-----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, NOHeabT5qEKBzH1z3qirvzwAVD5RCLe1cErwJd8oHtPWt28eNBny6eC8xeeB8Wxc uvAo1S3NyAUNJ23uX2ueWg== 0000066025-99-000011.txt : 19990810 0000066025-99-000011.hdr.sgml : 19990810 ACCESSION NUMBER: 0000066025-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990809 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-Q SEC ACT: SEC FILE NUMBER: 001-06026 FILM NUMBER: 99681223 BUSINESS ADDRESS: STREET 1: 7000 MIDLAND BLVD STREET 2: P O BOX 125 CITY: AMELIA STATE: OH ZIP: 45102-2607 BUSINESS PHONE: 5139437100 MAIL ADDRESS: STREET 2: P O BOX 1256 CITY: CINCINNATI STATE: OH ZIP: 45201 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended__________June 30, 1999__________________________ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________________to_________________________ Commission file number_____________________1-6026______________________________ _____________________________The Midland Company_______________________________ (Exact name of registrant as specified in its charter) Incorporated in Ohio 31-0742526 - ---------------------------------------------- ------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification or organization) No.) 7000 Midland Boulevard, Amelia, Ohio 45102-2607 (Address of principal executive offices) (Zip Code) (513) 943-7100 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ . No _______. The number of common shares outstanding as of June 30, 1999 was 9,534,246. PART I. FINANCIAL INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND DECEMBER 31, 1998 Amounts in 000's (Unaudited) June 30, Dec. 31, ASSETS 1999 1998 ---------- ---------- MARKETABLE SECURITIES AVAILABLE FOR SALE: Fixed income (cost, $434,995 at June 30, 1999 and $443,975 at December 31, 1998) $ 431,134 $ 453,422 Equity (cost, $43,620 at June 30, 1999 and $37,736 at December 31, 1998) 137,887 136,748 ---------- ---------- Total 569,021 590,170 ---------- ---------- CASH 6,297 3,687 ---------- ---------- RECEIVABLES: Accounts receivable 66,895 60,094 Less allowance for losses 753 753 ---------- ---------- Net 66,142 59,341 ---------- ---------- REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS 35,113 33,955 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - AT COST 114,837 114,466 Less accumulated depreciation and amortization 49,832 46,629 ---------- ---------- Net 65,005 67,837 ---------- ---------- OTHER REAL ESTATE - NET 8,700 8,700 ---------- ---------- DEFERRED INSURANCE POLICY ACQUISITION COSTS 73,567 63,962 ---------- ---------- OTHER ASSETS 12,611 9,568 ---------- ---------- TOTAL ASSETS $ 836,456 $ 837,220 ========== ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND DECEMBER 31, 1998 Amounts in 000's (Unaudited) June 30, Dec. 31, LIABILITIES & SHAREHOLDERS' EQUITY 1999 1998 ---------- ---------- UNEARNED INSURANCE PREMIUMS $ 273,110 $ 255,115 ---------- ---------- INSURANCE LOSS RESERVES 130,331 125,496 ---------- ---------- INSURANCE COMMISSIONS PAYABLE 21,273 20,272 ---------- ---------- FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES 9,317 14,624 ---------- ---------- LONG-TERM DEBT 52,890 54,563 ---------- ---------- OTHER NOTES PAYABLE: Banks 7,000 15,000 Commercial paper 6,179 6,522 ---------- ---------- Total 13,179 21,522 ---------- ---------- DEFERRED FEDERAL INCOME TAX 32,986 39,305 ---------- ---------- OTHER PAYABLES AND ACCRUALS 54,849 57,491 ---------- ---------- COMMITMENTS AND CONTINGENCIES - - ---------- ---------- SHAREHOLDERS' EQUITY: Common stock (issued and outstanding: 9,534 shares at June 30, 1999 and 9,352 shares at December 31, 1998 after deducting treasury stock of 1,394 shares and 1,576 shares, respectively) 911 911 Additional paid-in capital 17,372 15,947 Retained earnings 190,184 178,398 Accumulated other comprehensive income 58,774 70,507 Treasury stock - at cost (15,058) (15,293) Unvested restricted stock awards (3,662) (1,638) ---------- ---------- Total 248,521 248,832 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 836,456 $ 837,220 ========== ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Unaudited) FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 Amounts in 000's (except per share information) Six-Mos. Three-Mos. Ended June 30, Ended June 30, --------------------- --------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- REVENUES: Insurance: Premiums earned $ 197,974 $ 184,533 $ 99,837 $ 94,054 Net investment income 12,272 11,784 6,201 5,942 Net realized investment gains 1,739 3,268 669 2,229 Other