV of this report: Data pertaining to The Midland Company and Subsidiaries - Page Independent Auditors' Consent and Report on Schedules 7 Schedule II - Allowance for Losses for the Years Ended December 31, 1994, 1993 and 1992 8 PART IV (Continued) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) 3. Exhibits. 3. Articles of Incorporation and By-Laws - Filed as Exhibit 3 to the Registrant's 1980 Annual Report on Form 10-K, and incorporated herein by reference. 10. A description of the Company's Stock Option Plan and Profit Sharing Plan - Incorporated by reference to the Registrant's Proxy Statement dated March 17, 1995. 11. Computation of Consolidated Net Income Per Share for the years ended December 31, 1994, 1993 and 1992. 9 13. Annual Report to security holders - Incorporated by reference to the Registrant's 1994 Annual Report to Shareholders 21. Subsidiaries of the Registrant 10 22. Registrant's Proxy Statement dated - Incorporated by reference to the Registrant's Proxy Statement dated March 17, 1995. 23. Independent Auditors' Consent - Included in Consent and Report on Schedules referred to under Item 14(a)2 above. 27. Financila Data Schedule. (b) Reports on Form 8-K - Incorporated by reference to the Registrant's Current Report on Form 8-K dated January 5, 1995. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dully 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, Jr. Chairman, and March 2, 1995 (J. P. Hayden, Jr.) Chief Executive Officer S/ John I. Von Lehman Vice President, Treasurer, March 2, 1995 (John I. Von Lehman) Chief Financial Officer and Chief Accounting Officer 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/ George R. Baker Director March 2, 1995 (George R. Baker) S/ James H. Carey Director and Member March 2, 1995 (James H. Carey) of Audit Committee S/ Michael J. Conaton President, Chief Operating March 2, 1995 (Michael J. Conaton) Officer and Director S/ J. P. Hayden, Jr. Chairman, Chief Executive March 2, 1995 (J. P. Hayden, Jr.) Officer and Director S/ J. P. Hayden, III Vice President and Director March 2, 1995 (J. P. Hayden, III) S/ John W. Hayden Vice President and Director March 2, 1995 (John W. Hayden) S/ Robert W. Hayden Vice President and Director March 2, 1995 (Robert W. Hayden) S/ William T. Hayden Director March 2, 1995 (William T. Hayden) S/ William J. Keating Director March 2, 1995 (William J. Keating) S/ William McD. Kite Director March 2, 1995 (William McD. Kite) S/ John R. LaBar Vice President, Secretary March 2, 1995 (John R. LaBar) and Director S/ John M. O'Mara Director and Member March 2, 1995 (John M. O'Mara) of Audit Committee S/ John R. Orther Director and Member March 2, 1995 (John R. Orther) of Audit Committee S/ William F. Plettner Director March 2, 1995 (William F. Plettner) S/ Glenn E. Schembechler Director and Member March 2, 1995 (Glenn E. Schembechler) of Audit Committee S/ John I. Von Lehman Vice President, Treasurer, March 2, 1995 (John I. Von Lehman) Chief Financial Officer, Chief Accounting Officer and Director INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES To the Shareholders of The Midland Company: We consent to the incorporation by reference in Registration Statement No. 33- 48511 of The Midland Company on Form S-8 of our report dated February 16, 1995, incorporated by reference in this Annual Report on Form 10-K, and our report (appearing below) on the financial statement schedule of The Midland Company for the year ended December 31, 1994. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedule of The Midland Company and its subsidiaries, listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Cincinnati, Ohio March 14, 1995 SCHEDULE II THE MIDLAND COMPANY AND SUBSIDIARIES SCHEDULE II - ALLOWANCE FOR LOSSES FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES (ADDITIONS) OF PERIOD -------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1994: Allowance For Losses $ 1,117,000 $ 576,000 $ 158,000 (1) $ 1,535,000 YEAR ENDED DECEMBER 31, 1993: Allowance For Losses $ 1,192,000 $ 357,000 $ 432,000 (1) $ 1,117,000 YEAR ENDED DECEMBER 31, 1992: Allowance For Losses $ 1,133,000 $ 297,000 $ 238,000 (1) $ 1,192,000 NOTES: (1) Accounts written off are net of recoveries. EX-11 2 EXHIBIT (11) THE MIDLAND COMPANY AND SUBSIDIARIES EXHIBIT (11) - COMPUTATION OF CONSOLIDATED NET INCOME PER SHARE FOR THE YEARS DECEMBER 31, 1994, 1993 AND 1992 1994 1993 1992 ---------------------------------------------- Net Income $ 9,419,000 $ 17,972,000 (a) $ 11,979,000 ============================================== Weighted average number of shares outstanding 2,997,000 3,004,000 2,983,000 ============================================== Primary: Adjusted weighted average shares outstanding - after giving effect to conversion of stock optionsand stock awards 3,050,000 3,074,000 3,007,000 ============================================== Per share - after giving effect to conversion of stock options and stock awards (net income divided by adjusted weighted average shares outstanding) $ 3.09 $ 5.85 (a) $ 3.98 ============================================== Fully diluted: Adjusted weighted average shares outstanding - after giving effect to conversion of stock options and stock awards 3,066,000 3,078,000 3,079,000 ============================================== Per share - after giving effect to conversion of stock options and stock awards (net income divided by adjusted shares outstanding) $ 3.07 $ 5.84 (a) $ 3.87 ============================================== (a) Includes a credit of $4,867,000, $1.58 per common share, for the cumulative effect of a change in accounting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective January 1, 1993. EX-13 3 1994 MIDLAND ANNUAL REPORT PAGE 1 FINANCIAL HIGHLIGHTS THE MIDLAND COMPANY AND SUBSIDIARIES -------------------------------------------------------------------------------- For the Years Ended December 31, 1994 1993 1992 -------------------------------------------------------------------------------- Revenues $ 315,915,000 $ 267,667,000 $ 225,504,000 Net Income 9,419,000 17,972,000(a) 11,979,000 Shareholders' Equity 132,437,000 133,110,000 111,583,000 Earnings Per Common Share $ 3.09 $ 5.85(a) $ 3.98 Cash Dividends Per Common Share .58 .54 .50 Book Value Per Common Share 44.19 44.39 37.52 Common Shares Outstanding 2,997,000 2,999,000 2,974,000 (a) Includes a credit of $4,867,000, $1.58 per common share, for the cumulative effect of a change in accounting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective January 1, 1993. THE MIDLAND COMPANY Midland was founded in 1938 as a consumer finance company by the late J. Page Hayden, Sr. and H. R. LaBar. Today, Midland has three primary divisions - Insurance, Transportation and Sportswear. Midland is a publicly traded company on the American Stock Exchange. AMERICAN MODERN INSURANCE GROUP, INC. American Modern Insurance Group, Inc. consists of six property and casualty companies and two credit life companies. AMIG is licensed in all 50 states. Traditionally, AMIG has specialized in writing physical damage insurance and related coverages on manufactured housing, but in recent years has expanded its operations to include Lower Valued Homes, Dwelling Fire, Homeowners, Mortgage Fire, Collateral Protection, Watercraft, Long-Haul Truck, Commercial and Excess and Surplus Lines. M/G TRANSPORT SERVICES, INC. M/G Transport Services, Inc. owned 279 barges and four towboats as of December 31, 1994. The Company currently charters barges and brokers freight for the movement of commodities on the inland waterways. The Company's four towboats are chartered to outside companies on a long-term basis. In December, 1994, M/G Transport sold eight towboats and 314 barges in a transaction valued at $46,761,000. CS CRABLE SPORTSWEAR, INC. CS Crable Sportswear, Inc. produces high-quality embroidered, appliqued and imprinted sportswear featuring the mascots and logos of the nation's colleges and universities, as well as those of Major League Baseball, the National Football League, the National Hockey League, the International Hockey League, NASCAR and a variety of other specialty licensed and non-licensed categories. In January of 1995, the Company signed an exclusive licensing agreement with ESPN2 for the purpose of developing an "Xtreme Sports" sportswear collection. 1994 MIDLAND ANNUAL REPORT PAGE 2 CHAIRMAN'S LETTER Earnings for the year 1994 were the fourth best in the history of The Midland Company. This was quite an accomplishment after having begun the year with the California earthquake, followed by successive months of unusually adverse weather patterns. Midland's history of positive growth continued in 1994 with revenues and assets reaching record levels. Net income for 1994 was $9,419,000, $3.09 per share, on revenues of $315,915,000. Net income for 1993 before the cumulative effect of an accounting change was $13,105,000, $4.27 per share, and net income after the cumulative effect of an accounting change was $17,972,000, $5.85 per share, on revenues of $267,667,000. For the fourth quarter of 1994, net income was $5,244,000, $1.72 per share, on revenues of $86,472,000. This compares to the fourth quarter of 1993 earnings of $2,645,000, $.87 per share, on revenues of $70,848,000. Midland's Board of Directors, at its March, 1994 meeting, approved an increase in the cash dividend paid to shareholders from 54 cents to 58 cents per common share. This is the eighth consecutive year that Midland has increased its common dividend. At its December meeting, William T. Hayden, a partner with the law firm of Cohen, Todd, Kite & Stanford, was appointed to The Midland Company's Board of Directors. William T. Hayden is a valued addition to your Board of Directors. American Modern Insurance Group, Inc. (AMIG), the Company's insurance subsidiary, concluded