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, 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 March 31, 1999 was
9,515,249.
PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
Amounts in 000's
(Unaudited)
March 31, Dec. 31,
ASSETS 1999 1998
---------- ----------
MARKETABLE SECURITIES AVAILABLE FOR SALE:
Fixed income (cost, $429,933 at March 31, 1999 and
$443,975 at December 31, 1998) $ 435,238 $ 453,422
Equity (cost, $39,664 at March 31, 1999 and
$37,736 at December 31, 1998) 136,201 136,748
---------- ----------
Total 571,439 590,170
---------- ----------
CASH 4,878 3,687
---------- ----------
RECEIVABLES:
Accounts receivable 59,112 60,094
Less allowance for losses 753 753
---------- ----------
Net 58,359 59,341
---------- ----------
REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS 35,528 33,955
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - AT COST 114,120 114,466
Less accumulated depreciation and amortization 48,069 46,629
---------- ----------
Net 66,051 67,837
---------- ----------
OTHER REAL ESTATE - NET 8,700 8,700
---------- ----------
DEFERRED INSURANCE POLICY ACQUISITION COSTS 68,102 63,962
---------- ----------
OTHER ASSETS 9,373 9,568
---------- ----------
TOTAL ASSETS $ 822,430 $ 837,220
========== ==========
See notes to consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
Amounts in 000's
(Unaudited)
March 31, Dec. 31,
LIABILITIES & SHAREHOLDERS' EQUITY 1999 1998
---------- ----------
UNEARNED INSURANCE PREMIUMS $ 259,054 $ 255,115
---------- ----------
INSURANCE LOSS RESERVES 125,893 125,496
---------- ----------
INSURANCE COMMISSIONS PAYABLE 18,504 20,272
---------- ----------
FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES 10,326 14,624
---------- ----------
LONG-TERM DEBT 53,706 54,563
---------- ----------
OTHER NOTES PAYABLE:
Banks 7,000 15,000
Commercial paper 6,742 6,522
---------- ----------
Total 13,742 21,522
---------- ----------
DEFERRED FEDERAL INCOME TAX 36,976 39,305
---------- ----------
OTHER PAYABLES AND ACCRUALS 53,225 57,491
---------- ----------
COMMITMENTS AND CONTINGENCIES - -
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock (issued and outstanding: 9,515 shares
at March 31, 1999 and 9,352 shares at
December 31, 1998 after deducting treasury stock
of 1,413 shares and 1,576 shares, respectively) 911 911
Additional paid-in capital 17,385 15,947
Retained earnings 185,615 178,398
Accumulated other comprehensive income 66,217 70,507
Treasury stock - at cost (15,097) (15,293)
Unvested restricted stock awards (4,027) (1,638)
---------- ----------
Total 251,004 248,832
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 822,430 $ 837,220
========== ==========
See notes to consolidated financial statements.
THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Amounts in 000's except per share data
1999 1998
---------- ----------
REVENUES:
Insurance:
Premiums earned $ 98,137 $ 90,479
Net investment income 6,071 5,842
Net realized investment gains 1,070 1,039
Other insurance income 746 485
Transportation 7,927 9,237
Other 133 155
---------- ----------
Total 114,084 107,237
---------- ----------
COSTS AND EXPENSES:
Insurance:
Losses and loss adjustment expenses 48,382 48,121
Commissions and other policy acquisition cost 30,005 25,513
Operating and administrative expenses 14,867 14,855
Transportation operating expenses 7,688 8,150
Interest expense 1,062 1,257
Other operating and administrative expenses 995 757
---------- ----------
Total 102,999 98,653
---------- ----------
INCOME BEFORE FEDERAL INCOME TAX 11,085 8,584
---------- ----------
PROVISION FOR FEDERAL INCOME TAX 3,225 2,544
---------- ----------
NET INCOME $ 7,860 $ 6,040
========== ==========
BASIC EARNINGS PER SHARE
OF COMMON STOCK $ 0.86 $ 0.67
========== ==========
DILUTED EARNINGS PER SHARE
OF COMMON STOCK $ 0.83 $ 0.64
========== ==========
CASH DIVIDENDS PER SHARE
OF COMMON STOCK - DECLARED $ .0675 $ .0625
========== ==========
See notes to consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 6,040 6,040 $ 6,040
Increase in unrealized gain
on marketable securities,
net of related income tax
effect of $2,174 4,037 4,037 4,037
--------
Total comprehensive income $10,077
========
Purchase of treasury stock, net 32 (642) (610)
Cash dividends declared (581) (581)
Exercise of stock options (7) 28 21
Amortization and cancellation of
unvested restricted stock awards (30) (51) 229 148
-------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998 $911 $15,354 $159,256 $48,160 $(15,369) $(2,231) $206,081
===============================================================================
BALANCE, DECEMBER 31, 1998 $911 $15,947 $178,398 $70,507 $(15,293) $(1,638) $248,832
Comprehensive income:
Net income 7,860 7,860 $ 7,860
Decrease in unrealized gain
on marketable securities,
net of related income tax
effect of $(2,329) (4,290) (4,290) (4,290)
--------
Total comprehensive income $ 3,570
========
Purchase of treasury stock, net 64 (2,368) (2,304)
Cash dividends declared (643) (643)
Exercise of stock options (37) 1,297 1,260
Restricted stock awards 1,411 1,267 (2,678) -
Amortization and cancellation of
unvested restricted stock awards 289 289
-------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999 $911 $17,385 $185,615 $66,217 $(15,097) $(4,027) $251,004
===============================================================================
See notes to consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Amounts in 000's
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,860 $ 6,040
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,180 2,111
Net realized investment gains (1,070) (1,039)
Decrease in other accounts payable and accruals (4,324) (1,242)
Decrease in funds held under reinsurance
agreements and reinsurance payables (4,298) (2,255)
Increase in deferred insurance policy acquisition
costs (4,140) (1,217)
Increase (decrease) in unearned insurance premiums 3,939 (4,031)
Decrease in insurance commissions payable (1,768) (3,020)
Decrease (increase) in reinsurance recoverables and
prepaid reinsurance premiums (1,573) 5,166
Decrease in net accounts receivable 982 1,755
Increase in insurance loss reserves 397 6,599
Decrease (increase) in other assets 195 (133)
Other-net 1,002 475
---------- ----------
Net cash provided by provided by
operating activities (618) 9,209
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (32,097) (48,030)
Sale of marketable securities 18,650 24,883
Decrease in cash equivalent marketable securities 15,369 24,511
Maturity of marketable securities 10,292 10,887
Acquisition of property, plant and equipment (296) (2,223)
Sale of property, plant and equipment 120 88
---------- ----------
Net cash used in investing activities 12,038 10,116
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in net short-term borrowings (7,780) (19,644)
Net treasury stock transactions (1,007) (582)
Repayment of long-term debt (747) (874)
Dividends paid (585) -
Payment of capitalized lease obligations (110) (100)
---------- ----------
Net cash used in financing activities (10,229) (21,200)
---------- ----------
NET INCREASE (DECREASE) IN CASH 1,191 (1,875)
CASH AT BEGINNING OF PERIOD 3,687 5,277
---------- ----------
CASH AT END OF PERIOD $ 4,878 $ 3,402
========== ==========
See notes to consolidated financial statements.
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 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 three-month period ended March 31, 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. THREE-FOR-ONE STOCK SPLIT
On April 9, 1998, the Company approved a three-for-one stock split effective May
21, 1998 for holders of record on April 30, 1998. Accordingly, data related to
the Company's common stock (number of shares, average shares outstanding,
earnings per share and dividends per share) were adjusted for the period ended
March 31, 1998 to reflect the impact of this stock split.
