10-Q 1 l94399ae10-q.txt THE MIDLAND COMPANY FORM 10-Q 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 March 31, 2002 ------------------------------------------------ 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 or organization) Identification 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 April 12, 2002 was 8,763,106. PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS THE MIDLAND COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND DECEMBER 31, 2001 AMOUNTS IN 000'S
(UNAUDITED) MARCH 31, Dec. 31, ASSETS 2002 2001 ---------- ---------- MARKETABLE SECURITIES AVAILABLE FOR SALE: Fixed income (cost, $543,646 at March 31, 2002 and $542,563 at December 31, 2001) $ 549,514 $ 555,159 Equity (cost, $91,588 at March 31, 2002 and $91,191 at December 31, 2001) 156,696 148,850 ---------- ---------- Total 706,210 704,009 ---------- ---------- CASH 5,575 11,286 ---------- ---------- ACCOUNTS RECEIVABLE - NET 86,409 88,108 ---------- ---------- REINSURANCE RECOVERABLES AND PREPAID REINSURANCE PREMIUMS 69,801 69,795 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT - NET 60,339 59,095 ---------- ---------- DEFERRED INSURANCE POLICY ACQUISITION COSTS 97,493 100,785 ---------- ---------- OTHER ASSETS 18,313 20,864 ---------- ---------- TOTAL ASSETS $1,044,140 $1,053,942 ========== ==========
See notes to condensed consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND DECEMBER 31, 2001 AMOUNTS IN 000'S
(UNAUDITED) MARCH 31, Dec. 31, LIABILITIES & SHAREHOLDERS' EQUITY 2002 2001 ----------- ----------- UNEARNED INSURANCE PREMIUMS $ 398,791 $ 403,855 ----------- ----------- INSURANCE LOSS RESERVES 146,865 148,674 ----------- ----------- INSURANCE COMMISSIONS PAYABLE 25,254 26,887 ----------- ----------- FUNDS HELD UNDER REINSURANCE AGREEMENTS AND REINSURANCE PAYABLES 2,232 6,297 ----------- ----------- LONG-TERM DEBT 48,256 48,619 ----------- ----------- OTHER NOTES PAYABLE: Banks 30,000 26,000 Commercial paper 11,683 9,522 ----------- ----------- Total 41,683 35,522 ----------- ----------- DEFERRED FEDERAL INCOME TAX 32,197 31,803 ----------- ----------- OTHER PAYABLES AND ACCRUALS 50,739 60,409 ----------- ----------- COMMITMENTS AND CONTINGENCIES - - ----------- ----------- SHAREHOLDERS' EQUITY: Common stock (issued and outstanding: 8,765 shares at March 31, 2002 and 8,830 shares at December 31, 2001 after deducting treasury stock of 2,163 shares and 2,098 shares, respectively) 911 911 Additional paid-in capital 21,920 20,386 Retained earnings 271,147 264,057 Accumulated other comprehensive income 46,425 45,875 Treasury stock - at cost (41,703) (38,698) Unvested restricted stock awards (577) (655) ----------- ----------- Total 298,123 291,876 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,044,140 $ 1,053,942 =========== ===========
See notes to condensed consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES STATEMENTS OF CONDENSED CONSOLIDATED INCOME (Unaudited) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 AMOUNTS IN 000'S EXCEPT PER SHARE DATA
2002 2001 --------- --------- REVENUES: Insurance: Premiums earned $ 136,470 $ 118,571 Net investment income 8,706 8,834 Net realized investment gains (losses) (301) 1,071 Other insurance income 1,624 1,771 Transportation 5,881 9,606 Other 152 129 --------- --------- Total 152,532 139,982 --------- --------- COSTS AND EXPENSES: Insurance: Losses and loss adjustment expenses 69,623 62,266 Commissions and other policy acquisition costs 41,922 34,759 Operating and administrative expenses 20,819 19,065 Transportation operating expenses 6,231 8,572 Interest expense 784 1,413 Other operating and administrative expenses 236 291 --------- --------- Total 139,615 126,366 --------- --------- INCOME BEFORE FEDERAL INCOME TAX AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 12,917 13,616 PROVISION FOR FEDERAL INCOME TAX 3,597 3,924 --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 9,320 9,692 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (1,463) - --------- --------- NET INCOME $ 7,857 $ 9,692 ========= ========= BASIC EARNINGS PER SHARE OF COMMON STOCK: Income before change in accounting principle $ 1.08 $ 1.11 Cumulative effect of change in accounting principle (0.17) - --------- --------- Total $ 0.91 $ 1.11 ========= ========= DILUTED EARNINGS PER SHARE OF COMMON STOCK: Income before change in accounting principle $ 1.05 $ 1.07 Cumulative effect of change in accounting principle (0.17) - --------- --------- Total $ 0.88 $ 1.07 ========= ========= CASH DIVIDENDS PER SHARE OF COMMON STOCK - DECLARED $ .0875 $ .0800 ========= =========
See notes to condensed consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Unaudited) AMOUNTS IN 000'S
