-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PQVeDpToFwaypnsPefJy1tUbtbZTXbrzR22OMTborRQYDzGvKG7GdBLDiNwdzAU4 97/3HBxyB74/60/qOlPhTg== 0000066025-96-000002.txt : 19960401 0000066025-96-000002.hdr.sgml : 19960401 ACCESSION NUMBER: 0000066025-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MIDLAND CO CENTRAL INDEX KEY: 0000066025 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310742526 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06026 FILM NUMBER: 96540633 BUSINESS ADDRESS: STREET 1: 537 E PETE ROSE WAY CITY: CINCINNATI STATE: OH ZIP: 45202 BUSINESS PHONE: 5137213777 MAIL ADDRESS: STREET 1: 537 E PETE ROSE WAY CITY: CINCINNATI STATE: OH ZIP: 45202 10-K 1 THE MIDLAND COMPANY Annual Report on Form 10-K to the Securities and Exchange Commission for the Year Ended December 31, 1995 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, 1995 Commission File Number - 1-6026 THE MIDLAND COMPANY Incorporated in Ohio I.R.S. Employer Identification No. 31-0742526 7000 Midland Boulevard Amelia, Ohio 45102-2607 Tel. (513) 943-7100 Securities registered pursuant to Section 12(b) of the Act: 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 14, 1996 was $149,518,562. Number of shares of common stock outstanding as of March 14, 1996 - 3,020,577. Documents Incorporated by Reference Annual Report to Shareholders for the year ended December 31, 1995 is incorporated by reference into Parts I, II and IV. Registrant's Proxy Statement dated March 15, 1996 is incorporated by reference into Parts III and IV. 1 THE MIDLAND COMPANY FORM 10-K DECEMBER 31, 1995 PART I ITEM 1. Business. Incorporated by reference to the inside front cover and pages 2 through 13 and 30 (Note 12) of the Registrant's 1995 Annual Report to Shareholders. The number of persons employed by the Registrant was approximately 875 at December 31, 1995. ITEM 2. Properties. Incorporated by reference to the inside front cover and pages 2 through 13 of the Registrant's 1995 Annual Report to Shareholders. ITEM 3. Legal Proceedings. A Grand Jury returned a nine count indictment against M/G Transport Services, Inc. in February, 1995, alleging violations of certain environmental laws. Seven former M/G employees were also indicted. The indictments alleged that M/G employees had, over a period of years, discharged or permitted the discharge, of bilge water, ash and other refuse into the inland waterways. M/G faced fines of up to $4.2 million. The case, styled: United States of America vs. M/G Transport Services, et al., went to trial in the United States District Court for the District of Ohio beginning November 4, 1995. On December 22, 1995, the jury returned guilty verdicts against M/G on eight of the nine counts. Three of M/G's former employees were also found guilty on various counts. M/G has challenged the verdicts and has preserved its rights of appeal. If the verdicts are affirmed by the court, M/G could be fined up to $3.7 million. Sentencing is not expected to occur before the end of March, 1996. Related civil litigation is still pending, the outcome of which cannot be reasonably estimated at this time. 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 16, 30 (Note 13) and 32 of the Registrant's 1995 Annual Report to Shareholders. ITEM 6. Selected Financial Data. Incorporated by reference to page 17 of the Registrant's 1995 Annual Report to Shareholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Incorporated by reference to pages 18 and 19 of the Registrant's 1995 Annual Report to Shareholders. ITEM 8. Financial Statements and Supplementary Data. Incorporated by reference to pages 16 and 20 through 32 of the Registrant's 1995 Annual Report to Shareholders. 2 PART II (Continued) ITEM 9. Changes In and Disagreements with Accountants 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 15, 1996. Executive Officers of the Company - J. P. Hayden, Jr. - Age 66 - Chairman and Chief Executive Officer Michael J. Conaton - Age 62 - President and Chief Operating Officer John R. LaBar - Age 64 - Vice President and Secretary Robert W. Hayden - Age 57 - Vice President John I. Von Lehman - Age 43 - Vice President, Treasurer and Chief Financial Officer Thomas J. Rohs - Age 54 - Vice President J. P. Hayden, III - Age 43 - Vice President John W. Hayden - Age 38 - Vice President Michael L. Flowers - Age 44 - 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 15, 1996. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Incorporated by reference to the Registrant's Proxy Statement dated March 15, 1996. ITEM 13. Certain Relationships and Related Transactions. Incorporated by reference to the Registrant's Proxy Statement dated March 15, 1996. 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, 1995 and 1994. Consolidated Statements of Income and Retained Earnings for the Years Ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. 3 PART IV (Continued) (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 I - Condensed Financial Information of Registrant. 8-12 Schedule II - Allowance for Losses for the Years Ended December 31, 1995, 1994 and 1993. 13 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 15, 1996. 11. Computation of Consolidated Net Income Per Share for the years ended December 31, 1995, 1994 and 1993. 14 13. Annual Report to security holders - Incorporated by reference to the Registrant's 1995 Annual Report to Shareholders. 21. Subsidiaries of the Registrant. 15 22. Registrant's Proxy Statement - Incorporated by reference to the Registrant's Proxy Statement dated March 15, 1996. 23. Independent Auditors' Consent - Included in Consent and Report on Schedules referred to under Item 14(a)2 above. 27. Financial Data Schedule. (b) Report on Form 8-K - No such reports filed or required to be filed in the fourth quarter of 1995. 4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MIDLAND COMPANY Signature Title Date S/ J. P. Hayden, Jr. Chairman, and March 7, 1996 (J. P. Hayden, Jr.) Chief Executive Officer S/ John I. Von Lehman Vice President, Treasurer, March 7, 1996 (John I. Von Lehman) Chief Financial Officer and Chief Accounting Officer 5 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 7, 1996 (George R. Baker) S/ James H. Carey Director and Member March 7, 1996 (James H. Carey) of Audit Committee S/ Michael J. Conaton President, Chief Operating March 7, 1996 (Michael J. Conaton) Officer and Director S/ J. P. Hayden, Jr. Chairman, Chief Executive March 7, 1996 (J. P. Hayden, Jr.) Officer and Director S/ J. P. Hayden, III Vice President and Director March 7, 1996 (J. P. Hayden, III) S/ John W. Hayden Vice President and Director March 7, 1996 (John W. Hayden) S/ Robert W. Hayden Vice President and Director March 7, 1996 (Robert W. Hayden) S/ William T. Hayden Director March 7, 1996 (William T. Hayden) S/ William J. Keating Director March 7, 1996 (William J. Keating) S/ William McD. Kite Director March 7, 1996 (William McD. Kite) S/ John R. LaBar Vice President, Secretary March 7, 1996 (John R. LaBar) and Director S/ John M. O'Mara Director and Member March 7, 1996 (John M. O'Mara) of Audit Committee S/ John R. Orther Director and Member March 7, 1996 (John R. Orther) of Audit Committee S/ William F. Plettner Director March 7, 1996 (William F. Plettner) S/ Glenn E. Schembechler Director and Member March 7, 1996 (Glenn E. Schembechler) of Audit Committee S/ John I. Von Lehman Vice President, Treasurer, March 7, 1996 (John I. Von Lehman) Chief Financial Officer, Chief Accounting Officer and Director 6 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- 64821 on Form S-3 and No. 33-48511 on Form S-8 of The Midland Company of our report dated February 15, 1996, incorporated by reference in this Annual Report on Form 10-K, and our report (appearing below) on the financial statement schedules of The Midland Company for the year ended December 31, 1995. Our audits of the consolidated financial statements referred to in our aforementioned report also included the financial statement schedules of The Midland Company and its subsidiaries, listed in Item 14 (a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. S/ Deloitte & Touche LLP Deloitte & Touche LLP Cincinnati, Ohio March 22, 1996 7 THE MIDLAND COMPANY (Parent Only) Schedule I - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 1995 and 1994 ASSETS 1995 1994 ----------------------------- Cash $ 240,000 $ 184,000 ----------------------------- Marketable Securities (at market value) 8,116,000 10,974,000 ----------------------------- Receivables - Net 7,230,000 4,118,000 ----------------------------- Property, Plant and Equipment (at cost) 54,958,000 47,363,000 Less Accumulated Depreciation 4,112,000 12,935,000 ----------------------------- Net 50,846,000 34,428,000 ----------------------------- Other Assets 1,075,000 31,000 ----------------------------- Investment in Subsidiaries (at equity) 169,978,000 169,093,000 ----------------------------- Total $ 237,485,000 $ 218,828,000 ============================= 8 THE MIDLAND COMPANY (Parent Only) Schedule I - Condensed Financial Information of Registrant Condensed Balance Sheet Information December 31, 1995 and 1994 LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994 ----------------------------- Notes Payable within One Year: Banks (including current portion of long-term debt) $ 31,767,000 $ 22,265,000 Commercial Paper 4,620,000 5,546,000 ----------------------------- Total 36,387,000 27,811,000 ----------------------------- Other Payables and Accruals 1,471,000 568,000 ----------------------------- Intercompany Payables 14,541,000 49,570,000 ----------------------------- Long-Term Debt 28,491,000 8,442,000 ----------------------------- Shareholders' Equity: Common Stock - No Par (issued and outstanding: 3,020,000 shares at December 31, 1995 and 2,997,000 shares at December 31, 1994 after deducting treasury stock of 623,000 shares and 646,000 shares, respectively) 911,000 911,000 Additional Paid-In Capital 15,362,000 14,607,000 Retained Earnings 139,350,000 131,675,000 Net Unrealized Gain on Marketable Securities 19,716,000 2,754,000 Treasury Stock (at cost) (16,575,000) (16,648,000) Unvested Restricted Stock Awards (2,169,000) (862,000) ----------------------------- Total 156,595,000 132,437,000 ----------------------------- Total Liabilities and Shareholders' Equity $ 237,485,000 $ 218,828,000 ============================= 9 THE MIDLAND COMPANY (Parent Only) Schedule I - Condensed Financial Information of Registrant Condensed Statements of Income Information For the Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 ----------------------------------------- Revenues: Dividends from Subsidiaries $ 35,117,000 $ - $ - All