insurance income 2,100 1,063 1,354 578 Transportation 15,558 16,525 7,631 7,288 Other 788 495 655 340 ---------- ---------- ---------- ---------- Total 230,431 217,668 116,347 110,431 ---------- ---------- ---------- ---------- COSTS AND EXPENSES: Insurance: Losses and loss adjustment expenses 103,893 107,796 55,511 59,675 Commissions and other policy acquisition costs 57,106 51,061 27,101 25,548 Operating and administrative expenses 31,519 27,658 16,652 12,803 Transportation operating expenses 14,930 14,327 7,242 6,177 Interest expense 2,139 2,521 1,077 1,264 Other operating and administrative expenses 2,815 1,243 1,820 486 ---------- ---------- ---------- ---------- Total 212,402 204,606 109,403 105,953 ---------- ---------- ---------- ---------- INCOME BEFORE FEDERAL INCOME TAX 18,029 13,062 6,944 4,478 PROVISION FOR FEDERAL INCOME TAX 4,958 3,384 1,733 840 ---------- ---------- ---------- ---------- NET INCOME $ 13,071 $ 9,678 $ 5,211 $ 3,638 ========== ========== ========== ========== BASIC EARNINGS PER SHARE OF COMMON STOCK $ 1.43 $ 1.07 $ 0.57 $ 0.40 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE OF COMMON STOCK $ 1.38 $ 1.03 $ 0.55 $ 0.39 ========== ========== ========== ========== CASH DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ .135 $ .125 $ 0.0675 $ 0.0625 ========== ========== ========== ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) Amounts in 000's Accumulated Unvested Additional Other Compre- Restricted Compre- Common Paid-In Retained hensive Treasury Stock hensive Stock Capital Earnings Income Stock Awards Total Income -------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 $911 $15,359 $153,797 $44,123 $(14,704) $(2,460) $197,026 Comprehensive income: Net income 9,678 9,678 $ 9,678 Increase in unrealized gain on marketable securities, net of related income tax effect of $3,692 6,857 6,857 6,857 ---------- Total comprehensive income $ 16,535 ========== Purchase of treasury stock, net 142 (1,151) (1,009) Cash dividends declared (1,164) (1,164) Exercise of stock options 59 279 338 Amortization and cancellation of unvested restricted stock awards (30) (51) 425 344 --------------------------------------------------------------------------------- BALANCE, JUNE 30, 1998 $911 $15,530 $162,311 $50,980 $(15,627) $(2,035) $212,070 ================================================================================= BALANCE, DECEMBER 31, 1998 $911 $15,947 $178,398 $70,507 $(15,293) $(1,638) $248,832 Comprehensive income: Net income 13,071 13,071 $ 13,071 Decrease in unrealized gain on marketable securities, net of related income tax effect of $6,319 (11,733) (11,733) (11,733) ---------- Total comprehensive income $ 1,338 ========== Purchase of treasury stock, net 115 (2,604) (2,489) Cash dividends declared (1,285) (1,285) Exercise of stock options (84) 1,587 1,503 Restricted stock awards 1,411 1,267 (2,678) - Amortization and cancellation of unvested restricted stock awards (17) (15) 654 622 --------------------------------------------------------------------------------- BALANCE, JUNE 30, 1999 $911 $17,372 $190,184 $58,774 $(15,058) $(3,662) $ 248,521 ================================================================================= See notes to the consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE SIX-MONTHS ENDED JUNE 30, 1999 AND 1998 Amount in 000's 1999 1998 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,071 $ 9,678 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,542 4,312 Net realized investment gains (1,739) (3,268) Increase in unearned insurance premiums 17,995 9,560 Increase in deferred insurance policy acquisition costs (9,605) (5,196) Increase in net accounts receivable (6,348) (5,777) Decrease in funds held under reinsurance agreements and reinsurance payables (5,307) (1,825) Increase in insurance loss reserves 4,835 13,815 Decrease in other accounts payable and accruals (4,198) (4,131) Decrease (increase) in reinsurance recoverables and prepaid reinsurance premiums (1,158) 8,527 Increase (decrease) in insurance commissions payable 1,001 (1,392) Decrease (increase) in other assets 182 (343) Other-net 911 (59) --------- ---------- Net cash provided by operating activities 14,182 23,901 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (76,326) (106,332) Sale of marketable securities 46,724 64,536 Maturity of marketable securities 18,465 19,779 Decrease in cash equivalent marketable securities 15,578 18,796 Net cash used in business acquisitions (2,636) - Acquisition of property, plant and equipment (1,414) (3,183) Sale of property, plant and equipment 181 400 --------- ---------- Net cash provided by (used in) investing activities 572 (6,004) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in net short-term borrowings (8,343) (14,559) Repayment of long-term debt (1,673) (1,947) Dividends paid (1,226) (581) Net treasury stock transactions (902) (730) --------- ---------- Net cash used in financing activities (12,144) (17,817) --------- ---------- NET INCREASE IN CASH 2,610 80 CASH AT BEGINNING OF PERIOD 3,687 5,277 --------- ---------- CASH AT END OF PERIOD $ 6,297 $ 5,357 ========= ========== See notes to the consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) JUNE 30, 1999 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of The Midland Company and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Financial information as of December 31, 1998 has been derived from the audited consolidated financial statements of the Company. Revenue and operating results for the six-month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 1998 included in the Company's Annual Report on Form 10-K. Certain reclassifications (minor in nature) have been made to the 1998 amounts to conform to 1999 classifications. 2. EARNINGS PER SHARE Earnings per share (EPS) of common stock amounts are computed by dividing net income by the weighted average number of shares outstanding during the period for basic EPS, plus the dilutive share equivalents for stock options and restricted stock awards for diluted EPS. Shares used for EPS calculations were as follows (000's): For Basic EPS For Diluted EPS ------------- --------------- Six months ended June 30: 1999 9,106 9,437 ===== ===== 1998 9,004 9,403 ===== ===== 3. INCOME TAXES The federal income tax provisions for the three and six-month periods ended June 30, 1999 and 1998 are different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (000's): Six-Mos. Three-Mos. Ended June 30, Ended June 30, ------------------ ------------------ 1999 1998 1999 1998 -------- -------- -------- -------- Federal income tax at statutory rate $ 6,310 $ 4,572 $ 2,430 $ 1,567 Add (deduct) the tax effect of: Tax exempt interest and excludable dividend income (1,523) (1,013) (786) (562) Other - net 171 (175) 89 (165) -------- -------- -------- -------- Provision for federal income tax $ 4,958 $ 3,384 $ 1,733 $ 840 ======== ======== ======== ======== THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) 4. SUPPLEMENTAL CASH FLOW DISCLOSURES The Company paid interest of $2.1 million and $2.4 million in the first six months of 1999 and 1998, respectively. The Company paid income taxes of $4.5 million and $3.2 million during the first six months of 1999 and 1998. In February, 1999, the Company issued 119,500 shares of treasury stock under a restricted stock award program that decreased treasury stock by approximately $1.3 million and also increased paid-in capital by approximately $1.4 million. 5. SEGMENT DISCLOSURES Since the Company's annual report for 1998, there have been no changes in reportable segments or the manner in which the Company determines reportable segments or measures segment profit or loss. Summarized segment information for the interim periods for 1999 and 1998 is as follows (000's): Six Months Three Months Ended June 30, 1999 Ended June 30, 1999 ------------------------------- --------------------- Revenues- Revenues- Total External Pre-Tax External Pre-Tax Assets Customers Income Customers Income -------- ---------- ---------- ---------- --------- Reportable Segments: Insurance: Manufactured housing n/a $139,346 $ 20,165 $70,578 $ 9,730 Other n/a 60,728 1,775 30,613 (806) Unallocated $767,140 - (645) - (325) Transportation 35,173 15,558 510 7,631 339 Corporate and all other - - (3,776) - (1,994) --------- -------- $ 18,029 $ 6,944 ========= ======== Six Months Three Months Ended June 30, 1998 Ended June 30, 1998 ------------------------------- --------------------- Revenues- Revenues- Total External Pre-Tax External Pre-Tax Assets Customers Income Customers Income -------- ---------- ---------- ---------- --------- Reportable Segments: Insurance: Manufactured housing n/a $124,280 $ 14,285 $63,893 $ 3,698 Other n/a 61,316 2,237 30,739 1,271 Unallocated $698,587 - (2,652) - (347) Transportation 40,355 16,525 2,447 7,288 1,229 Corporate and all other - - (3,255) - (1,373) -------- -------- $13,062 $ 4,478 ======== ======== Intersegment revenues are insignificant. Revenues reported above, by definition, exclude investment income and realized gains. Certain amounts are not allocated to segments ("n/a" above) by the Company. 6. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", must (as modified by SFAS 137) be adopted by the Company effective with the first quarter of 2001. The Company is currently evaluating the impact of adoption of SFAS 133. INDEPENDENT ACCOUNTANTS' REPORT The Midland Company: We have reviewed the accompanying consolidated balance sheet of The Midland Company and subsidiaries as of June 30, 1999, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 1999 and 1998 and of changes in shareholders' equity and cash flows for the six-month periods ended June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Midland Company and subsidiaries as of December 31, 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 11, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998 is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. s/Deloitte & Touche LLP Deloitte & Touche LLP Cincinnati, Ohio July 15, 1999 THE MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A detailed discussion of the Company's liquidity and capital resources is included in the 1998 Annual Report on Form 10-K. Except as discussed below, no material changes have taken place since that date and, accordingly, the discussion is not repeated herein. RESULTS OF OPERATIONS Insurance Insurance Premiums Direct and assumed written premiums generated from American Modern Insurance Group's (AMIG) property and casualty and life insurance operations increased 3.5% in the second quarter to $129.2 million from $124.8 million for the same quarter of 1998. Net earned premiums for the second quarter increased 6.1% to $99.8 million from $94.1 million for the comparable quarter in 1998. On a year-to-date basis, direct and assumed written premiums generated by AMIG's insurance operations increased 3.4% to $235.8 million from $228.1 million for the same six-month period in 1998. Year-to-date net earned premiums increased 7.3% to $198.0 million from $184.5 million for 1998. The disparity in growth rates between direct and assumed written premiums and net earned premiums for the periods presented was due primarily to AMIG's decision to cede less business to its reinsurers in 1999 compared to 1998. The growth in direct and assumed written premiums for the periods presented is primarily the result of continued volume increases in manufactured home and related coverages insurance premium. Manufactured home and related coverages direct and assumed written premium generated in the second quarter increased 7.2% to $84.9 million from $79.2 million for the same quarter of 1998. On a year-to-date basis, manufactured home and related coverages direct and assumed written premium increased 5.0% to $155.3 million from $148.0 million. Volume decreases in the production of certain other specialty and discontinued property and casualty insurance programs for the three and six-month periods ended June 30, 1999 partially offset the increases in manufactured home and related coverages premiums. Direct and assumed written premiums of all other property and casualty specialty insurance products collectively decreased 6.3% to $40.5 million for the second quarter of 1999 from $43.2 million for the same quarter in 1998. On a year-to-date basis, direct and assumed written premiums of all other specialty insurance products collectively decreased 1.3% to $74.0 million from $75.0 million for the same period in 1998. These volume decreases were due, in part, to AMIG's underwriting strategies relative to improving the profitability of certain specialty insurance programs. Investment Income and Realized Capital Gains AMIG's net investment income (before taxes and excluding capital gains) increased 4.4% to $6.2 million in the second quarter of 1999 from $5.9 million for the second quarter of 1998. On a year-to-date basis, AMIG's net investment income increased 4.1% to $12.3 million from $11.8 million for the same six-month period in 1998. The increase in investment income was primarily the result of the positive cash flow from underwriting activities and the continued growth of AMIG's investment portfolio. AMIG's net realized capital gains (after-tax) decreased to $0.4 million, $.05 per share (diluted), for the second quarter, from $1.4 million, $.16 per share (diluted), for the same quarter in 1998. On a year-to-date basis, AMIG's net realized capital gains (after-tax) decreased to $1.1 million, $.12 per share (diluted) from $2.1 million, $.23 per