3. 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:
1999 9,098 9,439
===== =====
1998 8,994 9,374
===== =====
4. INCOME TAXES
The federal income tax provisions for the three-month periods ended March 31,
1999 and 1998 are different from amounts derived by applying the statutory tax
rates to income before federal income tax as follows (000's):
1999 1998
------- -------
Federal income tax at statutory rate $3,880 $3,005
Tax effect of:
Tax exempt interest and
excludable dividend income (737) (451)
Other - net 82 (10)
------- -------
Provision for federal income tax $3,225 $2,544
======= =======
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
5. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest of $1.0 million and $1.2 million in the first three
months of 1999 and 1998, respectively. The Company paid no income taxes during
the first three months of 1999 and received a tax refund of $1.4 million during
the first three months of 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.
6. 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):
Three Months Three Months
Ended March 31, 1999 Ended March 31, 1998
---------------------------- --------------------------
Revenues- Revenues-
Total External Pre-Tax Total External Pre-Tax
Assets Customers Income Assets Customers Income
-------- --------- ------- ------ --------- -------
Reportable Segments:
Insurance:
Manufactured housing n/a $68,768 $ 9,670 n/a $60,387 $ 9,889
Other n/a 30,115 3,346 n/a 30,577 1,664
Unallocated $743,618 - (320) $668,303 - (2,305)
Transportation 35,462 7,927 171 41,409 9,237 1,218
Corporate and all
other (1,782) (1,882)
-------- --------
$11,085 $ 8,584
======== ========
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.
7. NEW ACCOUNTING STANDARDS
The Fianancial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Investments and Hedging
Activities", must be adopted by the Company effective with the first quarter of
2000. 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 March 31, 1999, and the related
consolidated statements of income, changes in shareholders' equity and
cash flows for the three-month periods ended March 31, 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 Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and of making inquiries of persons
responsible for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with generally
accepted auditing standards, 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 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
April 12, 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
- ---------
Pre-Tax Income
For the Company's insurance subsidiary, American Modern Insurance Group,
Inc. (AMIG), pre-tax income amounted to $12.7 million for the first quarter of
1999 compared to $9.2 million for the first quarter of 1998.
Insurance Premiums
AMIG's direct and assumed written premiums generated from AMIG's
property and casualty and life insurance operations increased 3.2% in the first
quarter to $106.6 million from $103.3 million for the same quarter of 1998. Net
earned premiums for the first quarter increased 8.5% to $98.1 million from $90.5
million for the comparable quarter in 1998. The primary factor contributing to
the growth in direct and assumed written premiums was continued volume increases
in manufactured home and related coverages insurance premium. Manufactured home
and related coverages direct and assumed written premium increased to $70.4
million from $68.7 million for the same quarter of 1998. The increase in net
earned premiums is primarily the result of both the growth in written premium
and the Company's decision to cede less written business to reinsurers.
Investment Income and Realized Capital Gains
AMIG's net investment income (before taxes and excluding capital gains)
increased by approximately 3.9% to $6.1 million in the first quarter of 1999
from $5.8 million for the first quarter of 1998. The increase in investment
income was primarily the result of the continued growth of AMIG's investment
portfolio which resulted, inpart, from the investment of positive cash flow from
underwriting activities.
AMIG's after-tax net realized capital gains were approximately $0.7
million, or $0.07 per share (diluted) for the first quarters of 1999 and 1998.
Losses and Loss Adjustment Expenses
AMIG's losses and loss adjustment expenses in the first quarter of 1999
and 1998 were $48.4 million and $48.1 million, respectively. These expenses
were consistent from year-to-year primarily because of fewer weather related
catastrophes in 1999 ($4.2 million pre-tax) compared to 1998 ($5.9 million
pre-tax). Excluding catastrophe losses, the property and casualty combined
ratio for the first quarter was 90.2% vs. 88.5% for the first quarter of 1998.
Commissions, Other Policy Acquisition Costs and Other Operating and
Administration Expenses
AMIG's commissions, other policy acquisition costs and other operating
and administrative expenses for the first quarter increased 11.1% to $44.9
million from $40.4 million for the first quarter of 1998. These increases are
due primarily to the continued growth in net earned premiums including the
effects of less offsets for ceded commission income as a result of the decision
to cede less insurance premiums to reinsurers.