Other Income, Primarily Charges to Subsidiaries 9,434,000 8,001,000 7,018,000 ----------------------------------------- Total Revenues 44,551,000 8,001,000 7,018,000 ----------------------------------------- Expenses: Interest Expense 5,248,000 3,442,000 2,739,000 Depreciation and Amortization 4,884,000 3,715,000 2,884,000 All Other Expenses 1,727,000 1,968,000 1,430,000 ----------------------------------------- Total Expenses 11,859,000 9,125,000 7,053,000 ----------------------------------------- Income (Loss) Before Federal Income Tax, Cumulative Effect of Accounting Change and Change in Undistributed Income of Subsidiaries 32,692,000 (1,124,000) (35,000) Provision (Credit) for Federal Income Tax (902,000) (430,000) 214,000 ----------------------------------------- Income (Loss) Before Cumulative Effect of Accounting Change and Change in Undistributed Income of Subsidiaries 33,594,000 (694,000) (249,000) Cumulative Effect of Change in Accounting for Income Taxes - - 3,358,000 ----------------------------------------- Income (Loss) Before Change in Undistributed Income of Subsidiaries 33,594,000 (694,000) 3,109,000 Less - Distributed Income of Subsidiaries (35,117,000) - - Plus - Undistributed Income of Subsidiaries 11,075,000 10,113,000 14,863,000 ----------------------------------------- Net Income $ 9,552,000 $ 9,419,000 $ 17,972,000 ========================================= 10 THE MIDLAND COMPANY (Parent Only) Schedule I - Condensed Financial Information of Registrant Condensed Statements of Cash Flows Information For the Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 ----------------------------------------- Cash Flows from Operating Activities: Net Income $ 9,552,000 $ 9,419,000 $ 17,972,000 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiaries (11,075,000) (10,113,000) (14,863,000) Dividends received from subsidiaries 35,117,000 - - Depreciation and amortization 4,884,000 3,715,000 2,884,000 Increase in receivables (3,995,000) (5,000) (2,951,000) Increase in other assets (1,044,000) (3,000) (8,000) Increase (decrease) in other payables & accruals 871,000 (7,610,000) (1,749,000) Other - net 166,000 71,000 2,128,000 ----------------------------------------- Net cash provided by (used in) operating activities 34,476,000 (4,526,000) 3,413,000 ----------------------------------------- Cash Flows from Investing Activities: Acquisition of property, plant & equipment (28,060,000) (12,083,000) (11,085,000) Capital contributions to subsidiaries (2,999,000) (2,847,000) - Sale of property, plant & equipment 599,000 349,000 - Change in investments (excluding unrealized appreciation/depreciation) 5,379,000 (4,814,000) (232,000) ----------------------------------------- Net cash provided by (used in) investing activities (25,081,000) (19,395,000) (11,317,000) ----------------------------------------- Cash Flows from Financing Activities: Net change in intercompany payables (35,029,000) 34,662,000 622,000 Increase (decrease) in long-term debt 20,551,000 (250,000) 8,957,000 Increase (decrease) in short-term borrowings 8,074,000 (8,756,000) 436,000 Dividends paid (1,844,000) (1,628,000) (1,590,000) Purchase of treasury stock (1,143,000) (118,000) (799,000) Issuance of treasury stock 52,000 32,000 215,000 ----------------------------------------- Net cash provided by (used in) financing activities (9,339,000) 23,942,000 7,841,000 ----------------------------------------- Net Increase (Decrease) in Cash 56,000 21,000 (63,000) Cash at Beginning of Year 184,000 163,000 226,000 ----------------------------------------- Cash at End of Year $ 240,000 $ 184,000 $ 163,000 ========================================= 11 THE MIDLAND COMPANY (Parent Only) Schedule I - Condensed Financial Information of Registrant Notes to Condensed Financial Information For the Years Ended December 31, 1995 and 1994 The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in the Registrant's 1995 Annual Report to shareholders. Total debt of the Registrant (parent only) consists of the following: DECEMBER 31, ------------------------------ 1995 1994 ------------------------------ Short-Term Bank Borrowings $ 31,000,000 $ 22,000,000 Commercial Paper 4,620,000 5,546,000 Secured Mortgage Notes: 6.94% - Due December 20, 2005 20,800,000 - 5.82% - Due December 1, 2003 8,458,000 8,707,000 ------------------------------ Total Debt $ 64,878,000 $ 36,253,000 ============================== See Note 6 to the consolidated financial statements included in the 1995 Annual Report to Shareholders for further information on the Company's outstanding debt at December 31, 1995. The amount of debt, other than debt eliminated in consolidation, that becomes due during each of the next five years is as follows: 1996 - $36,387,000; 1997 - $824,000; 1998 - $880,000; 1999 - $939,000; 2000 - $998,000. 12 SCHEDULE II THE MIDLAND COMPANY AND SUBSIDIARIES SCHEDULE II - ALLOWANCE FOR LOSSES FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ------------------------------------------------- YEAR ENDED DECEMBER 31, 1995: Allowance For Losses $ 1,535,000 $ 468,000 $ 641,000(1) $ 1,362,000 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 NOTES: (1) Accounts written off are net of recoveries. 13 EX-11 2 EXHIBIT (11) THE MIDLAND COMPANY AND SUBSIDIARIES EXHIBIT (11) - COMPUTATION OF CONSOLIDATED NET INCOME PER SHARE FOR THE YEARS DECEMBER 31, 1995, 1994 AND 1993 1995 1994 1993 ----------------------------------------- Net Income $ 9,552,000 $ 9,419,000 $ 17,972,000(a) ========================================= Weighted average number of voting shares outstanding 3,028,000 2,998,000 3,004,000 ========================================= Primary: Adjusted weighted average shares outstanding - after giving effect to conversion of stock options and stock awards 3,072,000 3,050,000 3,074,000 ========================================= Per share - after giving effect to conversion of stock options and stock awards (net income divided by adjusted weighted average shares outstanding) $ 3.11 $ 3.09 $ 5.85(a) ========================================= Fully diluted: Adjusted weighted average shares outstanding - after giving effect to conversion of stock options and stock awards 3,084,000 3,066,000 3,078,000 ========================================= Per share - after giving effect to conversion of stock options and stock awards (net income divided by adjusted shares outstanding) $ 3.10 $ 3.07 $ 5.84(a) ========================================= (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. 14 EX-13 3 1995 MIDLAND ANNUAL REPORT - INSIDE FRONT COVER 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 subsidiaries - Insurance, Transportation and Sportswear. Midland is a publicly traded company on the American Stock Exchange (MLA). American Modern Insurance Group, Inc. American Modern Insurance Group (AMIG) consists of six property and casualty companies and two credit life companies. Licensed in all 50 states, AMIG has traditionally specialized in writing physical damage insurance and related coverages on manufactured housing and recently has expanded to other areas of insurance including 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 currently charters barges and brokers freight for the movement of commodities on the inland waterways. M/G owned 259 barges and four towboats at December 31, 1995. The barges are used in the brokerage operation and the towboats are chartered to outside companies. CS Crable Sportswear, Inc. CS Crable is a "value-added" manufacturer of high quality appliqued, embroidered and imprinted apparel specializing in the design and marketing of branded and licensed sportswear. CS Crable's designs feature major colleges and universities, professional leagues, lifestyle and specialty licensed and non-licensed programs. 1995 MIDLAND ANNUAL REPORT - PAGE 2 Chairman's Letter The Midland Company's net income for 1995 was $9,552,000, $3.11 per share, on revenues of $350,960,000. Net income for 1994 was $9,419,000, $3.09 per share, on revenues of $315,411,000. For the fourth quarter of 1995, net income was $2,622,000, $.85 per share, on revenues of $93,148,000, as compared to net income of $5,244,000, $1.72 per share, on revenues of $85,968,000 for the fourth quarter of 1994. Your Company, while faced with many difficult issues during 1995, ended the year well positioned for the future. Each of Midland's three major subsidiaries absorbed unusual expenses during 1995 that should not continue at the same level in 1996. These situations are discussed in more detail in the following pages of this year's annual report. We are pleased to report that Midland's Board of Directors, at its March 1995 meeting, approved an increase in the cash dividends to shareholders from 58 cents to 62 cents per common share. This marks the ninth consecutive year that Midland's dividend has increased. At its December meeting, the Board approved a dividend reinvestment plan available to all shareholders beginning with dividends payable in the first quarter of 1996. The book value of Midland's stock was $51.85 per share as of December 31, 1995, compared to $44.19 at December 31, 1994. This represents an increase of 17 percent. Profitable operating results, along with an almost $17,000,000 increase in the unrealized gain on marketable securities, added over $24,000,000 to Midland's shareholders' equity. The Company also attained record levels of assets and revenues during 1995. American Modern Insurance Group, Inc. (AMIG), the Company's insurance subsidiary, concluded the most successful year in the Company's history. Net premiums written increased 21% in 1995 as compared to 1994 with underwriting profits of the insurance operating subsidiaries increasing over 140% during the same period. AMIG's growth was a result of increased penetration in all of our major product lines as well as from expansion into other areas of insurance. AMIG's combined ratio (the ratio of losses and expenses to premiums earned) was 97.2% in 1995, considered excellent by industry standards. This is the sixth THIS PAGE INCLUDES A PHOTOGRAPH OF J.P. HAYDEN, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND MICHAEL J. CONATON, PRESIDENT AND CHIEF OPERATING OFFICER. 