ACCUMULATED UNVESTED ADDITIONAL OTHER COM- RESTRICTED COMPRE- COMMON PAID-IN RETAINED PREHENSIVE TREASURY STOCK HENSIVE STOCK CAPITAL EARNINGS INCOME STOCK AWARDS TOTAL INCOME -------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ 911 $ 19,838 $ 239,679 $ 54,396 $(30,404) $ (1,243) $ 283,177 Comprehensive income: Net income 9,692 9,692 $ 9,692 Decrease in unrealized gain on marketable securities, net of related income tax effect of $1,542 (2,923) (2,923) (2,923) ---------- Total comprehensive income $ 6,769 ========== Purchase of treasury stock (6,598) (6,598) Issuance of treasury stock for options exercised and employee savings plan (751) 2,059 1,308 Cash dividends declared (713) (713) Federal income tax benefit related to the exercise or granting of stock awards 803 803 Amortization and cancellation of unvested restricted stock awards 142 142 ---------------------------------------------------------------------------- BALANCE, MARCH 31, 2001 $ 911 $ 19,890 $ 248,658 $ 51,473 $(34,943) $ (1,101) $ 284,888 ============================================================================ BALANCE, DECEMBER 31, 2001 $ 911 $ 20,386 $ 264,057 $ 45,875 $(38,698) $ (655) $ 291,876 Comprehensive income: Net income 7,857 7,857 $ 7,857 Increase in unrealized gain on marketable securities, net of related income tax effect of $238 390 390 390 Other, net of federal income tax of $86 160 160 160 ---------- Total comprehensive income $ 8,407 ========== Purchase of treasury stock (3,290) (3,290) Issuance of treasury stock for options exercised and employee savings plan 63 290 353 Cash dividends declared (767) (767) Federal income tax benefit related to the exercise or granting of stock awards 1,473 1,473 Amortization and cancellation of unvested restricted stock awards (2) (5) 78 71 ---------------------------------------------------------------------------- BALANCE, MARCH 31, 2002 $ 911 $ 21,920 $ 271,147 $ 46,425 $(41,703) $ (577) $ 298,123 ============================================================================
See notes to condensed consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE-MONTHS ENDED MARCH 31, 2002 AND 2001 AMOUNT IN 000'S
2002 2001 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,857 $ 9,692 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,087 2,087 Cumulative effect of change in accounting for goodwill 2,251 - Net realized investment gains (145) (1,071) Decrease in other accounts payable and accruals (8,253) (15,418) Decrease in other assets 546 5,406 Increase (decrease) in unearned insurance premiums (5,064) 2,665 Decrease in funds held under reinsurance agreements and reinsurance payables (4,065) (860) Decrease (increase) in deferred insurance policy acquisition costs 3,292 (281) Decrease in insurance loss reserves (1,809) (4,212) Decrease (increase) in net accounts receivable 1,699 (1,409) Decrease in insurance commissions payable (1,633) (3,275) Increase in reinsurance recoverables and prepaid reinsurance premiums (6) (1,433) Other-net (455) (129) --------- --------- Net cash used in operating activities (3,698) (8,238) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (109,237) (79,108) Sale of marketable securities 70,614 58,114 Increase in cash equivalent marketable securities 27,687 42,363 Maturity of marketable securities 10,048 5,681 Acquisition of property, plant and equipment (3,293) (1,070) Proceeds from sale of property, plant and equipment 18 114 --------- --------- Net cash provided by (used in) investing activities (4,163) 26,094 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in net short-term borrowings 6,161 (12,735) Purchase of treasury stock (3,290) (6,598) Dividends paid (711) (684) Repayment of long-term debt (363) (351) Issuance of treasury stock 353 1,308 --------- --------- Net cash provided by (used in) financing activities 2,150 (19,060) --------- --------- NET DECREASE IN CASH (5,711) (1,204) CASH AT BEGINNING OF PERIOD 11,286 8,391 --------- --------- CASH AT END OF PERIOD $ 5,575 $ 7,187 ========= ========= INTEREST PAID $ 790 $ 1,372 INCOME TAXES PAID $ 500 $ -
See notes to the condensed consolidated financial statements. THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2002 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of The Midland Company and subsidiaries (Midland) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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, 2001 has been derived from the audited consolidated financial statements of Midland. Revenue and operating results for the three-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2001 included in Midland's Annual Report on Form 10-K. 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 ------------- --------------- Three months ended March 31: 2002 8,638 8,919 ===== ===== 2001 8,705 9,023 ===== ===== 3. INCOME TAXES The federal income tax provisions for the three-month periods ended March 31, 2002 and 2001 are different from amounts derived by applying the statutory tax rates to income before federal income tax as follows (000's):