another successful year. Net written premiums increased 31% in 1994 as compared to 1993. The Company's continued positive growth is the result of product diversification, increased penetration into existing product lines and expansion into the commercial lines area of insurance. The division produced an underwriting profit for the fifth consecutive year. This was a remarkable accomplishment considering the numerous catastrophes which plagued the entire property and casualty industry throughout most of 1994, including the earthquake in California, severe winter and spring storms throughout the southeastern United States, and the Georgia floods. The Company's combined ratio (the ratio of losses and expenses to premiums earned) was 98.5% in 1994. In 1994, Midland formed a new corporation named American Modern Insurance Group, Inc. This new corporate entity is an insurance holding company which houses all of the operations of the Company's insurance division. It is significant that in 1994 this new corporation was able to procure an unsecured $40,000,000 long-term debt facility, $20,000,000 of which was used to increase the capital and surplus of the property and casualty insurance companies. This increase in capital and surplus provides a solid financial base for the projected growth in written premiums for this division in future years. Once again, A.M. Best awarded American Modern Insurance Group the insurance industry's preferred rating of A+ Superior. This rating reflects the sound financial condition and strong earnings history of the American Modern Insurance Group. The Company's investment portfolio is conservatively invested in high-quality securities. There are no bonds in the portfolio below investment grade and the portfolio does not include any investments in real estate. THIS PAGE INCLUDES A PHOTOGRAPH OF MICHAEL J. CONATON, PRESIDENT AND CHIEF EXECUTIVE OFFICER AND J. P. HAYDEN, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER. 1994 MIDLAND ANNUAL REPORT PAGE 3 In December, 1994, Thomas J. Rohs was promoted to Chairman and Chief Executive Officer of AMIG; John W. Hayden was promoted to President and Chief Operating Officer of AMIG; and Kenneth G. Boberg was promoted to Executive Vice President and Chief Financial Officer of AMIG. All of these individuals have provided solid leadership to this division. M/G Transport Services, Inc., our transportation division, underwent significant change in 1994, selling approximately 67% of its river transportation equipment along with its affreightment contracts. The equipment sold included eight towboats, 314 barges and an exchange of 40 open hopper barges for 40 steel roll top barges. The assets were sold for $46,761,000, which resulted in a modest book gain. M/G Transport retained four towboats and 279 barges. All of the towboats and some of the barges are on long-term charter to other companies in the industry. The remaining barges will be used by the division's freight brokerage operation. CS Crable Sportswear, Inc., the Company's sportswear division, applies embroidery and screenprinting processes onto quality sportswear garments. A significant accomplishment in 1994 was the 30% reduction in our inventory levels. Net sales, excluding the inventory reduction program, were slightly higher in 1994 than prior years. Significant strides were made in improving our production, garment sourcing and creative art departments. In January, 1995, we signed an exclusive licensing agreement with ESPN2 which will support our continued commitment to innovative designs and new products. We are hopeful that this division's operating performance will improve in 1995 based on the actions we have taken. In July, 1994, Midland began construction of its new corporate headquarters and training facility which will be situated on 193 acres in an eastern suburb of the greater Cincinnati area. The cost of this facility is estimated at $26,000,000 and is scheduled for completion in the fourth quarter of 1995. This site will provide for your Company's expansion needs well into the next century. We thank our business associates and our employees for their dedicated efforts on behalf of The Midland Company and its subsidiaries. We take this opportunity to especially thank our former M/G Transport Services staff who contributed greatly to the past success of the transportation division. In closing, to you our shareholders, we continue to express our sincere appreciation for your unwavering support of the Company. Sincerely yours, J. P. Hayden, Jr. Chairman February 9, 1995 1994 MIDLAND ANNUAL REPORT PAGE 4 AMERICAN MODERN INSURANCE GROUP, INC. Nineteen ninety-four was a very successful and eventful year for your Insurance division. Among the highlights was the formation of American Modern Insurance Group, Inc., a holding company consisting of our six property and casualty companies and two life companies. AMIG is licensed in all 50 states and continues to maintain the A.M. Best industry rating of A+ Superior. Midland's property and casualty insurance subsidiaries have maintained this rating for seventeen consecutive years. This rating is very important as it is an indication of the financial strength and sound operating philosophies of the Company. The property and casualty companies continued their strong growth in 1994, as net premiums written increased by approximately 31% over 1993. The combined ratio for 1994 was 98.5%. We are extremely proud of the operating results for 1994 in light of the major catastrophes and the severe weather that occurred during the year. Among these events were the California earthquake, the severe winter weather that struck the southeastern United States during the first quarter of 1994 as well as the weather related catastrophes in the southeastern and southwestern United States in the months of April, June and July. Weather patterns finally returned to more normal conditions during the last third of 1994. As we have previously stated, we believe that AMIG's current level of rates is adequate to produce targeted levels of profitability assuming normal levels of catastrophe and weather related losses. 1994 MIDLAND ANNUAL REPORT PAGE 5 We have included on these pages pictures of employees from our claims, insurance services and marketing departments. This is just a small cross section of the many departments that are responsible for the continued success of American Modern Insurance Group. We remain focused on our company-wide commitment to excellence. An example of this commitment can be found in the Company's claims department. In recent years, we have increased the number of in-house adjusters to 120. This increased in-house staff has allowed AMIG to settle 86% of all claims made with our own staff. In addition, approximately 82% of all claims are settled within 30 days of being reported, thus making us a rather unique property and casualty company within the industry. AMIG has experienced excellent growth in recent years. In fact, the property and casualty companies' premiums written have grown at a compounded rate of 13 percent over the past 15 years. This growth has occurred in the Company's traditional manufactured housing and related products as well as many additional insurance products such as Site- Built Dwellings, Watercraft, Mortgage Fire, Collateral Protection, Long Haul Truck Physical Damage and Commercial Lines. These lines are depicted in the chart in this section. We have devoted significant effort into the development of credit life and related products. This business is generally written through financial institutions and retail accounts. We expect continued growth in this area over the years ahead. 1994 MIDLAND ANNUAL REPORT PAGE 6 Ameritrac is the name of AMIG's loan tracking service whereby we monitor loan portfolios for financial institutions and place physical damage coverages on site built homes, manufactured homes, automobiles and other loan collateral on which the borrower has not provided proof of insurance. This operation has significantly contributed to the overall growth of the Company. Today, AMIG is perhaps the largest single writer of insurance that is generated through the manufactured homes dealer network. We have developed software programs and instructional courses to assist the dealers in the writing of their finance and insurance packages. AMIG has received considerable recognition for its development of monitoring programs to protect the Company in the event of catastrophic events. Through a joint effort with an outside consulting firm, we now possess one of the most sophisticated systems available for tracking exposure to hurricanes and earthquakes. As a result, we believe that our catastrophe reinsurers look upon your Company as a progressive leader in this regard. The Company's investment portfolio consists of high quality fixed income and equity securities and there are no investments in real estate or derivative products. The fixed income portfolio has a weighted average quality of approximately AAA and the current average maturity of the fixed income portfolio is approximately five years. The value of the portfolio has continued to grow through the generation of significant cash flow from operations as well as investment income on the portfolio. In addition, the portfolio generated approximately $2,200,000 in net pre-tax capital gains in 1994. We thank our many business associates who have contributed to our continued growth and success. Our commitment to excellence will continue and, as a result, we will enhance our current relationships as well as create new ones. We would like to thank all of the employees of American Modern Insurance Group, for without their commitment to excellence and to the goals of the company, our success to date would not have been possible. 