1995 MIDLAND ANNUAL REPORT - PAGE 3 consecutive year that AMIG's combined ratio has been less than 100%. These results for 1995 were exceptionally strong given the fact that during 1995 the insurance industry encountered the largest amount of catastrophic losses ever reported for a fourth quarter period. Further, the year as a whole ranks as the third worst in history for natural disasters. Investment income for AMIG also reached record levels in 1995, increasing 58 percent over 1994. AMIG's investment portfolio grew to $358,939,000 at December 31, 1995, an increase of 34 percent from the prior year end. AMIG's investment portfolio remains conservatively invested in equity and high quality fixed income securities. The portfolio contains no bonds below investment grade or any investments in real estate. AMIG realized pre-tax capital gains of approximately $2,375,000 in 1995 and $2,190,000 in 1994. M/G Transport Services, Inc., Midland's transportation subsidiary, successfully concluded its first full year operating primarily as a freight broker after the sale of approximately two-thirds of its equipment in December of 1994. Operating results for 1995, after absorbing unusually high litigation costs, were comparable to the full year of 1994. The river transportation industry experienced a noticeable improvement in both freight rates and demand for equipment during 1995. M/G's freight brokerage operation benefited from this trend in 1995 and we foresee continued strength into 1996. Management has committed to the purchase of 70 open-hopper barges with delivery scheduled for 20 barges in 1996 and 50 barges in 1997. In January 1996, M/G exchanged two of its four towboats as the primary consideration for the 20 barges scheduled for delivery in 1996. CS Crable Sportswear, Inc., your Company's sportswear subsidiary, dramatically revamped its overall operations during 1995. At mid-year 1995, Management was fortunate to obtain the services of Mr. Richard K. Queen as President and Chief Operating Officer. Under his direction, CS Crable has revamped its product line, changed its sourcing procedures, employed new designs and fabrics and expanded its sales force and overall geographic coverage within the U.S. At the same time, Mr. Queen has reduced CS Crable's overall staff and the Company's inventory to the lowest level in over four years while placing CS Crable on a path to increase gross sales. It is Management's belief that CS Crable's 1996 results will reflect strong overall operating improvements. By year end, CS Crable should be well positioned to compete aggressively in its chosen niche areas of the sportswear industry. The Midland Company, in October 1995, moved into its new corporate headquarters and training center. Constructed on a campus-like setting in an eastern suburb of Cincinnati, Ohio, these facilities will allow the Company to grow and prosper well into the next century. As we enter 1996, Management is confident that The Midland Company is well positioned for continued growth in revenues and profits. Our reputation for quality and service should help contribute to this growth. We know that a company cannot be any better than the collective talents of its people and the support it receives from them. With that in mind, we would like to take this opportunity to thank all of our associates for their continued support and loyalty to the Company. At the same time, we wish to extend our sincere thanks and appreciation to all those lending institutions who have participated in our growth and, most particularly, to thank you, our loyal shareholders, for your confidence in us. Sincerely yours, S/J. P. Hayden, Jr. J. P. Hayden, Jr. Chairman February 15, 1996 1995 MIDLAND ANNUAL REPORT - PAGE 4 AMERICAN MODERN INSURANCE GROUP, INC. We are pleased to report that 1995 was a record setting year for American Modern Insurance Group, Inc. (AMIG), a holding company licensed in all 50 states through its six property and casualty and two life companies. The operating profits and revenues of the property and casualty companies reached all-time highs in 1995. Net premiums written increased by approximately 21% over 1994 with net underwriting income increasing over 130%. Even with the severe weather that occurred during the year, especially the spring hail storms in Texas and the incredible Atlantic hurricane season, the year-end loss ratio was 52%. This excellent result helped produce an overall combined ratio (the ratio of losses and expenses to premiums earned) of 97.2%. American Modern Insurance Group has produced a combined ratio of less than 100% for six consecutive years. AMIG's premium growth was spread across all of our major product lines. We continued to experience growth in our traditional physical damage insurance and related coverages for manufactured housing, most particularly in insurance generated through the manufactured homes dealer network. Our value added software programs and instructional courses designed to assist dealers in the writing of their finance and insurance packages have made us a preferred business partner in this channel of distribution. We also experienced growth in our other personal lines insurance products such as Site Built Dwellings and Watercraft. The Watercraft products continued their strong growth in 1995, with premiums increasing over 50% for the third consecutive year. This continued growth, which includes Personal Watercraft insurance, has positioned us as one of the leading insurance carriers in the industry. The Financial Services Division continues to expand and add to our product diversification. Several new product initiatives began to THIS PAGE INCLUDES A FIVE YEAR COMBINED RATIO BAR CHART WITH THE FOLLOWING DATA: 1991 96.9% 1992 94.6% 1993 93.9% 1994 98.5% 1995 97.2% THIS PAGE ALSO INCLUDES THE FOLLOWING TEXT: American Modern Insurance Group achieved record levels of profitablity, net premiums written and total assets in 1995. 1995 MIDLAND ANNUAL REPORT - PAGE 5 emerge in 1995, most notably the division's new Retail Services and Emerging Markets groups. These groups are developing a variety of credit related coverages and non-traditional insurance products with historically high margins and limited catastrophe exposure. Continued emphasis on our life insurance operations resulted in net premiums written increasing by approximately 44% over 1994. Significant effort has been devoted to gaining admission into additional states and we expect continued growth in this area over the years ahead. Ameritrac, American Modern Insurance Group's loan and lease tracking service, monitors portfolios for financial and leasing institutions and places physical damage coverage on site built homes, manufactured homes, automobiles and other loan collateral on which the borrower has not provided proof of insurance. Ameritrac has expanded its services to include both escrow and tax payment tracking for clients with a mortgage portfolio, a direct mail service and a service for converting an agent's manufactured home portfolio to AMIG from its current carrier. The Commercial Lines Division, consisting primarily of mobile home park and dealer insurance and a variety of program business, continues to mature according to plan. Our plans remain ambitious for continued growth in the commercial lines area. The American Modern Insurance Group places a strong emphasis on the management of exposure due to hurricanes and earthquakes. We are working with an outside consulting firm on the refinement of a sophisticated system to track the Company's exposure to natural THIS PAGE INCLUDES A PHOTOGRAPH OF JOHN W. HAYDEN, PRESIDENT AND CHIEF OPERATING OFFICER OF AMERICAN MODERN INSURANCE GROUP AND THOMAS J. ROHS, CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF AMERICAN MODERN INSURANCE GROUP. 1995 MIDLAND ANNUAL REPORT - PAGE 6 catastrophes. The premium increases we have achieved in 1995 have not come at the expense of the Company's continuing commitment to its risk management discipline. Our Company's Claims Department remains committed to providing policyholders superior service. In 1995, we increased the number of staff adjusters by 38% over 1994. This expansion helps us move ever closer to our customers and handle claims in a more timely and efficient manner. In fact, during the year, approximately 86% of all claims were settled within 30 days of being reported. Certainly one of the highlights and most exciting events of 1995 was the relocation to our new corporate headquarters located in Amelia, Ohio. A variety of work flow enhancements have been made in several of our key operating areas. Our employees have been invigorated by the relocation to the new facility and are more committed than ever to delivering quality products and superior service to our customers. As always, we remain focused on our company-wide commitment to excellence. An example of this commitment can be found in the Company's emphasis on employee training and development. In addition to our new corporate headquarters, we are fortunate to have a new training facility in which to further the education and development of our employees. A manager of education and development has been hired to help identify, prioritize and coordinate these organizational needs. The training and development units within our personal lines operation and claims department continue to be key areas responsible for the success of the American Modern Insurance Group. Our Company's ultimate commitment to excellence during 1995 was the participation by all AMIG employees in an extensive three-day Excellence Training Program. During these three days, all employees were trained in ways to improve interpersonal communication skills, THIS PAGE INCLUDES TWO FIVE YEAR BAR CHARTS WITH THE FOLLOWING DATA (AMOUNTS IN 000'S): AMIG NET WRITTEN PREMIUMS AMIG NET INVESTMENT INCOME 1991 $124,156 $10,559 1992 144,642 11,326 1993 182,884 13,631 1994 240,348 12.999 1995 291,808 19,455 1995 MIDLAND ANNUAL REPORT - PAGE 7 enhance problem solving ability and apply the quality improvement process. As we move into the future, all new employees will have the benefit of participating in this program. We view this commitment to excellence as vital to the Company's ongoing success. Once again we have made strides in increasing our customer awareness. With the addition of a director of marketing research, we are administering focus groups and customer satisfaction surveys in an effort to get more in touch with our customers' expectations and desires. We are using the results of this research to offer products and services that meet and exceed the needs of our valued customers. Advances in automation and technology have led, and will continue to lead, to service improvements as well. A few of the enhancements being implemented include upgrades within the commercial lines system, further automation of the claims adjustment process and the electronic imaging of documents. We firmly believe that investment in technology will provide us with a long-term competitive advantage. The American Modern Insurance Group's investment portfolio continues to be conservatively invested in high quality fixed income and THIS PAGE INCLUDES A PHOTOGRAPH OF ROBERT E. HILLIARD, SENIOR VICE PRESIDENT OF AMERICAN MODERN INSURANCE GROUP AND RONALD L. CRIPPEN, SENIOR VICE PRESIDENT OF AMERICAN MODERN INSURANCE GROUP. THIS PAGE ALSO INCLUDES THE FOLLOWING TEXT: AMIG's combined ratio for 1995 was less than 100 percent for the sixth consecutive year, demonstrating a commitment to sound underwriting policies. 