2002 2001 ---- ---- Federal income tax at statutory rate (including a tax credit of $3,734 $4,766 $787,000 on the cumulative effect of change in accounting principle) Tax effect of: Tax exempt interest and excludable dividend income (1,010) (919) Other - net 86 77 ------- ------- Provision for federal income tax $2,810 $3,924 ======= =======
THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. SEGMENT DISCLOSURES Since the Company's annual report for 2001, there have been no changes in reportable segments or the manner in which Midland determines reportable segments or measures segment profit or loss. Summarized segment information for the interim periods for 2002 and 2001 is as follows (000's):
Three Months Ended March 31, 2002 Three Months Ended March 31, 2001 --------------------------------- --------------------------------- Revenues- Revenues- Total External Pre-Tax Total External Pre-Tax Assets Customers Income Assets Customers Income ------ --------- ------ ------ --------- ------ Reportable Segments: Insurance: Manufactured housing n/a $80,763 $ 9,786 n/a $78,920 $ 7,675 Other n/a 57,331 4,334 n/a 41,422 6,448 Unallocated $987,811 - (183) $895,266 - (380) Transportation 24,778 5,881 (386) 27,248 9,606 943 Corporate and all other (634) (1,070) ------- ------- $12,917 $13,616 ======= =======
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. 5. DERIVATIVE FINANCIAL INSTRUMENTS Midland adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001, which established reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities in the consolidated balance sheet and measurement of those instruments at fair value. At March 31, 2002 Midland's investment portfolio included approximately $43.7 million of convertible securities, some of which contain embedded derivatives. The embedded conversion options are valued separately, and the change in the market value on the embedded options is reported in net realized investment gains (losses). For the three-month period ended March 31, 2002, Midland recorded pre-tax losses on these securities of $446,000. There was no gain or loss for the three month period ended March 31, 2001. During March 2002, Midland entered into a series of interest rate swap agreements to convert $30 million of its floating-rate debt to a fixed rate. The swaps qualify as cash flow hedges and are deemed to be 100% effective and thus the changes in the fair value of the swap agreement is recorded as a separate component of shareholders' equity and have no income statement impact. At March 31, 2002, the accumulated derivative gain recorded in Other Comprehensive Income, net of deferred taxes, amounted to $160,000. The swaps mature on December 1, 2005. THE MIDLAND COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 6. CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2002 Midland adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changed the accounting for goodwill from an amortization method to the impairment approach. Upon the adoption of the statement, Midland ceased amortizing goodwill, including goodwill recorded from past business combinations. As a result of the impairment test, Midland recorded an impairment charge of $1,463,000 (net of tax), or $0.17 per share (diluted), in its Other Insurance segment in the quarter ended March 31, 2002. This charge is reported separately in Midland's income statement as a Cumulative Effect of Change in Accounting Principle. The fair value of that reporting unit was estimated using the expected present value of future cash flows. At March 31, 2002 Midland's remaining goodwill balance, all of which is attributable to the Other Insurance segment, was $2,145,000. The following table provides what reported net income would have been exclusive of amortization expense related to goodwill had Midland adopted the standard effective January 1, 2001:
FOR THE THREE MONTHS ENDED MARCH 31 ----------------------------------- 2002 2001 --------- --------- Reported net income $7,857 $9,692 Add back: goodwill amortization (net of tax) - 96 --------- --------- Adjusted net income $7,857 $9,788 ========= ========= Basic earnings per share: Reported net income $0.91 $1.11 Goodwill amortization - 0.01 --------- --------- Adjusted net income $0.91 $1.12 ========= ========= Diluted earnings per share: Reported net income $0.88 $1.07 Goodwill amortization - 0.01 --------- --------- Adjusted net income $0.88 $1.08 ========= =========