1994 MIDLAND ANNUAL REPORT PAGE 7 THIS PAGE INCLUDES THREE BAR CHARTS WITH THE FOLLOWING DATA. THE FIRST CHART IS OF PROPERTY AND CASUALTY COMPANIES NET WRITTEN PREMIUMS (NET OF REINSURANCE) (IN MILLIONS), THE SECOND CHART IS THE PROPERTY AND CASUALTY COMPANIES COMBINED RATIO AND THE THIRD CHART IS THE MARKET VALUE OF AMIG'S INVESTMENT (IN MILLIONS) PORTFOLIO. ALL THE CHARTS ARE FOR 5 YEARS. NET WRITTEN COMBINED MARKET VALUE PREMIUMS RATIO EQUITIES FIXED INCOME 1990 $107,558 97.5% $13,082 $123,473 1991 123,692 96.9 19,695 146,488 1992 144,108 94.6 22,584 168,408 1993 180,318 94.0 23,501 195,106 1994 235,821 98.5 26,738 240,376 ALSO INCLUDED ON THIS PAGE IS THE FOLLOWING CHART: AMIG'S PRIMARY INSURANCE PRODUCTS Mobile Home & related Products Site Built Dwellings Collateral Protection Mortgage Fire Long-Haul Truck Physical Damage Watercraft Commercial Lines, Park Programs & Other Product Warranty Credit Life and Accident and Health 1994 MIDLAND ANNUAL REPORT PAGE 8 M/G TRANSPORT SERVICES, INC. M/G Transport Services, Inc., Midland's transportation division, experienced a year of significant change. The Company sold 314 jumbo open hopper barges and 8 towboats in December 1994 for $46,761,000. As part of this sale, the purchaser assumed M/G's affreightment contracts. In addition, the Company exchanged 40 open hopper barges for 40 steel roll top barges. This sale, which represented approximately two-thirds of M/G's assets, resulted in a modest book gain. The majority of the proceeds from the sale have been used to reduce the Company's long-term debt and deferred tax liability. As part of the agreement, the Company entered into a non-compete agreement which prohibits the Company from operating towboats on the Ohio and Mississippi river systems. The Company continues to own four towboats and 279 barges. The towboats are on long-term charter agreements with other companies in the industry. The remaining barges will be utilized mainly by M/G's brokerage operation, which is primarily involved in placing freight for various commodities including coal, petroleum coke, grain, steel, wood chips, logs, fertilizer, ores, etc. It is our desire to identify acquisition candidates which are poised for growth and to build a solid, profitable future for M/G and Midland's shareholders. M/G Transport's operating profits in 1994 were much improved over the previous years. These results would have been even better were it not for the severe flooding conditions on the inland waterways system in January, 1994. These profits were made possible by a stronger market for northbound freight. Management firmly believes that the asset sale was in the best interest of Midland's shareholders. We would be remiss, however, if we did not thank and acknowledge all of the employees of M/G Transport who contributed to the Company's past success. We are saddened by the fact that many of these employees were negatively impacted by the sale of the Company's assets. This was by far the most difficult part of the transaction and we wish all of those individuals prosperity and success in the future. 1994 MIDLAND ANNUAL REPORT PAGE 9 THIS PAGE INCLUDES THREE BAR CHARTS WITH THE FOLLOWING DATA. THE FIRST CHART IS LIST FIXED ASSETS, THE SECOND CHART IS THE COMPANY'S LONG - TERM DEBT AND THE THIRD CHART IS THE COMPANY'S REVENUES. ALL THE CHARTS ARE IN MILLIONS AND FOR 5 YEARS. LONG-TERM REVENUES FIXED ASSETS DEBT ON-GOING RELATED TO ASSETS SOLD 1990 $64,968 $30,600 $ 6,928 $52,848 1991 69,446 31,000 12,352 44,333 1992 70,370 34,900 14,134 33,052 1993 78,242 47,500 11,965 41,287 1994 28,761 18,400 19,673 33,522 ALSO INCLUDED ON THIS PAGE IS THE FOLLOWING CHART: COMMODITIES TRANSPORTED IN M/G TRANSPORT SERVICES, INC.'S BARGES COVERED BARGES OPEN HOPPER BARGES Grains Coal Calcined Coke Petroleum Coke Sugar Aggregates Dry Fertilizers Logs and Wood Chips Road Salt Various Ores Steel Products 1994 MIDLAND ANNUAL REPORT PAGE 10 CS CRABLE SPORTSWEAR, INC. CS Crable Sportswear, Inc., the Company's sportswear subsidiary, did much to position itself for continued growth and a return to acceptable levels of profitability during the course of this past year. Specializing in the production of licensed apparel, CS Crable produces high-quality embroidered, appliqued and imprinted sportswear featuring the mascots and logos of the nation's colleges and universities, as well as those of Major League Baseball, the National Football League, the National Hockey League, the International Hockey League, NASCAR and a variety of other specialty licensed and non-licensed categories. The Company also maintains an exclusive licensing arrangement with Pebble Beach for the development and production of a complete collection of casual sportswear bearing the Pebble Beach name and the famed Lone Cypress Wave logo. The collection is marketed under the "Pebble Beach Sportswear by CS Crable" label. The licensed apparel industry experienced phenomenal growth through the middle and late eighties and into the early nineties. CS Crable rode that wave of growth, as did a number of other licensed sportswear companies. That growth, however, has slowed considerably during the course of the past two years causing many in the industry to re-think their plans for the future. The result has been a consolidation and critical integration within the industry, and a centralization of power around the major professional licenses. CS Crable is positioning itself to survive and prosper in this highly competitive environment INCLUDED ON THIS PAGE ARE TWO PICTURES WITH THE FOLLOWING CAPTION: "ONE OF CS CRABLE'S MANY ARTISTS ENTERING A DESIGN INTO THE COMPUTERIZED GRAPHICS SYSTEM AND THE COMPUTERIZED DESIGN BEING PRODUCED ON ONE OF THE COMPANY'S EMBROIDERY MACHINES" 1994 MIDLAND ANNUAL REPORT PAGE 11 as a specialty or niche player. The Company will continue to explore new license categories which it believes will either complement existing licenses or serve as a point of differentiation for long-term growth purposes. Toward this end, the company signed in January of 1995 an exclusive licensing agreement with ESPN2 for the purpose of developing an "Xtreme Sports" sportswear collection. ESPN2, or "The Deuce" as it is known, bills itself as the younger, wilder son of ESPN. The network's 18 to 34 year old target audience is a perfect fit for this CS Crable line, which can best be described as a lifestyle collection with an attitude twist (see the feature box above for more information about this exciting new development). Management has undertaken several major initiatives during the course of the past year in order to position the Company for future success. Among them, a concerted effort to reduce on-site inventory levels has produced very positive results. On average, inventory levels have been reduced by nearly 30%; most of this reduction was accomplished without negatively impacting operating results. The Company is now in a position to execute more aggressive purchasing strategies as opportunities may dictate. THIS PAGE FEATURES A "FEATURE BOX" THAT CONTAINS OF PICTURE OF VARIOUS CS CRABLE GARMENTS WITH THE FOLLOWING VERBIAGE: ESPN2 FEATURE BOX Introducing...Johnny Xtreme CS Crable Sportswear is pleased to announce the execution of an exclusive licensing arrangement with ESPN2 for the purpose of developing an "Xtreme Sports" Sportswear Collection. ESPN2, or "The Deuce" as it is more commonly known, bills itself as the younger, wilder son of ESPN. The network's 18 to 34 year old target audience is a perfect fit for this exciting new line, which the Company describes as a "lifestyle collection with an attitude twist". CS Crable unveiled its first release of the line at the 1995 SGMA Super Show in Atlanta, Georgia. Sixteen T-shirts comprise the first offering - eight screen prints featuring extreme action graphics, and eight attitude verbiage designs featuring Johnny Xtreme, the wildly expressive character CS Crable has created to become the icon/spokesperson for the collection. The line capitalizes on the popularity and energy of attitude apparel, as it relates to the lifestyle of the exciting, on the edge, extreme sports featured on ESPN2 (snowboarding, skateboarding, in-line skating, rock climbing, mountain biking and street luge to name just a few!). The first release of the line will be available in stores on March 1, 1995. The Company will launch an aggressive, consumer-oriented advertising campaign on ESPN, MTV, and, of course, ESPN2. Subsequent releases of the line are planned for late spring, back-to-school and holiday season. Look for Johnny at department stores and specialty stores in your area! 1994 MIDLAND ANNUAL REPORT PAGE 12 The Company has also focused on the reduction of overhead and production-related expenses. Significant action has been taken during the second half of the year, the full benefit of which will not be realized until much later in the current year. Additional resources have been committed to the creative side of the business in the areas of art, marketing and product sourcing. Management believes the commitment of these resources is critical to the successful execution of its future niche marketing strategies. Net sales for 1994 were in line with Management's forecasts, ending the year with approximately $31,484,000 in "normal" sales and $10,361,000 in sales related to inventory reduction and close-out programs. Management's activities in the current year are focused on improving margins to a level that will allow the Company to operate profitably. CS Crable Sportswear would like to take this opportunity to express its appreciation to its employees, licensors, suppliers, retail partners, and most importantly, its customers for their loyalty and support. It is their commitment to, and insistence on, product quality that assures a bright future ahead. THIS PAGE ALSO FEATURES A PHOTOGRAPH OF VARIOUS CS CRABLE SPORTSWEAR GARMENTS DISPLAYED IN THE COMPANY'S SHOWROOM. 