1995 MIDLAND ANNUAL REPORT - PAGE 8 equity securities. There are no investments in real estate or derivative products. The fixed income portfolio maintains a weighted average quality of approximately AA to AAA and the current average maturity of the fixed income portfolio is approximately 4.7 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 $2,375,000 in net pre-tax capital gains in 1995. We would like to thank our many business partners and acknowledge the impact of their contributions to the Company's success. We are committed to excellence and believe we will be successful in earning your continued support. We would also like to thank all of the employees of American Modern Insurance Group, for without their dedication to excellence our continued success would not be possible. THIS PAGE INCLUDES A PHOTOGRAPH OF KENNETH G. BOBERG, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER OF AMERICAN MODERN INSURANCE GROUP AND CHARLES J. JENKINS, SENIOR VICE PRESIDENT OF AMERICAN MODERN ISURANCE GROUP. THIS PAGE ALSO INCLUDES THE FOLLOWING TEXT: AMIG's ultimate commitment to excellence during 1995 was the participation by all employees in an extensive three-day Excellence Training Program. 1995 MIDLAND ANNUAL REPORT - PAGE 9 American Modern Insurance Group, Inc. Investment Portfolio THIS PAGE INCLUDES TWO FIVE YEAR TOTAL RETURN BAR CHARTS WITH THE FOLLOWING DATA: Bonds & Notes Pretax After Tax Equities --------------------------------------------------- 1991 13.1% 9.1% 31.5% 1992 7.2 5.4 7.1 1993 8.9 6.4 7.8 1994 (0.8) 0.1 1.3 1995 13.4 9.2 31.3 1995 1994 1993 1992 1991 --------------------------------------------------- MARKET VALUES (000's) Bonds and Notes: Governments $152,942 $ 99,486 $ 72,477 $ 75,200 $ 76,333 Municipals 92,904 62,951 64,998 53,514 36,047 Corporate 35,347 30,598 10,977 8,101 10,788 Cash Equivalents 31,941 43,782 43,838 28,442 20,800 --------------------------------------------------- Total 313,134 236,817 192,290 165,257 143,968 Equity Securities 40,716 26,643 23,462 22,514 19,628 Accrued Interest and Dividends 5,089 3,654 2,855 2,921 2,587 --------------------------------------------------- Total $358,939 $267,114 $218,607 $190,692 $166,183 =================================================== AVERAGE MATURITY OF BONDS AND NOTES (years) 4.7 4.1 3.4 4.1 4.0 =================================================== The average quality rating of the portfolio was AA to AAA for all the years presented. 1995 MIDLAND ANNUAL REPORT - PAGE 10 M/G TRANSPORT SERVICES, INC. M/G Transport Services, Inc., Midland's transportation division, operates a fleet of 259 barges. M/G, at December 31, 1995, also owned four towboats that were operated by other companies in the industry through long-term charter agreements. The barges are utilized mainly by M/G's brokerage operation for the placement of freight in the movement of dry bulk commodities such as petroleum coke, iron ores, logs, fertilizers, sugar, aggregates, etc. M/G Transport's financial performance in 1995 marked a rebound from previous years when depressed freight rates negatively affected profits. Increased demand for barge capacity in the industry has positively affected freight rates. M/G's 1995 gross revenues from the retained brokerage operations increased 55% in 1995 compared to 1994. The related gross tonnage moved increased 55% over this same period. As previously reported, M/G sold approximately two-thirds of its assets in December of 1994. The restructuring actions taken by M/G Transport in 1994 have enabled us to achieve the results reported in 1995. The management team continues to believe that M/G's operations should continue to provide excellent returns. We are confident that we have the plans and THIS PAGE INCLUDES A PHOTOGRAPH OF THOMAS C. TERRELL III, PRSIDENT MGT SERVICES, INC. AND J. KEVIN JENNINGS, EXECUTIVE VICE PRESIDENT, MGT SERVICES, INC. THIS PAGE ALSO INCLUDES THE FOLLOWING TEXT: M/G Transport achieved a very favorable level of profitability in its first full year operating primarily as a freight broker. 1995 MIDLAND ANNUAL REPORT - PAGE 11 personnel in place to accomplish such results. In light of this optimism, M/G Transport has committed to purchase 20 open-hopper barges valued at $5,700,000 slated for delivery in the summer of 1996. In January, 1996, M/G exchanged two of its towboats as the primary consideration for the purchase of these barges. In addition, M/G has committed to the delivery of an additional 50 open-hopper barges, valued at $14,000,000, scheduled for delivery in the summery of 1997. We believe these equipment acquisitions are necessary to upgrade and modernize our fleet so as to further position ourselves for growth and development in the river transportation industry. Over the long term, Management feels M/G Transport is well positioned to build its earnings power as the market returns to normal conditions. Management also continues to explore the possibility of further expansion through the acquisition of similar or other business interests that would add solid growth and financial stability to M/G Transport Services, Inc. We would like to thank all of the M/G Transport staff for their determination and dedication throughout the year. M/G Transport's future success will be directly attributable to the efforts and hard work of the entire staff. THIS PAGE INCLUDES A PHOTOGRAPH OF JACK L. LORDO, VICE PRESIDENT M/G TRANSPORT SERVICES, INC., J. P. HAYDEN III, PRESIDENT AND CHIEF OPERATING OFFICER M/G TRANSPORT SERVICES, INC. AND RAYMOND R. LUDMANN, TREASURER M/G TRANSPORT SERVICES, INC. 1995 MIDLAND ANNUAL REPORT - PAGE 12 CS CRABLE SPORTSWEAR, INC. CS Crable Sportswear, Inc., Midland's wholly-owned sportswear subsidiary, is a "value-added" manufacturer of high-quality appliqued, embroidered and imprinted apparel that specializes in the design and marketing of branded and licensed sportswear. The Company is recognized as an innovator in garment and graphic designs. The CS Crable brand is well regarded for the high-quality and value of its sportswear. Emphasis has been placed on designs featuring major colleges and universities, professional leagues, lifestyle and specialty licensed and non-licensed programs. CS Crable markets its products with Company and independent sales representatives located throughout the United States. The Company has responded well to a very volatile market in 1995 characterized by a soft retail environment and substantial competitive activity and has completed the year well positioned for future growth and profitability. CS Crable achieved a substantial reduction (37%) in total inventory and ended the year with its lowest inventory position in four years. Inventory liquidation over the past two years has reduced inventories over 55%, providing a sound financial basis for renewed growth. Management has undertaken several major business initiatives in 1995 to strengthen the management team and bolster our ability to be a major competitor in the market. We are pleased that Mr. Richard K. Queen has joined the Company as President and Chief Operating Officer. Mr. Queen brings many years of executive management experience in the apparel industry to CS Crable. THIS PAGE FEATURES A PHOTOGRAPH OF VARIOUS CS CRABLE SPORTSWEAR GARMENTS DISPLAYED IN THE COMPANY'S SHOWROOM. THIS PAGE ALSO INCLUDES THE FOLLOWING TEXT: CS Crable's management initiatives and reduced inventory levels have positioned the Company for improved operating performance in 1996. 1995 MIDLAND ANNUAL REPORT - PAGE 13 With his leadership, CS Crable Sportswear is positioning itself to return to strong profitability in a very dynamic and competitive marketplace. The development of a new business planning process, as well as a review and reengineering of our business practices and policies, including the implementation of a new state-of-the-art information system, are well underway. A profitability analysis and review of all major business programs has prompted the discontinuation of several non-performing licenses and a repositioning of some other programs. Major League Baseball and Pebble Beach remain as substantial contributors to our business and are integral to our long-term business direction. The Company is also committed to exploring new licenses to complement existing lines and to expand and diversify into other channels of distribution. Continued emphasis will be placed on establishing unique products and brands for each channel of distribution while positioning each CS Crable brand as the highest quality, best value brand in its respective market. Management is focused on product and channel diversification and brand development. Two new programs, Crable Classics and Wolf Athletic, are in development for release in the Fall of 1996, and are expected to provide significant growth in 1997. Also, Johnny Xtreme, CS Crable's attitude brand, has been redeveloped for introduction with "mass" retailers. The Management of CS Crable Sportswear would like to extend its appreciation to all our employees for their ongoing dedication and hard work. The accomplishments of this past year would not have been possible without their positive attitude and professionalism. In addition, we would like to take this opportunity to express our gratitude to our many loyal suppliers, retailers and licensors for their continued support and partnership. We remain dedicated to providing our customers with the best valued, premium sportswear through the highest standards in innovation, quality and service. THIS PAGE INCLUDES A PHOTOGRAPH OF THOMAS R. HAYDEN, VICE PRESIDENT CS CRABLE SPORTSWEAR, RICHARD K. QUEEN, PRESIDENT AND CHIEF OPERATING OFFICER CS CRABLE SPORTSWEAR, GARY R. MASSA, VICE PRESIDENT CS CRABLE SPORTSWEAR AND KEITH E. COTTRELL, VICE PRESIDENT CS CRABLE SPORTSWEAR. 1995 MIDLAND ANNUAL REPORT - PAGE 16 QUARTERLY DATA THE MIDLAND COMPANY AND SUBSIDIARIES First Quarter Second Quarter Third Quarter Fourth Quarter -------------------------------------------------------------- 1995 Revenues $75,939,000 $87,847,000 $94,026,000 $93,148,000 Net Income 3,811,000 967,000 2,152,000 2,622,000 Earnings per common share 1.24 .31 .71 .85 Cash dividends per common share .155 .155 .155 .155 Price range of common stock(AMEX) 43-51 43 3/4-48 1/4 43 3/4-47 1/4 47-50 1/8 1994 Revenues $69,316,000 $74,755,000 $85,372,000 $85,968,000 Net income (loss) 810,000 (549,000) 3,914,000 5,244,000 Earnings (loss) per common share .26 (.17) 1.28 1.72 Cash 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 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. 