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, 2001
---------------------
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)
Ohio 31-0742526
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 July 31, 2001 was
8,908,936.
2
PART I. FINANCIAL INFORMATION
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
AMOUNTS IN 000'S
(UNAUDITED)
JUNE 30, DEC. 31,
ASSETS 2001 2000
-------- --------
MARKETABLE SECURITIES AVAILABLE FOR SALE:
Fixed income (cost, $496,383 at June 30, 2001 and
$534,038 at December 31, 2000) $507,602 $540,337
Equity (cost, $85,320 at June 30, 2001 and $74,983
at December 31, 2000) 150,855 152,320
-------- --------
Total 658,457 692,657
-------- --------
CASH 11,148 8,391
-------- --------
ACCOUNTS RECEIVABLE - NET 94,014 70,396
-------- --------
REINSURANCE RECOVERABLES AND
PREPAID REINSURANCE PREMIUMS 52,359 46,030
-------- --------
PROPERTY, PLANT AND EQUIPMENT - NET 55,523 56,976
-------- --------
DEFERRED INSURANCE POLICY ACQUISITION COSTS 100,193 91,574
-------- --------
OTHER ASSETS 22,684 27,826
-------- --------
TOTAL ASSETS $994,378 $993,850
======== ========
See notes to condensed consolidated financial statements.
3
THE MIDLAND COMPANY
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
AMOUNTS IN 000'S
(UNAUDITED)
JUNE 30, DEC. 31,
LIABILITIES & SHAREHOLDERS' EQUITY 2001 2000
--------- ---------
UNEARNED INSURANCE PREMIUMS $ 393,528 $ 357,185
--------- ---------
INSURANCE LOSS RESERVES 138,064 135,887
--------- ---------
INSURANCE COMMISSIONS PAYABLE 19,511 22,181
--------- ---------
FUNDS HELD UNDER REINSURANCE AGREEMENTS
AND REINSURANCE PAYABLES 2,576 2,803
--------- ---------
LONG-TERM DEBT 39,326 40,025
--------- ---------
OTHER NOTES PAYABLE:
Banks 12,000 39,000
Commercial paper 12,832 6,020
--------- ---------
Total 24,832 45,020
--------- ---------
DEFERRED FEDERAL INCOME TAX 30,551 32,938
--------- ---------
OTHER PAYABLES AND ACCRUALS 57,344 74,634
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock (issued and outstanding: 8,908 shares at
June 30, 2001 and 9,000 shares at December 31, 2000 after
deducting treasury stock of 2,020 shares and
1,928 shares, respectively) 911 911
Additional paid-in capital 20,083 19,838
Retained earnings 254,012 239,679
Accumulated other comprehensive income 49,899 54,396
Treasury stock - at cost (35,302) (30,404)
Unvested restricted stock awards (957) (1,243)
--------- ---------
Total 288,646 283,177
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 994,378 $ 993,850
========= =========
See notes to condensed consolidated financial statements.