1994 MIDLAND ANNUAL REPORT PAGE 13 SELECTED CONSOLIDATED FINANCIAL DATA THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1994 1993 1992 1991 1990 ------------------------------------------------------------------- Revenues $315,915,000 $267,667,000 $225,504,000 $202,583,000 $179,856,000 ------------------------------------------------------------------- Net Income $ 9,419,000 $ 17,972,000(a) $ 11,979,000 $ 9,231,000 $ 9,989,000 ------------------------------------------------------------------- Earnings Per Common Share $3.09 $5.85(a) $3.98 $3.02 $3.12 ------------------------------------------------------------------- Marketable Securities $278,088,000 $224,614,000 $188,531,000 $163,145,000 $138,642,000 ------------------------------------------------------------------- Property, Plant and Equipment (net) $ 66,042,000 $107,892,000 $ 93,042,000 $ 85,399,000 $ 81,181,000 ------------------------------------------------------------------- Total Assets $482,546,000 $450,222,000 $359,702,000 $318,101,000 $280,319,000 ------------------------------------------------------------------- Unearned Insurance Premiums $158,316,000 $118,802,000 $ 89,732,000 $ 76,963,000 $ 65,872,000 ------------------------------------------------------------------- Insurance Loss Reserves $ 57,715,000 $ 42,607,000 $ 23,993,000 $ 22,733,000 $ 19,542,000 ------------------------------------------------------------------- Long-Term Debt $ 47,091,000 $ 56,522,000 $ 34,801,000 $ 31,730,000 $ 30,670,000 ------------------------------------------------------------------- Shareholders' Equity $132,437,000 $133,110,000 $111,583,000 $101,724,000 $ 93,102,000 ------------------------------------------------------------------- Book Value Per Common Share $44.19 $44.39 $37.52 $33.69 $30.20 ------------------------------------------------------------------- Cash Dividends Per Common Share $.58 $.54 $.50 $.46 $.42 ------------------------------------------------------------------- Common Shares Outstanding 2,997,000 2,999,000 2,974,000 3,019,000 3,082,000 ------------------------------------------------------------------- (a) Includes a credit of $4,867,000, $1.58 per common share, for the cumulative effect of a change in accounting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective January 1, 1993. 1994 MIDLAND ANNUAL REPORT PAGE 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE MIDLAND COMPANY AND SUBSIDIARIES Reportable Segments The Company's operations are classified into four reportable business segments: Insurance, Transportation, Sportswear and Finance and Other. A description of these segments and comments with regard to their operations are included below. In addition, please refer to the text in the Chairman's Letter and to the other information on page 1 and pages 4 through 12 of the Annual Report. Such information, including the Quarterly Data presented on page 29, should also be considered a part of this analysis. Midland's insurance division consists primarily of six property and casualty companies and two credit life companies operating as American Modern Insurance Group (AMIG). AMIG is licensed to write business in all 50 states plus the District of Columbia. The majority of the Company's business is physical damage insurance on manufactured homes, generally written for a term of 12 months with coverages similar to conventional homeowners insurance policies. Other insurance products include Lower Valued Homes, Dwelling Fire, Homeowners, Mortgage Fire, Collateral Protection, Watercraft, Long-Haul Truck, Commercial and Excess and Surplus Lines. Throughout most of 1994, Midland's transportation division, M/G Transport Services, Inc., primarily hauled coal, aggregate, petroleum coke and miscellaneous dry bulk commodities on the Ohio and Mississippi rivers and their tributaries. The commodities were hauled under both long-term contracts and "spot" moves. In December, 1994, M/G Transport Services, Inc. sold approximately 67% of its river transportation assets as well as its affreightment contracts. The assets retained by the Company are either out on long-term charter to other companies within the river transportation industry or will be used in the Company's remaining business activity which is a freight brokerage operation involved in the placement of freight for various types of commodities. Midland's sportswear division, CS Crable Sportswear, Inc., purchases basic garments and imprints these garments using embroidery and screenprinting processes. Products are marketed by both Company and independent sales representatives located strategically throughout the United States. Midland's finance operations have not been significant in recent years, however, the Company continues to maintain a loan receivable portfolio. Results of Operations American Modern Insurance Group concluded another successful year in 1994. The year ended up being one of the division's most profitable years as past trends of solid growth and sound underwriting results continued in 1994. The profitability of this division during the first seven months of 1994 was adversely affected by the losses from the California earthquake and abnormal weather-related catastrophes during this period. A return to more normal weather patterns in the remainder of 1994 produced more customary profits. The results of this division in the fourth quarter of 1994 were among the best in the division's history. The division's pattern of solid growth continued in 1994 as net written premiums of the property and casualty companies increased 31% as compared to 1993. The combined ratio (the ratio of losses and expenses to premiums earned) increased from 94% in 1993 to 98.5% in 1994, however, the ratios for both years are considered excellent by industry standards. The increase in insurance revenues in 1994 and 1993 is due to the growth in the Company's established insurance products as well as the growth in new products which have been introduced in recent years. Insurance claims and policy acquisition costs increased in 1994 and 1993 due to the aforementioned growth in written premiums. Part of the 1994 increase was due to the increased ratio of losses in 1994 as compared to 1993. Transportation revenues in 1994 were comparable to 1993 and transportation expenses decreased in 1994 relative to 1993. This improved operating performance in 1994 was basically attributed to a stronger market in northbound freight movements. Transportation revenues and related operating expenses increased in 1993 over 1992 levels due primarily to the addition of a large one-year contract with a utility company which was not renewed in 1994. M/G Transport Services, Inc. sold approximately 67% of its river transportation equipment as well as its affreightment contracts in December, 1994. The equipment sold included eight towboats, 314 barges and an exchange of 40 open hopper barges for 40 steel roll top barges. The assets were sold at a modest gain and the $46,761,000 received from the sale was used to liquidate long-term debt and pay federal income taxes which had previously been deferred. The assets retained by M/G Transport Services, Inc. are either on long-term charter to other companies within the river transportation industry or will be devoted to the transportation division's freight brokerage operation. M/G Transport Services, Inc. is the subject of a criminal prosecution and related civil litigation concerning the alledged disposal of bilge water and other refuse from vessels on the inland waterways. M/G Transport is litigating these issues and the outcome cannot be reasonably estimated at this time. Sportswear revenues and related expenses increased in 1994 as compared to 1993 due primarily to the success of special close-out sales programs instituted in 1994. These sales represented approximately 25% of CS Crable's 1994 MIDLAND ANNUAL REPORT PAGE 15 total net sales. Profit margins were adversely affected by this program. Sportswear revenues in 1993 were only slightly higher than 1992 due to a contraction in the market for CS Crable's higher-priced sportswear. Management has undertaken several initiatives in 1994 which should favorably impact the sportswear division's operating performance in 1995. Inventory levels have been reduced by approximately 30% and significant cost- cutting measures have been implemented in an effort to reduce overhead and production-related expenses. The revenues and expenses associated with the Company's finance and other operations are not significant and have a relatively minor impact on the Company's operating margins. Liquidity and Capital Resources The Company and its finance subsidiary issue commercial paper, generally below the bank prime borrowing rates, and have $38 million of credit lines available under bank lines at costs not exceeding prime borrowing rates. There was approximately $5.5 million of commercial paper, $17 million of the previously mentioned bank line and $5 million in other short-term bank borrowings outstanding at December 31, 1994. The Company plans to service existing debt with internally generated funds. The Company's new corporate headquarters is currently under construction and is scheduled for completion in the fourth quarter of 1995. The cost of this facility is currently estimated at approximately $26 million and will be financed through conventional long-term debt financing arrangements upon completion. The Company's present corporate headquarter facility is listed for sale. The proceeds derived from the sale of this facility may be used to partially offset any such new debt. Change in Financial Condition Marketable securities increased in 1994 and 1993 due to the cash flow from operations and investment income received