ITEM 2. THE MIDLAND COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS A detailed discussion of Midland's liquidity and capital resources is included in the 2001 Annual Report on Form 10-K. Except as discussed below, as of March 31, 2002, no material changes have taken place since that date and, accordingly, the discussion is not repeated herein. RESULTS OF OPERATIONS INSURANCE Insurance Premiums Property and casualty and life insurance direct and assumed written premiums generated from American Modern Insurance Group, Inc. (American Modern), Midland's insurance subsidiary, increased 8.9% in the first quarter to $144.8 million from $133.0 million for the same quarter in 2001. Net earned premiums for the first quarter increased 15.1% to $136.5 million from $118.6 million for the comparable quarter in 2001. The disparity in growth rates between direct and assumed written premiums and net earned premiums for the periods presented was due primarily to a greater number of multi-year insurance policies being written in prior periods as compared to the more current periods. The growth in direct and assumed written premiums is primarily due to the growth in non-manufactured housing (hereafter referred to as other specialty property and casualty products) and credit life insurance products. Direct and assumed written premium in other specialty property and casualty insurance products (primarily site built, motorsport and recreational vehicle) collectively increased 22.1% to $60.0 million during the first quarter of 2002 from $49.1 million during the first quarter of 2001. This growth is primarily the result of concentrated efforts over the past several years to add balance and diversity to our product lines. Credit life direct and assumed written premium increased 97.1% to $14.6 million during the current quarter from $7.4 million during the prior year's quarter due primarily to the expansion of our relationship with US Bancorp. Manufactured housing direct and assumed written premium decreased 8.0% to $70.3 million during the first quarter of 2002 from $76.5 million during the first quarter of 2001. The manufactured housing market has been depressed for the past several years, however, this industry is showing some signs of recovery in the early months of 2002. Investment Income and Realized Capital Gains American Modern's net investment income (before taxes and excluding capital gains) decreased 1.4% to $8.7 million during the first quarter of 2002 from $8.8 million in the first quarter of 2001. This minimal decrease in income, in spite of positive growth within the portfolio, was primarily due to lower reinvestment rates relative to American Modern's fixed income portfolio. After-tax income from embedded derivatives included in net realized capital gains amounted to a loss of $(0.3) million, $(0.03) per share (diluted), during the first quarter of 2002. There was no income from this type of investment during the first quarter of 2001. Excluding the income from derivatives referred to above, American Modern's net realized capital gains decreased to $0.1 million, $0.01 per share (diluted), during the first quarter of 2002 from $0.7 million, $0.08 per share (diluted), during the first quarter of 2001. Losses and Loss Adjustment Expenses American Modern's losses and loss adjustment expenses in the first quarter of 2002 increased 11.8% to $69.6 million from $62.3 million for the first quarter of 2001. American Modern's total weather-related catastrophe losses (net of reinsurance recoveries) for the first quarter amounted to $3.3 million on a pre-tax basis compared with $5.3 million for the same quarter of 2001. These losses had an after-tax impact of approximately $0.24 per share (diluted) in the first quarter of 2002 compared to $0.38 per share (diluted) in the first quarter of 2001. Excluding catastrophe losses, the property and casualty combined ratio for the first quarter was 93.9% compared to 92.2% for the same quarter in 2001. Commissions, Other Policy Acquisition Costs and Operating and Administration Expenses American Modern's commissions and other policy acquisition costs and operating and administrative expenses for the first quarter of 2002 increased 16.6% to $62.7 million from $53.8 million for the first quarter of 2001. These increases are due primarily to the continued growth in net earned premiums. Property and Casualty Underwriting Results American Modern's property and casualty operations generated a pre-tax underwriting income of $4.9 million during the first quarter of 2002 compared to $3.5 million in the first quarter of 2001. For the current quarter, American Modern's combined ratio (ratio of losses and expenses as a percent of earned premium) for its property and casualty business was 96.4% compared to 97.0% in the first quarter of 2001. Underwriting profits increased during the current quarter compared to the prior quarter due to improvements in fire and commercial lines' losses. TRANSPORTATION M/G Transport, Midland's transportation subsidiary, reported revenues for the first quarter of 2002 of $5.9 million compared to $9.6 million during the first quarter of 2001. Pre-tax operating profits were a loss of $(0.4) million in the first quarter of 2002 compared to a profit of $0.9 million during the first quarter of 2001. The decline in revenues and profits was due to a significant reduction in shipments from its