4
THE MIDLAND COMPANY
AND SUBSIDIARIES
STATEMENTS OF CONDENSED CONSOLIDATED INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2001 AND 2000 AMOUNTS IN 000'S (EXCEPT
PER SHARE INFORMATION)
SIX-MOS. ENDED JUNE 30, THREE-MOS. ENDED JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES:
Insurance:
Premiums earned $242,297 $222,764 $123,726 $112,266
Net investment income 18,054 14,452 9,220 7,391
Net realized investment gains 2,677 3,201 1,606 1,319
Other insurance income 3,009 4,174 1,238 2,215
Transportation 17,554 16,034 7,948 9,034
Other 254 559 125 218
-------- -------- -------- --------
Total 283,845 261,184 143,863 132,443
-------- -------- -------- --------
COSTS AND EXPENSES:
Insurance:
Losses and loss adjustment expenses 137,681 116,939 75,415 61,963
Commissions and other policy acquisition costs 68,714 68,039 33,955 33,177
Operating and administrative expenses 36,331 35,344 17,266 17,511
Transportation operating expenses 16,314 13,496 7,742 7,186
Interest expense 2,590 2,056 1,177 1,168
Other operating and administrative expenses 492 1,280 201 429
-------- -------- -------- --------
Total 262,122 237,154 135,756 121,434
-------- -------- -------- --------
INCOME BEFORE FEDERAL INCOME TAX 21,723 24,030 8,107 11,009
PROVISION FOR FEDERAL INCOME TAX 5,964 7,517 2,040 3,679
-------- -------- -------- --------
NET INCOME $ 15,759 $ 16,513 $ 6,067 $ 7,330
======== ======== ======== ========
BASIC EARNINGS PER SHARE
OF COMMON STOCK $ 1.82 $ 1.80 $ 0.71 $ 0.80
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
OF COMMON STOCK $ 1.75 $ 1.75 $ 0.68 $ 0.78
======== ======== ======== ========
CASH DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK $ 0.160 $ 0.150 $ 0.080 $ 0.075
======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(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, 1999 $911 $18,583 $207,005 $49,388 $(15,786) $(2,099) $258,002
Comprehensive income:
Net income 16,513 16,513 $16,513
Decrease in unrealized gain
on marketable securities,
net of related income tax
effect of $(367) (677) (677) (677)
-------
Total comprehensive income $15,836
=======
Purchase of treasury stock (2,799) (2,799)
Issuance of treasury stock for
options exercised and employee
savings plan 125 259 384
Cash dividends declared (1,415) (1,415)
Federal income tax benefit related
to the exercise or granting of
stock awards 263 263
Revaluation of stock options
relating to a plan amendment 776 776
Amortization and cancellation of
unvested restricted stock awards (83) (122) 532 327
--------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 $911 $19,664 $222,103 $48,711 $(18,448) $ (1,567) $271,374
================================================================================
BALANCE, DECEMBER 31, 2000 $911 $19,838 $239,679 $54,396 $(30,404) $ (1,243) $283,177
Comprehensive income:
Net income 15,759 15,759 $15,759
Decrease in unrealized gain on
marketable securities, net
of related income tax effect
of $(2,387) (4,497) (4,497) (4,497)
-------
Total comprehensive income $11,262
=======
Purchase of treasury stock (7,233) (7,233)
Issuance of treasury stock for
options exercised and employee
savings plan (599) 2,335 1,736
Cash dividends declared (1,426) (1,426)
Federal income tax benefit related
to the exercise or granting of
stock awards 844 844
Amortization and cancellation of
unvested restricted stock awards 286 286
--------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 $911 $20,083 $254,012 $49,899 $(35,302) $ (957) $288,646
================================================================================
See notes to condensed consolidated financial statements.
6
THE MIDLAND COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX-MONTHS ENDED JUNE 30, 2001 AND 2000
AMOUNT IN 000'S
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,759 $ 16,513
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,197 4,630
Net realized investment gains (2,677) (3,201)
Increase in unearned insurance premiums 36,343 29,224
Increase in net accounts receivable (23,618) (13,955)
Increase (decrease) in other accounts payable and accruals (16,475) 1,189
Increase in deferred insurance policy acquisition costs (8,619) (6,533)
Increase in reinsurance recoverables and prepaid
reinsurance premiums (6,329) (4,989)
Decrease (increase) in other assets 4,847 (292)
Decrease in insurance commissions payable (2,670) (192)
Increase (decrease) in insurance loss reserves 2,177 (4,033)
Increase (decrease) in funds held under reinsurance
agreements and reinsurance payables (227) 155
Increase in deferred federal income tax -- 368
Other-net (719) (988)
--------- ---------
Net cash provided by operating activities 1,989 17,896
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (132,209) (122,228)
Sale of marketable securities 104,110 89,881
Decrease in cash equivalent marketable securities 45,304 9,877
Maturity of marketable securities 13,477 16,254
Acquisition of property, plant and equipment (2,284) (841)
Proceeds from sale of property, plant and equipment 151 2,161
Net cash used in business acquisition -- (2,471)
--------- ---------
Net cash provided by (used in) investing activities 28,549 (7,367)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in net short-term borrowings (20,188) (6,539)
Purchase of treasury stock (7,233) (2,799)
Issuance of treasury stock 1,736 384
Dividends paid (1,397) (1,352)
Repayment of long-term debt (699) (2,107)
--------- ---------
Net cash used in financing activities (27,781) (12,413)
--------- ---------
NET INCREASE (DECREASE) IN CASH 2,757 (1,884)
CASH AT BEGINNING OF PERIOD 8,391 10,098
--------- ---------
CASH AT END OF PERIOD $ 11,148 $ 8,214
========= =========
INTEREST PAID $ 2,466 $ 2,074
INCOME TAXES PAID $ 2,900 $ 5,330
See notes to the condensed consolidated financial statements.