from the insurance division's investment portfolio. Also impacting the 1993 increase in marketable securities was the increase in unrealized appreciation in the equity securities owned by the insurance companies plus the Company's adoption of SFAS 115 at December 31, 1993, which increased marketable securities by $8,603,000, increased deferred federal income tax by $2,944,000 and increased shareholders' equity by $5,659,000. The increases in 1994 and 1993 in accounts receivable, deferred insurance policy acquisition costs, unearned insurance premiums and insurance loss reserves are primarily attributable to the sustained growth of the Company's insurance companies. Sportswear inventories decreased in 1994 due to the special close-out inventory program implemented in 1994 which resulted in a 30% reduction in inventory levels as compared to 1993 inventory levels. Property, plant and equipment decreased in 1994 due to the transportation division's sale of approximately 67% of its river transportation equipment. The increase in property, plant and equipment in 1993 was due to M/G Transport Services, Inc.'s acquisition of 60 barges for approximately $12.5 million and approximately $7.8 million in construction costs associated with CS Crable Sportswear, Inc.'s new office, warehouse and production facility. The decrease in 1994 in the Company's current portion of long-term debt is directly related to the aforementioned transportation division's sale in 1994 of 67% of its river transportation equipment. Approximately $21 million of the proceeds from this sale was used to prepay long-term debt loans on the assets sold which significantly reduced the Company's current debt repayment requirements in 1995 and beyond. American Modern Insurance Group, Inc. procured a $40 million unsecured long-term debt facility in 1994, $20 million of which was in use at December 31, 1994. This facility was obtained to increase the capital and surplus of the property and casualty companies. Long-term debt increased in 1993 due to the financing requirements associated with the Company's 1993 acquisition of fixed assets. The 1994 decrease in deferred federal income tax was primarily due to the Company's payment of $8.5 million in previously deferred federal income taxes which became due as a result of the sale of its river transportation equipment. Also impacting the decrease in deferred federal income tax in 1994 was the decrease in the unrealized appreciation in marketable securities which decreased in 1994 due to rising interest rates which adversely affected market values of fixed income securities. The Company's net unrealized gain on marketable securities decreased in 1994 due to the previously mentioned rise in interest rates which decreased market values of the Company's fixed income investments. Impact of Inflation Management does not consider the impact of changing prices to be material in the analysis of the Company's overall operations. 1994 MIDLAND ANNUAL REPORT PAGE 16 CONSOLIDATED BALANCE SHEETS THE MIDLAND COMPANY AND SUBSIDIARIES December 31, 1994 1993 --------------------------- ASSETS Cash $ 4,036,000 $ 3,935,000 --------------------------- Marketable Securities 278,088,000 224,614,000 --------------------------- Receivables: Accounts receivable 82,293,000 62,907,000 Finance receivables (including amounts maturing after one year) 4,120,000 5,512,000 --------------------------- Sub-Total 86,413,000 68,419,000 Less allowance for losses 1,535,000 1,117,000 --------------------------- Net 84,878,000 67,302,000 --------------------------- Inventory - Sportswear Division 11,116,000 15,968,000 --------------------------- Property, Plant and Equipment: Original cost 109,729,000 185,164,000 Less accumulated depreciation and amortization 43,687,000 77,272,000 --------------------------- Net 66,042,000 107,892,000 --------------------------- Deferred Insurance Policy Acquisition Costs 37,653,000 28,825,000 --------------------------- Other Assets 733,000 1,686,000 --------------------------- Total Assets $482,546,000 $450,222,000 =========================== See notes to consolidated financial statements. 1994 MIDLAND ANNUAL REPORT PAGE 17 THE MIDLAND COMPANY AND SUBSIDIARIES December 31, 1994 1993 --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Notes Payable Within One Year: Banks $ 22,000,000 $ 22,000,000 Commercial Paper 5,546,000 14,302,000 --------------------------- Total 27,546,000 36,302,000 --------------------------- Accounts Payable - Trade 6,232,000 5,142,000 --------------------------- Other Payables and Accruals 46,455,000 37,513,000 --------------------------- Current Portion of Long-Term Debt 2,451,000 9,412,000 --------------------------- Unearned Insurance Premiums 158,316,000 118,802,000 --------------------------- Insurance Loss Reserves 57,715,000 42,607,000 --------------------------- Deferred Federal Income Tax 6,754,000 20,224,000 --------------------------- Long-Term Debt 44,640,000 47,110,000 --------------------------- Shareholders' Equity: Common stock (issued and outstanding: 2,997,000 shares at December 31, 1994 and 2,999,000 shares at December 31, 1993 after deducting treasury stock of 646,000 shares and 644,000 shares, respectively) 911,000 911,000 Additional paid-in capital 14,607,000 14,620,000 Retained earnings 131,675,000 123,995,000 Net unrealized gain on marketable securities 2,754,000 11,308,000 Treasury stock (at cost) (16,648,000) (16,564,000) Unvested restricted stock awards (862,000) (1,160,000) --------------------------- Total 132,437,000 133,110,000 --------------------------- Total Liabilities and Shareholders' Equity $482,546,000 $450,222,000 =========================== 1994 MIDLAND ANNUAL REPORT PAGE 18 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1994 1993 1992 -------------------------------------- Revenues: Insurance $219,654,000 $178,577,000 $144,774,000 Transportation 53,163,000 53,252,000 47,186,000 Sportswear 41,928,000 34,702,000 32,620,000 Finance and other 1,170,000 1,136,000 924,000 -------------------------------------- Total 315,915,000 267,667,000 225,504,000 -------------------------------------- Costs and Expenses: Insurance claims and policy acquisition costs 175,868,000 132,871,000 106,449,000 Insurance operating and administrative expenses 26,562,000 21,203,000 19,195,000 Transportation operating expenses 47,339,000 49,511,000 45,292,000 Sportswear operating expenses 43,917,000 37,023,000 30,033,000 Interest expense 4,865,000 4,144,000 3,739,000 Other operating and administrative expenses 5,477,000 4,662,000 4,791,000 -------------------------------------- Total 304,028,000 249,414,000 209,499,000 -------------------------------------- Income Before Federal Income Tax and Cumulative Effect of Accounting Change 11,887,000 18,253,000 16,005,000 Provision For Federal Income Tax 2,468,000 5,148,000 4,026,000 -------------------------------------- Income Before Cumulative Effect of Accounting Change 9,419,000 13,105,000 11,979,000 Cumulative Effect of Accounting Change -- 4,867,000 -- -------------------------------------- Net Income 9,419,000 17,972,000 11,979,000 Retained Earnings, Beginning of Year 123,995,000 107,646,000 97,156,000 Cash Dividends Declared (1,739,000) (1,623,000) (1,489,000) -------------------------------------- Retained Earnings, End of Year $131,675,000 $123,995,000 $107,646,000 ====================================== Earnings Per share of Common Stock: Income Before Cumulative Effect of Accounting Change $3.09 $4.27 $3.98 Cumulative Effect of Accounting Change -- 1.58 -- -------------------------------------- Net Income $3.09 $5.85 $3.98 ====================================== Cash Dividends Per Share of Common Stock $.58 $.54 $.50 ====================================== See notes to consolidated financial statements. 1994 MIDLAND ANNUAL REPORT PAGE 19 CONSOLIDATED STATEMENTS OF CASH FLOWS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1994 1993 1992 -------------------------------------- Cash Flows from Operating Activities: Net Income $ 9,419,000 $ 17,972,000 $ 11,979,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,609,000 10,291,000 9,150,000 Increase in unearned insurance premiums 39,514,000 19,920,000 12,769,000 Decrease (increase) in net accounts receivable (18,968,000) (10,658,000) 862,000 Increase in insurance loss reserves 15,108,000 13,140,000 1,260,000 Increase (decrease) in accounts payable and accruals 9,921,000 995,000 (1,265,000) Provision (credit) for deferred federal income tax (9,066,000) (4,854,000) (218,000) Increase in deferred insurance policy acquisition costs (8,828,000) (7,493,000) (3,870,000) Decrease (increase) in inventory - Sportswear Division 4,852,000 (2,839,000) (7,423,000) Decrease (increase) in other assets 953,000 (49,000) (248,000) Other - net (908,000) 229,000 (58,000) -------------------------------------- Net cash provided by operating activities 52,606,000 36,654,000 22,938,000 -------------------------------------- Cash Flows from Investing Activities: Purchase of marketable securities (122,895,000) (69,956,000) (47,624,000) Sale of marketable securities 55,899,000 52,694,000 27,390,000 Sale of property, plan and equipment 52,353,000 2,912,000 896,000 Acquisition of property, plant and equipment (19,559,000) (27,354,000) (17,608,000) Increase in cash equivalent marketable securities (8,166,000) (15,332,000) (7,362,000) Maturity of marketable securities 8,372,000 4,323,000 4,544,000 Net decrease (increase) in finance receivables 1,392,000 (2,227,000) 2,209,000 -------------------------------------- Net cash used in investing activities (32,604,000) (54,940,000) (37,555,000) -------------------------------------- Cash Flows from Financing Activities: Repayment of long-term debt (28,552,000) (9,061,000) (6,172,000) Issuance of long-term debt 20,000,000 31,597,000 10,000,000 Increase (decrease) in net short-term borrowings (8,756,000) 436,000 15,298,000 Dividends paid (1,628,000) (1,590,000) (1,464,000) Payment of capitalized lease obligations (879,000) (815,000) (757,000) Purchase of treasury stock (118,000) (799,000) (2,654,000) Issuance of treasury stock 32,000 215,000 468,000 -------------------------------------- Net cash provided by (used in) financing activities (19,901,000) 19,983,000 14,719,000 -------------------------------------- Net Increase in Cash 101,000 1,697,000 102,000 Cash at Beginning of Year 3,935,000 2,238,000 2,136,000 -------------------------------------- Cash at End of Year $ 4,036,000 $ 3,935,000 $ 2,238,000 ====================================== Supplemental Disclosures: The Company paid interest of $5,109,000, $4,025,000 and $3,568,000 and income taxes of $9,022,000, $5,215,000 and $6,226,000 in 1994, 1993 and 1992, respectively. See notes to consolidated financial statements. 