1995 MIDLAND ANNUAL REPORT - PAGE 17 SELECTED CONSOLIDATED FINANCIAL DATA THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1995 1994 1993 1992 1991 -------------------------------------------------------------------- Revenues $350,960,000 $315,411,000 $267,164,000 $225,063,000 $202,232,000 ==================================================================== Net Income $ 9,552,000 $ 9,419,000 $ 17,972,000(a) $ 11,979,000 $ 9,231,000 ==================================================================== Earnings Per Common Share $3.11 $3.09 $5.85(a) $3.98 $3.02 ==================================================================== Marketable Securities $367,054,000 $278,088,000 $224,614,000 $188,531,000 $163,145,000 ==================================================================== Property, Plant and Equipment (net) $ 85,849,000 $ 66,042,000 $107,892,000 $ 93,042,000 $ 85,399,000 ==================================================================== Total Assets $604,703,000 $482,546,000 $450,222,000 $359,702,000 $318,101,000 ==================================================================== Unearned Insurance Premiums $190,948,000 $158,316,000 $118,802,000 $ 89,732,000 $ 76,963,000 ==================================================================== Insurance Loss Reserves $ 68,347,000 $ 57,715,000 $ 42,607,000 $ 23,993,000 $ 22,733,000 ==================================================================== Long-Term Debt $ 65,456,000 $ 47,091,000 $ 56,522,000 $ 34,801,000 $ 31,730,000 ==================================================================== Shareholders' Equity $156,595,000 $132,437,000 $133,110,000 $111,583,000 $101,724,000 ==================================================================== Book Value Per Common Share $51.85 $44.19 $44.39 $37.52 $33.69 ==================================================================== Cash Dividends Per Common Share $.62 $.58 $.54 $.50 $.46 ==================================================================== Common Shares Outstanding 3,020,000 2,997,000 2,999,000 2,974,000 3,019,000 ==================================================================== (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. 1995 MIDLAND ANNUAL REPORT - PAGE 18 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 Other. A description of these segments and comments with regard to their operations are included below. In addition, please refer to the information on the inside front cover as well as the text in the Chairman's Letter and the other information on pages 4 through 13 of the Annual Report. Such information, including the Quarterly Data presented on page 16, 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. M/G Transport Services, Inc., Midland's transportation division, operates primarily as a freight broker. This division arranges for the movement of dry bulk commodities such as petroleum coke, iron ores, logs, fertilizers, sugar and aggregates on the lower Mississippi River and its tributaries. In 1994 and prior years, M/G Transport Services, Inc. was a traditional river transportation company involved in the affreightment of dry bulk commodities on the Ohio and Mississippi rivers and their tributaries. Midland's sportswear division, CS Crable Sportswear, Inc., is a value-added manufacturer of high-quality appliqued, embroidered and imprinted apparel specializing in the design and marketing of branded and licensed sportswear. CS Crable's products are marketed by Company and independent sales representatives located throughout the United States. The other segment consists primarily of financing activities that are considered immaterial. Results of Operations American Modern Insurance Group concluded another successful year in 1995. Record levels were achieved in the areas of profitability, net written premiums and earned premiums. The profits produced by this division in 1995 were especially encouraging considering 1995 was the third worst year in history for natural disasters within the insurance industry. The past trends of solid growth and sound underwriting policies continued in 1995. Net earned premiums increased 27% in 1995 as compared to the 25% increase in 1994. Direct written premiums increased 32% in 1995 and 29% in 1994. As a result of increased reinsurance activity, significantly more premiums were ceded to reinsurers in 1995 than prior years and, as a result, net written premiums increased by 21% in 1995 compared to a 31% increase in 1994. The division's combined ratio (ratio of losses and expenses to premiums earned) was 97.2% in 1995 compared to 98.5% in 1994. These results are considered excellent by industry standards. The increase in insurance revenues in 1995 and 1994 was due to the overall growth of all of our existing insurance products as well as expansion into other areas of insurance. The increases in insurance losses and loss adjustment expenses and commissions and other policy acquisition expenses in 1995 and 1994 are due to the aforementioned growth in earned premiums. Also contributing to the 1994 increase in insurance losses and loss adjustment expenses was a larger amount of catastrophe losses in 1994. The 1995 increase in insurance operating and administrative expenses is due to premium growth plus higher than normal litigation costs in 1995 compared to the prior year. As reported previously, operating results for 1993 include in income (principally insurance) a $4.3 million pre-tax California Proposition 103 settlement adjustment and $3.7 million of pre-tax net realized gains on sale of investments (such pre-tax gains for 1995 and 1994 amounted to $2.4 million and $2.2 million, respectively). The transportation division successfully concluded its first full year operating solely as a freight broker. This division's profit in 1995 was comparable to 1994 and was achieved in spite of high litigation costs. Transportation revenues and related expenses decreased in 1995 due to the sale in December, 1994 of 67% of its equipment as well as its affreightment contracts. Transportation revenues in 1994 were comparable to the prior year while related expenses decreased in 1994 as compared to 1993 due to a stronger market in northbound freight movements. Transportation revenues directly related to freight brokerage operations actually increased in 1995 as compared to 1994 due to an increased demand for barge capacity which positively impacted affreightment rates. Sportswear revenues and related expenses, as well as the overall operating performance of the sportswear division, decreased in 1995 as compared to 1994. These declines were reflective of a general downturn within the entire sportswear industry which is affecting numerous companies within the industry. Reacting to this condition, CS Crable's revamped management team established a policy to sell as much excess inventory as possible and to increase its reserve for inventory obsolescence. CS Crable's inventories are now lower than they have been in the past four years. 1995 MIDLAND ANNUAL REPORT - PAGE 19 Liquidity and Capital Resources The Company and its finance subsidiary issue commercial paper, generally below the bank prime borrowing rates, and have $45 million of credit lines available under bank lines at costs not exceeding prime borrowing rates. Approximately $4.6 million of commercial paper, $20 million of the previously mentioned bank lines and $11 million in other short-term bank borrowings were outstanding at December 31, 1995. The Company plans to service existing debt with internally generated funds. Although the payment of dividends to the parent Company from the Company's subsidiaries is restricted by state regulatory agencies and/or covenants contained in debt agreements, these restrictions have not had, and are not expected to have, a significant impact on the parent Company's liquidity or its ability to meet its obligations. The Company completed the construction of its new corporate headquarters and training facility in late 1995. The total cost of this facility approximated $29 million. The Company's previous headquarters facility is listed for sale and the eventual proceeds derived from the sale will be used to liquidate a portion of the short-term debt. M/G Transport Services, Inc. has committed to the acquisition of 20 barges in 1996 for a total cost of $5.7 million. The primary consideration for this purchase will be the exchange of two of M/G Transport's towboats valued at $5 million. M/G Transport has also committed to the purchase of 50 barges in 1997 for a total cost of $14 million. It is currently anticipated that these barges will be financed with conventional long-term debt. Changes in Financial Condition Marketable securities increased in 1995 and 1994 due to the cash flow from operations and investment income received from the insurance division's investment portfolio. Also contributing to the 1995 increase in marketable securities was the approximate $26 million ($17 million net of deferred federal income taxes) increase in the unrealized appreciation of these securities. The increases in 1995 and 1994 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 37% in 1995 as compared to 1994 and have decreased 55% in the last two years due to the special close-out inventory program implemented in 1994 and carried into 1995. Property, plant and equipment increased in 1995 due primarily to the costs associated with the Company's new corporate headquarters facility. The decrease in property, plant and equipment in 1994 was due to the transportation division's sale of approximately 67% of its river transportation equipment. Short-term bank borrowings and long-term debt increased in 1995 due to the financing of the Company's new corporate headquarters facility. This facility cost approximately $29 million with $20.8 million of this amount financed through long-term debt financing and the remainder financed with short-term borrowings. The 1994 decrease in the Company's current portion of long-term debt was the result of the transportation division's sale of assets in late 1994. Approximately $21 million of the proceeds from this sale was used to prepay long-term debt loans which significantly reduced the Company's current debt repayments for 1995 and beyond. Also in 1994, the Company's insurance subsidiary obtained a $40 million unsecured long-term debt facility, $20 million of which was in use at December 31, 1995 and 1994. The increase in other payables and accruals in 1995 is primarily related to a new reinsurance agreement entered into by our insurance division whereby funds related to ceded insurance are held in reserve rather than being released to the reinsurer. Approximately $16 million was held under this agreement at December 31, 1995. The 1995 increase in deferred federal income tax is due primarily to the increase in deferred taxes on the unrealized gains in the Company's marketable securities. The decrease in deferred federal income tax in 1994 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 in 1994. 