7
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2001
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of The
Midland Company and subsidiaries (the "Company") 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, 2000 has been derived from the audited
consolidated financial statements of the Company. Revenue and operating results
for the six and three-month periods ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. For further information, refer to the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 2000 included
in the Company's Annual Report on Form 10-K.
Certain reclassifications (minor in nature) have been made to the 2000 amounts
to conform to 2001 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:
2001 8,673 9,003
===== =====
2000 9,156 9,461
===== =====
3. INCOME TAXES
The federal income tax provisions for the three and six-month periods ended June
30, 2001 and 2000 are different from amounts derived by applying the statutory
tax rates to income before federal income tax as follows (000's):
SIX-MOS. ENDED JUNE 30, THREE-MOS. ENDED JUNE 30,
----------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Federal income tax at statutory rate $ 7,603 $ 8,410 $ 2,837 $ 3,853
Add (deduct) the tax effect of:
Tax exempt interest and
excludable dividend income (1,798) (1,660) (879) (842)
Federal excise tax -- 570 -- 570
Other - net 159 197 82 98
------- ------- ------- -------
Provision for federal income tax $ 5,964 $ 7,517 $ 2,040 $ 3,679
======= ======= ======= =======
4. SEGMENT DISCLOSURES
Since the Company's annual report for 2000, 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 2001 and 2000 is as follows (000's):
8
THE MIDLAND COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Six Months Ended June 30, 2001 Three Months Ended June 30, 2001
------------------------------ --------------------------------
Revenues- Revenues-
Total External Pre-Tax External Pre-Tax
Assets Customers Income Customers Income
------ --------- ------ --------- ------
Reportable Segments:
Insurance:
Manufactured housing n/a $158,208 $ 12,286 $79,288 $ 4,611
Other n/a 87,100 10,881 45,678 4,433
Unallocated $940,739 - (683) - (303)
Transportation 26,579 17,554 1,080 7,948 137
Corporate and all other - - (1,841) - (771)
-------- -------
$ 21,723 $ 8,107
======== =======
Six Months Ended June 30, 2000 Three Months Ended June 30, 2000
------------------------------ --------------------------------
Revenues- Revenues-
Total External Pre-Tax External Pre-Tax
Assets Customers Income Customers Income
------ --------- ------ --------- ------
Reportable Segments:
Insurance:
Manufactured housing n/a $152,960 $ 18,795 $76,957 $ 7,679
Other n/a 73,978 5,644 37,524 2,428
Unallocated $855,186 - (976) - (316)
Transportation 31,089 16,034 2,039 9,034 1,479
Corporate and all other - - (1,472) - (261)
-------- --------
$ 24,030 $ 11,009
======== ========
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. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities" during 1998. SFAS No. 133, as amended by SFAS Nos. 137 and
138, is effective for fiscal years beginning January 1, 2001. The Company's
investment portfolio includes approximately $34 million of convertible
securities, which contain imbedded derivatives. The embedded conversion options
are valued separately, and the change in market value of the embedded options is
reported in the results from operations. For both the three and six-month
periods ended June 30, 2001, the Company has recorded an $880,000 pre-tax gain
on these securities, which is included in investment income.