1994 MIDLAND ANNUAL REPORT PAGE 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1994, 1993 and 1992 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the Company and its subsidiaries conform to generally accepted accounting principles (GAAP) and reflect practices appropriate to the industries in which they operate. Those 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 debt securities (cash equivalents, debt instruments and preferred stocks having scheduled redemption provisions) and equity securities (common and preferred stocks which do not have redemption provisions). The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", effective December 31, 1993 (see Note 14). With the adoption of SFAS No. 115, the Company classified all debt and equity securities as available-for-sale and began to carry such investments at market value. Prior to 1993, debt securities were carried at amortized cost, equity securities held by the insurance subsidiaries were carried at market value, and equity securities held by the parent company were carried at the lower of cost or market value. Unrealized gains or losses on investments, net of income taxes associated therewith, are included in shareholders' equity. Realized gains and losses on sales of investments are recognized in income on a specific identification basis. Inventory--The sportswear division's inventory is valued at the lower of cost (using the weighted average method of inventory valuation) or market. Property and Depreciation--Property, plant and equipment is recorded at cost. Depreciation and amortization are generally calculated using the straight-line method over the estimated useful lives of the respective properties. Certain properties purchased after 1986 are depreciated on an accelerated basis. Federal Income Tax--The Company adopted SFAS No. 109, "Accounting for Income Taxes", effective January 1, 1993 (see Note 7). This statement requires the use of the liability method rather than the deferral method in determining the Company's deferred tax liability. 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. Investment tax credits previously allowed on property additions were deferred in the year of tax benefit and are being amortized against future operations over the estimated useful lives of the properties. The Company files a consolidated federal income tax return which includes all subsidiaries. Insurance Income--Premiums for physical damage and credit accident and health insurance, net of premiums ceded to reinsurers, are recognized as income on a pro-rata basis over the lives of the policies. Credit life premiums are recognized as income over the lives of the policies using the sum of the digits method. The Company 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 which 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. Reinsurance Agreements--The Company cedes varying portions of its written premiums to reinsurers and receives a commission on such premiums ceded. Failure of reinsurers to honor their obligations could result in losses to the Company, as reinsurance contracts do not relieve the Company from its 1994 MIDLAND ANNUAL REPORT PAGE 21 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 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. Allowance for Losses--Provisions for losses on receivables are made in amounts deemed necessary to maintain adequate reserves to cover possible future losses. 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. Earnings per Share--Earnings per share of common stock calculations are computed based on the weighted average number of shares outstanding during the years. The effect of shares issuable under the Company's stock option and award plans are comprehended in the earnings per share calculations. Proposition 103--In 1993, the Company's insurance subsidiaries reached a settlement with the state of California regarding California Proposition 103 (which proposed rate roll backs during certain earlier periods). As a result of this settlement, approximately $2,800,000 (net of federal income tax) was recognized as income in 1993 representing the amount reserved in excess of the agreed upon refunds to certain Company policyholders. Fair Value of Financial Instruments--The fair value of investments is considered to be the market value which is based on quoted market prices. The carrying value of short-term notes payable is considered to be the fair value of such debt because of the short-term nature and related features of the debt. 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. 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 Gross Unrealized Unrealized Market 1994 Cost Gains Losses Value ------------------------------------------------------------------------------- Debt Securities: Governments $ 103,152 $ 112 $ 3,778 $ 99,486 Municipals 63,891 605 1,545 62,951 Cash Equivalents 50,717 - - 50,717 Corporates 31,120 110 632 30,598 ----------------------------------------------------- Total 248,880 827 5,955 243,752 Equity Securities 21,220 10,369 907 30,682 Accrued Interest and Dividends 3,654 - - 3,654 ----------------------------------------------------- Total Marketable Securities $ 273,754 $ 11,196 $ 6,862 $ 278,088 ===================================================== /----------------Thousands of Dollars---------------/ Gross Gross Unrealized Unrealized Market 1993 Cost Gains Losses Value ------------------------------------------------------------------------------- Debt Securities: Governments $ 69,482 $ 3,101 $ 106 $ 72,477 Municipals 61,642 3,475 119 64,998 Cash Equivalents 45,965 - - 45,965 Corporates 10,514 467 4 10,977 ----------------------------------------------------- Total 187,603 7,043 229 194,417 Equity Securities 16,864 11,117 639 27,342 Accrued Interest and Dividends 2,855 - - 2,855 ----------------------------------------------------- Total Marketable Securities $ 207,322 $ 18,160 $ 868 $ 224,614 ====================================================== Included in the determination of net income are the following (amounts in 000's): 1994 1993 1992 ---------------------------------- Gross Realized Gains $ 3,252 $ 4,196 $ 1,845 Gross Realized Losses (1,062) (461) (335) Other Investment Income 12,114 11,050 10,960 Investment Expenses (1,044) (981) (861) --------------------------------- Net Investment Income $ 13,260 $13,804 $11,609 ================================= 1994 MIDLAND ANNUAL REPORT PAGE 22 The cost and approximate market value of debt securities held at December 31, 1994, 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 ---------------------- Under 1 year $ 71,612 $ 71,506 1-5 years 104,946 102,266 6-10 years 40,526 39,246 Over 10 years 31,796 30,734 ---------------------- $ 248,880 $243,752 ====================== 3. RECEIVABLES Accounts receivable at December 31, 1994 and 1993 are generally due within one year and consist of the following (amounts in 000's): 1994 1993 ---------------------- Insurance $ 72,829 $ 51,543 River Transportation 5,725 6,905 Sportswear 3,739 4,459 ---------------------- Total $ 82,293 $ 62,907 ====================== 4. PROPERTY, PLANT AND EQUIPMENT At December 31, 1994 and 1993, property, plant and equipment stated at original cost consist of the following (amounts in 000's): 1994 1993 ---------------------- Land $ 1,771 $ 1,256 Buildings, improvements, fixtures, etc. 46,610 41,166 Vessels and barges 52,683 134,599 Transportation equipment under capital leases 3,106 8,143 Construction-in-progress 5,559 - ---------------------- Total $ 109,729 $185,164 ====================== The 1994 construction-in-progress balance pertains to the construction costs related to the Company's new corporate headquarters which is expected to be completed (at an estimated completion cost of approximately $26 million) and occupied in the fourth quarter of 1995. In December 1994, the Company sold a major portion of the assets related to its river transportation division. The sales price of approximately $46,761,000 approximated the net book value of the assets sold. Total rent expense related to the rental of facilities and equipment included in the accompanying consolidated statements of income is $1,833,000 in 1994, $998,000 in 1993 and $2,970,000 in 1992. Future rentals under non- cancelable operating leases will be approximately $2,053,000 in 1995. 5. NOTES PAYABLE TO BANKS At December 31, 1994 and 1993, the Company had conventional lines of credit with commercial banks of $38,000,000 and $37,000,000, respectively. The lines of credit in use under these agreements at December 31, 1994 and 1993 amounted to $17,000,000 and $11,000,000, respectively. Borrowings under these lines of credit constitute senior debt. Commitment fees are currently required by the lending institutions regarding these credit agreements. Additionally, at December 31, 1994 and 1993, the Company had other short-term bank borrowings outstanding of $5,000,000 and $11,000,000, respectively. These borrowings also constitute senior debt. The aforementioned notes payable, together with outstanding commercial paper, had weighted average interest rates of 6.2% and 3.4% at December 31, 1994 and 1993, respectively. 