share (diluted) for the same six-month period in 1998. Losses and Loss Adjustment Expenses AMIG's losses and loss adjustment expenses in the second quarter decreased 7.0% to $55.5 million from $59.7 million for the second quarter of 1998. AMIG's weather-related catastrophe losses for the second quarter amounted to $11.3 million on a pre-tax basis compared with $10.7 million for the same quarter of 1998. These losses had an after-tax impact of approximately $.78 per share (diluted) in the second quarter compared to $.74 per share (diluted) in the second quarter of 1998. Excluding catastrophe losses, the property and casualty combined ratio for the second quarter was 86.7% compared to 92.2% for the same quarter in 1998. On a year-to-date basis, AMIG's losses and loss adjustment expenses decreased 3.6% to $103.9 million from $107.8 million for the same six-month period of 1998. This decrease is primarily the result of a decrease in the level of weather-related catastrophe losses. AMIG's weather-related catastrophe losses for the first six months of 1999 amounted to $15.5 million on a pre-tax basis compared with $18.2 million for the same period in 1998. These losses had an after-tax impact of approximately $1.07 per share (diluted) in the first six months of 1999 compared to $1.26 per share (diluted) in the same period of 1998. Excluding catastrophe losses, the property and casualty combined ratio for the first six months of 1999 was 88.4% compared to 89.5% for the same period in 1998. Commissions, Other Policy Acquisition Costs and Other Operating and Administrative Expenses AMIG's commissions and other policy acquisition costs and other operating and administrative expenses for the second quarter increased 14.1% to $43.8 million from $38.4 million for the second quarter of 1998. On a year-to-date basis, AMIG's commissions and other policy acquisition costs and other operating and administrative expenses for the first six months increased 12.6% to $88.6 million from $78.7 million for the same six-month period of 1998. These increases are due primarily to the continued growth in net earned premiums coupled with improvements in the underlying loss experience and the level of reinsurance activities. Property and Casualty Underwriting Results AMIG's property and casualty operations generated a pre-tax underwriting income of $1.7 million for the second quarter of 1999 compared to a pre-tax underwriting loss of $(3.5) million for the same quarter of 1998. For the current quarter, AMIG's combined ratio (ratio of losses and expenses as a percent of earned premium) for its property and casualty business was 98.3% compared to 103.8% in the second quarter of 1998. On a year-to-date basis, AMIG's property and casualty pre-tax underwriting income increased to $6.9 million from $0.7 million for the six-month period in 1998. AMIG's combined ratio for its property and casualty business was 96.4% for the first six months compared to 99.6% for the same period in 1998. Transportation M/G Transport (M/G), the Company's transportation subsidiary, reported revenues for the second quarter of $7.6 million compared with $7.3 million in the second quarter of 1998. Pre-tax operating profits for the second quarter decreased to $0.3 million from $1.2 million for the same quarter of 1998. On a year-to-date basis, revenues have decreased to $15.6 million from $16.5 million for the same six-month period of the prior year. Pre-tax operating profits for the first six months decreased to $0.5 million from $2.4 million for the same period of 1998. These decreases are primarily the result of lower prices and reduced demand for petroleum coke and barite products that have affected shipping patterns. Management anticipates that these factors will continue to adversely impact M/G's operating profit for the remainder of 1999. FINANCIAL CONDITION Cash flows from operating activities were primarily used to decrease the Company's short-term borrowings from year-end 1998. Shareholders' equity decreased slightly to $248.5 million at June 30, 1999 from $248.8 million at year-end 1998 due primarily to the decrease in accumulated other comprehensive income resulting from a decrease in the market value of the Company's investment portfolio. The decrease in the market value of the investment portfolio is primarily a result of the effect on market values of an increase in interest rates since December 31, 1998. The decrease in net unrealized gains also resulted in a decrease in deferred federal income tax. The