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 1995 increase in unvested restricted stock awards was due to the new grant awarded to employees in 1995. Impact of Inflation Management does not consider the impact of changing prices to be material in the analysis of the Company's overall operations. 1995 MIDLAND ANNUAL REPORT - PAGE 20 CONSOLIDATED BALANCE SHEETS THE MIDLAND COMPANY AND SUBSIDIARIES December 31, 1995 1994 ------------------------------ ASSETS Cash $ 6,385,000 $ 4,036,000 ------------------------------ Marketable Securities 367,054,000 278,088,000 ------------------------------ Receivables: Accounts receivable 94,677,000 86,413,000 Less allowance for losses 1,362,000 1,535,000 ------------------------------ Net 93,315,000 84,878,000 ------------------------------ Inventory - Sportswear Division 6,954,000 11,116,000 ------------------------------ Property, Plant and Equipment: Original cost 131,616,000 109,729,000 Less accumulated depreciation and amortization 45,767,000 43,687,000 ------------------------------ Net 85,849,000 66,042,000 ------------------------------ Deferred Insurance Policy Acquisition Costs 43,146,000 37,653,000 ------------------------------ Other Assets 2,000,000 733,000 ------------------------------ Total Assets $604,703,000 $482,546,000 ============================== See notes to consolidated financial statements. 1995 MIDLAND ANNUAL REPORT - PAGE 21 THE MIDLAND COMPANY AND SUBSIDIARIES December 31, 1995 1994 ------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Notes Payable Within One Year: Banks $ 31,000,000 $ 22,000,000 Commercial paper 4,620,000 5,546,000 ------------------------------ Total 35,620,000 27,546,000 ------------------------------ Accounts Payable - Trade 5,449,000 6,232,000 ------------------------------ Other Payables and Accruals 68,045,000 46,455,000 ------------------------------ Current Portion of Long-Term Debt 2,986,000 2,451,000 ------------------------------ Unearned Insurance Premiums 190,948,000 158,316,000 ------------------------------ Insurance Loss Reserves 68,347,000 57,715,000 ------------------------------ Deferred Federal Income Tax 14,243,000 6,754,000 ------------------------------ Long-Term Debt 62,470,000 44,640,000 ------------------------------ Shareholders' Equity: Common stock (issued and outstanding: 3,020,000 shares at December 31, 1995 and 2,997,000 shares at December 31, 1994 after deducting treasury stock of 623,000 shares and 646,000 shares, respectively) 911,000 911,000 Additional paid-in capital 15,362,000 14,607,000 Retained earnings 139,350,000 131,675,000 Net unrealized gain on marketable securities 19,716,000 2,754,000 Treasury stock (at cost) (16,575,000) (16,648,000) Unvested restricted stock awards (2,169,000) (862,000) ------------------------------ Total 156,595,000 132,437,000 ------------------------------ Total Liabilities and Shareholders' Equity $604,703,000 $482,546,000 ============================== 1995 MIDLAND ANNUAL REPORT - PAGE 22 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1995 1994 1993 ------------------------------------------ Revenues: Insurance $282,104,000 $219,462,000 $178,404,000 Transportation 30,371,000 53,163,000 53,252,000 Sportswear 37,733,000 41,928,000 34,702,000 Other 752,000 858,000 806,000 ------------------------------------------ Total 350,960,000 315,411,000 267,164,000 ------------------------------------------ Costs and Expenses: Insurance: Losses and loss adjustment expenses 136,211,000 113,096,000 84,787,000 Commisions and other policy acquisition costs 80,520,000 64,557,000 49,545,000 Operating and administrative expenses 39,475,000 26,103,000 20,919,000 Transportation operating expenses 28,033,000 47,820,000 50,023,000 Sportswear operating expenses 46,309,000 44,276,000 37,364,000 Interest expense 4,434,000 4,865,000 4,144,000 Other operating and administrative expenses 3,462,000 2,807,000 2,129,000 ------------------------------------------ Total 338,444,000 303,524,000 248,911,000 ------------------------------------------ Income Before Federal Income Tax and Cumulative Effect of Accounting Change 12,516,000 11,887,000 18,253,000 Provision For Federal Income Tax 2,964,000 2,468,000 5,148,000 ------------------------------------------ Income Before Cumulative Effect of Accounting Change 9,552,000 9,419,000 13,105,000 Cumulative Effect of Accounting Change -- -- 4,867,000 ------------------------------------------ Net Income 9,552,000 9,419,000 17,972,000 ------------------------------------------ Retained Earnings, Beginning of Year 131,675,000 123,995,000 107,646,000 Cash Dividends Declared (1,877,000) (1,739,000) (1,623,000) ------------------------------------------ Retained Earnings, End of Year $139,350,000 $131,675,000 $123,995,000 ========================================== Earnings Per share of Common Stock: Income Before Cumulative Effect of Accounting $3.11 $3.09 $4.27 Cumulative Effect of Accounting Change -- -- 1.58 ------------------------------------------ Net Income $3.11 $3.09 $5.85 ========================================== Cash Dividends Per Share of Common Stock $.62 $.58 $.54 ========================================== See notes to consolidated financial statements. 1995 MIDLAND ANNUAL REPORT - PAGE 23 CONSOLIDATED STATEMENTS OF CASH FLOWS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1995 1994 1993 ----------------------------------------- Cash Flows from Operating Activities: Net Income $ 9,552,000 $ 9,419,000 $ 17,972,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,960,000 10,609,000 10,291,000 Increase in unearned insurance premiums 32,632,000 39,514,000 19,920,000 Increase in accounts payable and accruals 20,774,000 9,921,000 995,000 Increase in insurance loss reserves 10,632,000 15,108,000 13,140,000 Increase in net accounts receivable (9,872,000) (18,968,000) (10,658,000) Increase in deferred insurance policy acquisition costs (5,493,000) (8,828,000) (7,493,000) Decrease (increase) in inventory - Sportswear Division 4,162,000 4,852,000 (2,839,000) Provision (credit) for deferred federal income tax (1,533,000) (9,066,000) (4,854,000) Decrease (increase) in other assets (1,267,000) 953,000 (49,000) Other - net (540,000) (908,000) 229,000 ----------------------------------------- Net cash provided by operating activities 68,007,000 52,606,000 36,654,000 ----------------------------------------- Cash Flows from Investing Activities: Purchase of marketable securities (152,166,000)(122,895,000) (69,956,000) Sale of marketable securities 44,503,000 55,899,000 52,694,000 Acquisition of property, plant and equipment (29,204,000) (19,559,000) (27,354,000) Maturity of marketable securities 27,791,000 8,372,000 4,323,000 Decrease (increase) in cash equivalent marketable securities 17,222,000 (8,166,000) (15,332,000) Net decrease (increase) in finance receivables 1,435,000 1,392,000 (2,227,000) Sale of property, plan and equipment 1,257,000 52,353,000 2,912,000 ----------------------------------------- Net cash used in investing activities (89,162,000) (32,604,000) (54,940,000) ----------------------------------------- Cash Flows from Financing Activities: Issuance of long-term debt 20,800,000 20,000,000 31,597,000 Increase (decrease) in net short-term borrowings 8,074,000 (8,756,000) 436,000 Repayment of long-term debt (2,128,000) (28,552,000) (9,061,000) Dividends paid (1,844,000) (1,628,000) (1,590,000) Purchase of treasury stock (1,143,000) (118,000) (799,000) Payment of capitalized lease obligations (307,000) (879,000) (815,000) Issuance of treasury stock 52,000 32,000 215,000 ----------------------------------------- Net cash provided by (used in) financing activities 23,504,000 (19,901,000) 19,983,000 ----------------------------------------- Net Increase in Cash 2,349,000 101,000 1,697,000 Cash at Beginning of Year 4,036,000 3,935,000 2,238,000 ----------------------------------------- Cash at End of Year $ 6,385,000 $ 4,036,000 $ 3,935,000 ========================================= Supplemental Disclosures: The Company paid interest of $4,998,000, $5,109,000, and $4,025,000 and income taxes of $7,251,000, $9,022,000, and $5,215,000 in 1995, 1994, and 1993, respectively. See notes to consolidated financial statements. 1995 MIDLAND ANNUAL REPORT - PAGE 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE MIDLAND COMPANY AND SUBSIDIARIES Years Ended December 31, 1995, 1994 and 1993 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company operates in four business segments: Insurance, Transportation, Sportswear and Other, with the most significant business activities being in insurance. The Company writes insurance business throughout the nation with larger concentrations in the Southern and Southeastern states. Such business consists primarily of physical damage insurance on manufactured homes featuring coverages similar to conventional homeowners insurance policies. The accounting policies of the Company and its subsidiaries conform to generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with generally accepted accounting principles requires management to use numerous estimates and assumptions. The accompanying consolidated financial statements include estimates for items such as insurance loss reserves, income taxes and various other liability accounts. Actual results could differ from those estimates. Policies that affect the more significant elements of the consolidated financial statements are summarized below. Principles of Consolidation--The consolidated financial statements include the accounts of the Company and all subsidiary companies. Material intercompany balances and transactions have been eliminated. Marketable Securities--Marketable securities are categorized as 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. 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 (see Note 2). 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. 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. 