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
FASB. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets will remain on the balance sheet and not be amortized. On an
annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The Company is required to implement SFAS No. 141
on July 1, 2001 and it has not determined the impact, if any, that this
statement will have on its consolidated financial position or results of
operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company is required to implement SFAS No. 142 on
January 1, 2002. The impact on after-tax income is only $0.04 per share each
year in 2000 and also in 2001.
9
ITEM 2. 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 2000 Annual Report on Form 10-K. Except as discussed below,
no material changes have taken place in 2001 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 17.5% in the second quarter to $167.7 million from $142.7 million for
the same quarter of 2000. Net earned premiums for the second quarter of 2001
increased 10.2% to $123.7 million from $112.3 million for the comparable quarter
in 2000. On a year-to-date basis, direct and assumed written premiums generated
by AMIG's insurance operations increased 10.9% to $300.7 million from $271.1
million for the same six-month period in 2000. Year-to-date net earned premiums
increased 8.8% to $242.3 million from $222.8 million in 2000.
The growth in direct and assumed written premiums for the periods
presented is primarily due to the growth in motorsports insurance products
(motorcycle, watercraft and snowmobile). This business came to American Modern
through a third quarter, 2000 reinsurance agreement with GuideOne Insurance.
Motorsports insurance products direct and assumed written premiums increased
$18.1 million in the second quarter of 2001 from $0 in the second quarter of
2000. On a year-to-date basis, motorsports insurance products direct and assumed
written premiums increased to $28.8 million from $0 in the comparable prior year
period. On a quarterly basis, mobile home and related direct and assumed written
premiums increased 1.7% to $92.8 million in the current quarter compared to
$91.3 million in the prior period. On a year-to-date basis, mobile home and
related direct and assumed written premiums decreased 3.4% from $175.3 million
in 2000 to $169.3 in 2001. All remaining specialty property and casualty
insurance products direct and assumed written premiums increased 7.7% in the
second quarter of 2001 to $44.5 million from $41.3 million in the same quarter
in 2000. On a year-to-date basis, all other specialty property and casualty
direct and assumed written premiums increased 6.6% to $82.9 million in the
current period from $77.8 million in the prior year period. Credit life direct
and assumed written premiums increased 21.1% during the second quarter of 2001
to $12.3 million from $10.1 million in the second quarter of 2000. On a
year-to-date basis, credit life direct and assumed written premiums increased
9.3% in the current period to $19.7 million from $18.0 million in the comparable
period in 2000.
Investment Income and Realized Capital Gains
Excluding the impact of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", AMIG's net investment income (before taxes
and excluding capital gains) increased 12.8% to $8.3 million in the second
quarter of 2001 from $7.4 million for the second quarter of 2000. On a
year-to-date basis, AMIG's net investment income (exclusive of the items
mentioned above) increased 18.8% to $17.2 million from $14.5 million for the
same six-month period in 2000. SFAS 133 increased the aforementioned net
investment income by $0.9 million (6 cents per share after-tax diluted) for both
the second quarter and first six months of 2001. SFAS 133 did not affect 2000
results. Investment income increased due to the continued growth in AMIG's
investment portfolio.
AMIG's net realized capital gains (after-tax) increased to $1.0
million, $0.11 per share (diluted), for the second quarter of 2001, from $0.9
million, $0.09 per share (diluted), for the same quarter in 2000. On a
year-to-date basis, AMIG's net realized capital gains (after-tax) decreased to
$1.7 million, $0.19 per share (diluted), from $2.1 million, $0.22 per share
(diluted), for the same six-month period in 2000.
Losses and Loss Adjustment Expenses
AMIG's losses and loss adjustment expenses in the second quarter
increased 21.7% to $75.4 million from $62.0 million for the second quarter of
2000. AMIG's weather-related catastrophe losses for the second quarter of 2001
amounted to $10.8 million on a pre-tax basis compared with $5.2 million for the
same quarter of 2000. These losses had an after-tax impact of approximately
$0.78 per share
10
(diluted) in the second quarter of 2001 compared to $0.36 per share (diluted) in
the second quarter of 2000. Excluding catastrophe losses, the property and
casualty combined ratio for the second quarter was 92.9% compared to 94.3% for
the same quarter in 2000.