Overall Underwriting Results
AMIG's property and casualty operations generated a pre-tax underwriting
income of $5.3 million for the first quarter of 1999 compared to a pre-tax
underwriting income of $4.2 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 94.5% vs.
95.2% a year ago.
Transportation
- --------------
For the quarter, the Company's transportation subsidiary, M/G Transport
(M/G), reported pre-tax revenue of $7.9 million compared with $9.2 million in
the first quarter of 1998 and pre-tax operating profits of $0.2 million vs.
$1.2 million. These decreases are the result of lower prices for petroleum
products which have affected shipping patterns. Management anticipates that
these factors will continue to adversly impact M/G's operating profit for the
balance of 1999. Net income from M/G contributed $0.1 million, or $0.01 per
share (diluted), in the first quarter of 1999, compared with $0.8 million, or
$0.09 per share (diluted), in the first quarter of 1998.
FINANCIAL CONDITION
Cash flows from sales and maturities of marketable securities were used
to decrease the Company's short-term borrowings from year-end 1998.
Shareholders' equity increased to $251.0 million at March 31, 1999 from $248.8
million at year-end 1998. This is due to the net income generated in the first
quarter of 1999 offset by the decrease in the accumulated other comprehensive
income resulting from a decrease in the market value of the Company's investment
portfolio. The changes in funds held under reinsurance agreements and
reinsurance payables and deferred insurance policy acquisition costs are due to
changes in the amounts of insurance premiums ceded to reinsurers under certain
reinsurance treaties and the continued growth in written premiums. The decrease
in accumulated other comprehensive income (net unrealized gains) also resulted
in a decrease in deferred federal income tax.
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
$0.6 million in dividends to its shareholders during the first quarter of 1999.
OTHER MATTERS
Comprehensive Income
- --------------------
For the Company, the only difference between net income and
comprehensive income is the net change in unrealized gain on marketable
securities. Changes in net unrealized gain result from both market conditions
and realized gains recognized in a reporting period. For the three-month
periods ended March 31, 1999 and 1998, the Company recognized comparable
realized gains, as discussed above, and, net of tax effects, a decrease in net
unrealized gain of $4.3 million in the first quarter of 1999 and an increase in
net unrealized gain of $4.0 million in the first quarter of 1998.
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 March 31, 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 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 cannot
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 (i.e. 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 March 31,
1999, the Company had expended approximately $0.7 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 statements 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
MARCH 31, 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
At the Company's 1999 annual meeting of Shareholders held on
April 8, 1999, the following actions were taken:
a.) The following persons were elected as members of the Board
of Directors to serve until the annual meeting of 2002
and until their successors are chosen and qualified:
Votes Broker
Votes For Withheld Abstentions Non-Votes
--------- -------- ----------- ---------
James E. Bushman 7,979,834 17,466 0 0
James H. Carey 7,978,935 18,385 0 0
John W. Hayden 7,979,254 18,066 0 0
Robert W. Hayden 7,979,254 18,066 0 0
David B. O'Maley 7,979,754 17,566 0 0
b.) A proposal by the Board of Directors to ratify the appointment of
the firm of Deloitte & Touche, LLP, as the Company's independent
auditors to conduct the annual audit of the financial statements of
the Company for the year ending December 31, 1999, was approved by
the Shareholders. The Shareholders cast 7,978,934 votes in favor
of this proposal and 3,458 votes against. There were 14,928
abstentions.
c.) A proposal by the Board of Directors to amend and restate the
Company's Code of Regulations was approved by the Shareholders.
The Shareholders cast 6,058,151 votes in favor of this proposal and
1,125,254 votes against. There were 34,228 abstentions.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a.) Exhibit 3(ii) - Code of Regulations (Amended and Restated)
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 dully authorized.
THE MIDLAND COMPANY
Date _________April 12, 1999__________ s/John I. Von Lehman_________
John I. Von Lehman, Executive
Vice President and Chief
Financial Officer