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 are recorded at cost. Depreciation and amortization are generally calculated using accelerated methods over the estimated useful lives of the respective properties (buildings and equipment - 15 to 35 years, furniture and equipment - 5 to 7 years, and vessels and barges - 20 to 30 years). 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 1995 MIDLAND ANNUAL REPORT - PAGE 25 resulting therefrom are included in earnings currently. Insurance loss reserves also include an amount for claim drafts issued but not yet paid. Allowance for Losses--Provisions for losses on receivables are made in amounts deemed necessary to maintain adequate reserves to cover 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 book values of cash, receivables, short-term notes payable, trade accounts payable and any financial instruments included in other assets and accrued liabilities approximate their fair values principally because of the short-term maturities of these instruments. The fair value of investments is considered to be the market value which is based on quoted market prices. The fair value of long-term debt is estimated using interest rates that are currently available to the Company for issuance of debt with similar terms and maturities. Stock Option and Award Plans--The Company has various plans which provide for granting options and common stock to certain employees and independent directors of the Company and its subsidiaries. Currently, the Company accounts for compensation expense related to such transactions using the "intrinsic value" based method. The Financial Accounting Standards Board has issued SFAS No. 123, "Accounting for Stock Based Compensation", that defines a "fair value" based method of accounting for stock-based compensation, but permits compensation expense to continue to be measured using the "intrinsic value" based method. The Company has yet to decide whether it will adopt the new "fair value" based method. However, adoption of such method will not affect the amounts reported in the accompanying consolidated financial statements. 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 1995 Cost Gains Losses Value Debt Securities: ------------------------------------------------ Governments $147,454 $ 5,575 $ 87 $152,942 Municipals 90,152 2,871 119 92,904 Corporates 34,665 708 26 35,347 Cash Equivalents 33,495 - - 33,495 ------------------------------------------------ Total 305,766 9,154 232 314,688 Equity Securities 25,880 22,031 634 47,277 Accrued Interest and Dividends 5,089 - - 5,089 ------------------------------------------------ Total Marketable Securities $336,735 $31,185 $ 866 $367,054 ================================================ 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 ================================================ 1995 MIDLAND ANNUAL REPORT - PAGE 26 Included in the determination of net income are the following (amounts in 000's): 1995 1994 1993 ---------------------------------------- Gross Realized Gains $ 3,045 $ 3,252 $ 4,196 Gross Realized Losses (672) (1,062) (461) Other Investment Income 18,068 12,114 11,050 Investment Expenses (639) (1,044) (981) ---------------------------------------- Net Investment Income $19,802 $13,260 $13,804 ======================================== The cost and approximate market value of debt securities held at December 31, 1995, 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 $ 60,795 $ 60,896 1-5 years 112,417 115,468 6-10 years 81,935 86,327 Over 10 years 50,619 51,997 ------------------------- $305,766 $314,688 ========================= 3. RECEIVABLES Accounts receivable at December 31, 1995 and 1994 are generally due within one year and consist of the following (amounts in 000's): 1995 1994 ------------------------- Insurance $83,737 $72,829 Transportation 3,646 5,725 Sportswear 4,609 3,739 Other 2,685 4,120 ------------------------- Total $94,677 $86,413 ========================= 4. PROPERTY, PLANT AND EQUIPMENT At December 31, 1995 and 1994, property, plant and equipment stated at original cost consist of the following (amounts in 000's): 1995 1994 ------------------------- Land $ 1,771 $ 1,771 Buildings, improvements, fixtures, etc. 75,303 46,610 Vessels and barges 51,436 52,683 Transportation equipment under capital leases 3,106 3,106 Construction-in-progress - 5,559 ------------------------- Total $131,616 $109,729 ========================= The 1994 construction-in-progress balance pertains to the construction costs related to the Company's new corporate headquarters which the Company moved into late in 1995. In December 1994, the Company sold a major portion of the assets related to its river transportation division. The sales price of $46,761,000 approximated the net book value of the assets sold. Total rent expense related to the rental of equipment included in the accompanying consolidated statements of income is $3,470,000 in 1995, $1,833,000 in 1994 and $998,000 in 1993. Future rentals under non-cancelable operating leases will be approximately $2,304,000 in 1996. The Company has commitments for the acquisition of 20 barges in 1996 at a cost of $5,700,000 and 50 barges in 1997 at a cost of $14,000,000. 5. NOTES PAYABLE TO BANKS At December 31, 1995 and 1994, the Company had conventional lines of credit with commercial banks of $45,000,000 and $38,000,000, respectively. The lines of credit in use under these agreements at December 31, 1995 and 1994 amounted to $20,000,000 and $17,000,000, respectively. Borrowings under these lines of credit constitute senior debt. Commitment fees are currently required by the lending institutions to maintain these credit agreements. Additionally, at December 31, 1995 and 1994, the Company had other short-term bank borrowings outstanding of $11,000,000 and $5,000,000, respectively. These borrowings also constitute senior debt. The aforementioned notes payable, together with outstanding commercial paper, had weighted average interest rates of 6.0% and 6.2% at December 31, 1995 and 1994, respectively. 6. LONG-TERM DEBT In December, 1995, The Midland Company obtained $20,800,000 in long-term debt financing on its new corporate headquarters facility. 1995 MIDLAND ANNUAL REPORT - PAGE 27 Long-term debt at December 31, 1995 and 1994 is summarized as follows (amounts in 000's): 1995 1994 ------------------------- Equipment Obligations - Due serially through 2002, weighted average rate of 6.19% $14,847 $16,727 Mortgage Notes - Due serially through 2005, weighted average rate of 6.62% 29,258 8,706 Unsecured Notes Payable Under $40,000,000 Long-Term Debt Facilities-- Amortizing 1999 to 2002, LIBOR plus 1% (6.9375% at December 31, 1995) 20,000 20,000 Capitalized Lease Obligations (transportation equipment) 1,351 1,658 ------------------------- Total obligations 65,456 47,091 Less current maturities 2,986 2,451 ------------------------- Total $62,470 $44,640 ========================= Equipment and real estate obligations are collateralized by transportation equipment and real estate with a net book value of approximately $56,000,000. The aggregate amount of repayment requirements on long-term debt and capitalized leases for the five years subsequent to 1995 are (amounts in 000's): 1996 - $2,986; 1997 - $3,079; 1998 - $10,671; 1999 - $6,542; 2000 - $7,328. At December 31, 1995 and 1994, the carrying value and the approximate fair value of the Company's long-term debt was as follows (amounts in 000's): 1995 1994 ------------------------- Carrying Value $65,456 $47,091 ========================= Fair Value $64,767 $45,600 ========================= 7. FEDERAL INCOME TAX The provision for federal income tax is summarized as follows (amounts in 000's): 1995 1994 1993 ---------------------------------------- Current provision $4,497 $11,534 $5,137 Deferred provision (credit) (1,533) (9,066) 11 ---------------------------------------- Total $2,964 $2,468 $5,148 ======================================== The federal income tax provision for the years ended December 31, 1995, 1994 and 1993 is different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (amounts in 000's): 1995 1994 1993 ---------------------------------------- Federal income tax at statutory rate $4,381 $4,160 $6,389 Tax effect of: Tax exempt interest and excludable dividend income (1,392) (1,247) (1,134) Investment tax credits (175) (488) (289) Increase in statutory rate on deferred taxes -- -- 357 Other--net 150 43 (175) Provision for federal ---------------------------------------- income tax $2,964 $2,468 $5,148 ======================================== Significant components of the Company's net deferred federal income tax liability are summarized as follows (amounts in 000's): 1995 1994 ------------------------- Deferred Tax Liabilities: Deferred insurance policy acquisition costs $14,266 $12,665 Accelerated depreciation 5,879 5,965 Unrealized gain on marketable securities 10,602 1,580 Investment tax credits 1,124 1,299 Other 642 285 ------------------------- Sub-total 32,513 21,794 ------------------------- Deferred Tax Assets: Unearned insurance premiums 11,187 9,373 Pension expense 2,318 1,902 Insurance loss reserves 1,618 1,260 Other 3,147 2,505 ------------------------- Sub-total 18,270 15,040 ------------------------- Deferred federal income tax $14,243 $ 6,754 ========================= 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. 1995 MIDLAND ANNUAL REPORT - PAGE 28 8. REINSURANCE AND INSURANCE LOSS RESERVES The Company reinsures certain levels of risk with other insurance companies and cedes varying portions of its written premiums to such reinsurers. Failure of reinsurers to honor their obligations could result in losses to the Company as reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. In addition, the Company pays a percentage of earned premiums to reinsurers in return for coverage against catastrophic losses. The Company also assumes a limited amount of business on certain reinsurance contracts. Related premiums and loss reserves are recorded based on records supplied by the ceding companies. 