On a year-to-date basis, AMIG's losses and loss adjustment expenses
increased 17.7% to $137.7 million from $116.9 million for the same six-month
period in 2000. AMIG's weather-related catastrophe losses for the first six
months of 2001 amounted to $16.4 million on a pre-tax basis compared with $7.7
million for the same period in 2000. These losses had an after-tax impact of
approximately $1.19 per share (diluted) in the first six months of 2001 compared
to $0.53 per share (diluted) in the same period of 2000. Excluding catastrophe
losses, the property and casualty combined ratio for the first six months of
2001 was 92.6% compared to 93.5% for the same period in 2000.
Catastrophe losses from Tropical Storm Allison and other severe storms
coupled with an overall increase in the fire loss ratio in 2001 compared to 2000
were the primary reasons for the increases in AMIG's losses and loss adjustment
expenses for the second quarter and first half of 2001 compared to the same
periods in 2000.
Commissions and Other Policy Acquisition Costs and Operating and
Administration Expenses
AMIG's commissions and other policy acquisition costs and operating and
administrative expenses for the second quarter of 2001 increased 1.1% to $51.2
million from $50.7 million in the second quarter of 2000. On a year-to-date
basis, AMIG's commissions and other policy acquisition costs and operating and
administrative expenses for the first six months of 2001 increased 1.6% to
$105.0 million from $103.4 million for the same six-month period in 2000. These
increases are due to continued growth in net earned premiums offset by a
decrease in contingent commission expense due to the catastrophe losses incurred
in the second quarter and first six months of 2001.
Property and Casualty Underwriting Results
AMIG's property and casualty operations generated a pre-tax
underwriting loss of ($2.2) million for the second quarter of 2001 compared to a
pre-tax underwriting profit of $1.1 million for the same quarter in 2000. 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 101.9%
compared to 99.0% in the second quarter of 2000. On a year-to-date basis, AMIG's
property and casualty pre-tax underwriting income decreased from $6.4 million in
the first half of 2000 to $1.2 million during the first six months of 2001.
AMIG's combined ratio for its property and casualty business was 99.5% for the
first six months of 2001 compared to 97.1% for the same period in 2000.
TRANSPORTATION
M/G Transport, the Company's transportation subsidiary, reported
comparable levels of revenue for the quarter, after the exclusion of a $1.0
million capital gain on the sale of equipment in the second quarter of 2000. On
a year-to-date basis, revenue (excluding $1.0 million in capital gains)
increased $2.6 million to $17.6 million in the first six months of 2001 from
$15.0 in the comparable prior year period. Pre-tax operating profit (excluding
gains from the sale of equipment) decreased in the current quarter to $0.1
million from $0.4 in the second quarter of 2000. Decreased earnings were due to
a larger concentration of lower margin northbound freight in 2001 compared to
2000. On a year-to-date basis, pre-tax operating profit was comparable at $1.1
million during the first half of 2001 compared to $1.0 million during the
comparable period in 2000. Revenues increased on a year-to-date basis due to an
increase in longer duration affreightment movements which have a lower profit
margin.
CORPORATE
During the second quarter of 2000, Midland recorded a gain of $7.0
million from the curtailment of a portion of its pension plan. This gain was
offset by excise taxes on the withdrawal of a portion of overfunded pension
assets and by one-time expenses related to consulting agreements with retired
executives. These transactions--exclusive of the excise tax--were included in
the income statement as a credit to other operating and administrative expenses.
The excise tax component was included in the Provision for Federal Income Tax.
The net impact of these transactions was a net after-tax charge to earnings of
one cent per share.
11
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Cash flows from operating and investing activities were used to
decrease the Company's short-term borrowings (Other Notes Payable) from year-end
2000.
Accounts Receivable increased from year-end 2000 due to the writing of
multi-year insurance policies which are being financed over the term of the
policy.