6. LONG-TERM DEBT In 1994, American Modern Insurance Group, Inc. (the Company's wholly owned subsidiary) procured a $40,000,000 unsecured long-term debt facility, $20,000,000 of which was in use at December 31, 1994. This instrument was obtained to increase the capital and surplus of the property and casualty insurance companies. Long-term debt at December 31, 1994 and 1993 is summarized as follows (amounts in 000's): 1994 1993 -------------------- Equipment Obligations- Due serially through 2002, weighted average rate of 6.19% $16,727 $18,607 Paid out in 1994 - 26,422 Mortgage Note-Due 2003, 5.82% 8,706 8,956 Unsecured Notes Payable Under Long-Term Debt Facilities- Amortizing 1997 to 2001, LIBOR (6.5% at December 31, 1994) plus 1% 20,000 - Capitalized Lease Obligations (transportation equipment) 1,658 2,537 --------------------- Total obligations 47,091 56,522 Less current maturities 2,451 9,412 --------------------- Total $44,640 $47,110 ===================== 1994 MIDLAND ANNUAL REPORT PAGE 23 Equipment and real estate obligations are collateralized by transportation equipment and real estate with a net book value of approximately $28,000,000. The aggregate amount of repayment requirements on long-term debt and capitalized leases for the five years subsequent to 1994 are (amounts in 000's): 1995 - $2,451; 1996 - $2,499; 1997 - $2,552; 1998 - $10,105; 1999 - $936. At December 31, 1994 and 1993, the carrying value and the approximate fair value of the Company's long-term debt was as follows (amounts in 000's): 1994 1993 ------------------- Carrying Value $47,091 $56,522 =================== Fair Value $45,600 $57,000 =================== 7. FEDERAL INCOME TAX The provision for federal income tax is summarized as follows (amounts in 000's): 1994 1993 1992 ---------------------------- Current provision $11,534 $5,137 $4,244 Deferred provision (9,066) 11 (218) ---------------------------- Total $ 2,468 $5,148 $4,026 ============================ The federal income tax provision for the years ended December 31, 1994, 1993 and 1992 is different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (amounts in 000's): 1994 1993 1992 ----------------------------- Federal income tax at statutory rate $ 4,160 $ 6,389 $ 5,442 Tax effect of: Tax exempt interest and excludable dividend income (1,247) (1,134) (943) Increase in statutory rate on deferred taxes - 357 - Investment tax credits (488) (289) (288) Other--net 43 (175) (185) ------------------------------ Provision for federal income tax $ 2,468 $ 5,148 $ 4,026 ============================== Significant components of the Company's net deferred federal income tax liability are summarized as follows (amounts in 000's): 1994 1993 ---------------------- Deferred Tax Liabilities: Deferred insurance policy acquisition costs $12,665 $ 9,660 Accelerated depreciation 5,965 14,339 Unrealized gain on marketable securities 1,580 5,984 Investment tax credits 1,299 1,787 Other 285 446 ---------------------- Sub-total 21,794 32,216 ---------------------- Deferred Tax Assets: Unearned insurance premiums 9,373 7,194 Pension expense 1,902 1,324 Insurance losses 1,260 1,055 Other 2,505 2,419 ---------------------- Sub-total 15,040 11,992 ---------------------- Deferred federal income tax $ 6,754 $20,224 ====================== The cumulative effect of adopting SFAS No. 109 on the Company's 1993 financial statements was to increase income and to decrease the deferred federal income tax liability by $4,867,000. 8. REINSURANCE ACTIVITY Premiums assumed on certain reinsurance contracts are recorded based on records supplied by the ceding companies. A reconciliation of direct to net premiums, on both a written and an earned basis for the property and casualty companies, is as follows: /-------------Thousands of Dollars-------------/ Direct Assumed Ceded Net ------------------------------------------------ 1994 Written $263,250 $11,836 $(39,689) $235,397 Earned 235,299 7,711 (38,433) 204,577 1993 Written $203,577 $14,134 $(37,704) $180,007 Earned 180,759 14,624 (31,530) 163,853 1992 Written $162,749 $ 6,487 $(25,217) $144,019 Earned 146,978 6,822 (20,937) 132,863 1994 MIDLAND ANNUAL REPORT PAGE 24 9. BENEFIT PLANS The Company has pension plans which provide for the payment of annual benefits to substantially all employees upon retirement. Such benefits are based on years of service and the employee'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. Total pension cost was $896,000 in 1994, $642,000 in 1993 and $518,000 in 1992. Included in the above amounts is a supplemental pension expense of $259,000 in 1994, $138,000 in 1993 and $119,000 in 1992. These amounts represent expenses accrued for supplemental pension benefits in excess of Internal Revenue Code Section 415 limitations. The following table sets forth the plans' funded status (amounts in 000's): 1994 1993 ------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $14,534 in 1994 and $11,687 in 1993 $15,115 $12,190 ========================= Projected benefit obligation for service rendered to date $20,169 $16,120 Plan assets at fair value, primarily U.S. bonds and listed stocks 14,583 15,537 ------------------------- Plan assets less than projected benefit obligation (5,586) (583) Unrecognized net assets at January 1, 1987 being recognized over 18 years (1,576) (1,738) Unrecognized prior service cost 48 52 Unrecognized net loss (gain) 4,094 (134) ------------------------- Pension liability included in Other Payables and Accruals $(3,020) $(2,403) ========================= Net pension cost included the following (amounts in 000's): 1994 1993 1992 ------------------------------ Srvice cost--benefits earned during the year $ 725 $ 541 $ 505 Interest cost on projected benefit obligation 1,216 1,160 1,019 Actual return on plan assets--(gain) 315 (1,705) (982) Net amortization and deferral (1,619) 508 (143) ------------------------------ Net periodic pension plan cost $ 637 $ 504 $ 399 =============================== In 1992, the Company provided a special one-time early retirement program for those employees who met certain age and years of service criteria. The 1992 pension plan expense associated with this program was $677,000 which was in addition to the net periodic pension plan cost referred to previously. The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were respectively 8% and 6%, in 1994 and 1992 and 7-1/4% and 5-1/2%, in 1993. The expected long-term rate of return on assets was 8% in all three years. 10. STOCK OPTION AND AWARD PLANS The Company has various plans which provide for the granting of options and common stock to key employees and independent directors of the Company and its subsidiaries. Under the Company's stock option plans, all of the outstanding stock options at December 31, 1994 were non-qualified options, all were exercisable and, generally, had an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. Stock options not exercised expire periodically through year 2003. A summary of stock option transactions follows: 1994 1993 1992 --------------------------------------------------------- Avg. Avg. Avg. (000's) Option (000's) Option (000's) Option Shares Price Shares Price Shares Price --------------------------------------------------------- Outstanding, beginning of year 218 $24.67 219 $23.52 243 $23.46 Exercised (2) 20.81 (9) 22.35 (21) 22.83 Expired - - (2) 38.56 (3) 23.13 Granted - - 10 50.13 - - --------------------------------------------------------- Outstanding, end of year 216 $24.69 218 $24.67 219 $23.52 ========================================================= The Company implemented a restricted stock award program during 1993. Under this program, awards of the Company's common stock will vest over an 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, 32,000 shares were awarded under this program and 31,000 shares remain outstanding at December 31, 1994. The value of the award is being amortized as compensation expense over a five year vesting period. 1994 MIDLAND ANNUAL REPORT PAGE 25 11. INSURANCE LOSS RESERVES Activity in the liability for unpaid insurance losses and loss adjustment expenses (excluding claim drafts issued but not yet paid) for the property and casualty companies is summarized as follows (amounts in 000's): 1994 1993 1992 ---------------------------------- Balance at January 1 $ 33,964 $ 23,185 $ 22,744 Less reinsurance recoverables 6,220 2,780 3,652 ---------------------------------- Net Balance at January 1 27,744 20,405 19,092 ---------------------------------- Incurred related to: Current year 114,511 86,637 67,364 Prior years (2,076) (1,980) (1,929) ---------------------------------- Total incurred 112,435 84,657 65,435 Paid related to: ---------------------------------- Current year 93,014 65,588 53,185 Prior year 9,684 11,730 10,937 ---------------------------------- Total paid 102,698 77,318 64,122 ---------------------------------- Net Balance at December 31 37,481 27,744 20,405 Plus reinsurance recoverables 14,597 6,220 2,780 ---------------------------------- Balance at December 31 $ 52,078 $ 33,964 $ 23,185 ================================== The amounts of recoveries pertaining to reinsurance contracts that were deducted from losses incurred during 1994, 1993 and 1992 were approximately $20,231,000, $21,077,000, and $6,453,000, respectively. 