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 --------------------------------------------------------- 1995 Written $348,187 $27,320 $(91,022) $284,485 Earned 301,388 18,046 (60,567) 258,867 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 Activity in the liability for unpaid insurance losses and loss adjustment expenses (excluding claim checks issued but not yet paid) for the property and casualty companies is summarized as follows (amounts in 000's): 1995 1994 1993 ----------------------------------------- Balance at January 1 $ 52,078 $ 33,964 $23,185 Less reinsurance recoverables 14,597 6,220 2,780 ----------------------------------------- Net Balance at January 1 37,481 27,744 20,405 ----------------------------------------- Incurred related to: Current year 141,887 114,511 86,637 Prior years (7,347) (2,076) (1,980) ----------------------------------------- Total incurred 134,540 112,435 84,657 ----------------------------------------- Paid related to: Current year 105,269 93,014 65,588 Prior year 19,040 9,684 11,730 ----------------------------------------- Total paid 124,309 102,698 77,318 ----------------------------------------- Net Balance at December 31 47,712 37,481 27,744 Plus reinsurance recoverables 13,785 14,597 6,220 ----------------------------------------- Balance at December 31 $ 61,497 $ 52,078 $33,964 ========================================= The amounts of recoveries pertaining to reinsurance contracts that were deducted from losses incurred during 1995, 1994 and 1993 were approximately $47,152,000, $20,231,000 and $21,077,000, respectively. 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 $1,365,000 in 1995, $896,000 in 1994 and $642,000 in 1993. Included in the above amounts is a supplemental pension expense of 1995 MIDLAND ANNUAL REPORT - PAGE 29 $449,000 in 1995, $259,000 in 1994 and $138,000 in 1993. 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): 1995 1994 ------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $13,876 in 1995 and $14,534 in 1994 $14,467 $15,115 ========================= Projected benefit obligation for service rendered to date $19,882 $20,169 Plan assets at fair value, primarily U.S. bonds and listed stocks 17,822 14,583 ------------------------- Plan assets less than projected benefit obligation (2,060) (5,586) Unrecognized net assets at January 1, 1987 being recognized over 18 years (1,443) (1,576) Unrecognized prior service cost 563 48 Unrecognized net loss (gain) (42) 4,094 ------------------------- Pension liability included in Other Payables and Accruals $(2,982) $(3,020) ========================= Net pension cost included the following (amounts in 000's): 1995 1994 1993 ----------------------------------------- Service cost--benefits earned during the year $ 843 $ 725 $ 541 Interest cost on projected benefit obligation 1,381 1,216 1,160 Actual return on plan assets--(gain) (3,144) 315 (1,705) Net amortization and deferral 1,836 (1,619) 508 ----------------------------------------- Net periodic pension plan cost $ 916 $ 637 $ 504 ========================================= The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7-1/4% and 5-1/2% in 1995 and 1993, respectively, and 8% and 6% in 1994. The expected long-term rate of return on assets was 8% in all three years. 10. STOCK OPTION AND AWARD PLANS Under the Company's stock option plans, all of the outstanding stock options at December 31, 1995 were exercisable non-qualified options and had an exercise price of not less than 100% of the fair market value of the common stock on the date of grant. Stock options expire periodically through year 2005. A summary of stock option transactions follows: 1995 1994 1993 ------------------------------------------------------- Avg. Avg. Avg. (000's) Option (000's) Option (000's) Option Shares Price Shares Price Shares Price ------------------------------------------------------- Outstanding, beginning of year 216 $24.69 218 $24.67 219 $23.52 Exercised (2) 21.16 (2) 20.81 (9) 22.35 Expired (4) 26.94 -- -- (2) 38.56 Granted 9 50.75 -- -- 10 50.13 ------------------------------------------------------- Outstanding, end of year 219 $25.76 216 $24.69 218 $24.67 ======================================================= The Company implemented a restricted stock award program during 1993. Under this program, grants of the Company's common stock will vest after 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 28,000 shares remain outstanding at December 31, 1995 and, in 1995, 49,000 shares were awarded under the program and 48,000 shares remain outstanding at December 31, 1995. The value of the awards is being amortized as compensation expense over a five year vesting period. 11. CONTINGENCIES Various litigation and claims against the Company and its subsidiaries are in process and pending. Significant sums are sought in these matters, the outcome of which cannot be reasonably estimated. Based upon a review of open matters with legal counsel, management believes that the outcome of such matters would not have a material effect upon the Company's consolidated financial position or results of operations. 1995 MIDLAND ANNUAL REPORT - PAGE 30 12. INDUSTRY SEGMENTS Listed below is financial information required to be reported for each industry segment. No single customer accounted for 10% or more of consolidated revenues during the last three years. Interest expense includes intercompany interest not eliminated for purposes of segment reporting. Thousands of Dollars ------------------------------------------------ 1995 1994 1993 Total segment revenues ------------------------------------------------ Insurance $283,141 $222,632 $181,035 Transportation 31,385 53,190 53,255 Sportswear 37,733 41,928 34,702 Other 3,649 3,320 3,544 Intersegment revenues (4,948) (5,659) (5,372) ------------------------------------------------ Total $350,960 $315,411 $267,164 ================================================ Operating profit Insurance $ 26,930 $ 16,630 $ 23,921 Transportation 3,352 5,370 3,232 Sportswear (8,577) (2,348) (2,663) Other 1,563 970 1,253 Interest expense (7,324) (5,952) (5,279) Unallocated corporate expenses (3,428) (2,783) (2,211) ------------------------------------------------ Total $ 12,516 $ 11,887 $ 18,253 ================================================ Acquisition of fixed assets Insurance $ -- $ -- $ -- Transportation 170 6,846 14,657 Sportswear 1,074 583 1,702 Corporate and other 27,960 12,130 10,995 ------------------------------------------------ Total $ 29,204 $ 19,559 $ 27,354 ================================================ Depreciation and amortization Insurance $ -- $ -- $ -- Transportation 3,004 5,773 6,434 Sportswear 1,065 1,078 973 Corporate and other 4,891 3,758 2,884 ------------------------------------------------ Total $ 8,960 $ 10,609 $ 10,291 ================================================ Identifiable assets Insurance $494,638 $379,287 $301,366 Transportation 48,375 52,534 87,654 Sportswear 14,018 17,264 23,932 Corporate and other 76,983 53,087 58,612 Intersegment receivables (29,311) (19,626) (21,342) ------------------------------------------------ Total $604,703 $482,546 $450,222 ================================================ 13. SHAREHOLDERS' EQUITY The Midland Company has 5,000,000 shares of common stock authorized without par value (stated value of $.25 a share), including 720,000 shares reserved for issuance under the Company's stock option and award plans. The Company also has 500,000 shares of preferred stock authorized, 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, $10,300,000 of its $34,200,000 net assets was not available for distribution to the Company at December 31, 1995. The insurance subsidiaries are subject to state regulations which limit by reference to statutory investment income and policyholders' surplus the dividends that can be paid to their parent company without prior regulatory approval. Dividend restrictions vary between the companies as determined by the laws of the domiciliary states. Under these restrictions, the maximum dividends that may be paid to the Company from its insurance subsidiaries in 1996 without regulatory approval is approximately $15,300,000; such subsidiaries paid actual cash dividends of $1,060,000 in 1995, $4,000,000 in 1994 and $3,000,000 in 1993. Net income as determined in accordance with statutory accounting practices for the Company's insurance subsidiaries was $13,367,000, $3,616,000 and $10,337,000 for 1995, 1994 and 1993, respectively. Shareholders' equity on the same basis was $120,398,000 and $96,863,000 at December 31, 1995 and 1994. 1995 MIDLAND ANNUAL REPORT - PAGE 31 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 Awards Total ------------------------------------------------------------------ Balance, January 1, 1993 $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 Net income 9,552 9,552 Purchase of treasury stock (1,143) (1,143) Cash dividends declared (1,877) (1,877) Exercise of stock options (12) 64 52 Changes in unrealized gain on investments, net of tax 16,962 16,962 Restricted stock awards 855 1,262 (2,117) -- Amortization and cancellation of unvested restricted stock awards (88) (110) 810 612 ------------------------------------------------------------------ Balance, December 31, 1995 $911 $15,362 $139,350 $19,716 $(16,575) $(2,169) $156,595 ================================================================== 1995 MIDLAND ANNUAL REPORT - PAGE 32 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS THE MIDLAND COMPANY AND SUBSIDIARIES 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, 1995 and 1994, 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, 1995. 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, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 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 LLP February 15, 1996 OTHER INFORMATION TRANSFER AGENT AND REGISTRAR Society National Bank P.O. Box 6477 Cleveland, Ohio 44101 INDEPENDENT AUDITORS Deloitte & Touche LLP 250 East Fifth Street 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 11, 1996 at the Company's offices, 7000 Midland Boulevard, Amelia, Ohio 45102. COMMON STOCK The number of holders of common stock at December 31, 1995 was 730. The Company's common stock is registered on the American Stock Exchange (MLA). DIVIDEND REINVESTMENT PLAN The Plan, effective with dividends paid in January, 1996, provides for the acquisition of additional shares of the Company without brokerage fees through automatic dividend reinvestment. Enrollment forms and information about the Plan are available from Society National Bank (1-800-542-7792). FORM 10-K A copy of the Company's 1995 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, 1995 The subsidiaries of the Registrant as of December 31, 1995, 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. 15 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-31-1995 DEC-31-1995 6,385,000 367,054,000 94,677,000 1,362,000 6,954,000 0 131,616,000 45,767,000 604,703,000 0 62,470,000 911,000 0 0 155,684,000 604,703,000 37,732,000 350,960,000 35,215,000 330,080,000 3,462,000 468,000 4,434,000 12,516,000 2,964,000 9,552,000 0 0 0 9,552,000 3.11 3.10
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