largest revenue source during the first quarter of 2002. M/G Transport is in the process of reconfiguring its revenue streams and believes its profits will be negligible, if any, for the remainder of 2002. LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION On January 25, 2001 Midland's Board of Directors approved an increase in the number of shares authorized under Midland's Common Stock Repurchase Program from 500,000 shares to 1,000,000 shares. No shares were repurchased during the first quarter of 2002 and a total of 302,000 shares remain authorized for repurchase under terms of this authority. On April 25, 2002 the board approved a two-year extension to the repurchase program that will run through the date of the board's second quarterly meeting in 2004. The resolution does not require the company to repurchase its shares but rather gives management discretion to make purchases based on market conditions and Midland's capital requirements. During the first quarter of 2002, Midland's insurance subsidiary, American Modern Insurance Group, Inc., entered into an interest rate swap agreement with a consortium of three banks. Under the terms of this agreement, the interest rate related to American Modern's current floating rate bank borrowing of $30 million has been fixed at 5.6% until December 1, 2005. The fair value of this agreement as of March 31, 2002 was $0.2 million and is included in Other Assets. American Modern Insurance Group's receivable balance from its largest customer, Conseco, Inc. decreased from $20.7 million at December 31, 2001 to $17.6 million at March 31, 2002. American Modern Insurance Group's reinsurance recoverables and prepaid reinsurance premiums balance at March 31, 2002 was $69.8 million. At March 31, 2002, $2.2 million represents amounts due from reinsurers for claims that have been paid and for which a contractual obligation to collect from a reinsurer exists. Approximately $48.2 million of the balance relates to unearned premiums that have been ceded to reinsurers and under the required accounting treatment results in the recording of a receivable by the ceding company and the remaining $19.4 million relates to unpaid loss reserves on business that has been ceded to other insurance companies. Management expects that cash and other liquid investments, coupled with future operating cash flows, will be readily available to meet Midland's operating cash requirements for the next twelve months. Midland declared $0.8 million in dividends to its shareholders during the first three months of 2002. OTHER MATTERS COMPREHENSIVE INCOME The only differences between net income and comprehensive income is the net after-tax change in unrealized gains on marketable securities and the after-tax change in the fair value of the interest rate swap agreement. For the three-month periods ended March 31, 2002 and 2001, such changes increased or (decreased), net of related income tax effects, by the following amounts (in thousands):
THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Changes in: Net unrealized capital gains $390 $(2,923) Fair value of interest rate swap hedge 160 - ---- -------- $550 $(2,923) ==== ========
Changes in net unrealized gains on marketable securities result from both market conditions and realized gains recognized in a reporting period. Changes in the after-tax fair value of the interest rate swap agreement are predicated on the current interest rate environment relative to the fixed rate of the swap agreement. CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2002, Midland adopted SFAS No. 142, "Goodwill and Other Intangible Assets". As required by SFAS No. 142, Midland ceased amortizing goodwill effective January 1, 2002, however, based on the impairment test required by SFAS No. 142, a non-recurring charge of $1.5 million (after-tax) was charged to income and is reported as "Cumulative Effect of Change in Accounting Principle" in the income statement. The March 31, 2001 income statement includes an after-tax expense of $0.1 million regarding goodwill amortization. As of March 31, 2002, Midland's remaining goodwill balance was $2.1 million and is included in Other Assets. CRITICAL ACCOUNTING POLICIES As of March 31, 2002, the critical accounting policies followed by Midland have not changed from those identified and disclosed in Midland's Annual Report on Form 10-K for the year ended December 31, 2001. PRIVATE SECURITIES REFORM ACT OF 1995 - FORWARD LOOKING STATEMENTS DISCLOSURE Certain statements made in this report are forward-looking and are made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. These statements include certain discussions relating to underwriting, premium and investment income volume, business strategies, profitability and business relationships, as well as any other statements concerning the year 2002 and beyond. The forward-looking statements involve risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Factors that might cause results to differ from those anticipated include, without limitation, adverse weather conditions, changes in underwriting results affected by adverse economic conditions, fluctuations in the investment markets, changes in the retail marketplace, changes in the laws or regulations affecting the operations of Midland or its subsidiaries, changes in the business tactics or strategies of Midland, its subsidiaries or its current or anticipated business partners, the financial condition of Midland's business partners, acquisitions or divestitures, changes in market forces, litigation and the other risk factors that have been identified in Midland's filings with the SEC, any one of which might materially affect the operations of Midland or its subsidiaries. Any forward-looking statements speak only as of the date made. We undertake no obligation to update nay forward-looking statements to reflect events or circumstances arising after the date on which they are made. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2002, the market risks associated with Midland's investment portfolios have not changed materially from those disclosed at year-end 2001. [DELOITTE & TOUCHE LETTERHEAD] INDEPENDENT ACCOUNTANTS' REPORT The Midland Company: We have reviewed the accompanying condensed consolidated balance sheet of The Midland Company and subsidiaries as of March 31, 2002, and the related condensed consolidated statements of income, changes in shareholders' equity and cash flows for the three-month periods ended March 31, 2002 and 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is 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 condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of The Midland Company and subsidiaries as of December 31, 2001, 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 7, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. /s/ Deloitte & Touche LLP April 11, 2002 PART II. OTHER INFORMATION THE MIDLAND COMPANY AND SUBSIDIARIES MARCH 31, 2002 Item 1. Legal Proceedings ----------------- None Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- None Item 3. Defaults Upon Senior Securities ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- At the Company's 2001 annual meeting of Shareholders held on April 11, 2002, the following actions were taken: a) The following persons were elected as members of the Board of Directors to serve until the year of the annual meeting indicated below and until their successors are chosen and qualified:
YEAR OF VOTES BROKER ANNUAL NAME VOTES FOR WITHHELD ABSTENTIONS NON-VOTES MEETING ---- --------- -------- ----------- --------- ------- James E. Bushman 7,804,085 453,416 0 0 2005 James H. Carey 7,808,536 448,965 0 0 2005 John W. Hayden 7,806,480 451,021 0 0 2005 Robert W. Hayden 7,806,480 451,021 0 0 2005 William J. Keating, Jr. 7,800,213 457,288 0 0 2003 David B. O'Maley 7,806,055 451,446 0 0 2005
b) A proposal by the Board of Directors to amend the Articles of Incorporation to increase the number of shares authorized to 41,000,000, of which 40,000,000 shares shall be common shares without par value and 1,000,000 shares shall be preferred shares without par value. The shareholders cast 6,392,291 votes in favor of this proposal and 1,048,008 votes against it. There were 29,377 abstentions. c) A proposal by the Board of Directors to adopt the 2002 Employee Incentive Stock Plan. The shareholders cast 5,743,683 votes in favor of this proposal and 1,675,050 votes against it. There were 50,942 abstentions. d) A proposal by the Board of Directors to adopt the 2002 Restricted Stock and Stock Option Plan for Non-Employee Directors. The shareholders cast 6,789,294 votes in favor of this proposal and 646,069 votes against it. There were 34,312 abstentions. e) A proposal by the Board of Directors to ratify the appointment of the firm of Deloitte & Touche LLP, as Midland's independent auditors to conduct the annual audit of the financial statements of Midland for the year ending December 31, 2002, was approved by the Shareholders. The Shareholders cast 8,225,782 votes in favor of this proposal and 10,979 votes against it. There were 20,740 abstentions. Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibit 10.1 - The Midland Company 2002 Employee Incentive Stock Plan* b) Exhibit 10.2 - The Midland Company 2002 Restricted Stock and Stock Option Plan* c) Exhibit 15 - Letter re: Unaudited Interim Financial Information d) Reports on Form 8-K - None *Management Compensatory Plan or Arrangement. Filed by reference to Annex I of Midland's Proxy Statement dated March 12, 2002. 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 April 11, 2002 s/John I. Von Lehman ---------------------- --------------------------------------------- John I. Von Lehman, Executive Vice President, Chief Financial Officer and Secretary