12. CONTINGENCIES M/G Transport Services, Inc. is the subject of a criminal prosecution and related civil litigation concerning the alleged disposal of bilge water and other refuse from vessels on the inland waterways. M/G Transport is litigating these issues and the outcome cannot be reasonably estimated at this time. 13. INDUSTRY SEGMENTS The Company's operations are classified into four industry segments. Listed below is the financial information required to be reported for each segment. No single customer accounted for 10% or more of consolidated revenues during the last three years. Interest expense directly related to finance operations has been included in the determination of operating profit of the finance and other segment. Interest expense includes intercompany interest not eliminated for purposes of segment reporting. Thousands of Dollars 1994 1993 1992 -------------------------------- Total segment revenues Insurance $220,382 $179,310 $145,476 Transportation 53,190 53,255 47,247 Sportswear 41,928 34,702 32,620 Finance and other 6,035 5,681 4,295 Intersegment revenues (5,620) (5,281) (4,134) -------------------------------- Total $315,915 $267,667 $225,504 ================================ Operating profit Insurance $ 16,032 $ 23,662 $ 18,526 Transportation 5,370 3,232 1,236 Sportswear (2,348) (2,663) 2,248 Finance and other 1,568 1,512 1,607 Interest expense (5,952) (5,279) (5,145) Unallocated corporate expenses (2,783) (2,211) (2,467) -------------------------------- Total $ 11,887 $ 18,253 $ 16,005 ================================ Acquisition of fixed assets Insurance $ - $ - $ - Transportation 6,846 14,657 7,758 Sportswear 583 1,702 1,903 Finance, corporate and other 12,130 10,995 7,947 -------------------------------- Total $ 19,559 $ 27,354 $ 17,608 ================================ Depreciation and amortization Insurance $ - $ - $ - Transportation 5,773 6,434 6,435 Sportswear 1,078 973 620 Finance, corporate and other 3,758 2,884 2,095 -------------------------------- Total $ 10,609 $ 10,291 $ 9,150 ================================ Identifiable assets Insurance $377,109 $300,708 $231,360 Transportation 52,534 87,654 79,697 Sportswear 17,264 23,932 21,390 Finance, corporate and other 53,769 59,163 46,932 Intersegment receivables (18,130) (21,235) (19,677) -------------------------------- Total $482,546 $450,222 $359,702 ================================ 1994 MIDLAND ANNUAL REPORT PAGE 26 14. SHAREHOLDERS' EQUITY The Midland Company has 5,000,000 shares of common stock authorized without par value (stated value of $.25 a share), including 778,000 shares reserved for issuance under the Company's stock option and award plans. The Company has also authorized 500,000 shares of preferred stock, without par value, none of which have been issued. Covenants included in the borrowing agreements of M/G Transport Services, Inc. limit its payment of dividends to The Midland Company. Under the most restrictive of such covenants, $10,000,000 of its net assets was not available for distribution to the Company at December 31, 1994. The insurance operations 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 to the Company from its insurance subsidiaries in 1995 without regulatory approval is approximately $8,000,000; such subsidiaries paid actual cash dividends of $4,000,000 in 1994 and $3,000,000 in both 1993 and 1992. Net income as determined in accordance with statutory accounting practices for the Company's insurance subsidiaries was $3,616,000, $10,337,000 and $10,299,000 for 1994, 1993 and 1992, respectively. Shareholders' equity on the same basis was $96,863,000 and $78,236,000 at December 31, 1994 and 1993. The 1994 statutory basis shareholders' equity includes $20 million of paid-in capital funded with long-term debt referred to in Note 6. Activity in the Shareholders' equity accounts is summarized as follows (amounts in 000's): Net Unrealized Unvested Additional Gain on Restricted Common Paid-In Retained Marketable Treasury Stock Stock Capital Earnings Securities Stock Award Total -------------------------------------------------------------------- Balance, January 1, 1992 $911 $14,030 $ 97,156 $ 4,280 $(14,653) $101,724 Net Income 11,979 11,979 Purchase of treasury stock (2,654) (2,654) Cash dividends declared (1,489) (1,489) Exercise of stock options (38) 505 467 Changes in unrealized gain on investments, net of tax 1,556 1,556 --------------------------------------------------------------------- Balance, December 31, 1992 911 13,992 107,646 5,836 (16,802) 111,583 Net income 17,972 17,972 Purchase of treasury stock (799) (799) Cash dividends declared (1,623) (1,623) Exercise of stock options (28) 243 215 Changes in unrealized gain on investments, net of tax (187) (187) Restricted stock awards 656 794 $(1,450) - Amortization of unvested restricted stock awards 290 290 Effect of change in accounting for marketable securities 5,659 5,659 --------------------------------------------------------------------- Balance, December 31, 1993 911 14,620 123,995 11,308 (16,564) (1,160) 133,110 Net income 9,419 9,419 Purchase of treasury stock (118) (118) Cash dividends declared (1,739) (1,739) Exercise of stock options (7) 39 32 Changes in unrealized gain on investments, net of tax (8,554) (8,554) Amortization and cancellation of unvested restricted stock awards (6) (5) 298 287 --------------------------------------------------------------------- Balance, December 31, 1994 $911 $14,607 $131,675 $2,754 $(16,648) $(862) $132,437 ===================================================================== 1994 MIDLAND ANNUAL REPORT PAGE 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Deloitte & Touche LLP 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, 1994 and 1993, and the related consolidated statements of income and retained earnings and of cash flows for each of the three years in the period ended December 31, 1994. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Midland Company and its subsidiaries at December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for debt and equity securities to conform with Statement of Financial Accounting Standards (SFAS) No. 115 effective December 31, 1993 and its method of accounting for income taxes to conform with SFAS No. 109 effective January 1, 1993. s/Deloitte & Touche February 16, 1995 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 generally accepted accounting principles. 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 generally accepted auditing standards, 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. s/John I. Von Lehman Vice President, Treasurer and Chief Financial Officer 1994 MIDLAND ANNUAL REPORT PAGE 29 QUARTERLY DATA THE MIDLAND COMPANY AND SUBSIDIARIES 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter --------------------- ----------- ----------- ----------- ----------- 1994 ---- Revenues $ 69,442,000 $ 74,883,000 $ 85,118,000 $ 86,472,000 Net income (loss) 810,000 (549,000) 3,914,000 5,244,000 Earnings (loss) per common share .26 (.17) 1.28 1.72 Dividends per common share .145 .145 .145 .145 Price range of common stock (AMEX) 38 - 45 1/8 34 3/4 - 39 34 1/4 - 38 38 - 43 3/4 1993 ---- Revenues $ 58,297,000 $ 62,806,000 $ 75,716,000 $ 70,848,000 Net income 6,175,000(a) 4,005,000 5,147,000 2,645,000 Earnings per common share 2.00(a) 1.31 1.67 .87 Dividends per common share .135 .135 .135 .135 Price range of common stock (AMEX) 44 7/8-50 5/8 39 3/4-48 1/8 40 1/2-45 1/4 41 3/8-47 1/2 (a) Includes a credit of $4,867,000, $1.58 per common share, for the cumulative effect of a change in accounting from the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective January 1, 1993. OTHER INFORMATION TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS Society National Bank Deloitte & Touche LLP P.O. Box 6477 250 East Fifth Street Cleveland, Ohio 44101 Cincinnati, Ohio 45202 GENERAL AND TAX COUNSEL Cohen, Todd, Kite & Stanford 525 Vine Building Cincinnati, Ohio 45202 SHAREHOLDERS' MEETING The next meeting of the shareholders will be held at 10:00 A.M. on Thursday, April 13, 1995 at the Company's offices, 537 E. Pete Rose Way, Cincinnati, Ohio 45202. COMMON STOCK The number of holders of common stock at December 31, 1994 was 736. The Company's common stock is registered on the American Stock Exchange. FORM 10-K A copy of the Company's 1994 Annual Report to the Securities and Exchange Commission on Form 10-K may be obtained by writing to the Company - Attention: Secretary. EX-21 4 EXHIBIT (21) THE MIDLAND COMPANY AND SUBSIDIARIES EXHIBIT (21) - SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1994 The subsidiaries of the Registrant as of December 31, 1994, 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 Inland Marine Brokerage Company Ohio 100 M/G Securities, Inc. Ohio 100 CS Crable Sportswear, Inc. Ohio 100 MGT River 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 Co. Ohio 100 American Family Home Insurance Co. Florida 100 Atlas Insurance Agency, Inc. Ohio 100 American Modern Life Insurance Company Ohio 100 Midwest Enterprises, Inc. Florida 100 Lloyds Modern Corporation Texas 100 American Modern Home Service Company Ohio 100 SUBSIDIARIES OF AMERICAN MODERN HOME INSURANCE CO. American Modern Lloyds Insurance Co. Texas 100 American Southern Home Insurance Co. Florida 100 American Western Home Insurance Co. Oklahoma 100 Guardian Underwriters Insurance Company, Inc. Pennsylvania 100 SUBSIDIARY OF AMERICAN WESTERN HOME INSURANCE CO. American Modern Life Insurance Company of Arizona, Inc. Arizona 100 The names of two wholly-owned subsidiaries of The Midland Company are not shown above as such individual listing is not required. EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1994 DEC-31-1994 4,036,000 278,088,000 86,413,000 1,535,000 11,116,000 0 109,729,000 43,687,000 482,546,000 0 44,640,000 911,000 0 0 131,526,000 482,546,000 41,855,000 315,915,000 31,870,000 293,110,000 5,477,000 576,000 4,865,000 11,887,000 2,468,000 9,419,000 0 0 0 9,419,000 3.09 3.07