changes in unearned insurance premiums, funds held under reinsurance agreements and reinsurance payables and deferred insurance policy acquisition costs are due primarily to changes in the amounts of insurance premiums ceded to reinsurers under certain reinsurance treaties and the continued growth in written premiums. Management expects that cash and other liquid investments, coupled with future operating cash flows, will be readily available to meet the Company's operating cash requirements for the next twelve months. The Company declared $1.3 million in dividends to its shareholders during the first six months of 1999. OTHER MATTERS Comprehensive Income The only difference between net income and comprehensive income is the net after-tax change in unrealized gains on marketable securities. For the three and six-month periods ended June 30, 1999 and 1998, such net unrealized gains increased or (decreased), net of related income tax effects, by the following amounts (in thousands): 1999 1998 ---- ---- Three months ended June 30, $( 7,443) $ 2,820 Six months ended June 30, $(11,733) $ 6,857 Changes in net unrealized gains on marketable securities result from both market conditions and realized gains recognized in a reporting period. Acquisitions AMIG acquired (for amounts not material to the capital and liquidity of the Company) certain operating assets of several businesses during the second quarter of 1999. Management pursued these acquisitions to afford AMIG the opportunity to expand its service contract, loan facilitation, finance and insurance capabilities. Year 2000 Compliance The Year 2000 Issue The Year 2000 Issue arises from the common computer programming convention of using a two digit shorthand to represent a calendar year (i.e., "99" means 1999). Some computer systems and embedded chips may not recognize the entry "00" as the two digit shorthand for calendar year 2000. This could lead to erroneous results or, in the worst case, to system shutdowns. Status of the Company's Response to the Year 2000 Issue The Company's information systems professional staff began preparing for the Year 2000 Issue as early as 1992. Since that time, the Company has been upgrading and replacing its computer hardware and software systems. These upgrades and replacements have been driven by non-Year 2000 related business requirements. However, the Company believes that all of its mission-critical, internal computer hardware and software systems are now Year 2000 compliant. The Company has developed a comprehensive Year 2000 work plan to deal with the Year 2000 Issue. As of June 30, 1999, the Company, with minor exceptions, had met the schedule established in its Year 2000 Work Plan. The Company's Year 2000 Work Plan consists of five phases: 1) awareness; 2) assessment; 3) remediation; 4) testing and 5) implementation. The awareness and assessment phases of the Company's Year 2000 Work Plan are ongoing, but have been substantially completed. Remediation, testing and implementation have been completed for all of the Company's internal mission critical systems. During the awareness phase, the Company formed a multi-disciplinary task force to address the Year 2000 Issue, defined the Year 2000 Issue, obtained executive level support, and educated Company personnel, customers, suppliers and policyholders concerning the Year 2000 Issue and its potential affects on the Company. Education efforts are ongoing. During the assessment phase the Company collected a comprehensive list of internal items (e.g., computer hardware and software, other equipment with embedded chips, services and products provided by others to the Company, etc.) that might be affected by Year 2000 Issues. The Company also identified critical business relationships that might be affected by the Year 2000 Issue (e.g., customers, vendors, suppliers, etc.). The Company then evaluated these items and business relationships to determine whether they faced Year 2000 Issues and what effect they would have on the Company if they failed due to Year 2000 Issues. The Company continues to try to identify potential Year 2000 Issues. During the remediation phase the Company analyzed the items that are affected by Year 2000 Issues, identified problem areas and remediated those items. Similarly, during the remediation phase, the Company is communicating and working with its critical business relationships to help them understand and remediate their Year 2000 Issues. During the testing phase the Company thoroughly tested all installed