On January 25, 2001, the Company's Board of Directors approved an
increase in the number of shares authorized under the Company's Common Stock
Repurchase Program from 500,000 shares to 1,000,000 shares. In the second
quarter of 2001, the Company repurchased 16,000 shares at a cost of $0.6 million
bringing the year-to-date total to 128,000 shares and a total cost of $4.2
million.
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
$1.4 million in dividends to its shareholders during the first six months of
2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risks associated with the Company's investment portfolios
have not changed materially from those disclosed in the 2000 Annual Report on
Form 10-K.
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, 2001 and 2000, such net unrealized gains
decreased, net of related income tax effects, by the following amounts (in
thousands):
2001 2000
---- ----
Three months ended June 30 $1,574 $5,560
====== ======
Six months ended June 30 $4,497 $ 677
====== ======
Changes in net unrealized gains on marketable securities result from
both market conditions and realized gains recognized in a reporting period.
PRIVATE SECURITIES REFORM ACT OF 1995 - FORWARD LOOKING STATEMENTS DISCLOSURE
This report contains forward looking statements. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results or
operations or of financial condition or state other "forward-looking"
information. Although management believes that the expectations reflected in its
forward-looking statements are based on reasonable assumptions, there are
certain facts that could cause a difference between actual results and those
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 2001 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 judgement, 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 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. When considering forward-looking statements contained herein, you
should keep in mind the other cautionary statements herein.
12
INDEPENDENT ACCOUNTANTS' REPORT
The Midland Company:
We have reviewed the accompanying condensed consolidated balance sheet of The
Midland Company and subsidiaries as of June 30, 2001, and the related condensed
consolidated statements of income for the three-month and six-month periods
ended June 30, 2001 and 2000 and of changes in shareholders' equity and cash
flows for the six-month periods ended June 30, 2001 and 2000. 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 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, 2000, 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 8, 2001, 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, 2000 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 19, 2001
13
PART II. OTHER INFORMATION
THE MIDLAND COMPANY AND SUBSIDIARIES
JUNE 30, 2001
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 2000 annual meeting of Shareholders held on April
12, 2001, 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 2004 and until
their successors are chosen and qualified:
VOTES BROKER
NAME VOTES FOR WITHHELD ABSTENTIONS NON-VOTES
---- --------- -------- ----------- ---------
J. P. Hayden, Jr. 8,483,034 10,058 0 0
William T. Hayden 8,469,805 23,287 0 0
John M. O'Mara 8,456,534 36,558 0 0
Glenn E. Schembechler 8,454,534 38,558 0 0
Francis Marie Thrailkill 8,482,134 10,958 0 0
John Von Lehman 8,398,026 95,066 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, 2001, was approved by the Shareholders. The
Shareholders cast 8,488,707 votes in favor of this proposal
and 3,069 votes against it. There were 1,316 abstentions.
c) The following directors were not due for election in 2001 and
will continue to serve on the Board of Directors through their
respective elected term:
James E. Bushman John W. Hayden
James H. Carey Robert W. Hayden
Michael J. Conaton William J. Keating, Jr.
Jerry A. Grundhofer John R. LaBar
J. P. Hayden III David B. O'Maley
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibit 10.1 - The Midland Company Non-Employee Director
Deferred Compensation Plan
b) Exhibit 10.2 - The Midland Company Supplemental Retirement Plan*
c) Exhibit 10.3 - Midland-Guardian Co. Salaried Employees'
Non-Qualified Savings Plan*
d) Exhibit 10.4 - Midland-Guardian Co. Non-Qualified Self-Directed
Retirement Plan*
14
Item 6. Exhibits and Reports on Form 8-K (cont'd)
-----------------------------------------
e) Exhibit 10.5 - The Midland Company Stock Option Plan for
Non-Employee Directors as Amended January 2000
f) Exhibit 15 - Letter re: Unaudited Interim Financial Information
g) Reports on Form 8-K - None
*Management Compensatory Plan or Arrangement
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 August 14, 2001 /s/John I. Von Lehman
------------------------ ---------------------------------------------
John I. Von Lehman, Executive Vice President,
Chief Financial Officer and Secretary