remediation to critical internal systems. Testing included present and forward date testing which simulated critical dates in the Year 2000. The Company believes it has successfully tested all of its critical internal systems and will attempt to verify Year 2000 compliance of its critical business relationships. During the implementation phase the Company placed all items that had been remediated and successfully tested into use. Successful completion of the Company's Year 2000 Work Plan is expected to significantly reduce the Company's level of uncertainty about Year 2000 Issues, and, in particular, about the Year 2000 compliance and readiness of its material business relationships. The Company believes that with the implementation of its new computer hardware and software systems and completion of its Year 2000 Work Plan as scheduled, the possibility of significant interruptions of normal operations should be reduced. Risks The Company believes that its internal mission critical computer hardware and software and other mission critical equipment is substantially Year 2000 compliant. The Company believes, based on responses to Year 2000 questionnaires it has received to date, that its significant business partners, including vendors, suppliers (including suppliers of utilities) and customers, will be Year 2000 compliant before December 31, 1999. If the Company's Year 2000 Work Plan has failed to identify or correct Year 2000 Issues in the Company's mission critical computer hardware and software or other equipment, the Company might not be able to communicate with and/or provide services to suppliers, customers and policyholders until corrective measures have been taken. Under such a worst case scenario, the Company might not be able to process policy applications and collect premium revenue or conduct normal operations for some period of time. If corrective actions cannot be taken in a timely fashion, this could have a material adverse affect on the Company's financial condition or results of operations. Sustained Year 2000 failures by certain of the Company's vendors and suppliers (especially suppliers of utility services such as electric and telephone) could have similar consequences for the Company. The Company can not currently predict the impact of the Year 2000 Issue on its customers. However, sustained Year 2000 failures by customers which, in the aggregate, provide a material portion of the Company's revenues could materially reduce cash flow available to the Company. This, in turn, could have a material adverse affect on the Company's financial condition or results of operations. Contingency Plans The Company has prepared internal Year 2000 contingency plans to deal with business failures in its operations brought about by Year 2000 Issues. Contingency planning includes plans for alternative processing of business from customers who experience disruptions due to the Year 2000 Issue. The Company's internal contingency plan involves invoking existing disaster recovery plans where appropriate. The Company is currently discussing contingency planning with significant customers. Cost of the Year 2000 Issue Based upon currently available information, the Company estimates that the total cost of implementing its Year 2000 Work Plan will be less than $1.0 million. This estimate does not include costs associated with converting the Company's mainframe operating system but does include an allocation of internal costs (such as salaries) dedicated to the Year 2000 Work Plan. As discussed above, the migration to the Company's new mainframe system was made, primarily, to address specific business needs rather than to address the Year 2000 Issue. The cost estimate, however, does include all activities undertaken on Year 2000 related matters across the Company including activities pursued as part of all five phases of the Company's Year 2000 Work Plan. Through June 30, 1999, the Company had expended approximately $0.8 million on the Year 2000 Work Plan. The majority of the remaining costs are expected to be directed primarily towards testing and contingency planning activities. These costs have been, and will continue to be, funded through operating cash flow and are expensed generally in the period in which they are incurred. Private Securities Reform Act of 1995 - Forward Looking Statements Disclosure This Report contains forward looking statements. For purposes of this Report, a "Forward Looking Statement", within the meaning of the Securities Reform Act of 1995, is any statement concerning the year 1999 and beyond. The actions and performance of the Company and its subsidiaries could deviate materially from what is contemplated by the forward looking statements contained in this Report. Factors which might cause deviations from the forward looking statements include, without limitations, the following: 1) changes in the laws or regulations affecting the operations of the Company or any of its subsidiaries; 2) changes in the business tactics or strategies of the Company or any of its subsidiaries; 3) acquisition(s) of assets or of new or complementary operations, or divestiture of any segment of the existing operations of the Company or any of its subsidiaries; 4) changing market forces or litigation which necessitate, in Management's judgment, changes in plans, strategy or tactics of the Company or its subsidiaries and 5) adverse weather conditions, fluctuations in the investment markets, changes in the retail marketplace, Year 2000 related issues or fluctuations in interest rates, any one of which might materially affect the operations of the Company and/or its subsidiaries. Any forward looking statement speaks only as of the date made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made. PART II. OTHER INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES JUNE 30, 1999 Item 1. Legal Proceedings Reference is made to Item 3 of Registrant's December 31, 1995, Form 10-K and to Item 3 of Registrant's December 31, 1998, Form 10-K concerning criminal litigation against M/G Transport Services, Inc. (M/G), a subsidiary of Registrant. On April 22, 1999, a three judge panel of the Sixth Circuit Court of Appeals issued an opinion which reversed the earlier ruling of the trial court which had dismissed six of the eight counts against M/G and several counts against individual defendants formerly employed by M/G. All of the verdicts against M/G on the six counts which had been dismissed by the trial court were reinstated by the Court of Appeals. The trial court has not yet set a date for sentencing on the reinstated verdicts. However, during the sentencing phase of the original trial, the probation department recommended total fines of $1,000,000 against M/G for all eight verdicts. M/G has already paid $250,000 in fines on the two counts the trial court did not dismiss. Registrant believes that based upon the original fines proposed by the probation department, it has established and maintained adequate accruals related to any additional fines which may be imposed by the trial court and believes that any such fines will not have a material adverse affect on the financial condition or results of operations of Registrant. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders Results of the Company's 1999 annual meeting of shareholders held on April 8, 1999, were reported in the Form 10-Q Quarterly Report dated April 12, 1999. Among the actions taken at that meeting, the shareholders approved amendments to the Company's Code of Regulations. The amended code of regulations was attached as an exhibit to such Form 10-Q. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a.) Exhibit 15 - Letter re: Unaudited Interim Financial Information Exhibit 27 - Financial Data Schedule b.) Reports on Form 8-K - None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MIDLAND COMPANY Date__________July 15, 1999_________ s/John I. Von Lehman John I. Von Lehman, Executive Vice President and Chief Financial Officer EX-15 2 EXHIBIT 15 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION The Midland Company: We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of The Midland Company and subsidiaries for the periods ended June 30, 1999 and 1998, as indicated in our report dated July 15, 1999; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, is incorporated by reference in Registration Statements No. 33-64821 on Form S-3 and No. 33-48511 on Form S-8. We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. s/Deloitte & Touche LLP - ----------------------- Deloitte & Touche LLP Cincinnati, Ohio July 15, 1999 EX-27 3
7 6-MOS DEC-31-1999 JUN-30-1999 431,134,000 0 0 137,887,000 0 0 569,021,000 6,297,000 21,023,000 73,567,000 836,456,000 130,331,000 273,110,000 0 30,590,000 66,069,000 0 0 911,000 247,610,000 836,456,000 197,974,000 12,272,000 1,739,000 18,446,000 103,893,000 57,106,000 31,519,000 18,029,000 4,958,000 13,071,000 0 0 0 13,071,000 1.43 1.38 88,267,000 0 0 0 0 87,888,000 0
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